UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~March~~June 3130, 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: 001-39285

Partners Bancorp

(Exact name of registrant as specified in its charter)

Maryland	52-1559535
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2245 Northwood Drive, Salisbury, Maryland	21801
(Address of principal executive offices)	(Zip Code)

410-548-1100

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	PTRS	Nasdaq Capital Market

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 ~~May~~August 1511, 2023, there were 17,985,577 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

Table of Contents

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION



		Page
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)		3

Consolidated Statements of Income (Unaudited)		4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)		5

Consolidated Statements of Stockholders' Equity (Unaudited)		6

Consolidated Statements of Cash Flows (Unaudited)		7

Notes to Consolidated Financial Statements (Unaudited)		8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		48

Item 3. Quantitative and Qualitative Disclosures About Market Risk		7883

Item 4. Controls and Procedures		7883

PART IIOTHER INFORMATION


Item 1. Legal Proceedings		7883

Item 1A. Risk Factors		7883

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		7883

Item 3. Defaults Upon Senior Securities		7984

Item 4. Mine Safety Disclosures		7984

Item 5. Other Information		7984

EXHIBIT INDEX		8085

SIGNATURES		8186

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS



	~~March~~June 3130,		December 31,
	2023		2022
(Dollars in thousands, except per share amounts)	(Unaudited)		*

ASSETS
Cash and due from banks	$	1516,~~146~~011	$	14,678
Interest-bearing deposits in other financial institutions		5343,~~173~~128		103,922
Federal funds sold		2317,~~825~~478		22,990
Cash and cash equivalents		9276,~~144~~617		141,590
Securities available for sale, at fair value		~~132~~129,~~802~~259		133,657
Loans held for sale		~~841~~519		1,314
Loans, less allowance for credit losses of $16,096 at March 31, 2023 and $14,315 at December 31, 2022		1,234,584		1,218,551
Loans, less allowance for credit losses of $16,217 at June 30, 2023 and $14,315 at December 31, 2022		1,261,546		1,218,551
Accrued interest receivable		4,~~496~~440		4,566
Premises and equipment, less accumulated depreciation		14,~~624~~441		14,857
Restricted stock		56,~~991~~163		6,512
Operating lease right-of-use assets		54,~~037~~826		5,065
Financing lease right-of-use assets		1,~~516~~482		1,550
Other investments		5,~~348~~364		4,888
Bank owned life insurance		18,~~822~~940		18,706
Core deposit intangible, net		1,~~419~~300		1,540
Goodwill		9,582		9,582
Other assets		1213,~~507~~983		12,234
Total assets	$	1,~~539~~548,~~713~~462	$	1,574,612
LIABILITIES
Deposits:
Non-interest-bearing demand	$	~~498~~500,~~655~~500	$	528,770
Interest-bearing demand		~~129~~118,~~403~~842		121,787
Savings and money market		~~382~~387,~~881~~596		431,538
Time		~~301~~311,~~602~~544		257,510
		1,~~312~~318,~~541~~482		1,339,605
Accrued interest payable on deposits		~~706~~907		267
Short-term borrowings with the Federal Home Loan Bank		2931,~~000~~100		42,000
Long-term borrowings with the Federal Home Loan Bank		19,800		19,800
Subordinated notes payable, net		22,~~226~~238		22,215
Other borrowings		~~608~~602		613
Operating lease liabilities		5,~~439~~230		5,465
Financing lease liabilities		1,~~975~~941		2,006
Other liabilities		54,~~520~~855		3,312
Total liabilities		1,~~397~~405,~~815~~155		1,435,283
COMMITMENTS, CONTINGENCIES & SUBSEQUENT EVENT
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $0.01, authorized 40,000,000 shares, issued and outstanding 17,985,577 as of March 31, 2023 and 17,973,724 as of December 31, 2022, including 18,669 nonvested shares as of March 31, 2023 and December 31, 2022		180		180
Common stock, par value $0.01, authorized 40,000,000 shares, issued and outstanding 17,985,577 as of June 30, 2023 and 17,973,724 as of December 31, 2022, including 9,338 nonvested shares as of June 30, 2023 and 18,669 nonvested shares as of December 31, 2022		180		180
Surplus		88,~~762~~785		88,669
Retained earnings		6467,~~052~~097		62,854
Noncontrolling interest in consolidated subsidiaries		~~676~~592		707
Accumulated other comprehensive loss, net of tax		(1113,~~772~~347)		(13,081)
Total stockholders' equity		~~141~~143,~~898~~307		139,329
Total liabilities and stockholders' equity	$	1,~~539~~548,~~713~~462	$	1,574,612

* Derived from audited consolidated financial statements.

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended ~~March~~June 3130,				Six Months Ended June 30,
(Dollars in thousands, except per share data)	2023		2022
(Dollars in thousands, except per share amounts)	2023		2022		2023		2022
INTEREST INCOME ON:
Loans, including fees	$	1617,~~151~~118	$	1213,~~894~~209	$	33,269	$	26,103
Investment securities:
Taxable		~~688~~676		~~396~~516		1,364		912
Tax-exempt		~~185~~187		~~184~~181		372		365
Federal funds sold		~~264~~306		1763		570		80
Other interest income		~~704~~536		~~162~~554		1,240		716
		1718,~~992~~823		1314,~~653~~523		36,815		28,176
INTEREST EXPENSE ON:
Deposits		13,~~965~~163		1,~~243~~126		5,128		2,369
Borrowings		~~858~~821		~~506~~508		1,679		1,013
		23,~~823~~984		1,~~749~~634		6,807		3,382
NET INTEREST INCOME		1514,~~169~~839		1112,~~904~~889		30,008		24,794
Provision for credit losses		~~300~~93		65319		393		384
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		14,~~869~~746		1112,~~839~~570		29,615		24,410
OTHER INCOME:
Service charges on deposit accounts		~~248~~262		~~223~~249		509		472
Mortgage banking income, net		~~252~~104		~~291~~427		356		718
Other income		753		778
Impairment loss on restricted stock		—		(1)		—		(1)
		1,253		1,292
Other income		709		778		1,436		1,556
OTHER EXPENSES:
		1,075		1,453		2,301		2,745
Salaries and employee benefits		6,004		5,575
OTHER EXPENSES:
Premises and equipment		1,402		1,481
Salaries and employee benefits		5,849		5,504		11,854		11,080
(Gains) and operating expenses on other real estate owned, net		—		(7)
Premises and equipment		1,374		1,400		2,776		2,881
Amortization of core deposit intangible		121		135
(Gains) and operating expenses on other real estate owned, net		—		(2)		—		(9)
Merger related expenses		1,032		396
Amortization of core deposit intangible		119		132		240		266
Other expenses		3,078		2,805
Merger related expenses		428		157		1,460		553
		11,637		10,385
Other expenses		3,121		2,723		6,171		5,530
INCOME BEFORE TAXES ON INCOME		4,485		2,746
		10,891		9,914		22,501		20,301
Federal and state income taxes		1,186		696
INCOME BEFORE TAXES ON INCOME		4,930		4,109		9,415		6,854
NET INCOME	$	3,299	$	2,050
Federal and state income taxes		1,250		926		2,436		1,622
Net loss attributable to noncontrolling interest		31		59
NET INCOME	$	3,680	$	3,183	$	6,979	$	5,232
NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP	$	3,330	$	2,109
Net loss (income) attributable to noncontrolling interest		84		(4)		115		56
Earnings per common share:
NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP	$	3,764	$	3,179	$	7,094	$	5,288
Basic earnings per share	$	0.19	$	0.12
Earnings per common share:
Diluted earnings per share	$	0.19	$	0.12
Basic earnings per share	$	0.21	$	0.18	$	0.39	$	0.29
Diluted earnings per share	$	0.21	$	0.18	$	0.39	$	0.29

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

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PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	~~Three Months Ended March 31,~~	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	~~2023~~	2023		~~2022~~	2022		2023		2022
NET INCOME	$	~~3,299~~$	3,680	$	~~2,050~~$	3,183	$	6,979	$	5,232
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Unrealized holding gains (losses) on securities available for sale arising during the period		1,721			(7,659)
Unrealized holding losses on securities available for sale arising during the period			(2,052)			(6,783)		(331)		(14,442)
Deferred income tax effect		~~(412)~~	477		~~1,816~~	1,549		65		3,365
Other comprehensive income (loss), net of tax		1,309			(5,843)
Other comprehensive loss, net of tax			(1,575)			(5,234)		(266)		(11,077)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		1,309			(5,843)
TOTAL OTHER COMPREHENSIVE LOSS			(1,575)			(5,234)		(266)		(11,077)
COMPREHENSIVE INCOME (LOSS)	$	~~4,608~~$	2,105	$	~~(3,793)~~$	(2,051)	$	6,713	$	(5,845)
COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST		31			59
Comprehensive loss (income) attributable to noncontrolling interest			84			(4)		115		56
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO PARTNERS BANCORP	$	~~4,639~~$	2,189	$	~~(3,734)~~$	(2,055)	$	6,828	$	(5,789)

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)


For the three months ended:									Accumulated
									Other		Total
	Common				Retained		Noncontrolling		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Interest		Loss		Equity
Balances, March 31, 2022	$	179	$	88,529	$	52,965	$	1,118	$	(5,528)	$	137,263
Net income		—		—		3,179		4		—		3,183
Other comprehensive loss, net of tax		—		—		—		—		(5,234)		(5,234)
Comprehensive loss												(2,051)
Cash dividends, $0.025 per share		—		—		(449)		—		—		(449)
Stock-based compensation expense		—		23		—		—		—		23
Balances, June 30, 2022	$	179	$	88,552	$	55,695	$	1,122	$	(10,762)	$	134,786

Balances, March 31, 2023	$	180	$	88,762	$	64,052	$	676	$	(11,772)	$	141,898
Net income (loss)		—		—		3,764		(84)		—		3,680
Other comprehensive loss, net of tax		—		—		—		—		(1,575)		(1,575)
Comprehensive income												2,105
Cash dividends, $0.040 per share		—		—		(719)		—		—		(719)
Stock-based compensation expense		—		23		—		—		—		23
Balances, June 30, 2023	$	180	$	88,785	$	67,097	$	592	$	(13,347)	$	143,307


For the three months ended:									Accumulated
									Other		Total
	Common				Retained		Noncontrolling		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Interest		Income (Loss)		Equity
Balances, December 31, 2021	$	179	$	88,390	$	51,305	$	1,179	$	315	$	141,368
Net income (loss)		—		—		2,109		(59)		—		2,050
Other comprehensive (loss), net of tax		—		—		—		—		(5,843)		(5,843)
Comprehensive loss												(3,793)
Cash dividends, $0.025 per share		—		—		(449)		—		—		(449)
Minority interest equity distribution		—		—		—		(2)		—		(2)
Stock option exercises, net		—		115		—		—		—		115
Stock-based compensation expense		—		24		—		—		—		24
Balances, March 31, 2022	$	179	$	88,529	$	52,965	$	1,118	$	(5,528)	$	137,263

Balances, December 31, 2022	$	180	$	88,669	$	62,854	$	707	$	(13,081)	$	139,329
Net income (loss)		—		—		3,330		(31)		—		3,299
Other comprehensive income, net of tax		—		—		—		—		1,309		1,309
Comprehensive income												4,608
Cumulative effect adjustment due to the adoption of ASC 326		—		—		(1,412)		—		—		(1,412)
Cash dividends, $0.04 per share		—		—		(720)		—		—		(720)
Stock option exercises, net		—		69		—		—		—		69
Stock-based compensation expense		—		24		—		—		—		24
Balances, March 31, 2023	$	180	$	88,762	$	64,052	$	676	$	(11,772)	$	141,898


For the six months ended:									Accumulated
									Other		Total
	Common				Retained		Noncontrolling		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Interest		Income (Loss)		Equity
Balances, December 31, 2021	$	179	$	88,390	$	51,305	$	1,179	$	315	$	141,368
Net income (loss)		—		—		5,288		(56)		—		5,232
Other comprehensive loss, net of tax		—		—		—		—		(11,077)		(11,077)
Comprehensive loss												(5,845)
Cash dividends, $0.050 per share		—		—		(898)		—		—		(898)
Minority interest equity distribution		—		—		—		(1)		—		(1)
Stock option exercises, net		—		115		—		—		—		115
Stock-based compensation expense		—		47		—		—		—		47
Balances, June 30, 2022	$	179	$	88,552	$	55,695	$	1,122	$	(10,762)	$	134,786

Balances, December 31, 2022	$	180	$	88,669	$	62,854	$	707	$	(13,081)	$	139,329
Net income (loss)		—		—		7,094		(115)		—		6,979
Other comprehensive loss, net of tax		—		—		—		—		(266)		(266)
Comprehensive income												6,713
Cumulative effect adjustment due to the adoption of ASU 2016-13		—		—		(1,412)		—		—		(1,412)
Cash dividends, $0.080 per share		—		—		(1,439)		—		—		(1,439)
Stock option exercises, net		—		69		—		—		—		69
Stock-based compensation expense		—		47		—		—		—		47
Balances, June 30, 2023	$	180	$	88,785	$	67,097	$	592	$	(13,347)	$	143,307

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	~~Three~~Six Months Ended
	~~March~~June 3130,
(Dollars in thousands)	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	37,~~330~~094	$	25,~~109~~288
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		~~300~~393		65384
Depreciation		~~419~~837		~~470~~943
Amortization and accretion		58124		~~137~~250
(Gain) loss on equity securities		(27)		89
Loss on equity securities		—		151
Gain on sale of loans held for sale, originated		(~~239~~334)		(~~258~~655)
Net (gains) on other real estate owned, including write‑downs		—		(5)
Net gains on other real estate owned, including write‑downs		—		(5)
Increase in bank owned life insurance cash surrender value		(~~116~~234)		(~~112~~225)
Stock‑based compensation expense, net of employee tax obligation		2447		2447
Net amortization (accretion) of certain acquisition related fair value adjustments		11		(193)
Net accretion of certain acquisition related fair value adjustments		(45)		(175)
Impairment loss on restricted stock		—		1
Changes in assets and liabilities:
Loans held for sale		~~712~~1,129		21,~~980~~663
Accrued interest receivable		70126		~~200~~227
Other assets		(~~193~~946)		(~~361~~744)
Accrued interest payable on deposits		~~439~~640		(1363)
Other liabilities		~~1,669~~903		~~354~~(453)
Net cash provided by operating activities		69,~~457~~734		56,~~486~~634
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(31,768)		(1435,~~412~~206)
Purchases of other investments		(~~433~~476)		(715)
Proceeds from maturities and paydowns of securities available for sale		25,~~532~~734		37,~~520~~138
Net increase in loans		(1744,~~551~~538)		(3552,~~995~~804)
Purchases of premises and equipment		(~~185~~421)		(~~265~~415)
Proceeds from the sales of foreclosed assets		—		842
Redemption (purchase) of restricted stocks		~~521~~349		(6664)
Net cash used in investing activities		(1541,~~119~~120)		(4680,~~383~~524)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in demand, money market, and savings deposits, net		(7175,~~156~~157)		71104,~~627~~810
Cash received for the exercise of stock options		69		115
Increase (decrease) in time deposits, net		4454,~~091~~033		(2352,~~051~~343)
(Decrease) in borrowings, net		(13,006)		(171)
Decrease in borrowings, net		(10,913)		(91)
Net decrease in minority interest contributed capital		(31115)		(6057)
Decrease in finance lease liability		(3165)		(2959)
Dividends paid		(~~720~~1,439)		(~~449~~898)
Net cash (used in) provided by financing activities		(4033,~~784~~587)		4751,~~982~~477
Net (decrease) increase in cash and cash equivalents		(49,446)		7,085
Net decrease in cash and cash equivalents		(64,973)		(22,413)
Cash and cash equivalents, beginning of period		141,590		338,829
Cash and cash equivalents, ending of period	$	9276,~~144~~617	$	~~345~~316,~~914~~416
Supplementary cash flow information:
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid	$	25,~~004~~557	$	23,~~021~~965
Income taxes paid		2,498		1,461
Right of use assets and corresponding lease liabilities		190		—
Unrealized gain (loss) on securities available for sale	$	1,721	$	(7,659)
Unrealized loss on securities available for sale		(331)		(14,442)
SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES
SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES:
Cumulative effect adjustment due to the adoption of ASU 2016-13	$	(1,412)	$	—

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

Table of Contents

PARTNERS BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Its Significant Accounting Policies

Partners Bancorp (the “Company”) is a multi-bank holding company with two wholly owned subsidiaries (the “Subsidiaries”), The Bank of Delmarva (“Delmarva”), a commercial bank headquartered in Seaford, Delaware that operates primarily in Wicomico and Worcester counties in Maryland, Sussex County in Delaware, and Camden and Burlington counties in New Jersey, and Virginia Partners Bank (“Partners”), a commercial bank headquartered in Fredericksburg, Virginia that operates in and around the greater Fredericksburg, Virginia area (Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia), the Greater Washington area (the District of Columbia, Arlington County, Clarke County, Fairfax County, Fauquier County, Loudoun County, Prince William County, Warren County, and the Cities of Alexandria, Fairfax, Falls Church, Manassas, Manassas Park, and Reston, Virginia) and Anne Arundel County and the three counties of Southern Maryland (Charles County, Calvert County and St. Mary’s County). The Subsidiaries engage in general banking business and provide a broad range of financial services to individual and corporate customers, and are subject to competition from other financial institutions. The Subsidiaries are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The accounting and reporting policies of the Company and its Subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and practices within the banking industry.

