John Marshall Bancorp (JMSB) 10-Q 2023 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

or

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                to                

Commission File Number: 001-41315

John Marshall Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Virginia	81-5424879
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1943 Isaac Newton Square East

Suite 100

Reston, VA 20190

(Address of Principal Executive Offices)

(703) 584-0840

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading symbol	Name of Exchange on which registered
Common Stock, $0.01 par value per share	JMSB	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☒    No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒	Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐    No  ☒

As of August 4, 2023, there were 14,126,138 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

		Page
Part I	Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (Unaudited)	3
	Consolidated Statements of Income for the three and six months ended June 30, 2023 and June 30, 2022 (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and June 30, 2022 (Unaudited)	5
	Consolidated Statements of Shareholders’ Equity for the three months ended June 30, 2023 and June 30, 2022 (Unaudited)	6
	Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2023 and June 30, 2022 (Unaudited)	7
	Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and June 30, 2022 (Unaudited)	8
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4.	Controls and Procedures	61
Part II	Other Information
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	62
Signatures

2

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

JOHN MARSHALL BANCORP, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

	June 30, 2023		December 31, 2022
Assets
Cash and due from banks	$	13,938	$	6,583
Interest-bearing deposits in other banks		115,613		55,016
Total cash and cash equivalents		129,551		61,599
Securities available-for-sale, at fair value		325,271		357,576
Securities held-to-maturity at amortized cost, fair value of $79,634 and $81,161 as of June 30, 2023 and December 31, 2022, respectively		97,453		99,415
Less: Allowance for investment credit losses		—		—
Securities held-to-maturity, net		97,453		99,415
Restricted securities, at cost		4,535		4,425
Equity securities, at fair value		2,695		2,115
Loans, net of unearned income		1,769,801		1,789,508
Less: Allowance for loan credit losses		(20,629)		(20,208)
Loans, net		1,749,172		1,769,300
Bank premises and equipment, net		1,370		1,219
Accrued interest receivable		5,178		5,531
Bank owned life insurance		21,371		21,170
Right of use assets		4,443		4,611
Other assets		23,211		21,274
Total assets	$	2,364,250	$	2,348,235
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing demand deposits	$	433,931	$	476,697
Interest-bearing demand deposits		652,638		691,945
Savings deposits		68,013		95,241
Time deposits		891,727		803,857
Total deposits		2,046,309		2,067,740
Federal funds purchased		—		25,500
Federal Reserve Bank borrowings		54,000		—
Subordinated debt		24,666		24,624
Accrued interest payable		2,336		1,035
Lease liabilities		4,733		4,858
Other liabilities		13,236		11,678
Total liabilities	$	2,145,280	$	2,135,435
Commitments and contingencies
Shareholders’ Equity
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares; none issued	$	—	$	—
Common stock, nonvoting, par value $0.01 per share; authorized 1,000,000 shares; none issued		—		—
Common stock, voting, par value $0.01 per share; authorized 30,000,000 shares; issued and outstanding, 14,126,138 shares at June 30, 2023, including 46,291 unvested shares, 14,098,986 shares at December 31, 2022, including 55,185 unvested shares		141		141
Additional paid-in capital		95,380		94,726
Retained earnings		152,024		146,630
Accumulated other comprehensive loss		(28,575)		(28,697)
Total shareholders’ equity	$	218,970	$	212,800
Total liabilities and shareholders’ equity	$	2,364,250	$	2,348,235

The accompanying notes are an integral part of these consolidated financial statements.

3

JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

	Three months ended				Six months ended
	June 30,				June 30,
	2023		2022		2023		2022
Interest and Dividend Income
Interest and fees on loans	$	21,005	$	17,334	$	41,430	$	35,518
Interest on investment securities, taxable		2,140		1,893		4,391		3,273
Interest on investment securities, tax-exempt		15		30		34		60
Dividends		70		64		145		124
Interest on deposits in banks		1,225		234		1,908		325
Total interest and dividend income	$	24,455	$	19,555	$	47,908	$	39,300
Interest Expense
Deposits	$	11,759	$	1,698	$	20,318	$	3,021
Federal funds purchased		—		—		9		—
Federal Home Loan Bank advances		—		12		67		42
Federal Reserve Bank borrowings		338		—		338		—
Subordinated debt		349		537		698		1,013
Total interest expense	$	12,446	$	2,247	$	21,430	$	4,076
Net interest income	$	12,009	$	17,308	$	26,478	$	35,224
Provision for (recovery of) credit losses		(868)		—		(1,642)		—
Net interest income after provision for (recovery of) credit losses	$	12,877	$	17,308	$	28,120	$	35,224
Non-interest Income
Service charges on deposit accounts	$	82	$	84	$	154	$	161
Bank owned life insurance		101		95		201		190
Other service charges and fees		314		157		517		294
Losses on sale of available-for-sale securities		—		—		(202)		—
Insurance commissions		50		44		256		265
Gain on sale of government guaranteed loans		23		—		23		—
Other income (loss)		115		(271)		302		(387)
Total non-interest income	$	685	$	109	$	1,251	$	523
Non-interest Expenses
Salaries and employee benefits	$	4,965	$	4,655	$	9,877	$	10,682
Occupancy expense of premises		448		482		918		975
Furniture and equipment expenses		304		341		600		666
Other operating expenses		2,114		2,203		4,206		4,144
Total non-interest expenses	$	7,831	$	7,681	$	15,601	$	16,467
Income before income taxes	$	5,731	$	9,736	$	13,770	$	19,280
Income tax expense		1,241		1,854		2,976		3,724
Net income	$	4,490	$	7,882	$	10,794	$	15,556
Earnings per share, basic	$	0.32	$	0.56	$	0.76	$	1.11
Earnings per share, diluted	$	0.32	$	0.56	$	0.76	$	1.10

The accompanying notes are an integral part of these consolidated financial statements.

4

JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three months ended				Six months ended
	June 30,				June 30,
	2023		2022		2023		2022
Net Income	$	4,490	$	7,882	$	10,794	$	15,556
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities, net of tax of $(893) and $(1,582) for the three months ended June 30, 2023 and June 30, 2022, respectively. Unrealized gain (loss) on available-for-sale securities, net of tax of $6 and $(4,370) for the six months ended June 30, 2023 and June 30, 2022, respectively.		(3,358)		(5,961)		11		(16,449)
Reclassification adjustment for losses on available-for-sale securities included in net income, net of tax of $(42) for the six months ended June 30, 2023.		—		—		160		—
Amortization of unrealized gains on securities transferred to held-to-maturity, net of tax of $(6) and $(10) for the three months ended June 30, 2023 and June 30, 2022, respectively. Amortization of unrealized gains on securities transferred to held-to-maturity, net of tax of $(13) and $(21) for the six months ended June 30, 2023 and June 30, 2022, respectively.		(22)		(38)		(49)		(79)
Total other comprehensive income (loss)	$	(3,380)	$	(5,999)	$	122	$	(16,528)
Total comprehensive income (loss)	$	1,110	$	1,883	$	10,916	$	(972)

The accompanying notes are an integral part of these consolidated financial statements.

5

JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended June 30, 2023 and 2022

(In thousands, except share and per share data)

(Unaudited)

								Accumulated
								Other		Total
				Additional Paid- In		Retained		Comprehensive		Shareholders’
	Shares	Common Stock		Capital		Earnings		Income (Loss)		Equity
Balance, March 31, 2022	13,890,204	$	139	$	93,135	$	122,510	$	(10,929)	$	204,855
Net income	—		—		—		7,882		—		7,882
Other comprehensive loss	—		—		—		—		(5,999)		(5,999)
Cash dividends attributable to changes in common shares through the record date	—		—		—		(9)		—		(9)
Exercise of stock options	75,562		1		670		—		—		671
Restricted stock vesting, net of 43 shares surrendered	2,287		—		—		—		—		—
Share-based compensation	—		—		130		—		—		130
Balance, June 30, 2022	13,968,053	$	140	$	93,935	$	130,383	$	(16,928)	$	207,530
Balance, March 31, 2023	14,076,807	$	141	$	95,235	$	150,642	$	(25,195)	$	220,823
Net income	—		—		—		4,490		—		4,490
Other comprehensive loss	—		—		—		—		(3,380)		(3,380)
Dividend declared on common stock ($0.22 per share)	—		—		—		(3,108)		—		(3,108)
Exercise of stock options	750		—		8		—		—		8
Restricted stock vesting	2,290		—		—		—		—		—
Share-based compensation	—		—		137		—		—		137
Balance, June 30, 2023	14,079,847	$	141	$	95,380	$	152,024	$	(28,575)	$	218,970

The accompanying notes are an integral part of these consolidated financial statements.

6

JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Shareholders’ Equity

For the Six Months Ended June 30, 2023 and 2022

(In thousands, except share and per share data)

(Unaudited)

									Accumulated
									Other		Total
					Additional Paid- In		Retained		Comprehensive		Shareholders’
	Shares		Common Stock		Capital		Earnings		Income (Loss)		Equity
Balance, December 31, 2021	13,669,772		$	137	$	91,107	$	117,626	$	(400)	$	208,470
Net income	—			—		—		15,556		—		15,556
Other comprehensive loss	—			—		—		—		(16,528)		(16,528)
Dividend declared on common stock ($0.20 per share)	—			—		—		(2,799)		—		(2,799)
Exercise of stock options	282,034			3		2,559		—		—		2,562
Restricted stock vesting, net of 43 shares surrendered	16,247			—		—		—		—		—
Share-based compensation	—			—		269		—		—		269
Balance, June 30, 2022	13,968,053		$	140	$	93,935	$	130,383	$	(16,928)	$	207,530
Balance, December 31, 2022	14,043,801		$	141	$	94,726	$	146,630	$	(28,697)	$	212,800
Net income	—	���		—		—		10,794		—		10,794
Adoption of ASC 326 - Financial Instruments - Credit Losses	—			—		—		(2,292)		—		(2,292)
Other comprehensive income	—			—		—		—		122		122
Dividend declared on common stock ($0.22 per share)	—			—		—		(3,108)		—		(3,108)
Exercise of stock options	27,375			—		320		—		—		320
Restricted stock vesting, net of 33 shares surrendered	8,671			—		—		—		—		—
Share-based compensation	—			—		334		—		—		334
Balance, June 30, 2023	14,079,847		$	141	$	95,380	$	152,024	$	(28,575)	$	218,970

The accompanying notes are an integral part of these consolidated financial statements.

7

JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six months ended
	June 30,
	2023		2022
Cash Flows from Operating Activities
Net income	$	10,794	$	15,556
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation		241		298
Right of use asset amortization		616		688
Provision for (recovery of) credit losses		(1,642)		—
Share-based compensation expense		334		269
Net (accretion)/amortization of securities		(131)		146
Fair value adjustment on equity securities		(172)		391
Amortization of debt issuance costs		42		236
Net gains on premises and equipment		(16)		—
Losses on available-for-sale securities		202		—
Deferred tax expense		414		375
Net increase in cash surrender value of life insurance		(201)		(190)
Gain on sale of government guaranteed loans		(23)		—
Changes in assets and liabilities:
Decrease in accrued interest receivable		353		492
Increase in other assets		(1,774)		(603)
Increase in accrued interest payable		1,301		53
Increase (decrease) in other liabilities		164		(1,124)
Net cash provided by operating activities	$	10,502	$	16,587
Cash Flows from Investing Activities
Net decrease (increase) in loans	$	19,424	$	(26,184)
Proceeds from sale of government guaranteed loans originally classified as held for investment		288		—
Purchase of available-for-sale securities		—		(173,362)
Purchase of held-to-maturity securities		—		(1,003)
Proceeds from sale of available-for-sale securities		11,511		—
Proceeds from maturities, calls and principal repayments of available-for-sale securities		20,977		26,601
Proceeds from maturities, calls and principal repayments of held-to-maturity securities		1,863		4,109
Net (purchases) redemptions of restricted securities		(110)		534
Net purchases of equity securities		(408)		(620)
Proceeds from sale of premises and equipment		82		—
Purchases of bank premises and equipment		(458)		(121)
Net cash provided by (used in) investing activities	$	53,169	$	(170,046)
Cash Flows from Financing Activities
Net (decrease) increase in deposits	$	(21,431)	$	162,188
Net repayment of Federal Home Loan Bank advances		—		(18,000)
Proceeds from Federal Reserve Bank borrowings		54,000		—
Issuance of subordinated debt		—		24,596
Cash dividends paid		(3,108)		(2,799)
Repayment of federal funds purchased		(25,500)		—
Issuance of common stock for share options exercised		320		2,562
Net cash provided by financing activities	$	4,281	$	168,547
Net increase in cash and cash equivalents	$	67,952	$	15,088
Cash and cash equivalents, beginning of period		61,599		105,799
Cash and cash equivalents, end of period	$	129,551	$	120,887
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	20,088	$	3,787
Income taxes		4,110		2,360
Supplemental Disclosures of Noncash Transactions
Unrealized gain (loss) on securities available-for-sale	$	219	$	(20,819)
Right of use asset obtained in exchange for new operating lease liability		505		56

The accompanying notes are an integral part of these consolidated financial statements.

8

JOHN MARSHALL BANCORP, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(Unaudited)

Note 1— Nature of Business and Summary of Significant Accounting Policies

Nature of Banking Activities

John Marshall Bancorp, Inc. (the “Company”), headquartered in Reston, Virginia, became the registered bank holding company under the Bank Holding Company Act of 1956 for its wholly-owned subsidiary, John Marshall Bank (the “Bank”), on March 1, 2017. This reorganization was completed through a one-for-one share exchange in which the Bank’s shareholders received one share of voting common stock of the Company in exchange for each share of the Bank’s voting common stock. The Company was formed on April 21, 2016 under the laws of the Commonwealth Virginia. The Bank was formed on April 5, 2005 under the laws of the Commonwealth of Virginia and was chartered as a bank on February 9, 2006, by the Virginia Bureau of Financial Institutions. The Bank is a member of the Federal Reserve System and is subject to the rules and regulations of the Virginia Bureau of Financial Institutions, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank opened for business on April 17, 2006 and provides banking services to its customers primarily in the Washington, D.C. metropolitan area.

Basis of Presentation

The accounting and reporting policies of John Marshall Bancorp, Inc. conform to generally accepted accounting principles in the United States of America (“GAAP”) and reflect practices of the banking industry. The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). They do not include all of the information and notes required by GAAP for complete financial statements. As such, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on March 23, 2023.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan credit losses.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for any other interim period or for the full year. All amounts and disclosures included in this quarterly report as of December 31, 2022, were derived from the Company’s audited consolidated financial statements. Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders’ equity.

Significant Accounting Policies and Estimates

Application of  the principles of GAAP and practices within the banking industry requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.

The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements and notes for the year ended December 31, 2022 and are contained in the

9

Company's 2022 Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Accounting Standards Adopted in 2023

ASU 2016-13: On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL methodology requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses.

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

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. At adoption, the after tax impact to retained earnings was a reduction of $(2.3) million based on our evaluation as of that date. This adjustment consisted of increases to the allowance for credit losses on loans, as well as the Company's allowance for unfunded loan commitments.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. The Company did not record an allowance for credit losses for securities classified as available-for-sale or held-to-maturity upon adoption. Refer to Note 2 – Investment Securities for further discussion.

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

ASU 2022-02: On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the Financial Accounting Standards Board as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the standard prospectively and it did not have a material impact on the financial statements.

Allowance for Credit Losses - Held-to-Maturity Securities

The Company estimates expected credit losses on held-to-maturity securities on an individual basis based on a Probability of Default/Loss Given Default (“PD/LGD”) methodology primarily using security-level credit ratings. The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit rating, which are influenced by a number of factors including obligor cash flow, geography, seniority, among other factors. The Company’s held-to-maturity securities with credit risk are municipal bonds, which had a credit rating of AA or better as of June 30, 2023. All other held-to-maturity securities are covered by the explicit or implied guarantee of the United States government or one of its agencies.

Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit losses in the Consolidated Statements of Income. The Company did not have an allowance for credit losses on held-to-maturity securities as of June 30, 2023 or upon adoption of ASC 326. Refer to Note 2 – Investment Securities for further discussion.

