UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2023

☐ 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: 000-25927

MACATAWA BANK CORPORATION

(Exact name of registrant as specified in its charter)

Michigan	38-3391345
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10753 Macatawa Drive, Holland, Michigan 49424

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (616) 820-1444

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	MCBC	NASDAQ

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

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

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging Growth Company ☐

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

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

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 34,291,487 shares of the Company's Common Stock (no par value) were outstanding as of ~~July 27,~~October 26, 2023.

Table of Contents

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to future levels of earning assets, future composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for credit losses and reserve recoveries, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future interest rate levels, future net interest margin levels, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, loan demand and loan growth, future amounts of unrecognized tax benefits, the future level of other revenue sources and future amounts of unrealized gains or losses in our investment securities portfolio. Management's determination of the provision and allowance for credit losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, respond to a changing interest rate environment, increase loan volume, originate high quality loans, maintain or improve mortgage banking income, realize the benefit of our deferred tax assets, continue payment of dividends and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets, interest rates and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

							September 30,			December 31,
	June 30, 2023			December 31, 2022			2023			2022
ASSETS
Cash and due from banks	$	40,255		$	51,215		$	40,687		$	51,215
Federal funds sold and other short-term investments		343,676			703,955			469,786			703,955
Cash and cash equivalents		383,931			755,170			510,473			755,170
Debt securities available for sale, at fair value		512,837			499,257			503,277			499,257
Debt securities held to maturity (fair value 2023 - $325,354 and 2022 - $332,650)		340,400			348,765
Debt securities held to maturity (fair value 2023 - $314,458 and 2022 - $332,650)								330,003			348,765
Federal Home Loan Bank (FHLB) stock		10,211			10,211			10,211			10,211
Loans held for sale, at fair value		—			215			—			215
Total loans		1,271,576			1,177,748			1,291,290			1,177,748
Allowance for credit losses		(17,109	)		(15,285	)		(17,001	)		(15,285	)
Net loans		1,254,467			1,162,463			1,274,289			1,162,463
Premises and equipment – net		39,766			40,306			39,399			40,306
Accrued interest receivable		7,499			7,606			9,957			7,606
Bank-owned life insurance		53,791			53,345			54,043			53,345
Other real estate owned - net		—			2,343			—			2,343
Net deferred tax asset		9,636			9,712			10,226			9,712
Other assets		17,716			17,526			17,832			17,526
Total assets	$	2,630,254		$	2,906,919		$	2,759,710		$	2,906,919
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	704,409		$	834,879		$	653,052		$	834,879
Interest-bearing		1,617,136			1,780,263			1,792,534			1,780,263
Total deposits		2,321,545			2,615,142			2,445,586			2,615,142
Other borrowed funds		30,000			30,000			30,000			30,000
Accrued expenses and other liabilities		14,890			14,739			14,247			14,739
Total liabilities		2,366,435			2,659,881			2,489,833			2,659,881
Commitments and contingent liabilities		—			—			—			—
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 34,291,487 and 34,298,640 shares issued and outstanding at June 30, 2023 and December 31, 2022		219,909			219,578
Common stock, no par value, 200,000,000 shares authorized; 34,291,487 and 34,298,640 shares issued and outstanding at September 30, 2023 and December 31, 2022								220,089			219,578
Retained earnings		74,670			59,036			83,349			59,036
Accumulated other comprehensive loss		(30,760	)		(31,576	)		(33,561	)		(31,576	)
Total shareholders' equity		263,819			247,038			269,877			247,038
Total liabilities and shareholders' equity	$	2,630,254		$	2,906,919		$	2,759,710		$	2,906,919

										Three Months			Three Months		Nine Months		Nine Months
										Ended			Ended		Ended		Ended
										September 30,			September 30,		September 30,		September 30,
	Three Months Ended June 30, 2023		Three Months Ended June 30, 2022		Six Months Ended June 30, 2023		Six Months Ended June 30, 2022			2023			2022		2023		2022
Interest income
Loans, including fees	$	17,176	$	10,344	$	32,835	$	20,741		$	18,065		$	12,164	$	50,900	$	32,905
Securities
Taxable		4,596		2,618		9,077		4,052			4,565			3,323		13,643		7,375
Tax-exempt		678		702		1,376		1,434			671			668		2,048		2,102
FHLB Stock		71		51		137		102			80			53		217		155
Federal funds sold and other short-term investments		4,599		1,720		10,961		2,249			6,406			4,667		17,366		6,915
Total interest income		27,120		15,435		54,386		28,578			29,787			20,875		84,174		49,452
Interest expense
Deposits		5,816		245		10,310		403			7,383			944		17,693		1,346
Other borrowings		158		347		314		667			160			160		474		827
Total interest expense		5,974		592		10,624		1,070			7,543			1,104		18,167		2,173
Net interest income		21,146		14,843		43,762		27,508			22,244			19,771		66,007		47,279
Provision for credit losses		300		—		300		(1,500	)		(150	)		—		150		(1,500	)
Net interest income after provision for credit losses		20,846		14,843		43,462		29,008			22,394			19,771		65,857		48,779
Noninterest income
Service charges and fees		1,018		1,218		2,012		2,430			1,061			1,263		3,072		3,693
Net gains on mortgage loans		21		199		32		508			5			166		37		673
Trust fees		1,136		1,096		2,168		2,184			1,109			969		3,277		3,153
ATM and debit card fees		1,740		1,762		3,403		3,360			1,675			1,724		5,077		5,084
Bank owned life insurance ("BOLI") income		221		230		420		470			239			217		660		687
Other		477		626		1,106		1,144			527			550		1,633		1,695
Total noninterest income		4,613		5,131		9,141		10,096			4,616			4,889		13,756		14,985
Noninterest expense
Salaries and benefits		6,843		6,402		13,541		12,691			6,949			6,639		20,490		19,331
Occupancy of premises		1,098		1,071		2,235		2,243			1,024			989		3,260		3,232
Furniture and equipment		1,064		988		2,095		2,004			1,050			1,014		3,145		3,017
Legal and professional		271		271		619		465			355			268		973		733
Marketing and promotion		205		195		423		390			225			196		648		586
Data processing		1,006		924		1,961		1,808			1,002			984		2,963		2,792
FDIC assessment		330		197		660		377			330			201		990		578
Interchange and other card expense		402		406		786		779			426			405		1,212		1,184
Bond and D&O Insurance		122		129		243		259			123			129		366		389
Other		1,332		1,330		2,275		2,636			1,305			1,302		3,580		3,936
Total noninterest expenses		12,673		11,913		24,838		23,652			12,789			12,127		37,627		35,778
Income before income tax		12,786		8,061		27,765		15,452			14,221			12,533		41,986		27,986
Income tax expense		2,474		1,493		5,449		2,884			2,808			2,488		8,257		5,372
Net income	$	10,312	$	6,568	$	22,316	$	12,568		$	11,413		$	10,045	$	33,729	$	22,614
Basic earnings per common share	$	0.30	$	0.19	$	0.65	$	0.37		$	0.33		$	0.29	$	0.98	$	0.66
Diluted earnings per common share	$	0.30	$	0.19	$	0.65	$	0.37		$	0.33		$	0.29	$	0.98	$	0.66
Cash dividends per common share	$	0.08	$	0.08	$	0.16	$	0.16		$	0.08		$	0.08	$	0.24	$	0.24

													Three Months			Three Months			Nine Months			Nine Months
													Ended			Ended			Ended			Ended
													September 30,			September 30,			September 30,			September 30,
	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022			Six Months Ended June 30, 2023			Six Months Ended June 30, 2022			2023			2022			2023			2022
Net income	$	10,312		$	6,568		$	22,316		$	12,568		$	11,413		$	10,045		$	33,729		$	22,614
Other comprehensive income (loss):
Unrealized gains (losses):
Net change in unrealized gains (losses) on debt securities available for sale		(5,694	)		(8,251	)		1,044			(23,371	)		(3,540	)		(17,714	)		(2,496	)		(41,085	)
Net unrealized gain at time of transfer on securities transferred to held-to-maturity		—			—			—			113			—			—			—			113
Amortization of net unrealized gains on securities transferred to held-to-maturity		(6	)		(6	)		(11	)		(10	)		(5	)		(5	)		(16	)		(16	)
Tax effect		1,197			1,734			(217	)		4,886			744			3,721			527			8,608
Net change in unrealized gains (losses) on debt securities available for sale, net of tax		(4,503	)		(6,523	)		816			(18,382	)		(2,801	)		(13,998	)		(1,985	)		(32,380	)
Less: reclassification adjustments:
Reclassification for gains included in net income		—			—			—			—			—			—			—			—
Tax effect		—			—			—			—			—			—			—			—
Reclassification for gains included in net income, net of tax		—			—			—			—			—			—			—			—
Other comprehensive income (loss), net of tax		(4,503	)		(6,523	)		816			(18,382	)		(2,801	)		(13,998	)		(1,985	)		(32,380	)
Comprehensive income (loss)	$	5,809		$	45		$	23,132		$	(5,814	)	$	8,612		$	(3,953	)	$	31,744		$	(9,766	)

Common
Stock

Retained Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders'
Equity

Balance, April 1, 2022
$ 219,266 $ 38,492 $ (12,156
)
$ 245,602
Net income for the three months ended June 30, 2022
— 6,568 — 6,568
Cash dividends at $0.08 per share
— (2,728
)
— (2,728
)
Repurchase of 815 shares for taxes withheld on vested restricted stock
(7
)
— — (7
)
Other comprehensive loss, net of tax
— — (6,523
)
(6,523
)
Stock compensation expense
197 — — 197
Balance, June 30, 2022
$ 219,456 $ 42,332 $ (18,679
)
$ 243,109

Balance, April 1, 2023
$ 219,733 $ 67,092 $ (26,257
)
$ 260,568
Net income for the three months ended June 30, 2023
— 10,312 — 10,312
Cash dividends at $0.08 per share
— (2,734
)
— (2,734
)
Repurchase of 807 shares for taxes withheld on vested restricted stock
(7
)
— — (7
)
Other comprehensive loss, net of tax
— — (4,503
)
(4,503
)
Stock compensation expense
183 — — 183
Balance, June 30, 2023
$ 219,909 $ 74,670 $ (30,760
)
$ 263,819

							Accumulated
							Other			Total
	Common			Retained			Comprehensive			Shareholders'
	Stock			Earnings			Income (Loss)			Equity
Balance, July 1, 2022	$	219,456		$	42,332		$	(18,679	)	$	243,109
Net income for the three months ended September 30, 2022		—			10,045			—			10,045
Cash dividends at $0.08 per share		—			(2,729	)		—			(2,729	)
Repurchase of 1,662 shares for taxes withheld on vested restricted stock		(15	)		—			—			(15	)
Other comprehensive loss, net of tax		—			—			(13,998	)		(13,998	)
Stock compensation expense		142			—			—			142
Balance, September 30, 2022	$	219,583		$	49,648		$	(32,677	)	$	236,554


Balance, July 1, 2023	$	219,909		$	74,670		$	(30,760	)	$	263,819
Net income for the three months ended September 30, 2023		—			11,413			—			11,413
Cash dividends at $0.08 per share		—			(2,734	)		—			(2,734	)
Repurchase of shares for taxes withheld on vested restricted stock		—			—			—			—
Other comprehensive loss, net of tax		—			—			(2,801	)		(2,801	)
Stock compensation expense		180			—			—			180
Balance, September 30, 2023	$	220,089		$	83,349		$	(33,561	)	$	269,877

																			Accumulated
																			Other			Total
													Common			Retained			Comprehensive			Shareholders'
	Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity			Stock			Earnings			Income (Loss)			Equity
Balance, January 1, 2022	$	219,082		$	35,220		$	(297	)	$	254,005		$	219,082		$	35,220		$	(297	)	$	254,005
Net income for the six months ended June 30, 2022		—			12,568			—			12,568
Cash dividends at $0.16 per share		—			(5,456	)		—			(5,456	)
Repurchase of 2,153 shares for taxes withheld on vested restricted stock		(20	)		—			—			(20	)
Net income for the nine months ended September 30, 2022														—			22,614			—			22,614
Cash dividends at $0.24 per share														—			(8,186	)		—			(8,186	)
Repurchase of 3,815 shares for taxes withheld on vested restricted stock														(35	)		—			—			(35	)
Other comprehensive loss, net of tax		—			—			(18,382	)		(18,382	)		—			—			(32,380	)		(32,380	)
Stock compensation expense		394			—			—			394			536			—			—			536
Balance, June 30, 2022	$	219,456		$	42,332		$	(18,679	)	$	243,109
Balance, September 30, 2022													$	219,583		$	49,648		$	(32,677	)	$	236,554


Balance, January 1, 2023	$	219,578		$	59,036		$	(31,576	)	$	247,038		$	219,578		$	59,036		$	(31,576	)	$	247,038
Adoption of ASU 2016-13, net of tax		—			(1,215	)		—			(1,215	)		—			(1,215	)		—			(1,215	)
Net income for the six months ended June 30, 2023		—			22,316			—			22,316
Cash dividends at $0.16 per share		—			(5,467	)		—			(5,467	)
Net income for the nine months ended September 30, 2023														—			33,729			—			33,729
Cash dividends at $0.24 per share														—			(8,201	)		—			(8,201	)
Repurchase of 2,145 shares for taxes withheld on vested restricted stock		(22	)		—			—			(22	)		(22	)		—			—			(22	)
Other comprehensive income, net of tax		—			—			816			816			—			—			(1,985	)		(1,985	)
Stock compensation expense		353			—			—			353			533			—			—			533
Balance, June 30, 2023	$	219,909		$	74,670		$	(30,760	)	$	263,819
Balance, September 30, 2023													$	220,089		$	83,349		$	(33,561	)	$	269,877

