FVCBankcorp, Inc. - Quarter Report: 2023 September (Form 10-Q)

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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 September 30, 2023

☐ 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: 001-38647

FVCBankcorp, Inc.

(Exact name of registrant as specified in its charter)


Virginia						47-5020283
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


11325 Random Hills Road
Suite 240
Fairfax,	Virginia	22030
(Address of principal executive offices)		(Zip Code)

(703) 436-3800

(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, $0.01 par value

FVCB

The Nasdaq Stock Market, LLC

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

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

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

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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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

17,802,173 shares of common stock, par value $0.01 per share, outstanding as of November 9, 2023

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FVCBankcorp, Inc.

INDEX TO FORM 10-Q


PART I — FINANCIAL INFORMATION			3

Item 1. Financial Statements:			3

Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022			3

Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)			4

Consolidated Statements of Comprehensive Income (Loss) For the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)			5

Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2023 and 2022 (unaudited)			6

Consolidated Statements of Changes in Stockholders’ Equity For the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)			7

Notes to Unaudited Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			40

Item 3. Quantitative and Qualitative Disclosures About Market Risk			71

Item 4. Controls and Procedures			71

PART II — OTHER INFORMATION			72

Item 1. Legal Proceedings			72

Item 1A. Risk Factors			72

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities			72

Item 3. Defaults Upon Senior Securities			72

Item 4. Mine Safety Disclosures			72

Item 5. Other Information			72

Item 6. Exhibits			72

SIGNATURES			74

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FVCBankcorp, Inc. and Subsidiary

Consolidated Balance Sheets

September 30, 2023 and December 31, 2022

(In thousands, except share data)


			September 30, 2023		December 31, 2022*
			(Unaudited)
Assets
Cash and due from banks			$	7,560	$	7,253
Interest-bearing deposits at other financial institutions			89,440		74,300
Securities held-to-maturity (fair value of $243 thousand and $252 thousand at September 30, 2023 and December 31, 2022, respectively), net of allowance for credit losses of $0 at September 30, 2023 and December 31, 2022.			264		264
Securities available-for-sale, at fair value			216,146		278,069
Restricted stock, at cost			7,745		15,612
Loans, net of allowance for credit losses of $18.8 million and $16.0 million at September 30, 2023 and December 31, 2022, respectively			1,830,664		1,824,394
Premises and equipment, net			1,047		1,220
Accrued interest receivable			10,151		9,435
Prepaid expenses			4,343		3,273
Deferred tax assets, net			18,980		18,533
Goodwill and intangibles, net			7,632		7,790
Bank owned life insurance ("BOLI")			56,438		55,371
Operating lease right-of-use assets			8,990		9,680
Other assets			46,072		39,128
Total assets			$	2,305,472	$	2,344,322

Liabilities
Deposits:
Noninterest-bearing			$	427,036	$	438,269
Interest-bearing checking, savings and money market			904,639		883,480
Time deposits			664,296		508,413
Total deposits			$	1,995,971	$	1,830,162

Federal funds purchased			$	—	$	30,000
Federal Home Loan Bank ("FHLB") advances			50,000		235,000
Subordinated notes, net of issuance costs			19,606		19,565
Accrued interest payable			3,033		1,269
Operating lease liabilities			9,632		10,394
Reserves for unfunded commitments			673		—
Accrued expenses and other liabilities			15,311		15,550
Total liabilities			$	2,094,226	$	2,141,940

Commitments and Contingent Liabilities

Stockholders' Equity	2023	2022
Preferred stock, $0.01 par value
Shares authorized	1,000,000	1,000,000
Shares issued and outstanding	—	—
Common stock, $0.01 par value
Shares authorized	20,000,000	20,000,000
Shares issued and outstanding	17,802,173	17,475,109	178		175
Additional paid-in capital			124,942		123,886
Retained earnings			120,960		114,888
Accumulated other comprehensive (loss), net			(34,834)		(36,567)
Total stockholders' equity			$	211,246	$	202,382
Total liabilities and stockholders' equity			$	2,305,472	$	2,344,322

See Notes to Consolidated Financial Statements.

*Derived from audited consolidated financial statements.

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FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Income

For the Three and Nine Months Ended September 30, 2023 and 2022

(In thousands, except per share data)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest and Dividend Income
Interest and fees on loans	$	25,243	$	19,344	$	73,625	$	52,194
Interest and dividends on securities held-to-maturity	2		2		4		5
Interest and dividends on securities available-for-sale	1,217		1,481		3,852		4,471
Dividends on restricted stock	89		93		461		253
Interest on deposits at other financial institutions	876		171		2,022		417
Total interest and dividend income	$	27,427	$	21,091	$	79,964	$	57,340

Interest Expense
Interest on deposits	$	13,799	$	2,892	$	34,592	$	6,619
Interest on federal funds purchased	—		237		11		248
Interest on short-term debt	35		178		2,851		336
Interest on subordinated notes	258		258		773		773
Total interest expense	$	14,092	$	3,565	$	38,227	$	7,976

Net Interest Income	$	13,335	$	17,526	$	41,737	$	49,364
(Recovery of) Provision for credit losses	(729)		365		132		1,900
Net interest income after (recovery of) provision for credit losses	$	14,064	$	17,161	$	41,605	$	47,464
Noninterest Income
Service charges on deposit accounts	$	284	$	241	$	731	$	706
BOLI income	373		352		1,067		844
(Loss) income from minority membership interests	(650)		(160)		(1,431)		754
Loss on sale of securities available-for-sale	—		—		(4,592)		—
Other income	218		142		714		540
Total noninterest (loss) income	$	225	$	575	$	(3,511)	$	2,844

Noninterest Expenses
Salaries and employee benefits	$	5,267	$	5,202	$	15,374	$	15,094
Occupancy expense	547		417		1,785		1,570
Internet banking and software expense	660		432		1,804		1,231
Data processing and network administration	601		595		1,834		1,688
State franchise taxes	584		509		1,753		1,527
Audit, legal and consulting fees	213		235		644		884
Merger and acquisition expense	—		—		—		125
Loan related (benefit)/expenses	(189)		242		199		230
FDIC insurance	431		155		968		515
Marketing, business development and advertising	167		93		527		270
Director fees	180		168		540		503
Postage, courier and telephone	39		33		134		124
Core deposit intangible amortization	50		97		157		298
Tax credit amortization	32		—		95		—
Other operating expenses	466		421		1,447		1,199
Total noninterest expenses	$	9,048	$	8,599	$	27,261	$	25,258
Net income before income tax expense	$	5,241	$	9,137	$	10,833	$	25,050
Income tax expense	1,202		2,094		1,941		4,970
Net income	$	4,039	$	7,043	$	8,892	$	20,080
Earnings per share, basic	$	0.23	$	0.40	$	0.50	$	1.15
Earnings per share, diluted	$	0.22	$	0.38	$	0.49	$	1.09

See Notes to Consolidated Financial Statements.

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FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2023 and 2022

(In thousands)

(Unaudited)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net income	$	4,039	$	7,043	$	8,892	$	20,080
Other comprehensive income (loss):
Unrealized loss on securities available for sale, net of tax benefit of $1,987 and $1,979 for the three and nine months ended September 30, 2023, respectively, and net of tax benefit of $3,614 and $11,014 for the three and nine months ended September 30, 2022, respectively.	(7,046)		(13,555)		(7,018)		(41,433)
Unrealized gain on interest rate swaps, net of tax expense of $839 and $1,458 for the three and nine months ended September 30, 2023, respectively,and net of tax expense of $842 and $1,037 for the three and nine months ended September 30, 2022, respectively.	2,974		3,167		5,169		3,896
Reclassification adjustment for securities losses realized in income, net of tax expense of $0 and $1,010 for the three and nine months ended September 30, 2023, respectively, and $0 for each of the three and nine months ended September 30, 2022, respectively.	—		—		3,582		—
Total other comprehensive income (loss)	$	(4,072)	$	(10,388)	$	1,733	$	(37,537)
Total comprehensive income (loss)	$	(33)	$	(3,345)	$	10,625	$	(17,457)

See Notes to Consolidated Financial Statements.

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FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2023 and 2022

(In thousands)

(Unaudited)


	2023		2022
Cash Flows From Operating Activities
Net income	$	8,892	$	20,080
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	306		317
Provision for credit losses	132		1,900
Net amortization of premium of securities	322		484
Net accretion of deferred loan costs and fees	(1,349)		(1,767)
Net accretion of acquisition accounting adjustments	(421)		(125)
Loss on sale of available-for-sale investment securities	4,592		—
Loss (income) from minority membership interest	1,431		(754)
Amortization of subordinated debt issuance costs	41		41
Core deposits intangible amortization	157		298
Tax credits amortization	95		—
Equity-based compensation expense	909		799
BOLI income	(1,067)		(844)
Changes in assets and liabilities:
Increase in accrued interest receivable, prepaid expenses, and other assets	(9,626)		(12,368)
Increase in accrued interest payable, accrued expenses, and other liabilities	7,326		5,833
Net cash provided by operating activities	$	11,740	$	13,894

Cash Flows From Investing Activities
(Increase) decrease in interest-bearing deposits at other financial institutions	$	(15,140)	$	159,823
Purchases of securities available-for-sale	—		(47,160)
Proceeds from sales of securities available-for-sale	35,778		—
Proceeds from redemptions of securities available-for-sale	16,814		29,564
Net redemption (purchase) of restricted stock	7,867		(2,689)
Net increase in loans	(7,571)		(209,141)
Purchase of bank-owned life insurance	—		(15,000)
Distribution received from minority owned investment	—		1,040
Purchases of premises and equipment, net	(133)		(129)
Net cash provided by (used in) investing activities	$	37,615	$	(83,692)

Cash Flows From Financing Activities
Net (decrease) increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits	$	9,926	$	(66,873)
(Decrease) increase in federal funds purchased	(30,000)		72,381
Net decrease in FHLB advances	(185,000)		—
Net increase in time deposits	155,876		50,000
Repurchase of shares of common stock	(1,448)		—
Taxes from vesting of restricted stock units	(113)		—
Common stock issuance	1,711		1,497
Net cash (used in) provided by financing activities	$	(49,048)	$	57,005
Net increase (decrease) in cash and cash equivalents	$	307	$	(12,793)
Cash and cash equivalents, beginning of year	7,253		24,613
Cash and cash equivalents, end of period	$	7,560	$	11,820

See Notes to Consolidated Financial Statements.

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FVCBankcorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2023 and 2022

(In thousands)

(Unaudited)


	Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at December 31, 2021	13,727	$	137	$	121,798	$	89,904	$	(2,043)	$	209,796
Net income	—	—		—		20,080		—		20,080
Other comprehensive loss	—	—		—		—		(37,537)		(37,537)
Common stock issuance for options exercised, net	219	3		1,494		—		—		1,497
Vesting of restricted stock grants	46	—		—		—		—		—
Stock-based compensation expense	—	—		799		—		—		799
Balance at September 30, 2022	13,992	$	140	$	124,091	$	109,984	$	(39,580)	$	194,635
Balance at June 30, 2022	13,971	$	140	$	123,710	$	102,941	$	(29,192)	$	197,599
Net income	—	—		—		7,043		—		7,043
Other comprehensive loss	—	—		—		—		(10,388)		(10,388)
Common stock issuance for options exercised, net	3	—		33		—		—		33
Vesting of restricted stock grants	18	—		—		—		—		—
Stock-based compensation expense	—	—		348		—		—		348
Balance at September 30, 2022	13,992	$	140	$	124,091	$	109,984	$	(39,580)	$	194,635
Balance at December 31, 2022	17,475	$	175	$	123,886	$	114,888	$	(36,567)	$	202,382
Net income	—	—		—		8,892		—		8,892
Impact of adoption of ASU 2016-13	—	—		—		(2,808)		—		(2,808)
Other comprehensive income	—	—		—		—		1,733		1,733
Repurchase of common stock	(116)	(1)		(1,447)		(12)		—		(1,460)
Common stock issuance for options exercised, net	360	4		1,707		—		—		1,711
Vesting of restricted stock grants	83	—		(113)		—		—		(113)
Stock-based compensation expense	—	—		909		—		—		909
Balance at September 30, 2023	17,802	$	178	$	124,942	$	120,960	$	(34,834)	$	211,246
Balance at June 30, 2023	17,783	$	178	$	124,713	$	116,922	$	(30,762)	$	211,051
Net income	—	—		—		4,039		—		4,039
Other comprehensive income	—	—		—		—		(4,072)		(4,072)
Repurchase of common stock	—	—		—		(1)		—		(1)

Vesting of restricted stock grants	19	—		(30)		—		—		(30)
Stock-based compensation expense	—	—		259		—		—		259
Balance at September 30, 2023	17,802	$	178	$	124,942	$	120,960	$	(34,834)	$	211,246

See Notes to Consolidated Financial Statements.

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Notes to Unaudited Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

FVCBankcorp, Inc. (the "Company"), a Virginia corporation, was formed in 2015 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Fairfax, Virginia. The Company conducts its business activities through the branch offices of its wholly owned subsidiary bank, FVCbank (the "Bank"). The Company exists primarily for the purposes of holding the stock of its subsidiary, the Bank.

The Bank was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the Washington, D.C. and Baltimore metropolitan areas. The Bank commenced operations on November 27, 2007 and is a member of the Federal Reserve System (the "Federal Reserve") and the Federal Deposit Insurance Corporation (the "FDIC"). It is subject to the regulations of the Board of Governors of the Federal Reserve and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.

On August 31, 2021, the Bank had made an investment in Atlantic Coast Mortgage, LLC (“ACM”) for $20.4 million. As a result of this investment, the Bank obtained a 28.7% ownership interest in ACM, which is subject to an earnback option of up to 3.7% over a three year period. The investment is accounted for using the equity method of accounting. In addition, the Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanant financing line, and has developed portfolio mortgage products to diversify the Bank's held to investment loan portfolio.

On December 15, 2022, the Company announced that the Board of Directors approved a five-for-four split of the Company's common stock in the form of a 25% stock dividend for shareholders of record on January 9, 2023, payable on January 31, 2023. Earnings per share and all other per share information reflected in the Company's consolidated financial statements have been adjusted for the five-for-four split of the Company's common stock for comparative purposes.

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2022. Certain prior period amounts have been reclassified to conform to current period presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.

Significant Accounting Policies

The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry.

Allowance for Credit Losses

The Company adopted the current expected credit loss model ("CECL") under Accounting Standards Update ("ASU") 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on January 1, 2023. The Company recorded a net reduction of retained earnings of $2.8 million upon adoption. The adoption adjustment included an increase in the allowance for credit losses on loans of $2.9 million in addition to an increase of $800 thousand to the reserve for unfunded commitments.

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Notes to Unaudited Consolidated Financial Statements

(Continued)

Allowance for Credit Losses - Loans and Unfunded Commitments

The allowance for credit losses represents an estimate of the expected credit losses in the Company's held for investment loan portfolio as of a valuation date. Accounting Standards Codification ("ASC") 326 replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the held for investment loan portfolio. Loans, or portions thereof, are charged off against the allowance for credit losses when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Reserves on loans that do not share risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segmented based on call report code and processed through a cash flow valuation model. In particular, loan-level probability of default ("PD") and severity (also referred to as loss given default ("LGD")) is applied to derive a baseline expected loss as of the valuation date. These expected default and severity rates, which are regression-derived and based on peer historical loan-level performance data, are calibrated to incorporate the Company's reasonable and supportable forecast of future losses as well as any necessary qualitative adjustments.

Typically, financial institutions use their historical loss experience and trends in losses for each loan segment which are then adjusted for portfolio trends and economic and environmental factors in determining the allowance for credit losses. Since the Bank’s inception in 2007, the Company has experienced minimal loss history within its loan portfolio. Due to the fact that limited internal loss history exists to generate statistical significance, management determined it was most prudent to rely on peer data when deriving its best estimate of PD and LGD. As part of the Company's estimation process, management will continue to assess the reasonableness of the data, assumptions, and model methodology utilized to derive its allowance for credit losses.

For each of the modeled loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on internal loan-level historical data. The Company utilizes national unemployment for its reasonable and supportable forecasting of expected default within the cash flow model. To further adjust the allowance for credit losses for expected losses not already within the quantitative component of the calculation, the Company may consider qualitative factors as prescribed in ASC 326.

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records a reserve for unfunded commitments on off-balance sheet credit exposures through a charge to provision for credit loss expense in its Consolidated Statement of Income. The reserve for unfunded commitments is estimated by call report code segmentation as of the valuation date under the CECL model using the same methodologies as portfolio loans taking utilization rates into consideration. The reserve for unfunded commitments is reflected as a liability on the Company's Consolidated Balance Sheet.

The Company's methodology utilized in the estimation of the allowance for credit losses, which is performed at least quarterly, is designed to be dynamic and responsive to changes in its loan portfolio credit quality, composition, and forecasted economic conditions. The review of the reasonableness and appropriateness of the allowance for credit losses is reviewed by the CECL Committee for approval as of the valuation date. Additionally, information is provided to the Board of Directors on a quarterly basis along with the Company's consolidated financial statements.