10

Allowance for Credit Losses - Available-for-Sale Securities

Management evaluates all available-for-sale securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any deficiency is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio. Refer to Note 2 – Investment Securities for further discussion.

Accrued interest receivable on available-for-sale securities totaled $864 thousand at June 30, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses - Loans

The allowance for loan credit losses represents an amount which, in management's judgment, is adequate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The allowance for loan credit losses is measured and recorded upon the initial recognition of a financial asset. The allowance for loan credit losses is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statements of Income.

The Company is utilizing a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates, home price indices, and/or gross domestic product, to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following four quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversely classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model.

Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The adoption of CECL did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices or charge-off policy.

11

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for (or recovery of) credit losses in the Consolidated Statements of Income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodology as the loan portfolio, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

Accrued Interest Receivable

The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the allowance for credit losses for both loans and held-to-maturity securities, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $4.0 million on loans and $257 thousand on held-to-maturity securities at June 30, 2023, and is included in “Accrued Interest Receivable” on the Company’s Consolidated Balance Sheets.  

12

Note 2— Investment Securities

Available-for-Sale

Each of the securities in the Company’s available-for-sale investment portfolio is either covered by the explicit or implied guarantee of the United States government or one of its agencies or rated investment grade or higher. All available-for-sale securities were current with no securities past due or on nonaccrual as of June 30, 2023 or December 31, 2022.

The following tables summarize the amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses at June 30, 2023 and December 31, 2022, respectively.

	June 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		(Losses)		Value
Available-for-sale
U.S. Treasuries	$	53,927	$	—	$	(3,771)	$	50,156
U.S. government and federal agencies		38,812		—		(3,801)		35,011
Corporate bonds		3,000		—		(555)		2,445
Collateralized mortgage obligations		43,146		—		(6,908)		36,238
Tax-exempt municipal		2,933		—		(305)		2,628
Taxable municipal		607		—		(30)		577
Mortgage-backed		219,264		—		(21,048)		198,216
Total Available-for-sale Securities	$	361,689	$	—	$	(36,418)	$	325,271

	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		(Losses)		Value
Available-for-sale
U.S. Treasuries	$	63,480	$	—	$	(4,270)	$	59,210
U.S. government and federal agencies		38,748		—		(3,988)		34,760
Corporate bonds		3,000		—		(386)		2,614
Collateralized mortgage obligations		44,732		—		(6,258)		38,474
Tax-exempt municipal		4,993		—		(348)		4,645
Taxable municipal		608		—		(29)		579
Mortgage-backed		238,652		—		(21,358)		217,294
Total Available-for-sale Securities	$	394,213	$	—	$	(36,637)	$	357,576

During the six months ended June 30, 2023, the Company sold available-for-sale securities with a total par value of $12.0 million resulting in a gross pre-tax loss of $202 thousand. The Company did not sell or recognize any gain or loss for any securities for the three months ended June 30, 2023. On July 17, 2023, the Company sold certain lower-yielding available-for-sale investment securities with a total par value of $161.2 million. Refer to Note 15 – Subsequent Events for additional information. The Company did not sell or recognize any gain or loss for any securities for the three or six months ended June 30, 2022.

Available-for-sale securities having a market value of $119.8 million and $83.4 million at June 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and for other purposes required by law. These securities had an amortized cost of $131.1 million and $91.0 million at June 30, 2023 and December 31, 2022, respectively.

The following tables summarize the fair value of securities available-for-sale at June 30, 2023 and December 31, 2022 and the corresponding amounts of gross unrealized losses. Management uses the valuations as of month-end in determining when securities are

13

in an unrealized loss position. Therefore, a security’s market value could have exceeded its amortized cost on other days during the prior twelve-month period.

	June 30, 2023
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
Available-for-sale
U.S. Treasuries	$	2,848	$	(105)	$	47,308	$	(3,666)	$	50,156	$	(3,771)
U.S. government and federal agencies		2,831		(97)		32,180		(3,704)		35,011		(3,801)
Corporate bonds		—		—		2,445		(555)		2,445		(555)
Collateralized mortgage obligations		3,366		(123)		32,872		(6,785)		36,238		(6,908)
Tax-exempt municipal		—		—		2,628		(305)		2,628		(305)
Taxable municipal		332		(5)		245		(25)		577		(30)
Mortgage-backed		64,097		(3,562)		134,119		(17,486)		198,216		(21,048)
Total Available-for-sale Securities	$	73,474	$	(3,892)	$	251,797	$	(32,526)	$	325,271	$	(36,418)

	December 31, 2022
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
Available-for-sale
U.S. Treasuries	$	31,261	$	(1,194)	$	27,949	$	(3,076)	$	59,210	$	(4,270)
U.S. government and federal agencies		16,107		(1,078)		18,653		(2,910)		34,760		(3,988)
Corporate bonds		2,614		(386)		—		—		2,614		(386)
Collateralized mortgage obligations		16,746		(1,143)		21,728		(5,115)		38,474		(6,258)
Tax-exempt municipal		4,645		(348)		—		—		4,645		(348)
Taxable municipal		337		(2)		242		(27)		579		(29)
Mortgage-backed		145,795		(9,612)		71,499		(11,746)		217,294		(21,358)
Total Available-for-sale Securities	$	217,505	$	(13,763)	$	140,071	$	(22,874)	$	357,576	$	(36,637)

The Company had 237 and 98 securities in an unrealized loss position for 12 months or longer as of June 30, 2023 and December 31, 2022, respectively. The Company has evaluated available-for-sale securities in an unrealized loss position for credit related impairment at June 30, 2023 and December 31, 2022 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 allowance for credit losses on available-for-sale securities at June 30, 2023.

The table below summarizes the contractual maturities of our available-for-sale investment securities as of June 30, 2023. Issuers may have the right to call or prepay certain obligations and as such, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented below.

	June 30, 2023
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Available-for-sale
Due in one year or less	$	13,905	$	13,588
Due after one year through five years		90,960		83,437
Due after five years through ten years		137,053		126,019
Due after ten years		119,771		102,227
Total Available-for-sale Securities	$	361,689	$	325,271

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In the prevailing rate environments as of June 30, 2023 and December 31, 2022, the Company’s available-for-sale investment portfolio had an estimated weighted average remaining life of approximately 3.6 years and 3.8 years, respectively.

Held-to-Maturity

Each of the securities in the Company’s held-to-maturity investment portfolio is either covered by the explicit or implied guarantee of the United States government or one of its agencies or rated investment grade or higher. All held-to-maturity securities were current with no securities past due or on nonaccrual as of June 30, 2023 or December 31, 2022.

The following tables summarize the amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized losses at June 30, 2023 and December 31, 2022, respectively.

	June 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		(Losses)		Value
Held-to-maturity
U.S. Treasuries	$	6,000	$	—	$	(814)	$	5,186
U.S. government and federal agencies		35,491		—		(5,820)		29,671
Collateralized mortgage obligations		20,326		—		(4,391)		15,935
Taxable municipal		6,065		—		(1,215)		4,850
Mortgage-backed		29,571		—		(5,579)		23,992
Total Held-to-maturity Securities	$	97,453	$	—	$	(17,819)	$	79,634

	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		(Losses)		Value
Held-to-maturity
U.S. Treasuries	$	6,000	$	—	$	(840)	$	5,160
U.S. government and federal agencies		35,551		—		(6,135)		29,416
Collateralized mortgage obligations		21,275		—		(4,227)		17,048
Taxable municipal		6,073		—		(1,364)		4,709
Mortgage-backed		30,516		—		(5,688)		24,828
Total Held-to-maturity Securities	$	99,415	$	—	$	(18,254)	$	81,161

Held-to-maturity securities having a market value of $7.1 million and $31.0 million at June 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and for other purposes required by law. These securities had an amortized cost of $8.9 million and $37.7 million at June 30, 2023 and December 31, 2022, respectively.

The following table summarizes the fair value of securities held-to-maturity at December 31, 2022 and the corresponding amounts of gross unrealized losses. Management uses the valuations as of month-end in determining when securities are in an unrealized loss position. Therefore, a security’s market value could have exceeded its amortized cost on other days during the prior twelve-month period.

	December 31, 2022
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
Held-to-maturity
U.S. Treasuries	$	—	$	—	$	5,160	$	(840)	$	5,160	$	(840)
U.S. government and federal agencies		—		—		29,416		(6,135)		29,416		(6,135)
Collateralized mortgage obligations		—		—		17,048		(4,227)		17,048		(4,227)
Taxable municipal		—		—		4,709		(1,364)		4,709		(1,364)
Mortgage-backed		825		(159)		24,003		(5,529)		24,828		(5,688)
Total Held-to-maturity Securities	$	825	$	(159)	$	80,336	$	(18,095)	$	81,161	$	(18,254)

15

The Company evaluates the credit risk of its held-to-maturity securities on at least a quarterly basis. The Company estimates expected credit losses on held-to-maturity securities on an individual basis based on a PD/LGD methodology primarily using security-level credit ratings. The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The Company’s held-to-maturity securities with credit risk were comprised of municipal bonds and had a credit rating of AA or better as of June 30, 2023. All other held-to-maturity securities are covered by the explicit or implied guarantee of the United States government or one of its agencies. The Company did not have an allowance for credit losses on held-to-maturity securities as of June 30, 2023 or upon adoption of ASC 326.

The table below summarizes the contractual maturities of our held-to-maturity investment securities as of June 30, 2023. Issuers may have the right to call or prepay certain obligations and as such, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented below.

	June 30, 2023
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Held-to-maturity
Due in one year or less	$	—	$	—
Due after one year through five years		20,157		17,360
Due after five years through ten years		24,495		20,224
Due after ten years		52,801		42,050
Total Held-to-maturity Securities	$	97,453	$	79,634

In the prevailing rate environments as of June 30, 2023 and December 31, 2022, the Company’s held-to-maturity investment portfolio had an estimated weighted average remaining life of approximately 7.1 years and 7.3 years, respectively.

Restricted Securities

The table below summarizes the carrying amount of restricted securities as of June 30, 2023 and December 31, 2022.

(Dollars in thousands)	June 30, 2023		December 31, 2022
Federal Reserve Bank Stock	$	3,303	$	3,292
Federal Home Loan Bank Stock		1,172		1,073
Community Bankers’ Bank Stock		60		60
Total Restricted Securities	$	4,535	$	4,425

Equity Securities

The Company held equity securities with readily determinable fair values totaling $2.7 million and $2.1 million at June 30, 2023 and December 31, 2022, respectively. These securities consist of mutual funds held in a trust and were obtained for the purpose of economically hedging changes in the Company’s nonqualified deferred compensation liability. Changes in the fair value of these securities are reflected in earnings. A gain of $84 thousand and a loss of $(273) thousand were recorded in other non-interest income in the Consolidated Statements of Income for the three months ended June 30, 2023 and June 30, 2022, respectively. A gain of $172 thousand and a loss of $(391) thousand was recorded in other non-interest income in the Consolidated Statements of Income for the six months ended June 30, 2023 and June 30, 2022, respectively.

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Note 3— Loans

The following table presents the composition of the Company’s loan portfolio as of June 30, 2023 and December 31, 2022.

(Dollars in thousands)	June 30, 2023		December 31, 2022
Real Estate Loans:
Commercial	$	1,101,543	$	1,118,127
Construction and land development		179,656		195,027
Residential		443,305		426,841
Commercial - Non-Real Estate:
Commercial loans		40,289		44,924
Consumer - Non-Real Estate:
Consumer loans		646		529
Total Gross Loans	$	1,765,439	$	1,785,448
Allowance for loan credit losses		(20,629)		(20,208)
Net deferred loan costs		4,362		4,060
Total net loans	$	1,749,172	$	1,769,300

Portfolio Segments

The Company currently manages its loan products and the respective exposure to credit losses by the following specific portfolio segments which are levels at which the Company develops and documents its systematic methodology to determine the allowance for loan credit losses attributable to each respective portfolio segment. These segments are:

● Real estate - commercial loans – The real estate commercial loans category contains commercial mortgage loans secured by owner occupied, non-owner occupied, and multifamily real estate.

● Real estate - construction and land development loans – The real estate construction and land development loans category contains residential and commercial construction loan financing to builders and developers and to consumers building their own homes.

● Real estate - residential loans – The real estate residential mortgage loans category contains permanent mortgage loans principally to consumers secured by residential real estate.

● Commercial loans – The commercial loans category contains business purpose loans made to provide funds for the financing of equipment, receivables, contract administration expenses, and other general corporate needs of commercial businesses.

● Consumer loans – The consumer loans category contains personal loans such as installment loans and lines of credit.

Note 4— Allowance for Loan Credit Losses

On January 1, 2023, the Company adopted the CECL methodology as required under ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 in this Quarterly Report on Form 10-Q.  All loan information presented as of June 30, 2023 is in accordance with ASC 326. All loan information presented prior to June 30, 2023 is in accordance with previous applicable GAAP.

17

Allowance for loan credit losses

The following tables present the activity in the allowance for loan credit losses for the six months ended June 30, 2023.

	June 30, 2023
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Beginning balance, December 31, 2022	$	13,205	$	2,860	$	3,044	$	456	$	5	$	638	$	20,208
Adjustment to allowance for adoption of ASC 326		(2,649)		476		4,552		367		57		(638)		2,165
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		2		—		—		2
Provision for (recovery of) credit losses		(700)		(110)		(794)		(110)		(32)		—		(1,746)
Ending balance, June 30, 2023	$	9,856	$	3,226	$	6,802	$	715	$	30	$	—	$	20,629

The following table presents the activity for the allowance for loan losses for the six months ended June 30, 2022.

	June 30, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance, December 31, 2021	$	13,091	$	2,824	$	2,769	$	711	$	5	$	632	$	20,032
Charge-offs		(1)		—		—		—		—		—		(1)
Recoveries		—		—		—		—		—		—		—
Provision for loan losses		581		(23)		(109)		(72)		2		(379)		—
Ending Balance, June 30, 2022	$	13,671	$	2,801	$	2,660	$	639	$	7	$	253	$	20,031

The following tables present the balance of the allowance for loan losses, the allowance by impairment methodology, total loans, and loans by impairment methodology as of December 31, 2022 and June 30, 2022, respectively. There were no collateral dependent or individually evaluated loans as of June 30, 2023.

	December 31, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		13,205		2,860		3,044		456		5		638		20,208
Total allowance	$	13,205	$	2,860	$	3,044	$	456	$	5	$	638	$	20,208
Loans:
Individually evaluated for impairment	$	—	$	—	$	418	$	—	$	—	$	—	$	418
Collectively evaluated for impairment		1,118,127		195,027		426,423		44,924		529		—		1,785,030
Total loans	$	1,118,127	$	195,027	$	426,841	$	44,924	$	529	$	—	$	1,785,448

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	June 30, 2022
	Real Estate
			Construction &
			Land
Dollars in thousands	Commercial		Development		Residential		Commercial		Consumer		Unallocated		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		13,671		2,801		2,660		639		7		253		20,031
Total allowance	$	13,671	$	2,801	$	2,660	$	639	$	7	$	253	$	20,031
Loans:
Individually evaluated for impairment	$	—	$	—	$	536	$	—	$	—	$	—	$	536
Collectively evaluated for impairment		1,083,194		189,644		367,834		47,878		651		—		1,689,201
Total loans	$	1,083,194	$	189,644	$	368,370	$	47,878	$	651	$	—	$	1,689,737

Impaired loans

Prior to the adoption of ASC 326, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing TDRs. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value.

The following tables present a summary of impaired loans and the related allowance as of December 31, 2022.

	December 31, 2022
			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Interest
	Principal		with		with		Recorded		Related		Recorded		Income
(Dollars in thousands)	Balance		No Allowance		Allowance		Investment		Allowance		Investment(1)		Recognized(1)
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction and land development		—		—		—		—		—		—		—
Residential		418		418		—		418		—		427		15
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total Impaired Loans	$	418	$	418	$	—	$	418	$	—	$	427	$	15

(1) Amounts shown for the twelve-month period ended December 31, 2022.

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Delinquency Information

The following tables present a summary of past due and nonaccrual loans by segment as of June 30, 2023 and December 31, 2022.

