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 ~~June~~September 30, 2023
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File Number: 001-39285

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 ~~August~~November 119, 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		4849

Item 3. Quantitative and Qualitative Disclosures About Market Risk		8385

Item 4. Controls and Procedures		8385

PART IIOTHER INFORMATION


Item 1. Legal Proceedings		8385

Item 1A. Risk Factors		8385

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		83
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		85

Item 3. Defaults Upon Senior Securities		8486

Item 4. Mine Safety Disclosures		8486

Item 5. Other Information		8486

EXHIBIT INDEX		8587

SIGNATURES		8688

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS



	~~June~~September 30,		December 31,
	2023		2022
(Dollars in thousands, except per share amounts)	(Unaudited)		*

ASSETS
Cash and due from banks	$	1615,~~011~~674	$	14,678
Interest-bearing deposits in other financial institutions		4323,~~128~~141		103,922
Federal funds sold		179,~~478~~816		22,990
Cash and cash equivalents		7648,~~617~~631		141,590
Securities available for sale, at fair value		~~129~~121,~~259~~920		133,657
Loans held for sale		~~519~~354		1,314
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
Loans, less allowance for credit losses of $16,075 at September 30, 2023 and $14,315 at December 31, 2022		1,281,429		1,218,551
Accrued interest receivable		4,~~440~~729		4,566
Premises and equipment, less accumulated depreciation		14,~~441~~116		14,857
Restricted stock		65,~~163~~640		6,512
Operating lease right-of-use assets		4,~~826~~631		5,065
Financing lease right-of-use assets		1,~~482~~447		1,550
Other investments		5,~~364~~363		4,888
Bank owned life insurance		1819,~~940~~064		18,706
Core deposit intangible, net		1,~~300~~185		1,540
Goodwill		9,582		9,582
Other assets		1314,~~983~~942		12,234
Total assets	$	1,~~548~~533,~~462~~033	$	1,574,612
LIABILITIES
Deposits:
Non-interest-bearing demand	$	~~500~~508,~~500~~793	$	528,770
Interest-bearing demand		~~118~~111,~~842~~936		121,787
Savings and money market		~~387~~374,~~596~~210		431,538
Time		~~311~~328,~~544~~090		257,510
		1,~~318~~323,~~482~~029		1,339,605
Accrued interest payable on deposits		~~907~~1,071		267
Short-term borrowings with the Federal Home Loan Bank		3110,~~100~~000		42,000
Long-term borrowings with the Federal Home Loan Bank		19,800		19,800
Subordinated notes payable, net		22,~~238~~249		22,215
Other borrowings		~~602~~596		613
Operating lease liabilities		5,~~230~~037		5,465
Financing lease liabilities		1,~~941~~907		2,006
Other liabilities		45,~~855~~685		3,312
Total liabilities		1,~~405~~389,~~155~~374		1,435,283
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
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
Common stock, par value $0.01, authorized 40,000,000 shares, issued and outstanding 17,985,577 as of September 30, 2023 and 17,973,724 as of December 31, 2022, including 9,338 nonvested shares as of September 30, 2023 and 18,669 nonvested shares as of December 31, 2022		180		180
Surplus		88,~~785~~809		88,669
Retained earnings		6770,~~097~~916		62,854
Noncontrolling interest in consolidated subsidiaries		~~592~~515		707
Accumulated other comprehensive loss, net of tax		(1316,~~347~~761)		(13,081)
Total stockholders' equity		143,~~307~~659		139,329
Total liabilities and stockholders' equity	$	1,~~548~~533,~~462~~033	$	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 ~~June~~September 30,				~~Six~~Nine Months Ended ~~June~~September 30,
(Dollars in thousands, except per share amounts)	2023		2022		2023		2022
INTEREST INCOME ON:
Loans, including fees	$	1718,~~118~~224	$	1314,~~209~~119	$	3351,~~269~~493	$	2640,~~103~~222
Investment securities:
Taxable		~~676~~690		~~516~~607		12,~~364~~054		~~912~~1,519
Tax-exempt		~~187~~188		~~181~~180		~~372~~560		~~365~~545
Federal funds sold		~~306~~253		63353		~~570~~823		80433
Other interest income		~~536~~423		~~554~~1,198		1,~~240~~664		~~716~~1,914
		1819,~~823~~778		1416,~~523~~457		3656,~~815~~594		2844,~~176~~633
INTEREST EXPENSE ON:
Deposits		3,~~163~~778		1,~~126~~071		58,~~128~~906		23,~~369~~440
Borrowings		~~821~~721		~~508~~511		12,~~679~~401		1,~~013~~524
		34,~~984~~499		1,~~634~~582		611,~~807~~307		34,~~382~~964
NET INTEREST INCOME		1415,~~839~~279		1214,~~889~~875		3045,~~008~~287		2439,~~794~~669
Provision for credit losses		932		~~319~~419		~~393~~396		~~384~~803
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		1415,~~746~~277		1214,~~570~~456		2944,~~615~~891		2438,~~410~~866
OTHER INCOME:
NONINTEREST INCOME:
Service charges on deposit accounts		~~262~~285		~~249~~255		~~509~~795		~~472~~727
Mortgage banking income, net		104		427		356		718
Losses on sales and calls of investment securities		—		(5)		—		(5)
Impairment loss on restricted stock		—		(1)		—		(1)
Mortgage banking income, net		99		231		455		949
Other income		709		778		1,436		1,556
Gains on disposal of other assets, net		2		—		2		—
		1,075		1,453		2,301		2,745
Impairment loss on restricted stock		—		—		—		(1)
OTHER EXPENSES:
Other income		720		760		2,156		2,316
Salaries and employee benefits		5,849		5,504		11,854		11,080
		1,106		1,241		3,408		3,986
Premises and equipment		1,374		1,400		2,776		2,881
NONINTEREST EXPENSE:
(Gains) and operating expenses on other real estate owned, net		—		(2)		—		(9)
Salaries and employee benefits		5,483		5,688		17,337		16,767
Amortization of core deposit intangible		119		132		240		266
Premises and equipment		1,418		1,411		4,194		4,292
Merger related expenses		428		157		1,460		553
(Gains) and operating expenses on other real estate owned, net		—		—		—		(9)
Other expenses		3,121		2,723		6,171		5,530
Amortization of core deposit intangible		115		128		355		394
		10,891		9,914		22,501		20,301
Merger related expenses		157		167		1,617		720
INCOME BEFORE TAXES ON INCOME		4,930		4,109		9,415		6,854
Other expenses		3,242		2,953		9,413		8,484
Federal and state income taxes		1,250		926		2,436		1,622
		10,415		10,347		32,916		30,648
NET INCOME	$	3,680	$	3,183	$	6,979	$	5,232
INCOME BEFORE TAXES ON INCOME		5,968		5,350		15,383		12,204
Net loss (income) attributable to noncontrolling interest		84		(4)		115		56
Federal and state income taxes		1,506		1,292		3,943		2,914
NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP	$	3,764	$	3,179	$	7,094	$	5,288
NET INCOME	$	4,462	$	4,058	$	11,440	$	9,290
Net loss attributable to noncontrolling interest		76		52		192		108
NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP	$	4,538	$	4,110	$	11,632	$	9,398
Earnings per common share:
Basic earnings per share	$	0.2125	$	0.1823	$	0.3965	$	0.2952
Diluted earnings per share	$	0.2125	$	0.1823	$	0.3965	$	0.2952

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 COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended ~~June~~September 30,				~~Six~~Nine Months Ended ~~June~~September 30,
(Dollars in thousands)	2023		2022		2023		2022
NET INCOME	$	34,~~680~~462	$	34,~~183~~058	$	611,~~979~~440	$	59,~~232~~290
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Unrealized holding losses on securities available for sale arising during the period		(24,~~052~~484)		(65,~~783~~690)		(~~331~~4,816)		(1420,~~442~~131)
Deferred income tax effect		~~477~~1,070		1,~~549~~368		651,136		34,~~365~~733
Other comprehensive loss, net of tax		(13,~~575~~414)		(54,~~234~~322)		(~~266~~3,680)		(1115,~~077~~398)

TOTAL OTHER COMPREHENSIVE LOSS		(1,575)		(5,234)		(266)		(11,077)
Reclassification adjustment for losses included in net income		—		5		—		5
COMPREHENSIVE INCOME (LOSS)	$	2,105	$	(2,051)	$	6,713	$	(5,845)
Deferred income tax effect		—		(1)		—		(1)
Comprehensive loss (income) attributable to noncontrolling interest		84		(4)		115		56
Other comprehensive loss, net of tax		—		4		—		4
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO PARTNERS BANCORP	$	2,189	$	(2,055)	$	6,828	$	(5,789)
TOTAL OTHER COMPREHENSIVE LOSS		(3,414)		(4,318)		(3,680)		(15,394)
COMPREHENSIVE INCOME (LOSS)	$	1,048	$	(260)	$	7,760	$	(6,104)
Comprehensive loss attributable to noncontrolling interest		76		52		192		108
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO PARTNERS BANCORP	$	1,124	$	(208)	$	7,952	$	(5,996)