Collateral Dependent Financial Assets

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Notes to Unaudited Consolidated Financial Statements

(Continued)

exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

Allowance for Credit Losses - Securities

The Company evaluates its available-for-sale and held-to-maturity debt securities portfolios for expected credit losses as of the valuation date under ASC 326. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it would be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income during the current period. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other driving factors. If the Company's assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded for the credit loss (which represents the difference between the expected cash flows and amortized cost basis), limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

The entire amount of an impairment loss is recognized in earnings only when: (1) the Company intends to sell the security; or (2) it is more likely than not that the Company will have to sell the security before recovery of the Company's amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders' equity as comprehensive income, net of deferred taxes.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance for credit losses when the Company believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a noncredit-related impairment.

As part of its estimation process, the Company have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheet. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, the Company does not recognize an allowance for credit loss against accrued interest receivable. This approach is consistent with the Company's nonaccrual policy implemented for its loan portfolio.

The Company separately evaluates its held-to-maturity investment securities for any credit losses. If it determines that a security indicates evidence of deteriorated credit quality, the security is individually-evaluated and a discounted cash flow analysis is performed and compared to the amortized cost basis. As of September 30, 2023, the Company had one security classified as held-to-maturity with an amortized cost basis of $264 thousand with the remainder of the securities portfolio held as available-for-sale.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." 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 the London Interbank Offered Rate ("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 2021-01 "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients

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and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 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 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.

We have certain loans, interest rate swap agreements, investment securities, and debt obligations with interest rates indexed to LIBOR. The administrator of LIBOR announced that the most commonly used U.S. dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023. Central banks and regulators around the world have commissioned working groups to find suitable replacements for LIBOR and other benchmark rates and to implement financial benchmark reforms more generally. There continues to be uncertainty regarding the use of alternative reference rates ("ARRs"), which may cause disruptions in a variety of markets, as well as adversely impact its business, operations and financial results.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on Secured Overnight Funding Rate ("SOFR") for contracts governed by U.S. law that have no or ineffective fallbacks. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected.

To facilitate an orderly transition from interbank offered rates and other benchmark rates to ARRs, the Company has established an enterprise-wide initiative led by senior management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs. 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.

In August 2020, the FASB issued ASU 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity." The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, including the Company, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions". ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU 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 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848". 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 would cease being

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published. In 2021, the administrator of LIBOR delayed the intended cessation date of certain tenors of 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 March 2023, the FASB issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 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 based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. This standard is commonly referred to as the current expected credit loss ("CECL") methodology. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans and reserve for unfunded loan commitments, was $3.7 million. The adjustment, net of tax, recorded to stockholders’ equity totaled $2.8 million at January 1, 2023.

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 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. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of troubled debt restructuring ("TDRs"), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. ASU 2022-02 resulted in no material impact to the Company's consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. ASU 2022-01 was effective for the Company on January 1, 2023. ASU 2022-01 resulted in no material impact to the Company's consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. 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

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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. ASU 2021-08 resulted in no material impact to the Company's consolidated financial statements.

Note 2. Securities

Amortized cost and fair values of securities held-to-maturity and securities available-for-sale as of September 30, 2023 and December 31, 2022, are as follows:


	September 30, 2023
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
Held-to-maturity
Securities of state and local municipalities tax exempt	$	264	$	—	$	(21)	$	243
Total Held-to-maturity Securities	$	264	$	—	$	(21)	$	243
Available-for-sale
Securities of U.S. government and federal agencies	$	13,559	$	—	$	(2,586)	$	10,973
Securities of state and local municipalities tax exempt	1,001		—		(18)		983
Securities of state and local municipalities taxable	469		—		(62)		407
Corporate bonds	20,206		—		(3,316)		16,890
SBA pass-through securities	62		—		(6)		56
Mortgage-backed securities	232,724		—		(49,046)		183,678
Collateralized mortgage obligations	4,054		—		(895)		3,159
Total Available-for-sale Securities	$	272,075	$	—	$	(55,929)	$	216,146


	December 31, 2022
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
Held-to-maturity
Securities of state and local municipalities tax exempt	$	264	$	—	$	(12)	$	252
Total Held-to-maturity Securities	$	264	$	—	$	(12)	$	252
Available-for-sale
Securities of U.S. government and federal agencies	$	13,559	$	—	$	(2,555)	$	11,004
Securities of state and local municipalities tax exempt	1,385		—		(9)		1,376
Securities of state and local municipalities taxable	506		—		(62)		444
Corporate bonds	21,212		—		(2,154)		19,058
SBA pass-through securities	74		—		(7)		67
Mortgage-backed securities	282,858		—		(45,424)		237,434
Collateralized mortgage obligations	9,998		—		(1,312)		8,686
Total Available-for-sale Securities	$	329,592	$	—	$	(51,523)	$	278,069

As a result of the adoption of ASC 326, no allowance for credit losses was recognized as of September 30, 2023 related to the Company's investment portfolio.

The Company had $2.2 million and $4.1 million in securities pledged with the Federal Reserve Bank of Richmond ("FRB") to collateralize certain municipal deposits at September 30, 2023 and December 31, 2022, respectively. The

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Company had $121.4 million in securities pledged with the Virginia Department of Treasury to collateralize certain municipal deposits at September 30, 2023. There were $104.6 million securities pledged to the Virginia Department of Treasury at December 31, 2022.

The Company monitors the credit quality of held-to-maturity securities through the use of credit rating. The Company monitors credit rating on a periodic basis. The following table summarizes the amortized cost of held-to-maturity securities at September 30, 2023, aggregated by credit quality indicator:


(In thousands)	Held-to-maturity
September 30, 2023	Securities of state and local municipalities tax exempt
Aa3	$	264
Total	$	264

The following table shows fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2023 and December 31, 2022, respectively. One security was held as of September 30, 2023 for which the book value and fair value were equal and therefore neither an unrealized gain nor loss was reflected herein. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the past twelve-month period. Available-for-sale securities that have been in a continuous unrealized loss position as of September 30, 2023 are as follows:


	Less Than 12 Months				12 Months or Longer				Total
(In thousands)
At September 30, 2023	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities of U.S. government and federal agencies	$	—	$	—	$	10,974	$	(2,586)	$	10,974	$	(2,586)
Securities of state and local municipalities tax exempt	—		—		983		(18)		983		(18)
Securities of state and local municipalities taxable	—		—		407		(62)		407		(62)
Corporate bonds	—		—		16,141		(3,316)		16,141		(3,316)
SBA pass-through securities	—		—		55		(6)		55		(6)
Mortgage-backed securities	—		—		183,678		(49,046)		183,678		(49,046)
Collateralized mortgage obligations	—		—		3,158		(895)		3,158		(895)
Total	$	—	$	—	$	215,396	$	(55,929)	$	215,396	$	(55,929)

Available-for-sale and held-to-maturity securities that have been in a continuous unrealized loss position as of December 31, 2022 are as follows:

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(In thousands)	Less Than 12 Months				12 Months or Longer				Total
At December 31, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities of U.S. government and federal agencies	$	—	$	—	$	11,004	$	(2,555)	$	11,004	$	(2,555)
Securities of state and local municipalities tax exempt	1,628		(21)		—		—		1,628		(21)
Securities of state and local municipalities taxable	—		—		444		(62)		444		(62)
Corporate bonds	12,344		(1,119)		5,964		(1,035)		18,308		(2,154)
SBA pass-through securities	—		—		67		(7)		67		(7)
Mortgage-backed securities	26,486		(1,831)		210,948		(43,593)		237,434		(45,424)
Collateralized mortgage obligations	2,601		(238)		6,085		(1,074)		8,686		(1,312)
Total	$	43,059	$	(3,209)	$	234,512	$	(48,326)	$	277,571	$	(51,535)

Securities of U.S. government and federal agencies: The unrealized losses on three available-for-sale securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.

Securities of state and local municipalities tax-exempt: The unrealized loss on two of the investments in securities of state and local municipalities was caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. These investments carry an S&P investment grade rating of AA+.

Securities of state and local municipalities taxable: The unrealized loss on one of the investments in securities of state and local municipalities was caused by interest rate increases. The contractual terms of this investment does not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The investment carries an S&P investment grade rating of AAA.

Corporate bonds: The unrealized losses on the investments in corporate bonds were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. One of these investments carries an S&P investment grade rating of BBB. The remaining 13 investments do not carry a rating.

SBA pass-through securities: The unrealized losses on one available-for-sale security was caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.

Mortgage-backed securities: The unrealized losses on the Company’s investment in 57 mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be impaired at September 30, 2023.

Collateralized mortgage obligations ("CMOs"): The unrealized loss associated with 12 CMOs was caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be impaired at September 30, 2023.

The Company has evaluated its available-for-sale investments securities in an unrealized loss position for credit related impairment at September 30, 2023 and December 31, 2022 and concluded no impairment existed based on several factors which included: (1) the majority of these securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) issuers continue to make timely principal and interest payments, and (4) the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized

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cost basis. Additionally, the Company’s mortgage-backed investment securities are primarily guaranteed by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association and do not have credit risk given the implicit and explicit government guarantees associated with these agencies.

In the first quarter of 2023, the Company executed a balance sheet repositioning strategy and sold available-for-sale investment securities with a total book value of $40.3 million at a pre-tax loss of $4.6 million and used the net proceeds to reduce existing high cost short-term FHLB advances and to fund higher yielding newly originated commercial loans. The deleverage strategy provides the Company with improved liquidity, enhanced tangible common equity, and additional run rate earnings.

The amortized cost and fair value of securities as of September 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.


	September 30, 2023
	Held-to-maturity				Available-for-sale
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
After 1 year through 5 years	$	264	$	243	$	5,687	$	5,068
After 5 years through 10 years	—		—		31,589		26,052
After 10 years	—		—		234,799		185,026
Total	$	264	$	243	$	272,075	$	216,146

For the nine months ended September 30, 2023 and 2022, proceeds from principal repayments of securities were $16.6 million and $20.5 million, respectively. During the nine months ended September 30, 2023 and 2022, proceeds from sales, calls and maturities of securities were $35.8 million and zero, respectively. There were $4.6 million gross realized losses during the nine months ended September 30, 2023 and zero for the nine months ended September 30, 2022.

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Note 3. Loans and Allowance for Credit Losses

A summary of loan balances by type follows:


	September 30, 2023
(In thousands)	Total
Commercial real estate	$	1,097,726
Commercial and industrial	223,651
Commercial construction	154,559
Consumer real estate	367,345
Consumer nonresidential	6,232
	$	1,849,513
Less:
Allowance for credit losses	18,849
Loans, net	$	1,830,664


	December 31, 2022
(In thousands)	Originated		Acquired		Total
Commercial real estate	$	1,085,513	$	14,748	$	1,100,261
Commercial and industrial	242,307		2,913		245,220
Commercial construction	147,436		503		147,939
Consumer real estate	322,579		17,012		339,591
Consumer nonresidential	7,661		24		7,685
	$	1,805,496	$	35,200	$	1,840,696
Less:
Allowance for credit losses	16,040		—		16,040
Unearned income and (unamortized premiums), net	262		—		262
Loans, net	$	1,789,194	$	35,200	$	1,824,394

The loan portfolio summary is presented on amortized cost basis as of September 30, 2023. For the year ended December 31, 2022, the loan portfolio is presented at outstanding principal balance.

During 2018, as a result of the Company’s acquisition of Colombo Bank ("Colombo"), the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans). The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20. The outstanding principal balance and related carrying amount of acquired loans included in the consolidated balance sheets as of December 31, 2022 is as follows:


(In thousands)	December 31, 2022
Purchased credit impaired acquired loans evaluated individually for credit losses
Outstanding principal balance	$	24
Carrying amount	—
Other acquired loans
Outstanding principal balance	35,604
Carrying amount	35,200
Total acquired loans
Outstanding principal balance	35,628
Carrying amount	35,200

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The following table presents changes during the year ended December 31, 2022, in the accretable yield on purchased credit impaired loans for which the Company applies ASC 310-30.


(In thousands)
Balance at January 1, 2022	$	3
Accretion	(197)
Reclassification of nonaccretable difference due to changes in expected cash flows	33
Other changes, net	161
Balance at December 31, 2022	$	—

An analysis of the allowance for credit losses for the three and nine months ended September 30, 2023 and 2022, and for the year ended December 31, 2022, follows:

Allowance for Credit Losses

For the Three Months Ended September 30, 2023

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Allowance for credit losses:
Beginning Balance, July 1	$	11,122	$	2,865	$	1,702	$	3,683	$	70	$	19,442
Charge-offs	—		—		—		—		—		—
Recoveries	—		—		—		—		7		7
Provision	(483)		(184)		(53)		124		(4)		(600)
Ending Balance, September 30,	$	10,639	$	2,681	$	1,649	$	3,807	$	73	$	18,849

Allowance for Credit Losses

For the Nine Months Ended September 30, 2023

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Allowance for credit losses:
Beginning Balance, Prior to January 1, 2023 Adoption of ASC 326	$	10,777	$	2,623	$	1,499	$	1,044	$	97	$	16,040
Impact of Adoption of ASC 326	498		452		70		1,856		(12)		2,864
Charge-offs	—		(350)		—		—		(15)		(365)
Recoveries	—		3		—		1		35		39
Provision	(636)		(47)		80		906		(32)		271
Ending Balance, September 30,	$	10,639	$	2,681	$	1,649	$	3,807	$	73	$	18,849

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Allowance for Credit Losses

For the Three Months Ended September 30, 2022

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Allowance for credit losses:
Beginning Balance, July 1	$	10,067	$	2,256	$	1,765	$	728	$	141	$	14,957
Charge-offs	—		—		—		—		(28)		(28)
Recoveries	—		—		—		—		19		19
Provision	362		(124)		(165)		310		(18)		365
Ending Balance September 30	$	10,429	$	2,132	$	1,600	$	1,038	$	114	$	15,313

Allowance for Credit Losses

For the Nine Months Ended September 30, 2022

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Allowance for credit losses:
Beginning Balance, January 1	$	8,995	$	1,827	$	2,009	$	781	$	217	$	13,829
Charge-offs	—		(396)		—		—		(82)		(478)
Recoveries	—		—		—		1		61		62
Provision	1,434		701		(409)		256		(82)		1,900
Ending Balance September 30	$	10,429	$	2,132	$	1,600	$	1,038	$	114	$	15,313

Allowance for Credit Losses

For the Year Ended December 31, 2022

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Allowance for credit losses:
Beginning Balance, January 1	$	8,995	$	1,827	$	2,009	$	781	$	217	$	13,829
Charge-offs	—		(396)		—		—		(101)		(497)
Recoveries	—		—		—		1		78		79
Provision	1,782		1,192		(510)		262		(97)		2,629
Ending Balance December 31	$	10,777	$	2,623	$	1,499	$	1,044	$	97	$	16,040

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(Continued)

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023:


(In thousands)	Real Estate		Business / Other Assets
Collateral-Dependent Loans
Commercial real estate	$	—	$	—
Commercial and industrial	—		—
Commercial construction	—		—
Consumer real estate	2,292		—
Consumer nonresidential	—		—
Total	$	2,292	$	—

The following tables present the recorded investment in loans and evaluation method as of September 30, 2022 and at December 31, 2022, by portfolio segment:

Allowance for Credit Losses

At September 30, 2022

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Allowance for credit losses:
Ending Balance
Individually evaluated for impairment	$	71	$	92	$	—	$	1	$	—	$	164
Purchased credit impaired	—		—		—		—		—		—
Collectively evaluated for impairment	10,358		2,040		1,600		1,037		114		15,149
	$	10,429	$	2,132	$	1,600	$	1,038	$	114	$	15,313

Loans Receivable

At September 30, 2022

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Financing receivables:
Ending Balance
Individually evaluated for impairment	$	11,357	$	4,753	$	—	$	89	$	—	$	16,199
Purchased credit impaired	—		—		—		—		—		—
Collectively evaluated for impairment	1,018,969		206,643		151,497		312,989		9,154		1,699,252
	$	1,030,326	$	211,396	$	151,497	$	313,078	$	9,154	$	1,715,451

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Notes to Unaudited Consolidated Financial Statements

(Continued)

Allowance for Credit Losses

At December 31, 2022

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Allowance for credit losses:
Ending Balance
Individually evaluated for impairment	$	—	$	86	$	—	$	—	$	—	$	86
Purchased credit impaired	—		—		—		—		—		—
Collectively evaluated for impairment	10,777		2,537		1,499		1,044		97		15,954
	$	10,777	$	2,623	$	1,499	$	1,044	$	97	$	16,040

Loans Receivable

At December 31, 2022

(In thousands)


	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Financing receivables:
Ending Balance
Individually evaluated for impairment	$	1,703	$	1,319	$	—	$	1,041	$	—	$	4,063
Purchased credit impaired	—		—		—		—		—		—
Collectively evaluated for impairment	1,098,558		243,901		147,939		338,550		7,685		1,836,633
	$	1,100,261	$	245,220	$	147,939	$	339,591	$	7,685	$	1,840,696

Impaired loans by class excluding purchased credit impaired at December 31, 2022, are summarized as follows:

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Notes to Unaudited Consolidated Financial Statements

(Continued)

Impaired Loans – Originated Loan Portfolio


(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2022
With an allowance recorded:
Commercial real estate	$	—	$	—	$	—	$	—	$	—
Commercial and industrial	1,319		1,329		86		1,604		107
Commercial construction	—		—		—		—		—
Consumer real estate	—		—		—		—		—
Consumer nonresidential	—		—		—		—		—
	$	1,319	$	1,329	$	86	$	1,604	$	107
December 31, 2022
With no related allowance:
Commercial real estate	$	1,703	$	1,703	$	—	$	1,704	$	135
Commercial and industrial	—		—		—		—		—
Commercial construction	—		—		—		—		—
Consumer real estate	1,041		1,044		—		1,048		34
Consumer nonresidential	—		—		—		—		—
	$	2,744	$	2,747	$	—	$	2,752	$	169

There were no impaired loans in the acquired loan portfolio at December 31, 2022. No additional funds are committed to be advanced in connection with the impaired loans. There were no nonaccrual loans excluded from the impaired loan disclosure.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass — Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention — Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the enhanced possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful — Loans classified as doubtful include those loans which have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, improbable.