	June 30, 2023
	30-59 Days		60-89 Days		90 Days or								90 Days or More
	Past		Past		More		Total Past				Total		Past Due and		Nonaccrual
(Dollars in thousands)	Due		Due		Past Due		Due		Current		Loans		Still Accruing		Loans
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	1,101,543	$	1,101,543	$	—	$	—
Construction and land development		—		—		—		—		179,656		179,656		—		—
Residential		—		—		—		—		443,305		443,305		—		—
Commercial		—		—		—		—		40,289		40,289		—		—
Consumer		—		—		—		—		646		646		—		—
Total Loans	$	—	$	—	$	—	$	—	$	1,765,439	$	1,765,439	$	—	$	—

	December 31, 2022
	30-59 Days		60-89 Days		90 Days or								90 Days or More
	Past		Past		More		Total Past				Total		Past Due and		Nonaccrual
(Dollars in thousands)	Due		Due		Past Due		Due		Current		Loans		Still Accruing		Loans
Real Estate Loans
Commercial	$	—	$	—	$	—	$	—	$	1,118,127	$	1,118,127	$	—	$	—
Construction and land development		—		—		—		—		195,027		195,027		—		—
Residential		—		—		—		—		426,841		426,841		—		—
Commercial		—		—		—		—		44,924		44,924		—		—
Consumer		—		—		—		—		529		529		—		—
Total Loans	$	—	$	—	$	—	$	—	$	1,785,448	$	1,785,448	$	—	$	—

Credit Quality Indicators

The Company assesses credit quality indicators based on internal risk rating of loans. Each loan is evaluated at least annually with more frequent evaluation of more severely criticized loans. The indicators represent the rating for loans as of the date presented is based on the most recent credit review performed. Internal risk rating definitions are:

Pass: These include satisfactory loans that have acceptable levels of risk.

Special Mention: Loans classified as special mention have a potential weakness that requires close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. These credits do not expose the Company to sufficient risk to warrant further adverse classification.

Substandard: A substandard asset is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard asset 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 improbable.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be received in the future.

The Company has a portfolio of smaller homogenous loans that are not individually risk rated and include residential permanent and construction mortgages, home equity lines of credit, and consumer installment loans. For these loans, management uses payment status

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as the primary credit quality indicator. The payment status of these loans is then translated into an internal risk rating. The following table summarizes the translation of past due status to risk rating for loans that are not individually risk rated.

	Internal
Days Past Due	Risk Rating
0 - 29 days	Pass
30-59 days	Special Mention
60-89 days	Substandard
90-119 days	Doubtful
120+ days	Loss

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The following table presents the Company’s recorded investment in loans by credit quality indicator by year of origination as of June 30, 2023.

	Term Loans by Year of Origination
Dollars in thousands	2023		2022		2021		2020		2019		Prior		Revolving		Total
Real Estate Loans - Commercial
Pass	$	14,312	$	302,444	$	208,105	$	123,829	$	100,580	$	347,975	$	3,061	$	1,100,306
Special mention		—		—		—		1,237		—		—		—		1,237
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Real Estate Loans - Commercial	$	14,312	$	302,444	$	208,105	$	125,066	$	100,580	$	347,975	$	3,061	$	1,101,543
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real Estate Loans - Construction and land development
Pass	$	17,432	$	56,591	$	46,604	$	20,516	$	53	$	9,727	$	26,583	$	177,506
Special mention		—		—		—		—		2,150		—		—		2,150
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Real Estate Loans - Construction and land development	$	17,432	$	56,591	$	46,604	$	20,516	$	2,203	$	9,727	$	26,583	$	179,656
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real Estate Loans - Residential
Pass	$	30,597	$	117,526	$	136,489	$	89,708	$	26,781	$	24,987	$	17,217	$	443,305
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Real Estate Loans - Residential	$	30,597	$	117,526	$	136,489	$	89,708	$	26,781	$	24,987	$	17,217	$	443,305
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Loans
Pass	$	1,651	$	7,805	$	2,217	$	3,589	$	5,480	$	6,564	$	12,983	$	40,289
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Commercial Loans	$	1,651	$	7,805	$	2,217	$	3,589	$	5,480	$	6,564	$	12,983	$	40,289
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer Loans
Pass	$	410	$	9	$	35	$	110	$	—	$	15	$	67	$	646
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total Consumer Loans	$	410	$	9	$	35	$	110	$	—	$	15	$	67	$	646
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2022.

	December 31, 2022
			Special								Total
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Loans
Real Estate Loans
Commercial	$	1,116,890	$	1,237	$	—	$	—	$	—	$	1,118,127
Construction and land development		192,877		2,150		—		—		—		195,027
Residential		426,841		—		—		—		—		426,841
Commercial		44,924		—		—		—		—		44,924
Consumer		529		—		—		—		—		529
Total Loans	$	1,782,061	$	3,387	$	—	$	—	$	—	$	1,785,448

The allowance for loan credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination. The starting point for the estimate of the allowance for loan credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. As part of the Company’s loan modification program to borrowers experiencing financial difficulty, the Company may provide concessions to minimize the economic loss and improve long-term loan performance and collectability. The Company did not make any loan modifications to borrowers experiencing financial difficulty during the three or six months ended June 30, 2023.

The Company had a recorded investment in TDRs of $418 thousand as of December 31, 2022, all of which were in compliance with their modified terms at December 31, 2022. There were no loans modified in TDRs that subsequently defaulted within 12 months of their modification date during the three or six months ended June 30, 2022. As of December 31, 2022, none of the Bank’s TDRs required a specific reserve. As of December 31, 2022, there were no additional commitments to disburse funds on loans classified TDRs. The Company adopted ASU 2022-02 on January 1, 2023, which eliminated the accounting guidance for TDRs.

Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable by the Company. The allowance for off-balance sheet credit exposures is adjusted as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for loan credit losses. The allowance for credit losses for unfunded loan commitments of $1.1 million and $303 thousand at June 30, 2023 and December 31, 2022, respectively, is separately classified within Other Liabilities on the Consolidated Balance Sheets.

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the six months ended June 30, 2023.

	Allowance for Credit Losses
(Dollars in thousands)	Unfunded Commitments
Beginning balance, December 31, 2022	$	303
Adjustment to allowance for unfunded commitments for adoption of ASC 326		737
Provision for (recovery of) credit losses		104
Ending balance, June 30, 2023	$	1,144

Note 5— Derivatives

The Company enters into interest rate swap agreements (“swaps”) with commercial loan customers to provide a facility for customers to manage their interest rate risk. These swaps are matched in exact offsetting terms with swaps that the Company enters into with an independent third party. These swaps qualify as derivatives, but are not designated as hedging instruments.

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The following tables summarize the Company’s swaps at June 30, 2023 and December 31, 2022.

	June 30, 2023
				Estimated	Weighted Average
		Notional		Fair	Years to	Receive		Pay
(Dollars in thousands)		Amount		Value	Maturity	Rate		Rate
Interest rate swap agreements:
Pay fixed/receive variable swaps	$	19,736	$	1,273	3.7 years	6.23	%	3.39	%
Pay variable/receive fixed swaps		19,736		(1,273)	3.7 years	3.39	%	6.23	%
Total interest rate swap agreements	$	39,472	$	—	3.7 years	4.81	%	4.81	%

	December 31, 2022
				Estimated	Weighted Average
		Notional		Fair	Years to	Receive		Pay
(Dollars in thousands)		Amount		Value	Maturity	Rate		Rate
Interest rate swap agreements:
Pay fixed/receive variable swaps	$	13,767	$	1,217	2.8 years	6.02	%	2.59	%
Pay variable/receive fixed swaps		13,767		(1,217)	2.8 years	2.59	%	6.02	%
Total interest rate swap agreements	$	27,534	$	—	2.8 years	4.31	%	4.31	%

The estimated fair value of the swaps at June 30, 2023 and December 31, 2022 were recorded in other assets and liabilities in the Consolidated Balance Sheets. The associated net gains and losses on the swaps are recorded in other income (loss) in the Consolidated Statements of Income.

Note 6— Deposits and Borrowings

The following tables show the components of the Company’s funding sources.

(Dollars in thousands)	June 30, 2023		December 31, 2022
Deposits:
Non-interest bearing demand deposits(1)	$	433,931	$	476,697
Interest-bearing demand deposits(1)		652,638		691,945
Savings deposits		68,013		95,241
Time deposits(2)		891,727		803,857
Total Deposits	$	2,046,309	$	2,067,740

						June 30, 2023		December 31, 2022
(Dollars in thousands)	Stated Interest Rate		Weighted-Average Interest Rate			Carrying Value		Carrying Value
Short-term Debt:
Federal Reserve Bank borrowings	4.80	%		4.80	%	$	54,000		—
Total Short-term Debt						$	54,000		—
Long-term Debt:
Subordinated debt	5.25	%		5.25	%	$	24,666	$	24,624
Total Long-term Debt						$	24,666	$	24,624

(1)  Overdraft demand deposits reclassified to loans totaled $1 thousand at both June 30, 2023 and December 31, 2022.

(2) The aggregate amount of certificates of deposit with a minimum denomination of $250,000 was $379.1 million and $318.7 million at June 30, 2023 and December 31, 2022, respectively.

The Company obtains certain deposits through the efforts of third-party brokers. Brokered deposits totaled $346.4 million and $352.0 million at June 30, 2023 and December 31, 2022, respectively, and were included primarily in time deposits on the Company’s Consolidated Balance Sheets. Reciprocal IntraFi certificates of deposit totaled $49.7 million and $25.7 million at June 30, 2023 and December 31, 2022, respectively. Reciprocal IntraFi demand and money market deposits totaled $252.1 million and $197.3 million at June 30, 2023 and December 31, 2022, respectively.

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At June 30, 2023, there were no depositors that represented 5% or more of the Company’s total deposits.

The Company completed a private placement of a $25.0 million fixed-to-floating subordinated note on June 15, 2022 (“2022 note”). Subject to limited exceptions permitting earlier redemption, the note is callable, in whole or in part, commencing July 1, 2027. Unless redeemed earlier, the note will mature on July 1, 2032. The note bears interest at a fixed rate of 5.25% to but excluding July 1, 2027, and will bear interest at a floating rate equal to the three-month Secured Overnight Financing Rate plus 245 basis points thereafter. The note is carried at its principal amount, less unamortized issuance costs.

The Company from time to time uses FHLB advances as a source of funding and to manage interest rate risk. FHLB advances are secured by a blanket floating lien on all real estate mortgage loans secured by 1-to-4 family residential, multi-family and commercial real estate properties. At June 30, 2023, the Company did not have any outstanding FHLB advances. Available borrowing capacity based on collateral value amounted to approximately $451.1 million as of June 30, 2023.

The Company also has the capacity to borrow up to $25.1 million at the Federal Reserve discount window of which $0 had been drawn upon at June 30, 2023. The Bank had loans pledged at the Federal Reserve discount window totaling $29.8 million as of June 30, 2023.

On March 12, 2023, the Federal Reserve Bank of Richmond (“Reserve Bank”) made available the Bank Term Funding Program (“BTFP”), which enhances the ability of banks to borrow against the par value of certain high-quality, unencumbered investments. On May 15, 2023, the Company obtained a $54.0 million BTFP advance to secure lower funding costs relative to wholesale deposits. The BTFP advance has a term of one year, bears interest at a fixed rate of 4.80% and can be prepaid without penalty prior to maturity. At June  30, 2023, the Company had pledged as collateral for the BTFP advance held-to-maturity investment securities with an amortized cost and fair value of $55.1 million and $44.3 million, respectively. If the Company were to avail itself of additional BTFP funding, the Company estimates additional borrowing capacity of up to $260.4 million based on the par value of eligible investments as of June 30, 2023.

The Company also has federal funds lines of credit with correspondent banks available for overnight borrowing of $110.0 million, of which $0 had been drawn upon at June 30, 2023.

The following table shows the carrying amount of the Company’s time deposits by contractual maturity as of June 30, 2023.

(Dollars in thousands)	June 30, 2023
2023	$	316,042
2024		395,962
2025		137,755
2026		40,575
2027		1,111
Thereafter		282
Total	$	891,727

Note 7— Commitments and Contingencies

The Company is party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. Refer to Note 4 – Allowance for Loan Credit Losses for further discussion regarding the Company’s estimate of lifetime credit losses for off-balance sheet exposure.

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The following table summarizes the contract or notional amount of the Company’s exposure to off-balance sheet risk as of June 30, 2023 and December 31, 2022.

(Dollars in thousands)	June 30, 2023		December 31, 2022
Commitments to extend credit	$	289,289	$	240,084
Standby letters of credit	$	19,721	$	14,677

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, income-producing commercial properties, and other real estate properties.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Note 8— Fair Value Measurements

Determination of Fair Value

The Company determines the fair values of its financial instruments based on the fair value hierarchy established by Accounting Standards Codification (“ASC”) Topic 820 – Fair Value Measurement, which defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market and in an orderly transaction between market participants on the measurement date.

The fair value measurements and disclosures topic specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets Measured at Fair Value on a Recurring Basis

In accordance with ASC Topic 820, the following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a recurring basis in the financial statements.

Securities Available-for-sale and Equity Securities

Securities available-for-sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3).

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its portfolio of debt securities. The vendor’s primary source for security valuation is ICE Data Services, which evaluates securities based on market data. ICE Data Services utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Interest Rate Swap Agreements

Interest rate swap agreements are measured by alternative pricing sources using a discounted cash flow method that incorporates current market interest rates. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These characteristics classify interest rate swap agreements as Level 2 in the fair value hierarchy.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance and rating to incorporate additional spreads to the industry benchmark curves.

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The following tables summarize the fair value of assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022.

			Fair Value Measurements at June 30, 2023 Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Balance as of		Identical Assets		Observable Inputs		Inputs
(Dollars in thousands)	June 30, 2023		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available-for-sale:
U.S. Treasuries	$	50,156	$	—	$	50,156	$	—
U.S. government and federal agencies		35,011		—		35,011		—
Corporate bonds		2,445		—		2,445		—
Collateralized mortgage obligations		36,238		—		36,238		—
Tax-exempt municipal		2,628		—		2,628		—
Taxable municipal		577		—		577		—
Mortgage-backed		198,216		—		198,216		—
Equity securities, at fair value		2,695		2,695		—		—
Interest rate swap agreements		1,273		—		1,273		—
Mortgage servicing rights		5		—		—		5
Total assets at fair value	$	329,244	$	2,695	$	326,544	$	5
Liabilities:
Interest rate swap agreements	$	1,273	$	—	$	1,273	$	—
Total liabilities at fair value	$	1,273	$	—	$	1,273	$	—

			Fair Value Measurements at December 31, 2022 Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Balance as of		Identical Assets		Observable Inputs		Inputs
(Dollars in thousands)	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available-for-sale:
U.S. Treasuries	$	59,210	$	—	$	59,210	$	—
U.S. government and federal agencies		34,760		—		34,760		—
Corporate bonds		2,614		—		2,614		—
Collateralized mortgage obligations		38,474		—		38,474		—
Tax-exempt municipal		4,645		—		4,645		—
Taxable municipal		579		—		579		—
Mortgage-backed		217,294		—		217,294		—
Equity securities, at fair value		2,115		2,115		—		—
Interest rate swap agreement		1,217		—		1,217		—
Total assets at fair value	$	360,908	$	2,115	$	358,793	$	—
Liabilities:
Interest rate swap agreement	$	1,217	$	—	$	1,217	$	—
Total liabilities at fair value	$	1,217	$	—	$	1,217	$	—

Assets Measured at Fair Value on a Nonrecurring Basis

Under certain circumstances, the Company makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

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Collateral Dependent Loans

In accordance with ASC 326, loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. The measurement of loss associated with collateral dependent loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if an appraisal of the property is more than one-year-old and not solely based on observable market comparables, or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had no collateral dependent loans with a recorded reserve as of June 30, 2023 or December 31, 2022.

Other Real Estate Owned (“OREO”)

OREO is carried at the lower of cost or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value using observable market data, the Company records the property as Level 2. When an appraised value using observable market data is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the property as Level 3 valuation. Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The Company had no OREO as of June 30, 2023 or December 31, 2022.

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The following tables present the carrying value and estimated fair value, including the level within the fair value hierarchy, of the Company’s financial instruments as of June 30, 2023 and December 31, 2022.