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
Balances, June 30, 2022	$	179	$	88,552	$	55,695	$	1,122	$	(10,761)	$	134,787
Net income		—		—		3,179		4		—		3,183
Net income (loss)		—		—		4,110		(52)		—		4,058
Other comprehensive loss, net of tax		—		—		—		—		(54,~~234~~318)		(54,~~234~~318)
Comprehensive loss												(~~2,051~~260)
Cash dividends, $0.025 per share		—		—		(449)		—		—		(449)
Stock-based compensation expense		—		23		—		—		—		23
Minority interest equity distribution		—		—		—		(343)		—		(343)
Balances, June 30, 2022	$	179	$	88,552	$	55,695	$	1,122	$	(10,762)	$	134,786
Stock-based compensation expense		—		24		—		—		—		24
Balances, September 30, 2022	$	179	$	88,576	$	59,356	$	727	$	(15,079)	$	133,759

Balances, March 31, 2023	$	180	$	88,762	$	64,052	$	676	$	(11,772)	$	141,898
Balances, June 30, 2023	$	180	$	88,785	$	67,097	$	591	$	(13,347)	$	143,306
Net income (loss)		—		—		34,~~764~~538		(8476)		—		34,~~680~~462
Other comprehensive loss, net of tax		—		—		—		—		(13,~~575~~414)		(13,~~575~~414)
Comprehensive income												21,~~105~~048
Cash dividends, $0.040 per share		—		—		(719)		—		—		(719)
Stock-based compensation expense		—		2324		—		—		—		2324
Balances, June 30, 2023	$	180	$	88,785	$	67,097	$	592	$	(13,347)	$	143,307
Balances, September 30, 2023	$	180	$	88,809	$	70,916	$	515	$	(16,761)	$	143,659


For the six months ended:									Accumulated
For the nine 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)		—		—		59,~~288~~398		(56108)		—		59,~~232~~290
Other comprehensive loss, net of tax		—		—		—		—		(1115,~~077~~394)		(1115,~~077~~394)
Comprehensive loss												(56,~~845~~104)
Cash dividends, $0.050 per share		—		—		(898)		—		—		(898)
Cash dividends, $0.075 per share		—		—		(1,347)		—		—		(1,347)
Minority interest equity distribution		—		—		—		(1344)		—		(1344)
Stock option exercises, net		—		115		—		—		—		115
Stock-based compensation expense		—		4771		—		—		—		4771
Balances, June 30, 2022	$	179	$	88,552	$	55,695	$	1,122	$	(10,762)	$	134,786
Balances, September 30, 2022	$	179	$	88,576	$	59,356	$	727	$	(15,079)	$	133,759

Balances, December 31, 2022	$	180	$	88,669	$	62,854	$	707	$	(13,081)	$	139,329
Net income (loss)		—		—		711,~~094~~632		(~~115~~192)		—		611,~~979~~440
Other comprehensive loss, net of tax		—		—		—		—		(~~266~~3,680)		(~~266~~3,680)
Comprehensive income												67,~~713~~760
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)
Cash dividends, $0.120 per share		—		—		(2,158)		—		—		(2,158)
Stock option exercises, net		—		69		—		—		—		69
Stock-based compensation expense		—		4771		—		—		—		4771
Balances, June 30, 2023	$	180	$	88,785	$	67,097	$	592	$	(13,347)	$	143,307
Balances, September 30, 2023	$	180	$	88,809	$	70,916	$	515	$	(16,761)	$	143,659

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)


	~~Six~~Nine Months Ended
	~~June~~September 30,
(Dollars in thousands)	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	711,~~094~~632	$	59,~~288~~398
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		~~393~~396		~~384~~803
Depreciation		~~837~~1,262		~~943~~1,404
Amortization and accretion		~~124~~181		~~250~~347
Loss on equity securities		—		151
Losses on sales and calls of investment securities		—		5
Gain on sale of loans held for sale, originated		(334)		(655)
Net gains on sales of assets		(2)		—
Loss on equity securities		53		226
Gain on sale of loans held for sale, originated		(424)		(869)
Net gains on other real estate owned, including write‑downs		—		(5)
Increase in bank owned life insurance cash surrender value		(~~234~~358)		(~~225~~338)
Stock‑based compensation expense, net of employee tax obligation		4771		4771
Net accretion of certain acquisition related fair value adjustments		(45)		(~~175~~163)
Impairment loss on restricted stock		—		1
Changes in assets and liabilities:
Loans held for sale		1,~~129~~384		14,~~663~~732
Accrued interest receivable		~~126~~(163)		~~227~~278
Other assets		(~~946~~605)		(~~744~~621)
Accrued interest payable on deposits		~~640~~804		(6391)
Other liabilities		~~903~~1,495		~~(453)~~855
Net cash provided by operating activities		915,~~734~~681		616,~~634~~033
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(1,~~768~~772)		(3540,~~206~~599)
Purchases of other investments		(~~476~~528)		(1525)
Proceeds from maturities and paydowns of securities available for sale		5,734		7,138
Purchase of Farmers Bank Stock		—		(49)
Net increase in loans		(44,538)		(52,804)
Proceeds from the sale of Farmers Bank Stock		—		44
Purchases of premises and equipment		(421)		(415)
Proceeds from maturities and paydowns of securities available for sale		8,547		10,717
Net increase in loans		(64,262)		(87,840)
Proceeds from sale of assets		2		—
Purchases of premises and equipment		(521)		(487)
Proceeds from the sales of foreclosed assets		—		842
Redemption (purchase) of restricted stocks		~~349~~872		(6421)
Net cash used in investing activities		(4157,~~120~~662)		(80117,~~524~~418)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in demand, money market, and savings deposits, net		(7587,~~157~~156)		~~104~~89,~~810~~287
Cash received for the exercise of stock options		69		115
Increase (decrease) in time deposits, net		5470,~~033~~578		(5276,~~343~~225)
Decrease in borrowings, net		(1032,~~913~~020)		(91441)
Net decrease in minority interest contributed capital		(~~115~~192)		(57452)
Decrease in finance lease liability		(6599)		(5989)
Dividends paid		(12,~~439~~158)		(~~898~~1,347)
Net cash (used in) provided by financing activities		(3350,~~587~~978)		5110,~~477~~848
Net decrease in cash and cash equivalents		(6492,~~973~~959)		(2290,~~413~~537)
Cash and cash equivalents, beginning of period		141,590		338,829
Cash and cash equivalents, ending of period	$	7648,~~617~~631	$	~~316~~248,~~416~~292
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid	$	510,~~557~~160	$	35,~~965~~291
Income taxes paid		24,~~498~~125		12,~~461~~416
Right of use assets and corresponding lease liabilities		190		—
Unrealized loss on securities available for sale		(~~331~~4,816)		(1420,~~442~~131)
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 previously held a 40.55% 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 ~~June~~September 30, 2023 and December 31, 2022, the results of its operations for three and ~~six~~nine months and its cash flows for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 in conformity with U.S. GAAP.

Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 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		1,029
Adjustment to PCD Loans			(9)		-		(9)
ACL - unfunded credit commitments			512		120		392
Total impact of CECL adoption		$	1,842	$	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

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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 9 – 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 ~~June~~September 30, 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 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 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 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 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 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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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 loan level based upon loan characteristics. Life calculations for each loan grouping incorporates future cash flows at the 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, and these appraisals or valuations are updated every twelve months. 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; or

●

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

Acquired Loans

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~~financial~~Acquired 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

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 financial 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.

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 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 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 ~~two~~three 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 ~~June~~September 30, 2023 or December 31, 2022 for possible repurchases. Management does not believe that a provision for early default or refinancing cost is necessary at ~~June~~September 30, 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 rates. The fair value of rate lock commitments and forward sales commitments was considered immaterial at ~~June~~September 30, 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~~Noninterest ~~expenses~~expense” on the Company’s Consolidated Statements of Income. At ~~June~~September 30, 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 12 – 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 management 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 ~~six~~nine months ended ~~June~~September 30, 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 17,985,577 and 17,985,~~267~~371 for the three and ~~six~~nine months ended ~~June~~September 30, 2023, 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 8 – 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 ~~June~~September 30, 2023 or December 31, 2022. As such, the Company has recorded no allowance for credit losses related to AFS investment securities as of ~~June~~September 30, 2023.

The following tables summarize the amortized cost and fair value of AFS investment securities and the corresponding amounts of gross unrealized gains and losses at ~~June~~September 30, 2023 and December 31, 2022:


	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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	September 30, 2023
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	17,231	$	—	$	1,906	$	15,325
Obligations of States and political subdivisions		29,615		—		3,914		25,701
Mortgage-backed securities		94,450		—		15,842		78,608
Subordinated debt investments		2,471		—		185		2,286
	$	143,767	$	—	$	21,847	$	121,920


	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 ~~June~~September 30, 2023 and December 31, 2022, are as follows:

~~June~~September 30, 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

71,~~659~~934

~~169~~20

713,~~872~~391

1,~~491~~886

15,~~531~~325

1,~~660~~906

Obligations of States and political subdivisions

95,~~479~~667

~~232~~430

1720,~~087~~034

23,~~180~~484

2625,~~566~~701

23,~~412~~914

Mortgage-backed securities

1,~~456~~409

59100

8277,~~727~~197

1315,~~061~~742

8478,~~183~~606

1315,~~120~~842

Subordinated debt investments

~~442~~—

37—

12,~~595~~037

~~146~~185

2,037

~~183~~185

Total investment securities with unrealized losses

199,~~036~~010

~~497~~550

~~109~~112,~~281~~659

1621,~~878~~297

~~128~~121,~~317~~669

1721,~~375~~847

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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 ~~June~~September 30, 2023, there ~~were~~was ~~two~~one mortgage-backed investment ~~securities~~security (“MBS”), ~~eight~~two agency investment securities, ~~one subordinated debt investment security~~ and ~~twenty-two~~thirteen municipal investment securities that have been in a continuous unrealized loss position for less than twelve months. At ~~June~~September 30, 2023, there were ~~sixty-nine~~seventy MBS investment securities, ~~ten~~sixteen agency investment securities, ~~three~~four subordinated debt investment securities, and ~~thirty~~forty-~~eight~~nine 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 ~~June~~September 30, 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 investment securities as of September 30, 2023.