Significant accounting policies not disclosed elsewhere in the consolidated financial statements are as follows:

Principles of Consolidation:

The consolidated financial statements include the accounts of the Company; the Subsidiaries, along with their consolidated subsidiaries: Delmarva Real Estate Holdings, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; Davie Circle, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; Delmarva BK Holdings, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; DHB Development, LLC, of which Delmarva ~~holds~~previously held a 40.55% interest, and which is a real estate holding company; ~~and FBW, LLC, of which Delmarva holds a 50% interest, and which is a real estate holding company;~~ Bear Holdings, Inc., a wholly owned subsidiary of Partners, which is a real estate holding company; Johnson Mortgage Company, LLC (“JMC”), of which Partners owns a 51% interest, and which is a residential mortgage company; and 410 William Street, LLC, a wholly owned subsidiary of Partners, which holds investment property. During the second quarter of 2023, DHB Development, LLC was dissolved, and all remaining assets were distributed to the members, which resulted in no gain or loss to the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Statement Presentation:

The unaudited interim consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations, changes in stockholder's equity, and cash flows in conformity with U.S. GAAP. In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position at ~~March~~June 3130, 2023 and December 31, 2022, the results of its operations for three and six months and its cash flows for the ~~three~~six months ended ~~March~~June 3130, 2023 and 2022 in conformity with U.S. GAAP.

Operating results for the three and six months ended ~~March~~June 3130, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or for any other period.

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Use of Estimates:

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain of the critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company’s reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. Actual results could differ from those estimates. The more significant areas in which management of the Company applies critical assumptions and estimates that are most susceptible to change in the short term include the calculation of the allowance for credit losses and the unrealized gain or loss on investment securities available for sale.

Adoption of New Accounting Standard in 2023:

Effective 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” (“ASU 2016-13”), which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL” or the “CECL Standard”). The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held- to- maturity (“HTM”). It also applies to off-balance-sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments. In addition, the CECL Standard changes the accounting for investment securities classified as available for sale ("AFS"), including a requirement that estimated credit losses on AFS investment securities be presented as an allowance rather than as a direct write-down of the carrying balance of investment securities which the Company does not currently intend to sell or does not believe, based on current conditions, that it is likely that the Company will be required to sell.

The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Upon adoption, we recognized an after-tax cumulative effect reduction to retained earnings totaling $1.4 million, as detailed in the table below. As discussed further below, purchased credit deteriorated assets (“PCD”) were measured on a prospective basis in accordance with the CECL Standard and all purchased credit impaired (“PCI”) loans as of December 31, 2022 were considered PCD loans upon adoption. Results for reporting periods beginning after January 1, 2023 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance. The adoption of the CECL Standard resulted in the following adjustments to our financial statements as of January 1, 2023:



Dollars in thousands			Change in Consolidated Balance Sheet		Tax Effect		Change to Retained Earnings from Adoption of ASU 2016-13

Allowance for credit losses ("ACL") - loans		$	1,330	$	310	$	1,020
Adjustment related to purchased credit-deteriorated loans	(1)		9		-		-9
Total ACL - loans			1,339		310		1,~~020~~029
Adjustment to PCD Loans			(9)		-		(9)
ACL - unfunded credit commitments			512		120		392
Total impact of CECL adoption		$	1,~~851~~842	$	430	$	1,412

(1) Represents a gross-up of the balance sheet related to PCD loans resulting from the adoption of ASU 2016-13 on January 1, 2023.

Loans designated as PCI and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as PCD loans. In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The Company recorded an increase to the balance of PCD loans and an increase to the allowance for credit losses for loans of $9 thousand, which ~~represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized~~

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represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2023 over the remaining estimated life of the loans.

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”). ASU 2022-02 addresses areas identified by the Financial Accounting Standards Board (“FASB”) as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL Standard. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL Standard 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 consolidated financial statements.

In December 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Comptroller of the Currency (“OCC”) approved a final rule to address changes to credit loss accounting under U.S. GAAP, including banking organizations’ adoption of the CECL Standard. The final rule provides banking organizations the option to phase-in, over a three-year period, the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The Company has elected to phase -in the impact of the adoption of this standard on the Company’s regulatory capital over the three-year transition period. See Note 109 – Regulatory Capital Requirements for further information.

Investment Securities Available for Sale (“AFS”):

Management evaluates all AFS investment 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 investment security or it is more likely than not that the Company will be required to sell the investment security, the investment 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 investment security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the investment 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 investment security and any deficiency is recorded as an allowance for credit losses, 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 (loss), net of tax.

Changes in the allowance for credit losses 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 losses when management believes an AFS investment security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At ~~March~~June 3130, 2023, there was no allowance for credit losses related to the AFS investment securities portfolio.

Impairment may result from credit deterioration of the issuer or collateral underlying the investment security. In performing an assessment of recoverability, all relevant information is considered, including the length of time and extent to which fair value has been less than the amortized cost basis, the cause of the price decline, credit performance of the issuer and underlying collateral, and recoveries or further declines in fair value subsequent to the balance sheet date.

Restricted Stock, Equity Securities and Other Investments:

Federal Reserve Bank (“FRB”) stock, at cost, Federal Home Loan Bank (“FHLB”) stock, at cost, Atlantic Central Bankers Bank (“ACBB”) stock, at cost, and Community Bankers Bank (“CBB”) stock, at cost, are equity interests in the FRB, FHLB, ACBB, and CBB, respectively. These securities do not have a readily determinable fair value for purposes of ASC 321 “Investments-Equity Securities” (“ASC 321”) because their ownership is restricted and they lack an active market. As there is no readily determinable fair value for these securities, they are carried at cost less any impairment.

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of ASC 321 Investments-Equity Securities (“ASC 321”) because their ownership is restricted and they lack an active market. As there is no readily determinable fair value for these securities, they are carried at cost less any impairment.

Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Any equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. The entirety of any impairment on equity securities is recognized in earnings. Equity securities are included in “Other investments” on the Consolidated Balance Sheets.

Other investments ~~includes~~include an equity ownership of Solomon Hess SBA Loan Fund LLC, for which the value is adjusted for its pro rata share of assets in the fund. Other investments also ~~includes~~include equity securities the Company holds with Community Capital Management in their Community Reinvestment Act (“CRA”) Qualified Investment Fund.

Bank Owned Life Insurance:

The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or amounts due that are probable at settlement.

Loans and the Allowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjusted for ~~unearned~~deferred loan fees and costs, which are amortized over the term of the loan using the effective interest rate method. Interest on loans is accrued based on the principal amounts outstanding. It is the Company’s policy to discontinue the accrual of interest when a ~~the~~ borrower is determined to be experiencing financial difficulty or when principal or interest on the loan is delinquent for ninety days or more. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Cash collections on loans classified as nonaccrual are applied as reductions of the loan principal balance and no interest income is recognized on those loans until the principal balance has been collected. As a general rule, a nonaccrual loan may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and interest, or (2) when it otherwise becomes well secured and in the process of collection.

The allowance for credit losses is maintained at a level believed to be adequate by management to absorb expected losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, the concentration of credits within each segment, the effects of any changes in lending policies, procedures, including underwriting standards and collections, charge -off and recovery practices, the effects of changes in the experience, depth and ability of management, the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors, an assessment of individually evaluated loans and actual loss experience, the value of the underlying collateral, the condition of various market segments, both locally and nationally, and current ~~and~~ reasonable and supportable forecasts of economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions, along with external factors such as competition and the legal environment. The Company’s allowance for credit losses incorporates forward-looking information and applies a reversion methodology beyond the reasonable and supportable forecast period of twelve months. After the forecast period, the Company’s model immediately reverts back to the historical loss rate adjusted for the quantitative factors described above for the remaining contractual life of the financial assets. Determination of the allowance for credit losses is inherently subjective, as it requires significant estimates, which may be susceptible to significant change. Loan losses are charged off against the allowance for credit losses, while recoveries of amounts previously charged off are credited to the allowance for credit losses. A provision for credit losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary. Expected credit losses are estimated over the contractual term of the loans, and are adjusted for expected prepayments.

The Company’s allowance for credit losses measures the expected lifetime loss using pooled assumptions and loan level details for loans that share common risk characteristics and evaluates an individual reserve in instances where the loans do not share the same risk characteristics.

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The Company’s allowance for credit losses measures the expected lifetime loss using pooled assumptions and loan-level details for loans that share common risk characteristics and evaluates an individual reserve in instances where the loans do not share the same risk characteristics.

Loans that share common risk characteristics are considered collectively assessed. Loss estimates within the collectively assessed population are based on a combination of pooled assumptions and loan-level characteristics. Quantitative loss estimation models have been developed based largely on internal and peer historical data at the loan and portfolio levels and the economic conditions during the same time period.

Expected losses for the Company’s collectively assessed loan segments are estimated using the average charge-off method, which calculates an estimate of losses based upon historical experience and is applied prospectively across the life of each loan. This method calculates future cash flows at the individual ~~note~~loan level based upon ~~note~~loan characteristics. Life calculations for each loan grouping incorporates future cash flows at the ~~note~~loan level, in addition to prepayment assumptions.

Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the specific reserve is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the specific reserve is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed uncollectible.

The Company obtains appraisals from a pre-approved list of independent, third party appraisers located in the market in which the collateral is located. At a minimum, it is ascertained that the appraiser is currently licensed in the state in which the property is located, experienced in the appraisal of properties similar to the property being appraised, has knowledge of current real estate market conditions and financing trends, and is reputable. Independent appraisals or valuations are obtained on all individually assessed loans, asand ~~well~~these asappraisals or valuations are updated every twelve months ~~for all individually assessed loans~~. External valuation sources are the primary source to value collateral dependent loans; however, the Company may also utilize values obtained through other valuation sources. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. The specific reserve on loans individually assessed is updated, reviewed, and approved on a quarterly basis at or near the end of each reporting period.

The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Upon origination, each commercial loan is assigned a risk rating, with loans closer to one having less risk. This risk rating scale is the Company’s primary credit quality indicator.

Loan Charge-off Policies

Loans are generally fully or partially charged down to the fair value of securing collateral when:

●

management deems the asset to be uncollectible;

●

repayment is deemed to be made beyond the reasonable time frames;

● the asset has been classified as a loss by internal or external review; ~~and~~or

●

the borrower has filed bankruptcy and the loss becomes evident owing to a lack of assets.

Acquired Loans

Loans acquired in connection with acquisitions are recorded at their acquisition date fair value with no carryover of related allowance for credit losses. Acquired loans are classified into two categories: (1) PCD loans, which are purchased

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~~Acquired~~financial ~~Loans~~instruments with more than insignificant credit deterioration, and (2) loans with insignificant credit deterioration (“non-PCD”). PCD loans are defined as a loan or group of loans that have experienced more than insignificant credit deterioration since origination. Non-PCD loans will have an allowance for credit losses established on the acquisition date, which is recognized in the current period provision for credit losses. For PCD loans, an allowance for credit losses is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost basis”. There is no provision for credit losses recognized on PCD loans because the initial allowance for credit losses is established by grossing-up the amortized cost of the PCD loan. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Acquired loans are classified into two categories - purchased financial instruments with more than insignificant credit deterioration (“PCD”) loans, and loans with insignificant credit deterioration (“non-PCD”). PCD loans are defined as a loan or group of loans that have experienced more than insignificant credit deterioration since origination. Non-PCD loans will have an allowance for credit losses established on the acquisition date, which is recognized in the current period provision for credit losses. For PCD loans, an allowance for credit losses is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost basis”. There is no provision for credit losses recognized on PCD loans because the initial allowance for credit losses is established by grossing-up the amortized cost of the PCD loan. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

PCD loans are accounted for in accordance with ASC 326-20, Financial Instruments- Credit Losses- Measured at Amortized Cost (“ASC 326-20”), if, at acquisition, the loan or pool of loans has experienced more- than- insignificant credit deterioration since origination. At acquisition, the Company considers several factors as indicators that an acquired loan or pool of loans has experienced more- than- insignificant credit deterioration. These factors include loans 30 days or more past due, loans with an internal risk grade of below average or lower, loans classified as ~~non-accrual~~nonaccrual by the acquired institution, and the materiality of the credit.

Under ASC 326-20, a group of loans with similar risk characteristics can be assessed to determine if the pool of loans is PCD. However, if a loan does not have similar risk characteristics as any other acquired loan, the loan is individually assessed to determine if it is PCD. In addition, the initial allowance for credit losses related to acquired loans can be estimated for a pool of loans if the loans have similar risk characteristics. Even if the loans were individually assessed to determine if they were PCD, they can be grouped together in the initial allowance for credit losses calculation if they share similar risk characteristics. If a PCD loan has an unfunded commitment at acquisition, the initial allowance for credit losses calculation reflects only the expected credit losses associated with the funded portion of the PCD loan. Expected credit losses associated with the unfunded commitment are included in the initial measurement of the commitment. For PCD loans, the non-credit discount or premium is allocated to individual loans as determined by the difference between the loan’s amortized cost basis and the unpaid principal balance. The non-credit premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan. For non-PCD loans, the interest and credit discount or premium is allocated to individual loans as determined by the difference between the loan’s amortized cost basis and the unpaid principal balance. The premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan.

TDRs prior to the Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, a loan was accounted for and reported as a TDR when, for economic or legal reasons, the Company granted a concession to a borrower experiencing financial difficulty that it would not otherwise consider. Management would work with borrowers identified as being in financial difficulty to modify to more affordable terms before their loan would reach nonaccrual status. These modified terms may have included rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. A restructuring that resulted in only an insignificant delay in payment was not considered a concession. A delay may have been considered insignificant if the payments subject to the delay were insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period was insignificant relative to the frequency of the payments, the ~~debt~~loan’s original contractual maturity or original expected duration.