			Fair Value Measurements at June 30, 2023 Using
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	Carrying Value as of		Assets		Observable Inputs		Inputs		Fair Value as of
(Dollars in thousands)	June 30, 2023		(Level 1)		(Level 2)		(Level 3)		June 30, 2023
Assets:
Cash and cash equivalents	$	129,551	$	129,551	$	—	$	—	$	129,551
Securities:
Available-for-sale		325,271		—		325,271		—		325,271
Held-to-maturity		97,453		—		79,634		—		79,634
Equity securities, at fair value		2,695		2,695		—		—		2,695
Restricted securities, at cost		4,535		—		4,535		—		4,535
Loans, net		1,749,172		—		—		1,619,778		1,619,778
Interest rate swap agreements		1,273		—		1,273		—		1,273
Mortgage servicing rights		5		—		—		5		5
Bank owned life insurance		21,371		—		21,371		—		21,371
Accrued interest receivable		5,178		—		5,178		—		5,178
Liabilities:
Deposits	$	2,046,309	$	—	$	2,042,439	$	—	$	2,042,439
Federal Reserve Bank borrowings		54,000		—		54,000		—		54,000
Subordinated debt		24,666		—		—		21,394		21,394
Interest rate swap agreements		1,273		—		1,273		—		1,273
Accrued interest payable		2,336		—		2,336		—		2,336

			Fair Value Measurements at December 31, 2022 Using
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
	Carrying Value as of		Assets		Observable Inputs		Inputs		Fair Value as of
(Dollars in thousands)	December 31, 2022		(Level 1)		(Level 2)		(Level 3)		December 31, 2022
Assets:
Cash and cash equivalents	$	61,599	$	61,599	$	—	$	—	$	61,599
Securities:
Available-for-sale		357,576		—		357,576		—		357,576
Held-to-maturity		99,415		—		81,161		—		81,161
Equity securities, at fair value		2,115		2,115		—		—		2,115
Restricted securities, at cost		4,425		—		4,425		—		4,425
Loans, net		1,769,300		—		—		1,676,887		1,676,887
Interest rate swap agreement		1,217		—		1,217		—		1,217
Bank owned life insurance		21,170		—		21,170		—		21,170
Accrued interest receivable		5,531		—		5,531		—		5,531
Liabilities:
Deposits	$	2,067,740	$	—	$	2,065,248	$	—	$	2,065,248
FHLB advances		—		—		—		—		—
Subordinated debt		24,624		—		—		22,457		22,457
Federal funds purchased		25,500		—		25,500		—		25,500
Interest rate swap agreement		1,217		—		1,217		—		1,217
Accrued interest payable		1,035		—		1,035		—		1,035

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Note 9— Earnings per Common Share

Earnings per common share is calculated in accordance with ASC 260 - Earnings Per Share, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.

Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of voting common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table summarizes the computation of earnings per share for the three and six months ended June 30, 2023 and June 30, 2022.

	Three months ended				Six months ended
	June 30,				June 30,
	2023		2022		2023		2022
Earnings per common share - basic:
Income available to common shareholders (in thousands):
Net income	$	4,490	$	7,882	$	10,794	$	15,556
Less: Income attributable to unvested restricted stock awards		(15)		(34)		(38)		(70)
Net income available to common shareholders	$	4,475	$	7,848	$	10,756	$	15,486
Weighted average shares outstanding:
Common shares outstanding, including unvested restricted stock		14,125,538		13,992,414		14,199,553		13,920,387
Less: Unvested restricted stock		(47,880)		(60,158)		(49,398)		(62,330)
Weighted-average common shares outstanding - basic		14,077,658		13,932,256		14,150,155		13,858,057
Earnings per common share - basic	$	0.32	$	0.56	$	0.76	$	1.11
Earnings per common share - diluted:
Income available to common shareholders (in thousands):
Net income	$	4,490	$	7,882	$	10,794	$	15,556
Less: Income attributable to unvested restricted stock awards		(15)		(34)		(37)		(69)
Net income available to common shareholders	$	4,475	$	7,848	$	10,757	$	15,487
Weighted average shares outstanding:
Common shares outstanding, including unvested restricted stock		14,125,538		13,992,414		14,199,553		13,920,387
Less: Unvested restricted stock		(47,880)		(60,158)		(49,398)		(62,330)
Plus: Effect of dilutive options		65,595		152,904		78,000		184,148
Weighted-average common shares outstanding - diluted		14,143,253		14,085,160		14,228,155		14,042,205
Earnings per common share - diluted	$	0.32	$	0.56	$	0.76	$	1.10

Outstanding options to purchase common stock were considered in the computation of diluted earnings per share for the periods presented. All stock options outstanding as of June 30, 2023 were included in computing diluted earnings per share for the three and six months ended June 30, 2023, as none had anti-dilutive effects. All stock options outstanding as of June 30, 2022 were included in computing diluted earnings per share for the three and six months ended June 30, 2022, as none had anti-dilutive effects.

Note 10— Stock Based Compensation Plan

The Company’s share-based compensation plan, approved by stockholders and effective April 28, 2015 (the “2015 Plan”), provides for the grant of share-based awards in the form of incentive stock options, non-incentive stock options, restricted stock and restricted stock units to directors and employees. The Company has reserved 976,211 shares of voting common stock for issuance under the 2015 Plan, which will remain in effect until April 28, 2025. The Company’s Compensation Committee administers the 2015 Plan and has the

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authority to determine the terms and conditions of each award thereunder. As of June 30, 2023, 301,242 shares are available to grant in future periods under the 2015 Plan.

The Company’s previous share-based compensation plan, the 2006 Stock Option Plan (the “2006 Plan”), provided for the grant of share-based awards in the form of incentive stock options and non-incentive stock options to directors and employees. As amended, the 2006 Plan provided for awards of up to 1,490,700 shares. In April 2015, the 2006 Plan was terminated and replaced with the 2015 Plan. Options outstanding prior to April 28, 2015 were granted under the 2006 Plan and shall be subject to the provisions of the 2006 Plan.

To date, options granted under the 2015 Plan typically vest over five years and expire 10 years from the grant date. Under the 2015 Plan, the exercise price of options may not be less than 100% of fair market value at the grant date with a maximum term for an option award of 10 years from the date of grant.

The table below provides a summary of the stock options activity for the six months ended June 30, 2023.

	June 30, 2023
		Weighted Average		Aggregate Intrinsic
	Shares	Exercise Price		Value
Outstanding at January 1, 2023	189,934	$	11.76
Granted	—		—
Exercised	(27,375)		11.75
Forfeited or expired	(412)		9.44
Outstanding at June 30, 2023	162,147		11.77	$	1,348,951
Exercisable at June 30, 2023	162,147	$	11.77	$	1,348,951

The aggregate intrinsic value of stock options in the table above represents the total amount by which the current market value of the underlying stock exceeds the exercise price of the option that would have been received by the Company had all option holders exercised their options on June 30, 2023. The intrinsic value of options exercised was $7 thousand and $370 thousand for the three and six months ended June 30, 2023, respectively, and $1.2 million and $3.7 million for the three and six months ended June 30, 2022, respectively. These amounts and the intrinsic values noted in the table above change based on changes in the market value of the Company’s voting common stock.

The table below provides a summary of the stock options outstanding and exercisable as of June 30, 2023.

	June 30, 2023
	Options Outstanding		Options Exercisable
		Weighted Average		Weighted Average
		Remaining		Remaining
	Number	Contractual Life	Number	Contractual Life
Exercise Prices	Outstanding	in Years	Exercisable	in Years
$11.01 - $12.00	161,085	1.82	161,085	1.82
$12.01 - $13.00	1,062	1.49	1,062	1.49
Total	162,147	1.82	162,147	1.82

There were no options granted during the three or six months ended June 30, 2023 or June 30, 2022.

The Company did not record any share-based compensation expense applicable to the Company’s share-based compensation plans for stock options during the three or six months ended June 30, 2023 or June 30, 2022.

The Company does not have any unrecognized share-based compensation expense related to nonvested options as of June 30, 2023.

The table below provides a summary of the restricted stock awards granted under the 2015 plan for the six months ended June 30, 2023.

	June 30, 2023
		Weighted Average
	Shares	Grant Date Fair Value
Nonvested at January 1, 2023	55,185	$	21.80
Granted	180		21.78
Vested	(8,704)		19.20
Forfeited	(370)		15.50
Nonvested at June 30, 2023	46,291		22.34

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Compensation expense for restricted stock grants is recognized over the vesting period of the awards based on the fair value of the Company’s voting common stock at issue date. The fair value of the stock was determined using the closing stock price on the day of grant. The restricted stock grants vest over two to five years. The Company awarded 500 restricted stock grants during the six months ended June 30, 2022.

Share-based compensation expense applicable to the Company’s share-based compensation plans for restricted stock grants was $137 thousand and $130 thousand for the three months ended June 30, 2023 and June 30, 2022, respectively. The total fair value of the shares, which vested during the three months ended June 30, 2023 and June 30, 2022, was $46 thousand and $65 thousand, respectively.

Share-based compensation expense applicable to the Company’s share-based compensation plans for restricted stock grants was $334 thousand and $269 thousand for the six months ended June 30, 2023 and June 30, 2022, respectively. The total fair value of the shares, which vested during the six months ended June 30, 2023 and June 30, 2022, was $210 thousand and $371 thousand, respectively.

Unrecognized share-based compensation expense related to nonvested restricted stock grants amounted to $762 thousand as of June 30, 2023. This amount is expected to be recognized over a weighted-average period of 1.5 years.

Note 11— Regulatory Capital

The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Securities Exchange Act of 1934, as amended (“Exchange Act”). As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory capital requirements.

The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision. Failure to meet minimum capital requirements can initiate certain mandatory – possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes that the Bank met all capital adequacy requirements to which it was subject as of June 30, 2023 and December 31, 2022.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, common equity Tier 1 to risk-weighted assets, and Tier 1 capital to average assets.

In addition to the minimum regulatory capital required for capital adequacy purposes, the Bank is required to maintain a minimum capital conservation buffer above those minimums in the form of common equity. The capital conservation buffer, which was phased in ratably over a four year period beginning January 1, 2016, is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. The capital conservation buffer was 2.5% at June 30, 2023, and is applicable for the common equity Tier 1, Tier 1, and total capital ratios.

On January 1, 2023, the Company adopted ASC 326, which replaced the incurred loss methodology with the CECL methodology for estimating credit losses and generally applies to financial assets measured at amortized cost. The Federal Reserve and FDIC have adopted rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over a three-year transition period ending January 1, 2026 the day-one impact on regulatory capital that may result from the adoption of the CECL model. The Company implemented the CECL model on January 1, 2023 and elected to apply the provisions of the CECL deferral transition in the determination of its risk based capital ratios. The impact of the application of this deferral transition on the ratios was not significant.

As of June 30, 2023, the most recent notification from the Reserve Bank categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the institution must maintain minimum total risk-based,

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common equity Tier 1, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The table below provides a summary of the Bank’s capital ratios as of June 30, 2023 and December 31, 2022.

									Minimum To Be Well Capitalized
	Actual				Minimum Capital Requirement(1)				Under Prompt Corrective Action
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2023
Total capital (to risk weighted assets)	$	291,262	16.1	%	$	190,422	10.5	%	$	181,354	10.0	%
Tier 1 capital (to risk weighted assets)		271,209	15.0	%		154,151	8.5	%		145,083	8.0	%
Common equity tier 1 capital (to risk weighted assets)		271,209	15.0	%		126,948	7.0	%		117,880	6.5	%
Tier 1 capital (to average assets)		271,209	11.6	%		93,738	4.0	%		117,173	5.0	%
As of December 31, 2022
Total capital (to risk weighted assets)	$	283,471	15.6	%	$	190,798	10.5	%	$	181,712	10.0	%
Tier 1 capital (to risk weighted assets)		262,960	14.4	%		155,219	8.5	%		146,089	8.0	%
Common equity tier 1 capital (to risk weighted assets)		262,960	14.4	%		127,828	7.0	%		118,697	6.5	%
Tier 1 capital (to average assets)		262,960	11.3	%		93,083	4.0	%		116,354	5.0	%

(1)Including capital conservation buffer.

Note 12— Revenue

Certain of the Company’s non-interest revenue streams are derived from short-term contacts associated with services provided to deposit account holders as well as other ancillary services, which are accounted for in accordance with ASC 606 – Revenue Recognition. For most of these revenue streams, the duration of the contract does not extend beyond the services performed. Due to the short duration of most customer contracts that generate non-interest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.

The following table shows the components of non-interest income for the three and six months ended June 30, 2023 and June 30, 2022.

	Three months ended				Six months ended
	June 30,				June 30,
(Dollars in thousands)	2023		2022		2023		2022
Service charges on deposit accounts (1)
Overdrawn account fees	$	21	$	22	$	35	$	41
Account service fees		61		62		119		120
Other service charges and fees (1)
Interchange income		104		105		203		198
Other charges and fees		210		52		314		96
Bank owned life insurance		101		95		201		190
Losses on sale of available-for-sale securities		—		—		(202)		—
Net gains (losses) on premises and equipment (1)		17		—		16		(1)
Insurance commissions (1)		50		44		256		265
Gain on sale of government guaranteed loans		23		—		23		—
Other operating income (loss) (2)		98		(271)		286		(386)
Total non-interest income	$	685	$	109	$	1,251	$	523

(1) Income within the scope of ASC 606.

(2) Includes other operating income within the scope of ASC 606 amounting to $14 thousand and $22 thousand for the three and six months ended June 30, 2023, respectively. Includes a gain of $84 thousand related to the fair value adjustment on equity securities carried at fair value for the three months ended June 30, 2023, which is outside the scope of ASC 606. Includes other operating

34

income of $91 thousand related to swap fee income on a back-to-back loan swap and a gain of $172 thousand related to the fair value adjustment on equity securities carried at fair value for the six months ended June 30, 2023, both of which are outside the scope of ASC 606. These equity securities consist of mutual funds held in a trust and were obtained for the purpose of economically hedging changes in the nonqualified deferred compensation liability. Includes other operating income within the scope of ASC 606 amounting to $2 thousand and $6 thousand for the three and six months ended June 30, 2022, respectively. Includes other operating losses consisting of a fair value adjustment of $(273) thousand and $(391) thousand outside the scope of ASC 606 for the three and six months ended June 30, 2022, respectively.

A description of the Company’s revenue streams accounted for under ASC 606 follows:

Service charges on deposit accounts

Service charges on deposit accounts consist of overdrawn account fees and account service fees. Overdrawn account fees are recognized at the point in time that the overdraft occurs. Account service fees consist primarily of account analysis and other maintenance fees and are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Payment for service charges on deposit accounts is received immediately or in the following month through a direct charge to customers’ accounts.

Other service charges and fees

Other service charges and fees are primarily comprised of interchange income and other charges and fees. Interchange income is earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. Other charges and fees include revenue from processing wire transfers, cashier’s checks, and other transaction based services. The Company’s performance obligation for these charges and fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Net gains (losses) on premises and equipment

The Company records a gain or loss on the disposition of premises and equipment when control of the property transfers or is involuntarily converted to a monetary asset (e.g., insurance proceeds). This income is reflected in other operating income on the Company’s Consolidated Statements of Income.

Insurance commissions

The Company performs the function of an insurance intermediary by introducing the policyholder and insurer and is compensated in the form of a commission for placement of an insurance policy based on a percentage of premiums issued and maintained during the period. Revenue is recognized when received.

Note 13— Other Operating Expenses

The following table shows the components of other operating expenses for the three and six months ended June 30, 2023 and June 30, 2022.

	Three months ended					Six months ended
	June 30,					June 30,
(Dollars in thousands)	2023		2022			2023		2022
Advertising expense	$	76	$	61		$	153	$	100
Data processing		447		490			881		928
FDIC insurance		283		140			496		270
Professional fees		136		297			294		571
State franchise tax		604		523			1,181		1,047
Director costs		188		203			443		415
Other operating expenses		380		489			758		813
Total other operating expenses	$	2,114	$	2,203	��	$	4,206	$	4,144

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Note 14— Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss), by category, net of tax for the six months ended June 30, 2023 and June 30, 2022.