							Nine Months			Nine Months
							Ended			Ended
							September 30,			September 30,
	Six Months Ended June 30, 2023			Six Months Ended June 30, 2022			2023			2022
Cash flows from operating activities
Net income	$	22,316		$	12,568		$	33,729		$	22,614
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		242			1,204			266			1,493
Stock compensation expense		353			394			533			536
Provision for credit losses		300			(1,500	)		150			(1,500	)
Origination of loans for sale		(2,620	)		(18,548	)		(2,904	)		(25,009	)
Proceeds from sales of loans originated for sale		2,867			19,300			3,156			26,855
Net gains on mortgage loans		(32	)		(508	)		(37	)		(673	)
Net gain on sales of other real estate		(356	)		—			(356	)		(47	)
Deferred income tax expense		182			533			336			585
Earnings in bank-owned life insurance		(420	)		(470	)		(660	)		(687	)
Change in accrued interest receivable and other assets		(83	)		(2,008	)		(2,657	)		(5,536	)
Change in accrued expenses and other liabilities		89			66			(554	)		1,499
Net cash from operating activities		22,838			11,031			31,002			20,130
Cash flows from investing activities
Loan originations and payments, net		(93,780	)		(2,680	)		(113,452	)		(29,220	)
Purchases of securities available for sale		(24,072	)		(186,326	)		(24,072	)		(232,108	)
Purchases of securities held to maturity		(6,505	)		(137,355	)		(9,613	)		(160,481	)
Proceeds from:
Maturities and calls of securities available for sale		5,546			13,265			8,160			17,486
Maturities and calls of securities held to maturity		10,014			9,481			23,300			37,998
Principal paydowns on securities available for sale		6,829			8,586			10,740			12,003
Principal paydowns on securities held to maturity		4,816			35,382			5,016			33,149
Sales of other real estate		2,699			—			2,699			47
Redemption of FHLB stock		—			1,347			—			1,347
Additions to premises and equipment		(538	)		(466	)		(698	)		(605	)
Net cash for investing activities		(94,991	)		(258,766	)		(97,920	)		(320,384	)
Cash flows from financing activities
Change in deposits		(293,597	)		(83,375	)		(169,556	)		(21,761	)
Repayments and maturities of other borrowed funds		—			(80,000	)		—			(80,000	)
Proceeds from other borrowed funds		—			25,000			—			25,000
Repurchase of shares for taxes withheld on vested restricted stock		(22	)		(20	)		(22	)		(35	)
Cash dividends paid		(5,467	)		(5,456	)		(8,201	)		(8,186	)
Net cash for financing activities		(299,086	)		(143,851	)		(177,779	)		(84,982	)
Net change in cash and cash equivalents		(371,239	)		(391,586	)		(244,697	)		(385,236	)
Cash and cash equivalents at beginning of period		755,170			1,151,788			755,170			1,151,788
Cash and cash equivalents at end of period	$	383,931		$	760,202		$	510,473		$	766,552

					Nine Months		Nine Months
					Ended		Ended
					September 30,		September 30,
	Six Months Ended June 30, 2023		Six Months Ended June 30, 2022		2023		2022
Supplemental cash flow information
Interest paid	$	10,144	$	1,106	$	17,499	$	2,204
Income taxes paid		4,950		3,000		7,400		5,000
Supplemental noncash disclosures:
Security settlement		—		1,662		—		1,000
Transfer of securities from available for sale to held to maturity		—		123,469		—		123,469

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Macatawa Bank Corporation ("the Company", "our", "we") and its wholly-owned subsidiary, Macatawa Bank ("the Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation.

Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank operates 26 full service branch offices providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan.

Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) believed necessary for a fair presentation have been included.

Operating results for the three and ~~six~~nine ~~months period~~month periods ended ~~June~~ September 30,2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022~~31,~~~~2022.~~.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for credit losses and fair values of financial instruments are particularly subject to change.

FASB issued ASU No. 2016-13, as amended, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU, commonly referred to as Current Expected Credit Loss ("CECL"), provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.

The Company adopted these standards as required on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for loans of $1.5 million and an increase of $62,000 to establish a reserve for unfunded commitments, with a $1.2 million decrease to retained earnings, with the $323,000 income tax portion being recorded as part of the deferred tax asset in the Company's Consolidated Balance Sheet.

Allowance for Credit Losses ("ACL") - Loans: The allowance for credit losses (allowance) is a valuation account that is deducted from the loan portfolios' amortized cost basis to present the net amount expected to be collected on loans. The allowance is increased by the provision for credit losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance balance to be adequate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, current and forecasted economic conditions and other relevant factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance.

The allowance is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogeneous classes, or pools, for allowance calculation. Commercial loans are divided into eight classes based primarily on property type and risk characteristics. They are further segmented based on commercial loan risk grade. Retail loans are segmented into categories including residential mortgage, home equity, unsecured and other secured and then further segmented based on delinquency status.

The Company's loan portfolio classes as of ~~June~~September 30, 2023were as follows:

Commercial and Industrial - Risks to this category include industry concentration and limitations associated with monitoring the adequacy and condition of collateral which can include inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Residential developed - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area, inadequate long-term financing arrangements and velocity of sales. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates as well as market demand and supply of similar property. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Unsecured to residential developers - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Vacant and unimproved - Risks to this category include industry concentration, valuation of farm land, agricultural properties and residential properties as well as velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Commercial development - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Residential improved - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Commercial improved - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates, cost overruns, changes in market demand for property or services and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Manufacturing and industrial - Risks to this category include industry concentration, valuation of commercial properties, changes in market demand for products produced and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

Unsecured - Unsecured loans are susceptible to weakening general economic conditions and increases in unemployment rates.

Home equity - Home equity loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

Other secured - Other secured loans are susceptible to weakening general economic conditions and increases in unemployment rates, regulatory risks as well as the inability to monitor collateral consisting of personal property.

The remaining life methodology is used for all loan pools. This nondiscounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Given the bank's limited loss history over the past twelve years, a loss rate computed for a comparable sized peer group (banks with assets between $1-3 billion) is then applied to future loan balances at the instrument level based on the remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period and reversion periods.

Reasonable and supportable economic forecasts have to be incorporated in determining expected losses. The forecast period represents the time frame from the current period end through the point in time that the Company can reasonably forecast. Ideally, the economic forecast period would cover the contractual terms of all loans; however, the ability to produce a forecast that is both reasonable and supportable becomes more difficult the longer the period is projected.

For periods beyond the forecast period, the loss rate reverts back to the baseline lifetime loss. As of ~~June~~September 30, 2023, the Company used a one-year reasonable and supportable economic forecast period, with a ~~six~~nine-month straight-line reversion period for all loan classes. In determining the reasonable and supportable economic forecast period, the Company used a consensus economic forecast from a third-party provider that provided forecasts from twenty five leading economists. The Company considered the ~~June~~September 2023 report's consensus/mean estimates for gross domestic product and unemployment rates and selected a loss period for the reasonable and supportable forecast period that most closely matched that consensus ( December 2006 to ~~September~~June 2007). The forecast period used at ~~June~~September 30, 2023was not materially different from the one used in the ~~March 31,~~June 30, 2023 calculation.

A number of qualitative factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising interest rates, external factors and other considerations. During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods.

The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments. Any allowance for off-balance sheet credit exposures is reported as an other liability on the Company's Consolidated Balance Sheet and is increased or decreased via other noninterest expense on the Company's Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan using the level-yield method without anticipating prepayments. Accrued interest on loans totaled ~~$3.9~~$4.8 million at ~~June~~September 30, 2023and $4.0 million at December 31, ~~2022.~~2022.

Accrued interest receivable for loans is included as a separate line item on the Company's Consolidated Balance Sheet. The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse accrued interest income on loans that are placed on nonaccrual status. The Company believes this policy results in the timely reversal of uncollectible interest.

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Securities: Securities are classified as held to maturity ("HTM") and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale ("AFS") consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as AFS are reported at their fair value and the related unrealized gain or loss is reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level yield method without anticipating prepayments. Gains and losses on sales are based on the amortized cost of the security sold. Accrued interest receivable on securities totaled ~~$3.5~~$4.4 million at ~~June~~September 30, 2023and $3.4 million at December 31, ~~2022.~~2022.

ACL - Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses ("ACL") is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. The Company has never experienced a loss on any debt securities AFS. At ~~June~~September 30, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses.

ACL - Securities Held to Maturity - Since the adoption of CECL, the Company measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in the Company's Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. The Company has never experienced any loss on HTM securities. At ~~June~~September 30, 2023, there was no ACL related to securities HTM.

~~NOTE~~ 1– ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~

Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

The Company recognizes a tax position as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and penalties related to income tax matters in income tax expense.

Revenue From Contracts With Customers: The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("Topic 606"). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) it satisfies a performance obligation. No revenue has been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company's primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

The Company generally satisfies its performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Interest Income: The Company’s largest source of revenue is interest income which is primarily recognized on an accrual basis based on contractual terms written into loans and investment contracts.

Noninterest Revenue: The Company derives the majority of its noninterest revenue from: (1) service charges for deposit related services, (2) gains related to mortgage loan sales, (3) trust fees and (4) debit and credit card interchange income. Most of these services are transaction based and revenue is recognized as the related service is provided.

Derivatives: Certain of the Bank’s commercial loan customers have entered into interest rate swap agreements directly with the Bank. At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer. This is known as a back-to-back swap agreement. Under this arrangement the Bank has two freestanding interest rate swaps, each of which is carried at fair value. As the terms mirror each other, there is no income statement impact to the Bank. At ~~June~~ September 30,2023 and December 31,2022, the total notional amount of such agreements was ~~$112.7~~$110.7 million and $125.3 million, respectively, and resulted in a derivative asset with a fair value of ~~$6.0~~$6.8 million and $6.5 million, respectively, which were included in other assets and a derivative liability of ~~$6.0~~$6.8 million and $6.5 million, respectively, which were included in other liabilities.

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as derivatives not qualifying for hedge accounting. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The Bank enters into commitments to sell mortgage backed securities, which it later buys back in order to hedge its exposure to interest rate risk in its mortgage pipeline. At times, the Bank also enters into forward commitments for the future delivery of mortgage loans when loans are closed but not yet sold, in order to hedge the change in interest rates resulting from its commitments to sell the loans.

Changes in the fair values of these interest rate lock and mortgage backed security and forward commitment derivatives are included in net gains on mortgage loans. The fair value of interest rate lock commitments was $0$(2,000) at ~~June~~ September 30,2023 and $0 at December 31, 2022~~31,~~~~2022.~~. The net fair value of mortgage backed security derivatives was ~~$6,000~~$2,000 at ~~June~~ September 30,2023 and $0 at December 31, 2022~~31,~~~~2022.~~

~~NOTE~~ 1– ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. As of ~~June~~ September 30,2023 and December 31,2022, these loans had net unrealized gains of $0 and $4,000, respectively, which are reflected in their carrying value. Changes in fair value of loans held for sale are included in net gains on mortgage loans. Loans are sold with servicing released; therefore no mortgage servicing right assets are established.

Newly Issued Not Yet Effective Standards: FASB issued ASU 2023-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This standard allows 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. This election allows the entity to record a writedown of investment to federal income tax expense where income tax credits are recorded. This also aligns the treatment of other tax equity investments with that allowed for low income housing tax credit investments. The standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years. The Company already utilizes the proportional amortization method for its investments in low income housing tax credit investments and as it has no other types of investments in tax credit structures, adoption of this standard will not have any immediate impact.

FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements. This standard requires entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. The standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years. As the Company does not have any such common control leases, adoption of this standard will not have any immediate impact.

The amortized cost and fair value of securities at period-end were as follows (dollars in thousands):

June 30, 2023	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
												Gross		Gross
										Amortized		Unrealized		Unrealized			Fair
										Cost		Gains		Losses			Value
September 30, 2023
Available for Sale
U.S. Treasury and federal agency securities	$	255,547	$	—	$	(15,366	)	$	240,181	$	255,887	$	—	$	(15,774	)	$	240,113
U.S. Agency MBS and CMOs		130,977		—		(14,828	)		116,149		127,040		—		(17,078	)		109,962
Tax-exempt state and municipal bonds		35,218		5		(612	)		34,611		34,614		—		(1,365	)		33,249
Taxable state and municipal bonds		117,976		36		(7,831	)		110,181		116,132		4		(7,927	)		108,209
Corporate bonds and other debt securities		12,136		—		(421	)		11,715		12,161		—		(417	)		11,744
	$	551,854	$	41	$	(39,058	)	$	512,837	$	545,834	$	4	$	(42,561	)	$	503,277

Held to Maturity
U.S. Treasury	$	251,266	$	—	$	(13,162	)	$	238,104	$	251,248	$	—	$	(12,277	)	$	238,971
Tax-exempt state and municipal bonds		89,134		199		(2,083	)		87,250		78,755		55		(3,323	)		75,487
	$	340,400	$	199	$	(15,245	)	$	325,354	$	330,003	$	55	$	(15,600	)	$	314,458

												Gross		Gross
										Amortized		Unrealized		Unrealized			Fair
										Cost		Gains		Losses			Value
December 31, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale:
U.S. Treasury and federal agency securities	$	240,921	$	23	$	(16,310	)	$	224,634	$	240,921	$	23	$	(16,310	)	$	224,634
U.S. Agency MBS and CMOs		128,165		—		(14,347	)		113,818		128,165		—		(14,347	)		113,818
Tax-exempt state and municipal bonds		37,198		10		(498	)		36,710		37,198		10		(498	)		36,710
Taxable state and municipal bonds		120,647		49		(8,525	)		112,171		120,647		49		(8,525	)		112,171
Corporate bonds and other debt securities		12,387		—		(463	)		11,924		12,387		—		(463	)		11,924
	$	539,318	$	82	$	(40,143	)	$	499,257	$	539,318	$	82	$	(40,143	)	$	499,257
Held to Maturity
U.S. Treasury	$	251,307	$	—	$	(13,677	)	$	237,630	$	251,307	$	—	$	(13,677	)	$	237,630
Tax-exempt state and municipal bonds		97,458		415		(2,853	)		95,020		97,458		415		(2,853	)		95,020
	$	348,765	$	415	$	(16,530	)	$	332,650	$	348,765	$	415	$	(16,530	)	$	332,650

There were no sales of securities in the three and ~~six~~nine month periods ended ~~June~~September 30, 2023 ~~30,~~~~2023~~and ~~2022.~~2022.