Loss — Loans classified as loss include those loans which are considered uncollectible and of such little value that their continuance as loans is not warranted. Even though partial recovery may be achieved in the future, it is neither practical nor desirable to defer writing off these loans.

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Notes to Unaudited Consolidated Financial Statements

(Continued)

Based on the most recent analysis performed, amortized cost basis of loans by risk category, class and year of origination was as follows as of September 30, 2023:


(In thousands)	Prior		2019		2020		2021		2022		2023		Revolving Loans Amort. Cost Basis		Revolving Loans Convert. to Term		Total
Commercial Real Estate
Grade:
Pass	$	351,621	$	84,975	$	72,431	$	148,332	$	212,269	$	73,825	$	154,273	$	—	$	1,097,726
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total	$	351,621	$	84,975	$	72,431	$	148,332	$	212,269	$	73,825	$	154,273	$	—	$	1,097,726
Commercial and Industrial
Grade:
Pass	$	14,879	$	2,615	$	7,862	$	14,845	$	72,131	$	47,834	$	63,485	$	—	$	223,651
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total	$	14,879	$	2,615	$	7,862	$	14,845	$	72,131	$	47,834	$	63,485	$	—	$	223,651
Commercial Construction
Grade:
Pass	$	18,183	$	344	$	—	$	10,441	$	—	$	709	$	124,882	$	—	$	154,559
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total	$	18,183	$	344	$	—	$	10,441	$	—	$	709	$	124,882	$	—	$	154,559
Consumer Real Estate
Grade:
Pass	$	37,660	$	8,251	$	11,726	$	27,925	$	198,562	$	45,501	$	34,660	$	—	$	364,285
Special mention	—		—		—		—		753		—		58		—		811
Substandard	863		—		—		—		830		—		556		—		2,249
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total	$	38,523	$	8,251	$	11,726	$	27,925	$	200,145	$	45,501	$	35,274	$	—	$	367,345
Consumer Nonresidential
Grade:
Pass	$	702	$	—	$	9	$	4	$	55	$	164	$	5,298	$	—	$	6,232
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total	$	702	$	—	$	9	$	4	$	55	$	164	$	5,298	$	—	$	6,232
Total Recorded Investment	$	423,908	$	96,185	$	92,028	$	201,547	$	484,600	$	168,033	$	383,212	$	—	$	1,849,513

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Notes to Unaudited Consolidated Financial Statements

(Continued)

As of September 30, 2023 – Total Loan Portfolio


(In thousands)	Total
Grade:
Pass	$	1,846,453
Special mention	811
Substandard	2,249
Doubtful	—
Loss	—
Total Recorded Investment	$	1,849,513

Based on the most recent analysis performed, the risk category of loans by class of loans was as follows as of December 31, 2022:

As of December 31, 2022 – Originated Loan Portfolio


(In thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Grade:
Pass	$	1,077,526	$	237,638	$	147,436	$	320,735	$	7,661	$	1,790,996
Special mention	6,284		3,350		—		803		—		10,437
Substandard	1,703		1,319		—		1,041		—		4,063
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	1,085,513	$	242,307	$	147,436	$	322,579	$	7,661	$	1,805,496

As of December 31, 2022 – Acquired Loan Portfolio


(In thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Consumer Nonresidential		Total
Grade:
Pass	$	14,748	$	2,913	$	503	$	17,012	$	24	$	35,200
Special mention	—		—		—		—		—		—
Substandard	—		—		—		—		—		—
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	14,748	$	2,913	$	503	$	17,012	$	24	$	35,200

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes larger non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. At September 30, 2023, the Company had $811 thousand in loans identified as special mention, a decrease from $10.4 million at December 31, 2022. Special mention rated loans are loans that have a potential weakness that deserves management’s

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Notes to Unaudited Consolidated Financial Statements

(Continued)

close attention; however, the borrower continues to pay in accordance with their contract. Loans rated as special mention do not have a specific reserve and are considered well-secured.

At September 30, 2023, the Company had $2.3 million in loans identified as substandard, a decrease of $1.8 million from December 31, 2022. The increase in substandard loans was primarily related to the addition of one loan. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. At September 30, 2023, an individually assessed allowance for credit losses totaling $72 thousand has been estimated to supplement any shortfall of collateral.

Past due and nonaccrual loans presented by loan class were as follows at September 30, 2023 and December 31, 2022

As of September 30, 2023


(In thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Nonaccruals		Total Recorded Investment in Loans
Commercial real estate	$	499	$	—	$	—	$	499	$	1,097,227	$	—	$	1,097,726
Commercial and industrial	518		—		—		518		223,133		—		223,651
Commercial construction	—		—		—		—		154,559		—		154,559
Consumer real estate	686		—		144		830		365,129		1,386		367,345
Consumer nonresidential	—		—		—		—		6,232		—		6,232
Total	$	1,703	$	—	$	144	$	1,847	$	1,846,280	$	1,386	$	1,849,513

As of December 31, 2022 – Originated Loan Portfolio


(In thousands)	30-59 days past due		60-89 days past due		90 or more past due		Total past due		Current		Total loans		90 days past due and still accruing		Nonaccruals
Commercial real estate	$	546	$	—	$	2,096	$	2,642	$	1,082,871	$	1,085,513	$	393	$	1,703
Commercial and industrial	512		—		1,319		1,831		240,476		242,307		—		1,319
Commercial construction	—		—		125		125		147,311		147,436		125		—
Consumer real estate	805		—		953		1,758		320,821		322,579		825		128
Consumer nonresidential	—		63		—		63		7,598		7,661		—		—
Total	$	1,863	$	63	$	4,493	$	6,419	$	1,799,077	$	1,805,496	$	1,343	$	3,150

As of December 31, 2022 – Acquired Loan Portfolio


(In thousands)	30-59 days past due		60-89 days past due		90 or more past due		Total past due		Current		Total loans		90 days past due and still accruing		Nonaccruals
Commercial real estate	$	—	$	—	$	—	$	—	$	14,748	$	14,748	$	—	$	—
Commercial and industrial	—		—		—		—		2,913		2,913		—		—
Commercial construction	—		—		—		—		503		503		—		—
Consumer real estate	—		—		—		—		17,012		17,012		—		—
Consumer nonresidential	—		—		—		—		24		24		—		—
Total	$	—	$	—	$	—	$	—	$	35,200	$	35,200	$	—	$	—

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Notes to Unaudited Consolidated Financial Statements

(Continued)

The following presents nonaccrual loans as of September 30, 2023:


(dollars in thousands)	Nonaccrual with No Allowance for Credit Losses		Nonaccrual with an Allowance for Credit Losses		Total Nonaccrual Loans		Interest Income Recognized
Nonaccrual Loans
Commercial real estate	$	—	$	—	$	—	$	—
Commercial and industrial	—		—		—		—
Commercial construction	—		—		—		—
Consumer real estate	1,386		—		1,386		58
Consumer nonresidential	—		—		—		—
Total	$	1,386	$	—	$	1,386	$	58

There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2023 and December 31, 2022, respectively.

There were overdrafts of $133 thousand and $1.3 million at September 30, 2023 and December 31, 2022, respectively, which have been reclassified from deposits to loans. At September 30, 2023 and December 31, 2022, loans with a carrying value of $566.9 million and $458.7 million, respectively, were pledged to the FHLB.

Modifications with Borrowers Experiencing Financial Difficulty

On January 1, 2023, the Company adopted ASU 2022-02, which eliminates the accounting guidance for TDRs and enhances the disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty ("FDMs"). FDMs occur as a result of loss mitigation activities. A variety of solutions are offered to borrowers, including loan modifications that may result in principal forgiveness, interest rate reductions, term extensions, payment delays, repayment plans or combinations thereof. FDMs exclude loans held for sale and loans accounted for under the fair value option. Loans with guarantor support, or guaranteed loans are included in the Company's disclosed population of FDMs when those loan modifications are granted to a borrower experiencing financial difficulty.

There were 5 loans of $8.1 million modified during the the nine months ended September 30, 2023 with a combination of payment delays and contractual extension to the maturity of the loan. No loans were modified with principal and interest forgiveness or an interest rate reduction. All loans modified during the nine month ended September 30, 2023 are performing according the modified contractual terms.

Prior to the adoption of ASC 326, the Company had zero reserves for unfunded commitments as of December 31, 2022. Upon adoption of ASC 326, the Company established a reserve for unfunded commitments of $811 thousand as of January 1, 2023. As of September 30, 2023, the reserve for unfunded commitments increased to $673 thousand.

The following table presents a breakdown of the provision for credit losses included in the Consolidated Statements of Income for the applicable periods:


	For the Three Months Ended					For the Nine Months Ended
(In thousands)		September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Provision for (reversal of) credit losses - loans		$	(600)	$	365	$	271	$	1,900
Provision for (reversal of) credit losses - unfunded commitments		(129)		—		(139)		—
Total provision for credit losses		$	(729)	$	365	$	132	$	1,900

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Notes to Unaudited Consolidated Financial Statements

(Continued)

Note 4. Derivative Financial Instruments

The Company enters into interest rate swap agreements ("swap agreements") to facilitate the risk management strategies needed to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these loan agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. These back-to-back swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities) as of September 30, 2023 and December 31, 2022. The Company is party to master netting arrangements with its financial institution counterparty; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments, commonly referred to as variation margin, are recorded as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures, which effectively results in any centrally cleared derivative having a Level 2 fair value that approximates zero on a daily basis, and therefore, these swap agreements were not included in the offsetting table in the Fair Value Measurement section. As of September 30, 2023, the Company had entered into 17 interest rate swap agreements which are collateralized with $30 thousand in cash. There were 15 interest rate swap agreements outstanding as of December 31, 2022 which were collateralized with $30 thousand in cash.

The notional amount and fair value of the Company’s derivative financial instruments as of September 30, 2023 and December 31, 2022 were as follows:


	September 30, 2023
	Notional Amount		Fair Value
	(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps	$	82,965	$	5,758
Pay Fixed/Receive Variable Swaps	82,965		(5,758)


	December 31, 2022
	Notional Amount		Fair Value
	(In thousands)
Interest Rate Swap Agreements
Receive Fixed/Pay Variable Swaps	$	74,178	$	4,260
Pay Fixed/Receive Variable Swaps	74,178		(4,260)

Interest Rate Risk Management—Cash Flow Hedging Instruments

The Company uses FHLB advances and other wholesale funding from time to time as a source of funds for use in the Company’s lending and investment activities and other general business purposes. This wholesale funding exposes the Company to increased interest rate risk as a result of the variability in cash flows (future interest payments). The Company believes it is prudent to reduce this interest rate risk. To meet this objective, the Company entered into interest rate swap agreements whereby the Company reduces the interest rate risk associated with the Company’s variable rate advances (or other wholesale funding) from the designation date and going through the maturity date.

At September 30, 2023 and December 31, 2022, the information pertaining to outstanding interest rate swap agreements used to hedge variability in cash flows was as follows:

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(Continued)


(In thousands)	September 30, 2023		December 31, 2022
Notional amount	$	250,000	$	145,000
Weighted average pay rate	3.25%		2.12%
Weighted average receive rate	5.31%		4.74%
Weighted average maturity in years	4.28		3.49
Unrealized gain relating to interest rate swaps	$	10,879	$	4,251

These agreements provided for the Company to receive payments determined by a specific index in exchange for making payments at a fixed rate. At September 30, 2023 and December 31, 2022, the unrealized gain relating to interest rate swaps designated as hedging instruments of the variability of cash flows associated with the interest payments on FHLB advances and wholesale deposits are reported in other comprehensive income. These amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the funding affects earnings. The Company measures cash flow hedging relationships for effectiveness on a monthly basis, and at September 30, 2023 and December 31, 2022, the hedges were highly effective and the amount of ineffectiveness reflected in earnings was de minimus.

Note 5. Financial Instruments with Off-Balance Sheet Risk

The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

At September 30, 2023 and December 31, 2022, the following financial instruments were outstanding, which contract amounts represent credit risk:


(In thousands)	September 30, 2023		December 31, 2022
Commitments to grant loans	$	8,580	$	135,441
Unused commitments to fund loans and lines of credit	217,363		235,617
Commercial and standby letters of credit	6,197		6,503

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments, if deemed necessary.

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Notes to Unaudited Consolidated Financial Statements

(Continued)

The Company enters into rate lock commitments to finance residential mortgage loans with its customers. These commitments offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.

The Company maintains its cash accounts with the FRB and correspondent banks. The total amount of cash on deposit in correspondent banks exceeding the federally insured limits was $3.1 million and $1.4 million at September 30, 2023 and December 31, 2022, respectively.

Note 6. Stock-Based Compensation Plan

The Company’s Amended and Restated 2008 Option Plan (the "Plan"), which is stockholder-approved, was adopted to advance the interests of the Company by providing selected key employees of the Company, their affiliates, and directors with the opportunity to acquire shares of common stock in connection with their service to the Company. In May 2022, the stockholders approved an amendment to the Plan to extend the term and increase the number of shares authorized for issuance under the Plan by 200,000 shares. The Company has granted stock options and restricted stock units under the Plan.

The maximum number of shares with respect to which awards may be made is 2,929,296 shares of common stock, subject to adjustment for certain corporate events. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest annually over four years of continuous service and have a contractual term of ten years. At September 30, 2023, 148,125 shares were available to grant under the Plan. No options were granted during the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023, there were 63,634 shares withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant. There were 4,772 shares withheld from issuance upon exercise of options in order to cover the cost of the exercise by the participant during the nine months ended September 30, 2022.

A summary of option activity under the Plan as of September 30, 2023 and changes during the nine months ended is presented below:


Options	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Contractual Remaining Term (Years)	Aggregate Intrinsic Value (1)
Outstanding at January 1, 2023	1,621,920	$	6.82	1.81
Granted	—
Exercised	(423,380)	5.97
Forfeited or expired	(20,437)	5.73
Outstanding and Exercisable at September 30, 2023	1,178,103	$	7.15	1.56	$	6,671,990

(1) The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2023. This amount changes based on changes in the market value of the Company’s common stock.

As of September 30, 2023, all outstanding stock options granted under the Plan are fully vested and amortized. There was $0 thousand in income tax benefit related to stock options exercised and recognized in the income statement for share-based compensation arrangements for the three months ended September 30, 2023. There was $31 thousand in income tax benefit related to stock options exercised and recognized in the income statement for share-based compensation arrangements for the three months ended September 30, 2022. Tax benefits recognized in the income statement for share-based compensation arrangements during the nine months ended September 30, 2023 and 2022 totaled $479 thousand and $235 thousand, respectively.

Restricted stock units relating to 9,438 shares were granted during the nine months ended September 30, 2023. There were 119,720 restricted stock units granted during the three months ended September 30, 2022. For the nine months ended September 30, 2023, there were 10,071 shares withheld from issuance upon vesting of restricted stock units in order to cover the cost of the vesting by the participant. There were no shares withheld from issuance upon vesting of restricted stock units in order to cover the cost of the vesting by the participant during the nine months ended September 30, 2022.

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A summary of the Company’s restricted stock unit grant activity as of September 30, 2023 is shown below.


	Number of Shares	Weighted Average Grant Date Fair Value per share
Nonvested at January 1, 2023	278,245	$	14.63
Granted	9,438	10.55
Vested	(92,360)	14.69
Forfeited	(12,262)	15.42
Balance at September 30, 2023	183,061	$	14.34

The compensation cost that has been charged to income for the Plan was $259 thousand and $348 thousand for the three months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, there was $2.2 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the Plan. The cost is expected to be recognized over a weighted-average period of 28 months.

Note 7. Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date (exit price). Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

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.

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.

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

Securities available-for-sale: Securities available-for-sale 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 considers observable market data (Level 2).