16During the three and nine months ended September 30, 2023, the Company did not sell any investment securities. During the three and nine months ended September 30, 2022, the Company sold one investment security, resulting in a loss of $5 thousand.

During the three and nine months ended September 30, 2023, no investment securities either matured or were called. During the three months ended September 30, 2022, there were no calls or maturities on investment securities. During the nine months ended September 30, 2022, two investment securities either matured or were 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 September 30, 2023 and December 31, 2022. The amortized cost and fair value of these pledged investment securities was $10.1 million and $8.3 million, respectively, at September 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 $53 thousand on equity securities during the three and nine months ended September 30, 2023. The Company realized a loss of $75 thousand and $226 thousand on equity securities during the three and nine months ended September 30, 2022, respectively. These losses are included in the “Other expenses” line item of “Noninterest Expense” in the Consolidated Statements of Income.

Contractual maturities of investment securities at September 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

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~~increases~~National inMortgage ~~market~~Association. ~~interest~~Repayment ~~rates, (3) the contractual terms~~ of ~~the~~MBS ~~investments do not permit the issuer(s) to settle the~~ investment securities atis aaffected ~~price~~by ~~less than~~ the ~~cost~~contractual ~~basis~~repayment terms of ~~each investment, (4) issuers continue to make timely principal and interest payments, and (5)~~ the ~~Company~~underlying ~~does~~mortgages ~~not~~collateralizing ~~intend~~these toobligations ~~sell any of the investment securities~~ and the ~~accounting~~current ~~standard~~level of ~~“more~~interest ~~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~~rates. ~~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:


	~~June~~September 30, 2023
	Investment Securities AFS
	Dollars in Thousands
		Amortized		Fair
		Cost		Value
Due in one year or less	$	~~995~~6,341	$	~~976~~6,238
Due after one year through five years		1712,~~599~~180		1611,~~750~~247
Due after five years through ten years		4039,~~755~~663		3735,~~757~~516
Due after ten years or more		8785,~~272~~583		7368,~~776~~919
	$	~~146~~143,~~621~~767	$	~~129~~121,~~259~~920

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Note 3. Loans and Allowance for Credit Losses

Major categories of loans as of ~~June~~September 30, 2023 and December 31, 2022 are as follows:


(Dollars in thousands)	~~June~~September 30, 2023		December 31, 2022
Originated Loans
Real Estate Mortgage
Construction and land development	$	~~108~~113,~~339~~281	$	117,256
Residential real estate		~~218~~212,~~967~~719		204,211
Nonresidential		~~671~~704,~~580~~242		633,910
Home equity loans		2230,~~558~~707		22,866
Commercial		~~129~~115,~~728~~579		115,221
Consumer and other loans		23,~~724~~660		2,554
		1,~~153~~180,~~896~~188		1,096,018
Acquired Loans
Real Estate Mortgage
Construction and land development		51		40
Residential real estate		2322,~~911~~387		25,693
Nonresidential		8177,~~546~~858		88,710
Home equity loans		78,~~870~~022		8,579
Commercial		108,~~273~~794		13,332
Consumer and other loans		~~216~~204		494
		~~123~~117,~~867~~316		136,848
Total Loans
Real Estate Mortgage
Construction and land development		~~108~~113,~~390~~332		117,296
Residential real estate		~~242~~235,~~878~~106		229,904
Nonresidential		~~753~~782,~~126~~100		722,620
Home equity loans		3038,~~428~~729		31,445
Commercial		~~140~~124,~~001~~373		128,553
Consumer and other loans		23,~~940~~864		3,048
		1,~~277~~297,~~763~~504		1,232,866
Less: Allowance for credit losses		(16,~~217~~075)		(14,315)
	$	1,~~261~~281,~~546~~429	$	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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~~accordance~~Allowance ~~with previously applicable U.S. GAAP. Prior to adopting ASU 2016-13, the Company reviewed and analyzed each of the segments above using historical charge-off experience~~ for ~~their~~Credit respective segments as well as the following qualitative factors: changes in the levels and trends in delinquencies, nonaccruals, classified assets and TDRs; changes in the value of underlying collateral; changes in the nature and volume of the portfolio; effects of any changes in lending policies, procedures, including underwriting standards and collections, charge-off and recovery practices; changes in the experience, depth and ability of management; changes in the national and local economic conditions and developments, including the condition of various market segments; changes in the concentration of credits within each pool; changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors; changes in external factors such as competition and the legal environment. These factors resulted in a FASB ASC 450-10-20 calculated reserve for environmental factors.Losses

All loan information presented as of September 30, 2023 is in accordance with ASU 2016-13. All loan information presented as of December 31, 2022, or prior to the three and nine month periods ended September 30, 2023, is presented in accordance with previously applicable U.S. GAAP. Prior to adopting ASU 2016-13, the Company reviewed and analyzed each of the segments above using historical charge-off experience for their respective segments as well as the following qualitative factors: changes in the levels and trends in delinquencies, nonaccruals, classified assets and TDRs; changes in the value of underlying collateral; changes in the nature and volume of the portfolio; effects of any changes in lending policies, procedures, including underwriting standards and collections, charge-off and recovery practices; changes in the experience, depth and ability of management; changes in the national and local economic conditions and developments, including the condition of various market segments; changes in the concentration of credits within each pool; changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors; changes in external factors such as competition and the legal environment. These factors resulted in a FASB ASC 450-10-20 calculated reserve for environmental factors.

Credit quality indicators are utilized to help estimate the collectability of each loan within the segments. The primary credit quality indicator used for evaluating credit quality is the risk rating categories of Pass, Watch, Special Mention, Substandard, and Doubtful. While other credit quality indicators may be evaluated as part of the Company’s credit risk management activities, including delinquency trends and loan or 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 is measured 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 is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If 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 is recognized within the allowance for credit losses estimate or a charge-off to the allowance for credit losses.

The establishment of a specific reserve does not necessarily mean that the loan with the specific reserve will definitely incur a 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:
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~~nine months ended ~~June~~September 30, 2023 and 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.


	~~June~~September 30, 2023
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Quarter Ended
Beginning Balance	$	21,~~364~~933	$	2,~~556~~710	$	78,~~622~~023	$	~~641~~628	$	2,~~357~~563	$	47	$	~~509~~313	$	16,~~096~~217
Adjustment for PCD acquired loans		—		—		—		—		—		—		—		—
Charge-offs		—		—		—		—		(2310)		(1421)		—		(16331)
Recoveries		—		109		20143		1		2170		310		—		55233
Provision/(recovery)		~~(431)~~192		~~144~~(68)		~~381~~214		~~(14)~~37		~~187~~(452)		1136		(~~196~~3)		82(44)
Ending Balance	$	12,~~933~~125	$	2,~~710~~651	$	8,~~023~~380	$	~~628~~666	$	21,~~563~~871	$	4772	$	~~313~~310	$	16,~~217~~075
Six Months Ended
Nine 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)		—		—		—		(52362)		(2951)		—		(91423)
Recoveries		—		2736		19164		23		93162		1120		—		~~152~~385
Provision/(recovery)		(~~1,056~~864)		~~365~~297		~~946~~1,158		(7639)		~~257~~(194)		1654		5047		~~502~~459
Ending Balance	$	12,~~933~~125	$	2,~~710~~651	$	8,~~023~~380	$	~~628~~666	$	21,~~563~~871	$	4772	$	~~313~~310	$	16,~~217~~075


	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.

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

Nonaccrual with

No Allowance

Allowance

For Credit

Total Nonaccrual

Allowance for

At June 30, 2023

Losses

Loans

Credit Losses

At September 30, 2023

Losses

Loans

Credit Losses

Dollars in Thousands

Real Estate Mortgage

Construction and land development

~~246~~73

—

~~246~~73

—

Residential real estate

1,~~220~~157

—

1,~~220~~157

—

Nonresidential

~~673~~627

—

~~673~~627

—

Home equity loans

5251

—

5251

—

Commercial

—

~~299~~—

~~282~~—

Consumer and other loans

—

TOTAL

21,~~191~~908

~~299~~—

21,~~490~~908

~~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 ~~June~~September 30, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the three or ~~six~~nine months ended ~~June~~September 30, 2023, and as such, did not have any loans made to borrowers experiencing financial difficulty that subsequently defaulted. 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 June 30, 2023. There~~ were no loans secured by 1-4 family residential properties that were in the process of foreclosure at September 30, 2023 and December 31, 2022.