On January 1, 2022, the Company reclassified ten U.S. Treasury securities with an amortized cost of $123.5 million from available for sale to held to maturity, as it has the intent and ability to hold these securities to maturity. These securities had net unrealized gains of $113,000 at the date of transfer, which will continue to be reported in accumulated other comprehensive income, and will be amortized over the remaining life of the securities as an adjustment of yield. The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred.

Contractual maturities of debt securities at ~~June~~ September 30,2023 were as follows (dollars in thousands):

									Held–to-Maturity Securities				Available-for-Sale Securities
	Held–to-Maturity Securities				Available-for-Sale Securities				Amortized		Fair		Amortized		Fair
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Cost		Value		Cost		Value
Due in one year or less	$	115,991	$	113,729	$	60,850	$	59,717	$	133,471	$	131,195	$	96,702	$	95,025
Due from one to five years		206,975		194,472		336,794		316,350		179,098		166,829		304,828		283,371
Due from five to ten years		17,434		17,153		24,734		22,027		17,434		16,434		18,656		16,224
Due after ten years		—		—		129,476		114,743		—		—		125,648		108,657
	$	340,400	$	325,354	$	551,854	$	512,837	$	330,003	$	314,458	$	545,834	$	503,277

Securities with unrealized losses at ~~June~~ September 30,2023 and December 31,2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
June 30, 2023	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
																Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2023																Value		Loss			Value		Loss			Value		Loss
Available for Sale
U.S. Treasury and federal agency securities	$	53,921	$	(1,053	)	$	182,058	$	(14,313	)	$	235,979	$	(15,366	)	$	32,037	$	(293	)	$	208,077	$	(15,481	)	$	240,114	$	(15,774	)
U.S. Agency MBS and CMOs		50,238		(1,450	)		65,911		(13,378	)		116,149		(14,828	)		27,594		(646	)		82,369		(16,432	)		109,963		(17,078	)
Tax-exempt state and municipal bonds		30,453		(369	)		5,451		(243	)		35,904		(612	)		18,452		(692	)		14,796		(673	)		33,248		(1,365	)
Taxable state and municipal bonds		31,301		(833	)		73,536		(6,998	)		104,837		(7,831	)		12,611		(153	)		93,537		(7,774	)		106,148		(7,927	)
Corporate bonds and other debt securities		5,445		(161	)		6,270		(260	)		11,715		(421	)		460		(10	)		11,284		(407	)		11,744		(417	)
	$	171,358	$	(3,866	)	$	333,226	$	(35,192	)	$	504,584	$	(39,058	)	$	91,154	$	(1,794	)	$	410,063	$	(40,767	)	$	501,217	$	(42,561	)

Held to Maturity
U.S. Treasury	$	29,018	$	(566	)	$	209,086	$	(12,596	)	$	238,104	$	(13,162	)	$	—	$	—		$	238,972	$	(12,277	)	$	238,972	$	(12,277	)
Tax-exempt state and municipal bonds		10,527		(88	)		47,479		(1,995	)		58,006		(2,083	)		14,869		(206	)		53,122		(3,117	)		67,991		(3,323	)
	$	39,545	$	(654	)	$	256,565	$	(14,591	)	$	296,110	$	(15,245	)	$	14,869	$	(206	)	$	292,094	$	(15,394	)	$	306,963	$	(15,600	)

																Less than 12 Months					12 Months or More					Total
	Less than 12 Months					12 Months or More					Total					Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2022	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Value		Loss			Value		Loss			Value		Loss
Available for Sale:
U.S. Treasury and federal agency securities	$	144,796	$	(6,230	)	$	66,008	$	(10,080	)	$	210,804	$	(16,310	)	$	144,796	$	(6,230	)	$	66,008	$	(10,080	)	$	210,804	$	(16,310	)
U.S. Agency MBS and CMOs		64,427		(4,789	)		41,340		(9,558	)		105,767		(14,347	)		64,427		(4,789	)		41,340		(9,558	)		105,767		(14,347	)
Tax-exempt state and municipal bonds		31,337		(498	)		—		—			31,337		(498	)		31,337		(498	)		—		—			31,337		(498	)
Taxable state and municipal bonds		71,165		(3,337	)		33,452		(5,188	)		104,617		(8,525	)		71,165		(3,337	)		33,452		(5,188	)		104,617		(8,525	)
Corporate bonds and other debt securities		10,668		(357	)		1,256		(106	)		11,924		(463	)		10,668		(357	)		1,256		(106	)		11,924		(463	)
	$	322,393	$	(15,211	)	$	142,056	$	(24,932	)	$	464,449	$	(40,143	)	$	322,393	$	(15,211	)	$	142,056	$	(24,932	)	$	464,449	$	(40,143	)

Held to Maturity:
U.S. Treasury	$	237,630	$	(13,677	)	$	—	$	—		$	237,630	$	(13,677	)	$	237,630	$	(13,677	)	$	—	$	—		$	237,630	$	(13,677	)
Tax-exempt state and municipal bonds		57,671		(2,314	)		21,721		(539	)		79,392		(2,853	)		57,671		(2,314	)		21,721		(539	)		79,392		(2,853	)
	$	295,301	$	(15,991	)	$	21,721	$	(539	)	$	317,022	$	(16,530	)	$	295,301	$	(15,991	)	$	21,721	$	(539	)	$	317,022	$	(16,530	)

Management evaluates securities in an unrealized loss position at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In analyzing an issuer's financial condition, Management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer's financial condition.

At ~~June~~ September 30,2023 ~~454~~, 455 securities available for sale with fair values totaling ~~$504.6~~$501.2 million had unrealized losses totaling ~~$39.1~~$42.6 million. At December 31, 2022, 444 securities available for sale with fair values totaling $464.4 million had unrealized losses totaling $40.1 million. For securities available for sale with unrealized losses, management considered the financial condition of the issuer and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. At ~~June~~ September 30,2023 66, 81 securities held to maturity with fair values totaling ~~$296.1~~$307.0 million had unrealized losses totaling ~~$15.2~~$15.6 million. At December 31, 2022, 76 securities held to maturity with fair values totaling $317.0 million had unrealized losses totaling $16.5 million. Management has the intent and ability to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Management determined that the unrealized losses for each period and each investment were attributable to changes in interest rates and not due to credit quality. As such, no allowance for credit losses on securities available for sale or held to maturity have been established as of ~~June~~September 30, ~~2023.~~2023.

Securities with a carrying value of approximately $3.6 million and $3.5 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at ~~June~~ September 30,2023 and December 31,2022, respectively.

							September 30,			December 31,
	June 30, 2023			December 31, 2022			2023			2022
Commercial and industrial	$	489,273		$	441,716		$	488,224		$	441,716

Commercial real estate:
Residential developed		4,437			7,234			5,040			7,234
Unsecured to residential developers		—			—			800			—
Vacant and unimproved		37,577			36,270			37,084			36,270
Commercial development		94			103			89			103
Residential improved		111,621			112,791			116,407			112,791
Commercial improved		260,394			259,281			257,673			259,281
Manufacturing and industrial		145,490			121,924			150,192			121,924
Total commercial real estate		559,613			537,603			567,285			537,603
Consumer:
Residential mortgage		165,221			139,148			180,420			139,148
Unsecured		113			121			113			121
Home equity		54,568			56,321			51,798			56,321
Other secured		2,788			2,839			3,450			2,839
Total consumer		222,690			198,429			235,781			198,429
Total loans		1,271,576			1,177,748			1,291,290			1,177,748
Allowance for credit losses		(17,109	)		(15,285	)		(17,001	)		(15,285	)
	$	1,254,467		$	1,162,463		$	1,274,289		$	1,162,463

The totals above are shown net of deferred fees and costs. Deferred fees on loans totaled $1.4 million and $1.3 million at ~~June~~ September 30,2023 and December 31,2022, respectively. Deferred costs on loans totaled $1.5 million and $1.4 million at ~~June~~ September 30,2023 and December 31,2022, respectively.

Activity in the allowance for credit losses by portfolio segment was as follows (dollars in thousands):

Three months ended June 30, 2023	Commercial and Industrial			Commercial Real Estate		Consumer			Unallocated			Total
															Commercial
															and			Commercial
Three months ended September 30, 2023															Industrial			Real Estate		Consumer			Unallocated			Total
Beginning balance	$	7,124		$	6,770	$	2,818		$	82		$	16,794		$	7,011		$	6,928	$	3,099		$	71		$	17,109
Charge-offs		—			—		(22	)		—			(22	)		—			—		(41	)		—			(41	)
Recoveries		7			3		27			—			37			8			50		25			—			83
Provision for credit losses (1)		(120	)		155		276			(11	)		300			(398	)		114		177			(43	)		(150	)
Ending Balance	$	7,011		$	6,928	$	3,099		$	71		$	17,109		$	6,621		$	7,092	$	3,260		$	28		$	17,001

Three months ended June 30, 2022	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Beginning balance	$	5,329		$	7,071		$	2,153		$	63		$	14,616
																Commercial
																and			Commercial
Nine months ended September 30, 2023																Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance, prior to adoption of ASU 2016-03																$	5,596		$	7,180		$	2,458		$	51		$	15,285
Impact of adoption of ASU 2016-03																	1,299			(212	)		389			—			1,476
Charge-offs		(38	)		—			(22	)		—			(60	)		—			—			(84	)		—			(84	)
Recoveries		5			38			32			—			75			24			56			94			—			174
Provision for credit losses (1)		(40	)		(87	)		153			(26	)		—			(298	)		68			403			(23	)		150
Ending Balance	$	5,256		$	7,022		$	2,316		$	37		$	14,631		$	6,621		$	7,092		$	3,260		$	28		$	17,001

Six months ended June 30, 2023	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance, prior to adoption of ASU 2016-03	$	5,596	$	7,180		$	2,458		$	51	$	15,285
Impact of adoption of ASU 2016-03		1,299		(212	)		389			—		1,476
														Commercial
														and		Commercial
Three months ended September 30, 2022														Industrial		Real Estate			Consumer			Unallocated			Total
Beginning balance														$	5,256	$	7,022		$	2,316		$	37		$	14,631
Charge-offs		—		—			(43	)		—		(43	)		—		—			(46	)		—			(46	)
Recoveries		16		6			69			—		91			175		5			56			—			236
Provision for credit losses (1)		100		(46	)		226			20		300			179		(147	)		(14	)		(18	)		—
Ending Balance	$	7,011	$	6,928		$	3,099		$	71	$	17,109		$	5,610	$	6,880		$	2,312		$	19		$	14,821

Six months ended June 30, 2022	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
															Commercial
															and			Commercial
Nine months ended September 30, 2022															Industrial			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	5,176		$	8,051		$	2,633		$	29	$	15,889		$	5,176		$	8,051		$	2,633		$	29		$	15,889
Charge-offs		(38	)		—			(57	)		—		(95	)		(38	)		—			(103	)		—			(141	)
Recoveries		10			271			56			—		337			185			276			112			—			573
Provision for credit losses (1)		108			(1,300	)		(316	)		8		(1,500	)		287			(1,447	)		(330	)		(10	)		(1,500	)
Ending Balance	$	5,256		$	7,022		$	2,316		$	37	$	14,631		$	5,610		$	6,880		$	2,312		$	19		$	14,821

The following table presents gross chargeoffs for the ~~six~~nine months ended ~~June~~September 30, 2023by portfolio class and origination year (dollars in thousands):

Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Under CECL for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance on the fair value of collateral.

The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and the loan's amortized cost. If the fair value of the collateral exceeds the loan's amortized cost, no allowance is necessary. The Company's policy is to obtain appraisals on any significant pieces of collateral. For real estate collateral that is in industries that are undergoing significant stress, or properties that are specialized use or have limited marketability, higher discounts are applied in determining fair value.

There have been no significant changes to the types of collateral securing our collateral dependent loans.