Cash flow hedges: The Company has loan interest rate swap derivatives and interest rate swap derivatives on certain time deposits and borrowings, which the latter are designated as cash flow hedges. These derivatives are recorded at fair value using published yield curve rates from a national valuation service. These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:


			Fair Value Measurements at September 30, 2023 Using
(In thousands)	Balance as of September 30, 2023		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description			(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale
Securities of U.S. government and federal agencies	$	10,973	$	—	$	10,973	$	—
Securities of state and local municipalities tax exempt	983		—		983		—
Securities of state and local municipalities taxable	407		—		407		—
Corporate bonds	16,890		—		16,890		—
SBA pass-through securities	56		—		56		—
Mortgage-backed securities	183,678		—		183,678		—
Collateralized mortgage obligations	3,159		—		3,159		—
Total Available-for-Sale Securities	$	216,146	$	—	$	216,146	$	—
Derivative assets - interest rate swaps	$	5,758	$	—	$	5,758	$	—
Derivative assets - cash flow hedge	10,879		—		10,879		—
Liabilities
Derivative liabilities - interest rate swaps	5,758		—		5,758		—

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(Continued)


			Fair Value Measurements at December 31, 2022 Using
(In thousands)	Balance as of December 31, 2022		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description			(Level 1)		(Level 2)		(Level 3)
Assets
Available-for-sale
Securities of U.S. government and federal agencies	$	11,004	$	—	$	11,004	$	—
Securities of state and local municipalities tax exempt	1,376		—		1,376		—
Securities of state and local municipalities taxable	444		—		444		—
Corporate bonds	19,058		—		19,058		—
SBA pass-through securities	67		—		67		—
Mortgage-backed securities	237,434		—		237,434		—
Collateralized mortgage obligations	8,686		—		8,686		—
Total Available-for-Sale Securities	$	278,069	$	—	$	278,069	$	—
Derivative assets - interest rate swaps	$	4,260	$	—	$	4,260	$	—
Derivative assets - cash flow hedge	4,251		—		4,251		—
Liabilities
Derivative liabilities - interest rate swaps	4,260		—		4,260		—

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these 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:

At September 30, 2023, all of the Company's individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC 820, individually evaluated loans where an allowance is established based on the the fair value of collateral (i.e., those loans that are collateral dependent) require classification in the fair value hierarchy. 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, has the value derived by discounting comparable sales due to lack of similar properties, or is discounted by the Company due to marketability, 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 using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired Loans (prior to adoption of ASC 326): Loans are designated as impaired when, in the judgment of management 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. The measurement of loss associated with impaired loans can be based on either the present value of future cash flows, 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, has the value derived by discounting comparable sales due to lack of

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(Continued)

similar properties, or is discounted by the Company due to marketability, 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 using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired 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 provision for credit losses on the Consolidated Statements of Income.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at September 30, 2023 and December 31, 2022:


			Fair Value Measurements Using
(In thousands)	Balance as of September 30, 2023		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description			(Level 1)		(Level 2)		(Level 3)
Assets
Collateral-dependent loans
Commercial real estate	$	708	$	—	$	—	$	708
Total Collateral-dependent loans	$	708	$	—	$	—	$	708


			Fair Value Measurements Using
(In thousands)	Balance as of December 31, 2022		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description			(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans
Commercial and industrial	$	1,233	$	—	$	—	$	1,233
Total Impaired loans	$	1,233	$	—	$	—	$	1,233

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2023 and December 31, 2022:

Quantitative information about Level 3 Fair Value Measurements for September 30, 2023

(Dollars In thousands)

Assets

Fair Value

Valuation Technique(s)

Unobservable input

Range

(Avg.)

Collateral-dependent loans

Commercial real estate

708

Discounted appraised value

Marketability/Selling costs

8.00% - 9.42%

9.42

Quantitative information about Level 3 Fair Value Measurements for December 31, 2022

(Dollars In thousands)

Assets

Fair Value

Valuation Technique(s)

Unobservable input

Range

(Avg.)

Impaired loans

Commercial and industrial

1,233

Discounted appraised value

Marketability/Selling costs

8% - 8%

8.00

The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2023 and December 31, 2022. Fair values for September 30, 2023 and

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(Continued)

December 31, 2022 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”


			Fair Value Measurements as of September 30, 2023, using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)			Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	7,560	$	7,560	$	—	$	—
Interest-bearing deposits at other institutions	89,440		89,440		—		—
Securities held-to-maturity	264		—		243		—
Securities available-for-sale	216,146		—		216,146		—
Restricted stock	7,745		—		7,745		—
Loans, net	1,830,664		—		—		1,725,171
Bank owned life insurance	56,438		—		56,438		—
Accrued interest receivable	10,151		—		10,151		—
Derivative assets - interest rate swaps	5,758		—		5,758		—
Derivative assets - cash flow hedge	10,879		—		10,879		—

Financial liabilities:
Checking, savings and money market accounts	$	1,331,675	$	—	$	1,331,675	$	—
Time deposits	664,296		—		663,207		—
FHLB advances	50,000		—		50,000		—
Subordinated notes	19,606		—		18,763		—
Accrued interest payable	3,033		—		3,033		—
Derivative liabilities - interest rate swaps	5,758		—		5,758		—

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(Continued)


			Fair Value Measurements as of December 31, 2022, using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)			Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	7,253	$	7,253	$	—	$	—
Interest-bearing deposits at other institutions	74,300		74,300		—		—
Securities held-to-maturity	264		—		252		—
Securities available-for-sale	278,069		—		278,069		—
Restricted stock	15,612		—		15,612		—
Loans, net	1,824,394		—		—		1,756,984
Bank owned life insurance	55,371		—		55,371		—
Accrued interest receivable	9,435		—		9,435		—
Derivative assets - interest rate swaps	4,260		—		4,260		—
Derivative assets - cash flow hedge	4,251		—		4,251		—

Financial liabilities:
Checking, savings and money market accounts	$	1,321,749	$	—	$	1,321,749	$	—
Time deposits	508,413		—		510,754		—
Fed funds purchased	30,000		—		30,000		—
FHLB advances	235,000		—		235,000		—
Subordinated notes	19,565		—		18,856		—
Accrued interest payable	1,269		—		1,269		—
Derivative liabilities - interest rate swaps	4,260		—		4,260		—

Note 8. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of stock which then shared in the earnings of the Company. Holders of the Company’s restricted stock units do not have voting rights during the vesting period and therefore, restricted stock units are not included in the computation of basic earnings per share. Weighted average shares – diluted includes the potential dilution of stock options and restricted stock units as of September 30, 2023 and 2022, respectively.

The following shows the weighted average number of shares used in computing earnings per share and the effect of weighted average number of shares of dilutive potential common stock. Dilutive potential common stock has no effect on income available to common stockholders. There were 9,327 restricted stock units excluded from weighted average dilutive shares for the three and nine months ended September 30, 2023 as the shares were anti-dilutive. There were no anti-dilutive shares for three and nine month periods ended September 30, 2022.

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(Continued)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2023		2022		2023		2022

Net income	$	4,039	$	7,043	$	8,892	$	20,080

Weighted average number of shares	17,800		17,485		17,696		17,413

Effect of dilutive securities, restricted stock units and options	474		980		514		1,069

Weighted average diluted shares	18,274		18,465		18,210		18,482

Basic EPS	$	0.23	$	0.40	$	0.50	$	1.15
Diluted EPS	$	0.22	$	0.38	$	0.49	$	1.09

Note 9. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) ("AOCI") for the three and nine months ended September 30, 2023 and 2022 are shown in the following table. The Company has two components, which are available-for-sale securities and cash flow hedges, for the periods presented.


(In thousands)
Three Months Ended September 30, 2023	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	(36,316)	$	5,554	$	(30,762)
Net unrealized (losses) gains during the period	(7,046)		2,974		(4,072)

Other comprehensive (loss) income, net of tax	(7,046)		2,974		(4,072)
Balance, end of period	$	(43,362)	$	8,528	$	(34,834)


(In thousands)
Nine Months Ended September 30, 2023	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	(39,926)	$	3,359	$	(36,567)
Net unrealized (losses) gains during the period	(7,018)		5,169		(1,849)
Net reclassification adjustment for losses realized in income	3,582		—		3,582
Other comprehensive (loss) income, net of tax	(3,436)		5,169		1,733
Balance, end of period	$	(43,362)	$	8,528	$	(34,834)


(In thousands)
Three Months Ended September 30, 2022	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	(29,861)	$	669	$	(29,192)
Net unrealized (losses) gains during the period	(13,555)		3,167		(10,388)
Other comprehensive (loss) income, net of tax	(13,555)		3,167		(10,388)
Balance, end of period	$	(43,416)	$	3,836	$	(39,580)

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(Continued)


(In thousands)
Nine Months Ended September 30, 2022	Available-for-Sale Securities		Cash Flow Hedges		Total
Balance, beginning of period	$	(1,983)	$	(60)	$	(2,043)
Net unrealized (losses) gains during the period	(41,433)		3,896		(37,537)
Other comprehensive (loss) income, net of tax	(41,433)		3,896		(37,537)
Balance, end of period	$	(43,416)	$	3,836	$	(39,580)

There were no gains for the three months ended September 30, 2023, that were reclassified from AOCI into income. During the first quarter of 2023, $40.3 million in investment securities available-for-sale, or 12% of the investment portfolio, were sold with a realized after-tax loss of $3.6 million. There were no gains that were reclassified from AOCI into income for the three and nine months ended September 30, 2022, respectively.

Note 10. Subordinated Notes

On June 20, 2016, the Company issued $25.0 million of fixed-to-floating rate subordinated notes due June 30, 2026, in a private placement to accredited investors. Interest was payable at 6.00% per annum, from and including June 20, 2016 to, but excluding, June 30, 2021, semi-annually in arrears. From and including June 30, 2021 to the maturity date or early redemption date, the interest rate was to reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 487 basis points, payable quarterly in arrears.

The Company had the option, on any scheduled interest payment date, to redeem the subordinated notes, in whole

or in part, upon not fewer than 30 nor greater than 60 days’ notice to holders, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. In August 2021, the Company provided a redemption notice to each holder of the subordinated notes that the notes would be redeemed on September 30, 2021 or such later date as the holder returned its note to the Company. The Company redeemed and paid $23.8 million of principal during the year ended December 31, 2021. The remaining note holders redeemed their notes with a principal balance of $1.2 million in February 2022. The notes stopped accruing interest effective as of the September 30, 2021 redemption date.

On October 13, 2020, the Company completed its private placement of $20.0 million of its 4.875% Fixed to Floating Subordinated Notes due 2030 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes have a maturity date of October 15, 2030 and carry a fixed rate of interest of 4.875% for the first five years. Thereafter, the Notes will pay interest at 3-month SOFR plus 471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The Notes have been structured to qualify as Tier 2 capital for regulatory purposes.

Note 11. Revenue Recognition

The Company recognizes revenue in accordance with ASU 2014-09 ‘‘Revenue from Contracts with Customers’’ ("Topic 606") and all subsequent ASUs that modified Topic 606 in recognizing revenue. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, gain on sale of securities, bank-owned life insurance income, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and insurance commissions. 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. Non-interest 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 personal 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

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(Continued)

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 in the following month through a direct charge to customers’ accounts.

Fees, Exchange and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges and are included in other income on the Company’s consolidated statements of income. 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. This income is reflected in other income on the Company’s consolidated statements of income.

Other Income

Other non-interest income consists of loan swap fees, insurance commissions, and other miscellaneous revenue streams not meeting the criteria above. When the Company enters into an interest rate swap agreement, the Company may receive an additional one-time payment fee which is recognized as income when received. The Company receives monthly recurring commissions based on a percentage of premiums issued and revenue is recognized when received. Any residual miscellaneous fees are recognized as they occur, and therefore, the Company determined this consistent practice satisfies the obligation for performance.

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months and nine months ended September 30, 2023 and 2022, respectively:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Non-interest Income
In-scope of Topic 606
Service Charges on Deposit Accounts	$	284	$	241	$	731	$	706
Fees, Exchange, and Other Service Charges	98		101		269		282
Other income	13		8		90		97
Non-interest Income (in-scope of Topic 606)	395		350		1,090		1,085
Non-interest Income (out-scope of Topic 606)	(170)		225		(4,601)		1,759
Total Non-interest Income	$	225	$	575	$	(3,511)	$	2,844

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(Continued)

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2023 and 2022, the Company did not have any significant contract balances.

Contract Acquisition Costs

Under Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company did not capitalize any contract acquisition cost during the three months ended September 30, 2023 or 2022.

Note 12. Supplemental Cash Flow Information

Below is additional information regarding the Company’s cash flows for the nine months ended September 30, 2023 and 2022.


	For the Nine Months Ended September 30,
(In thousands)	2023		2022
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest on deposits and borrowed funds	$	36,421	$	8,158
Income taxes	2,360		6,283
Noncash investing and financing activities:
Unrealized (loss) on securities available-for-sale	(4,406)		(52,447)
Unrealized gain on interest rate swaps	6,627		4,932
Adoption of CECL accounting standard	(2,808)		—
Right-of-use assets obtained in the exchange for lease liabilities during the current period	397		522

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

The following presents management’s discussion and analysis of our consolidated financial condition at September 30, 2023 and December 31, 2022 and the results of our operations for the three and nine months ended September 30, 2023 and 2022. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. Results of operations for the three and nine month periods ended September 30, 2023 are not necessarily indicative of the results of operations for the balance of 2023, or for any other periods. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q, as well as other periodic reports filed with the U.S. Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of FVCBankcorp, Inc. and our subsidiary (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements.

The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

•general business and economic conditions, including higher inflation and its impacts, nationally or in the markets that the Company serves could adversely affect, among other things, real estate valuations, unemployment levels, the ability of businesses to remain viable, consumer and business confidence and consumer and business spending, which could lead to decreases in demand for loans, deposits, and other financial services that the Company provides and increases in loan delinquencies and defaults;

•the risk of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;

•changes in the Company’s liquidity requirements could be adversely affected by changes in its assets and liabilities;

•changes in the assumptions underlying the establishment of reserves for possible credit losses;

•changes in market conditions, specifically declines in the commercial and residential real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions we do business with;

•risks inherent in making loans such as repayment risks and fluctuating collateral values;

•the Company’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates used to value the securities in the portfolio;

•the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), inflation, interest rate, market and monetary fluctuations;

•declines in the Company's common stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to record a noncash impairment charge to earnings in future periods;

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•the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

•geopolitical conditions, including acts or threats of terrorism, or actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

•the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events;

•our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;

•changes in consumer spending and savings habits;

•technological and social media changes;

•changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

•the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

•the impact of changes in laws, regulations and policies affecting the real estate industry;

•the effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the U.S. Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setting bodies;

•the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

•the willingness of users to substitute competitors’ products and services for our products and services;

•the effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

•changes in the level of our nonperforming assets and charge-offs;

•our involvement, from time to time, in legal proceedings and examination and remedial actions by regulators; and

•potential exposure to fraud, negligence, computer theft and cyber-crime.

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2022, including those discussed in the section entitled “Risk Factors”. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

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Overview

We are a bank holding company headquartered in Fairfax County, Virginia. Our sole subsidiary, FVCbank (the “Bank”), was formed in November 2007 as a community-oriented, locally-owned and managed commercial bank under the laws of the Commonwealth of Virginia. The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship officers focus on attracting small and medium sized businesses, commercial real estate developers and builders, including government contractors, non-profit organizations, and professionals. Our approach to our market features competitive customized financial services offered to customers and prospects in a personal relationship context by seasoned professionals.

On October 12, 2018, we completed our acquisition of Colombo Bank ("Colombo"), which was headquartered in Rockville, Maryland, and added five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland.

On August 31, 2021, we announced that the Bank made an investment in Atlantic Coast Mortgage, LLC (“ACM”) for $20.4 million to obtain a 28.7% ownership interest in ACM. The ownership interest is subject to an earnback option of up to 3.7% over the next three years. In addition, the Bank provides a warehouse lending facility to ACM, which includes a construction-to-permanent financing line, and has developed portfolio mortgage products to diversify our held for investment loan portfolio.

On December 15, 2022, the Company announced that the Board of Directors approved a five-for-four split of the Company's common stock in the form of a 25% stock dividend for shareholders of record on January 9, 2023, payable on January 31, 2023. Earnings per share and all other per share information reflected herein have been adjusted for the five-for-four split of the Company's common stock for comparative purposes.

Net interest income is our primary source of revenue. We define revenue as net interest income plus non-interest income. We manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely. In addition to managing interest rate risk, we also analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, non-interest income is a complementary source of revenue for us and includes, among other things, service charges on deposits and loans, income from minority membership interest in ACM, merchant services fee income, insurance commission income, income from bank owned life insurance (“BOLI”), and gains and losses on sales of investment securities available-for-sale.

Critical Accounting Policies

General

The accounting principles we apply under U.S. generally accepted accounting principles (“GAAP”) are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates.

The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for credit losses - loans & reserve for unfunded commitments, allowance for credit losses - securities, and fair value measurements.