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TDR Disclosures Prior to the Adoption of ASU 2022-02

There ~~was~~were ~~one~~no ~~loan~~loans modified under the terms of a TDR during the three ~~and~~months ~~six~~ended September 30, 2022. There was one loan modified under the terms of a TDR during the nine months ended ~~June~~September 30, 2022. A summary of loans that were modified under the terms of a TDR during the ~~three~~nine ~~and six~~ months ended ~~June~~September 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.


	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
Three months ended September 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
Nine months ended September 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~~nine months ended ~~June~~September 30, 2022, there were no loans modified as a TDR that subsequently defaulted during the period ended ~~June~~September 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 ~~June~~September 30, 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 ~~June~~September 30, 2023 is as follows:


		Term Loans by Origination Year												Revolving
At June 30, 2023		Prior		2019		2020		2021		2022		2023		Loans		Total
At September 30, 2023		Prior		2019		2020		2021		2022		2023		Loans		Total
		Dollars in thousands
Construction and Land Development
Pass	$	4,~~664~~465	$	1,~~377~~400	$	54,~~927~~357	$	2216,~~432~~303	$	4044,~~966~~628	$	1827,~~693~~457	$	14,~~085~~649	$	~~108~~113,~~144~~259
Marginal		—		—		—		—		—		—		—		—
Substandard		74—		—73		—		—		—		—		~~172~~—		~~246~~73
		4,~~738~~465		1,~~377~~473		54,~~927~~357		2216,~~432~~303		4044,~~966~~628		1827,~~693~~457		14,~~257~~649		~~108~~113,~~390~~332
Residential Real Estate
Pass		6058,~~716~~498		15,~~960~~341		27,~~179~~322		5148,~~640~~815		5560,~~351~~064		1415,~~055~~373		168,~~307~~125		~~241~~233,~~208~~538
Marginal		—		—		—		—		—		—		—		—
Substandard		1,~~670~~568		—		—		—		—		—		—		1,~~670~~568
		6260,~~386~~066		15,~~960~~341		27,~~179~~322		5148,~~640~~815		5560,~~351~~064		1415,~~055~~373		168,~~307~~125		~~242~~235,~~878~~106
Nonresidential
Pass		~~212~~205,~~558~~706		6564,~~028~~364		8887,~~216~~156		~~170~~174,~~428~~236		~~174~~166,~~165~~170		3072,277		108,~~239~~100		~~750~~778,~~911~~009
Marginal		—204		—		—		—		—		—		—		—204
Substandard		~~505~~2,855		~~385~~—		~~1,325~~656		—376		—		—		—		23,~~215~~887
		~~213~~208,~~063~~765		6564,~~413~~364		8987,~~541~~812		~~170~~174,~~428~~612		~~174~~166,~~165~~170		3072,277		108,~~239~~100		~~753~~782,~~126~~100
Home Equity
Pass		139		—		19—		—		2524		—6		3038,~~148~~464		3038,~~331~~633
Marginal		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		9796		9796
		139		—		19—		—		2524		—6		3038,~~245~~560		3038,~~428~~729
Commercial
Pass		7,~~520~~003		43,~~192~~739		13,~~640~~265		21,~~675~~286		1617,~~640~~428		2112,~~092~~623		5448,~~495~~796		~~139~~124,~~254~~140
Marginal		—		~~115~~65		—		—		—		—		~~332~~79		~~447~~144
Substandard		~~299~~—		—		—		—		1		—		—88		~~300~~89
		7,~~819~~003		43,~~307~~804		13,~~640~~265		21,~~675~~286		1617,~~641~~429		2112,~~092~~623		5448,~~827~~963		~~140~~124,~~001~~373
Consumer and Other
Pass		~~603~~966		3224		~~161~~135		~~669~~623		~~430~~358		~~487~~573		~~355~~1,185		23,~~737~~864
Marginal		—		—		—		—		—		—		~~203~~—		~~203~~—
Substandard		—		—		—		—		—		—		—		—
		~~603~~966		3224		~~161~~135		~~669~~623		~~430~~358		~~487~~573		~~558~~1,185		23,~~940~~864
TOTAL	$	~~288~~281,~~748~~404	$	8785,~~089~~006	$	~~136~~132,~~467~~891	$	~~266~~261,~~844~~639	$	~~287~~288,~~578~~673	$	84128,~~604~~309	$	~~126~~119,~~433~~582	$	1,~~277~~297,~~763~~504

Gross Charge-offs	$	3313	$	—	$	10	$	—	$	50	$	2850	$	—	$	91423

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 ~~June~~September 30, 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 June 30, 2023

Past Due *

Past Due **

Past Due***

Past Due

Balance****

Loans

and Accruing

At September 30, 2023

Past Due *

Past Due

Past Due**

Past Due

Balance***

Loans

and Accruing

Dollars in Thousands

Real Estate Mortgage

Construction and land development

—141

—

~~246~~73

~~246~~214

~~108~~113,~~144~~118

~~108~~113,~~390~~332

—

Residential real estate

~~260~~414

76124

~~252~~—

~~588~~538

~~242~~234,~~290~~568

~~242~~235,~~878~~106

~~252~~—

Nonresidential

—1,769

~~2,876~~103

~~673~~592

32,~~549~~464

~~749~~779,~~577~~636

~~753~~782,~~126~~100

—

Home equity loans

~~178~~77

—

~~178~~77

3038,~~250~~652

3038,~~428~~729

—

Commercial

—

—9

—

—9

~~140~~124,~~001~~364

~~140~~124,~~001~~373

—

Consumer and other loans

—

23,~~940~~864

—

TOTAL

~~438~~2,401

~~2,952~~236

~~1,171~~665

43,~~561~~302

1,~~273~~294,202

1,~~277~~297,~~763~~504

~~252~~—

* Includes $~~133~~346 thousand of nonaccrual loans.

** Includes $40663 thousand of nonaccrual loans.

*** Includes $~~918~~899 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 June 30, 2023

Secured Loans

Total Loans

Credit Losses

At September 30, 2023

Secured Loans

Total Loans

Credit Losses

Dollars in Thousands

Real Estate Mortgage

Construction and land development

~~246~~73

—

~~246~~73

—

Residential real estate

1,~~330~~214

—

1,~~330~~214

—

Nonresidential

~~890~~3,278

—

~~890~~3,278

—

Home equity loans

—

Commercial

—88

~~299~~—

~~299~~88

~~282~~—

Consumer and other loans

—

TOTAL

24,~~518~~705

~~299~~—

24,~~817~~705

~~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 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 loans 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 ~~six~~nine months ended ~~June~~September 30, 2022:


Dollars in Thousands	~~June~~September 30, 2022
Beginning balance	$	1,896
Accretion		(~~392~~500)
Other changes, net		—
Ending balance	$	1,~~504~~396

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During the three and ~~six~~nine months ended ~~June~~September 30, 2022, the Company recorded $1912 thousand and $5567 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 ~~June~~September 30, 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 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 ~~June~~September 30, 2023 and December 31, 2022, the allowance for credit losses on off-balance sheet credit exposures totaled $~~669~~715 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~~September 30,				~~Six~~Nine Months Ended ~~June~~September 30,
Dollars in Thousands		2023		2022		2023		2022
Beginning balance	$	~~658~~669	$	265	$	265	$	265
Impact of adopting ASC 326		-		-		512		-
Provision for (recovery of) credit losses		1146		-		(~~108~~62)		-
Ending balance	$	~~669~~715	$	265	$	~~669~~715	$	265

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Note 4. Borrowings and Notes Payable

The Company owns capital stock of the FHLB as a condition for $~~415~~418.42 million convertible advance credit facilities from the FHLB. As of ~~June~~September 30, 2023, the Company had remaining credit availability of $~~364~~388.54 million under these facilities.

The following tables detail the advances the Company had outstanding with the FHLB at ~~June~~September 30, 2023 and December 31, 2022:


		~~June~~September 30, 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		21,100	5.32	%	December 2023	Variable, paid daily
Fixed rate credit		10,000	5.46	%	October 2023	Fixed, paid monthly
Fixed rate credit		10,000	5.24	%	July 2023	Fixed, paid monthly
Total advances	$	29,800
Total advances	$	50,900


		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 $3110.10 million at ~~June~~September 30, 2023. Average short-term borrowings outstanding under the FHLB approximated $2819.93 million and $3127.54 million during the three and ~~six~~nine months ended ~~June~~September 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 $~~291~~293.09 million and $296.7 million at ~~June~~September 30, 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 $~~617~~610 thousand as of ~~June~~September 30, 2023, which was carried on the balance sheet net of a discount of $14 thousand. The loan was refinanced on April 30, 2015 with a twenty-

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~~on the balance sheet net of a discount of $15 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~~SOFR plus 2.250%, rounded to the nearest 0.125% (7.~~750~~875% at ~~June~~September 30, 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 ~~June~~September 30, 2023 or December 31, 2022. Interest expense on the warehouse lines of credit was $78 thousand and $2331 thousand for the three and ~~six~~nine months ended ~~June~~September 30, 2023, respectively, and $1518 thousand and $2942 thousand for the three and ~~six~~nine months ended ~~June~~September 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 $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 ~~June~~September 30, 2023, 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 $32 thousand.