TDRs were designated as impaired loans because interest and principal payments would not be received in accordance with the original contract terms. TDRs that were performing and on accrual status as of the date of the modification remained on accrual status. TDRs that were nonperforming as of the date of modification generally remained as nonaccrual until the prospect of future payments in accordance with the modified loan agreement was reasonably assured, generally demonstrated when the borrower maintained compliance with the restructured terms for a predetermined period, normally at least six months. TDRs that had temporary below-market concessions remained designated as a TDR and impaired regardless of the accrual or performance status until the loan was paid off. However, if the TDR was modified

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~~as nonaccrual until the prospect of future payments~~ in ~~accordance with the modified loan agreement was reasonably assured, generally demonstrated when the borrower maintained compliance with the restructured terms for~~ a predetermined period, normally at least six months. TDRs that had temporary below-market concessions remained designated as a TDR and impaired regardless of the accrual or performance status until the loan was paid off. However, if the TDR was modified in a subsequent restructure with market terms and the borrower was not currently experiencing financial difficulty, then the loan was no longer designated as a TDR. See “Adoption of New Accounting Standards in 2023” as discussed previously for further discussion related to accounting for modifications of loans to borrowers experiencing financial difficulty subsequent to the adoption of ASU 2022-02 as of January 1, 2023.

Loans Held for Sale:

These loans consist of loans made through Partners’ majority owned subsidiary JMC.

JMC is engaged in the mortgage brokerage business in which JMC originates, closes, and immediately sells mortgage loans and related servicing rights to permanent investors in the secondary market. JMC has written commitments from several permanent investors (large financial institutions) and only closes loans that meet the lending requirements of the permanent investors. Loans are made in connection with the purchase or refinancing of existing and new one- to- four family residences primarily in southeastern and northern Virginia. Loans are initially funded primarily by JMC’s lines of credit. With the concurrent sale and delivery of mortgage loans to the permanent investors, JMC records receivables for mortgage loans sold and recognizes the related gains and losses on such sales. The receivables for mortgage loans sold are usually satisfied within 30 days of sale, whereupon the related borrowings on the lines of credit are repaid. Because of the short holding period, these loans are carried at the lower of cost or market and no market adjustments were deemed necessary in the first ~~quarter~~two quarters of 2023 or 2022. JMC’s agreements with its permanent investors include provisions that could require JMC to repurchase loans under certain circumstances, and also provide for the assessment of fees if loans go into default or are refinanced within specified periods of time. JMC has never been required to repurchase a loan and no indemnification reserve has been recorded as of ~~March~~June 3130, 2023 or December 31, 2022 for possible repurchases. Management does not believe that a provision for early default or refinancing cost is necessary at ~~March~~June 3130, 2023 or December 31, 2022.

JMC enters into commitments with its customers to originate loans where the interest rate on the loans is determined (locked) prior to funding. While this subjects JMC to the risk that interest rates may change from the commitment date to the funding date, JMC simultaneously enters into financial agreements (best efforts forward sales commitments) with its permanent investors giving JMC the right to deliver (put) loans to the investors at specified yields, thus enabling JMC to manage its exposure to changes in interest rates such that JMC is not subject to fluctuations in fair values of these agreements due to changes in interest rates. However, a default by a permanent investor required to purchase loans under such an agreement would expose JMC to potential fluctuation in selling prices of loans due to changes in interest ~~rate~~rates. The fair value of rate lock commitments and forward sales commitments was considered immaterial at ~~March~~June 3130, 2023 and December 31, 2022 and an adjustment was not recorded. Gains and losses on the sale of mortgages as well as origination fees, brokerage fees, interest rate lock-in fees and other fees paid by mortgagors are included in “Mortgage banking income, net” on the Company’s Consolidated Statements of Income.

Other Real Estate Owned (“OREO”):

OREO comprises properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value, net of estimated selling costs, at the date acquired creating a new cost basis. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent write-downs that may be required, and expenses of operation and gains and losses realized from the sale of OREO are included in “Other expenses” on the Company’s Consolidated Statements of Income. At ~~March~~June 3130, 2023 and December 31, 2022, there were no properties included in OREO.

Intangible Assets and Amortization:

During the fourth quarter of 2019, the Company acquired Partners, and during the first quarter of 2018, the Company acquired Liberty Bell Bank (“Liberty”). ASC 350, Intangibles-Goodwill and Other (“ASC 350”) prescribes accounting for intangible assets subsequent to initial recognition. Acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to the acquisitions of Partners and Liberty are being amortized over their remaining useful life. See Note 12 – Goodwill and Intangible Assets for further information.

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accounting for intangible assets subsequent to initial recognition. Acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to the acquisitions of Partners and Liberty are being amortized over their remaining useful life. See Note 13 – Goodwill and Intangible Assets for further information.

Goodwill:

The Company’s goodwill was recognized in connection with the acquisitions of Partners and Liberty. The Company reviews the carrying value of goodwill at least annually during the fourth quarter or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if wemanagement ~~conclude~~concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying amount to determine whether an impairment exists. No impairment adjustment of goodwill was required for the ~~three~~six months ended ~~March~~June 3130, 2023 or 2022 or for the year ended December 31, 2022 based on management’s assessment.

Accounting for Stock Based Compensation:

The Company follows ASC 718-10, Compensation—Stock Compensation (“ASC 718-10”) for accounting and reporting for stock-based compensation plans. ASC 718-10 defines a fair value at grant date to be used for measuring compensation expense for stock-based compensation plans to be recognized in the consolidated statement of income.

Earnings Per Share:

Basic earnings per common share are determined by dividing net income by the weighted average number of shares outstanding for each period, giving retroactive effect to stock splits and dividends. Weighted average common shares outstanding were 17,~~984~~985,~~953~~577 and 17,~~958~~985,~~104~~267 for the three and six months ended ~~March~~June 3130, 2023 ~~and 2022~~, respectively. Calculations of diluted earnings per common share include the average dilutive common stock equivalents outstanding during the period, unless they are anti-dilutive. Dilutive common equivalent shares consist of stock options calculated using the treasury stock method and restricted stock awards. See Note 98 – Earnings Per Share for further information.

Note 2. Investment Securities

The Company’s AFS investment securities portfolio, other than subordinated debt investment securities, is either covered by the explicit or implied guarantee of the United States government or one of its agencies or are generally rated investment grade or higher. Subordinated debt investments, which are not rated, are issued by financial institutions within the geographic region of the Company. In addition, the Company performs a quarterly credit review on the majority of its municipal bonds issued by states and political subdivisions. All AFS investment securities were current with no AFS investment securities past due or on nonaccrual as of ~~March~~June 3130, 2023 or December 31, 2022. As such, the Company has recorded no allowance for credit losses related to ~~available-for-sale~~AFS investment securities as of ~~March~~June 3130, 2023.

The following tables summarize the amortized cost and fair value of AFS investment securities ~~AFS~~ and the corresponding amounts of gross unrealized gains and losses at ~~March~~June 3130, 2023 and December 31, 2022~~, respectively.~~:


	June 30, 2023
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	17,191	$	—	$	1,660	$	15,531
Obligations of States and political subdivisions		29,654		13		2,412		27,255
Mortgage-backed securities		97,306		—		13,120		84,186
Subordinated debt investments		2,470		—		183		2,287
	$	146,621	$	13	$	17,375	$	129,259

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	March 31, 2023
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	17,153	$	2	$	1,472	$	15,683
Obligations of States and political subdivisions		29,440		27		1,948		27,519
Mortgage-backed securities		99,050		—		11,847		87,203
Subordinated debt investments		2,470		—		73		2,397
	$	148,113	$	29	$	15,340	$	132,802


	December 31, 2022
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	17,115	$	—	$	1,649	$	15,466
Obligations of States and political subdivisions		29,480		7		2,422		27,065
Mortgage-backed securities		101,626		—		12,886		88,740
Subordinated debt investments		2,468		—		82		2,386
	$	150,689	$	7	$	17,039	$	133,657

Gross unrealized losses and fair values, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position, at ~~March~~June 3130, 2023 and December 31, 2022, are as follows:

~~March~~June 3130, 2023

Dollars in Thousands

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Loss

Value

Loss

Value

Loss

Obligations of U.S. Government agencies and corporations

7,~~661~~659

~~123~~169

7,~~051~~872

1,~~349~~491

1415,~~712~~531

1,~~472~~660

Obligations of States and political subdivisions

79,~~294~~479

~~174~~232

1517,~~856~~087

12,~~774~~180

2326,~~150~~566

12,~~948~~412

Mortgage-backed securities

161,~~536~~456

~~671~~59

7082,~~665~~727

1113,~~176~~061

8784,~~201~~183

1113,~~847~~120

Subordinated debt investments

~~1,432~~442

~~715~~1,595

36146

2,~~147~~037

73183

Total investment securities with unrealized losses

3219,~~923~~036

~~1,005~~497

94109,~~287~~281

1416,~~335~~878

~~127~~128,~~210~~317

1517,~~340~~375

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	December 31, 2022
	Dollars in Thousands
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies and corporations	$	12,447	$	829	$	3,019	$	820	$	15,466	$	1,649
Obligations of States and political subdivisions		23,975		1,714		1,821		708		25,796		2,422
Mortgage-backed securities		34,133		2,343		54,605		10,543		88,738		12,886
Subordinated debt investments		2,136		82		—		—		2,136		82
Total investment securities with unrealized losses	$	72,691	$	4,968	$	59,445	$	12,071	$	132,136	$	17,039

At ~~March~~June 3130, 2023, there were ~~twelve~~two mortgage-backed investment securities (“MBS”), eight agency investment securities, ~~two~~one subordinated debt investment ~~securities~~security and ~~seventeen~~twenty-two municipal investment securities that have been in a continuous unrealized loss position for less than twelve months. At ~~March~~June 3130, 2023, there were ~~fifty~~sixty-nine MBS investment securities, ~~nine~~ten agency investment securities, ~~two~~three subordinated debt investment securities, and thirty-~~four~~eight municipal investment securities that had been in a continuous unrealized loss position for more than twelve months.

The Company has evaluated AFS investment securities in an unrealized loss position for credit related impairment at ~~March~~June 3130, 2023 and concluded no impairment existed based on several factors, which included: (1) the majority of these investment 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 investment securities at a price less than the cost basis 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 investment securities and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investment securities before recovery of their amortized cost basis. As such, the Company has recorded no allowance for credit losses related to AFS securities as of March 31, 2023.

~~During the three months ended March 31, 2023 and 2022, the Company did not sell any investment securities.~~ 16

During the three months ended March 31, 2023, no investment securities either matured or were called. During the three months ended March 31, 2022, one investment security was called, resulting in no gain or loss during the period.

The Company has pledged certain investment securities as collateral for qualified customers’ deposit accounts at March 31, 2023 and December 31, 2022. The amortized cost and fair value of these pledged investment securities was $10.3 million and $9.1 million, respectively, at March 31, 2023. The amortized cost and fair value of these pledged investment securities was $10.4 million and $9.1 million, respectively, at December 31, 2022.

The Company realized a gain of $27 thousand and a loss of $89 thousand on equity securities during the three months ended March 31, 2023 and 2022, respectively, which are included in “Other expenses” in the Consolidated Statements of Income.

Contractual maturities of investment securities at March 31, 2023 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. MBS investment securities have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of MBS is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

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increases in market interest rates, (3) the contractual terms of the investments do not permit the issuer(s) to settle the investment securities at a price less than the cost basis 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 investment securities and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investment securities before recovery of their amortized cost basis. As such, the Company has recorded no allowance for credit losses related to AFS investment securities as of June 30, 2023.

During the three and six months ended June 30, 2023 and 2022, the Company did not sell any investment securities.

During the three and six months ended June 30, 2023, no investment securities either matured or were called. During the three months ended June 30, 2022, there were no investment securities that either matured or were called, and during the six months ended June 30, 2022, one investment security either matured or was called, resulting in no gain or loss for the period.

The Company has pledged certain investment securities as collateral for qualified customers’ deposit accounts at June 30, 2023 and December 31, 2022. The amortized cost and fair value of these pledged investment securities was $10.2 million and $8.9 million, respectively, at June 30, 2023. The amortized cost and fair value of these pledged investment securities was $10.4 million and $9.1 million, respectively, at December 31, 2022.

The Company realized a loss of $27 thousand on equity securities during the three months ended June 30, 2023 and no gain or loss on equity securities during the six months ended June 30, 2023. The Company realized a loss of $62 thousand and $151 thousand on equity securities during the three and six months ended June 30, 2022, respectively. These losses are included in “Other expenses” in the Consolidated Statements of Income.

Contractual maturities of investment securities at June 30, 2023 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. MBS investment securities have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of MBS investment securities is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

The following is a summary of maturities, calls, or repricing of AFS investment securities:


	~~March~~June 3130, 2023
	Investment Securities AFS
	Dollars in Thousands
		Amortized		Fair
		Cost		Value
Due in one year or less	$	—995	$	—976
Due after one year through five years		1517,~~480~~599		1516,~~125~~750
Due after five years through ten years		4240,~~894~~755		4037,~~394~~757
Due after ten years or more		8987,~~739~~272		7773,~~283~~776
	$	~~148~~146,~~113~~621	$	~~132~~129,~~802~~259

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Note 3. Loans and Allowance for Credit Losses

Major categories of loans as of ~~March~~June 3130, 2023 and December 31, 2022 are as follows:


(Dollars in thousands)	~~March~~June 3130, 2023		December 31, 2022
Originated Loans
Real Estate Mortgage
Construction and land development	$	~~124~~108,~~064~~339	$	117,256
Residential real estate		~~209~~218,~~825~~967		204,211
Nonresidential		~~645~~671,~~216~~580		633,910
Home equity loans		22,~~091~~558		22,866
Commercial		~~117~~129,~~494~~728		115,221
Consumer and other loans		2,~~435~~724		2,554
		1,~~121~~153,~~125~~896		1,096,018
Acquired Loans
Real Estate Mortgage
Construction and land development	$	4151	$	40
Residential real estate		2423,~~619~~911		25,693
Nonresidential		8481,~~418~~546		88,710
Home equity loans		7,~~689~~870		8,579
Commercial		1210,~~327~~273		13,332
Consumer and other loans		~~461~~216		494
		~~129~~123,~~555~~867		136,848
Total Loans
Real Estate Mortgage
Construction and land development	$	~~124~~108,~~105~~390	$	117,296
Residential real estate		~~234~~242,~~444~~878		229,904
Nonresidential		~~729~~753,~~634~~126		722,620
Home equity loans		2930,~~780~~428		31,445
Commercial		~~129~~140,~~821~~001		128,553
Consumer and other loans		2,~~896~~940		3,048
		1,~~250~~277,~~680~~763		1,232,866
Less: Allowance for credit losses		(16,~~096~~217)		(14,315)
	$	1,~~234~~261,~~584~~546	$	1,218,551

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13. The allowance for credit losses under ASU 2016-13 is calculated utilizing the average historical loss methodology. The Company uses historical loss rates for the CECL Standard calculation based on Company specific historical losses and peer loss history, where applicable. The Company utilizes multiple assumptions to calculate the expected credit losses, which may include loan groupings, prepayment speeds, unfunded commitment funding assumptions, and forward-looking factors for the forecast period. For its reasonable and supportable forecasting of current expected credit losses, the Company analyzes a simple regression using forecasted economic metrics and historical peer loss data. The Company uses the average of four quarters of projected charge-offs and recoveries based on the Federal Open Markets Committee (“FOMC”) forecast to account for the forward-looking adjustment. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company considers the following qualitative adjustment factors: concentration of credit, ability of staff, loan review, trends in loan quality, policy changes, collateral, and changes in nature and/or volume of loans. The Company made an accounting election to exclude accrued interest from the measurement of the allowance for credit losses because the Company has a robust policy in place to reverse or write-off accrued interest when loans are placed on nonaccrual, as described in Note 1 – Nature of Business and Its Significant Accounting Policies.