Allowance for Credit Losses - Loans & Unfunded Commitments

We maintain the allowance for credit losses at a level that represents management’s best estimate of expected losses in our loan portfolio. We adopted the provisions of the current expected credit losses ("CECL") accounting standard as of January 1, 2023 in accordance with the required implementation date and recorded the impact of the adoption to retained earnings, net of deferred income taxes, as required by the standard. Prior to the adoption of CECL, we utilized an incurred loss model to derive our best estimate of the allowance for credit losses.

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Accounting Standards Codification ("ASC") 326 requires that an estimate of CECL be immediately recognized and reevaluated over the contractual life of the financial asset. The allowance for credit losses ("ACL") is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loan portfolio. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries are recorded to the extent they do not exceed the aggregate of amounts previously and expected to be charged-off.

Reserves on loans that do not share risk characteristics are evaluated on an individual basis. Nonaccrual loans are specifically reviewed for loss potential and when deemed appropriate are assigned a reserve based on an individual evaluation. The remainder of the portfolio, representing all loans not evaluated individually for impairment, is segmented based on call report code and processed through a cash flow valuation model. In particular, loan-level probability of default ("PD") and severity (also referred to as loss given default ("LGD")) is applied to derive a baseline expected loss as of the valuation date. These expected default and severity rates, which are regression-derived and based on peer historical loan-level performance data, are calibrated to incorporate our reasonable and supportable forecast of future losses as well as any necessary qualitative adjustments.

Typically, financial institutions use their historical loss experience and trends in losses for each loan segment which are then adjusted for portfolio trends and economic and environmental factors in determining the allowance for credit losses. Since the Bank’s inception in 2007, we have experienced minimal loss history within our loan portfolio. Due to the fact that limited internal loss history exists to generate statistical significance, we determined it was most prudent to rely on peer data when deriving our best estimate of PD and LGD. As part of our estimation process, we will continue to assess the reasonableness of the data, assumptions, and model methodology utilized to derive our allowance for credit losses.

For each of the modeled loan segments, we generate cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, PD rates, and LGD rates. The modeling of expected prepayment speeds is based on internal loan-level historical data. For our cash flow model, we utilize national unemployment for reasonable and supportable forecasting of expected default. To further adjust the ACL for expected losses not already within the quantitative component of the calculation, we may consider qualitative factors as prescribed in ASC 326.

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. We record a reserve for unfunded commitments on off-balance sheet credit exposures through a charge to provision for credit loss expense in our Consolidated Statement of Income. The reserve for unfunded commitments is estimated by call report code segmentation as of the valuation date under the CECL model using the same methodologies as portfolio loans taking utilization rates into consideration. The reserve for unfunded commitments is reflected as a liability on our Consolidated Balance Sheet.

While our methodology in establishing the ACL attributes portions of a combined reserve to multiple elements, we believe that the combined allowance of credit losses (which is inclusive of the reserve for unfunded commitments) represents the most appropriate coverage metric for loss absorption purposes.

Our methodology utilized in the estimation of the ACL, which is performed at least quarterly, is designed to be dynamic and responsive to changes in our loan portfolio credit quality, composition, and forecasted economic conditions. The review of the reasonableness and appropriateness of the ACL is reviewed by the CECL Committee for approval as of the valuation date. Additionally, information is provided to the Board of Directors on a quarterly basis along with our consolidated financial statements.

Credit losses are an inherent part of our business and, although we believe the methodologies for determining the ACL and the current level of the allowance and reserve on unfunded commitments are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would be recorded, and would negatively impact earnings.

Collateral Dependent Financial Assets

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Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value ("NPV") from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

Allowance for Credit Losses - Securities

We evaluate our available-for-sale and held-to-maturity debt securities portfolios for expected credit losses as of the valuation date under ASC 326. For available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell, the security before recovery of our amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income during the current period. For available-for-sale debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other driving factors. If our assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded for the credit loss (which represents the difference between the expected cash flows and amortized cost basis), limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.

The entire amount of an impairment loss is recognized in earnings only when: (1) we intend to sell the security; or (2) it is more likely than not that we will have to sell the security before recovery of our amortized cost basis; or (3) we do not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders' equity as comprehensive income, net of deferred taxes.

Changes in the ACL are recorded as a provision for (or reversal of) credit losses. Losses are charged against the ACL when we believe the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an ACL is recognized in other comprehensive income as a noncredit-related impairment.

As part of our estimation process, we have made a policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheet. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an ACL against accrued interest receivable. This approach is consistent with our nonaccrual policy implemented for our loan portfolio.

We separately evaluate our held-to-maturity investment securities for any credit losses. If we determine that a security indicates evidence of deteriorated credit quality, the security is individually-evaluated and a discounted cash flow analysis is performed and compared to the amortized cost basis. As of September 30, 2023, we had one security classified as held-to-maturity with an amortized cost basis of $264 thousand with the remainder of the securities portfolio held as available-for-sale.

Fair Value Measurements

We determine the fair values of financial instruments based on the 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. Our investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. Depending on the availability of observable inputs and prices, different

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valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

LIBOR and Other Benchmark Rates

We previously had certain loans, interest rate swap agreements, investment securities, and debt obligations with interest rates indexed to the London Interbank Offered Rate ("LIBOR"). The administrator of LIBOR announced that the most commonly used U.S. dollar LIBOR settings would cease to be published or cease to be representative after June 30, 2023. Central banks and regulators around the world have commissioned working groups to find suitable replacements for LIBOR and to implement financial benchmark reforms more generally. There continues to be uncertainty regarding the use of alternative reference rates ("ARRs"), which may cause disruptions in a variety of markets, as well as adversely impact our business, operations and financial results.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on Secured Overnight Funding Rate for contracts governed by U.S. law that have no or ineffective fallbacks. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates, or the value of LIBOR-based securities will not be adversely affected.

To facilitate an orderly transition from interbank offered rates and other benchmark rates to ARRs, we established an enterprise-wide initiative led by senior management. The objective of this initiative was to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs. As of September 30, 2023, we no longer have any financial instruments that are indexed to LIBOR.

Results of Operations— Three and Nine Months Ended September 30, 2023 and 2022

Overview

We recorded net income of $4.0 million, or $0.22 diluted earnings per share, for the three months ended September 30, 2023, compared to net income of $7.0 million, or $0.38 per diluted earnings per share, for the three months ended September 30, 2022, a decrease of $3.0 million, or 43%. Net interest income decreased $4.2 million, or 24%, to $13.3 million for the three months ended September 30, 2023, compared to $17.5 million for the same period of 2022. A release of reserves for credit losses of $729 thousand was recorded for the three months ended September 30, 2023, compared to a provision for credit losses of $365 thousand for the same period of 2022. Noninterest income was $225 thousand and $575 thousand for the three months ended September 30, 2023 and 2022, respectively. Noninterest expense was $9.0 million for the three months ended September 30, 2023, compared to $8.6 million for the three months ended September 30, 2022, an increase of $449 thousand, or 5%.

The annualized return on average assets for the three months ended September 30, 2023 and 2022 was 0.70% and 1.32%, respectively. The annualized return on average equity for the three months ended September 30, 2023 and 2022 was 7.57% and 13.87%, respectively.

For the nine months ended September 30, 2023, we recorded net income of $8.9 million, or $0.49 diluted earnings per share, compared to net income of $20.1 million, or $1.09 diluted earnings per share for the nine months ended September 30, 2022. Net income for the nine months ended September 30, 2023 was impacted by an after-tax loss totaling $3.6 million from the February sale of available-for-sale investment securities. Additionally, net income for the nine months ended September 30, 2023 included our portion of losses from our membership interest in ACM, which was $1.4 million, net of tax, compared to income of $754 thousand, net of tax, for the nine months ended September 30, 2022. Net interest income for the nine months ended September 30, 2023 was $41.7 million, compared to $49.4 million for the same period in 2022, a decrease of $7.6 million, or 15%. Provision for credit losses for the nine months ended September 30, 2023 was $132 thousand, compared to $1.9 million for the same period of 2022. Non-interest income was recorded as a loss of $3.5 million compared to income of $2.8 million for the nine months ended September 30, 2023 and 2022, respectively. Noninterest expense was $27.3 million and $25.3 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $2.0 million, or 8%.

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Commercial bank operating earnings, which exclude the losses on the above-noted securities sales, and 2022 merger-related expenses, all net of tax, for the three months ended September 30, 2023 and September 30, 2022 were $4.0 million and $7.0 million, respectively, a decrease of $3.0 million. For the nine months ended September 30, 2023 and September 30, 2022, commercial bank operating earnings were $12.5 million and $20.2 million, respectively. Diluted commercial bank operating earnings per share for the three months ended September 30, 2023 and September 30, 2022 was $0.23 and $0.40 respectively. For the nine months ended September 30, 2023 and 2022, diluted commercial bank operating earnings per share was $0.69 and $1.09, respectively. We consider commercial bank operating earnings a useful financial measure of our operating performance. Commercial bank operating earnings is determined by methods other than in accordance with GAAP. A reconciliation of non-GAAP financial measures to their most comparable financial measure in accordance with GAAP can be found in the tables below.

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Reconciliation of Net Income (GAAP) to Commercial Bank Operating Earnings (Non-GAAP)

For the Three and Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands, except per share data)


	For the Three Months Ended September 30,
	2023			2022
Net income (as reported)	$	4,039		$	7,043
Add: Merger and acquisition expense	—			—
Add: Loss on sale of available-for-sale investment securities	—			—
(Subtract) Add: (Provision) Benefit for income taxes associated with non-GAAP adjustments	—			—
Non-GAAP Commercial Bank Operating Earnings, excluding above items	$	4,039		$	7,043
Earnings per share - basic (GAAP net income)	$	0.23		$	0.40
Earnings per share - Non-GAAP expenses including provision for income taxes	—			—
Earnings per share - basic (non-GAAP core bank operating earnings)	$	0.23		$	0.40
Earnings per share - diluted (GAAP net income)	$	0.22		$	0.38
Earnings per share - Non-GAAP expenses including provision for income taxes	$	—		—
Earnings per share - diluted (non-GAAP core bank operating earnings)	$	0.22		$	0.38
Return on average assets (GAAP net income)	0.70		%	1.32		%
Non-GAAP expenses including provision for income taxes	—		%	—		%
Return on average assets (non-GAAP core bank operating earnings)	0.70		%	1.32		%
Return on average equity (GAAP net income)	7.57		%	13.87		%
Non-GAAP expenses including provision for income taxes	—		%	—		%
Return on average equity (non-GAAP core bank operating earnings)	7.57		%	13.87		%

	For the Nine Months Ended September 30,
	2023			2022
Net income (as reported)	$	8,892		$	20,080
Add: Merger and acquisition expense	—			125
Add: Loss on sale of available-for-sale investment securities	4,592			—
(Subtract) Add: (Provision) Benefit for income taxes associated with non-GAAP adjustments	(1,010)			(28)
Non-GAAP Commercial Bank Operating Earnings, excluding above items	$	12,474		$	20,177
Earnings per share - basic (GAAP net income)	$	0.50		$	1.15
Earnings per share - Non-GAAP expenses including provision for income taxes	0.20			0.01
Earnings per share - basic (non-GAAP core bank operating earnings)	$	0.70		$	1.16
Earnings per share - diluted (GAAP net income)	$	0.49		$	1.09
Earnings per share - Non-GAAP expenses including provision for income taxes	0.20			—
Earnings per share - diluted (non-GAAP core bank operating earnings)	$	0.69		$	1.09
Return on average assets (GAAP net income)	0.52		%	1.28		%
Non-GAAP expenses including provision for income taxes	0.21		%	—		%
Return on average assets (non-GAAP core bank operating earnings)	0.73		%	1.28		%
Return on average equity (GAAP net income)	5.68		%	13.14		%
Non-GAAP expenses including provision for income taxes	2.29		%	0.06		%
Return on average equity (non-GAAP core bank operating earnings)	7.97		%	13.20		%

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Net Interest Income/Margin

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The following table presents average balance information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended September 30, 2023 and 2022.

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Average Balances and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

For the Three Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	2023							2022
	Average Balance			Interest Income/Expense		Average Yield/ Rate		Average Balance			Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Loans (1):
Commercial real estate	$	1,106,429	$	$	13,586	4.91	%	$	1,003,052	$	$	11,195	4.46	%
Commercial and industrial	235,858			4,351		7.38	%	212,997			2,786		5.23	%
Commercial construction	154,569			2,780		7.19	%	156,429			2,163		5.53	%
Consumer residential	366,614			4,410		4.81	%	285,588			3,021		4.23	%

Consumer nonresidential	5,349			116		8.67	%	9,455			179		7.57	%
Total loans (1)	$	1,868,819		$	25,243	5.40	%	1,667,521			19,344		4.64	%

Investment securities (2)	$	276,002		$	1,220	1.77	%	$	341,995		$	1,485	1.74	%
Restricted stock	5,380			89		6.63	%	7,412			93		5.02	%
Deposits at other financial institutions and federal funds sold	64,722			876		5.37	%	40,814			171		1.66	%

Total interest-earning assets and interest income	$	2,214,923		$	27,428	4.95	%	$	2,057,742		$	21,093	4.10	%

Noninterest-earning assets:
Cash and due from banks	$	6,721						$	4,958
Premises and equipment, net	1,083							1,344
Accrued interest and other assets	99,576							92,985
Allowance for credit losses	(19,432)							(15,072)
Total assets	$	2,302,870						$	2,141,957

Liabilities and Stockholders' Equity
Interest - bearing liabilities:
Interest - bearing deposits:

Interest checking	$	641,746	$	$	5,134	3.17	%	$	737,907	$	$	1,320	0.71	%
Savings and money markets	240,504			1,544		2.55	%	314,105			727		0.92	%
Time deposits	359,217			3,550		3.92	%	213,845			752		1.41	%
Wholesale deposits	366,667			3,571		3.86	%	41,957			93		0.88	%
Total interest - bearing deposits	$	1,608,134		$	13,799	3.40	%	$	1,307,814		$	2,892	0.88	%

Other borrowed funds	$	9,141		$	35	1.53	%	$	81,902		$	415	2.01	%
Subordinated notes, net of issuance costs	19,597			258		5.21	%	19,542			258		5.23	%

Total interest-bearing liabilities and interest expense	$	1,636,872		$	14,092	3.42	%	$	1,409,258		$	3,565	1.01	%

Noninterest-bearing liabilities:
Demand deposits	$	425,807						$	506,700
Other liabilities	26,681							22,910
Common stockholders' equity	213,510							203,089
Total liabilities and stockholders' equity	$	2,302,870						$	2,141,957

Net interest income and net interest margin				$	13,336	2.39	%				$	17,528	3.38	%

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(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented. Net loan fees and late charges included in interest income on loans totaled $612 thousand and $917 thousand for the three months ended September 30, 2023 and 2022, respectively.

(2)The average yields for investment securities are reported on a fully taxable equivalent basis at an effective rate of 22% for September 30, 2023 and 21% for September 30, 2022.

The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates.

The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities for the three months ended September 30, 2023.

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Rate and Volume Analysis

For the Three Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	2023 Compared to 2022
	Average Volume		Average Rate		Increase (Decrease)
Interest income:

Loans (1):
Commercial real estate	$	1,154	$	1,237	$	2,391
Commercial and industrial	299		1,266		1,565
Commercial construction	(26)		643		617
Consumer residential	857		532		1,389
Consumer nonresidential	(78)		15		(63)
Total loans (1)	2,206		3,693		5,899

Investment securities (2)	(286)		21		(265)
Restricted stock	(26)		22		(4)
Deposits at other financial institutions and federal funds sold	117		588		705

Total interest income	2,011		4,324		6,335

Interest expense:

Interest - bearing deposits:
Interest checking	(156)		3,970		3,814
Savings and money markets	(170)		987		817
Time deposits	520		2,278		2,798
Wholesale deposits	720		2,758		3,478
Total interest - bearing deposits	914		9,993		10,907

Other borrowed funds	(481)		101		(380)
Total interest expense	433		10,094		10,527

Net interest income	$	1,578	$	(5,770)	$	(4,192)

(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented.

(2)The average yields for investment securities are reported on a fully taxable equivalent basis at an effective rate of 22% for September 30, 2023 and 21% for September 30, 2022.

Net interest income totaled $13.3 million, a decrease of $4.2 million, or 24%, for three months ended September 30, 2023, compared to September 30, 2022. The decrease in net interest income is primarily due to an increase in funding costs, which have increased precipitously as a result of Federal Reserve monetary policy, coupled with the need to meet intense competition from market area banks, brokerages, other financial institutions and the U.S. Treasury.

Average earning assets increased $157.2 million to $2.21 billion during the third quarter of 2023 as compared to $2.06 billion for the same period of 2022, primarily related to average growth in our loan portfolio of $201.3 million for the third quarter of 2023 as compared to the same period of 2022. This growth was offset by a decrease in average investment securities of $68.0 million for the quarter ended September 30, 2023 as compared to the year ago quarter for

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2022, a result of the securities sale executed during the first quarter of 2023 and the decrease in the market value of the securities portfolio during the past year.