The Company has pledged investment securities AFS with a combined amortized cost and fair value of $3.32 million and $2.75 million, respectively, with the FRB to secure Discount Window borrowings at ~~June~~September 30, 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 ~~June~~September 30, 2023 and December 31, 2022, there were no outstanding borrowings under these facilities.

Maturities of debt at ~~June~~September 30, 2023 are as follows (dollars in thousands):


2023	$	319,~~089~~994
2024		19,778
2025		—
2026		—
2027		—
Thereafter		22,873
	$	7352,~~740~~645

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 noted below:


Dollars in Thousands	~~June~~September 30, 2023			December 31, 2022
Balance Sheet
Operating Lease Amounts
Right-of-use asset	$	4,~~826~~631		$	5,065
Lease liability		5,~~230~~037			5,465
Finance Lease Amounts
Right-of-use asset	$	1,~~482~~447		$	1,550
Lease liability		1,~~941~~907			2,006

Supplemental balance sheet information
Weighted average lease term - Operating Leases (Yrs.)		7.6047			7.59
Weighted average lease term - Finance Leases (Yrs.)		10.5934			11.05
Weighted average discount rate - Operating Leases (1)		2.4142	%		2.31	%
Weighted average discount rate - Finance Leases (1)		2.84	%		2.84	%

Income Statement
Three Months Ended	~~June~~September 30, 2023			~~June~~September 30, 2022
Operating lease cost classified as premises and equipment	$	~~250~~251		$	286
Finance lease cost classified as interest on borrowings		14			15
Six Months Ended
Nine Months Ended
Operating lease cost classified as premises and equipment	$	~~510~~718		$	~~572~~858
Finance lease cost classified as interest on borrowings		2842			3044

Operating outgoing cash flows from operating leases	$	~~486~~683		$	~~514~~787
Operating outgoing cash flows from finance leases	$	92140		$	89134

(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.

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Minimum lease payments at ~~June~~September 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	$	~~836~~810
One to three years		1,~~362~~308
Three to five years		1,~~065~~034
Over 5 years		2,~~606~~495
Total undiscounted cash flows		5,~~869~~647
Less: Discount		(~~639~~610)
Lease Liabilities	$	5,~~230~~037

Finance Leases:
One year or less	$	191
One to three years		~~403~~406
Three to five years		408
Over 5 years		1,~~263~~212
Total undiscounted cash flows		2,~~265~~217
Less: Discount		(~~324~~310)
Lease Liabilities	$	1,~~941~~907

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.

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


	~~June~~September 30, 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 June 30, 2023	—	$	—
Options exercisable at September 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.

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.

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


	~~June~~September 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	2.8559	$	-76,793

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

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~~September 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.~~

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 or ~~six~~nine months ended ~~June~~September 30, 2023 or 2022.

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.

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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. 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 contingent upon the merger closing. The 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.

As of ~~June~~September 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~~September 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 June 30, 2023	9,338	$	8.99
Nonvested Awards September 30, 2023	9,338	$	8.99

As a result of applying the provisions of ASC 718-10, during the three and ~~six~~nine months ended ~~June~~September 30, 2023, the Company recognized restricted stock-based compensation expense of $2324 thousand, or $17 thousand net of tax, and $4771 thousand, or $3552 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 $8763 thousand at ~~June~~September 30, 2023. The remaining period over which this unrecognized restricted stock-compensation expense is expected to be recognized is approximately 0.97 years.

Note 8. 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.

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The following tables present basic and diluted EPS for the three and ~~six~~nine months ended ~~June~~ September 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 June 30, 2023
For the three months ended September 30, 2023
Basic EPS	$	34,~~764~~538		17,986	$	0.~~209~~252
Effect of dilutive stock awards		—		—8		—(0.000)
Diluted EPS	$	34,~~764~~538		17,~~986~~994	$	0.~~209~~252

For the six months ended June 30, 2023
For the nine months ended September 30, 2023
Basic EPS	$	711,~~094~~632		17,985	$	0.~~394~~647
Effect of dilutive stock awards		—		98		—(0.001)
Diluted EPS	$	711,~~094~~632		17,~~994~~993	$	0.~~394~~646


For the three months ended June 30, 2022
For the three months ended September 30, 2022
Basic EPS	$	34,~~179~~110		17,962	$	0.~~177~~229
Effect of dilutive stock awards		—		32		—(0.001)
Diluted EPS	$	34,~~179~~110		17,994	$	0.~~177~~228

For the six months ended June 30, 2022
For the nine months ended September 30, 2022
Basic EPS	$	59,~~288~~398		17,960	$	0.~~294~~523
Effect of dilutive stock awards		—		7335		(0.001)
Diluted EPS	$	59,~~288~~398		1817,~~033~~995	$	0.~~293~~522

Note 9. 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%, 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.~~

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~~Quantitative~~Prompt ~~measures~~Corrective ~~established~~Action ~~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~~will 1not ~~capital~~be torequired ~~risk-weighted assets, Tier 1 capital~~ to ~~average~~report ~~assets,~~or ~~and~~calculate ~~common equity Tier 1 capital to~~ risk-~~weighted~~based ~~assets~~capital. ~~Management~~The ~~believes as of June 30, 2023 that the~~ Company’s ~~Subsidiaries~~has ~~met~~elected ~~all~~not ~~capital~~to ~~adequacy~~opt ~~requirements~~into tothe ~~which~~CBLR ~~they~~framework ~~are~~at ~~subject~~this time.

AsQuantitative ofmeasures ~~June 30, 2023,~~established ~~the~~by ~~most~~regulation ~~recent~~to ~~notification~~ensure ~~from~~capital ~~the~~adequacy ~~FDIC~~require ~~categorized~~ the Company’s Subsidiaries asto ~~well~~maintain ~~capitalized~~minimum ~~under~~amounts ~~the~~and ~~regulatory~~ratios ~~framework for prompt corrective action. To be categorized~~ (as ~~well~~defined ~~capitalized~~in the ~~Company’s~~regulations) ~~Subsidiaries~~of ~~must maintain minimum~~ total ~~risk-based,~~and Tier 1 capital to risk-~~based~~weighted assets, Tier 1 ~~leverage~~capital to average assets, and common equity Tier 1 capital to risk-~~based~~weighted ~~ratios~~assets. ~~There~~Management ~~are~~believes noas ~~conditions~~of orSeptember 30, 2023 ~~events~~that ~~since~~the ~~that~~Company’s ~~notification~~Subsidiaries ~~that~~met ~~management~~all ~~believes~~capital ~~have~~adequacy ~~changed~~requirements ~~the~~to ~~Company’s~~which ~~Subsidiaries’~~they ~~categories~~are subject.

As of September 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 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.

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 ~~June~~September 30, 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 ~~June~~September 30, 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 ~~June~~September 30, 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 June 30, 2023
As of September 30, 2023
Total Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva	$	~~104~~107,~~602~~821	14.02	%	$	7879,~~573~~821	10.5	%	$	7476,~~832~~020	10.0	%
Virginia Partners Bank		6566,~~379~~386	11.14	%		6261,~~077~~157	10.5	%		5958,~~121~~245	10.0	%
Tier 1 Capital Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		9598,~~238~~312	12.79	%		6364,~~607~~617	8.5	%		5960,~~865~~816	8.0	%
Virginia Partners Bank		6061,~~092~~082	10.25	%		5049,~~253~~508	8.5	%		4746,~~297~~596	8.0	%
Common Equity Tier I Ratio
(To Risk Weighted Assets)
The Bank of Delmarva		9598,~~238~~312	12.79	%		5253,~~382~~214	7.0	%		4849,~~640~~413	6.5	%
Virginia Partners Bank		6061,~~092~~082	10.25	%		4140,~~385~~772	7.0	%		3837,~~429~~859	6.5	%
Tier 1 Leverage Ratio
(To Average Assets)
The Bank of Delmarva		9598,~~238~~312	10.69	%		3635,~~056~~971	4.0	%		4544,~~070~~963	5.0	%
Virginia Partners Bank		6061,~~092~~082	9.5	%		25,~~330~~723	4.0	%		3132,~~662~~154	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 ~~June~~September 30, 2023 and December 31, 2022, approximately $2226.87 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 ~~June~~September 30, 2023 and December 31, 2022, approximately $2731.4 million and $25.0 million, respectively, was available for the payment of dividends to the Company from the Subsidiaries without regulatory approval.