All loan information presented as of June 30, 2023 is in accordance with ASU 2016-13. All loan information presented as of December 31, 2022, or prior to the three and six month periods ended June 30, 2023, is presented in

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~~utilizes~~accordance ~~multiple~~with ~~assumptions~~previously toapplicable ~~calculate~~U.S. ~~the~~GAAP. Prior ~~expected~~to ~~credit~~adopting ~~losses~~ASU 2016-13, ~~which~~the ~~may~~Company ~~include~~reviewed ~~loan~~and ~~groupings,~~analyzed ~~prepayment~~each ~~speeds,~~of ~~unfunded~~the ~~commitment~~segments ~~funding~~above ~~assumptions,~~using ~~and~~historical ~~forward~~charge-~~looking~~off ~~factors~~experience for ~~the~~their ~~forecast~~respective ~~period. For~~segments ~~its~~as ~~reasonable~~well ~~and~~as ~~supportable~~the ~~forecasting~~following ofqualitative ~~current~~factors: ~~expected~~changes ~~credit~~in ~~losses,~~ the ~~Company~~levels ~~analyzes~~and atrends ~~simple~~in ~~regression~~delinquencies, ~~using~~nonaccruals, ~~forecasted~~classified ~~economic~~assets ~~metrics~~ and ~~historical~~TDRs; ~~peer~~changes ~~loss~~in ~~data. The Company uses~~ the ~~average~~value of ~~four~~underlying ~~quarters~~collateral; ofchanges ~~projected~~in ~~charge-offs~~the nature and ~~recoveries~~volume ~~based~~of on the ~~Federal~~portfolio; ~~Open~~effects ~~Markets~~of ~~Committee~~any ~~(“FOMC”)~~changes ~~forecast~~in tolending ~~account~~policies, ~~for~~procedures, ~~the~~including ~~forward-looking~~underwriting ~~adjustment. To~~standards ~~further~~and ~~adjust~~collections, ~~the~~charge-off ~~allowance~~and ~~for~~recovery ~~credit~~practices; ~~losses~~changes ~~for~~in ~~expected~~the ~~losses~~experience, ~~not~~depth ~~already~~and ~~included~~ability ~~within~~of ~~the~~management; ~~quantitative~~changes ~~component~~in of the ~~calculation,~~national ~~the~~and ~~Company~~local ~~considers~~economic ~~the~~conditions ~~following~~and ~~qualitative~~developments, ~~adjustment~~including ~~factors:~~the ~~concentration~~condition of ~~credit,~~various ~~ability~~market ofsegments; ~~staff,~~changes ~~loan review, trends~~ in ~~loan~~the ~~quality,~~concentration ~~policy~~of ~~changes,~~credits ~~collateral,~~within ~~and~~each pool; changes in ~~nature~~the ~~and/or~~quality ~~volume~~ of ~~loans.~~the ~~The~~ Company’s ~~made~~loan anreview ~~accounting~~system ~~election~~and ~~to exclude accrued interest from~~ the ~~measurement~~degree of ~~the~~oversight ~~allowance~~by ~~for credit losses because~~ the Company’s ~~has~~Board aof ~~robust~~Directors; ~~policy~~changes in ~~place~~external tofactors ~~reverse~~such oras ~~write-off~~competition ~~accrued~~and ~~interest~~the ~~when~~legal ~~loans~~environment. These ~~are~~factors ~~placed~~resulted ~~on nonaccrual, as described~~ in ~~Note~~a 1FASB –ASC ~~Nature~~450-10-20 ofcalculated ~~Business~~reserve ~~and~~for ~~Its~~environmental ~~Significant Accounting Policies~~factors.

~~All~~Credit ~~loan~~quality ~~information~~indicators ~~presented~~are asutilized ofto ~~March~~help ~~31,~~estimate ~~2023~~the iscollectability inof ~~accordance~~each ~~with~~loan ~~ASU~~within ~~2016-13~~the segments. ~~All~~The ~~loan~~primary ~~information~~credit ~~presented~~quality asindicator ofused ~~December~~for ~~31,~~evaluating ~~2022,~~credit orquality ~~prior~~is to the ~~three~~risk ~~month~~rating ~~period~~categories ~~ended~~of ~~March~~Pass, 31Watch, ~~2023~~Special Mention, isSubstandard, ~~presented~~and inDoubtful. While ~~accordance~~other ~~with~~credit ~~previously~~quality ~~applicable~~indicators ~~U.S.~~may ~~GAAP. Prior~~be toevaluated ~~adopting~~as ~~ASU~~part ~~2016-13,~~of the Company’s ~~reviewed~~credit ~~and~~risk ~~analyzed~~management ~~each~~activities, ofincluding ~~the~~delinquency ~~segments~~trends ~~above~~and ~~using~~loan ~~historical~~or ~~charge-off~~borrower ~~experience~~specific ~~for~~market ~~their~~conditions, ~~respective~~among ~~segments~~other asthings, ~~well~~these asindicators ~~the~~are ~~following~~primarily ~~qualitative~~used ~~factors: changes~~ in estimating the ~~levels~~allowance ~~and~~for ~~trends~~credit inlosses. The ~~delinquencies,~~determination ~~nonaccruals,~~for ~~classified~~a ~~assets~~specific ~~and~~reserve ~~TDRs;~~is ~~changes~~measured inbased on the present value of ~~underlying~~expected ~~collateral;~~future ~~changes~~cash inflows, ~~the~~discounted ~~nature~~at ~~and~~the ~~volume~~loan's ofeffective ~~the~~interest ~~portfolio;~~rate, ~~effects~~except ofwhen ~~any~~the ~~changes~~sole in(remaining) ~~lending~~source ~~policies,~~of ~~procedures,~~repayment ~~including~~for ~~underwriting~~the ~~standards~~loan ~~and~~is ~~collections,~~the ~~charge~~operation ~~off~~or ~~and~~liquidation ~~recovery~~of ~~practices;~~the ~~changes~~collateral. inIn ~~the~~these ~~experience~~cases, ~~depth~~management ~~and~~uses ~~ability~~the ofcurrent ~~management;~~fair ~~changes~~value inof the ~~national~~collateral, ~~and~~less ~~local~~selling ~~economic~~cost ~~conditions~~when ~~and~~foreclosure ~~developments~~is probable, ~~including~~instead ~~the~~of ~~condition~~discounted ofcash ~~various~~flows. ~~market~~If ~~segments;~~management ~~changes~~determined inthat the ~~concentration~~value of ~~credits~~the ~~within~~loan ~~each~~is ~~pool;~~less ~~changes~~than in the ~~quality~~recorded ofinvestment in the ~~Company’s~~ loan ~~review~~(net ~~system~~of ~~and~~previous ~~the~~charge-offs, ~~degree~~deferred ofloan ~~oversight~~fees byor ~~the~~costs ~~Company’s~~and ~~Board~~unamortized ofpremium ~~Directors;~~or ~~changes~~discount), ina ~~external~~specific ~~factors~~reserve ~~such~~is asrecognized ~~competition~~within ~~and~~ the ~~legal~~allowance ~~environment. These~~for ~~factors~~credit ~~resulted~~losses inestimate or a ~~FASB ASC 450~~charge-~~10-20~~off ~~calculated~~to ~~reserve~~the allowance for ~~environmental~~credit ~~factors~~losses.

~~Credit quality indicators are utilized to help estimate the collectibility of each loan within the segments.~~ The ~~primary~~establishment ~~credit quality indicator used for evaluating credit quality is the risk rating categories~~ of ~~Pass,~~a ~~Watch,~~specific ~~Special~~reserve ~~Mention,~~does ~~Substandard,~~not ~~and~~necessarily ~~Doubtful. While~~mean ~~other~~that ~~credit quality indicators may be evaluated as part of~~ the ~~Company’s credit risk management activities, including delinquency trends and~~ loan orwith ~~borrower specific market conditions, among other things, these indicators are primarily used in estimating~~ the ~~allowance for credit losses. The determination for a~~ specific reserve iswill ~~measured~~definitely ~~based~~incur ona ~~the~~loss ~~present value of expected future cash flows, discounted~~ at the ~~loan's~~reserve ~~effective~~level. ~~interest~~It ~~rate, except when the sole (remaining) source of repayment for the loan~~ is ~~the~~only ~~operation~~an orestimation ~~liquidation~~ of ~~the~~potential ~~collateral.~~loss Inbased ~~these~~upon ~~cases,~~known ~~management~~events ~~uses~~that ~~the~~are ~~current~~subject ~~fair~~to ~~value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows~~change. IfA ~~management determined that the value of the loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), a~~ specific reserve iswill ~~recognized~~not ~~within~~be ~~the~~established ~~allowance~~unless ~~for~~loss ~~credit~~elements ~~losses~~can ~~estimate~~be ordetermined aand ~~charge-off~~quantified tobased ~~the~~on ~~allowance~~known ~~for credit losses~~facts.

The establishment of a specific reserve does not necessarily mean that the credit with the specific reserve will definitely incur loss at the reserve level. It is only an estimation of potential loss based upon known events that are subject to change. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts.

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The following table includes impairment information relating to loans and the allowance for credit losses as of December 31, 2022, prior to the adoption of ASU 2016-13:


	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Balance at December 31, 2022
Purchased credit impaired loans
Purchased credit impaired loans:
Balance in allowance	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Related loan balance		—		696		352		—		8		—		—		1,056
Individually evaluated for impairment:
Balance in allowance	$	8	$	—	$	—	$	—	$	282	$	—	$	—	$	290
Related loan balance		259		1,748		2,442		54		326		—		—		4,829
Collectively evaluated for impairment:
Balance in allowance	$	1,072	$	2,059	$	8,637	$	249	$	1,636	$	76	$	296	$	14,025
Related loan balance		117,037		227,460		719,826		31,391		128,219		3,048		—		1,226,981

Note: The balances above include unamortized discounts on acquired loans of $1.7 million.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and six months ended ~~March~~June 3130, 2023 and ~~for~~ the year ended December 31, 2022. Allocation of a portion of the allowance for credit losses to one loan class does not preclude its availability to absorb losses in other loan classes.


	~~March~~June 3130, 2023
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Three Months Ended
Quarter Ended
Beginning Balance	$	2,364	$	2,556	$	7,622	$	641	$	2,357	$	47	$	509	$	16,096
Adjustment for PCD acquired loans		—		—		—		—		—		—		—		—
Charge-offs		—		—		—		—		(2)		(14)		—		(16)
Recoveries		—		10		20		1		21		3		—		55
Provision/(recovery)		(431)		144		381		(14)		187		11		(196)		82
Ending Balance	$	1,933	$	2,710	$	8,023	$	628	$	2,563	$	47	$	313	$	16,217
Six Months Ended
Beginning Balance	$	1,080	$	2,059	$	8,637	$	249	$	1,918	$	76	$	296	$	14,315
Effect of adoption of ASC 326		1,919		259		(1,579)		453		347		(27)		(33)		1,339
Adjustment for PCD acquired loans		—		—		—		—		—		—		—		—
Charge-offs		(10)		—		—		—		(5052)		(1529)		—		(7591)
Recoveries		—		1727		—19		12		7293		711		—		97152
Provision/(recovery)		(~~625~~1,056)		~~221~~365		~~564~~946		(6276)		70257		616		~~246~~50		~~420~~502
Ending Balance	$	21,~~364~~933	$	2,~~556~~710	$	78,~~622~~023	$	~~641~~628	$	2,~~357~~563	$	47	$	~~509~~313	$	16,~~096~~217


	December 31, 2022
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Year Ended
Beginning Balance	$	1,143	$	1,893	$	9,239	$	212	$	1,885	$	36	$	248	$	14,656
Charge-offs		(13)		—		(1,555)		(27)		(182)		(72)		—		(1,849)
Recoveries		1		59		23		9		20		48		—		160
Provision/(recovery)		(51)		107		930		55		195		64		48		1,348
Ending Balance	$	1,080	$	2,059	$	8,637	$	249	$	1,918	$	76	$	296	$	14,315

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Nonaccruals

In general, a loan will be placed on nonaccrual status at the end of the reporting month in which the interest or principal is past due more than 90 days or it is determined that the borrower is experiencing financial difficulty that is not considered temporary. Exceptions to the policy are those loans that are in the process of collection and are well-secured. A well-secured loan is secured by collateral with sufficient market value to repay principal and all accrued interest.

20The following tables show nonaccrual loans as of June 30, 2023 and December 31, 2022:

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The following tables show nonaccrual loans as of March 31, 2023 and December 31, 2022:

Nonaccrual with

No Allowance

Allowance

For Credit

Total Nonaccrual

Allowance for

At March 31, 2023

Losses

Loans

Credit Losses

At June 30, 2023

Losses

Loans

Credit Losses

Dollars in Thousands

Real Estate Mortgage

Construction and land development

~~247~~246

—

~~247~~246

—

Residential real estate

1,~~234~~220

—

1,~~234~~220

—

Nonresidential

~~292~~673

—

~~292~~673

—

Home equity loans

5452

—

5452

—

Commercial

—

~~310~~299

~~280~~282

Consumer and other loans

—

TOTAL

12,~~827~~191

~~310~~299

2,~~137~~490

~~280~~282


	Nonaccrual with		Nonaccrual with
	No Allowance		Allowance
	For Credit		For Credit		Total Nonaccrual		Allowance for
At December 31, 2022	Losses		Losses		Loans		Credit Losses

	Dollars in Thousands
Real Estate Mortgage
Construction and land development	$	248	$	11	$	259	$	8
Residential real estate		1,263		—		1,263		—
Nonresidential		305		—		305		—
Home equity loans		—		—		—		—
Commercial		—		327		327		282
Consumer and other loans		—		—		—		—
TOTAL	$	1,816	$	338	$	2,154	$	290

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted ASU 2016-13 effective January 1, 2023, including the adoption of ASU 2022-02, which eliminated the recognition and measurement of TDRs and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. As of ~~March~~June 3130, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the three or six months ended ~~March~~June 3130, 2023, and as such, did not have any loans made to borrowers experiencing financial difficulty that subsequently defaulted. In addition, during the three months ended March 31, 2022, there were no loans made to borrowers experiencing financial difficulty that subsequently defaulted during the period ended March 31, 2022 which had been modified during the twelve months prior to default. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.

There was one loan secured by a 1-4 family residential property in the process of foreclosure at ~~March~~June 3130, 2023. There were no loans secured by 1-4 family residential properties that were in the process of foreclosure at December 31, 2022.

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TDR Disclosures Prior to the Adoption of ASU 2022-02

There ~~were~~was noone ~~loans~~loan modified under the terms of a TDR during the three and six months ended ~~March~~June 3130, 2022. A summary of loans that were modified under the terms of a TDR during the three and six months ended June 30, 2022 is shown below by class. The post-modification recorded balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal pay-downs, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged -off, or foreclosed upon by period end are not reported.

During the three months ended March 31, 2022, there were no loans modified as a TDR that subsequently defaulted during the period ended March 31, 2022 which had been modified as a TDR during the twelve months prior to default.


	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Total

	Dollars in Thousands
Three months ended June 30, 2022
Number of loans modified during the period		—		1		—		—		—		—		1
Pre-modification recorded balance	$	—	$	48,303	$	—	$	—	$	—	$	—	$	48,303
Post-modification recorded balance		—		48,263		—		—		—		—		48,263
Six months ended June 30, 2022
Number of loans modified during the period		—		1		—		—		—		—		1
Pre-modification recorded balance	$	—	$	48,303	$	—	$	—	$	—	$	—	$	48,303
Post-modification recorded balance		—		48,263		—		—		—		—		48,263

During the three and six months ended June 30, 2022, there were no loans modified as a TDR that subsequently defaulted during the period ended June 30, 2022, which had been modified as a TDR during the twelve months prior to default.