Interest income for the three months ended September 30, 2023 increased $6.3 million to $27.4 million from $21.1 million for the three months ended September 30, 2022. Loan interest income during the third quarter of 2023 increased $5.9 million as compared to the year ago quarter due to both loan growth and an increase in yields earned on the portfolio. Income from investment securities decreased $264 thousand for the three months ended September 30, 2023 compared to the same period of 2022, primarily as a result of a decrease in volume due to the securities sale. This decrease was offset by an increase of $705 thousand in interest income from deposits at other financial institutions for the third quarter of 2023 compared to the third quarter of 2022, which was primarily due to the increase in rates earned on those funds.

Total average interest-bearing deposits increased $300.3 million to $1.61 billion for the three months ended September 30, 2023 compared to $1.31 billion for the three months ended September 30, 2022. Average noninterest-bearing deposits decreased $80.9 million to $425.8 million for the three months ended September 30, 2023 compared to $506.7 million for the same period in 2022. Average wholesale deposits increased $324.7 million to $366.7 million for the three months ended September 30, 2023 compared to $42.0 million for the same period in 2022. Average other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, decreased $72.8 million to $9.1 million at September 30, 2023 compared to $81.9 million at September 30, 2022

Interest expense for the three months ended September 30, 2023 increased $10.5 million to $14.1 million from $3.6 million for the three months ended September 30, 2022. Deposit interest expense for the third quarter of 2023 increased $10.9 million compared to the year ago quarter primarily as a result of increased rates, which contributed $10.0 million to the increase.

Our net interest margin, on a tax equivalent basis, for the three months ended September 30, 2023 and 2022 was 2.39% and 3.38%, respectively. The decrease in our net interest margin was primarily a result of the increase in the cost of our interest-bearing liabilities during 2023 compared to 2022, a result of the rising rate environment. The yield on interest-earning assets increased 85 basis points to 4.95% for the three months ended September 30, 2023, compared to 4.10% for the same period of 2022. The average yield of the loan portfolio for the three month periods ended September 30, 2023 and 2022 was 5.40% and 4.64%, respectively, an increase of 76 basis points. The cost of interest-bearing deposits increased 252 basis points to 3.40% for the three months ended September 30, 2023, compared to 0.88% for the same period of 2022, which was primarily attributable to the repricing of our interest-bearing deposits due to higher interest rates. Cost of deposits (which includes noninterest-bearing deposits) was 2.36% for the three months ended September 30, 2023 compared to 0.64% for the same three month period of 2022. Cost of other borrowed funds increased 141 basis points to 4.04% for the three months ended September 30, 2023 compared to 2.63% for the three months ended September 30, 2022.

Average balances of nonperforming loans, which consist of nonaccrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2023 and 2022.

Net interest income, on a tax equivalent basis, is a non-GAAP financial measure that we believe provides a more accurate picture of the interest margin for comparative purposes. To derive our net interest margin on a tax equivalent basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use our statutory tax rates for the periods presented. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.

The following table provides a reconciliation of our GAAP net interest income to our tax equivalent net interest income.

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Supplemental Financial Data and Reconciliations to GAAP Financial Measures

For the Three and Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
GAAP Financial Measurements:
Interest income:
Loans	$	25,243	$	19,344	$	73,625	$	52,194
Deposits at other financial institutions and federal funds sold	876		171		2,022		417
Investment securities available‑for‑sale	1,217		1,481		3,852		4,471
Investment securities held‑to‑maturity	2		2		4		5
Dividend on Restricted stock	89		93		461		253
Total interest income	27,427		21,091		79,964		57,340
Interest expense:
Interest‑bearing deposits	$	13,799	$	2,892	$	34,592	$	6,619
Other borrowed funds	293		673		3,635		1,357
Total interest expense	$	14,092	$	3,565	$	38,227	$	7,976
Net interest income	$	13,335	$	17,526	$	41,737	$	49,364
Non‑GAAP Financial Measurements:
Add: Tax benefit on tax‑exempt interest income - securities	1		2		4		8
Total tax benefit on tax-exempt interest income	$	1	$	2	$	4	$	8
Tax equivalent net interest income	$	13,336	$	17,528	$	41,741	$	49,372

The following table presents average balance information, interest income, interest expense and the corresponding average yields earned and rates paid for the nine months ended September 30, 2023 and 2022.

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

For the Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	2023								2022
	Average Balance			Interest Income/Expense		Average Yield/ Rate			Average Balance			Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Loans (1):
Commercial real estate	$	1,107,935	$	$	39,807	4.79		%	$	952,824	$	$	30,856	4.32		%
Commercial and industrial	228,189			12,400		7.25		%	207,399			7,387		4.75		%
Commercial construction	154,862			8,233		7.09		%	170,483			6,379		4.99		%
Consumer residential	358,960			12,767		4.74		%	234,959			7,050		4.00		%

Consumer nonresidential	6,062			418		9.20		%	9,373			522		7.43		%
Total loans (1)	$	1,856,008		$	73,625	5.29	%	%	$	1,575,038		$	52,194	4.42	%	%

Investment securities (2)	$	289,735		$	3,861	1.78		%	$	348,245		$	4,484	1.72		%
Restricted stock	9,343			460		6.56		%	6,533			253		5.16		%
Deposits at other financial institutions and federal funds sold	52,711			2,022		5.13		%	87,176			417		0.64		%

Total interest-earning assets and interest income	$	2,207,797		$	79,968	4.83	%	%	$	2,016,992		$	57,348	3.79	%	%

Noninterest-earning assets:
Cash and due from banks	$	6,159							$	6,811
Premises and equipment, net	1,147								1,452
Accrued interest and other assets	96,985								88,096
Allowance for credit losses	(18,523)								(14,349)
Total assets	$	2,293,565							$	2,099,002

Liabilities and Stockholders' Equity
Interest - bearing liabilities:
Interest - bearing deposits:

Interest checking	$	564,765	$	$	11,595	2.74		%	$	743,193	$	$	3,323	0.60		%
Savings and money markets	259,308			4,307		2.22		%	319,871			1,522		0.64		%
Time deposits	351,762			9,292		3.53		%	192,099			1,640		1.14		%
Wholesale deposits	332,217			9,398		3.78		%	37,344			134		0.48		%
Total interest - bearing deposits	$	1,508,052		$	34,592	3.07	%	%	$	1,292,507		$	6,619	0.68	%	%

Other borrowed funds	98,378			2,862		3.89		%	44,982			584		1.73		%

Subordinated notes, net of issuance costs	19,583			773		5.27			19,529			773		5.29
Total interest-bearing liabilities and interest expense	$	1,626,013		$	38,227	3.14	%	%	$	1,357,018		$	7,976	0.78	%	%

Noninterest-bearing liabilities:
Non-interest bearing deposits	$	433,335							$	514,238
Other liabilities	25,413								23,990
Common stockholders' equity	208,804								203,756
Total liabilities and stockholders' equity	$	2,293,565							$	2,099,002

Net interest income and net interest margin				$	41,741	2.53		%				$	49,372	3.27		%

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(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented. Net loan fees and late charges included in interest income on loans totaled $1.5 million and $2.5 million for the nine months ended September 30, 2023 and 2022, respectively.

(2)The average yields for investment securities are reported on a fully taxable equivalent basis at an effective rate of 22% for September 30, 2023 and 21% for September 30, 2022.

The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates.

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Rate and Volume Analysis

For the Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	2023 Compared to 2022
	Average Volume		Average Rate		Increase (Decrease)
Interest income:

Loans (1):
Commercial real estate	$	5,023	$	3,928	$	8,951
Commercial and industrial	740		4,273		5,013
Commercial construction	(584)		2,438		1,854
Consumer residential	3,721		1,996		5,717
Consumer nonresidential	(185)		81		(104)
Total loans (1)	8,715		12,716		21,431

Investment securities (2)	(753)		130		(623)
Restricted stock	113		94		207
Deposits at other financial institutions and federal funds sold	(165)		1,770		1,605

Total interest income	7,910		14,710		22,620

Interest expense:

Interest - bearing deposits:
Interest checking	(798)		9,070		8,272
Savings and money markets	(288)		3,073		2,785
Time deposits	1,363		6,289		7,652
Wholesale deposits	1,058		8,206		9,264
Total interest - bearing deposits	1,335		26,638		27,973

Other borrowed funds	1,124		1,154		2,278
Total interest expense	2,459		27,792		30,251

Net interest income	$	5,451	$	(13,082)	$	(7,631)

(1)Nonaccrual loans are included in average balances and do not have a material effect on the average yield. Interest income on nonaccruing loans was not material for the periods presented.

(2)The average yields for investment securities are reported on a fully taxable equivalent basis at an effective rate of 22% for September 30, 2023 and 21% for September 30, 2022

Net interest income totaled $13.3 million, a decrease of $4.2 million, or 24%, for three months ended September 30, 2023, compared to September 30, 2022. Net interest income for the nine months ended September 30, 2023 and September 30, 2022, was $41.7 million and $49.4 million, respectively, a decrease of $7.6 million, or 15%. The decrease in net interest income is again primarily due to an increase in funding costs, which have increased significantly over the last 15 months.

Average earning assets increased $194.6 million to $2.30 billion during the nine months ended September 30, 2023 as compared to $2.10 billion for the same period of 2022, primarily related to average growth in our loan portfolio of $281.0 million for the nine months of 2023 as compared to the same period of 2022. This growth was offset by a decrease

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in average investment securities of $55.7 million for the year-to-date period ended September 30, 2023 as compared to the same year ago period for 2022, a result of the securities sale executed during the first quarter of 2023 and the decrease in the market value of the securities portfolio during the past year. The average balance for deposits at other financial institutions also decreased $34.5 million for the nine months ended September 30, 2023 compared to the same period of 2022, as excess liquidity was used to fund loan originations.

Interest income for the nine months ended September 30, 2023 increased $22.6 million to $80.0 million from $57.3 million for the nine months ended September 30, 2022. Loan interest income during the first nine months of 2023 increased $21.4 million as compared to the year ago nine month period as a result of both loan growth and an increase in yields earned on the portfolio. Income from investment securities decreased $416 thousand for the nine months ended September 30, 2023 compared to the same period of 2022, primarily as a result of a decrease in volume due to the securities sale. This decrease was offset by an increase of $1.6 million in interest income from deposits at other financial institutions for the first nine months of 2023 compared to the same period of 2022, which was primarily due to the increase in rates earned on those funds.

Total average interest-bearing deposits increased $215.5 million to $1.51 billion for the nine months ended September 30, 2023 compared to $1.29 billion for the nine months ended September 30, 2022. Average noninterest-bearing deposits decreased $80.9 million to $433.3 million for the nine months ended September 30, 2023 compared to $514.2 million for the same period of 2022. Average wholesale deposits increased $294.9 million to $332.2 million for the nine months ended September 30, 2023 compared to $37.3 million for the same period in 2022. Average other borrowed funds, which include federal funds purchased and FHLB advances, increased $53.4 million to $98.4 million at September 30, 2023 compared to $45.0 million at September 30, 2022.

Interest expense for the nine months ended September 30, 2023 increased $30.3 million to $38.2 million from $8.0 million for the nine months ended September 30, 2022. Deposit interest expense for the year-to-date period of 2023 increased $28.0 million compared to the year ago nine month period primarily as a result of increased rates, which contributed $27.8 million to the increase.

Our net interest margin, on a tax equivalent basis, for the nine months ended September 30, 2023 and 2022 was 2.53% and 3.27%, respectively. The decrease in our net interest margin was primarily a result of the increase in the cost of our interest-bearing liabilities during 2023 compared to 2022, a result of the rising rate environment. The yield on interest-earning assets increased 87 basis points to 4.83% for the nine months ended September 30, 2023, compared to 3.79% for the same period of 2022. The average yield of the loan portfolio for the nine month periods ended September 30, 2023 and 2022 was 5.29% and 4.42%, respectively, an increase of 87 basis points. The cost of interest-bearing deposits increased 239 basis points to 3.07% for the nine months ended September 30, 2023, compared to 0.68% for the same period of 2022, which was primarily attributable to the repricing of our interest-bearing deposits due to higher interest rates. Cost of deposits (which includes noninterest-bearing deposits) was 2.09% for the nine months ended September 30, 2023 compared to 0.49% for the same nine month period of 2022. Cost of other borrowed funds increased 216 basis points to 3.89% for the nine months ended September 30, 2023 compared to 1.73% for the nine months ended September 30, 2022.

Provision Expense and Allowance for Credit Losses

Our policy is to maintain the allowance for credit losses at a level that represents our best estimate of expected losses in the loan portfolio as of the valuation date. Both the amount of the provision and the level of the allowance for credit losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers. We adopted CECL as of January 1, 2023 in accordance with the required implementation date and recorded the impact of the adoption to retained earnings, net of deferred income taxes, as required by the standard. Note that prior to the adoption of CECL, we utilized an incurred loss model to derive our best estimate of the allowance for loan losses.

As a result of the adoption of CECL, reserves for credit losses increased $3.7 million and consisted of increases to the allowance for credit losses on loans as well as an increase in reserves for unfunded commitments (referred to as combined ACL herein). For the third quarter and first nine months of 2023, subsequent to the aforementioned adoption, the Company released $729 thousand of its allowance for credit losses and recorded a provision for credit losses of $132 thousand, respectively, compared to a provision of $365 thousand for the three months ended September 30, 2022 and a provision of $1.9 million for the nine months ended September 30, 2022. The Company continues to lend to well-established and relationship-driven borrowers and has a proven track record of low historical credit losses.

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We continue to maintain our disciplined credit guidelines during the current rising rate environment. We proactively monitor the impact of rising interest rates on our adjustable loans as the industry navigates through this economic cycle of increased inflation and higher interest rates. Credit quality metrics remained strong for the third quarter of 2023 with reserves on the individually evaluated portfolio decreasing to $72 thousand as of September 30, 2023, down from $86 thousand at December 31, 2022, and down from $164 thousand at September 30, 2022, a result of valuation adjustments. We recorded net recoveries of $7 thousand during the third quarter of 2023 and net charge-offs of $9 thousand for same period of 2022. For the nine months ended September 30, 2023 and 2022, we recorded net charge-offs of $326 thousand and $416 thousand, respectively.

See “Asset Quality” below for additional information on the credit quality of the loan portfolio. The allowance for credit losses at September 30, 2023 was $18.8 million compared to $16.0 million at December 31, 2022. Our allowance for credit losses on loans as a percent of total loans, net of deferred fees and costs, was 1.06% at September 30, 2023, compared to 0.87% at December 31, 2022.

Noninterest Income

The following table provides detail for non-interest income for the three and nine months ended September 30, 2023 and 2022.

Non-Interest Income

For the Three and Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	For the Three Months Ended September 30,				Change from Prior Year
	2023		2022		Amount		Percent
Service charges on deposit accounts	$	284	$	241	$	43	17.8	%
Fees on loans	107		32		75		234.4	%
BOLI income	373		352		21		6.0	%
(Loss) Income from minority membership interest	(650)		(160)		(490)		306.3	%
Other fee income	111		110		1		0.9	%
Total non‑interest income	$	225	$	575	$	(350)	(60.9)	%

	For the Nine Months Ended September 30,				Change from Prior Year
	2023		2022		Amount		Percent
Service charges on deposit accounts	$	731	$	706	$	25	3.5	%
Fees on loans	352		159		193		121.4	%
BOLI income	1,067		844		223		26.4	%
(Loss) Income from minority membership interest	(1,431)		754		(2,185)		(289.8)	%
Loss on sale of available-for-sale securities	(4,592)		—		(4,592)		(100.0)	%
Other fee income	362		381		(19)		(5.0)	%
Total non‑interest income (loss)	$	(3,511)	$	2,844	$	(6,355)	(223.5)	%

Noninterest income includes service charges on deposits and loans, loan swap fee income, income from our membership interest in ACM and other investments, income from our BOLI policies, and other fee income, and continues to supplement our operating results. Non-interest income for the three months ended September 30, 2023 was $225 thousand compared to $575 thousand for the three month ended September 30, 2022. For the nine months ended September 30, 2023, we recorded noninterest income as a loss of $3.5 million compared to income of $2.8 million for same period in 2022.

Fee income from loans was $107 thousand for the three months ended September 30, 2023, compared to $32 thousand for the three months ended September 30, 2022, an increase of $75 thousand, primarily due to an increase in

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back-to-back loan swap fee income. Service charges on deposit accounts and other fee income totaled $284 thousand for the three months ended September 30, 2023, compared to $241 thousand for the same period in 2022. Loss from our minority membership interest in ACM was $650 thousand for the three months ended September 30, 2023 compared to $160 thousand for the same period of 2022. Income from BOLI increased $21 thousand to $373 thousand for the three months ended September 30, 2023, compared to $352 thousand for the same period of 2022.