Note 10. 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 ~~June~~September 30, 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

1615,~~011~~674

—

1615,~~011~~674

Interest bearing deposits

4323,~~128~~141

—

4323,~~128~~141

Federal funds sold

179,~~478~~816

—

179,~~478~~816

Securities:

Available for sale

~~129~~121,~~259~~920

—

~~129~~121,~~259~~920

—

~~129~~121,~~259~~920

Loans held for sale

~~519~~354

—

~~519~~354

—

~~519~~354

Loans, net of allowance for credit losses

1,~~261~~281,~~546~~429

—

1,~~195~~208,~~625~~741

Accrued interest receivable

4,~~440~~729

—

4,~~440~~729

—

4,~~440~~729

Restricted stock

65,~~163~~640

—

65,~~163~~640

—

65,~~163~~640

Other investments

5,~~364~~363

—

5,~~364~~363

—

5,~~364~~363

Bank owned life insurance

1819,~~940~~064

—

1819,~~940~~064

—

1819,~~940~~064

Financial liabilities:

Deposits

1,~~318~~323,~~482~~029

—

1994,~~006,938~~939

~~305~~323,~~849~~395

1,~~312~~318,~~787~~334

Accrued interest payable on deposits

~~907~~1,071

—

~~907~~1,071

—

~~907~~1,071

FHLB advances

5029,~~900~~800

—

5029,~~308~~421

—

5029,~~308~~421

Subordinated notes payable

22,~~238~~249

—

2526,~~876~~646

—

2526,~~876~~646

Other borrowings

~~602~~596

—

~~602~~596

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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 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 11. 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 ~~June~~September 30, 2023 and December 31, 2022:


							Fair
Dollars are in thousands	Level 1		Level 2		Level 3		Value
June 30, 2023
September 30, 2023
Securities AFS:
Obligations of U.S. Government agencies and corporations	$	—	$	15,~~531~~325	$	—	$	15,~~531~~325
Obligations of States and political subdivisions		—		2725,~~255~~701		—		2725,~~255~~701
Mortgage-backed securities		—		8478,~~186~~608		—		8478,~~186~~608
Subordinated debt investments		—		2,~~287~~286		—		2,~~287~~286
Total securities AFS	$	—	$	~~129~~121,~~259~~920	$	—	$	~~129~~121,~~259~~920
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 ~~June~~September 30, 2023 or December ~~31,~~

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31, 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 ~~June~~September 30, 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~~Expense” 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 ~~June~~September 30, 2023. The Company had no OREO at ~~June~~September 30, 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 table 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:


			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 12. 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 ~~June~~September 30, 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 six months ended June 30, 2023 and the year ended December 31, 2022.

~~Core Deposit Intangible:~~ The Company acquired ~~core~~goodwill ~~deposit intangibles~~ in the acquisitions of Liberty, ~~and~~which ~~Partners.~~was ~~For~~effective ~~the~~in ~~core deposit intangible related to Liberty~~2018, ~~the~~and ~~Company utilizes the double declining balance method of amortization~~Partners, in which ~~the~~was ~~straight-line~~effective ~~amortization~~in ~~rate is doubled and applied to the remaining unamortized portion of the intangible asset~~2019. ~~The~~There ~~amortization~~were ~~method~~no changes to ~~the~~goodwill ~~straight-line~~during ~~method of amortization when~~ the ~~straight-line~~nine ~~amortization~~months ~~amount~~ended ~~exceeds~~September 30, 2023 ~~the~~and ~~amount that would be calculated under~~ the ~~double~~year ~~declining~~ended ~~balance method. This core deposit intangible will be amortized over seven years. For the core deposit intangible related to Partners~~December 31, ~~the Company utilizes the sum of months method and an estimated average life of 120 months~~2022.

~~The~~Core ~~following~~Deposit ~~table provides changes in the core deposit intangible for the six months ended June 30, 2023 and the year ended December 31, 2022~~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 nine months ended September 30, 2023 and the year ended December 31, 2022:


	~~June~~September 30,		December 31,
Dollars in Thousands	2023		2022
Beginning balance	$	1,540	$	2,060
Amortization		(~~240~~355)		(520)
Ending balance	$	1,~~300~~185	$	1,540

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


	~~June~~September 30,
Dollars in Thousands	2023
2023	$	~~227~~112
2024		415
2025		246
2026		182
2027		129
Thereafter		101
	$	1,~~300~~185

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~~Company ~~table~~paid ~~provides~~a ~~changes~~deposit premium in the ~~net~~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 ~~for~~is accreted as an increase in interest expense over the ~~six~~life ~~months~~of ~~ended~~the ~~June 30, 2023~~acquired time deposits. The premium and ~~the~~discount ~~year~~on ~~ended~~acquired ~~December 31,~~time ~~2022:~~deposits will both be amortized and accreted over approximately five years.


	June 30,		December 31,
Dollars in Thousands	2023		2022
Beginning balance	$	(3)	$	(9)
Accretion, net		1		6
Ending balance	$	(2)	$	(3)

The following table provides changes in the net deposit premium and discount for the nine months ended September 30, 2023 and the year ended December 31, 2022:


	September 30,		December 31,
Dollars in Thousands	2023		2022
Beginning balance	$	(3)	$	(9)
Accretion, net		2		6
Ending balance	$	(1)	$	(3)

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


	~~June~~September 30,
Dollars in Thousands	2023
2023	$	1
2024		1
	$	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 Statements of 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)


	September 30,		September 30,
	2023		2022
Three Months Ended	Dollars in Thousands
Adjustments to net income
Loans (1)	$	116	$	118
Time deposits (2)		(1)		(1)
Core deposit intangible (3)		(115)		(128)
Note Payable (4)		(1)		(1)
Net impact to income before taxes	$	(1)	$	(12)


	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

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	September 30,		September 30,
	2023		2022
Nine Months Ended	Dollars in Thousands
Adjustments to net income
Loans (1)	$	404	$	566
Time deposits (2)		(2)		(6)
Core deposit intangible (3)		(355)		(394)
Note Payable (4)		(2)		(3)
Net impact to income before taxes	$	45	$	163

(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 "Amortization of core deposit intangible" section of "~~Other~~Noninterest 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.

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Note 13. 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 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~~44

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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 OREO:

Gain or loss on sale of OREO 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 14. 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 1.15 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.

At special 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. On October 13, 2023, the Company and LINK announced the receipt of required regulatory approvals from the FDIC, the Pennsylvania Department of Banking and Securities, the Virginia State Corporation Commission, the Delaware Office of the State Bank Commissioner and the Maryland Office of the Commissioner of Financial Regulation related to the pending merger. The Merger remains subject to ~~receipt~~the approval of ~~required~~the ~~regulatory~~Federal ~~approvals~~Reserve and ~~certain~~fulfillment of other customary closing ~~conditions~~condtions. The Company and LINK anticipate closing the merger in the fourth quarter of 2023.

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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 16. Recent Accounting Pronouncements

In June 2016, the FASB issued 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 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 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.

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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 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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In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.

In December 2022, the FASB issued ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” (“ASU 2022-06”). ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the LIBOR would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In July 2023, the FASB issued ASU No. 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)” (“ASU 2023-03”). ASU 2023-03 amends the FASB ASC for Securities and Exchange Commission (“SEC”) paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

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SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”). ASU 2023-06 incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB Accounting Standards Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

4748

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion compares the Company’s financial condition at ~~June~~September 30, 2023 to its financial condition at December 31, 2022 and the results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and the other information included in this Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2023 (this “Quarterly Report”). Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or any other period.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, the completion and benefits of the merger with LINK, including the anticipated closing date of the mergers, the Company’s expectations with regard to its business, financial and operating results, including its deposit base and funding and the impact of future economic conditions, anticipated changes in the interest rate environment and the related impacts on the Company’s net interest margin, changes in economic conditions, the Company’s beliefs regarding liquidity and capital resources, strategic business initiatives including growth in the Greater Washington market and the anticipated effects thereof, adequacy of allowances for credit losses and the level of future charge-offs, and statements that include other projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “anticipate,” “contemplate,” “expect,” “believe,” “estimate,” “foresee,” “plan,” “project,” “predict,” “intend,” “indicate,” “likely,” “target,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:

●

the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the LINK Merger Agreement between the Company and LINK;

●

the outcome of any legal proceedings that may be instituted against the Company or LINK;

● the possibility that the proposed transaction will not close when expected or at all because the remaining required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated (and the risk that the remaining required regulatory ~~approvals~~approval may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction);

●

the ability of the Company and LINK to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction;

●

the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the common stock of either or both parties to the proposed transaction;

●

the possibility that the anticipated benefits of the proposed transaction will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Company and LINK do business;

●

certain restrictions during the pendency of the proposed transaction that may impact the parties’ ability to pursue certain business opportunities or strategic transactions;

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●

the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

●

diversion of management’s attention from ongoing business operations and opportunities;

●

the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all and to successfully integrate the Company’s operations and those of LINK, which may be more difficult, time-consuming or costly than expected;

●

revenues following the proposed transaction may be lower than expected;

●

the Company’s and LINK’s success in executing their respective business plans and strategies and managing the risks involved in the foregoing;

●

the dilution caused by LINK’s issuance of additional shares of its capital stock in connection with the proposed transaction;

●

effects of the announcement, pendency or completion of the proposed transaction on the ability of the Company and LINK to retain customers and retain and hire key personnel and maintain relationships with their suppliers, and on their operating results and businesses generally;

●

changes in interest rates, such as volatility in yields on U.S. Treasury bonds and increases or volatility in mortgage rates, and the impacts on macroeconomic conditions, customer and client spending and saving behaviors, the Company’s funding costs and the Company’s loan and investment securities portfolios;

●

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve, and the effect of these policies on interest rates and business in our markets;

● general business conditions, as well as conditions within the financial markets, including the impact thereon of unusual and infrequently occurring events, such as the recent bank closures and related negative impact on the banking industry, weather-related disasters, terrorist acts, geopolitical conflicts (such as the military ~~conflict~~conflicts between Russia and Ukraine and Israel and Hamas) or public health events (such as the COVID-19 pandemic), and of governmental and societal responses thereto;

●

general economic conditions, in the United States generally and particularly in the markets in which the Company operates and which its loans are concentrated, including the effects of declines in real estate values, increases in unemployment levels and inflation, recession and slowdowns in economic growth;

●

changes in the value of securities held in the Company’s investment portfolios;

●

changes in the quality or composition of the loan portfolios and the value of the collateral securing those loans;

●

changes in the level of net charge-offs on loans and the adequacy of our allowance for credit losses;

●

demand for loan products;

●

deposit flows;

●

the strength of the Company’s counterparties;

●

competition from both banks and non-banks;

●

demand for financial services in the Company’s market areas;

●

reliance on third parties for key services;

●

changes in the commercial and residential real estate markets;

●

cyber threats, attacks or events;

●

expansion of Delmarva’s and Partners’ product offerings;

●

changes in accounting principles, standards, rules and interpretations, and elections by the Company thereunder, and the related impact on the Company’s financial statements;

●

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

●

legislative or regulatory changes and requirements;

●

the discontinuation of London Interbank Offered Rate (“LIBOR”) and its impact on the financial markets, and the Company’s ability to manage operational, legal and compliance risks related to the discontinuation of LIBOR and implementation of one or more alternative reference rates; and

●

other factors, many of which are beyond the control of the Company.