The amortized cost of collateral-dependent loans by class as of ~~June~~September 30, 2023was as follows (dollars in thousands):

	Collateral Type						Collateral Type
June 30, 2023	Real Estate		Other		Allowance Allocated
											Allowance
September 30, 2023							Real Estate		Other		Allocated

Commercial and industrial	$	584	$	—	$	—	$	584	$	—	$	—
Commercial real estate:
Residential developed		—		—		—		—		—		—
Unsecured to residential developers		—		—		—		—		—		—
Vacant and unimproved		—		—		—		—		—		—
Commercial development		—		—		—		—		—		—
Residential improved		29		—		—		27		—		—
Commercial improved		299		—		2		296		—		—
Manufacturing and industrial		—		—		—		546		—		—
		328		—		2		869		—		—
Consumer
Residential mortgage		—		—		—		—		—		—
Unsecured		—		—		—		—		—		—
Home equity		—		—		—		—		—		—
Other secured		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	912	$	—	$	2	$	1,453	$	—	$	—

The following table presents the balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on impairment method (dollars in thousands):

											Commercial
											and		Commercial
December 31, 2022	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total		Industrial		Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	55	$	20	$	220	$	—	$	295	$	55	$	20	$	220	$	—	$	295
Collectively evaluated for impairment		5,541		7,160		2,238		51		14,990		5,541		7,160		2,238		51		14,990
Total ending allowance balance	$	5,596	$	7,180	$	2,458	$	51	$	15,285	$	5,596	$	7,180	$	2,458	$	51	$	15,285
Loans:
Individually reviewed for impairment	$	3,603	$	518	$	2,886	$	—	$	7,007	$	3,603	$	518	$	2,886	$	—	$	7,007
Collectively evaluated for impairment		438,113		537,085		195,543		—		1,170,741		438,113		537,085		195,543		—		1,170,741
Total ending loans balance	$	441,716	$	537,603	$	198,429	$	—	$	1,177,748	$	441,716	$	537,603	$	198,429	$	—	$	1,177,748

The following table presents loans individually evaluated for impairment by class of loans as of December 31,2022 (dollars in thousands):

									Unpaid						Year-To-Date
									Principal		Recorded		Allowance		Average Recorded
December 31, 2022	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Year-To-Date Average Recorded Investment		Balance		Investment		Allocated		Investment
With no related allowance recorded:
Commercial and industrial	$	3,278	$	3,278	$	—	$	2,338	$	3,278	$	3,278	$	—	$	2,338
Commercial real estate:
Residential improved		31		31		—		33		31		31		—		33
		31		31		—		33		31		31		—		33
Consumer		—		—		—		—		—		—		—		—
Total with no related allowance recorded	$	3,309	$	3,309	$	—	$	2,371	$	3,309	$	3,309	$	—	$	2,371

With an allowance recorded:
Commercial and industrial	$	325	$	325	$	55	$	365	$	325	$	325	$	55	$	365
Commercial real estate:
Commercial improved		307		307		9		313		307		307		9		313
Manufacturing and industrial		180		180		11		185		180		180		11		185
		487		487		20		498		487		487		20		498
Consumer:
Residential mortgage		2,653		2,653		202		2,619		2,653		2,653		202		2,619
Unsecured		29		29		2		29		29		29		2		29
Home equity		204		204		16		234		204		204		16		234
		2,886		2,886		220		2,882		2,886		2,886		220		2,882
Total with an allowance recorded	$	3,698	$	3,698	$	295	$	3,745	$	3,698	$	3,698	$	295	$	3,745
Total	$	7,007	$	7,007	$	295	$	6,116	$	7,007	$	7,007	$	295	$	6,116

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of ~~June~~ September 30,2023 and December 31, 2022~~31,~~~~2022:~~:

June 30, 2023	Nonaccrual with No Allowance		Nonaccrual with Allowance		Total Nonaccrual		Over 90 days Accruing		Total Nonperforming Loans
																	Over 90		Total
											Nonaccrual with		Nonaccrual with				days		Nonperforming
September 30, 2023											No Allowance		Allowance		Total Nonaccrual		Accruing		Loans
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Residential developed		—		—		—		—		—		—		—		—		—		—
Unsecured to residential developers		—		—		—		—		—		—		—		—		—		—
Vacant and unimproved		—		—		—		—		—		—		—		—		—		—
Commercial development		—		—		—		—		—		—		—		—		—		—
Residential Improved		—		—		—		—		—		—		—		—		—		—
Commercial improved		—		—		—		—		—		—		—		—		—		—
Manufacturing and industrial		—		—		—		—		—		—		—		—		—		—
		—		—		—		—		—		—		—		—		—		—
Consumer:
Residential mortgage		—		72		72		—		72		—		1		1		—		1
Unsecured		—		—		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—		—		—
Other secured		—		—		—		—		—		—		—		—		—		—
		—		72		72		—		72		—		1		1		—		1
Total	$	—	$	72	$	72	$	—	$	72	$	—	$	1	$	1	$	—	$	1

No interest income was recognized on nonaccrual loans during the three and ~~six~~nine months ended ~~June~~September 30, ~~2023.~~2023.

The following table presents the aging of the recorded investment in past due loans as of ~~June~~ September 30,2023 and December 31,2022 by class of loans (dollars in thousands):

June 30, 2023	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
											30-90		Greater Than		Total		Loans Not
September 30, 2023											Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	—	$	—	$	—	$	489,273	$	489,273	$	—	$	—	$	—	$	488,224	$	488,224
Commercial real estate:
Residential developed		—		—		—		4,437		4,437		—		—		—		5,040		5,040
Unsecured to residential developers		—		—		—		—		—		—		—		—		800		800
Vacant and unimproved		—		—		—		37,577		37,577		—		—		—		37,084		37,084
Commercial development		—		—		—		94		94		—		—		—		89		89
Residential improved		—		—		—		111,621		111,621		—		—		—		116,407		116,407
Commercial improved		—		—		—		260,394		260,394		—		—		—		257,673		257,673
Manufacturing and industrial		—		—		—		145,490		145,490		—		—		—		150,192		150,192
		—		—		—		559,613		559,613		—		—		—		567,285		567,285
Consumer:
Residential mortgage		—		71		71		165,150		165,221		—		—		—		180,420		180,420
Unsecured		—		—		—		113		113		—		—		—		113		113
Home equity		87		—		87		54,481		54,568		—		—		—		51,798		51,798
Other secured		—		—		—		2,788		2,788		—		—		—		3,450		3,450
		87		71		158		222,532		222,690		—		—		—		235,781		235,781
Total	$	87	$	71	$	158	$	1,271,418	$	1,271,576	$	—	$	—	$	—	$	1,291,290	$	1,291,290

											30-90		Greater Than		Total		Loans Not
December 31, 2022	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total		Days		90 Days		Past Due		Past Due		Total
Commercial and industrial	$	—	$	—	$	—	$	441,716	$	441,716	$	—	$	—	$	—	$	441,716	$	441,716
Commercial real estate:
Residential developed		—		—		—		7,234		7,234		—		—		—		7,234		7,234
Unsecured to residential developers		—		—		—		—		—		—		—		—		—		—
Vacant and unimproved		—		—		—		36,270		36,270		—		—		—		36,270		36,270
Commercial development		—		—		—		103		103		—		—		—		103		103
Residential improved		—		—		—		112,791		112,791		—		—		—		112,791		112,791
Commercial improved		71		—		71		259,210		259,281		71		—		71		259,210		259,281
Manufacturing and industrial		—		—		—		121,924		121,924		—		—		—		121,924		121,924
		71		—		71		537,532		537,603		71		—		71		537,532		537,603
Consumer:
Residential mortgage		—		77		77		139,071		139,148		—		77		77		139,071		139,148
Unsecured		—		—		—		121		121		—		—		—		121		121
Home equity		24		—		24		56,297		56,321		24		—		24		56,297		56,321
Other secured		—		—		—		2,839		2,839		—		—		—		2,839		2,839
		24		77		101		198,328		198,429		24		77		101		198,328		198,429
Total	$	95	$	77	$	172	$	1,177,576	$	1,177,748	$	95	$	77	$	172	$	1,177,576	$	1,177,748

At times, the Company will modify terms of a loan to allow the customer to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan. In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt. The second note is charged off immediately and collected only after the first note is paid in full. This modification type is commonly referred to as an A-B note structure. For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual status at the time of restructure, it will remain on accrual status after the restructuring. In some cases, a nonaccrual loan may be placed on accrual status at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accrual status.

As with other individually reviewed loans, an allowance for credit loss is estimated for each such modification made to borrowers experiencing financial difficulty based on the most likely source of repayment for each loan. For commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell. For individually reviewed commercial loans where repayment is expected from cash flows from business operations, the allowance is computed based on a discounted cash flow computation. Certain groups of such loans, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted cash flow computation on the change in weighted rate for the pool. The allowance allocations for commercial modifications to borrowers experiencing financial difficulty where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual rate.

The following table presents information regarding modifications to borrowers experiencing financial difficulty as of ~~June~~ September 30,2023 (dollars in thousands):

								September 30, 2023
										Outstanding		Percentage to
	June 30, 2023							Number of		Recorded		Total
	Number of Loans		Outstanding Recorded Balance		Percentage to Total Loans			Loans		Balance		Loans
Commercial and industrial		3	$	288		0.06	%		3	$	266		0.05	%
Commercial real estate		3		501		0.09	%		3		493		0.09	%
Consumer		33		2,850		1.28	%		31		2,690		1.14	%
		39	$	3,639		0.29	%		37	$	3,449		0.27	%

The following table presents information related to modifications to borrowers experiencing financial difficulty as of ~~June~~ September 30, 2023~~30,~~~~2023.~~. The table presents the amount of accruing modifications that were on nonaccrual status prior to the modification, accruing at the time of modification and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the modified terms as of the period reported (dollars in thousands):

			September 30,
	June 30, 2023		2023
Accruing - nonaccrual at modification	$	—	$	—
Accruing - accruing at modification		3,639		3,449
Accruing - upgraded to accruing after six consecutive payments		—		—
	$	3,639	$	3,449

There was one ~~consumer~~commercial loan modification made to a borrower experiencing financial difficulty during the three ~~and~~ ~~six~~month ~~periods~~period ended ~~June~~September 30, 2023. The pre-modification balance of the loan was ~~$34,000~~$584,000 and there was no writedown upon modification. There was one consumer loan and one commercial loan modification made to borrowers experiencing financial difficulty during the nine month period ended September 30, 2023. The pre-modification balance of these loans totaled $618,000 and there were no writedowns upon modification. There was one consumer loan modification made to a borrower experiencing financial difficulty during the three ~~and~~ ~~six~~month ~~periods~~period ended ~~June~~September 30, ~~2022~~2022. The pre-modification balance of this loan totaled $278,000 and there was no writedown upon modification. There were two consumer loan modifications during the nine month period ended September 30, 2022. The pre-modification balance of these loans totaled $377,000 and there were no writedowns upon modification.

There were no defaults on loans with modifications to borrowers experiencing financial difficulty during the three and ~~six~~nine month periods ended ~~June~~ September 30,2023 and the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of modification were not material.

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually and classifies these relationships by credit risk grading. The Company uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits. The higher the risk grade, the stronger likelihood of loss. At grade 7, a loan is placed on nonaccrual status. All commercial loans are assigned a grade at origination, at each renewal or any amendment. When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by the credit department and the loan officer. All watch credits have an ALR completed quarterly which analyzes the collateral position and cash flow of the borrower and its guarantors. Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled. When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR. Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process. The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance. The Company uses the following definitions for the risk grades in ascending order of likelihood of loss:

1. Excellent - Loans supported by extremely strong financial condition or secured by the Bank’s own deposits. Minimal risk to the Bank and the probability of serious rapid financial deterioration is extremely small.

2. Above Average - Loans supported by sound financial statements that indicate the ability to repay or borrowings secured (and margined properly) with marketable securities. Nominal risk to the Bank and probability of serious financial deterioration is highly unlikely. The overall quality of these credits is very high.

3. Good Quality - Loans supported by satisfactory asset quality and liquidity, good debt capacity coverage, and good management in all critical positions. Loans are secured by acceptable collateral with adequate margins. There is a slight risk of deterioration if adverse market conditions prevail.

4. Acceptable Risk - Loans carrying an acceptable risk to the Bank, which may be slightly below average quality. The borrower has limited financial strength with considerable leverage. There is some probability of deterioration if adverse market conditions prevail. These credits should be monitored closely by the Relationship Manager.

5. Marginally Acceptable - Loans are of marginal quality with above normal risk to the Bank. The borrower shows acceptable asset quality but very little liquidity with high leverage. There is inconsistent earning performance without the ability to sustain adverse market conditions. The primary source of repayment is questionable, but the secondary source of repayment still remains an option. Very close attention by the Relationship Manager and management is needed.

6. Substandard - Loans are inadequately protected by the net worth and paying capacity of the borrower or the collateral pledged. The primary and secondary sources of repayment are questionable. Heavy debt condition may be evident and volume and earnings deterioration may be underway. It is possible that the Bank will sustain some loss if the deficiencies are not immediately addressed and corrected.

7. Doubtful - Loans supported by weak or no financial statements, as well as the ability to repay the entire loan, are questionable. Loans in this category are normally characterized less than adequate collateral, insolvent, or extremely weak financial condition. A loan classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses makes collection or liquidation in full highly questionable. The possibility of loss is extremely high, however, activity may be underway to minimize the loss or maximize the recovery.

8. Loss - Loans are considered uncollectible and of little or no value as a bank asset.

The following table summarizes loan ratings by grade for commercial loans (dollars in thousands):