Non-interest income for the nine months ended September 30, 2023 was a loss of $3.5 million compared to income of $2.8 million for same period in 2022. The decrease in non-interest income is primarily attributable to a loss on the sale of available-for-sale securities of $4.6 million resulting from the balance sheet repositioning completed in the first quarter of 2023. Additionally, we recorded a loss of $1.4 million related to the Bank's minority investment in ACM during the first nine months of 2023. Fee income from loans was $352 thousand for the nine months ended September 30, 2023, compared to $159 thousand for the nine months ended September 30, 2022, an increase of $193 thousand, primarily due to an increase in loan extension fees and back-to-back loan swap fee income. Service charges on deposit accounts and other fee income totaled $731 thousand for the nine months ended September 30, 2023, compared to $706 thousand for the same period in 2022. Income from BOLI increased $223 thousand to $1.1 million for the nine months ended September 30, 2023, compared to $844 thousand for the same period of 2022.

Non-interest Expense

The following table reflects the components of non-interest expense for the three and nine months ended September 30, 2023 and 2022.

Non-Interest Expense

For The Three and Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2023		2022		Change from Prior Year				2023		2022		Change from Prior Year
					Amount		Percent						Amount		Percent
Salaries and employee benefits	$	5,267	$	5,202	$	65	1.2	%	$	15,374	$	15,094	$	280	1.9	%
Occupancy expense	547		417		130		31.2	%	1,785		1,570		215		13.6	%
Internet banking and software expense	660		432		228		52.8	%	1,804		1,231		573		46.5	%
Data processing and network administration	601		595		6		1.0	%	1,834		1,688		146		8.6	%
State franchise taxes	584		509		75		14.8	%	1,753		1,527		226		14.8	%
Audit, legal and consulting fees	213		235		(22)		(9.4)	%	644		884		(240)		(27.0)	%
Merger and acquisition expense	—		—		—		—	%	—		125		(125)		(100.0)	%
Loan related expenses	(189)		242		(431)		178.1	%	199		230		(31)		13.5	%
FDIC insurance	431		155		276		178.1	%	968		515		453		88.0	%
Marketing, business development and advertising	167		93		74		79.6	%	527		270		257		95.2	%
Director fees	180		168		12		7.1	%	540		503		37		7.4	%
Postage, courier and telephone	39		33		6		18.2	%	134		124		10		8.1	%
Core deposit intangible amortization	50		97		(47)		(48.5)	%	157		298		(141)		(47.3)	%
Tax credit amortization	32		—		32		100.0	%	95		—		95		100.0	%
Other operating expenses	466		421		45		10.7	%	1,447		1,199		248		20.7	%
Total non‑interest expense	$	9,048	$	8,599	$	449	5.2	%	$	27,261	$	25,258	$	2,003	7.9	%

Non-interest expense includes, among other things, salaries and benefits, occupancy and equipment costs, professional fees, data processing, insurance and miscellaneous expenses. Non-interest expense was $9.0 million and $8.6 million for the three month periods ended September 30, 2023 and 2022, respectively. Salaries and benefits expense was $5.3 million and $5.2 million for the third quarters of 2023 and 2022 respectively, an increase of $65 thousand, or 1.2%, which was primarily related to a decrease in salaries deferred related to loan origination activity totaling $211 thousand. Internet banking and software expense increased $228 thousand compared to the quarter ended September 30, 2022,

primarily as a result of enhanced customer software solutions. Federal Deposit Insurance Corporate ("FDIC") insurance premium expense increased $276 thousand for the three months ended September 30, 2023 compared to the same period of 2022, a result of the FDIC increasing the assessment rate to replenish its deposit insurance fund. Marketing expenses increased $74 thousand to $167 thousand for the three months ended September 30, 2023 compared to the same period of 2022, related to lower cost deposit gathering and branding efforts. Lastly, loan related expenses decreased $431 thousand during the quarter ended September 30, 2023 compared to the same period of 2022, as we received a recovery of legal expenses associated with a previous watchlist credit.

Non-interest expense was $27.3 million and $25.3 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $2.0 million. Salaries and benefits expense was $15.4 million and $15.1 million for the nine months ended September 30, 2023 and 2022 respectively, an increase of $280 thousand, or 1.9%. During the first quarter of 2023, we had staffing changes that are expected to result in annualized savings of approximately $1.0 million. Internet banking and software expense increased $573 thousand compared to the nine months ended September 30, 2022, primarily as a result of enhanced customer software solutions. FDIC insurance premium expense increased $453 thousand for the nine months ended September 30, 2023 compared to the same period of 2022, a result of the FDIC increasing the assessment rate to replenish its deposit insurance fund. Marketing expenses increased $257 thousand to $527 thousand for the nine months ended September 30, 2023 compared to the same period of 2022, related to higher deposit gathering and branding efforts.

Income Taxes

We recorded a provision for income taxes of $1.2 million for the three months ended September 30, 2023, compared to $2.1 million for the same period in 2022. The effective tax rate for each of the three months ended September 30, 2023 and 2022 was 22.4% and 20.0%, respectively. For the nine months ended September 30, 2023 and 2022, provision for income taxes was $1.9 million and $5.0 million, respectively. The effective tax rate for the nine months ended September 30, 2023 was 17.9% and for the comparable nine month period of 2022 was 19.8%. The effective tax rates for these year-to-date periods are less than the Company's combined federal and state statutory rate of 22.5% primarily because of discrete tax benefits recorded as a result of exercised nonqualified stock options during the aforementioned periods.

Discussion and Analysis of Financial Condition

Overview

Total assets were $2.31 billion at September 30, 2023 and December 31, 2022, respectively. Investment securities were $216.4 million at September 30, 2023, a decrease of $61.9 million, from $278.3 million at December 31, 2022, primarily as a result of the aforementioned sale of available-for-sale investment securities that occurred during the first quarter of 2023. Total deposits increased $257.9 million, or 9%, to $2.00 billion at September 30, 2023 compared to $1.83 billion at December 31, 2022. At September 30, 2023 and December 31, 2022, we had federal funds purchased totaling $0.0 and $30.0 million, respectively. The Bank had FHLB advances of $50.0 million and $235.0 million at September 30, 2023 and December 31, 2022, respectively. Subordinated debt, net of unamortized issuance costs, totaled $19.6 million at each of September 30, 2023 and December 31, 2022.

Loans Receivable, Net

Loans receivable, net of deferred fees, were $1.85 billion at September 30, 2023 and $1.84 billion at December 31, 2022, an increase of $9.1 million, or 0.3%. During the third quarter of 2023, new commercial loan originations totaled $18.4 million with a weighted average rate of 8.01% and repayments of loans and lines of credit totaled $26.0 million with a weighted average rate of 7.58%.

Commercial real estate loans totaled $1.10 billion at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, commercial real estate loans represented 59% of the Company's total gross loans receivable. Owner-occupied commercial real estate loans were $212.8 million at September 30, 2023 compared to $206.8 million at December 31, 2022. Nonowner-occupied commercial real estate loans were $884.9 million at September 30, 2023 compared to $893.2 million at December 31, 2022. Commercial construction loans totaled $154.6 million at September 30, 2023, an increase of $6.7 million, or 5%, from $147.9 million at December 31, 2022, and comprised 8% of total gross loans receivable. Of the $154.6 million in construction loans at September 30, 2023, $31.5 million are collateralized by

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land and only $2.7 million are lot acquisition and development loans (which have a higher degree of credit risk than the remaining portion of the construction portfolio). Our regulatory commercial real estate concentration (which includes nonowner-occupied real estate and construction loans) was 390% of our total risk based capital at September 30, 2023.

The following table presents the composition of our loans receivable portfolio at September 30, 2023 and December 31, 2022.

Loans Receivable

At September 30, 2023 and December 31, 2022

(Dollars in thousands)


	September 30, 2023		December 31, 2022
Commercial real estate	1,100,406		1,100,261
Commercial and industrial	224,264		245,220
Commercial construction	155,081		147,939
Consumer real estate	362,345		339,591
Consumer nonresidential	6,231		7,685

Gross loans	1,848,327		1,840,696

Less:
Allowance for credit losses on loans	18,849		16,040
Unearned income and (unamortized premiums), net	(1,186)		262

Loans receivable, net	$	1,830,664	$	1,824,394

Asset Quality

Nonperforming loans, defined as nonaccrual loans and loans contractually past due 90 days or more as to principal or interest and still accruing, were $1.5 million and $4.5 million at September 30, 2023 and December 31, 2022, respectively, a decrease of $3.0 million, or 66%. Loans that we have classified as nonperforming are a result of customer specific deterioration, mostly financial in nature, that are not a result of economic, industry, or environmental causes that we might see as a pattern for possible future losses within our loan portfolio. For each of our criticized assets, we conduct an impairment analysis to determine the level of additional or specific reserves required for any portion of the loan that may result in a loss. As a result of the analysis completed, we had specific reserves totaling $72 thousand and $86 thousand at September 30, 2023 and December 31, 2022, respectively. Our ratio of nonperforming loans to total assets was 0.07% and 0.19% at September 30, 2023 and December 31, 2022, respectively. We had no other real estate owned and there were $8.3 million in loan modifications for borrowers who were experiencing financial difficulty during the nine months ended September 30, 2023.

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. At September 30, 2023, we had $811 thousand in loans identified as special mention, a decrease from $10.4 million from December 31, 2022. Special mention rated loans are loans that have a potential weakness that deserves our close attention; however, the borrower continues to pay in accordance with their contract. The decrease from December 31, 2022 was primarily related to two relationships comprising of three loans paying off totaling $9.6 million. Loans rated as special mention do not have a specific reserve and are considered well-secured.

At September 30, 2023, we had $2.2 million in loans identified as substandard, a decrease of $1.9 million from December 31, 2022. Substandard rated loans are loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. For each of these substandard loans, a liquidation analysis is completed. The decrease from December 31, 2022 was primarily related to two relationships comprising of three loans

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paying off totaling $2.7 million offset by two relationships comprising of two loans being downgraded totaling $1.2 million. At September 30, 2023, individual reserves on loans totaling $72 thousand has been allocated within the allowance for credit losses to supplement any shortfall of collateral.

We recorded annualized net charge-offs (recoveries) to average loans receivable of 0.02% for the nine months ended September 30, 2023, compared to 0.04% for the nine months ended September 30, 2022. The following tables provide additional information on our asset quality for the periods presented.

Nonperforming Assets

At September 30, 2023 and December 31, 2022

(Dollars in thousands)


	September 30, 2023			December 31, 2022
Nonperforming assets:
Nonaccrual loans, gross	$	1,366		$	3,150
Loans contractually past‑due 90 days or more and still accruing	144			1,343
Total nonperforming loans (NPLs)	$	1,510		$	4,493
Total nonperforming assets (NPAs)	$	1,510		$	4,493

NPLs/Total Assets	0.07		%	0.19		%
NPAs/Total Assets	0.07		%	0.19		%
Allowance for credit losses on loans/NPLs	1,248.28		%	357.00		%
Combined allowance for credit losses/NPLs	1,292.85		%	357.00		%

We are closely and proactively monitoring the effects of recent market activity. Our commercial real estate loan portfolio totaled $1.10 billion, or 59% of total, at September 30, 2023 and $1.10 billion, or 58% of total loans, at December 31, 2022. The commercial real estate portfolio, including construction loans, is diversified by asset type and geographic concentration. We manage this portion of the portfolio in a disciplined manner, and have comprehensive policies to monitor, measure and mitigate our loan concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices. Included in commercial real estate are loans secured by office buildings totaling $95.7 million, or 5% of total loans, and retail shopping centers totaling $267.3 million, or 14% of total loans, at September 30, 2023. Multi-family commercial properties totaled $179.0 million, or 10% of total loans, at September 30, 2023. The following table provides further stratification of these asset classes as of September 30, 2023 (dollars in thousands).

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Owner Occupied Commercial Real Estate				Non-Owner Occupied Commercial Real Estate				Construction		Total CRE
Asset Class	Average Loan-to-Value (1)	Number of Total Loans	Bank Owned Principal (2)	Average Loan-to-Value (1)	Number of Total Loans	Bank Owned Principal (2)	Top 3 Geographic Concentration	Number of Total Loans	Bank Owned Principal (2)	Total Bank Owned Principal (2)	% of Total Loans
Office, Class A	70%	6	$7,580	48%	4	$3,804	Counties of Fairfax and Loudoun, Virginia and Montgomery County, Maryland	1	$2,836	$14,220
Office, Class B	47%	35	13,906	47%	31	61,660		—	—	75,566
Office, Class C	49%	6	3,149	41%	8	1,974		1	788	5,911
Subtotal		47	$24,635		43	$67,438		2	$3,624	$95,697	5%

Retail- Neighborhood/Community Shop		—	$—	44%	31	$84,997	Prince George's County, Maryland, Fairfax County, Virginia and Washington, D.C.	2	$10,250	95,247
Retail- Restaurant	58%	9	8,248	45%	17	30,733		—	—	38,981
Retail- Single Tenant	60%	5	2,018	40%	22	37,313		—	—	39,331
Retail- Anchored,Other	71%	1	2,060	52%	11	39,041		1	2,315	43,416
Retail- Grocery-anchored		—	—	45%	8	49,688		1	625	50,313
Subtotal		15	$12,326		89	$241,772		4	$13,190	$267,288	14%

Multi-family, Class A (Market) (4)		—	$—	27%	1	$—	Washington, D.C., Baltimore City, Maryland and Arlington County, Virginia	1	$729	729
Multi-family, Class B (Market)		—	—	63%	21	78,669		—	—	78,669
Multi-family, Class C (Market)		—	—	57%	57	72,086		2	6,800	78,886
Multi-Family-Affordable Housing		—	—	53%	10	16,605		1	4,096	20,701
Subtotal		0	$—		89	$167,360		4	$11,625	$178,985	10%

Industrial	52%	44	$71,761	52%	38	$133,809	Prince William County, Virginia, Fairfax County, Virginia and Howard County, Maryland		$—	205,570
Warehouse	52%	14	18,914	30%	11	11,589			—	30,503
Flex	50%	15	16,170	54%	14	56,531			—	72,701
Subtotal		73	$106,845		63	$201,929		2	$—	$308,774	17%

Hotels		0	$—	44%	9	$52,956		1	$6,410	$59,366	3%
Mixed Use	46%	11	6,804	61%	36	62,095		1	$6,824	$75,723	4%

Other (including net deferred costs)			$62,199			$91,367			$112,886	$266,452	14%
Total commercial real estate and construction loans, net of fees, at September 30, 2023			$212,809			$884,917			$154,559	$1,252,285	68%

1) Loan-to-value is determined at origination date against current bank owned principal.
2) Minimum debt service coverage policy is 1.30x for Owner Occupied and 1.25x for Non-Owner Occupied at origination.

The loans shown in the above table exhibit strong credit quality, reflecting no delinquencies and no classified loans at September 30, 2023. During our assessment of the allowance for credit losses on loans, we addressed the credit risks associated with these portfolio segments and believe that as a result of our conservative underwriting discipline at loan origination, we have appropriately reserved for expected credit concerns in the event of a downturn in economic activity.

At September 30, 2023 and December 31, 2022, there were no performing loans considered potential problem loans. Potential problem loans are defined as loans that are not included in the 90 days or more past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes us to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. We take a conservative approach with respect to risk rating loans in our portfolio. Based upon the status as a potential problem loan, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, our allowance for credit losses on loans estimation methodology adjusts expected losses to calibrate the likelihood of a default event to occur through the use of risk ratings.

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Unexpected changes in economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs, allowance for credit losses, and provision for credit losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit losses for us. Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.

See “Critical Accounting Policies” above for more information on our allowance for credit losses methodology.

The following tables present additional information pertaining to the activity in and allocation of the allowance for credit losses on loans by loan type and the percentage of the loan type to the total loan portfolio. The allocation of the allowance for credit losses on loans to a category of loans is not necessarily indicative of future losses or charge-offs, and does not restrict the use of the allowance to any specific category of loans.

Allowance for Credit Losses on Loans

For the Three and Nine Months Ended September 30, 2023 and 2022

(Dollars in thousands)


	For the Three Months Ended September 30,
	2023					2022
	Net (charge-offs) recoveries			Percentage of net charge-offs (annualized) to average loans outstanding during the year		Net (charge-offs) recoveries			Percentage of net charge-offs (annualized) to average loans outstanding during the year
Commercial real estate	$	—		—	%	$	—		—	%
Commercial and industrial	—		1	—	%	—			—	%
Consumer residential	—			—	%	—			—	%
Consumer nonresidential	7			—	%	(9)			—	%
Total	$	7		—	%	$	(9)		—	%
Average loans outstanding during the period	$	1,868,819				$	1,667,521

	For the Nine Months Ended September 30,
	2023					2022
	Net (charge-offs) recoveries			Percentage of net charge-offs (annualized) to average loans outstanding during the year		Net (charge-offs) recoveries			Percentage of net charge-offs (annualized) to average loans outstanding during the year
Commercial real estate	$	—		—	%	$	—		—	%
Commercial and industrial	(347)			(0.02)	%	(396)			(0.03)	%
Consumer residential	1			—	%	1			—	%
Consumer nonresidential	20			—	%	(21)			—	%
Total	$	(326)		(0.02)	%	$	(416)		(0.04)	%
Average loans outstanding during the period	$	1,856,008				$	1,575,038

						September 30,
						2023			2022
Allowance for credit losses to loans receivable, net of fees						1.02		%	0.89	%
Combined allowance for credit losses to loans receivable, net of fees						1.06		%	0.89	%

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Allocation of the Allowance for Credit Losses on Loans

At September 30, 2023 and December 31, 2022

(Dollars in thousands)


	September 30,				December 31,
	2023				2022
	Allocation		% of Total*		Allocation		% of Total*
Commercial real estate	$	10,639	59.54	%	$	10,777	59.77	%
Commercial and industrial	2,681		12.13	%	2,623		13.21	%
Commercial construction	1,649		8.39	%	1,499		8.04	%
Consumer real estate	3,807		19.60	%	1,044		18.45	%
Consumer nonresidential	73		0.34	%	97		0.42	%

Total allowance for credit losses	$	18,849	100.00	%	$	16,040	99.89	%

*Percentage of loan type to the total loan portfolio.