	June 30, 2023
			Unrealized Gains on
			Securities Transferred from
	Unrealized Gain (Loss) on		Available-for-sale to		Accumulated Other
(Dollars in thousands)	Available-for-sale Securities		Held-to-maturity		Comprehensive Income (Loss)
Beginning balance, January 1, 2023	$	(28,942)	$	245	$	(28,697)
Net change during the period		171		(49)		122
Ending balance, June 30, 2023	$	(28,771)	$	196	$	(28,575)

	June 30, 2022
			Unrealized Gains on
			Securities Transferred from
	Unrealized Loss on		Available-for-sale to		Accumulated Other
(Dollars in thousands)	Available-for-sale Securities		Held-to-maturity		Comprehensive Loss
Beginning balance, January 1, 2022	$	(789)	$	389	$	(400)
Net change during the period		(16,449)		(79)		(16,528)
Ending balance, June 30, 2022	$	(17,238)	$	310	$	(16,928)

Items reclassified out of accumulated other comprehensive income (loss) to net income during the six months ended June 30, 2023 consisted of losses on securities classified as available-for-sale. The losses on these transactions totaled $202 thousand and the related tax benefit was $42 thousand. Losses are included in the “Losses on sale of available-for-sale securities” line item and the related tax is presented in the “Income tax expense” line item in the Consolidated Statements of Income. The Company did not have any items reclassified out of accumulated other comprehensive income (loss) to net income during the six months ended June 30, 2022.

Note 15 – Subsequent Events

On July 17, 2023, the Company sold certain lower-yielding available-for-sale investment securities with a total par value of $161.2 million and surrendered $21.4 million of bank owned life insurance (“BOLI”) contracts (the “restructuring”), resulting in a non-recurring, after-tax loss of $14.6 million. The sale of the available-for-sale securities will not impact book-value-per-share as the after-tax loss of $13.5 million was already reflected in accumulated other comprehensive loss as of June 30, 2023. The remaining $1.1 million after-tax loss stems from the taxation on the gain associated with the expected cash payout from the BOLI policies. The Company believes that the restructuring will positively impact long-term profitability. Refer to Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q for additional information regarding the restructuring.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the consolidated financial condition and results of operations of the Company and its subsidiary should be read in conjunction with the consolidated financial statements and related notes presented in Item 1, Financial Statements, of this Form 10-Q. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate results of operations or trends in operations for any future periods.

Cautionary Note on Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. These forward-looking statements are based on our beliefs and assumptions and on the information available to us at the time that these disclosures were prepared, and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to have been correct. Should any known or unknown risks and uncertainties develop into actual events, those developments could have material adverse effects on our business, financial condition and results of operations. Factors that could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, the following:

● the concentration of our business in the Washington, D.C. metropolitan area and the effect of changes in the economic, political and environmental conditions on this market;

● adequacy of our allowance for loan credit losses, allowance for unfunded commitments credit losses, and allowance for credit losses associated with our held-to-maturity and available-for-sale securities portfolios;

● deterioration of our asset quality;

● future performance of our loan portfolio with respect to recently originated loans;

● the level of prepayments on loans and mortgage-backed securities;

● liquidity, interest rate and operational risks associated with our business;

● changes in our financial condition or results of operations that reduce capital;

● our ability to maintain existing deposit relationships or attract new deposit relationships;

● changes in consumer spending, borrowing and savings habits;

● inflation and changes in interest rates that may reduce our margins or reduce the fair value of financial instruments;

● changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve;

● additional risks related to new lines of business, products, product enhancements or services;

● increased competition with other financial institutions and fintech companies;

● adverse changes in the securities markets;

● changes in the financial condition or future prospects of issuers of securities that we own;

37

● our ability to maintain an effective risk management framework;

● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements;

● compliance with legislative or regulatory requirements;

● results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan credit losses or to write-down assets or take similar actions;

● potential claims, damages, and fines related to litigation or government actions;

● the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting;

● geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad;

● the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, geopolitical conflicts (such as the ongoing war between Russia and Ukraine) or public health events (such as COVID-19), and of governmental and societal responses thereto;

● technological risks and developments, and cyber threats, attacks, or events;

● the additional requirements of being a public company;

● changes in accounting policies and practices;

● our ability to successfully capitalize on growth opportunities;

● our ability to retain key employees;

● deteriorating economic conditions, either nationally or in our market area, including higher unemployment and lower real estate values;

● implications of our status as a smaller reporting company and as an emerging growth company; and

● other factors discussed in Item 1A. Risk Factors in the Company’s 2022 Annual Report on Form 10-K filed with the SEC.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary note.

Overview

We are a bank holding company headquartered in Reston, Virginia primarily serving the Washington, D.C. metropolitan area. The material business operations of our organization are performed through the Bank. As a result, the discussion and analysis within this section primarily relate to activities conducted at the Bank.

As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. To account for credit risk inherent in all loans, the Bank maintains an allowance for loan credit losses to absorb lifetime losses on existing loans. The Bank establishes and

38

maintains this allowance by recording a provision for credit losses against earnings. In addition to net interest income, the Bank also generates income through service charges on deposits, insurance commission income, income from bank owned life insurance, merchant services fee income, swap fee income and gain on sale of the guaranteed portion of Small Business Administration (“SBA”) 7(a) loans. In order to maintain its operations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.

As of June 30, 2023, the Company had total consolidated assets of $2.36 billion, total loans net of unearned income of $1.77 billion, total deposits of $2.05 billion and total shareholders’ equity of $219.0 million.

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Selected Financial Data

The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of June 30, 2023 and June 30, 2022 and the selected income statement data for the three and six months ended June 30, 2023 and June 30, 2022 have been derived from our consolidated financial statements.

		As of or for the Three Months Ended						As of or for the Six Months Ended
(Dollars in thousands, except per share data)	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Balance Sheet Data:
Loans, net of unearned income	$	1,769,801		$	1,692,652		$	1,769,801		$	1,692,652
Allowance for loan credit losses		20,629			20,031			20,629			20,031
Total assets		2,364,250			2,316,374			2,364,250			2,316,374
Deposits		2,046,309			2,043,741			2,046,309			2,043,741
Shareholders’ equity		218,970			207,530			218,970			207,530
Asset Quality Data:
Net (charge-offs) recoveries to average total loans, net of unearned income (annualized)		0.00	%		0.00	%		0.00	%		0.00	%
Allowance for loan credit losses to nonperforming loans		NM			NM			NM			NM
Allowance for loan credit losses to total gross loans net of unearned income		1.17	%		1.18	%		1.17	%		1.18	%
Non-performing assets to total assets		0.00	%		0.00	%		0.00	%		0.00	%
Non-performing loans to total loans		0.00	%		0.00	%		0.00	%		0.00	%
Capital Ratios (Bank level):
Equity-to-total assets ratio		10.2	%		9.9	%		10.2	%		9.9	%
Total risk-based capital ratio		16.1	%		15.1	%		16.1	%		15.1	%
Tier 1 risk-based capital ratio		15.0	%		14.0	%		15.0	%		14.0	%
Common equity tier 1 ratio		15.0	%		14.0	%		15.0	%		14.0	%
Leverage ratio		11.6	%		11.0	%		11.6	%		11.0	%
Income Statement Data:
Interest and dividend income	$	24,455		$	19,555		$	47,908		$	39,300
Interest expense		12,446			2,247			21,430			4,076
Net interest income	$	12,009		$	17,308		$	26,478		$	35,224
Provision for (recovery of) credit losses		(868)			—			(1,642)			—
Non-interest income		685			109			1,251			523
Non-interest expense		7,831			7,681			15,601			16,467
Income before taxes	$	5,731		$	9,736		$	13,770		$	19,280
Income tax expense		1,241			1,854			2,976			3,724
Net income	$	4,490		$	7,882		$	10,794		$	15,556
Per Share Data and Shares Outstanding:
Weighted average common shares (basic)		14,077,658			13,932,256			14,150,155			13,858,057
Weighted average common shares (diluted)		14,143,253			14,085,160			14,228,155			14,042,205
Common shares outstanding		14,126,138			14,026,589			14,126,138			14,026,589
Earnings per share, basic	$	0.32		$	0.56		$	0.76		$	1.11
Earnings per share, diluted	$	0.32		$	0.56		$	0.76		$	1.10
Book value	$	15.50		$	14.80		$	15.50		$	14.80
Performance Ratios:
Return on average assets ("ROAA")(1)		0.77	%		1.41	%		0.93	%		1.41	%
Return on average equity ("ROAE")(2)		8.13	%		15.28	%		9.85	%		15.02	%
Net interest margin(3)		2.10	%		3.16	%		2.33	%		3.25	%
Non-interest expense to average assets (annualized)(4)		1.34	%		1.38	%		1.34	%		1.49	%
Efficiency ratio(5)		61.7	%		44.1	%		56.3	%		46.1	%

NM – Not meaningful

(1) ROAA is calculated by dividing year-to-date net income annualized by year-to-date average assets.

(2) ROAE is calculated by dividing year-to-date net income annualized by year-to-date average equity.

(3) Net interest margin for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(4) Non-interest expense to average assets is calculated by dividing year-to-date annualized non-interest expense by year-to-date average assets.

(5) The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.

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Results of Operations – Six Months Ended June 30, 2023 and June 30, 2022

Overview

Net income for the six months ended June 30, 2023 decreased $4.8 million or 30.6% to $10.8 million compared to $15.6 million for the same period of 2022.  Diluted earnings per share for the six months ended June 30, 2023 were $0.76, a 31.3% decrease when compared to the $1.10 reported for the six months ended June 30, 2022.

Net interest income for the six months ended June 30, 2023 decreased $8.7 million or 24.8% compared to the same period of 2022, driven primarily by the increase in costs of interest-bearing liabilities outpacing the increase in yield on interest-earning assets.

The Company recorded a $1.6 million recovery of provision for credit losses for the six months ended June 30, 2023 compared to no provision for the six month ended June 30, 2022. Additional discussion of the provision for credit losses is included below under the heading Provision for Credit Losses.

Non-interest income increased $728 thousand during the six months ended June 30, 2023 compared to the same period of 2022. The increase in non-interest income was primarily due to an increase of $563 thousand as a result of mark-to-market adjustments on investments related to the Company’s nonqualified deferred compensation plan. The Company also had an increase in other service charges and fee income of $223 thousand primarily as a result of penalty fee income recognized on the early withdrawal of certificates of deposit, as well as a $91 thousand increase in customer interest rate swap fee income. These increases were partially offset by losses of $202 thousand recognized on the sale of $12.0 million of investment securities during six months ended June 30, 2023. The sales were executed to manage the Company’s interest rate risk position and allow for the reinvestment of proceeds into higher yielding assets.

Non-interest expense decreased $866 thousand or 5.3% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease in non-interest expense was primarily due to decreases in salaries and employee benefits expense, professional fees, occupancy expense of premises and furniture and equipment expense. The decrease in salaries and employee benefits was primarily due to a reduction in incentive compensation accruals when compared to the same period of the prior year. Incentive compensation accruals can fluctuate materially from quarter to quarter, based upon the Company’s financial performance and conditions measured against, among other evaluation criteria, our strategic plan and budget. At the end of each year, the ultimate determination of the incentive compensation is approved by the Board of Directors. The decrease in professional fees was due to non-recurring professional fees incurred in the first half of 2022 as part of our registration with the SEC and timing of projects. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases. The decrease in furniture and equipment expense was due to lower depreciation expense on fixed assets. The decrease in non-interest expense was partially offset by increases in FDIC insurance expense, franchise tax expense and director compensation expense. The increase in FDIC insurance expense was attributable to the FDIC increasing the base assessment rate for all insured depository institutions. The increase in franchise tax expense was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The increase in director compensation expense was primarily due to the accelerated vesting of restricted stock awards as a result of the death of a director during the first quarter of 2023.

The ROAA for the six months ended June 30, 2023 and June 30, 2022 was 0.93% and 1.41%, respectively. The ROAE for the six months ended June 30, 2023 and June 30, 2022 was 9.85% and 15.02%, respectively.

Net Interest Income and Net Interest Margin

Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings, and is the Company’s primary revenue source. Net interest income is affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. The Company’s interest-earning assets include loans, investment securities and interest-bearing deposits in other banks, while our interest-bearing liabilities include interest-bearing deposits and borrowings. Net interest margin represents the difference between interest received and interest paid as a percentage of average total interest-earning assets. Management seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through management’s asset and liability management policies. Interest rate risk is managed by monitoring the pricing, maturity, and repricing options of all classes of interest-bearing assets and liabilities. Management expects net interest income and net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of the Company’s interest-earning assets and interest-bearing liabilities.

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The following table presents the average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the six months ended June 30, 2023 and June 30, 2022.

Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

	June 30, 2023						June 30, 2022
			Interest Income /		Average				Interest Income /		Average
(Dollars in thousands)	Average Balance		Expense		Rate		Average Balance		Expense		Rate
Assets:
Securities:
Taxable	$	449,272	$	4,536	2.04	%	$	407,341	$	3,397	1.68	%
Tax-exempt(1)		3,184		43	2.72	%		5,004		76	3.06	%
Total securities	$	452,456	$	4,579	2.04	%	$	412,345	$	3,473	1.70	%
Loans, net of unearned income(2):
Taxable		1,741,915		40,969	4.74	%		1,611,916		35,209	4.40	%
Tax-exempt(1)		28,447		584	4.14	%		19,367		391	4.07	%
Total loans, net of unearned income	$	1,770,362	$	41,553	4.73	%	$	1,631,283	$	35,600	4.40	%
Interest-bearing deposits in other banks	$	77,571	$	1,908	4.96	%	$	150,734	$	325	0.43	%
Total interest-earning assets	$	2,300,389	$	48,040	4.21	%	$	2,194,362	$	39,398	3.62	%
Total non-interest earning assets		39,342						33,830
Total assets	$	2,339,731					$	2,228,192
Liabilities & Shareholders’ Equity:
Interest-bearing deposits
NOW accounts	$	272,872	$	2,245	1.66	%	$	323,546	$	424	0.26	%
Money market accounts		390,511		4,951	2.56	%		395,532		789	0.40	%
Savings accounts		81,025		475	1.18	%		111,312		177	0.32	%
Time deposits		858,027		12,647	2.97	%		635,359		1,631	0.52	%
Total interest-bearing deposits	$	1,602,435	$	20,318	2.56	%	$	1,465,749	$	3,021	0.42	%
Federal funds purchased		392		9	4.63	%		—		—	0.00
Subordinated debt		24,643		698	5.71	%		27,007		1,013	7.56	%
Other borrowed funds		17,023		405	4.80	%		12,453		42	0.68	%
Total interest-bearing liabilities	$	1,644,493	$	21,430	2.63	%	$	1,505,209	$	4,076	0.55	%
Demand deposits		456,445						497,899
Other liabilities		17,845						16,161
Total liabilities	$	2,118,783					$	2,019,269
Shareholders’ equity	$	220,948					$	208,923
Total liabilities and shareholders’ equity	$	2,339,731					$	2,228,192
Net interest spread					1.58	%					3.07	%
Net interest income and margin			$	26,610	2.33	%			$	35,322	3.25	%

(1) Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2) The Company did not have any loans on non-accrual as of June 30, 2023 or June 30, 2022.

Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.

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Tax-Equivalent Net Interest Income

	Six months ended
	June 30,
(Dollars in thousands)	2023		2022
GAAP Financial Measurements:
Interest Income - Loans	$	41,430	$	35,518
Interest Income - Securities and Other Interest-Earning Assets		6,478		3,782
Interest Expense - Deposits		20,318		3,021
Interest Expense - Borrowings		1,112		1,055
Total Net Interest Income	$	26,478	$	35,224
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans		123		82
Add: Tax Benefit on Tax-Exempt Interest Income - Securities		9		16
Total Tax Benefit on Tax-Exempt Interest Income (1)	$	132	$	98
Tax-Equivalent Net Interest Income	$	26,610	$	35,322

(1)Tax benefit was calculated using the federal statutory tax rate of 21%.

Net interest income decreased $8.7 million or 24.7% on a fully tax-equivalent basis for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The decrease in net interest income was driven by the increase in the costs of interest-bearing liabilities outpacing the increase in yield on interest-earning assets.