	Term Loans Amortized Cost Basis By Origination Year and Risk Grades																*Term Loans Amortized Cost Basis By Origination Year and Risk Grades*
June 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving		Total
September 30, 2023																	*2023*		*2022*		*2021*		*2020*		*2019*		*Prior*		*Revolving*		*Total*
Commercial
Commercial and industrial
Grades 1-3	$	38,229	$	60,629	$	17,597	$	6,062	$	13,584	$	40,524	$	75,039	$	251,664	$	42,102	$	56,819	$	16,680	$	5,488	$	12,718	$	41,434	$	66,332	$	241,573
Grade 4		34,073		44,956		24,579		18,044		8,718		27,865		74,597		232,832		55,344		40,840		22,181		14,968		7,699		24,553		72,555		238,140
Grade 5		—		330		68		48		84		—		3,586		4,116		—		415		59		284		72		1,232		5,820		7,882
Grade 6		—		10		34		—		—		32		585		661		584		—		20		—		—		25		—		629
Grade 7-8		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	72,302	$	105,925	$	42,278	$	24,154	$	22,386	$	68,421	$	153,807	$	489,273	$	98,030	$	98,074	$	38,940	$	20,740	$	20,489	$	67,244	$	144,707	$	488,224
Residential development
Grades 1-3																	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 4																		399		612		679		—		—		—		3,350		5,040
Grade 5																		—		—		—		—		—		—		—		—
Grade 6																		—		—		—		—		—		—		—		—
Grade 7-8																		—		—		—		—		—		—		—		—
																	$	399	$	612	$	679	$	—	$	—	$	—	$	3,350	$	5,040
Unsecured to residential developers
Grades 1-3																	$	—	$	—	$	—	$	—	$	—	$	800	$	—	$	800
Grade 4																		—		—		—		—		—		—		—		—
Grade 5																		—		—		—		—		—		—		—		—
Grade 6																		—		—		—		—		—		—		—		—
Grade 7-8																		—		—		—		—		—		—		—		—
																	$	—	$	—	$	—	$	—	$	—	$	800	$	—	$	800
Vacant and unimproved
Grades 1-3																	$	449	$	4,842	$	8,144	$	6,874	$	—	$	83	$	150	$	20,542
Grade 4																		1,548		2,498		2,671		7,987		157		110		239		15,210
Grade 5																		1,332		—		—		—		—		—		—		1,332
Grade 6																		—		—		—		—		—		—		—		—
Grade 7-8																		—		—		—		—		—		—		—		—
																	$	3,329	$	7,340	$	10,815	$	14,861	$	157	$	193	$	389	$	37,084
Commercial development
Grades 1-3																	$	—	$	89	$	—	$	—	$	—	$	—	$	—	$	89
Grade 4																		—		—		—		—		—		—		—		—
Grade 5																		—		—		—		—		—		—		—		—
Grade 6																		—		—		—		—		—		—		—		—
Grade 7-8																		—		—		—		—		—		—		—		—
																	$	—	$	89	$	—	$	—	$	—	$	—	$	—	$	89
Residential improved
Grades 1-3	$	—	$	94	$	—	$	—	$	—	$	—	$	—	$	94	$	4,635	$	12,320	$	1,359	$	8,797	$	251	$	5,225	$	789	$	33,376
Grade 4		—		—		—		—		—		—		—		—		974		553		33,253		1,795		7,092		15,454		23,882		83,003
Grade 5		—		—		—		—		—		—		—		—		—		—		28		—		—		—		—		28
Grade 6		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	—	$	94	$	—	$	—	$	—	$	—	$	—	$	94	$	5,609	$	12,873	$	34,640	$	10,592	$	7,343	$	20,679	$	24,671	$	116,407
Commercial improved
Grades 1-3	$	10,855	$	22,493	$	50,283	$	18,553	$	14,127	$	17,113	$	6,894	$	140,318	$	12,533	$	22,410	$	51,324	$	19,385	$	14,513	$	15,695	$	8,582	$	144,442
Grade 4		6,290		34,306		19,195		32,803		17,600		2,802		1,080		114,076		6,353		34,017		16,729		31,082		16,674		2,080		443		107,378
Grade 5		273		32		—		16		2,195		3,135		50		5,701		269		26		—		—		2,164		3,098		—		5,557
Grade 6		—		—		299		—		—		—		—		299		—		—		296		—		—		—		—		296
Grade 7-8		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	17,418	$	56,831	$	69,777	$	51,372	$	33,922	$	23,050	$	8,024	$	260,394	$	19,155	$	56,453	$	68,349	$	50,467	$	33,351	$	20,873	$	9,025	$	257,673
Manufacturing and industrial
Grades 1-3	$	6,697	$	27,465	$	4,621	$	8,148	$	4,305	$	3,897	$	350	$	55,483	$	7,062	$	35,006	$	5,425	$	6,672	$	4,240	$	3,824	$	880	$	63,109
Grade 4		17,524		26,618		13,864		7,773		5,721		13,765		1,610		86,875		16,712		26,539		12,692		7,603		5,641		13,138		1,665		83,990
Grade 5		173		—		—		—		—		316		—		489		170		—		—		—		—		305		—		475
Grade 6		—		—		—		—		—		2,643		—		2,643		—		—		—		—		—		2,618		—		2,618
Grade 7-8		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	24,394	$	54,083	$	18,485	$	15,921	$	10,026	$	20,621	$	1,960	$	145,490	$	23,944	$	61,545	$	18,117	$	14,275	$	9,881	$	19,885	$	2,545	$	150,192
Residential development
Grades 1-3	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 4		256		2,018		1,143		—		—		—		1,020		4,437
Grade 5		—		—		—		—		—		—		—		—
Grade 6		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—
	$	256	$	2,018	$	1,143	$	—	$	—	$	—	$	1,020	$	4,437
Residential improved
Grades 1-3	$	4,590	$	9,457	$	1,410	$	9,172	$	255	$	5,336	$	394	$	30,614
Grade 4		999		560		31,454		1,952		7,163		15,576		23,275		80,979
Grade 5		—		—		28		—		—		—		—		28
Grade 6		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—
	$	5,589	$	10,017	$	32,892	$	11,124	$	7,418	$	20,912	$	23,669	$	111,621
Vacant and unimproved
Grades 1-3	$	460	$	4,441	$	8,310	$	7,042	$	—	$	97	$	—	$	20,350
Grade 4		1,711		2,506		2,813		8,162		160		113		425		15,890
Grade 5		1,337		—		—		—		—		—		—		1,337
Grade 6		—		—		—		—		—		—		—		—
Grade 7-8		—		—		—		—		—		—		—		—
	$	3,508	$	6,947	$	11,123	$	15,204	$	160	$	210	$	425	$	37,577

Total Commercial
Grades 1-3	$	60,831	$	124,579	$	82,221	$	48,977	$	32,271	$	66,967	$	82,677	$	498,523	$	66,781	$	131,486	$	82,932	$	47,216	$	31,722	$	67,061	$	76,733	$	503,931
Grade 4		60,853		110,964		93,048		68,734		39,362		60,121		102,007		535,089		81,330		105,059		88,205		63,435		37,263		55,335		102,134		532,761
Grade 5		1,783		362		96		64		2,279		3,451		3,636		11,671		1,771		441		87		284		2,236		4,635		5,820		15,274
Grade 6		—		10		333		—		—		2,675		585		3,603		584		—		316		—		—		2,643		—		3,543
Grade 7-8		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	123,467	$	235,915	$	175,698	$	117,775	$	73,912	$	133,214	$	188,905	$	1,048,886	$	150,466	$	236,986	$	171,540	$	110,935	$	71,221	$	129,674	$	184,687	$	1,055,509

As of December 31,2022, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans by year of origination and based on delinquency status at ~~June~~September 30, 2023 (~~dollars~~ (dollars in thousands):

	Term Loans Amortized Cost Basis By Origination Year																*Term Loans Amortized Cost Basis By Origination Year*
June 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving		Total
September 30, 2023																	*2023*		*2022*		*2021*		*2020*		*2019*		*Prior*		*Revolving*		*Total*
Retail
Residential mortgage
Performing	$	36,055	$	41,784	$	26,777	$	10,181	$	5,059	$	30,898	$	14,395	$	165,149	$	57,860	$	40,375	$	26,324	$	9,800	$	4,936	$	29,136	$	11,989	$	180,420
Nonperforming		—		—		—		—		—		72		—		72		—		—		—		—		—		—		—		—
	$	36,055	$	41,784	$	26,777	$	10,181	$	5,059	$	30,970	$	14,395	$	165,221	$	57,860	$	40,375	$	26,324	$	9,800	$	4,936	$	29,136	$	11,989	$	180,420
Consumer unsecured
Performing	$	—	$	—	$	—	$	12	$	14	$	87	$	—	$	113	$	—	$	—	$	—	$	12	$	13	$	—	$	88	$	113
Nonperforming		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	—	$	—	$	—	$	12	$	14	$	87	$	—	$	113	$	—	$	—	$	—	$	12	$	13	$	—	$	88	$	113
Home equity
Performing	$	131	$	803	$	227	$	478	$	228	$	2,209	$	50,492	$	54,568	$	256	$	701	$	223	$	461	$	219	$	1,989	$	47,949	$	51,798
Nonperforming		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	131	$	803	$	227	$	478	$	228	$	2,209	$	50,492	$	54,568	$	256	$	701	$	223	$	461	$	219	$	1,989	$	47,949	$	51,798
Other
Performing	$	742	$	872	$	645	$	295	$	70	$	164	$	—	$	2,788	$	1,658	$	745	$	607	$	251	$	50	$	139	$	—	$	3,450
Nonperforming		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
	$	742	$	872	$	645	$	295	$	70	$	164	$	—	$	2,788	$	1,658	$	745	$	607	$	251	$	50	$	139	$	—	$	3,450

Total Retail	$	36,928	$	43,459	$	27,649	$	10,966	$	5,371	$	33,430	$	64,887	$	222,690	$	59,774	$	41,821	$	27,154	$	10,524	$	5,218	$	31,264	$	60,026	$	235,781

The following table presents the recorded investment in consumer loans based on payment status at December 31, 2022 (~~dollars~~ (dollars in thousands):

									Residential		Consumer		Home		Consumer
December 31, 2022	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other		Mortgage		Unsecured		Equity		Other
Performing	$	139,071	$	121	$	56,321	$	2,839	$	139,071	$	121	$	56,321	$	2,839
Nonperforming		77		—		—		—		77		—		—		—
Total	$	139,148	$	121	$	56,321	$	2,839	$	139,148	$	121	$	56,321	$	2,839

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value include:

Investment Securities: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable market inputs (Level 3 inputs).

Loans Held for Sale: The fair value of loans held for sale is based upon binding quotes from third party investors (Level 2 inputs).

Impaired Loans: Loans identified as impaired are measured using one of three methods: the loan’s observable market price, the fair value of collateral or the present value of expected future cash flows. For each period presented, no impaired loans were measured using the loan’s observable market price. If an impaired loan has had a charge-off or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level 3. The fair value of collateral of impaired loans is generally based on recent real estate appraisals, less costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Other real estate owned (OREO) properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis. Adjustments to OREO are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.

Interest Rate Swaps: For interest rate swap agreements, we measure fair value utilizing pricing provided by a third-party pricing source that that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate swap agreements are classified as Level 3.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

~~Assets measured at fair value on a non-recurring basis are summarized below (in thousands):~~

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis was as follows at period end (dollars in thousands):

Asset Fair
Value

Valuation
Technique

Unobservable
Inputs

Range (%)

Asset Fair

Valuation

Unobservable

June 30, 2023

Value

Technique

Inputs

Range (%)

September 30, 2023

Collateral dependent loans

910

Sales comparison approach

Adjustment for differences
between comparable sales

1.5

20.0

Sales comparison approach

Adjustment for differences between comparable sales

2.0 to 41.0

Income approach

Capitalization rate

9.5

11.0

Income approach

Capitalization rate

7.5 to 8.5

Asset Fair

Valuation

Unobservable

Asset Fair
Value

Valuation
Technique

Unobservable
Inputs

Range (%)

Value

Technique

Inputs

Range (%)

December 31, 2022

Impaired Loans

328

Sales comparison approach

Adjustment for differences
between comparable sales

1.5

20.0

328

Sales comparison approach

Adjustment for differences between comparable sales

1.5 to 20.0

Income approach

Capitalization rate

9.5

11.0

Income approach

Capitalization rate

9.5 to 11.0

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at ~~June~~ September 30,2023 and December 31,2022 (dollars in thousands):

														Level in	September 30, 2023						December 31, 2022
	Level in	June 30, 2023						December 31, 2022						Fair Value	Carrying			Fair			Carrying			Fair
	Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Hierarchy	Amount			Value			Amount			Value
Financial assets
Cash and due from banks	Level 1	$	40,255		$	40,255		$	51,215		$	51,215		Level 1	$	40,687		$	40,687		$	51,215		$	51,215
Federal funds sold and other short-term investments	Level 1		343,676			343,676			703,955			703,955		Level 1		469,786			469,786			703,955			703,955
Securities held to maturity - U.S. Treasury	Level 2		251,266			238,104			251,307			237,630		Level 2		251,248			238,971			251,307			237,630
Securities held to maturity - tax-exempt and municipal	Level 3		89,134			87,250			97,458			95,020		Level 3		78,755			75,487			97,458			95,020
FHLB stock	Level 3		10,211			10,211			10,211			10,211		Level 3		10,211			10,211			10,211			10,211
Loans, net	Level 2		1,253,557			1,233,454			1,162,135			1,131,387		Level 2		1,274,262			1,249,319			1,162,135			1,131,387
Bank owned life insurance	Level 3		53,791			53,791			53,345			53,345		Level 3		54,043			54,043			53,345			53,345
Accrued interest receivable	Level 2		7,499			7,499			7,606			7,606		Level 2		9,957			9,957			7,606			7,606
Financial liabilities
Deposits	Level 2		(2,321,545	)		(2,323,329	)		(2,615,142	)		(2,615,860	)	Level 2		(2,445,586	)		(2,447,649	)		(2,615,142	)		(2,615,860	)
Other borrowed funds	Level 2		(30,000	)		(28,785	)		(30,000	)		(28,666	)	Level 2		(30,000	)		(29,006	)		(30,000	)		(28,666	)
Accrued interest payable	Level 2		(365	)		(365	)		(114	)		(114	)	Level 2		(554	)		(554	)		(114	)		(114	)
Off-balance sheet credit-related items
Loan commitments	Loan commitments		—			—			—			—		Loan commitments		—			—			—			—

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable, demand deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions, or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability, so fair value approximates its cost. The fair value of off-balance sheet credit-related items is not significant.

The estimated fair values of financial instruments disclosed above follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity and marketability factors.

Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. The Company executes interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings. Since they offset perfectly, there is no net impact to earnings.

The notional and fair value of derivative instruments as of ~~June~~ September 30,2023 and December 31,2022 are reflected in the following table (dollars in thousands):

	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
June 30, 2023
September 30, 2023
Derivative assets
Interest rate swaps	$	56,325	Other Assets	$	6,000	$	55,349	Other Assets	$	6,812

Derivative liabilities
Interest rate swaps		56,325	Other Liabilities		6,000		55,349	Other Liabilities		6,812

The fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was ~~$6.0~~$6.8 million and $6.5 million as of ~~June~~ September 30,2023 and December 31,2022, respectively. The Bank has a master netting arrangement with the correspondent bank and has the right to offset, however it has elected to present the assets and liabilities gross. The Bank is required to pledge collateral to the correspondent bank equal to or in excess of the net liability position. The Bank's derivative liability with the correspondent bank was $0 at ~~June~~September 30, 2023and$0 at December 31, ~~2022.~~ 2022. Securities pledged as collateral with fair values totaling ~~$1.8~~$1.7 million and $1.7 million were provided to the counterparty correspondent bank as of ~~June~~ September 30,2023 and December 31,2022, respectively.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating ~~$56.3~~$55.3 million as of ~~June~~ September 30,2023 and $62.7 million at December 31, 2022~~31,~~~~2022.~~. Associated credit exposure is generally mitigated by securing the interest rate swaps with the underlying collateral of the loan instrument that has been hedged.