Investment Securities

Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment securities available-for-sale and investment securities held-to-maturity. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity for each of September 30, 2023 and December 31, 2022 totaled $264 thousand, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. The fair value of our investment securities available-for-sale was $216.1 million at September 30, 2023, a decrease of $61.9 million, or 22%, from $278.1 million at December 31, 2022, primarily as a result of the $40.3 million of available-for-sale securities sold in February 2023, principal paydowns of $17.1 million, and an increase in the portfolio's unrealized losses of $4.4 million.

As of September 30, 2023 and December 31, 2022, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk. All of our mortgage-backed securities are guaranteed by either the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. The effective duration of the investment securities portfolio continues to be slightly over five years, which is within the industry average. Investment securities that were pledged to secure public deposits totaled $121.4 million and $108.7 million at September 30, 2023 and December 31, 2022, respectively.

In accordance with ASC 326, we complete periodic assessments on at least a quarterly basis to determine if credit deterioration exists within our investment securities portfolio and if an allowance for credit losses would be required as of a valuation date. For additional details related to management's assessment process, see the “Critical Accounting Policies” section above. As a result of the assessment performed as of September 30, 2023, the investment securities with unrealized losses are a result of pricing changes due to recent rising interest rate conditions in the current market environment and not as a result of credit deterioration. Contractual cash flows for agency-backed portfolios are guaranteed and funded by the U.S. government. Municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe we will be required to sell any of our investment securities portfolio prior to the recovery of the amortized cost as of the valuation date. As such, no impairment was recognized in our investment securities portfolio as of September 30, 2023.

We hold restricted investments in equities of the Federal Reserve Bank of Richmond ("FRB") and FHLB. At September 30, 2023, we owned $3.6 million in FRB stock and $4.0 million in FHLB stock. At December 31, 2022, we owned $4.4 million in FRB stock and $11.1 million in FHLB stock.

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The following table presents the weighted average yields of our investment portfolio for each of the maturity ranges at September 30, 2023 and December 31, 2022.

Investment Securities by Stated Yields

At September 30, 2023 and December 31, 2022


	At September 30, 2023
	Within One Year		One to Five Years			Five to Ten Years		Over Ten Years			Total
		Weighted Average Yield		Weighted Average Yield		Weighted Average Yield			Weighted Average Yield		Weighted Average Yield
Held‑to‑maturity
Securities of state and local municipalities tax exempt		—		2.32	%	—			—		2.32	%
Total held‑to‑maturity securities		—		2.32	%	—			—		2.32	%
Available‑for‑sale
Securities of U.S. government and federal agencies		—		1.22	%	1.59	%		—		1.49	%
Securities of state and local municipalities		—		2.25	%	—			2.92	%	2.46	%
Corporate bonds		—		10.23	%	4.09	%		—		4.39	%
Mortgaged‑backed securities		—		2.11	%	3.08	%		1.56	%	1.58	%
Total available‑for‑sale securities		—		3.01	%	3.22	%		1.56	%	1.79	%
Total investment securities		—		2.98	%	2.81	%		1.56	%	1.79	%


	At December 31, 2022
	Within One Year		One to Five Years			Five to Ten Years		Over Ten Years			Total
		Weighted Average Yield		Weighted Average Yield		Weighted Average Yield			Weighted Average Yield		Weighted Average Yield
Held‑to‑maturity
Securities of state and local municipalities tax exempt		—		2.32	%	—			—		2.32	%
Total held‑to‑maturity securities		—		2.32	%	—			—		2.32	%
Available‑for‑sale
Securities of U.S. government and federal agencies		—		—		1.49	%		—		1.49	%
Securities of state and local municipalities		—		2.25	%	—			2.92	%	2.43	%
Corporate bonds		—		6.02	%	4.09	%		—		4.27	%
Mortgaged‑backed securities		—		2.09	%	2.48	%		1.57	%	1.62	%
Total available‑for‑sale securities		—		3.73	%	2.84	%		1.57	%	1.79	%
Total investment securities		—		3.65	%	2.51	%		1.57	%	1.79	%

Deposits and Other Borrowed Funds

The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the nine months ended September 30, 2023 and 2022.

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Average Deposits Balance
For the Nine Months Ended September 30, 2023 and 2022
(Dollars in thousands)

	September 30, 2023				September 30, 2022
Noninterest bearing demand	$	433,335	22.32	%	$	514,238	28.46	%
Interest-bearing deposits
Interest checking	564,765		29.10	%	743,193		41.14	%
Savings and money markets	259,308		13.36	%	319,871		17.70	%
Certificates of deposits, $100,000 to $249,999	86,168		4.44	%	48,584		2.69	%
Certificates of deposits, $250,000 or more	265,594		13.68	%	143,515		7.94	%
Other time deposits	332,217		17.11	%	37,344		2.07	%
Total	$	1,941,387	100.00	%	$	1,806,745	100.00	%

Total deposits increased $165.8 million, or 9.1%, to $2.00 billion at September 30, 2023 from $1.83 billion at December 31, 2022. Noninterest-bearing deposits were $433.0 million at September 30, 2023, or 22% of total deposits. At September 30, 2023, core deposits, which exclude wholesale deposits, increased $131.3 million from December 31, 2022, or 8%. Time deposits (which exclude wholesale deposits) increased $121.3 million, or 47%, to $381.8 million at September 30, 2023 from December 31, 2022, and were 22% of core deposits, representing new and existing customer deposits as customers were looking to fix interest rates on their deposit balances.

Wholesale deposits were $282.5 million at September 30, 2023 compared to $248.0 million at December 31, 2022, an increase of $34.5 million, or 14%. Wholesale deposits were used to pay off FHLB advances at maturity freeing up collateral for future use as needed. Wholesale deposits are partially fixed at a weighted average rate of 3.62% as we have executed $250.0 million in pay-fixed/receive-floating interest rate swaps to reduce funding costs. In addition, we are a member of the IntraFi Network (“IntraFi”), which gives us the ability to offer Certificates of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) products to our customers who seek to maximize FDIC insurance protection. When a customer places a large deposit with us for IntraFi, funds are placed into certificates of deposit or other deposit products with other banks in the CDARS and ICS networks in increments of less than $250 thousand so that principal and interest are eligible for FDIC insurance protection. These deposits are part of our core deposit base. At September 30, 2023 and December 31, 2022, we had $312.4 million and $117.6 million, respectively, in either CDARS reciprocal or ICS reciprocal products.

As of September 30, 2023, the estimated amount of total uninsured deposits (excluding collateralized deposits) was $635.1 million, or 31.8% of total deposits. The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes of the Bank's regulatory reporting requirements.

The following table reports maturities of the estimated amount of uninsured certificates of deposit at September 30, 2023.

Certificates of Deposit Greater than $250,000

At September 30, 2023

(Dollars in thousands)


	September 30, 2023
Three months or less	$	51,441
Over three months through six months	106,347
Over six months through twelve months	37,945
Over twelve months	51,667
	$	247,400

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Other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, were $69.6 million at September 30, 2023 compared to $284.6 million at December 31, 2022. Subordinated debt was $19.6 million at both September 30, 2023 and December 31, 2022. At September 30, 2023 and December 31, 2022, federal funds purchased was $0 and $30.0 million, respectively. For September 30, 2023 and December 31, 2022, FHLB advances totaled $50.0 million and $235.0 million, respectively.

Total wholesale funding (which includes wholesale deposits and FHLB advances) decreased $80.8 million, or 20%, during the third quarter of 2023 to $332.5 million at September 30, 2023 from $513.0 million at December 31, 2022.

Capital Resources

Capital adequacy is an important measure of financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. The minimum capital requirements for the Bank are: (i) a common equity Tier 1 (“CET1”), capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total risk based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Additionally, a capital conservation buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to the Bank’s CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, we currently consider the Bank’s minimum capital ratios to be as follows: 7.00% for CET1; 8.50% for Tier 1 capital; and 10.50% for Total capital. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation.

On January 1, 2020, the federal banking agencies adopted a “Community Bank Leverage Ratio” ("CBLR"), which is calculated by dividing tangible equity capital by average consolidated total assets. If a “qualified community bank,” generally a depository institution or depository institution holding company with consolidated assets of less than $10.00 billion, opts into the CBLR framework and has a leverage ratio that exceeds the CBLR threshold, which was initially set at 9%, then such bank will be considered to have met all generally applicable leverage and risk based capital requirements under Basel III, the capital ratio requirements for “well capitalized” status under Section 38 of the Federal Deposit Insurance Act, and any other leverage or capital requirements to which it is subject. A bank or holding company may be excluded from qualifying community bank status based on its risk profile, including consideration of its off-balance sheet exposures; trading assets and liabilities; total notional derivatives exposures; and such other facts as the appropriate federal banking agencies determine to be appropriate. At January 1, 2020, we qualified and adopted this simplified capital structure. Effective September 30, 2022, we opted out of the CBLR framework. A banking organization that opts out of the CBLR framework can subsequently opt back into the CBLR framework if it meets the criteria listed above. We believe that the Bank met all capital adequacy requirements to which it was subject as of September 30, 2023 and December 31, 2022.

Shareholders’ equity at September 30, 2023 was $211.2 million, an increase of $8.9 million, or 4%, compared to $202.4 million at December 31, 2022. During the first quarter of 2023, retained earnings decreased $2.8 million primarily as a result of the adoption of CECL on January 1, 2023.

Total shareholders’ equity to total assets for September 30, 2023 and December 31, 2022 was 9.2% and 8.6%, respectively. Tangible book value per share (a non-GAAP financial measure which is defined in the table below) at September 30, 2023 and December 31, 2022 was $11.44 and $11.14, respectively.

As noted above, regulatory capital levels for the Bank meet those established for “well capitalized” institutions. While we are currently considered “well capitalized,” we may from time to time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.

As the Company is a bank holding company with less than $3.00 billion in assets, and which does not (i) conduct significant off balance sheet activities, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”), it is not currently subject to risk-based capital requirements adopted by the Federal Reserve, pursuant to the small bank holding company policy statement. The Federal Reserve has not historically deemed a bank holding company ineligible for application of the small bank holding company policy statement solely because its common stock is registered under the Exchange Act. There can be no assurance that the Federal Reserve will continue this practice.

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The following tables show the minimum capital requirements and the Bank's capital position at September 30, 2023 and December 31, 2022.

Bank Capital Components

At September 30, 2023 and December 31, 2022

(Dollars in thousands)


	Actual				Minimum Capital Requirement (1)					Minimum to be Well Capitalized Under Prompt Corrective Action
	Amount		Ratio		Amount			Ratio		Amount			Ratio
At September 30, 2023
Total risk-based capital	$	267,572	13.93	%	$	201,640	>	10.50	%	$	192,038	>	10.00	%
Tier 1 risk-based capital	248,050		12.92	%	163,232		>	8.50	%	153,630		>	8.00	%
Common equity tier 1 capital	248,050		12.92	%	134,427		>	7.00	%	124,825		>	6.50	%
Leverage capital ratio	248,050		10.62	%	91,887		>	4.00	%	114,858		>	5.00	%
At December 31, 2022
Total risk-based capital	$	256,898	13.28	%	$	203,113	>	10.50	%	$	193,441	>	10.00	%
Tier 1 risk-based capital	240,858		12.45	%	164,425		>	8.50	%	154,753		>	8.00	%
Common equity tier 1 capital	240,858		12.45	%	135,409		>	7.00	%	125,737		>	6.50	%
Leverage capital ratio	240,858		10.75	%	87,894		>	4.00	%	109,867		>	5.00	%
(1) Includes capital conservation buffer.

Tangible Book Value

At September 30, 2023 and December 31, 2022

(Dollars in thousands, except per share data)


	September 30, 2023		December 31, 2022
Total stockholders’ equity (GAAP)	$	211,246	$	202,382
Less: goodwill and intangibles, net	(7,632)		(7,790)
Tangible Common Equity (non-GAAP)	$	203,614	$	194,592

Book value per common share (GAAP)	$	11.87	$	11.58
Less: intangible book value per common share	(0.43)		(0.44)
Tangible book value per common share (non-GAAP)	$	11.44	$	11.14

Liquidity

Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash. The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service, technology and pricing. As of September 30, 2023, estimated uninsured deposits (excluding collateralized deposits) for the Bank improved to 31.8% of total deposits from 39.7% at December 31, 2022.

In addition to deposits, we have access to the various wholesale funding markets. These markets include the brokered certificate of deposit market and the federal funds market. We are a member of the IntraFi Network, which allows banking customers to access FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits. As part of our membership with the IntraFi Network, we have one-way authority for both their CDARs and ICS products

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which provides the Bank the ability to access additional wholesale funding as needed. We also maintain secured lines of credit with the FRB and the FHLB for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding.

Cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.

We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs.

Our primary and secondary sources of liquidity remain strong. Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $313.1 million at September 30, 2023, or 14% of total assets, a decrease from $359.6 million, or 15%, at December 31, 2022. As of September 30, 2023 and December 31, 2022, $121.4 million and $108.7 million, respectively, in investment securities available for sale were pledged as collateral for municipal deposits. We held investments that are classified as held-to-maturity in the amount of $264 thousand at September 30, 2023. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and FRB. Additional borrowing capacity at the FHLB at September 30, 2023 was approximately $481.6 million. Borrowing capacity with the FRB was approximately $135.9 million at September 30, 2023. We have the ability to access the Federal Reserve's new Bank Term Funding Program ("BTFP"), but have not accessed this facility during the first half of 2023. These facilities are subject to the FHLB and the FRB approving disbursement to us. We also have unsecured federal funds purchased lines of $185.0 million available to us, of which none were used at September 30, 2023. We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements. As of September 30, 2023, our liquidity position was significantly in excess of its estimated uninsured deposits at 134%.

Liquidity is essential to our business. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that we may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us. Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events. While we believe we have a healthy liquidity position and do not anticipate the loss of deposits of any of the significant deposit customers, any of the factors discussed above could materially impact our liquidity position in the future.

Financial Instruments with Off-Balance-Sheet Risk and Credit Risk

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. We evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based on our evaluation of the counterparty. Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition. The rates and terms of these instruments are competitive with others in the market in which we do business.

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

Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

With the exception of these off-balance sheet arrangements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, changes in financial condition, revenue, expenses, capital expenditures, or capital resources, that is material to our business.

At September 30, 2023 and December 31, 2022, unused commitments to fund loans and lines of credit totaled $217.4 million and $235.6 million, respectively. Commercial and standby letters of credit totaled $6.2 million for the quarters ended September 30, 2023 and December 31, 2022.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a - 15(e) under the Exchange Act). As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on and as of the date of such evaluation, these officers concluded that the Company’s disclosure controls and procedures were effective.

The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and are properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel, and an internal audit program to monitor its effectiveness. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of our operations, we become party to various legal proceedings. Currently, we are not party to any material legal proceedings, and no such proceedings are, to management’s knowledge, threatened against us.

Item 1A. Risk Factors

There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

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

(a)None.

(b)Not applicable.

(c)On March 16, 2023, we publicly announced that the Board of Directors had renewed the share repurchase program (the "Repurchase Program") that was initiated in 2020. Under the renewed Repurchase Program, we may purchase up to 1,300,000 shares of our common stock, or approximately 8% of our outstanding shares of common stock at December 31, 2022, post-stock split effective January 31, 2023. The Repurchase Program will expire on March 31, 2024, subject to earlier termination of the program by the Board of Directors.

No shares were purchased during the three months ended September 30, 2023.

Item 3. Defaults Upon Senior Securities

(a)None.

(b)None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

(a)None.

(b)None.

Item 6. Exhibits

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31.1			Rule 13a-14(a) Certification of Principal Executive Officer
31.2			Rule 13a-14(a) Certification of Principal Financial Officer
32.1			Statement of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2			Statement of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
101			The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.
104			The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline Extensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

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


			FVCBankcorp, Inc.
			(Registrant)

Date: November 9, 2023			/s/ David W. Pijor
			David W. Pijor
			Chairman and Chief Executive Officer
			(Principal Executive Officer)

Date: November 9, 2023			/s/ Jennifer L. Deacon
			Jennifer L. Deacon
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)