On a fully tax-equivalent basis, the net interest margin was 2.33% for the six months ended June 30, 2023, compared to 3.25% for the six months ended June 30, 2022. The decrease in net interest margin was primarily due to increases in the cost of interest-bearing deposits and other borrowed funds outpacing the increase in yield on loans and securities. The cost of interest-bearing liabilities increased 2.08% from 0.55% for the six months ended June 30, 2022 to 2.63% for the six months ended June 30, 2023. The increase in the cost of interest-bearing liabilities was primarily due to higher interest expense on deposits and other borrowings. The increase in the overall cost of interest-bearing liabilities in the first half of 2023 relative to the same period of the prior year is largely due to rate hikes totaling 5.00% by the Federal Reserve Bank since the beginning of 2022, which is increasing cost of funds and compressing net interest margins broadly across the banking industry.

The loan portfolio’s yield for the six months ended June 30, 2023 was 4.73% compared to 4.40% for the six months ended June 30, 2022. The increase of 0.33% was primarily attributable to an increase in yield on the Company’s variable rate loans as a result of an increase in interest rates subsequent to June 30, 2022 coupled with a higher weighted average yield on loans originated since the second quarter of 2022.

The investment securities portfolio’s yield for the six months ended June 30, 2023 was 2.04% compared to 1.70% for the six months ended June 30, 2022. The increase of 0.34% was primarily due to higher yields on investment securities purchased subsequent to June 30, 2022.

The yield on interest-bearing deposits due from banks for the six months ended June 30, 2023 was 4.96% compared to 0.43% for the six months ended June 30, 2022. The increase of 4.53% was primarily due to a higher federal funds rate during the six months ended June 30, 2023 when compared to the same period of 2022.

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to volume.

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Rate/Volume Analysis

	For the Six Months Ended June 30,
	2023 and 2022
	Increase
	(Decrease) Due to
(Dollars in thousands)	Volume		Rate		Total Increase (Decrease)
Interest-earning Assets:
Securities:
Taxable	$	402	$	737	$	1,139
Tax-exempt(1)		(27)		(6)		(33)
Total securities	$	375	$	731	$	1,106
Loans, net of unearned income:
Taxable		3,058		2,702		5,760
Tax-exempt(1)		187		6		193
Total loans, net of unearned income(2)	$	3,245	$	2,708	$	5,953
Interest-bearing deposits in other banks	$	(1,746)	$	3,329	$	1,583
Total interest-earning assets	$	1,874	$	6,768	$	8,642
Interest-bearing Liabilities:
Interest-bearing deposits:
NOW accounts	$	(517)	$	2,338	$	1,821
Money market accounts		(143)		4,305		4,162
Savings accounts		(178)		476		298
Time deposits		3,242		7,774		11,016
Total interest-bearing deposits	$	2,404	$	14,893	$	17,297
Federal funds purchased		9		—		9
Subordinated debt		(67)		(248)		(315)
Other borrowed funds		127		236		363
Total interest-bearing liabilities	$	2,473	$	14,881	$	17,354
Change in net interest income	$	(599)	$	(8,113)	$	(8,712)

(1) Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2)The Company did not have any loans on non-accrual as of June 30, 2023 or June 30, 2022.

Interest Income

Interest income increased by $8.6 million or 21.9% to $48.0 million on a fully tax-equivalent basis for the six months ended June 30, 2023 compared to $39.4 million for the six months ended June 30, 2022, driven by both an increase in volume and rates on interest-earning assets. The increase in volume of average interest-earning assets was primarily attributable to the Company’s loan portfolio. The increase in rate on interest-earning assets was primarily attributable to interest-bearing deposits due from banks, as well as the Company’s loan portfolio.

Fully tax-equivalent interest income on loans increased by approximately $6.0 million as a result of volume and an increase in rate. Average loans for the comparative six month period increased approximately $139.1 million between June 30, 2023 and June 30, 2022, which was primarily attributable to origination volume in the commercial real estate and residential real estate portfolios subsequent to June 30, 2022.

Fully tax-equivalent interest income on investment securities increased by approximately $1.1 million as a result of volume growth and rate increases. Average investment securities for the comparative six month period increased approximately $40.1 million between the six months ended June 30, 2023 and June 30, 2022. The increase in investment securities was due to purchases and funded primarily by Paycheck Protection Program loan payoffs.

The increase in rates on loans, investment securities, and interest-bearing deposits in other banks was primarily attributable to an increase in benchmark interest rates since June 30, 2022.

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Interest Expense

Interest expense increased by $17.3 million to $21.4 million for the six months ended June 30, 2023 compared to $4.1 million for the six months ended June 30, 2022, primarily due to an increase in rates and, to a lesser extent, volume of deposits. The increase in rates was primarily a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on deposit accounts subsequent to June 30, 2022 as a result of an increase in benchmark interest rates.  

Provision for Credit Losses

The Company recorded a $1.6 million recovery of provision for credit losses for the six months ended June 30, 2023 compared to no provision for the six months ended June 30, 2022. The recovery of provision for credit losses for the current period that is directly attributable to the loan portfolio was $1.7 million. The current period net recovery of provision for credit losses also contains a $104 thousand provision expense associated with unfunded loan commitments, which partially offset the recovery of provision for credit losses directly attributable to the loan portfolio.

The recovery of provision for credit losses during the six months ended June 30, 2023 directly attributable to the loan portfolio was primarily due to an improvement in the forecasted housing price index used in the quantitative component of the CECL model, changes in qualitative factors and a decrease in loan balances during the first half of the year.

The provision for credit losses during the six months ended June 30, 2023 directly attributable to unfunded loan commitments was primarily due to an increase in unfunded loan commitment balances during the first half of 2023.

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

Non-interest Income

The Company’s recurring sources of non-interest income consist primarily of bank owned life insurance income, service charges on deposit accounts, interchange income and insurance commissions. Generally speaking, loan fees are included in interest income on the loan portfolio and not reported as non-interest income.

The following table summarizes non-interest income for the six months ended June 30, 2023 and June 30, 2022.

	Six months ended
	June 30,
(Dollars in thousands)	2023		2022
Service charges on deposit accounts
Overdrawn account fees	$	35	$	41
Account service fees		119		120
Other service charges and fees
Interchange income		203		198
Other charges and fees		314		96
Bank owned life insurance		201		190
Losses on sale of available-for-sale securities		(202)		—
Net gains (losses) on premises and equipment		16		(1)
Insurance commissions		256		265
Gain on sale of government guaranteed loans		23		—
Other operating income (loss)		286		(386)
Total non-interest income	$	1,251	$	523

Non-interest income increased $728 thousand during the six months ended June 30, 2023 compared to the same period of 2022. The increase in non-interest income was primarily due to an increase of $563 thousand as a result of mark-to-market adjustments on investments related to the Company’s nonqualified deferred compensation plan. The Company also had an increase in other service charges and fee income of $223 thousand primarily as a result of penalty fee income recognized on the early withdrawal of certificates of deposit, as well as a $91 thousand increase in customer interest rate swap fee income. These increases were partially offset by losses of $202 thousand recognized on the sale of $12.0 million of investment securities during six months ended June 30, 2023. The sales

45

were executed to manage the Company’s interest rate risk position, allow for the reinvestment of proceeds into higher yielding assets and as a risk management strategy to reduce the Company’s exposure to municipalities. Excluding mark-to-market adjustments on nonqualified deferred compensation plan investments and the loss on securities sold, non-interest income increased $367 thousand or 40.2% when compared to the same period in 2022.

Non-interest Expense

Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing banking services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, data processing expenses, professional fees, advertising expenses and other general and administrative expenses, including FDIC assessments, and Virginia state franchise taxes.

The following table summarizes non-interest expense for the the six months ended June 30, 2023 and June 30, 2022.

	Six months ended
	June 30,
(Dollars in thousands)	2023		2022
Salaries and employee benefits expense	$	9,877	$	10,682
Occupancy expense of premises		918		975
Furniture and equipment expenses		600		666
Advertising expense		153		100
Data processing		881		928
FDIC insurance		496		270
Professional fees		294		571
State franchise tax		1,181		1,047
Bank insurance		114		90
Vendor services		273		301
Supplies, printing, and postage		62		61
Director costs		443		415
Other operating expenses		309		361
Total non-interest expense	$	15,601	$	16,467

Non-interest expense decreased $866 thousand or 5.3% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease in non-interest expense was primarily due to decreases in salaries and employee benefits expense, professional fees, occupancy expense of premises and furniture and equipment expense. The decrease in salaries and employee benefits was primarily due to a reduction in incentive compensation accruals when compared to the same period of the prior year. Incentive compensation accruals can fluctuate materially from quarter to quarter, based upon the Company’s financial performance and conditions measured against, among other evaluation criteria, our strategic plan and budget. At the end of each year, the ultimate determination of the incentive compensation is approved by the Board of Directors. The decrease in professional fees was due to non-recurring professional fees incurred in the first half of 2022 as part of our registration with the SEC and timing of projects. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases. The decrease in furniture and equipment expense was due to lower depreciation expense on fixed assets.

The decrease in non-interest expense was partially offset by increases in FDIC insurance expense, franchise tax expense and director compensation expense. The increase in FDIC insurance expense was attributable to the FDIC increasing the base assessment rate for all insured depository institutions. The increase in franchise tax expense was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The increase in director compensation expense was primarily due to the accelerated vesting of restricted stock awards as a result of the death of a director during the first quarter of 2023.

Income Taxes

Income tax expense decreased $748 thousand or 20.1% to $3.0 million for the six months ended June 30, 2023 compared to $3.7 million for the six months ended June 30, 2022. Our effective tax rate for the six months ended June 30, 2023 was 21.6%, compared to 19.3% for the same period of 2022. The increase in our effective tax rate was primarily due to non-recurring tax benefits realized in connection with the exercise of certain nonqualified stock options during the six months ended June 30, 2022.

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Results of Operations – Three Months Ended June 30, 2023 and June 30, 2022

Overview

Net income for the three months ended June 30, 2023 decreased $3.4 million or 43.0% to $4.5 million compared to $7.9 million for the three months ended June 30, 2022. Diluted earnings per share for the three months ended June 30, 2023 were $0.32, a 42.9% decrease when compared to the $0.56 reported for the three months ended June 30, 2022.

Net interest income for the three months ended June 30, 2023 decreased $5.3 million or 30.6% compared to the three months ended June 30, 2022, driven primarily by the increase in costs of interest-bearing liabilities outpacing the increase in yield on interest-earning assets.

The Company recorded a $868 thousand recovery of provision for credit losses for the three months ended June 30, 2023 compared to no provision for the three months ended June 30, 2022. Additional discussion of the provision for credit losses is included below under the heading Provision for Credit Losses.

Non-interest income increased $576 thousand during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase in non-interest income was primarily due to an increase of $357 thousand as a result of mark-to-market adjustments on investments related to the Company’s nonqualified deferred compensation plan. The Company also had an increase in other service charges and fee income of $157 thousand primarily as a result of penalty fee income recognized on the early withdrawal of certificates of deposit. The increase in non-interest income was also attributable to a $23 thousand gain recorded as a result of the Company’s first sale of the guaranteed portion of a SBA 7(a) loan.

Non-interest expense increased $150 thousand or 2.0% during the second quarter of 2023 compared to the three months ended June 30, 2022. The increase in non-interest expense was primarily due to an increase in salaries and employee benefit expense as a result of lower offsetting direct loan origination costs as a result of lower loan origination volume in the second quarter of 2023 when compared to the same period of the prior year. Salaries and employee benefit expense is reduced to account for the portion of salary costs incurred to originate a loan and are subsequently amortized into net interest income to match the costs incurred with the economic benefit derived from originating a loan. The increase in non-interest expense was also attributable to increases in FDIC insurance expense and franchise tax expense. The increase in FDIC insurance expense resulted from the FDIC increasing the base assessment rate for all insured depository institutions. The increase in franchise tax expense was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The increase in non-interest expense was partially offset by decreases in professional fees, occupancy expense of premises and furniture and equipment expense. The decrease in professional fees was due to non-recurring professional fees incurred in the second quarter of 2022 as part of our registration with the SEC and timing of projects. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases. The decrease in furniture and equipment expense was due to lower depreciation expense on fixed assets. The Company continues to analyze cost savings opportunities on existing leases and material contracts.

The ROAA for the three months ended June 30, 2023 and June 30, 2022 was 0.77% and 1.41%, respectively. The ROAE for the three months ended June 30, 2023 and June 30, 2022 was 8.13% and 15.28%, respectively.

Net Interest Income and Net Interest Margin

The following table presents the average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the three months ended June 30, 2023 and June 30, 2022.

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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

	June 30, 2023						June 30, 2022
			Interest Income /		Average				Interest Income /		Average
(Dollars in thousands)	Average Balance		Expense		Rate		Average Balance		Expense		Rate
Assets:
Securities:
Taxable	$	438,845	$	2,210	2.02	%	$	442,686	$	1,957	1.77	%
Tax-exempt(1)		2,933		20	2.74	%		5,002		38	3.05	%
Total securities	$	441,778	$	2,230	2.02	%	$	447,688	$	1,995	1.79	%
Loans, net of unearned income(2):
Taxable		1,739,511		20,775	4.79	%		1,622,666		17,180	4.25	%
Tax-exempt(1)		28,320		292	4.14	%		19,248		195	4.06	%
Total loans, net of unearned income	$	1,767,831	$	21,067	4.78	%	$	1,641,914	$	17,375	4.24	%
Interest-bearing deposits in other banks	$	95,441	$	1,225	5.15	%	$	115,107	$	234	0.82	%
Total interest-earning assets	$	2,305,050	$	24,522	4.27	%	$	2,204,709	$	19,604	3.57	%
Total non-interest earning assets		39,662						35,410
Total assets	$	2,344,712					$	2,240,119
Liabilities & Shareholders’ Equity:
Interest-bearing deposits
NOW accounts	$	287,094	$	1,483	2.07	%	$	322,255	$	222	0.28	%
Money market accounts		352,373		2,476	2.82	%		398,641		439	0.44	%
Savings accounts		74,483		231	1.24	%		114,216		89	0.31	%
Time deposits		901,104		7,569	3.37	%		633,273		948	0.60	%
Total interest-bearing deposits	$	1,615,054	$	11,759	2.92	%	$	1,468,385	$	1,698	0.46	%
Federal funds purchased		—		—	0.00	%		—	��	—	0.00	%
Subordinated debt		24,653		349	5.68	%		29,222		537	7.37	%
Other borrowed funds		27,890		338	4.86	%		6,967		12	0.69	%
Total interest-bearing liabilities	$	1,667,597	$	12,446	2.99	%	$	1,504,574	$	2,247	0.60	%
Demand deposits		436,648						511,846
Other liabilities		18,859						16,732
Total liabilities	$	2,123,104					$	2,033,152
Shareholders’ equity	$	221,608					$	206,967
Total liabilities and shareholders’ equity	$	2,344,712					$	2,240,119
Net interest spread					1.28	%					2.97	%
Net interest income and margin			$	12,076	2.10	%			$	17,357	3.16	%

(1) Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2) The Company did not have any loans on nonaccrual as of June 30, 2023 or June 30, 2022.

Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.

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Tax-Equivalent Net Interest Income

	Three months ended
	June 30,
(Dollars in thousands)	2023		2022
GAAP Financial Measurements:
Interest Income - Loans	$	21,005	$	17,334
Interest Income - Securities and Other Interest-Earning Assets		3,450		2,221
Interest Expense - Deposits		11,759		1,698
Interest Expense - Borrowings		687		549
Total Net Interest Income	$	12,009	$	17,308
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans		62		41
Add: Tax Benefit on Tax-Exempt Interest Income - Securities		5		8
Total Tax Benefit on Tax-Exempt Interest Income (1)	$	67	$	49
Tax-Equivalent Net Interest Income	$	12,076	$	17,357

(1) Tax benefit was calculated using the federal statutory tax rate of 21%.

Net interest income decreased $5.3 million or 30.4% on a fully tax-equivalent basis for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The decrease in net interest income was driven by the increase in the costs of interest-bearing liabilities outpacing the increase in yield on interest-earning assets.