Time deposits that exceeded the FDIC insurance limit of $250,000 were approximately ~~$73.1~~$85.1 million at ~~June~~ September 30,2023 and $29.7 million at December 31, 2022~~31,~~~~2022.~~.

Other borrowed funds include advances from the Federal Home Loan Bank and borrowings from the Federal Reserve Bank.

At period-end, advances from the Federal Home Loan Bank were as follows (dollars in thousands):

Each advance is subject to a prepayment fee if paid prior to its maturity date. Fixed rate advances are payable at maturity. Amortizable mortgage advances are fixed rate advances with scheduled repayments based upon amortization to maturity. These advances were collateralized by residential and commercial real estate loans totaling ~~$455.2~~$463.5 million and $446.1 million under a blanket lien arrangement at ~~June~~ September 30,2023 and December 31,2022, respectively. The $20.0 million putable advance at ~~June~~September 30, 2023and December 31, 2022had a one-time put option on November 13, 2020. The FHLB did not exercise this option.

Scheduled repayments of FHLB advances as of ~~June~~ September 30,2023 were as follows (in thousands):

The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at ~~June~~ September 30,2023 and December 31,2022, and the Company had approximately ~~$3.4~~$1.3 million and $5.5 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling ~~$3.6~~$1.4 million and $5.8 million at ~~June~~ September 30,2023 and December 31,2022, respectively. In March 2023, the Federal Reserve Bank implemented a new lending facility called the Bank Term Funding Program. This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses. The term is for one year and the interest rate is fixed at the time the advance is taken and there is no prepayment penalty. Allowable investments for pledge are those the Federal Reserve Bank can own. This would include all of the Company's investments except municipal securities and corporate bonds. At ~~June~~September 30, 2023, the Company had no advances under this program and had ~~$638.3~~$634.4 million in unused borrowing capacity under this program. The program expires on March 11, 2024.

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three and ~~six~~nine month periods ended ~~June~~September 30, 2023 ~~30,~~~~2023~~and 2022 are as follows (dollars in thousands, except per share data):

									Three Months		Three Months		Nine Months		Nine Months
									Ended		Ended		Ended		Ended
									September 30,		September 30,		September 30,		September 30,
	Three Months Ended June 30, 2023		Three Months Ended June 30, 2022		Six Months Ended June 30, 2023		Six Months Ended June 30, 2022		2023		2022		2023		2022
Net income available to common shares	$	10,312	$	6,568	$	22,316	$	12,568	$	11,413	$	10,045	$	33,729	$	22,614
Weighted average shares outstanding, including participating stock awards - Basic		34,292,179		34,253,846		34,294,570		34,254,306		34,291,487		34,251,792		34,293,531		34,253,459
Dilutive potential common shares:
Stock options		—		—		—		—		—		—		—		—
Weighted average shares outstanding - Diluted		34,292,179		34,253,846		34,294,570		34,254,306		34,291,487		34,251,792		34,293,531		34,253,459
Basic earnings per common share	$	0.30	$	0.19	$	0.65	$	0.37	$	0.33	$	0.29	$	0.98	$	0.66
Diluted earnings per common share	$	0.30	$	0.19	$	0.65	$	0.37	$	0.33	$	0.29	$	0.98	$	0.66

There were no antidilutive shares of common stock in the three and ~~six~~nine month periods ended ~~June~~September 30, 2023 ~~30,~~~~2023~~and ~~2022.~~2022.

									Three Months		Three Months		Nine Months		Nine Months
									Ended		Ended		Ended		Ended
									September 30,		September 30,		September 30,		September 30,
	Three Months Ended June 30, 2023		Three Months Ended June 30, 2022		Six Months Ended June 30, 2023		Six Months Ended June 30, 2022		2023		2022		2023		2022
Current	$	2,442	$	1,416	$	5,267	$	2,351	$	2,654	$	2,436	$	7,921	$	4,787
Deferred		32		77		182		533		154		52		336		585
	$	2,474	$	1,493	$	5,449	$	2,884	$	2,808	$	2,488	$	8,257	$	5,372

The difference between the financial statement tax expense and amount computed by applying the statutory federal tax rate to pretax income was reconciled as follows (dollars in thousands):

													Three Months			Three Months			Nine Months			Nine Months
													Ended			Ended			Ended			Ended
													September 30,			September 30,			September 30,			September 30,
	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022			Six Months Ended June 30, 2023			Six Months Ended June 30, 2022			2023			2022			2023			2022
Statutory rate		21	%		21	%		21	%		21	%		21	%		21	%		21	%		21	%
Statutory rate applied to income before taxes	$	2,685		$	1,693		$	5,831		$	3,245		$	2,986		$	2,632		$	8,817		$	5,877
Deduct
Tax-exempt interest income		(142	)		(143	)		(289	)		(297	)		(114	)		(137	)		(362	)		(434	)
Bank-owned life insurance		(46	)		(49	)		(88	)		(99	)		(51	)		(45	)		(139	)		(144	)
Other, net		(23	)		(8	)		(5	)		35			(13	)		38			(59	)		73
	$	2,474		$	1,493		$	5,449		$	2,884		$	2,808		$	2,488		$	8,257		$	5,372

The realization of deferred tax assets is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. Management believes it is more likely than not that all of the deferred tax assets at ~~June~~ September 30,2023 will be realized against deferred tax liabilities and projected future taxable income.

The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):

							September 30,			December 31,
	June 30, 2023			December 31, 2022			2023			2022
Deferred tax assets
Allowance for credit losses	$	3,592		$	3,210		$	3,570		$	3,210
Net deferred loan fees		—			—			—			—
Nonaccrual loan interest		13			12			13			12
Valuation allowance on other real estate owned		—			—			—			—
Unrealized loss on securities available for sale and transferred to held to maturity		8,177			8,394			8,921			8,394
Other		394			257			388			257
Gross deferred tax assets		12,176			11,873			12,892			11,873
Valuation allowance		—			—			—			—
Total net deferred tax assets		12,176			11,873			12,892			11,873
Deferred tax liabilities
Depreciation		(1,075	)		(1,098	)		(1,032	)		(1,098	)
Net deferred loan fees		(8	)		(309	)		(15	)		(309	)
Prepaid expenses		(309	)		(21	)		(303	)		(21	)
Other		(1,148	)		(733	)		(1,316	)		(733	)
Gross deferred tax liabilities		(2,540	)		(2,161	)		(2,666	)		(2,161	)
Net deferred tax asset	$	9,636		$	9,712		$	10,226		$	9,712

There were no unrecognized tax benefits at ~~June~~ September 30,2023 or December 31,2022 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to audit by the Internal Revenue Service for years before 2020.

Some financial instruments are used to meet customer financing needs and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to varying degrees, credit and interest rate risk in excess of the amount reported in the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates. Collateral or other security is normally not obtained for these financial instruments prior to their use and many of the commitments are expected to expire without being used. Standby letters of credit are conditional commitments to guarantee a customer’s performance to a third party. Exposure to credit loss if the customer does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. At ~~June~~September 30, 2023, the reserve for unfunded commitments was $73,000 and was included in other liabilities in the Company's consolidated balance sheet.

A summary of the contractual amounts of financial instruments with off‑balance‑sheet risk was as follows at period-end (dollars in thousands):

					September 30,		December 31,
	June 30, 2023		December 31, 2022		2023		2022
Commitments to extend credit	$	102,635	$	77,384	$	83,509	$	77,384
Letters of credit		12,234		13,455		10,034		13,455
Unused lines of credit		726,021		745,674		715,072		745,674

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately ~~$302,000~~$0 and $0 at ~~June~~ September 30,2023 and December 31,2022, respectively.

The Bank enters into commitments to sell mortgage backed securities, which it later buys back in order to hedge its exposure to interest rate risk in its mortgage pipeline. These commitments were ~~approximately $1.8 million~~approximately$250,000 and $0 at ~~June~~ September 30,2023 and December 31,2022, respectively.

At ~~June~~ September 30,2023, approximately ~~53.1%~~39.1% of the Bank’s commitments to make loans were at fixed rates, offered at current market rates. The remainder of the commitments to make loans were at variable rates tied to prime or one month term SOFR and generally expire within 30 days. The majority of the unused lines of credit were at variable rates tied to prime or SOFR.

The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. As of ~~June~~ September 30,2023, there were no material pending legal proceedings to which the Company or any of its subsidiaries are a party or which any of its properties are the subject.

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

The regulatory capital requirements include a common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which effectively results in a minimum CET1 ratio of 7.0%. The minimum ratio of Tier 1 capital to risk-weighted assets is 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5%), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer). The minimum leverage ratio is 4.0%.

At ~~June~~ September 30,2023 and December 31,2022, actual capital levels and minimum required levels were (dollars in thousands):

						Minimum Capital					Minimum Capital Adequacy With					To Be Well Capitalized Under Prompt Corrective																				To Be Well
	Actual					Adequacy					Capital Buffer					Action Regulations										Minimum					Minimum Capital					Capitalized Under
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio								Capital					Adequacy With					Prompt Corrective
June 30, 2023
																					Actual					Adequacy					Capital Buffer					Action Regulations
																					Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2023
CET1 capital (to risk weighted assets)
Consolidated	$	294,579		17.2	%	$	77,231		4.5	%	$	120,138		7.0	%		N/A		N/A		$	303,438		17.7	%	$	77,330		4.5	%	$	120,292		7.0	%		N/A		N/A
Bank		285,930		16.7			77,219		4.5			120,119		7.0		$	111,539		6.5	%		294,503		17.1			77,329		4.5			120,289		7.0		$	111,697		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		294,579		17.2			102,975		6.0			145,881		8.5			N/A		N/A			303,438		17.7			103,107		6.0			146,068		8.5			N/A		N/A
Bank		285,930		16.7			102,959		6.0			145,858		8.5			137,278		8.0			294,503		17.1			103,105		6.0			146,065		8.5			137,473		8.0
Total capital (to risk weighted assets)
Consolidated		311,688		18.2			137,300		8.0			180,206		10.5			N/A		N/A			320,439		18.7			137,476		8.0			180,437		10.5			N/A		N/A
Bank		303,039		17.7			137,278		8.0			180,178		10.5			171,598		10.0			311,504		18.1			137,473		8.0			180,434		10.5			171,842		10.0
Tier 1 capital (to average assets)
Consolidated		294,579		11.1			106,389		4.0			N/A		N/A			N/A		N/A			303,438		10.9			111,285		4.0			N/A		N/A			N/A		N/A
Bank		285,930		10.8			106,386		4.0			N/A		N/A			132,982		5.0			294,503		10.6			111,280		4.0			N/A		N/A			139,100		5.0

December 31, 2022
CET1 capital (to risk weighted assets)
Consolidated	$	278,615		16.9	%	$	74,003		4.5	%	$	115,116		7.0	%		N/A		N/A		$	278,615		16.9	%	$	74,003		4.5	%	$	115,116		7.0	%		N/A		N/A
Bank		270,274		16.4			73,992		4.5			115,098		7.0		$	106,877		6.5	%		270,274		16.4			73,992		4.5			115,098		7.0		$	106,877		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		278,615		16.9			98,670		6.0			139,783		8.5			N/A		N/A			278,615		16.9			98,670		6.0			139,783		8.5			N/A		N/A
Bank		270,274		16.4			98,655		6.0			139,762		8.5			131,540		8.0			270,274		16.4			98,655		6.0			139,762		8.5			131,540		8.0
Total capital (to risk weighted assets)
Consolidated		293,900		17.9			131,561		8.0			172,673		10.5			N/A		N/A			293,900		17.9			131,561		8.0			172,673		10.5			N/A		N/A
Bank		285,559		17.4			131,540		8.0			172,647		10.5			164,426		10.0			285,559		17.4			131,540		8.0			172,647		10.5			164,426		10.0
Tier 1 capital (to average assets)
Consolidated		278,615		9.7			114,589		4.0			N/A		N/A			N/A		N/A			278,615		9.7			114,589		4.0			N/A		N/A			N/A		N/A
Bank		270,274		9.4			114,582		4.0			N/A		N/A			143,227		5.0			270,274		9.4			114,582		4.0			N/A		N/A			143,227		5.0

The Bank was categorized as "well capitalized" at ~~June~~ September 30,2023 and December 31, 2022~~31,~~~~2022.~~.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Macatawa Bank Corporation is a Michigan corporation and a registered bank holding company. It wholly-owns Macatawa Bank. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the FDIC. The Bank operates twenty-six branch offices and a lending and operational service facility, providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan. For further information regarding consolidation, see the Notes to Consolidated Financial Statements.

At ~~June~~September 30, 2023, we had total assets of ~~$2.63~~$2.76 billion, total loans of ~~$1.27~~$1.29 billion, total deposits of ~~$2.32~~$2.45 billion and shareholders' equity of ~~$263.8~~$269.9 million. For the three months ended ~~June~~September 30, 2023, we recognized net income of ~~$10.3~~$11.4 million compared to ~~$6.6~~$10.0 million for the same period in 2022. For the ~~six~~nine months ended ~~June~~September 30, 2023, we recognized net income of ~~$22.3~~$33.7 million compared to ~~$12.6~~$22.6 million for the same period in 2022. The Bank was categorized as “well capitalized” under regulatory capital standards at ~~June~~September 30, 2023.

We paid a dividend of $0.08 per share in each quarter in 2022 and in each of the first ~~two~~three quarters of 2023.

In early March 2023, three bank failures caused concern regarding the financial condition and stability of the banking industry in general. We believe that, due to the strength of Macatawa Bank Corporation's financial condition, there was little impact of this concern on the Company. While our deposits decreased by $284.2 million in the first quarter of 2023, most of the decline took place prior to the bank failures noted. Our deposits were stable in the second quarter of 2023, declining by $9.4 ~~million.~~million and increased by $124.8 million for the third quarter of 2023.