Credit Quality Information

The following tables represent credit exposures by creditworthiness category at ~~March~~June 3130, 2023 and December 31, 2022. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Company’s internal creditworthiness is based on experience with similarly graded credits. The Company uses the definitions below for categorizing and managing its criticized loans. Loans categorized as “Pass” do not meet the criteria set forth below and are not considered criticized.

Marginal — Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems. Loans in this category may not meet required underwriting criteria and have no mitigating factors. More than the ordinary amount of attention is warranted for these loans.

Substandard — Loans in this category exhibit well-defined weaknesses that would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower. The possibility of loss is much more evident and above average supervision is required for these loans.

Doubtful — Loans in this category have all the weaknesses inherent in a loan categorized as Substandard, with the 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 in this category are of little value and are not warranted as a bankable asset.

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A summary of loans by risk rating segmented by year of origination as of ~~March~~June 3130, 2023 is as follows:


		Term Loans by Origination Year												Revolving
At March 31, 2023		Prior		2019		2020		2021		2022		2023		Loans		Total
At June 30, 2023		Prior		2019		2020		2021		2022		2023		Loans		Total
		Dollars in thousands
Construction & Land Development
Construction and Land Development
Pass	$	54,~~292~~664	$	1,~~348~~377	$	65,~~924~~927	$	3222,~~690~~432	$	5540,~~804~~966	$	818,~~664~~693	$	1314,~~136~~085	$	~~123~~108,~~858~~144
Marginal		—		—		—		—		—		—		—		—
Substandard		74		—		—		—		—		—		~~173~~172		~~247~~246
		54,~~366~~738		1,~~348~~377		65,~~924~~927		3222,~~690~~432		5540,~~804~~966		818,~~664~~693		1314,~~309~~257		~~124~~108,~~105~~390
Residential Real Estate
Pass		6360,~~604~~716		1615,~~957~~960		27,~~300~~179		51,~~028~~640		5255,~~863~~351		614,~~841~~055		1416,~~195~~307		~~232~~241,~~788~~208
Marginal		—		—		—		—		—		—		—		—
Substandard		1,~~656~~670		—		—		—		—		—		—		1,~~656~~670
		6562,~~260~~386		1615,~~957~~960		27,~~300~~179		51,~~028~~640		5255,~~863~~351		614,~~841~~055		1416,~~195~~307		~~234~~242,~~444~~878
Nonresidential
Pass		~~213~~212,~~546~~558		6765,~~490~~028		9088,~~403~~216		~~165~~170,~~549~~428		~~166~~174,~~598~~165		1530,~~370~~277		910,~~356~~239		~~728~~750,~~312~~911
Marginal		~~144~~—		—		~~668~~—		—		—		—		—		~~812~~—
Substandard		~~510~~505		—385		—1,325		—		—		—		—		~~510~~2,215
		~~214~~213,~~200~~063		6765,~~490~~413		9189,~~071~~541		~~165~~170,~~549~~428		~~166~~174,~~598~~165		1530,~~370~~277		910,~~356~~239		~~729~~753,~~634~~126
Home Equity
Pass		~~113~~139		—		4619		—		2725		—		2930,~~495~~148		2930,~~681~~331
Marginal		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		9997		9997
		~~113~~139		—		4619		—		2725		—		2930,~~594~~245		2930,~~780~~428
Commercial
Pass		87,~~484~~520		34,~~840~~192		1413,~~514~~640		2621,~~627~~675		1916,~~492~~640		521,~~439~~092		5054,~~222~~495		~~128~~139,~~618~~254
Marginal		—		~~165~~115		—		—		—		—		~~727~~332		~~892~~447
Substandard		~~311~~299		—		—		—		—1		—		—		~~311~~300
		87,~~795~~819		4,~~005~~307		1413,~~514~~640		2621,~~627~~675		1916,~~492~~641		521,~~439~~092		5054,~~949~~827		~~129~~140,~~821~~001
Consumer & Other
Consumer and Other
Pass		~~684~~603		4332		~~198~~161		~~723~~669		~~480~~430		~~229~~487		~~214~~355		2,~~571~~737
Marginal		—		—		—		—		—		—		~~325~~203		~~325~~203
Substandard		—		—		—		—		—		—		—		—
		~~684~~603		4332		~~198~~161		~~723~~669		~~480~~430		~~229~~487		~~539~~558		2,~~896~~940
TOTAL	$	~~294~~288,~~418~~748	$	8987,~~843~~089	$	~~140~~136,~~053~~467	$	~~276~~266,~~617~~844	$	~~295~~287,~~264~~578	$	3684,~~543~~604	$	~~117~~126,~~942~~433	$	1,~~250~~277,~~680~~763

Gross Charge-offs	$	—3	$	—	$	10	$	—	$	50	$	1528	$	—	$	7591

A summary of loans by risk rating as of December 31, 2022 is as follows:


	Real Estate Mortgage
	Construction &
	and Land		Residential								Consumer &
At December 31, 2022	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Total
	Dollars in Thousands
Pass	$	117,037	$	228,217	$	721,225	$	31,347	$	127,241	$	2,700	$	1,227,767
Marginal		—		—		872		—		985		348		2,205
Substandard		259		1,687		523		98		327		—		2,894
TOTAL	$	117,296	$	229,904	$	722,620	$	31,445	$	128,553	$	3,048	$	1,232,866

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The following tables include an aging analysis of the recorded investment of past due loans as of ~~March~~June 3130, 2023 and December 31, 2022:

Recorded

Investment

Greater than

>90 Days

30 - 59 Days

60 - 89 Days

90 Days

Total

Current

Total

Past Due

At March 31, 2023

Past Due *

Past Due **

Past Due***

Past Due

Balance****

Loans

and Accruing

At June 30, 2023

Past Due *

Past Due **

Past Due***

Past Due

Balance****

Loans

and Accruing

Dollars in Thousands

Real Estate Mortgage

Construction and land development

—

~~247~~246

~~123~~108,~~858~~144

~~124~~108,~~105~~390

—

Residential real estate

~~679~~260

~~740~~76

77252

~~1,496~~588

~~232~~242,~~948~~290

~~234~~242,~~444~~878

28252

Nonresidential

~~647~~—

~~218~~2,876

~~292~~673

13,~~157~~549

~~728~~749,~~477~~577

~~729~~753,~~634~~126

—

Home equity loans

75178

54—

—

~~129~~178

2930,~~651~~250

2930,~~780~~428

—

Commercial

3—

—

3—

~~129~~140,~~818~~001

~~129~~140,~~821~~001

—

Consumer and other loans

2—

—

2—

2,~~894~~940

2,~~896~~940

—

TOTAL

~~1,406~~438

12,~~012~~952

~~616~~1,171

34,~~034~~561

1,~~247~~273,~~646~~202

1,~~250~~277,~~680~~763

28252

* Includes $180 thousand of nonaccrual loans.

** Includes $54 thousand of nonaccrual loans.

*** Includes $588 thousand of nonaccrual loans.

**** Includes $1.3 million of nonaccrual loans.

* Includes $133 thousand of nonaccrual loans.

** Includes $40 thousand of nonaccrual loans.

*** Includes $918 thousand of nonaccrual loans.

**** Includes $1.4 million of nonaccrual loans.


													Recorded
													Investment
					Greater than								>90 Days
	30 - 59 Days		60 - 89 Days		90 Days		Total		Current		Total		Past Due
At December 31, 2022	Past Due*		Past Due		Past Due**		Past Due		Balance***		Loans		and Accruing

	Dollars in Thousands
Real Estate Mortgage
Construction and land development	$	—	$	—	$	259	$	259	$	117,037	$	117,296	$	—
Residential real estate		949		225		51		1,225		228,679		229,904		—
Nonresidential		474		—		305		779		721,841		722,620		—
Home equity loans		54		—		45		99		31,346		31,445		45
Commercial		—		—		—		—		128,553		128,553		—
Consumer and other loans		—		2		—		2		3,046		3,048		—
TOTAL	$	1,477	$	227	$	660	$	2,364	$	1,230,502	$	1,232,866	$	45

* Includes $916 thousand of nonaccrual loans.

** Includes $615 thousand of nonaccrual loans.

*** Includes $623 thousand of nonaccrual loans.

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Collateral Dependent Loans

Management may determine that an individual loan exhibits unique risk characteristics which differentiates it from the other loans within our loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loans and economic conditions affecting the borrower’s industry, among other things.

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of collateral. The following table presents the amortized cost basis of collateral dependent loans by loan segment, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to those loans.

Real Estate

Non-Real Estate

Allowance for

At March 31, 2023

Secured Loans

Total Loans

Credit Losses

At June 30, 2023

Secured Loans

Total Loans

Credit Losses

Dollars in Thousands

Real Estate Mortgage

Construction and land development

~~247~~246

—

~~247~~246

—

Residential real estate

1,~~312~~330

—

1,~~312~~330

—

Nonresidential

~~510~~890

—

~~510~~890

—

Home equity loans

5452

—

5452

—

Commercial

3—

~~308~~299

~~311~~299

~~280~~282

Consumer and other loans

—

TOTAL

2,~~126~~518

~~308~~299

2,~~434~~817

~~280~~282

When the ultimate collectability of the total principal of an individually evaluated loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an individually evaluated loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.

Impaired Loans (prior to the Adoption of ASU 2016-13)

Prior to the adoption of ASU 2016-13, impaired loans were defined as nonaccrual loans, TDRs, PCI loans, and loans risk rated as substandard, doubtful or ~~above~~loss. When management identified a loan as impaired, the impairment was measured for potential loss based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan was the operation or liquidation of the collateral. In these cases, management used the current fair value of the collateral, less selling cost when foreclosure was probable, instead of discounted cash flows. If management determined that the value of the impaired loan was less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment was recognized through an allowance for credit losses estimate or a charge-off to the allowance for credit losses.

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The following table includes the recorded investment and unpaid principal balances for impaired loans, excluding PCI loans, with the associated allowance for credit losses amount, if applicable, as of December 31, 2022, as determined in accordance with ASC 310-30 prior to the adoption of ASU 2016-13. Also presented is the average recorded investment in the impaired loans and the related amount of interest income recognized during the time within the period that the impaired loans were impaired.

Total impaired loans of $4.8 million at December 31, 2022 do not include PCI ~~loan~~loans ~~balances~~ of $1.1 million, which are net of a remaining purchase discount of $414 thousand. At December 31, 2022, there were no specific reserves related to PCI loans included in the allowance for credit losses.


			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
December 31, 2022	Investment		Balance		Recognized		Reserve		Investment
	Dollars in Thousands
Impaired loans with specific reserves:
Real Estate Mortgage
Construction and land development	$	11	$	24	$	1	$	8	$	18
Residential real estate		—		—		—		—		—
Nonresidential		—		—		—		—		—
Home equity loans		—		—		—		—		—
Commercial		326		337		45		282		368
Consumer and other loans		—		—		—		—		—
Total impaired loans with specific reserves	$	337	$	361	$	46	$	290	$	386
Impaired loans with no specific reserve:
Real Estate Mortgage
Construction and land development	$	248	$	248	$	2	$	—	$	249
Residential real estate		1,748		1,748		42		—		1,797
Nonresidential		2,442		2,442		301		—		3,932
Home equity loans		54		54		2		—		53
Commercial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total impaired loans with no specific reserve	$	4,492	$	4,492	$	347	$	—	$	6,031
TOTAL	$	4,829	$	4,853	$	393	$	290	$	6,417

All acquired loans were initially recorded at fair value at the acquisition date. Prior to the adoption of ASU 2016-13, the outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheets are as follows:


Dollars in Thousands	December 31, 2022
Accountable for under ASC 310-30 (PCI loans)
Outstanding balance	$	1,470
Carrying amount		1,056
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	137,106
Carrying amount		135,792
Total acquired loans
Outstanding balance	$	138,576
Carrying amount		136,848

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-20 for the ~~three~~six months ended ~~March~~June 3130, 2022:


Dollars in Thousands	~~March~~June 3130, 2022
Balance at beginning of period	$	1,896
Beginning balance	$	1,896
Accretion		(~~295~~392)
Other changes, net		1—
Balance at end of period	$	1,602
Ending balance	$	1,504

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During the three and six months ended ~~March~~June 3130, 2022, the Company recorded $819 thousand and $55 thousand, respectively, in accretion on acquired loans accounted for under ASC 310-30.

The Company had no commitments to loan additional funds to the borrowers of restructured, impaired, or nonaccrual loans as of ~~March~~June 3130, 2023 and December 31, 2022.

Concentration of Risk:

The Company makes loans to customers located primarily within Anne Arundel, Charles, Calvert, St. Mary’s, Wicomico and Worcester Counties, Maryland, Sussex County, Delaware, Camden and Burlington Counties, New Jersey, the Greater Fredericksburg, Virginia area (Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia) and the Greater Washington D.C. area (the District of Columbia, Arlington County, Clarke County, Fairfax County, Fauquier County, Loudoun County, Prince William County, Warren County, and the Cities of Alexandria, Fairfax, Falls Church, Manassas, Manassas Park, and Reston, Virginia). A substantial portion of ~~its~~the Company’s loan portfolio consists of residential and commercial real estate mortgages. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

Off-Balance- Sheet Arrangements and Commitments

In the normal course of business, the Company enters into various transactions, which, in accordance with U.S. GAAP are not included in our consolidated balance sheets. The Company enters into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

The Company records an allowance for credit losses on off-balance sheet credit exposures through a charge to provision for credit losses in the Company’s Consolidated Statements of Income. The allowance for credit losses on off-balance- sheet credit exposures is a liability account, calculated in accordance with ASU 2016-13, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance for credit losses is recognized if the Company has the unconditional right to cancel the obligation. Off-balance- sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance- sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance for credit losses represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described above for loans as if such commitments were funded.

At ~~March~~June 3130, 2023 and December 31, 2022, the allowance for credit losses on off-balance sheet credit exposures totaled $~~658~~669 thousand and $265 thousand, respectively, and was included in other liabilities on the Company’s consolidated balance sheets.

The following table details activity in the allowance for credit losses on off-balance- sheet commitments for the periods indicated.


		Three Months Ended June 30,					Six Months Ended June 30,
		March 31,
Dollars in Thousands			2023			2022		2023		2022
Dollars in Thousands		2023			2022
Beginning balance		$	658		$	265	$	265	$	265
Beginning balance, prior to adoption of ASC 326	$	265		$	265
Impact of adopting ASC 326			-			-		512		-
Impact of adopting ASC 326		513			-
Provision for (recovery of) credit losses			11			-		(108)		-
Provision for (recovery of) credit losses		(120)			-
Ending balance		$	669		$	265	$	669	$	265
Ending balance	$	658		$	265

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Note 4. Borrowings and Notes Payable

The Company owns capital stock of the FHLB as a condition for $~~393~~415.04 million convertible advance credit facilities from the FHLB. As of ~~March~~June 3130, 2023, the Company had remaining credit availability of $~~344~~364.25 million under these facilities.

The following tables detail the advances the Company had outstanding with the FHLB at ~~March~~June 3130, 2023 and December 31, 2022:


		~~March~~June 3130, 2023
Dollars in Thousands		Outstanding Balance	Interest Rate		Maturity Date	Interest Payment
Fixed rate hybrid	$	9,900	1.29	%	March 2024	Fixed, paid quarterly
Fixed rate hybrid		9,900	1.29	%	March 2024	Fixed, paid quarterly
Daily rate credit		421,~~000~~100	5.0732	%	December 2023	Variable, paid daily
Fixed rate credit		2510,000	45.8424	%	~~April~~July 2023	Fixed, paid monthly
Total advances	$	4850,~~800~~900


		December 31, 2022
Dollars in Thousands		Outstanding Balance	Interest Rate		Maturity Date	Interest Payment
Fixed rate hybrid	$	9,900	1.29	%	March 2024	Fixed, paid quarterly
Fixed rate hybrid		9,900	1.29	%	March 2024	Fixed, paid quarterly
Daily rate credit		42,000	4.57	%	December 2023	Variable, paid daily
Total advances	$	61,800

The Company had short-term borrowings outstanding with the FHLB of $2931.01 million at ~~March~~June 3130, 2023. Average short-term borrowings outstanding under the FHLB approximated $3428.19 million and $31.5 million during the three and six months ended ~~March 31~~June 30, 2023, respectively. The Company had short-term borrowings outstanding with the FHLB of $42.0 million at December 31, 2022. Average short-term borrowings outstanding under the FHLB approximated $263 thousand during the year ended December 31, 2022. Borrowings with the FHLB are considered short-term if they have an original maturity of less than a year.