Please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s 2022 Annual Report on Form 10-K and comparable sections of this

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Quarterly Report and related disclosures in other filings which have been filed with the Securities and Exchange Commission (“SEC”) and are available on the SEC’s website at www.sec.gov. All risk factors and uncertainties described herein and therein should be considered in evaluating forward-looking statements. All of the forward-looking statements made in this Quarterly Report are expressly qualified by the cautionary statements contained or referred to herein. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report. Forward-looking statements speak only as of the date they are made. The Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.

Overview

The Company, a bank holding corporation, through its wholly owned subsidiaries, Delmarva and Partners, each of which are commercial banking corporations, engages in general commercial banking operations, with nineteen branches throughout Wicomico, Charles, Anne Arundel, and Worcester Counties in Maryland, Sussex County in Delaware, Camden and Burlington Counties in New Jersey, the cities of Fredericksburg and Reston, Virginia, and Spotsylvania County, Virginia.

The Company derives the majority of its income from interest received on our loans and investment securities. The primary source of funding for making these loans and purchasing investment securities are deposits and secondarily, borrowings. Consequently, one of the key measures of the Company’s success is the amount of net interest income, or the difference between the income on interest-earning assets, such as loans and investment securities, and the expense on interest-bearing liabilities, such as deposits and borrowings. The resulting ratio of that difference as a percentage of average interest-earning assets represents the net interest margin. Another key measure is the spread between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, which is called the net interest spread. In addition to earning interest on loans and investment securities, the Company earns income through fees and other charges to customers. Also included is a discussion of the various components of this noninterest income, as well as of noninterest expense.

There are risks inherent in all loans, so the Company maintains an allowance for credit losses to absorb expected losses on existing loans that may become uncollectible. The Company maintains this allowance for credit losses by charging a provision for credit losses as needed against our operating earnings for each period. The Company has included a detailed discussion of this process, as well as several tables describing its allowance for credit losses.

During March of 2023 and continuing well into the second quarter of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized investment securities losses and eroding consumer confidence in the banking system. These concerns and volatility in the banking industry may continue if other banks are closed by federal or state banking regulators or other participants in the banking industry experience similar high-profile financial challenges. The continuing impact of the volatility and turmoil in the banking industry on the Company, its financial condition and its results of operations for the rest of 2023 is uncertain and cannot be predicted. Despite these negative factors and banking industry developments, the Company and its Subsidiaries remain well capitalized, and the Company’s liquidity position and balance sheet remains strong. Please refer to the “Capital” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information about the Company’s and its Subsidiaries’ regulatory capital.

The Company’s total deposits decreased by 1.62% at ~~June~~September 30, 2023 as compared to December 31, 2022, representing minimal deposit outflow in the first nine months of 2023. However, during the third quarter of 2023, the Company’s total deposits increased by 0.3%, shifting away from the negative industry trends that were experienced during the first half of 2023. In addition, the Company took a number of preemptive actions, including proactive outreach to customers and actions to maximize its funding sources in response to these recent developments. Please refer to the “Liquidity” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information about the Company’s liquidity. The Company continues to actively monitor balance sheet trends, deposit flows and liquidity needs in light of the recent events in the banking industry, a continued rising interest rate environment and persistent concerns about recessionary conditions in the U.S. economy during 2023 or 2024, in order to ~~ensure that the Company and its Subsidiaries are able to meet the needs of the Subsidiaries’ customers and to maintain financial flexibility.~~

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Onensure ~~February~~that ~~22, 2023,~~ the Company and ~~LINK,~~its ~~parent~~Subsidiaries ~~company~~are ofable ~~LINKBANK, announced that they have entered into the LINK Merger Agreement pursuant~~ to ~~which~~meet the ~~Company~~needs ~~will merge into LINK, with LINK surviving, and following which Delmarva and Partners will each successively merge with and into LINKBANK, with LINKBANK surviving. Upon completion~~ of the ~~transaction, the Company~~Subsidiaries’s ~~shareholders~~customers ~~will own approximately 56%~~ and LINK shareholders, inclusive of shares issued in a concurrent private placement of common stock by LINK, will own approximately 44% of the combined company. At special meetings of their respective shareholders held on June 22, 2023, shareholders of LINK and the Company each voted to ~~approve~~maintain ~~the~~financial ~~LINK Merger Agreement and the transactions contemplated thereby~~flexibility. ~~The mergers remain subject to receipt of all required regulatory approvals and fulfillment of other customary closing conditions.~~

Also, on November 9, 2022, the Company and OCFC entered into the Termination Agreement pursuant to which, among other things, the parties mutually agreed to terminate the OCFC Merger Agreement entered into on November 4, 2021 and transactions completed thereby. Each party will bear its own costs and expenses in connection with the terminated transaction, and neither party will pay 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.

On February 22, 2023, the Company and LINK, parent company of LINKBANK, announced that they have entered into the LINK Merger Agreement pursuant to which the Company will merge into LINK, with LINK surviving, and following which Delmarva and Partners will each successively merge with and into LINKBANK, with LINKBANK surviving. Upon completion of the transaction, the Company’s shareholders will own approximately 56% and LINK shareholders, inclusive of shares issued in a concurrent private placement of common stock by LINK, will own approximately 44% of the combined company. Early in the fourth quarter of 2023, the Company and LINK announced the receipt of required regulatory approvals from the FDIC, the Pennsylvania Department of Banking and Securities, the Virginia State Corporation Commission, the Delaware Office of the State Bank Commissioner and the Maryland Office of the Commissioner of Financial Regulation related to our pending merger. The mergers remain subject to the approval of the Federal Reserve and fulfillment of other customary closing conditions. The Company and LINK anticipate closing the mergers in the fourth quarter of 2023.

Also, on November 9, 2022, the Company and OCFC entered into the Termination Agreement pursuant to which, among other things, the parties mutually agreed to terminate the OCFC Merger Agreement entered into on November 4, 2021 and transactions completed 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.

The Company believes that it is well-positioned to be successful in its banking markets, including the highly competitive Greater Washington market. The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in the Company’s primary markets where the Company operates and in the United States as a whole.

The Company continually monitors the impact of various global and national events on the Company’s results of operations and financial condition, including inflation, rising interest rates, economic uncertainty caused by forecasts of a potential recession in the United States, and geopolitical conflicts such as the ~~war~~wars in Ukraine. and Gaza. Due to growth in economic activity and demand for goods in services, as well as labor shortages and global supply chain issues, inflation has risen. As a result, the FOMC increased the Federal Funds target rates throughout 2022 and 2023 to its current range of 5.25% to 5.50%, ~~the highest level since early 2021,~~ after an extended period at historical lows. The FOMC has noted that it will closely monitor incoming information and assess the implications for monetary policy in determining future actions with respect to the target rates and also confirmed the continued reduction to the Federal Reserve’s holdings of U.S. Treasury securities, agency debt and agency MBS. These events are expected to impact the Company’s financial results throughout the balance of 2023; although, the timing and impact of inflation, market interest rates and the competitive landscape of deposits on the Company’s financial results and business will depend on future developments, which are highly uncertain and difficult to predict.

Please refer to the “Provision for Credit Losses and Allowance for Credit Losses” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information related to the impact on the allowance for credit losses.

The following discussion and analysis also identifies significant factors that have affected the Company’s financial position and operating results during the periods included in the consolidated financial statements accompanying this report. This “Management's Discussion and Analysis” should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Item 1 in this Quarterly Report, and the other information included in this Quarterly Report.