On a fully tax-equivalent basis, the net interest margin was 2.10% for the three months ended June 30, 2023, compared to 3.16% for the three months ended June 30, 2022. The decrease in net interest margin was primarily due to an increase in the cost of interest-bearing liabilities, which more than offset the increase in yields on loans, investments, and interest-bearing deposits in other banks. The cost of interest-bearing liabilities was 2.99% for the second quarter of 2023 compared to 0.60% for the same quarter of the prior year. The increase in the cost of interest-bearing liabilities was primarily due to a 2.46% increase in the cost of interest-bearing deposits as a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on deposit accounts subsequent to June 30, 2022 as a result of higher market interest rates.

The loan portfolio’s yield for the three months ended June 30, 2023 was 4.78% compared to 4.24% for the three months ended June 30, 2022. The increase of 0.54% was primarily attributable to an increase in yield on the Company’s variable rate loans as a result of an increase in interest rates subsequent to June 30, 2022 coupled with a higher weighted average yield on loans originated since the second quarter of 2022.

The investment securities portfolio’s yield for the three months ended June 30, 2023 was 2.02% compared to 1.79% for the three months ended June 30, 2022. The increase of 0.23% was primarily due to higher yields on investment securities purchased subsequent to June 30, 2022.

The yield on interest-bearing deposits due from banks for the three months ended June 30, 2023 was 5.15% compared to 0.82% for the three months ended June 30, 2022. The increase of 4.33% was primarily due to a higher federal funds rate during the three months ended June 30, 2023 when compared to the same period of 2022.

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to volume.

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Rate/Volume Analysis

	For the Three Months Ended June 30,
	2023 and 2022
	Increase
	(Decrease) Due to
(Dollars in thousands)	Volume		Rate		Total Increase (Decrease)
Interest-earning Assets:
Securities:
Taxable	$	(17)	$	270	$	253
Tax-exempt(1)		(14)		(4)		(18)
Total securities	$	(31)	$	266	$	235
Loans, net of unearned income:
Taxable		1,396		2,199		3,595
Tax-exempt(1)		94		3		97
Total loans, net of unearned income(2)	$	1,490	$	2,202	$	3,692
Interest-bearing deposits in other banks	$	(252)	$	1,243	$	991
Total interest-earning assets	$	1,207	$	3,711	$	4,918
Interest-bearing Liabilities:
Interest-bearing deposits:
NOW accounts	$	(163)	$	1,424	$	1,261
Money market accounts		(426)		2,463		2,037
Savings accounts		(123)		265		142
Time deposits		2,232		4,389		6,621
Total interest-bearing deposits	$	1,520	$	8,541	$	10,061
Federal funds purchased		—		—		—
Subordinated debt		(64)		(124)		(188)
Other borrowed funds		338		(12)		326
Total interest-bearing liabilities	$	1,794	$	8,405	$	10,199
Change in net interest income	$	(587)	$	(4,694)	$	(5,281)

(1) Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%.

(2)The Company did not have any loans on nonaccrual as of June 30, 2023 or June 30, 2022.

Interest Income

Interest income increased by $4.9 million or 25.1% to $24.5 million on a fully tax-equivalent basis for the three months ended June 30, 2023 compared to $19.6 million for the three months ended June 30, 2022, driven by both an increase in volume and rates on interest-earning assets. The increase in volume of average interest-earning assets was primarily attributable to the Company’s loan portfolio. The increase in rate on interest-earning assets was primarily attributable to the loan portfolio and interest-bearing deposits due from banks.

Fully tax-equivalent interest income on loans increased by approximately $3.7 million as a result of volume growth and an increase in rate. Average loans increased approximately $125.9 million between the three months ended June 30, 2023 and June 30, 2022, which was primarily attributable to origination volume in the commercial real estate and residential real estate portfolios subsequent to June 30, 2022.

Fully tax-equivalent interest income on investment securities increased by approximately $266 thousand as a result of rate increases, which was partially offset by a decrease in fully tax-equivalent interest income of $31 thousand due to a decrease in volume. Average investment securities decreased approximately $5.9 million between the three months ended June 30, 2023 and June 30, 2022. The decrease in investment securities was primarily due to the amortization of securities coupled with the sale of securities during the six months ended June 30, 2023.

The increase in rates on loans, investment securities, and interest-bearing deposits in other banks was primarily attributable to an increase in benchmark interest rates since June 30, 2022.

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Interest Expense

Interest expense increased by $10.2 million to $12.4 million for the three months ended June 30, 2023 compared to $2.2 million for the three months ended June 30, 2022, primarily due to an increase in rates and, to a lesser extent, volume of deposits. The increase in rates was primarily a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on deposit accounts subsequent to June 30, 2022 as a result of an increase in benchmark interest rates.

Provision for Credit Losses

The Company recorded a $868 thousand recovery of provision for credit losses for the second quarter of 2023 compared to no provision for the second quarter of 2022. The recovery of provision for credit losses for the current period that is directly attributable to the loan portfolio was $990 thousand. The current period net recovery of provision for credit losses also contains a $122 thousand provision expense associated with unfunded loan commitments, which partially offset the recovery of provision for credit losses directly attributable to the loan portfolio.

The recovery of provision for credit losses during the second quarter of 2023 directly attributable to the loan portfolio was primarily due to an improvement in the forecasted housing price index used in the quantitative component of the CECL model, changes in qualitative factors and a decrease in loan balances during the second quarter of 2023.

The provision for credit losses during the second quarter of 2023 directly attributable to unfunded loan commitments was primarily due to an increase in unfunded loan commitment balances during the second quarter of 2023.

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

Non-interest Income

The following table summarizes non-interest income for the three months ended June 30, 2023 and June 30, 2022.

	Three months ended
	June 30,
(Dollars in thousands)	2023		2022
Service charges on deposit accounts
Overdrawn account fees	$	21	$	22
Account service fees		61		62
Other service charges and fees
Interchange income		104		105
Other charges and fees		210		52
Bank owned life insurance		101		95
Net gains on premises and equipment		17		—
Insurance commissions		50		44
Gain on sale of government guaranteed loans		23		—
Other operating income (loss)		98		(271)
Total non-interest income	$	685	$	109

Non-interest income increased $576 thousand during the second quarter of 2023 compared to the second quarter of 2022. The increase in non-interest income was primarily due to an increase of $357 thousand as a result of mark-to-market adjustments on investments related to the Company’s nonqualified deferred compensation plan. The Company also had an increase in other service charges and fee income of $157 thousand primarily as a result of penalty fee income recognized on the early withdrawal of certificates of deposit. The increase in non-interest income was also attributable to a $23 thousand gain recorded as a result of the Company’s first sale of the guaranteed portion of a Small Business Administration 7(a) loan. Excluding mark-to-market adjustments on nonqualified deferred compensation plan investments, non-interest income increased $219 thousand or 57.3% when compared to the same period in 2022.  

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Non-interest Expense

The following table summarizes non-interest expense for the three months ended June 30, 2023 and June 30, 2022.

	Three months ended
	June 30,
(Dollars in thousands)	2023		2022
Salaries and employee benefits expense	$	4,965	$	4,655
Occupancy expense of premises		448		482
Furniture and equipment expenses		304		341
Advertising expense		76		61
Data processing		447		490
FDIC insurance		283		140
Professional fees		136		297
State franchise tax		604		523
Bank insurance		57		45
Vendor services		129		149
Supplies, printing, and postage		37		40
Director costs		188		203
Other operating expenses		157		255
Total non-interest expense	$	7,831	$	7,681

Non-interest expense increased $150 thousand or 2.0% during the second quarter of 2023 compared to the three months ended June 30, 2022. The increase in non-interest expense was primarily due to an increase in salaries and employee benefit expense as a result of lower offsetting direct loan origination costs as a result of lower loan origination volume in the second quarter of 2023 when compared to the same period of the prior year. Salaries and employee benefit expense is reduced to account for the portion of salary costs incurred to originate a loan and are subsequently amortized into net interest income to match the costs incurred with the economic benefit derived from originating a loan. The increase in non-interest expense was also attributable to increases in FDIC insurance expense and franchise tax expense. The increase in FDIC insurance expense resulted from the FDIC increasing the base assessment rate for all insured depository institutions. The increase in franchise tax expense was due to an increase in the Bank’s equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions.

The increase in non-interest expense was partially offset by decreases in professional fees, occupancy expense of premises, furniture and equipment expense, data processing fees and other operating expenses. The decrease in professional fees was due to non-recurring professional fees incurred in the second quarter of 2022 as part of our registration with the SEC and timing of projects. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases. The decrease in furniture and equipment expense was due to lower depreciation expense on fixed assets. The decrease in data processing fees due to contract renegotiations. The Company continues to analyze cost savings opportunities on existing leases and material contracts.

Income Taxes

Income tax expense decreased $613 thousand or 33.1% to $1.2 million for the three months ended June 30, 2023 compared to $1.9 million for the three months ended June 30, 2022. Our effective tax rate for the three months ended June 30, 2023 was 21.7%, compared to 19.0% for the same period ended June 30, 2022. The increase in our effective tax rate was primarily due to non-recurring tax benefits realized in connection with the exercise of certain nonqualified stock options during the second quarter of 2022.

Discussion and Analysis of Financial Condition 

Assets, Liabilities, and Shareholders’ Equity

The Company’s total assets increased $16.0 million or 0.7% to $2.36 billion at June 30, 2023 compared to $2.35 billion at December 31, 2022. The increase in total assets is primarily attributable to an increase in interest-bearing deposits in banks of $60.6 million, partially offset from decreases in available-for-sale securities and loans net of unearned income of $32.3 and $19.7 million, respectively.

The Company’s total liabilities increased $9.8 million or 0.5% to $2.15 billion at June 30, 2023 compared to $2.14 billion at December 31, 2022. The increase in total liabilities was primarily attributable to a $54.0 million increase in borrowings as a result of the BTFP

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advance obtained during the second quarter of 2023. The increase in total liabilities was partially offset by a decrease in federal funds purchased and deposits of $25.5 million and $21.4 million, respectively.

Shareholders’ equity increased $6.2 million or 2.9% to $219.0 million at June 30, 2023 compared to $212.8 million at December 31, 2022. The increase in shareholders’ equity was primarily attributable to net income for the six months ended June 30, 2023, a decrease in other comprehensive loss during the period as a result of changes in fair value in the Company’s available-for-sale investment portfolio, and an increase in additional paid-in capital as a result of option exercises during the six months ended June 30, 2023. The increase was partially offset by the impact of the Company’s adoption of ASC 326 on January 1, 2023 and dividends declared. Book value per share was $15.50 as of June 30, 2023 compared to $15.09 as of December 31, 2022.

Investment Securities

The Company maintains a primarily fixed income investment securities portfolio that had a total carrying value of $422.7 million at June 30, 2023 and $457.0 million at December 31, 2022. The investment portfolio is used as a source of liquidity, interest income, and credit risk diversification, as well as to manage rate sensitivity and provide collateral for secured public funds and secured credit lines. Investment securities are classified as available-for-sale or held-to-maturity based on management’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Investment securities that we may sell prior to maturity in response to changes in management’s investment strategy, liquidity needs, interest rate risk profile or for other reasons are classified as available-for-sale. The Company also had restricted stock and equity securities within its investment securities portfolio with total carrying values of $4.5 million and $2.7 million, respectively, as of June 30, 2023 and $4.4 million and $2.1 million, respectively, as of December 31, 2022.

The Company did not purchase investment securities during the six months ended June 30, 2023. During the six months ended June 30, 2023, the Company sold available-for-sale securities with a total par value of $12.0 million, which were comprised of $10.0 million of U.S. Treasuries and $2.0 million of municipal bonds. The sale resulted in a pre-tax loss of $202 thousand. The Company had $22.8 million in maturities, calls and principal repayments on securities during the six months ended June 30, 2023, which was comprised of $20.3 million of mortgage-backed securities and $2.5 million of collateralized mortgage obligation securities.

The following table summarizes the amortized cost and fair value of the Company’s fixed income investment portfolio as of June 30, 2023 and December 31, 2022, respectively.

	June 30, 2023				December 31, 2022
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Held-to-maturity
U.S. Treasuries	$	6,000	$	5,186	$	6,000	$	5,160
U.S. government and federal agencies		35,491		29,671		35,551		29,416
Collateralized mortgage obligations		20,326		15,935		21,275		17,048
Taxable municipal		6,065		4,850		6,073		4,709
Mortgage-backed		29,571		23,992		30,516		24,828
Total Held-to-maturity Securities	$	97,453	$	79,634	$	99,415	$	81,161
Available-for-sale
U.S. Treasuries	$	53,927	$	50,156	$	63,480	$	59,210
U.S. government and federal agencies		38,812		35,011		38,748		34,760
Corporate bonds		3,000		2,445		3,000		2,614
Collateralized mortgage obligations		43,146		36,238		44,732		38,474
Tax-exempt municipal		2,933		2,628		4,993		4,645
Taxable municipal		607		577		608		579
Mortgage-backed		219,264		198,216		238,652		217,294
Total Available-for-sale Securities	$	361,689	$	325,271	$	394,213	$	357,576

In the prevailing rate environments as of June 30, 2023 and December 31, 2022, the Company’s investment portfolio had an estimated weighted average remaining life of approximately 4.4 years and 4.5 years, respectively. The available-for-sale investment portfolio had an estimated weighted average remaining life of approximately 3.6 years and 3.8 years as of June 30, 2023 and December 31, 2022, respectively. The held-to-maturity investment portfolio had an estimated weighted average remaining life of approximately 7.1 years and 7.3 years as of June 30, 2023 and December 31, 2022, respectively.

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The following table summarizes the maturity composition of our fixed income investment securities as of June 30, 2023, including the weighted average yield of each maturity band. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.

	June 30, 2023
	Amortized		Fair		Weighted-Average
(Dollars in thousands)	Cost		Value		Yield
Held-to-maturity
Due in one year or less	$	—	$	—	—
Due after one year through five years		20,157		17,360	1.01	%
Due after five years through ten years		24,495		20,224	1.48	%
Due after ten years		52,801		42,050	1.39	%
Total Held-to-maturity Securities	$	97,453	$	79,634	1.33	%
Available-for-sale
Due in one year or less	$	13,905	$	13,588	2.31	%
Due after one year through five years		90,960		83,437	1.63	%
Due after five years through ten years		137,053		126,019	2.33	%
Due after ten years		119,771		102,227	1.74	%
Total Available-for-sale Securities	$	361,689	$	325,271	1.96	%

On July 17, 2023, the Company sold certain lower-yielding available-for-sale investment securities with a total par value of $161.2 million. The sale of the available-for-sale securities will not impact book-value-per-share as the after-tax loss associated with the investment securities was already reflected in accumulated other comprehensive loss as of June 30, 2023. The proceeds from the restructuring will be reinvested in higher yielding assets with an expected after-tax loss earn back of less than 3 years. The restructuring is expected to improve the Company’s earnings, while maintaining strong capital ratios on a GAAP basis and continuing to meaningfully exceed well-capitalized ratios on a regulatory basis. Upon completion of the sale, the Company’s available-for-sale and held-to-maturity fixed income securities portfolio has an estimated weighted average life of 4.6 years and the available-for-sale portfolio has an estimated weighted average life of 3.2 years. Nearly 65% of the remaining portfolio is invested in amortizing bonds and is expected to return, on average, $2.5 million in cash flows each month. The Company believes that the restructuring will positively impact long-term profitability.

Loan Portfolio

Gross loans, net of unearned income, decreased $19.7 million or 1.1% to $1.77 billion as of June 30, 2023 compared to $1.79 billion as of December 31, 2022. The Company continues to maintain its disciplined underwriting standards while prudently pursuing loan growth opportunities that provide acceptable risk-adjusted returns. Management believes the Company’s loan pipeline headed into the third quarter of 2023 is robust and gaining momentum. We are seeing increased lending opportunities that meet our underwriting standards and, in many cases, fewer competitors for those loans as some market participants have scaled back lending efforts.

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The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of June 30, 2023 and December 31, 2022.

	June 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		Percent		Amount		Percent
Real Estate Loans:
Commercial	$	1,101,543	62.39	%	$	1,118,127	62.62	%
Construction and land development		179,656	10.18	%		195,027	10.92	%
Residential		443,305	25.11	%		426,841	23.91	%
Commercial - Non Real Estate:
Commercial loans		40,289	2.28	%		44,924	2.52	%
Consumer - Non-Real Estate:
Consumer loans		646	0.04	%		529	0.03	%
Total Gross Loans	$	1,765,439	100.00	%	$	1,785,448	100.00	%
Allowance for loan credit losses		(20,629)				(20,208)
Net deferred loan costs		4,362				4,060
Total net loans	$	1,749,172			$	1,769,300

The following table summarizes the contractual maturities of the loans as of June 30, 2023 by loan type. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The table also summarizes the fixed and floating rate composition of loans held for investment for contractual maturities greater than one year.