The Company has pledged a portion of its residential and commercial mortgage loan portfolio as collateral for these credit facilities. The lendable collateral value outstanding on these pledged loans totaled approximately $~~285~~291.60 million and $296.7 million at ~~March~~June 3130, 2023 and December 31, 2022, respectively.

In addition to the FHLB credit facilities, in January 2018, the Company entered into a subordinated loan agreement for an aggregate principal amount of $4.5 million, net of issuance costs, to fund the acquisition of Liberty. Interest-only payments are due quarterly at 6.875% per annum, and the outstanding principal balance matures in April 2028. In June 2020, the Company entered into a subordinated loan agreement for an aggregate principal amount of $18.1 million, net of issuance costs, to provide capital to support organic growth or growth through strategic acquisitions and capital expenditures. The subordinated notes will initially bear interest at 6.000% per annum, beginning June 25, 2020 to but excluding July 1, 2025, payable semi-annually in arrears. From and including July 1, 2025 to but excluding July 1, 2030, or an earlier redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three- month SOFR plus 590 basis points, payable quarterly in arrears. Beginning on July 1, 2025 through maturity, the subordinated notes may be redeemed, at the Company’s option, on any scheduled interest payment date. The subordinated notes will mature on July 1, 2030. The subordinated notes are subject to customary representations, warranties and covenants made by the Company and the purchasers.

Partners owns a one-half undivided interest in 410 William Street, Fredericksburg, Virginia. Partners purchased a one-half interest in the land for cash, plus additional settlement costs, and assumption of one-half of the remaining deed of trust loan on December 14, 2012. Partners indemnified the indemnities, who are the personal guarantors of the deed of trust loan in the amount of $886 thousand, which was one-half of the outstanding balance of the loan as of the purchase date. Partners has a remaining obligation under the note payable of $~~623~~617 thousand as of ~~March~~June 3130, 2023, which was carried

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on the balance sheet net of a discount of $1615 thousand. The loan was refinanced on April 30, 2015 with a twenty-five year amortization. The interest rate is fixed at 3.60% for the first 10 years, and then becomes a variable rate of 3.0% plus the 10-year Treasury rate until maturity.

The Company provides JMC a warehouse line of credit, which is eliminated in consolidation. In addition, JMC has a warehouse line of credit with another financial institution in the amount of $3.0 million. The interest rate is the weekly average of the one- month LIBOR plus 2.250%, rounded to the nearest 0.125% (7.~~500~~750% at ~~March~~June 3130, 2023). The rate is subject to change the first of every month. Amounts borrowed are collateralized by a security interest in the mortgage loans financed under the line and are payable upon demand. The warehouse line of credit is set to renew or mature on March 1, 2024. There was no balance outstanding at ~~March~~June 3130, 2023 or December 31, 2022. Interest expense on the warehouse lines of credit was $157 thousand and $1423 thousand ~~during~~for the three and six months ended ~~March~~June 3130, 2023, respectively, and $15 thousand and $29 thousand for the three and six months ended June 30, 2022, respectively.

The proceeds of these long-term borrowings were generally used to purchase higher yielding investment securities, fund additional loans, redeem preferred stock, or fund acquisitions. Additionally, the Company has secured credit availability of $5.0 million and unsecured credit availability of $~~153~~144.0 million with various correspondent banks for short-term liquidity needs, if necessary. The secured facility must be collateralized by specific securities at the time of any usage. At ~~March~~June 3130, 2023 ~~and December 31~~, ~~2022,~~ there were no borrowings outstanding under these credit agreements, and securities pledged under this secured credit facility had an amortized cost and fair value of $3 thousand.

The Company has pledged investment securities AFS with a combined amortized cost and fair value of $3.43 million and $2.87 million, respectively, with the FRB to secure Discount Window borrowings at ~~March~~June 3130, 2023. The combined amortized cost and fair value of these pledged investment securities AFS were $3.4 million and $2.8 million, respectively, at December 31, 2022. At ~~March~~June 3130, 2023 and December 31, 2022, there were no outstanding borrowings under these facilities.

Maturities of debt at ~~March~~June 3130, 2023 are as follows (dollars in thousands):


2023	$	2831,~~983~~089
2024		19,~~779~~778
2025		—
2026		—
2027		—
Thereafter		22,~~872~~873
	$	7173,~~634~~740

Note 5. Lease Commitments

The Company accounts for leases in accordance with ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The Company leases seventeen locations for administrative and loan production offices and branch locations. Fifteen leases were classified as operating leases and two leases were classified as finance leases. Leases with an initial term of 12 months or less as well as leases with a discounted present value of future cash flows below $25 thousand are not recorded on the balance sheet and the related lease expense is recognized over the lease term. The Company elected to use the practical expedient to not recognize short-term leases on the consolidated balance sheet and instead account for them as executory contracts.

Certain leases include options to renew, with renewal terms that can extend the lease term, typically for five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The Company has determined that it will place a limit on exercises of available lease renewal options that would extend the lease term up to a maximum of fifteen years, including the initial term. The depreciable life of leased assets is limited by the expected lease term.

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The following tables present information about the Company’s leases as of the dates and for the periods ~~ended~~noted below:


Dollars in Thousands	~~March~~June 3130, 2023			December 31, 2022
Balance Sheet
Operating Lease Amounts
Right-of-use asset	$	54,~~037~~826		$	5,065
Lease liability		5,~~439~~230			5,465
Finance Lease Amounts
Right-of-use asset	$	1,~~516~~482		$	1,550
Lease liability		1,~~975~~941			2,006

Supplemental balance sheet information
Weighted average lease term - Operating Leases (Yrs.)		7.7460			7.59
Weighted average lease term - Finance Leases (Yrs.)		10.8459			11.05
Weighted average discount rate - Operating Leases (1)		2.4041	%		2.31	%
Weighted average discount rate - Finance Leases (1)		2.84	%		2.84	%

Income Statement
Three Months Ended	June 30, 2023			June 30, 2022
Operating lease cost classified as premises and equipment	$	~~260~~250		$	286
Finance lease cost classified as interest on borrowings		14			15
Six Months Ended
Operating lease cost classified as premises and equipment	$	510		$	572
Finance lease cost classified as interest on borrowings		28			30

Operating outgoing cash flows from operating leases	$	~~247~~486		$	~~241~~514
Operating outgoing cash flows from finance leases	$	4592		$	4589

(1)	The discount rate was developed by using the fixed rate credit advance borrowing rate at the FHLB of Atlanta for a term correlating to the remaining life of each lease. Management believes this rate closely mirrors its incremental borrowing rate for similar terms.

~~Minimum lease payments at March 31, 2023, for the next five years and thereafter, assuming renewal options are exercised, are approximately as follows:~~30

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Minimum lease payments at June 30, 2023, for the next five years and thereafter, assuming renewal options are exercised, are approximately as follows:


	Dollars in Thousands
Operating Leases:
One year or less	$	~~876~~836
One to three years		1,~~421~~362
Three to five years		1,~~095~~065
Over 5 years		2,~~716~~606
Total undiscounted cash flows		65,~~108~~869
Less: Discount		(~~669~~639)
Lease Liabilities	$	5,~~439~~230

Finance Leases:
One year or less	$	191
One to three years		~~400~~403
Three to five years		~~407~~408
Over 5 years		1,~~314~~263
Total undiscounted cash flows		2,~~312~~265
Less: Discount		(~~337~~324)
Lease Liabilities	$	1,~~975~~941

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Note 6. Stock Option Plans

Liberty Stock Option Plans

In 2004, Liberty adopted the 2004 Incentive Stock Option Plan and the 2004 Non-Qualified Stock Option Plan, which were stock-based incentive compensation plans (the “Liberty Plans”). In February 2014, the Liberty Plans expired pursuant to their terms. Options under these plans had a 10-year life and vested over 5 years. Remaining options under these plans became fully vested with the signing of the Agreement of Merger with the Company in February 2018. In accordance with the terms of the Agreement of Merger between the Company and Liberty, the Liberty Plans were assumed by the Company, and the options were converted into and became an option to purchase an adjusted number of shares of the common stock of the Company at an adjusted exercise price per share. The number of shares was determined by multiplying the number of shares of Liberty common stock for which the option was exercisable by the number of shares of the Company’s common stock into which shares of Liberty common stock were convertible in the Agreement of Merger, which was 0.2857 (the “Liberty Conversion Ratio”), rounded to the next lower whole share. The exercise price was determined by dividing the exercise price per share of Liberty common stock by the Liberty Conversion Ratio, rounded up to the nearest cent. At the effective time of the merger between the Company and Liberty in 2018 (the “Liberty Merger”) there were 48,225 options outstanding at an exercise price of $1.18. These shares were converted to 13,771 options outstanding at an exercise price of $4.14.

~~A summary of stock option transactions with respect to such options for the three months ended March~~ 31~~, 2023 is as follows:~~

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A summary of stock option transactions with respect to such options for the six months ended June 30, 2023 is as follows:


	~~March~~June 3130, 2023
				Weighted
			Weighted	Average
			Average	Remaining
			Exercise	Contractual		Intrinsic
	Shares		Price	Life		Value
Outstanding at beginning of period	4,733	$	4.14	0.23
Granted	—		—	—
Exercised	—		—	—
Forfeited	(4,733)		4.14	—
Outstanding at end of period	—	$	—	—	$	—

Options exercisable at March 31, 2023	—	$	—
Options exercisable at June 30, 2023	—	$	—

Partners Stock Option Plan

In 2015, Partners adopted the 2015 Stock Option Plan (the “2015 Partners Plan”), which allowed both incentive stock options and nonqualified stock options to be granted. The exercise price of each stock option equaled the market price of Partners' common stock on the date of grant and a stock option’s maximum term was 10 years. Stock options granted in the years ended December 31, 2018 and 2017 vested over 3 years. Partners’ previous stock compensation plan (the “2008 Partners Plan”) provided for the grant of share-based awards in the form of incentive stock options and nonqualified stock options to Partners’ directors, officers and employees. In April 2015, the 2008 Partners Plan was terminated and replaced with the 2015 Partners Plan. Stock options outstanding prior to April 2015 were granted under the 2008 Partners Plan and became subject to the provisions of the 2015 Partners Plan. The 2008 Partners Plan also provided for stock options to be granted to seed investors as a reward for the contribution to organizational funds which were at risk if Partners’ organization had not been successful. Under the 2008 Partners Plan, Partners granted stock options to seed investors in 2008, which were fully vested upon the date of the grant.

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As a result of the acquisition of Partners in 2019 through an exchange of shares in an all stock transaction (the “Partners Share Exchange”), each stock option (the "Partners Options"), whether vested or unvested, issued and outstanding immediately prior to the effective time under the 2008 Partners Plan or the 2015 Partners Plan and together with the 2008 Partners Plan, (the "Partners Stock Plans"), immediately 100% vested, to the extent not already vested, and converted into and became stock options to purchase Company common stock. In addition, the Company assumed each Partners Stock Plan, and assumed each Partners Option in accordance with the terms and conditions of the Partners Stock Plans pursuant to which it was issued. As such, Partners Options to acquire 149,200 shares of Partners’ common stock at a weighted average exercise price of $10.52 per share were converted into stock options to acquire 256,294 shares of the Company’s common stock at a weighted average exercise price of $6.13 per share. The number of shares was determined by multiplying the number of shares of Partners’ common stock for which the option was exercisable by the number of shares of the Company common stock into which shares of Partners common stock were convertible in the Partners Share Exchange, which was 1.7179 (the “Partners Conversion Ratio”), rounded to the next lower whole share. The exercise price was determined by dividing the exercise price per share of Partners common stock by the Partners Conversion Ratio, rounded up to the nearest cent.

A summary of stock option transactions with respect to such options for the three months ended March 31, 2023 is as follows:


	March 31, 2023
				Weighted
			Weighted	Average
			Average	Remaining
			Exercise	Contractual		Intrinsic
	Shares		Price	Life		Value
Outstanding at beginning of period	88,467	$	6.59	2.85
Granted	—		—	—
Exercised	(11,853)		5.83	—
Forfeited	(1,546)		5.83	—
Outstanding at end of period	75,068	$	6.73	3.10	$	82,798

Options exercisable at March 31, 2023	75,068	$	6.73

As stated in Note 1 – Nature of Business and Its Significant Accounting Policies, the Company follows ASC 718-10 which requires that stock-based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date, which, for the Company, is the date of the grant. All stock option expenses had been fully recognized prior to 2020. As such, there was no expense recorded related to stock options during the three months ended March 31, 2023 and 2022.

Note 7. Restricted Stock Plan

The Company had an employee and director restricted stock plan (the “Company Plan”) and reserved 405,805 shares of stock for issuance thereunder. The Company adopted the Company Plan, pursuant to which employees and directors of the Company could acquire shares of common stock. The Company Plan was adopted by the Company’s Board of Directors in April 2014, and subject to the right of the Board of Directors to terminate the Company Plan at any time, terminated on June 30, 2018. The termination of the Company Plan, either at the scheduled termination date or before such date, did not affect any award issued prior to termination. During the years ended December 31, 2017 and 2018, the Company awarded 5,000 and 9,000 shares, respectively, to individual employees based on certain employment criteria. These shares vested over two or three years, based on the specific employment agreement. Each award from the

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~~Company~~A ~~Plan~~summary ~~is evidenced by an award agreement that specifies the vesting period~~ of ~~the restricted~~ stock ~~award,~~option ~~the~~transactions ~~number~~with ofrespect ~~shares~~ to ~~which~~such ~~the~~options ~~award~~for ~~pertains,~~the ~~and~~six ~~such~~months ~~other~~ended ~~provisions~~June 30, 2023 is as ~~the grantor determines.~~follows:

~~As of March 31, 2023, there were no remaining non-vested restricted stock awards under the Company Plan.~~

As stated in Note 1 – Nature of Business and Its Significant Accounting Policies, the Company follows ASC 718-10 which requires that restricted stock-based compensation to employees and directors be recognized as compensation cost in the income statement based on their fair values on the measurement date. The fair value of restricted stock granted was equal to the underlying fair value of the stock. The Company did not recognize any restricted stock-based compensation expense during the three months ended March 31, 2023 or 2022. The Company did not have any unrecognized restricted stock-based compensation expense related to restricted stock awards under the Company Plan as of March 31, 2023 or 2022.


	June 30, 2023
				Weighted
			Weighted	Average
			Average	Remaining
			Exercise	Contractual		Intrinsic
	Shares		Price	Life		Value
Outstanding at beginning of period	88,467	$	6.59	2.85
Granted	—		—	—
Exercised	(11,853)		5.83	—
Forfeited	(1,546)		5.83	—
Outstanding at end of period	75,068	$	6.73	2.85	$	-

Options exercisable at June 30, 2023	75,068	$	6.73

~~Note 8. Incentive Stock Plan~~

The intrinsic value represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock options exceeds the exercise price) that would have been received by the holders had they exercised their stock options on June 30, 2023. At June 30, 2023, the stock options had no intrinsic value as the current market value of the underlying stock options did not exceed the exercise price.