Regarding our liquidity position, at ~~June~~September 30, 2023, the Company had ~~$343.7~~$469.8 million in federal funds sold and overnight balances and had total additional borrowing capacity of ~~$964.2~~$964.5 million, including ~~$257.5~~$263.7 million in unused availability with the FHLB, $65.0 million in available fed funds facilities with correspondent banks, ~~$3.4~~$1.3 million in availability at the FRB's Discount Window and ~~$638.3~~$634.4 million availability in the FRB Bank Term Funding Program. At ~~June~~September 30, 2023, our uninsured deposits totaled approximately ~~$952.9 million,~~$1.10 billion, or ~~41%~~45% of total ~~deposits, and~~deposits. At September 30, 2023, our liquidity sources exceeded the amount of uninsured deposit balances by ~~over $300~~$336.6 million.

Our deposit base is primarily made up of many small accounts, and balances at ~~June~~September 30, 2023 were comprised of ~~45%~~42% personal customers and ~~55%~~58% business customers. Our core deposits - which we define as deposits we have sourced within our local markets - represented 100% of our total deposits at ~~June~~September 30, 2023. Our total deposit balance of ~~$2.32~~$2.45 billion at ~~June~~September 30, 2023 remains elevated, reflecting a ~~$616.2~~$740.2 million increase, or ~~36%~~43%, over pre-pandemic totals of $1.71 billion as of March 31, 2020.

Summary: Net income for the three months ended ~~June~~September 30, 2023 was ~~$10.3~~$11.4 million, compared to ~~$6.6~~$10.0 million for the same period in 2022. Net income per share on a diluted basis for the three months ended ~~June~~September 30, 2023 was ~~$0.30~~$0.33 compared to ~~$0.19~~$0.29 for the same period in 2022. Net income for the ~~six~~nine months ended ~~June~~September 30, 2023 was ~~$22.3~~$33.7 million, compared to ~~$12.6~~$22.6 million for the same period in 2022. Net income per share on a diluted basis for the ~~six~~nine months ended ~~June~~September 30, 2023 was ~~$0.65~~$0.98 compared to ~~$0.37~~$0.66 for the same period in 2022.

The increase in earnings in the three and ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same periods in 2022 was due primarily to higher levels of net interest income partially offset by lower mortgage banking ~~income and a provision for credit loss expense taken in the three months ended June 30, 2023.~~income. Throughout 2022, beginning in March, the Federal Reserve Bank increased the federal funds rate several times, bringing the high end of their rate range from 0.25% at the beginning of 2022 to 4.50% at the end of 2022. The Federal Reserve Bank raised this rate an additional 50 basis points to 5.00% during the three months ended March 31, 2023, ~~and~~ another 25 basis points to 5.25% in the three months ended June 30, 2023 and another 25 basis points to 5.50% in the three months ended September 30, 2023. Given our asset sensitive balance sheet posture, this had a significant positive impact on our net interest income. Net interest income increased to ~~$21.1~~$22.2 million in the three months ended ~~June~~September 30, 2023 compared to ~~$14.8~~$19.8 million in the same period in 2022 and to ~~$43.8~~$66.0 million in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to ~~$27.5~~$47.3 million in the same period in 2022. The high interest rate environment had a negative impact on our mortgage business as gains on sales of mortgage loans decreased to $5,000 in the three months ended September 30, 2023 compared to $166,000 in the same period in 2022. Gains on sales of mortgage loans decreased to ~~$21,000~~$37,000 in the ~~three~~nine months ended ~~June~~September 30, 2023 compared to ~~$199,000 in the same period in 2022. Gains on sales of mortgage loans decreased to $32,000 in the six months ended June 30, 2023 compared to $508,000~~$673,000 in the same period in 2022.

The provision for credit losses was ~~$300,000~~a benefit of $150,000 for the three months ended ~~June~~September 30, 2023, compared to $0 for the same period in 2022. We were in a net loan recovery position for the three months ended ~~June~~September 30, 2023, with ~~$15,000~~$42,000 in net loan recoveries, compared to ~~$15,000~~$190,000 in net loan recoveries in the same period in 2022. The provision for credit losses was ~~$300,000~~$150,000 for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to a provision benefit of $1.5 million for same period in 2022. We were also in a net loan recovery position for the ~~six~~nine months ended ~~June~~September 30, 2023, with ~~$48,000~~$90,000 in net recoveries compared to ~~$242,000~~$432,000 in net recoveries in the same period in 2022. Several of the previous qualitative environmental factors related to the COVID-19 pandemic were reduced in the first quarter of 2022, reflecting improvement in economic conditions and success at mitigating the effects of the COVID-19 pandemic, resulting in the net provision benefit recorded in the first ~~six~~nine months of 2022. Also impacting comparability between periods is our adoption of ASU 2016-13, commonly referred to as CECL, effective January 1, 2023. At adoption, we increased the allowance for credit losses by $1.5 million. Provisions for the 2023 periods were determined under CECL while the 2022 periods were determined under the probable incurred loss model.

Net Interest Income: Net interest income totaled ~~$21.1~~$22.2 million for the three months ended ~~June~~September 30, 2023 compared to ~~$14.8~~$19.8 million for the same period in 2022. Net interest income totaled ~~$43.8~~$66.0 million for the ~~six~~nine months ended ~~June~~September 30, 2023 compared to ~~$27.5~~$47.3 million for the same period in 2022. Net interest income ~~benefitted~~benefited in each period as a result of the Federal Reserve Bank's federal funds rate increase campaign to combat inflation, which began in March 2022 and has risen ~~475~~500 basis points since then from 0.50% at the end of March 2022 to ~~5.25%~~5.50% at the end of ~~June~~September 2023.

Net interest income for the ~~six~~nine months ended ~~June~~September 30, 2023 increased ~~$16.3~~$18.7 million compared to the same period in 2022. Of this increase, ~~$2.1 million~~$617,000 was from changes in the volume of average interest earning assets and interest bearing liabilities and ~~$14.2~~$18.1 million was from increases from changes in rates earned or paid. The largest changes occurred in interest income on commercial loans and in overnight funds. The net change in interest income for commercial loans was an increase of ~~$11.4~~$14.9 million with an increase of ~~$9.5~~$13.1 million due to rate and an increase of ~~$1.9~~$1.8 million due to portfolio growth. Overnight funds contributed an increase of ~~$8.7~~$10.5 million, with ~~$10.5~~$15.4 million due to changes in rate, partially offset by a reduction of ~~$1.8~~$4.9 million due to lower average balances compared to the ~~six~~nine months ended ~~June~~September 30, 2022 as excess funds were deployed into loans and investment securities. The average balance of our investment portfolio grew by ~~$237.1~~$181.1 million from ~~$662.6~~$711.8 million in the ~~six~~nine months ended ~~June~~September 30, 2022 to ~~$899.7~~$892.9 million in the same period in 2023. This growth resulted in an additional ~~$5.0~~$2.7 million of interest income in the first ~~six~~nine months of 2023.

The cost of interest bearing liabilities increased to ~~1.43%~~1.69% in the ~~second~~third quarter of 2023 compared to ~~0.14%~~0.26% in the ~~second~~third quarter of 2022. For the first ~~six~~nine months of 2023, the cost of interest bearing liabilities increased to ~~1.25%~~1.40% compared to ~~0.12%~~0.17% for the same period in 2022. Increases in the rates paid on our interest-bearing checking, savings, money market and certificate of deposit accounts in response to the federal funds rate and market rate increases over the past year as well as significant growth in our certificate of deposit account balances caused the increase in our cost of funds in these periods.

The asset yield improvement to ~~4.31%~~4.48% in the ~~second~~third quarter of 2023 from ~~2.28%~~3.02% in the ~~second~~third quarter of 2022 far outweighed the increase in cost of funds. As a result, net interest margin improved to ~~3.36%~~3.35% for the ~~second~~third quarter 2023 compared to ~~2.19%~~2.86% for the ~~second~~third quarter of 2022. Similarly for the ~~six~~nine month periods ended ~~June~~September 30, 2023 and 2022, our asset yield improved from ~~2.10%~~2.41% in 2022 to ~~4.23%~~4.31% in 2023, resulting in an increase in our net interest margin from ~~2.02%~~2.30% for the ~~six~~nine months ended ~~June~~September 30, 2022 to ~~3.40%~~3.38% for the ~~six~~nine months ended ~~June~~September 30, 2023.

The following table shows an analysis of net interest margin for the three month periods ended ~~June~~September 30, 2023 and 2022 (dollars in thousands):

																	For the three months ended September 30,
																	2023								2022
	For the three months ended June 30,																			Interest		Average						Interest		Average
	2023								2022								Average			Earned		Yield			Average			Earned		Yield
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost			Balance			or Paid		or Cost			Balance			or Paid		or Cost
Assets
Taxable securities	$	772,311		$	4,596		2.38	%	$	587,263		$	2,618		1.78	%	$	766,437		$	4,565		2.38	%	$	670,832		$	3,323		1.98	%
Tax-exempt securities (1)		128,413			678		2.72			164,148			702		2.20			112,942			671		3.06			137,645			668		2.50
Commercial loans (2)		1,033,881			14,577		5.58			922,796			8,587		3.72			1,044,065			15,096		5.66			937,125			10,223		4.27
PPP loans (3)		—			—		—			5,037			199		15.80			—			—		—			1,745			94		21.08
Residential mortgage loans		156,043			1,534		3.93			120,838			988		3.27			172,580			1,816		4.20			128,611			1,093		3.39
Consumer loans		55,955			1,064		7.63			55,876			570		4.09			57,225			1,153		8.00			57,724			754		5.18
Federal Home Loan Bank stock		10,211			72		2.78			10,211			51		1.97			10,211			80		3.08			10,211			53		2.04
Federal funds sold and other short-term investments		360,023			4,599		5.05			858,545			1,720		0.79			467,434			6,406		5.36			803,082			4,667		2.27
Total interest earning assets (1)		2,516,837			27,120		4.31			2,724,714			15,435		2.28			2,630,894			29,787		4.48			2,746,975			20,875		3.02
Noninterest earning assets:
Cash and due from banks		34,365								35,869								41,475								42,454
Other		74,132								86,798								70,700								84,914
Total assets	$	2,625,334							$	2,847,381							$	2,743,069							$	2,874,343
Liabilities
Deposits:
Interest bearing demand	$	601,484		$	725		0.48	%	$	679,168		$	54		0.03	%	$	625,963		$	708		0.45	%	$	713,913		$	247		0.14	%
Savings and money market accounts		829,394			3,390		1.64			871,875			146		0.07			838,733			4,019		1.90			871,508			636		0.29
Time deposits		210,979			1,701		3.23			88,341			45		0.20			272,883			2,656		3.86			83,192			61		0.29
Borrowings:
Other borrowed funds		30,000			158		2.08			54,305			347		2.53			30,000			160		2.08			30,000			160		2.08
Total interest bearing liabilities		1,671,857			5,974		1.43			1,693,689			592		0.14			1,767,579			7,543		1.69			1,698,613			1,104		0.26
Noninterest bearing liabilities:
Noninterest bearing demand accounts		674,565								897,727								692,436								917,552
Other noninterest bearing liabilities		16,148								12,613								16,715								13,321
Shareholders' equity		262,764								243,352								266,339								244,857
Total liabilities and shareholders' equity	$	2,625,334							$	2,847,381							$	2,743,069							$	2,874,343
Net interest income				$	21,146							$	14,843							$	22,244							$	19,771
Net interest spread (1)							2.88	%							2.14	%							2.79	%							2.76	%
Net interest margin (1)							3.36	%							2.19	%							3.35	%							2.86	%
Ratio of average interest earning assets to average interest bearing liabilities		150.54	%							160.87	%							148.84	%							161.72	%

The following table shows an analysis of net interest margin for the ~~six~~nine month periods ended ~~June~~September 30, 2023 and 2022 (dollars in thousands):

																	For the nine months ended September 30,
																	2023								2022
	For the six months ended June 30,																			Interest		Average						Interest		Average
	2023								2022								Average			Earned		Yield			Average			Earned		Yield
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost			Balance			or Paid		or Cost			Balance			or Paid		or Cost
Assets
Taxable securities	$	769,172		$	9,077		2.37	%	$	495,627		$	4,053		1.64	%	$	768,250		$	13,643		2.37	%	$	554,670		$	7,375		1.77	%
Tax-exempt securities (1)		130,541			1,376		2.71			166,981			1,433		2.21			124,610			2,048		2.82			157,095			2,101		2.30
Commercial loans (2)		1,009,704			27,877		5.49			912,628			16,475		3.59			1,021,283			42,973		5.55			920,883			26,698		3.82
PPP loans (3)		—			—		—			12,658			1,251		19.66			—			—		—			8,980			1,345		19.75
Residential mortgage loans		149,975			2,877		3.84			118,682			1,926		3.24			157,593			4,692		3.96			122,029			3,019		3.29
Consumer loans		56,625			2,081		7.41			54,991			1,089		3.99			56,828			3,235		7.61			55,912			1,843		4.41
Federal Home Loan Bank stock		10,211			137		2.66			10,613			102		1.90			10,211			216		2.81			10,478			155		1.95
Federal funds sold and other short-term investments		457,306			10,961		4.77			984,183			2,249		0.45			460,719			17,367		4.97			923,153			6,916		0.99
Total interest earning assets (1)		2,583,534			54,386		4.23			2,756,363			28,578		2.10			2,599,494			84,174		4.31			2,753,200			49,452		2.41
Noninterest earning assets:
Cash and due from banks		34,489								34,196								36,844								36,979
Other		73,076								91,669								72,274								89,392
Total assets	$	2,691,099							$	2,882,228							$	2,708,612							$	2,879,571
Liabilities
Deposits:
Interest bearing demand	$	645,620		$	1,466		0.45	%	$	692,943		$	94		0.03	%	$	638,996		$	2,175		0.46	%	$	700,010		$	341		0.06	%
Savings and money market accounts		866,111			6,407		1.50			883,362			211		0.05			856,884			10,426		1.63			879,368			846		0.13
Time deposits		172,901			2,437		2.84			90,281			98		0.22			206,595			5,092		3.30			87,892			159		0.24
Borrowings:
Other borrowed funds		30,000			314		2.08			69,569			667		1.91			30,000			474		2.08			56,234			827		1.94
Long-term debt		—			—		—			—			—		—
Total interest bearing liabilities		1,714,632			10,624		1.25			1,736,155			1,070		0.12			1,732,475			18,167		1.40			1,723,504			2,173		0.17
Noninterest bearing liabilities:
Noninterest bearing demand accounts		703,340								886,537								699,666								896,989
Other noninterest bearing liabilities		16,630								12,083								16,657								12,499
Shareholders' equity		256,497								247,453								259,814								246,579
Total liabilities and shareholders' equity	$	2,691,099							$	2,882,228							$	2,708,612							$	2,879,571
Net interest income				$	43,762							$	27,508							$	66,007							$	47,279
Net interest spread (1)							2.98	%							1.98	%							2.91	%							2.24	%
Net interest margin (1)							3.40	%							2.02	%							3.38	%							2.30	%
Ratio of average interest earning assets to average interest bearing liabilities		150.68	%							158.76	%							150.05	%							159.74	%