Critical Accounting Estimates

Certain critical accounting policies affect significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. These significant accounting policies are described in the notes to the consolidated financial statements included in this Quarterly Report as well as in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The accounting principles the Company follows and the methods of applying these principles conform to U.S. GAAP and general banking industry practices. The Company’s most critical accounting policy relates to the determination of the allowance for credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance for

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consolidated financial statements included in this Quarterly Report as well as in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The accounting principles the Company follows and the methods of applying these principles conform to U.S. GAAP and general banking industry practices. The Company’s most critical accounting policy relates to the determination of the allowance for credit losses, which reflects the estimated losses resulting from the inability of borrowers to make loan payments. The determination of the adequacy of the allowance for credit losses involves significant judgment and complexity and is based on many factors. If the financial condition of the Company’s borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for credit losses may be required. See “Provision for Credit Losses and Allowance for Credit Losses” of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 1 – Nature of Business and Its Significant Accounting Policies and Note 3 – Loans and Allowance for Credit Losses of the unaudited consolidated financial statements included in this Quarterly Report.

Goodwill and Intangible Assets - Another of the Company’s critical accounting policies, with the acquisitions of Liberty in 2018 and Partners in 2019, relates to the valuation of goodwill and intangible assets. The Company accounted for the Liberty Merger and the Partners Share Exchange in accordance with ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of accounting. Under this method, assets acquired, including intangible assets, and liabilities assumed, are recorded at their fair value. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from the Liberty Merger and the Partners Share Exchange, which totaled approximately $5.2 million and $4.4 million, respectively, under the acquisition method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings, which is limited to the amount of goodwill allocated to that reporting unit. In evaluating the goodwill on its consolidated balance sheet for impairment after the consummation date of the Liberty Merger and the Partners Share Exchange, the Company will first assess qualitative factors to determine whether it is more likely than not that the fair value of our acquired assets is less than the carrying amount of the acquired assets, as allowed under ASU 2017-04. After making the assessment based on several factors, which will include, but is not limited to, the current economic environment, the economic outlook in our markets, our financial performance and common stock value as compared to our peers, we will determine if it is more likely than not that the fair value of our assets is greater than their carrying amount and, accordingly, will determine whether impairment of goodwill should be recorded as a charge to earnings in years subsequent to the Liberty Merger and the Partners Share Exchange. This assessment was performed during the fourth quarter of 2022, and resulted in no impairment of goodwill. Management considers the impact of changes in the financial markets, including the recent volatility in the banking industry and the bank closures by federal regulators, and their impact on the Company and may determine that goodwill is required to be evaluated for impairment due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations. See Note 12 – Goodwill and Intangible Assets of the unaudited consolidated financial statements included in this Quarterly Report for more information related to goodwill and intangible assets.

Allowance for Credit Losses — The allowance for credit losses reduces the loan portfolio to the net amount expected to be collected and establishes an allowance for unfunded credit commitments. The allowance for credit losses represents the lifetime expected losses for all loans and unfunded credit commitments at the initial recognition date. The allowance for credit losses incorporates forward-looking information and applies a reversion methodology beyond the reasonable and supportable forecast. The allowance for credit losses is increased by a provision for credit losses charged to operating expense and reduced by charge-offs, net of recoveries. Management evaluates the appropriateness of the allowance for credit losses at least quarterly. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change from period to period. The allowance for credit losses calculation is based on the loan’s amortized cost basis, which is comprised of the unpaid principal balance of the loan, deferred loan fees (costs), acquired premium (discount) less write-downs.

The Company’s accounting policies related to the allowance for credit losses on financial instruments including loans and unfunded credit commitments are considered to be critical as these policies involve considerable subjective judgment and estimation by management. As discussed in Note 1 – Nature of Business and Its Significant Accounting Policies, our policies related to allowances for credit losses changed on January 1, 2023 in connection with the adoption of ASU 2016-13. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASU 2016-13, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of unfunded credit commitments, the allowance for credit losses is a liability account, calculated in accordance with ASU 2016-13, reported as a component of other liabilities in our consolidated balance sheets. The amount of each allowance for credit losses account represents management's best estimate of current expected credit losses

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Policies, our policies related to allowances for credit losses changed on January 1, 2023 in connection with the adoption of ASU 2016-13. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASU 2016-13, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of unfunded credit commitments, the allowance for credit losses is a liability account, calculated in accordance with ASU 2016-13, reported as a component of other liabilities in our consolidated balance sheets. The amount of each allowance for credit losses account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience from the Company’s own history as well as peer loss history, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance for credit losses accounts is dependent upon a variety of factors beyond our control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.

Specific reserves are established for individually evaluated loans when appropriate for such loans based on the present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any. Management may also adjust its assumptions to account for differences between expected and actual losses from period to period. The variability of management’s assumptions could alter the level of the allowance for credit losses and may have a material impact on future results of operations and financial condition. The loss estimation models and methods used to determine the allowance for credit losses are continually refined and enhanced. For additional information regarding critical accounting policies, refer to Note 1 – Nature of Business and Its Significant Accounting Policies and Note 3 – Loans and Allowance for Credit Losses of the unaudited consolidated financial statements included in this Quarterly Report.

Deferred Tax Assets and Liabilities - Another critical accounting policy relates to deferred tax assets and liabilities. The Company records deferred tax assets and deferred tax liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits, such as net operating loss carry forwards available from the Liberty Merger, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided when it is more likely than not that a portion or the full amount of the deferred tax asset will not be realized. In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Such a deferred tax liability will only be recognized when it becomes apparent that those temporary differences will reverse in the foreseeable future. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than fifty (50) percent more likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Results of Operations

Net income attributable to the Company was $34.85 million, or $0.2125 per basic and diluted share, for the three months ended ~~June~~September 30, 2023, a $~~585~~429 thousand, or 1810.4%, increase when compared to net income attributable to the Company of $34.21 million, or $0.1823 per basic and diluted share, for the same period in 2022. Net income attributable to the Company was $711.16 million, or $0.3965 per basic and diluted share, for the ~~six~~nine months ended ~~June~~September 30, 2023, a $12.82 million, or 3423.18%, increase when compared to net income attributable to the Company of $59.34 million, or $0.2952 per basic and diluted share, for the same period in 2022.

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The Company’s results of operations for the three months ended ~~June~~September 30, 2023 were directly impacted by the following:

Positive Impacts:

● An increase in net interest income due primarily to ~~increases~~an increase in average loan ~~and investment securities~~ balances and higher yields earned ~~on each~~, an increase in the yields earned on average cash and cash equivalents and investment securities balances, and a decrease in average interest-bearing deposit balances, which were partially offset by adecreases ~~decrease~~ in average cash and cash equivalents and investment securities balances, higher rates paid on average interest-bearing deposit balances, and an increase in average borrowings balances and higher rates paid~~, and lower net loan fees earned related to the forgiveness of loans originated and funded under the Paycheck Protection Program (“PPP”) of the Small Business Administration~~;

●	A higher net interest margin (tax equivalent basis);

● Recording a lower provision for credit losses due to changes in the assessment of economic factors, and for ~~June~~September 30, 2023, more favorable views on the downside risks to the economic forecast compared to ~~March~~June 3130, 2023, and lower net charge-offs, which were partially offset by ~~organic loan growth and~~ a higher required reserve on unfunded credit commitments; and organic loan growth;

● Recording no ~~impairment~~losses ~~loss~~ on ~~restricted~~sales ~~stock~~and calls of investment securities during the three months ended ~~June~~September 30, 2023.; and

●	Recording gains on sales of other assets during the three months ended September 30, 2023.

Negative Impacts:

● Reduced operating results from Partners’ majority owned subsidiary JMC and lower mortgage division fees at Delmarva; and

● ~~Recording~~Incurring no$157 ~~gains~~thousand orin ~~operating~~merger related expenses onduring ~~other~~the ~~real~~three ~~estate~~months ~~owned~~ended September 30, ~~net~~2023 ~~during~~in connection with the ~~three~~Company’s ~~months~~pending ~~ended~~merger ~~June~~with 30LINK, ~~2023;~~as ~~and~~compared to $167 thousand during the same period of 2022 in connection with the Company’s terminated merger with OCFC.

● Incurring $428 thousand in merger related expenses during the three months ended June 30, 2023 in connection with the Company’s pending merger with LINK, as compared to $157 thousand during the same period of 2022 in connection with the Company’s terminated merger with OCFC.

The Company’s results of operations for the ~~six~~nine months ended ~~June~~September 30, 2023 were directly impacted by the following:

Positive Impacts:

● An increase in net interest income due primarily to increases in average loan and investment securities balances and higher yields earned on each, an increase in the yields earned on average cash and cash equivalents balances, and a decrease in average interest-bearing deposit balances, which were partially offset by a decrease in average cash and cash equivalents balances, higher rates paid on average interest-bearing deposit balances, an increase in average borrowings balances and higher rates paid, and lower net loan fees earned related to the forgiveness of loans originated and funded under the Paycheck Protection Program (“PPP”) of the Small Business Administration;

● A higher net interest margin (tax equivalent basis); ~~and~~

● Recording noa ~~impairment~~lower ~~loss~~provision onfor ~~restricted~~credit ~~stock~~losses ~~during~~due to changes in the ~~six~~assessment ~~months~~of ~~ended~~economic ~~June~~factors, and for September 30, 2023., more favorable views on the downside risks to the economic forecast compared to January 1, 2023, lower net charge-offs, and a lower required reserve on unfunded credit commitments, which were partially offset by organic loan growth;

●	Recording no losses on sales and calls of investment securities during the nine months ended September 30, 2023;

●	Recording no impairment loss on restricted stock during the nine months ended September 30, 2023; and

Filing Compare · PARTNERS BANCORP