Note 7. Incentive Stock Plan

At the 2021 annual meeting of shareholders held on May 19, 2021 (the “2021 Annual Meeting”), the Company’s shareholders approved the Partners Bancorp 2021 Incentive Stock Plan (the “2021 Incentive Stock Plan”), which the Company’s Board of Directors had adopted, subject to shareholder approval, on January 27, 2021, based on the recommendation of the Compensation Committee of the Company’s Board of Directors (the “Committee”). The 2021 Incentive Stock Plan became effective upon shareholder approval at the 2021 Annual Meeting. The 2021 Incentive Stock Plan authorizes the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and performance units to key employees and non-employee directors, including members of advisory boards, of the Company and certain of its subsidiaries, as determined by the Committee. Subject to the right of the Board of Directors to terminate the 2021 Incentive Stock Plan at any time, awards may be granted under the 2021 Incentive Stock Plan until May 18, 2031. Subject to adjustment in the event of certain changes in the Company’s capital structure, the maximum number of shares of the Company’s common stock that may be issued under the 2021 Incentive Stock Plan is 1,250,000.

On April 28, 2021, the Company’s Board of Directors granted 58,824 shares of restricted stock to two senior officers of Partners in accordance with Nasdaq Listing Rule 5635(c)(4) as inducements material to each of them accepting employment with Partners. All of these shares were subject to time vesting in three equal annual installments beginning on April 28, 2022. On December 10, 2021, in accordance with the terms and conditions set forth in the definitive agreement and plan of merger (the “OCFC Merger Agreement”) with OceanFirst Financial Corp. (“OCFC”), the Company’s Board of Directors approved to immediately vest these outstanding and unvested awards. Although the Company and OCFC mutually agreed to terminate the OCFC Merger Agreement and transactions contemplated thereby on November 9, 2022, the accelerated vesting of these awards was not contingent upon the merger closing. Each grantee irrevocably and unconditionally covenanted and agreed to not transfer, convey or sell any share of Company common stock, along with certain other terms, in respect of such accelerated vesting of the restricted stock awards.

On October 12, 2021, the Company’s Board of Directors granted 68,000 shares of restricted stock to employees of Partners under the 2021 Incentive Stock Plan. All of these shares were subject to time vesting in three equal annual installments beginning on June 1, 2022. On December 10, 2021, in accordance with the terms and conditions set forth in the OCFC Merger Agreement, the Company’s Board of Directors approved to immediately vest 40,000 of these outstanding and unvested awards. Although the Company and OCFC mutually agreed to terminate the OCFC Merger Agreement and transactions contemplated thereby on November 9, 2022, the accelerated vesting of these awards was not contingent upon the merger closing. Each grantee of awards that were subject to the accelerated vesting provisions irrevocably and unconditionally covenanted and agreed to not transfer, convey or sell any share of Company common stock, along with certain other terms, in respect of such accelerated vesting of the restricted stock awards.

On October 27, 2021, the Company’s Board of Directors granted 27,000 shares of restricted stock to a director of the Company and Partners under the 2021 Incentive Stock Plan. All of these shares were subject to time vesting in three equal annual installments beginning on June 1, 2022. On December 10, 2021, in accordance with the terms and conditions set forth in the OCFC Merger Agreement, the Company’s Board of Directors approved to immediately vest these outstanding and unvested awards. Although the Company and OCFC mutually agreed to terminate the OCFC Merger Agreement and transactions contemplated thereby on November 9, 2022, the accelerated vesting of these awards was not

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On October 12, 2021, the Company’s Board of Directors granted 68,000 shares of restricted stock to employees of Partners under the 2021 Incentive Stock Plan. All of these shares were subject to time vesting in three equal annual installments beginning on June 1, 2022. On December 10, 2021, in accordance with the terms and conditions set forth in the OCFC Merger Agreement, the Company’s Board of Directors approved to immediately vest 40,000 of these outstanding and unvested awards. Although the Company and OCFC mutually agreed to terminate the OCFC Merger Agreement and transactions contemplated thereby on November 9, 2022, the accelerated vesting of these awards was not contingent upon the merger closing. ~~The~~Each grantee of awards that were subject to the accelerated vesting provisions irrevocably and unconditionally covenanted and agreed to not transfer, convey or sell any share of Company common stock, along with certain other terms, in respect of such accelerated vesting of the restricted stock awards.

AsOn October 27, 2021, the Company’s Board of ~~March~~Directors granted 3127,000 ~~2023,~~shares ~~there~~of restricted stock to a director of the Company and Partners under the 2021 Incentive Stock Plan. All of these shares were 18subject to time vesting in three equal annual installments beginning on June 1,~~669~~ ~~non-vested~~2022. ~~shares~~On ~~related~~December 10, 2021, in accordance with the terms and conditions set forth in the OCFC Merger Agreement, the Company’s Board of Directors approved to ~~restricted~~immediately ~~stock~~vest these outstanding and unvested awards. A Although ~~schedule~~the ofCompany ~~non-vested~~and ~~shares~~OCFC ~~related~~mutually agreed to ~~restricted~~terminate ~~stock~~the OCFC Merger Agreement and transactions contemplated thereby on November 9, 2022, the accelerated vesting of these awards aswas not contingent upon the merger closing. The grantee irrevocably and unconditionally covenanted and agreed to not transfer, convey or sell any share of ~~March~~Company 31common stock, ~~2023~~along iswith ascertain ~~follows:~~other terms, in respect of such accelerated vesting of the restricted stock awards.

As of June 30, 2023, there were 9,338 non-vested shares related to restricted stock awards. A schedule of non-vested shares related to restricted stock awards as of June 30, 2023 is as follows:


	Employees
		Weighted
		Average
	Shares	Fair Value
Nonvested Awards December 31, 2022	18,669	$	8.99
Awarded in 2023	—		—
Vested in 2023	—(9,331)		—8.99
Nonvested Awards March 31, 2023	18,669	$	8.99
Nonvested Awards June 30, 2023	9,338	$	8.99

As a result of applying the provisions of ASC 718-10, during the three and six months ended ~~March~~June 3130, 2023, the Company recognized restricted stock-based compensation expense of $2423 thousand, or $17 thousand net of tax, and $47 thousand, or $35 thousand net of tax, respectively, related to the restricted stock awards. Restricted stock-based compensation expense is accounted for using the fair value of the Company’s common stock on the date the restricted shares were awarded, which was $7.65 for the awards granted on April 28, 2021, $8.99 for the awards granted on October 12, 2021, and $8.72 for the awards granted on October 27, 2021. Unrecognized restricted stock-based compensation expense related to the restricted stock awards totaled approximately $~~110~~87 thousand at ~~March~~June 3130, 2023. The remaining period over which this unrecognized restricted stock-compensation expense is expected to be recognized is approximately 10.29 years.

Note 98. Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income or loss by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding during the period, including the effect of all potentially dilutive shares outstanding attributable to stock instruments.

Applicable guidance requires that outstanding, unvested share- based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

~~The following tables present basic and diluted EPS for the three months ended March 31, 2023 and 2022:~~ 34

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The following tables present basic and diluted EPS for the three and six months ended June 30, 2023 and 2022:


	Net Income Applicable
	to Basic Earnings		Weighted Average		Earnings
(Dollars and amounts in thousands, except per share data)	Per Common Share		Shares Outstanding		Per Share
For the three months ended March 31, 2023
For the three months ended June 30, 2023
Basic EPS	$	3,~~330~~764		17,~~985~~986	$	0.~~185~~209
Effect of dilutive stock awards		—		22—		—
Diluted EPS	$	3,~~330~~764		1817,~~007~~986	$	0.~~185~~209

For the six months ended June 30, 2023
Basic EPS	$	7,094		17,985	$	0.394
Effect of dilutive stock awards		—		9		—
Diluted EPS	$	7,094		17,994	$	0.394


For the three months ended March 31, 2022
For the three months ended June 30, 2022
Basic EPS	$	23,~~109~~179		17,~~958~~962	$	0.~~117~~177
Effect of dilutive stock awards		—		3932		—
Diluted EPS	$	23,~~109~~179		17,~~997~~994	$	0.~~117~~177

For the six months ended June 30, 2022
Basic EPS	$	5,288		17,960	$	0.294
Effect of dilutive stock awards		—		73		(0.001)
Diluted EPS	$	5,288		18,033	$	0.293

34Note 9. Regulatory Capital Requirements

~~Table~~The Company’s Subsidiaries are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s Subsidiaries must meet specific capital adequacy guidelines that involve quantitative measures of ~~Contents~~the Company’s Subsidiaries’ assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s Subsidiaries’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Federal banking regulations also impose regulatory capital requirements on bank holding companies. Under the small bank holding company policy statement of the Federal Reserve, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Company is not subject to regulatory capital requirements.

Note 10. Regulatory Capital Requirements

The Company’s Subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s Subsidiaries must meet specific capital adequacy guidelines that involve quantitative measures of the Company’s Subsidiaries’ assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s Subsidiaries’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Federal banking regulations also impose regulatory capital requirements on bank holding companies. Under the small bank holding company policy statement of the Federal Reserve, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Company is not subject to regulatory capital requirements.

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of at least 9 ~~percent~~%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The Company has elected not to opt into the CBLR framework at this time.

Quantitative measures established by regulation to ensure capital adequacy require the Company’s Subsidiaries to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and common equity Tier 1 capital to risk-weighted assets. Management believes as of March 31, 2023 that the Company’s Subsidiaries met all capital adequacy requirements to which they are subject.

As of March 31, 2023, the most recent notification from the FDIC categorized the Company’s Subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company’s Subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 risk-based ratios. There are no conditions or events since that notification that management believes have changed the Company’s Subsidiaries’ categories.

The Common Equity Tier 1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated by risk weight category, and certain off-balance-sheet items, among other things. The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

The Basel III Capital Rules require the Company’s Subsidiaries to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% Total capital ratio, effectively resulting in a minimum Total capital ratio of 10.5%) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

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Quantitative measures established by regulation to ensure capital adequacy require the Company’s Subsidiaries to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and common equity Tier 1 capital to risk-weighted assets. Management believes as of June 30, 2023 that the Company’s Subsidiaries met all capital adequacy requirements to which they are subject.

As of June 30, 2023, the most recent notification from the FDIC categorized the Company’s Subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company’s Subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 risk-based ratios. There are no conditions or events since that notification that management believes have changed the Company’s Subsidiaries’ categories.

The Basel III Capital Rules require the Company’s Subsidiaries to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% Total capital ratio, effectively resulting in a minimum Total capital ratio of 10.5%) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The implementation of the capital conservation buffer became fully phased in on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The following table presents actual and required capital ratios as of ~~March~~June 3130, 2023 and December 31, 2022 for the Company’s Subsidiaries under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of ~~March~~June 3130, 2023 and December 31, 2022 based on the fully phased-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based on prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. A comparison of the Company’s Subsidiaries’ capital amounts and ratios as of ~~March~~June 3130, 2023 and December 31, 2022 with the minimum requirements are presented below.

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									To Be
									Well Capitalized
					For Capital				Under Prompt
					Adequacy				Corrective Action
In Thousands	Actual				Purposes				Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of March 31, 2023
As of June 30, 2023
Total Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva	$	~~101~~104,~~654~~602	1314.70	%	$	7778,~~958~~573	10.5	%	$	74,~~246~~832	10.0	%
Virginia Partners Bank		6465,~~739~~379	11.31	%		6062,~~292~~077	10.5	%		5759,~~421~~121	10.0	%
Tier 1 Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		9295,~~362~~238	12.47	%		63,~~109~~607	8.5	%		59,~~397~~865	8.0	%
Virginia Partners Bank		5960,~~455~~092	10.42	%		4850,~~808~~253	8.5	%		4547,~~937~~297	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		9295,~~362~~238	12.47	%		5152,~~972~~382	7.0	%		48,~~260~~640	6.5	%
Virginia Partners Bank		5960,~~455~~092	10.42	%		4041,~~195~~385	7.0	%		3738,~~324~~429	6.5	%
Tier 1 Leverage Ratio
(To Average Assets)
The Bank of Delmarva		9295,~~362~~238	10.16	%		36,~~642~~056	4.0	%		4845,~~803~~070	5.0	%
Virginia Partners Bank		5960,~~455~~092	9.5	%		25,~~142~~330	4.0	%		31,~~428~~662	5.0	%

As of December 31, 2022
Total Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva	$	98,910	13.4	%	$	77,763	10.5	%	$	74,060	10.0	%
Virginia Partners Bank		63,558	11.3	%		58,862	10.5	%		56,059	10.0	%
Tier 1 Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		89,645	12.1	%		62,951	8.5	%		59,248	8.0	%
Virginia Partners Bank		58,895	10.5	%		47,650	8.5	%		44,848	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		89,645	12.1	%		51,842	7.0	%		48,139	6.5	%
Virginia Partners Bank		58,895	10.5	%		39,242	7.0	%		36,439	6.5	%
Tier 1 Leverage Ratio
(To Average Assets)
The Bank of Delmarva		89,645	9.3	%		38,416	4.0	%		48,020	5.0	%
Virginia Partners Bank		58,895	8.9	%		26,348	4.0	%		32,935	5.0	%

As permitted by the federal banking regulatory agencies, the Company has elected the option to phase in the impact on regulatory capital of the adoption of ASU 2016-13, which was effective for the Company on January 1, 2023. The initial impact of adoption of ASU 2016-13 will be phased in the regulatory capital calculations evenly over a three year period, with 25% recognized in year one, 50% recognized in year two, and 75% recognized in year three.

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Banking regulations also limit the amount of dividends that may be paid without prior approval of the Company’s regulatory agencies. Regulatory approval is required to pay dividends, which exceed the Company’s and its Subsidiaries’ net profits for the current year plus its retained net profits for the preceding two years. At ~~March~~June 3130, 2023 and December 31, 2022, approximately $1922.8 million and $21.1 million, respectively, was available for the payment of dividends to stockholders by the Company without regulatory approval. Dividends from the Subsidiaries to the Company are also limited by the amount of retained net profits of the Subsidiaries in the current year and the preceding two years. At ~~March~~June 3130, 2023 and December 31, 2022, approximately $2327.94 million and $25.0 million, respectively, was available for the payment of dividends to the Company from the Subsidiaries without regulatory approval.