	June 30, 2023
			After 1		After 5
			Year		years		Maturing
	Within 1		Within 5		Within 15		After 15
(Dollars in thousands)	Year		Years		Years		Years		Total
Real Estate Loans:
Residential	$	5,792	$	40,500	$	39,205	$	357,808	$	443,305
Commercial		41,973		253,329		794,580		11,661		1,101,543
Construction and land development		91,985		56,869		29,804		998		179,656
Commercial - Non-Real Estate:
Commercial loans		12,039		17,001		10,347		902		40,289
Consumer - Non-Real Estate:
Consumer loans		531		95		—		20		646
Total Gross Loans	$	152,320	$	367,794	$	873,936	$	371,389	$	1,765,439
For Maturities Over One Year:
Floating rate loans			$	146,857	$	299,487	$	359,470	$	805,814
Fixed rate loans				220,937		574,449		11,919		807,305
			$	367,794	$	873,936	$	371,389	$	1,613,119

Asset Quality

The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Credit Officer is responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions.

The Company’s asset quality remained strong through the second quarter of 2023. The Company did not have any nonperforming assets, which includes nonperforming loans and OREO, as of June 30, 2023 or December 31, 2022. As a result, the Company did not have any nonperforming loans, which consists of loans that are 90 days or more past due or loans placed on nonaccrual as of June 30, 2023 or December 31, 2022.

The Company did not have any nonaccrual loans as of June 30, 2023 or December 31, 2022 nor were there any loans placed on nonaccrual during those periods. A loan is placed on nonaccrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and

55

interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. As a result, the Company did not have any interest income that would have been recognized on nonaccrual loans for the three or six months ended June 30, 2023 or the three or six months ended June 30, 2022.

The Company did not make any loan modifications to borrowers experiencing financial difficulty during the three or six months ended June 30, 2023. The Company had a recorded investment in TDRs of $418 thousand as of December 31, 2022, all of which were in compliance with their modified terms at December 31, 2022. The Company adopted ASU 2022-02 on January 1, 2023, which eliminated the accounting guidance for TDRs.

The following table summarizes the Company’s asset quality as of June 30, 2023 and December 31, 2022.

(Dollars in thousands)	June 30, 2023			December 31, 2022
Nonaccrual loans	$	—		$	—
Loans past due 90 days and accruing interest		—			—
Other real estate owned and repossessed assets		—			—
Total nonperforming assets	$	—		$	—
Allowance for loan credit losses to nonperforming assets		NM			NM
Nonaccrual loans to gross loans		0.00	%		0.00	%
Nonperforming assets to period end loans and OREO		0.00	%		0.00	%

NM – Not meaningful

Allowance for Loan Credit Losses

Refer to the discussion in Note 1 in Item 1 of this Form 10-Q for management’s approach to estimating the allowance for loan credit losses.

The Company recorded net recoveries of $1 thousand during the three months ended June 30, 2023 compared to no charge-offs or recoveries during the three months ended June 30, 2022. The Company recorded net recoveries of $2 thousand during the six months ended June 30, 2023 compared to net charge-offs of $1 thousand during the six months ended June 30, 2022. At June 30, 2023, the allowance for loan credit losses was $20.6 million or 1.17% of outstanding loans, net of unearned income, compared to $20.2 million or 1.13% of outstanding loans, net of unearned income, at December 31, 2022. The increase in the allowance as a percentage of outstanding loans, net of unearned income, was primarily a result of the Company recognizing an incremental allowance upon adoption of ASC 326 on January 1, 2023. The Company previously accounted for its allowance for loan losses under the incurred loss model.

The following table summarizes the Company’s loan loss experience by loan portfolio for the three months ended June 30, 2023 and June 30, 2022.

	June 30, 2023					June 30, 2022
	Net		Net			Net		Net
	(charge-offs)		(charge-off)			(charge-offs)		(charge-off)
(Dollars in thousands)	recoveries		recovery rate (1)			recoveries		recovery rate (1)
Real estate loans:
Commercial	$	—		—		$	—	—
Construction and land development		—		—			—	—
Residential		—		—			—	—
Commercial loans		1		0.00	%		—	—
Consumer loans		—		—			—	—
Total	$	1				$	—
Average loans outstanding during the period	$	1,767,831				$	1,641,914
Allowance coverage ratio (2)				1.17	%			1.18	%
Total net (charge-off) recovery rate				0.00	%			—	%
Allowance to nonaccrual loans ratio(3)				NM				NM

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NM – Not meaningful

(1) The net (charge-off) recovery rate is calculated by dividing annualized total net (charge-offs) recoveries during the period by average gross loans outstanding during the period.

(2) The allowance coverage ratio is calculated by dividing the allowance for loan credit losses at the end of the period by gross loans, net of unearned income at the end of the period.

(3) The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan credit losses at the end of the period by nonaccrual loans at the end of the period.

The following table summarizes the Company’s loan loss experience by loan portfolio for the six months ended June 30, 2023 and June 30, 2022.

	June 30, 2023					June 30, 2022
	Net		Net			Net		Net
	(charge-offs)		(charge-off)			(charge-offs)		(charge-off)
(Dollars in thousands)	recoveries		recovery rate (1)			recoveries		recovery rate (1)
Real estate loans:
Commercial	$	—		—		$	(1)	(0.00)	%
Construction and land development		—		—			—	—
Residential		—		—			—	—
Commercial loans		2		0.01	%		—	—
Consumer loans		—		—			—	—
Total	$	2				$	(1)
Average loans outstanding during the period	$	1,770,362				$	1,631,283
Allowance coverage ratio (2)				1.17	%			1.18	%
Total net (charge-off) recovery rate				0.00	%			(0.00)	%
Allowance to nonaccrual loans ratio(3)				NM				NM

NM – Not meaningful

(1) The net (charge-off) recovery rate is calculated by dividing annualized total net (charge-offs) recoveries during the period by average gross loans outstanding during the period.

(2) The allowance coverage ratio is calculated by dividing the allowance for loan credit losses at the end of the period by gross loans, net of unearned income at the end of the period.

(3) The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan credit losses at the end of the period by nonaccrual loans at the end of the period.

The following tables summarize the allowance for loan credit losses by portfolio with a comparison of the percentage composition in relation to total allowance for loan credit losses and total loans as of June 30, 2023 and December 31, 2022.

	June 30, 2023
	Allowance		Percent of Allowance		Percent of Loans in
	for Loan Credit		in Each Category to		Each Category to Total
(Dollars in thousands)	Losses		Total Allocated Allowance		Loans
Real Estate Loans:
Commercial	$	9,856	47.78	%	62.39	%
Construction and land development		3,226	15.64	%	10.18	%
Residential		6,802	32.97	%	25.11	%
Commercial - Non-Real Estate:
Commercial loans		715	3.47	%	2.28	%
Consumer - Non-Real Estate:
Consumer loans		30	0.14	%	0.04	%
Total	$	20,629	100.00	%	100.00	%

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	December 31, 2022
	Allowance		Percent of Allowance		Percent of Loans in
	for Loan		in Each Category to		Each Category to Total
(Dollars in thousands)	Losses		Total Allocated Allowance		Loans
Real Estate Loans:
Commercial	$	13,205	67.48	%	62.62	%
Construction and land development		2,860	14.61	%	10.92	%
Residential		3,044	15.55	%	23.91	%
Commercial - Non-Real Estate:
Commercial loans		456	2.33	%	2.52	%
Consumer - Non-Real Estate:
Consumer loans		5	0.03	%	0.03	%
Unallocated		638	—		—
Total	$	20,208	100.00	%	100.00	%

Management believes that the allowance for loan credit losses is adequate to absorb lifetime credit losses inherent in the portfolio as of June 30, 2023. There can be no assurance, however, that adjustments to the provision for (recovery of) credit losses will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; or changes in the circumstances of particular borrowers are criteria that could change and make adjustments to the provision for (recovery of) credit losses necessary.

Deposits

Total deposits decreased $21.4 million or 1.0% to $2.05 billion as of June 30, 2023 compared to $2.07 billion as of December 31, 2022.

Non-interest bearing demand deposits decreased $42.8 million or 9.0% to $433.9 million as of June 30, 2023 compared to $476.7 million at December 31, 2022. Non-interest bearing demand deposits represented 21.2% and 23.1% of total deposits at June 30, 2023 and December 31, 2022, respectively.

Interest-bearing deposits, which include NOW accounts, regular savings accounts, money market accounts, and time deposits, increased $21.3 million or 1.3% to $1.61 billion as of June 30, 2023 compared to $1.59 billion as of December 31, 2022. Interest-bearing deposits represented 78.8% and 76.9% of total deposits at June 30, 2023 and December 31, 2022, respectively.

The Company focuses on funding asset growth with deposit accounts, with an emphasis on core deposit growth, as its primary source of deposits. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, time deposits, reciprocal IntraFi Demand^® deposits, IntraFi Money Market^® deposits and IntraFi CD^® deposits. Core deposits totaled $1.69 billion or 82.5% of total deposits and $1.69 billion or 81.9% of total deposits at June 30, 2023 and December 31, 2022, respectively.

The following table sets forth the average balances of deposits and the average interest rates paid for the three months ended June 30, 2023 and June 30, 2022.

	June 30, 2023				June 30, 2022
	Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Non-interest bearing	$	436,648			$	511,846
Interest bearing:
NOW accounts		287,094	2.07	%		322,255	0.28	%
Money market accounts		352,373	2.82	%		398,641	0.44	%
Savings accounts		74,483	1.24	%		114,216	0.31	%
Time deposits		901,104	3.37	%		633,273	0.60	%
Total interest-bearing		1,615,054	2.92	%		1,468,385	0.46	%
Total	$	2,051,702			$	1,980,231

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The following table sets forth the average balances of deposits and the average interest rates paid for the six months ended June 30, 2023 and June 30, 2022.

	June 30, 2023				June 30, 2022
	Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Non-interest bearing	$	456,445			$	497,899
Interest bearing:
NOW accounts		272,872	1.66	%		323,546	0.26	%
Money market accounts		390,511	2.56	%		395,532	0.40	%
Savings accounts		81,025	1.18	%		111,312	0.32	%
Time deposits		858,027	2.97	%		635,359	0.52	%
Total interest-bearing		1,602,435	2.56	%		1,465,749	0.42	%
Total	$	2,058,880			$	1,963,648

The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of June 30, 2023.

	June 30, 2023
(Dollars in thousands)	Total		Uninsured
Three months or less	$	70,217	$	55,467
Over three through 6 months		153,209		110,709
Over 6 through 12 months		56,990		42,490
Over 12 months		98,733		87,483
Total	$	379,149	$	296,149

The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) was estimated at $869.1 million at June 30, 2023 and $963.9 million at December 31, 2022. Included in these amounts were $172.1 million and $162.2 million of public fund deposits that are collateralized by securities as of June 30, 2023 and December 31, 2022, respectively. Deposits that were not insured or not collateralized by securities represented 34% and 39% of total deposits, respectively, as of June 30, 2023 and December 31, 2022.

Capital Resources

The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Exchange Act. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory capital requirements.

The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision.

Note 11 to the Consolidated Financial Statements, included in Item 1 of this Form 10-Q, contains additional discussion and analysis regarding the Company and Bank’s regulatory capital requirements.

Shareholders’ equity increased $6.2 million or 2.9% to $219.0 million at June 30, 2023 compared to $212.8 million at December 31, 2022. The increase in shareholders’ equity was primarily attributable to net income for the six months ended June 30, 2023, a decrease in other comprehensive loss during the period as a result of changes in fair value in the Company’s available-for-sale investment portfolio, and an increase in additional paid-in capital as a result of option exercises during the six months ended June 30, 2023. The increase was partially offset by the impact of the Company’s adoption of ASC 326 on January 1, 2023 and dividends declared.

In August of 2022, the Company’s Board of Directors authorized the extension of the Company’s stock repurchase program that was originally adopted in August of 2021. Under the stock repurchase program, the Company may repurchase up to 700,000 shares of its outstanding common stock, or 5.0% of outstanding shares as of June 30, 2023. The stock repurchase program will expire on August 31, 2023 or earlier if all the authorized shares have been repurchased. The Company has not repurchased any of its outstanding common stock under the program as of June 30, 2023.

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Liquidity

Liquidity reflects a financial institution’s ability to fund assets and meet current and future financial obligations. Liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Monitoring and managing both liquidity measurements is critical in developing prudent and effective balance sheet management. Management conducts liquidity stress testing on a quarterly basis to prepare for unexpected adverse scenarios and contemporaneously develops mitigating strategies to reduce losses in the event of an economic downturn.

The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. In addition to the liquidity provided by balance sheet cash flows, the Company supplements its liquidity with additional sources such as secured borrowing credit lines with the FHLB and the Reserve Bank. Specifically, the Company has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and the Reserve Bank. Based on collateral pledged as of June 30, 2023, the total FHLB available borrowing capacity was $451.1 million. Additional borrowing capacity with the Reserve Bank was approximately $25.1 million as of June 30, 2023.

On March 12, 2023, the Reserve Bank made available the BTFP, which enhances the ability of banks to borrow against the par value of certain high-quality, unencumbered investments. On May 15, 2023, the Company obtained a $54.0 million BTFP advance to secure lower funding costs relative to wholesale deposits. The BTFP advance has a term of one year and bears interest at a fixed rate of 4.80%.

Total liquidity, defined as cash and cash equivalents, unencumbered securities at fair value, and available secured borrowing capacity, was $839.4 million at June 30, 2023 compared to $763.5 million at December 31, 2022. The Company’s liquidity position represented 120% of uninsured, non-collateralized deposits at June 30, 2023. If the Company were to avail itself of additional BTFP funding, we estimate an incremental increase in our liquidity position of approximately $29.1 million, increasing our potential liquidity to $868.5 million and representing 125% of uninsured, non-collateralized deposits as of June 30, 2023.

In addition to available secured borrowing capacity, the Company had available federal funds lines with correspondent banks of $110.0 million at June 30, 2023.

Liquidity is a core pillar of the Company’s operations. Conditions may arise in the future that could negatively impact the Company’s future liquidity position resulting in funding mismatches. These include market constraints on the ability to convert assets into cash or accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks also can affect a bank’s liquidity. Management believes that the Company has a strong liquidity position, but any of the factors referenced above could materially impact that in the future.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For further information, see Note 7 to the Consolidated Financial Statements, included in Item 1 of this Form 10-Q, for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

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Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2023. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and regulations are designed and operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the second fiscal quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of our operations, the Company and its subsidiary are parties to various claims and lawsuits. Currently, we are not party to any material legal proceedings, and no such proceedings are, to management’s knowledge, threatened against us. Although the ultimate outcome of legal proceedings cannot be ascertained at this time, it is the opinion of management that the liabilities (if any) resulting from such legal proceedings will not have a material adverse effect on the Company’s business, including its consolidated financial position, results of operations, or cash flows.

Item 1A. Risk Factors

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in our 2022 Annual Report on Form 10-K, which we filed with the SEC on March 23, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.	Description
31.1†	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2†	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1†	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0†	Interactive data files formatted in Inline eXtensible Business Reporting Language pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited), (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2023 and June 30, 2022 (unaudited), (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and June 30, 2022 (unaudited), (iv) the Consolidated Statements of Shareholders’ Equity for the three months ended June 30, 2023 and June 30, 2022 (unaudited), (v) the Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2023 and June 30, 2022 (unaudited), (vi) the Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and June 30, 2022 (unaudited) and (vii) the Notes to the Consolidated Financial Statements.
104†	Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101.0)

†Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 9, 2023

JOHN MARSHALL BANCORP, INC.
By:	/s/ Christopher W. Bergstrom
Name:	Christopher W. Bergstrom
Title:	President, Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Kent D. Carstater
Name:	Kent D. Carstater
Title:	Senior Executive Vice President, Chief Financial Officer
	(Principal Financial Officer)

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