Note 1110. Fair Values of Financial Instruments

FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

Dollars are in thousands

Fair Value Measurements at ~~March~~June 3130, 2023

Quoted Prices in

Significant

Active Markets for

Other

Unobservable

Carrying

Identical Assets

Observable Inputs

Inputs

Amount

(Level 1)

(Level 2)

(Level 3)

Balance

Financial assets:

Cash and due from banks

1516,~~146~~011

—

1516,~~146~~011

Interest bearing deposits

5343,~~173~~128

—

5343,~~173~~128

Federal funds sold

2317,~~825~~478

—

2317,~~825~~478

Securities:

Available for sale

~~132~~129,~~802~~259

—

~~132~~129,~~802~~259

—

~~132~~129,~~802~~259

Loans held for sale

~~841~~519

—

~~841~~519

—

~~841~~519

Loans, net of allowance for credit losses

1,~~234~~261,~~584~~546

—

1,~~184~~195,~~461~~625

Accrued interest receivable

4,~~496~~440

—

4,~~496~~440

—

4,~~496~~440

Restricted stock

56,~~991~~163

—

56,~~991~~163

—

56,~~991~~163

Other investments

5,~~348~~364

—

5,~~348~~364

—

5,~~348~~364

Bank owned life insurance

18,~~822~~940

—

18,~~822~~940

—

18,~~822~~940

Financial liabilities:

Deposits

1,~~312~~318,~~541~~482

—

1,~~010~~006,~~939~~938

~~296~~305,~~318~~849

1,~~307~~312,~~257~~787

Accrued interest payable on deposits

~~706~~907

—

~~706~~907

—

~~706~~907

FHLB advances

4850,~~800~~900

—

4850,~~142~~308

—

4850,~~142~~308

Subordinated notes payable

22,~~226~~238

—

2625,~~264~~876

—

2625,~~264~~876

Other borrowings

~~608~~602

—

~~608~~602

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Dollars are in thousands			Fair Value Measurements at December 31, 2022
			Quoted Prices in		Significant		Significant
			Active Markets for		Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)		Balance
Financial assets:
Cash and due from banks	$	14,678	$	14,678	$	—	$	—	$	14,678
Interest bearing deposits		103,922		103,922		—		—		103,922
Federal funds sold		22,990		22,990		—		—		22,990
Securities:
Available for sale		133,657		—		133,657		—		133,657
Loans held for sale		1,314		—		1,314		—		1,314
Loans, net of allowance for credit losses		1,218,551		—		—		1,165,190		1,165,190
Accrued interest receivable		4,566		—		4,566		—		4,566
Restricted stock		6,512		—		6,512		—		6,512
Other investments		4,888		—		4,888		—		4,888
Bank owned life insurance		18,706		—		18,706		—		18,706
Financial liabilities:
Deposits	$	1,339,605	$	—	$	1,082,084	$	249,183	$	1,331,267
Accrued interest payable on deposits		267		—		267		—		267
FHLB advances		61,800		—		60,990		—		60,990
Subordinated notes payable		22,215		—		26,364		—		26,364
Other borrowings		613		—		—		613		613

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to ~~repay~~prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.

Note 1211. Fair Value Measurements

The Company follows ASC 820-10 Fair Value Measurements and Disclosures (“ASC 820-10”), which provides a framework for measuring and disclosing fair value under U.S. GAAP. ASC 820-10 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, AFS investment securities) or on a nonrecurring basis (for example, collateral dependent loans).

ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally 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.

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Level 2 - Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model- based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 - Valuation is based on model- based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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:

Investment Securities AFS:

Investment securities AFS 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. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s investment securities AFS are considered to be Level 2 securities.

The following table presents the balances of financial assets measured at fair value on a recurring basis as of ~~March~~June 3130, 2023 and December 31, 2022:


							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
March 31, 2023
June 30, 2023
Securities AFS:
Obligations of U.S. Government agencies and corporations	$	—	$	15,~~683~~531	$	—	$	15,~~683~~531
Obligations of States and political subdivisions		—		27,~~519~~255		—		27,~~519~~255
Mortgage-backed securities		—		8784,~~203~~186		—		8784,~~203~~186
Subordinated debt investments		—		2,~~397~~287		—		2,~~397~~287
Total securities AFS	$	—	$	~~132~~129,~~802~~259	$	—	$	~~132~~129,~~802~~259
December 31, 2022
Securities AFS:
Obligations of U.S. Government agencies and corporations	$	—	$	15,466	$	—	$	15,466
Obligations of States and political subdivisions		—		27,065		—		27,065
Mortgage-backed securities		—		88,740		—		88,740
Subordinated debt investments		—		2,386		—		2,386
Total securities AFS	$	—	$	133,657	$	—	$	133,657

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these financial assets usually result from the application of lower of cost or market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans Held for Sale:

Loans held for sale are loans originated by JMC for sale in the secondary market. Loans originated for sale by JMC are recorded at lower of cost or market. No market adjustments were required at ~~March~~June 3130, 2023; ~~therefore,~~or ~~loans~~December 31,

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2022; therefore, loans held for sale were carried at cost. Because of the short-term nature, the book value of these loans approximates fair value at ~~March~~June 3130, 2023 and December 31, 2022.

Loans Individually Evaluated for Credit Losses (Impaired Loans with Specific Reserves prior to adoption of ASU 2016-13):

Loans are individually evaluated for credit losses when, in the judgment of management the loan does not share similar risk characteristics with loans collectively evaluated for credit losses and based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. 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. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company 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 real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent loans allocated to the allowance for credit losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as a provision for credit losses in the Consolidated Statements of Income.

OREO:

OREO is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the allowance for credit losses. Subsequent fair value adjustments are recorded in the period incurred and included in “Other ~~noninterest expenses~~Expenses” in the Consolidated Statements of Income.

The following table presents the balances of financial assets measured at fair value on a nonrecurring basis as of December 31, 2022. There were no financial assets measured at fair value on a nonrecurring basis as of ~~March~~June 3130, 2023. The Company had no ~~other~~OREO ~~real estate owned~~ at ~~March~~June 3130, 2023 or December 31, 2022.


							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
December 31, 2022
Impaired loans	$	—	$	—	$	3	$	3
Total	$	—	$	—	$	3	$	3

The following ~~tables~~table ~~present~~presents additional quantitative information about financial assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value as of December 31, 2022:


December 31, 2022			Valuation	Unobservable	Range of
			Valuation	Unobservable	Range of
Dollars are in thousands	Fair Value		Technique	Inputs	Inputs
December 31, 2022
Impaired loans	$	3	Appraisals	Discount to reflect current market conditions and estimated selling costs	8%
Total	$	3

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Note 1312. Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with ASC 350. The Company records goodwill when the purchase price of an acquired entity is greater than the fair value of the identifiable tangible and intangible assets acquired minus the liabilities assumed. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amount of the intangible assets may be impaired. The Company does not amortize goodwill or any acquired intangible assets with an indefinite useful economic life, but reviews them for impairment on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of ~~March~~June 3130, 2023 or December 31, 2022.

Goodwill: The Company acquired goodwill in the acquisitions of Liberty, which was effective in 2018, and Partners, which was effective in 2019. There were no changes to goodwill during the ~~three~~six months ended ~~March~~June 3130, 2023 and the year ended December 31, 2022.

Core Deposit Intangible: The Company acquired core deposit intangibles in the acquisitions of Liberty and Partners. For the core deposit intangible related to Liberty, the Company utilizes the double declining balance method of amortization, in which the straight-line amortization rate is doubled and applied to the remaining unamortized portion of the intangible asset. The amortization method changes to the straight-line method of amortization when the straight-line amortization amount exceeds the amount that would be calculated under the double declining balance method. This core deposit intangible will be amortized over seven years. For the core deposit intangible related to Partners, the Company utilizes the sum of months method and an estimated average life of 120 months.

The following table provides changes in the core deposit intangible for the ~~three~~six months ended ~~March~~June 3130, 2023 and the year ended December 31, 2022:


	~~March~~June 3130,		December 31,
Dollars in Thousands	2023		2022
Balance at the beginning of the period	$	1,540	$	2,060
Beginning balance	$	1,540	$	2,060
Amortization		(~~121~~240)		(520)
Balance at the end of the period	$	1,419	$	1,540
Ending balance	$	1,300	$	1,540

The following table provides the remaining amortization expense for the core deposit intangible over the years indicated below:


	~~March~~June 3130,
Dollars in Thousands	2023
2023	$	~~346~~227
2024		415
2025		246
2026		182
2027		129
Thereafter		101
	$	1,~~419~~300

Net Deposits Purchased Premium and Discount: The Company paid a deposit premium in the acquisition of Liberty and received a deposit discount in the acquisition of Partners, which are included in the balances of time deposits on the consolidated balance sheets. The deposit premium is amortized as a reduction in interest expense over the life of the acquired time deposits and the deposit discount is accreted as an increase in interest expense over the life of the acquired

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time deposits. The premium and discount on acquired time deposits will both be amortized and accreted over approximately five years.

The following table provides changes in the net deposit premium and discount for the ~~three~~six months ended ~~March~~June 3130, 2023 and the year ended December 31, 2022:


	~~March~~June 3130,		December 31,
Dollars in Thousands	2023		2022
Balance at the beginning of the period	$	(3)	$	(9)
Beginning balance	$	(3)	$	(9)
Accretion, net		1		6
Balance at the end of the period	$	(2)	$	(3)
Ending balance	$	(2)	$	(3)

The following table provides the remaining accretion for the net deposit discount over the years indicated below:


	~~March~~June 3130,
Dollars in Thousands	2023
2023	$	1
2024		1
	$	2

The net effect of the amortization of premiums and accretion of discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed had the following impact on the ~~consolidated~~Consolidated ~~statements~~Statements of ~~income~~Income for the periods indicated below:


	June 30,		June 30,
	2023		2022
Three Months Ended	Dollars in Thousands
Adjustments to net income
Loans (1)	$	177	$	118
Time deposits (2)		(1)		(2)
Core deposit intangible (3)		(119)		(132)
Note Payable (4)		(1)		(1)
Net impact to income before taxes	$	56	$	(17)


	March 31,		March 31,
	2023		2022
Three Months Ended	Dollars in Thousands
Adjustments to net income
Loans (1)	$	112	$	330
Time deposits (2)		(1)		(2)
Core deposit intangible (3)		(121)		(134)
Note Payable (4)		(1)		(1)
Net impact to income before taxes	$	(11)	$	193


	June 30,		June 30,
	2023		2022
Six Months Ended	Dollars in Thousands
Adjustments to net income
Loans (1)	$	288	$	448
Time deposits (2)		(1)		(5)
Core deposit intangible (3)		(240)		(266)
Note Payable (4)		(2)		(2)
Net impact to income before taxes	$	45	$	175

(1)	Loan discount accretion is included in the "Loans, including fees" section of "Interest Income" in the Consolidated Statements of Income.

(2)	Time deposit discount accretion is included in the "Deposits" section of "Interest Expense" in the Consolidated Statements of Income.

(3) Core deposit intangible premium amortization is included in the "~~Other~~Amortization ~~Expenses~~of core deposit intangible" section of "~~Non-interest~~Other Expense" in the Consolidated Statements of Income.

(4)	Note payable discount accretion is included in the "Borrowings" section of "Interest Expense" in the Consolidated Statements of Income.

Note 14. Revenue Recognition

The Company follows ASU No. 2014-09 Revenue from Contracts with Customers (“Topic 606”) and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees and merchant income. However, the recognition of these revenue streams did not

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~~change~~Note ~~significantly upon adoption of Topic 606~~13. ~~Substantially~~Revenue ~~all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.~~Recognition

The Company follows ASU No. 2014-09 Revenue from Contracts with Customers (“Topic 606”) and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees and merchant income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Other Noninterest Income

Other noninterest income consists of: fees, exchange, other service charges, safe deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges 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. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment.

Gain or loss on sale or disposal of other assets

Gain or loss on sale of other assets is recorded when control of the property transfers to the buyer. Gain or loss on disposal of fixed assets is recorded when the asset is determined to no longer be in service.

Gain or loss on sale of ~~other~~OREO ~~real estate owned~~

Gain or loss on sale of ~~other~~OREO ~~real estate owned~~ is recorded when control of the property transfers to the buyer, which generally occurs at the time of transfer of the deed. If the Company finances the sale of a foreclosed property to the buyer, we assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed property is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer.

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Note 1514. Transaction with LINKBANCORP, Inc.

On February 22, 2023, the Company entered into an Agreement and Plan of Merger (the “LINK Merger Agreement”) with LINKBANCORP, Inc., a Pennsylvania corporation (“LINK”). The LINK Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into LINK, with LINK as the surviving entity (the “Merger”). The LINK Merger Agreement further provides that immediately following the Merger, Delmarva, a Delaware chartered bank and a wholly-owned subsidiary of the Company, will merge with and into LINKBANK, a Pennsylvania chartered bank and a wholly-owned subsidiary of LINK, with LINKBANK as the surviving bank (the “Delmarva Bank Merger”). The LINK Merger Agreement also provides that immediately following the Delmarva Bank Merger, Partners, a Virginia chartered bank and a wholly-owned subsidiary of the Company, will merge with and into LINKBANK, with LINKBANK as the surviving bank (the “Partners Bank Merger” and, together with the Merger and the Delmarva Bank Merger, the “Transaction”). The LINK Merger Agreement was unanimously approved by the board of directors of each of LINK and the Company.

Upon the terms and subject to the conditions of the LINK Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of the Company (“Company Common Stock”) outstanding immediately prior to the Effective Time, other than certain shares held by the Company or LINK, will be converted into the right to receive 1.~~150~~15 shares (the “Exchange Ratio”) of common stock, par value $0.01 per share, of LINK (“LINK Common Stock”). Holders of Company Common Stock will receive cash in lieu of fractional shares.

~~Note~~At 16special meetings of their respective shareholders held on June 22, 2023, shareholders of LINK and the Company each voted to approve the LINK Merger Agreement and the transactions contemplated thereby. ~~Transaction~~The ~~with~~Merger ~~OceanFirst~~remains ~~Financial~~subject ~~Corporation~~to receipt of required regulatory approvals and certain other customary closing conditions.

Note 15. Transaction with OceanFirst Financial Corp.

On November 4, 2021, the Company, OCFC and Coastal Merger Sub Corp. (“Merger Sub”) entered into the OCFC Merger Agreement. Pursuant to the terms and subject to the conditions set forth in the OCFC Merger Agreement, (i) Merger Sub would merge with and into the Company, with the Company as the surviving entity, and (ii) immediately thereafter, the Company would merge with and into OCFC, with OCFC as the surviving entity. On November 9, 2022, the Company and OCFC entered into a Mutual Termination Agreement (the “Termination Agreement”) pursuant to which, among other things, the parties mutually agreed to terminate the OCFC Merger Agreement and transactions contemplated thereby. Each party bore its own costs and expenses in connection with the terminated transaction, and neither party paid a termination fee in connection with the termination of the OCFC Merger Agreement. The Termination Agreement also mutually released the parties from any claims of liability to one another relating to the OCFC Merger Agreement and the terminated transaction.

Note 1716. Recent Accounting Pronouncements

In June 2016, the FASB issued ~~Accounting Standards Update (“~~ASU”) No. 2016-13, “Financial Instruments – Credit Losses” (“Topic 326”): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost basis on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for AFS investment securities and addressed purchased financial assets with deterioration. The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard. The transition adjustment of the CECL Standard adoption included an increase in the allowance for credit losses of $1.3 million, $512 thousand to increase the reserve for unfunded credit commitments and a $1.4 million decrease to retained earnings to reflect the cumulative adjustment of adopting the CECL Standard, with a $430 thousand tax impact portion being recorded as part of the deferred tax asset on the Company’s Consolidated Balance Sheet. Subsequent to adoption, the Company will record adjustments to its allowance for credit losses and reserves for unfunded credit commitments through the provision for credit losses in the consolidated statements of income.

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The Company is utilizing a third-party model to tabulate its estimate of current expected credit losses, using the average historical loss methodology. In accordance with ASC 326, the Company has segmented its loan portfolio based on call report categories. The Company primarily utilizes historical loss rates for the CECL calculation based on Company-specific historical losses and peer loss history where applicable. For its reasonable and supportable forecasting of current expected credit losses over a period of twelve months, the Company analyzed a simple regression using forecasted economic metrics and historical peer loss data. To further adjust the allowance for credit losses for expected credit losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: concentration of credit, ability of staff, loan review, trends in loan quality, policy changes, collateral, and changes in nature and/or volume of loans. The Company’s CECL implementation process was overseen by a CECL implementation committee overseen by the Chief Credit Officer and included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience. During the first quarter of 2023, the Company engaged a third-party to perform a comprehensive model validation.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“Topic 848”). These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope”. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the ~~discounting~~ transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the ~~discounting~~ transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments, and is currently evaluating the effect that ASU 2020-04 will have on the Company’s consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. ASU 2021-08 was effective for the Company on January 1, 2023, and did not have a material impact on its consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 addresses areas identified by the FASB 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 by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 was effective for the Company on January 1, 2023, and did not have a material impact on its consolidated financial statements.

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