The following table presents the dollar amount of changes in net interest income due to changes in volume and rate for the three and ~~six~~nine month periods ended ~~June~~September 30, 2023 and 2022 (dollars in thousands):

																			For the three months ended September 30,								For the nine months ended September 30,
																			2023 vs 2022								2023 vs 2022
	For the three months ended June 30, 2023 vs 2022 Increase (Decrease) Due to									For the six months ended June 30, 2023 vs 2022 Increase (Decrease) Due to									Increase (Decrease) Due to								Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate		Total			Volume			Rate		Total

Interest income
Taxable securities	$	959		$	1,019		$	1,978		$	2,787		$	2,237		$	5,024		$	513		$	729	$	1,242		$	3,349		$	2,919	$	6,268
Tax-exempt securities		(215	)		191			(24	)		(438	)		381			(57	)		(170	)		173		3			(611	)		558		(53	)
Commercial loans, excluding PPP loans		1,165			4,825			5,990			1,908			9,494			11,402			1,265			3,608		4,873			3,166			13,109		16,275
PPP loans		(199	)		—			(199	)		(1,244	)		(7	)		(1,251	)		(94	)		—		(94	)		(1,345	)		—		(1,345	)
Residential mortgage loans		322			224			546			563			388			951			426			297		723			985			688		1,673
Consumer loans		1			493			494			33			959			992			(6	)		405		399			31			1,361		1,392
Federal Home Loan Bank stock		—			21			21			(4	)		39			35			—			27		27			(4	)		66		62
Federal funds sold and other short-term investments		(1,502	)		4,381			2,879			(1,802	)		10,514			8,712			(2,509	)		4,248		1,739			(4,940	)		15,390		10,450
Total interest income		531			11,154			11,685			1,803			24,005			25,808			(575	)		9,487		8,912			631			34,091		34,722
Interest expense
Interest bearing demand	$	(7	)	$	678		$	671		$	(7	)	$	1,379			1,372		$	(34	)	$	495	$	461		$	(32	)	$	1,866		1,834
Savings and money market accounts		(7	)		3,251			3,244			(4	)		6,200			6,196			(25	)		3,408		3,383			(22	)		9,602		9,580
Time deposits		142			1,514			1,656			166			2,173			2,339			407			2,188		2,595			477			4,456		4,933
Other borrowed funds		(136	)		(53	)		(189	)		(409	)		56			(353	)		—			—		—			(409	)		56		(353	)
Long-term debt		—			—			—			—			—			—
Total interest expense		(8	)		5,390			5,382			(254	)		9,808			9,554			348			6,091		6,439			14			15,980		15,994
Net interest income	$	539		$	5,764		$	6,303		$	2,057		$	14,197		$	16,254		$	(923	)	$	3,396	$	2,473		$	617		$	18,111	$	18,728

Provision for Credit Losses: The provision for credit losses for the three months ended ~~June~~September 30, 2023 was ~~$300,000~~a benefit of $150,000 compared to $0 for the same period in 2022. Net loan recoveries were ~~$15,000~~$42,000 in the three months ended ~~June~~September 30, 2023 compared to net loan recoveries of ~~$15,000~~$190,000 in the same period in 2022. The provision for credit losses for the ~~six~~nine months ended ~~June~~September 30, 2023 was ~~$300,000~~$150,000 compared to a provision benefit of $1.5 million for the same period in 2022. Net loan recoveries were ~~$48,000~~$90,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to ~~$242,000~~$432,000 in the same period in 2022. Total loans increased by ~~$93.8~~$113.5 million in the ~~six~~nine months ended ~~June~~September 30, 2023 which, on its own, created a need for provision expense; however, the economic forecast used in our calculation improved slightly from January 1, 2023 to ~~June~~September 30, 2023, thereby partially offsetting the amount of necessary provision expense due to loan portfolio growth.

Gross loan recoveries were ~~$37,000~~$83,000 for the three months ended ~~June~~September 30, 2023 and ~~$75,000~~$236,000 for the same period in 2022. In the three months ended ~~June~~September 30, 2023, we had ~~$22,000~~$41,000 in gross loan charge-offs, compared to ~~$60,000~~$46,000 in the same period in 2022. Gross loan recoveries were ~~$91,000~~$174,000 for the ~~six~~nine months ended ~~June~~September 30, 2023 and ~~$337,000~~$573,000 for the same period in 2022. In the ~~six~~nine months ended ~~June~~September 30, 2023, we had ~~$43,000~~$84,000 in gross loan charge-offs, compared to ~~$95,000~~$141,000 in the same period in 2022.

We adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $1.5 million, $62,000 to establish a reserve for unfunded commitments and a $1.2 million decrease to retained earnings to reflect the cumulative effect of adoption of CECL, with the $323,000 tax impact portion being recorded as part of the deferred tax asset on our Consolidated Balance Sheet. The amounts of provision for credit losses in each period were the result of establishing our allowance for credit losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The provision for credit losses for the ~~six~~nine months ended ~~June~~September 30, 2022 was impacted by net reductions to certain qualitative factors that had been elevated in response to the COVID-19 pandemic. More information about our allowance for credit losses and our methodology for establishing its level may be found under the heading "Allowance for Credit Losses" below.

Noninterest Income: Noninterest income for the three and ~~six~~nine month periods ended ~~June~~September 30, 2023 was $4.6 million and ~~$9.1~~$13.8 million compared to ~~$5.1~~$4.9 million and ~~$10.1~~$15.0 million for the same periods in 2022, respectively. The components of noninterest income are shown in the table below (in thousands):

									Three Months		Three Months		Nine Months		Nine Months
									Ended		Ended		Ended		Ended
									September 30,		September 30,		September 30,		September 30,
	Three Months Ended June 30, 2023		Three Months Ended June 30, 2022		Six Months Ended June 30, 2023		Six Months Ended June 30, 2022		2023		2022		2023		2022
Service charges and fees on deposit accounts	$	1,018	$	1,218	$	2,012	$	2,430	$	1,061	$	1,263	$	3,072	$	3,693
Net gains on mortgage loans		21		199		32		508		5		166		37		673
Trust fees		1,136		1,096		2,168		2,184		1,109		969		3,277		3,153
ATM and debit card fees		1,740		1,762		3,403		3,360		1,675		1,724		5,077		5,084
Bank owned life insurance (“BOLI”) income		221		230		420		470		239		217		660		687
Investment services fees		278		345		689		658		406		339		1,096		997
Other income		199		281		417		486		121		211		537		698
Total noninterest income	$	4,613	$	5,131	$	9,141	$	10,096	$	4,616	$	4,889	$	13,756	$	14,985

Service charges on deposit accounts decreased by ~~$200,000~~$202,000 in the three months ended ~~June~~September 30, 2023 as compared to the same period in 2022 and were down ~~$418,000~~$621,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022 largely due to higher earnings credit offsets for treasury management accounts. Net gains on mortgage loans were down ~~$178,000~~$161,000 in the three months ended ~~June~~September 30, 2023 compared to the same period in 2022 and were down ~~$476,000~~$636,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022 as a result of changes in the volume of loans originated for sale. Mortgage rates increased sharply throughout 2022 and ~~into the first half of~~throughout 2023, causing a reduction in mortgage volume compared to 2022. In addition, more of our origination volume in the first three and ~~six~~nine months of 2023 was held in portfolio. Mortgage loans originated for sale in the three months ended ~~June~~September 30, 2023 were ~~$2.4 million,~~$284,000, compared to ~~$8.4~~$6.5 million in the same period in 2022. For the first ~~six~~nine months of 2023, mortgage loans originated for sale were ~~$2.6~~$2.9 million, compared to ~~$18.5~~$25.0 million for the same period in 2022.

Trust fees were up ~~$40,000~~$140,000 in the three months ended ~~June~~September 30, 2023 compared to the three months ended ~~June~~September 30, 2022 and were ~~down $16,000~~up $124,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022. The changes for the three and ~~six~~nine months ended ~~June~~September 30, 2023 were largely due to changes in market valuations of underlying trust investments. ATM and debit card fees were stable in the three and ~~six~~nine months ended ~~June~~September 30, 2023 as compared to the same periods in 2022. Investment services fees were ~~down~~up $67,000 in the three months ended ~~June~~September 30, 2023 compared to the same period in 2022 and were up ~~$31,000~~$99,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022. These variances were largely reflective of investment market conditions during these periods. Other income was down $90,000 in the three months ended September 30, 2023 compared to the same period in 2022 and was down $161,000 in the nine months ended September 30, 2023 compared to the same period in 2022. The decrease in both periods was due to no rental income from other real estate owned being recognized in the 2023 periods as we sold our last other real estate owned property in the first quarter of 2023.

Noninterest Expense: Noninterest expense increased by ~~$760,000~~$662,000 to ~~$12.7~~$12.8 million for the three month period ended ~~June~~September 30, 2023 as compared to ~~$11.9~~$12.1 million for the same period in 2022. Noninterest expense increased by ~~$1.2~~$1.8 million to ~~$24.8~~$37.6 million for the ~~six~~nine month period ended ~~June~~September 30, 2023 compared to ~~$23.7~~$35.8 million for the same period in 2022. The components of noninterest expense are shown in the table below (in thousands):

Most categories of noninterest expense were relatively unchanged compared to the three and ~~six~~nine months ended ~~June~~September 30, 2022 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by ~~$441,000~~$310,000 in the three months ended ~~June~~September 30, 2023 from the same period in 2022. This increase iswas primarily due to higher base compensation, higher variable compensation, higher medical costs and lower salary deferral from commercial loan originations partially offset by lower variable compensation tied to lower mortgage production. Salaries and benefits increased by ~~$850,000~~$1.2 million for the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022 due to the same combination of factors. The table below identifies the primary components of salaries and benefits (in thousands):

													Three Months			Three Months			Nine Months			Nine Months
													Ended			Ended			Ended			Ended
													September 30,			September 30,			September 30,			September 30,
	Three Months Ended June 30, 2023			Three Months Ended June 30, 2022			Six Months Ended June 30, 2023			Six Months Ended June 30, 2022			2023			2022			2023			2022
Salaries and other compensation	$	6,067		$	5,772		$	11,980			11,398		$	6,138		$	5,878		$	18,117			17,277
Salary deferral from commercial loan originations		(215	)		(219	)		(360	)		(433	)		(171	)		(211	)		(531	)		(644	)
Bonus accrual		287			220			575			442			287			344			862			786
Mortgage production - variable comp		131			141			188			285			125			91			314			376
401k matching contributions		198			188			408			399			195			187			603			586
Medical insurance costs		375			300			750			600			375			350			1,125			950
Total salaries and benefits	$	6,843		$	6,402		$	13,541		$	12,691		$	6,949		$	6,639		$	20,490		$	19,331

Legal and professional fees were ~~unchanged~~up $87,000 in the three months ended ~~June~~September 30, 2023 and were up ~~$154,000~~$240,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same periods in 2022 due to costs associated with new accounting and proxy disclosures as well as regulatory compliance matters related to loan and deposit accounts referred to legal counsel during the period. Data processing expenses were up ~~$82,000~~$18,000 in the three months ended ~~June~~September 30, 2023 compared to the same period in 2022 and were up ~~$153,000~~$171,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022 due to inflationary increases imposed by software providers and heavier use of electronic banking channels by our customers. FDIC assessment costs were up ~~$133,000~~$129,000 in the three months ended ~~June~~September 30, 2023 compared to the same period in 2022 and were up ~~$283,000~~$412,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022 due to higher assessment rates imposed by the FDIC on all banks. Other noninterest expense was down ~~$287,000~~$267,000 in the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022 largely due to the $356,000 net gain recognized on the sale of our last remaining other real estate owned property during the first quarter of 2023.

Federal Income Tax Expense: We recorded ~~$2.5~~$2.8 million and ~~$5.4~~$8.3 million in federal income tax expense for the three and ~~six~~nine month periods ended ~~June~~September 30, 2023 compared to ~~$1.5~~$2.5 million and ~~$2.9~~$5.4 million for the same periods in 2022. Our effective tax rates for the three and ~~six~~nine month periods ended ~~June~~September 30, 2023 were ~~19.35%~~19.75% and ~~19.63%~~19.85% compared to ~~18.52%~~19.67% and ~~18.66%~~19.20% for the same periods in 2022.

Total assets were ~~$2.63~~$2.76 billion at ~~June~~September 30, 2023, a decrease of ~~$276.7~~$147.2 million from December 31, 2022. This decrease was caused primarily by a decrease in total deposits of ~~$293.6~~$169.6 million at ~~June~~September 30, 2023 compared to December 31, 2022, with ~~$284.2 million~~all of this deposit decrease occurring in the three months ended March 31, 2023.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were ~~$383.9~~$510.5 million at ~~June~~September 30, 2023 compared to $755.2 million at December 31, 2022. The decrease in these balances primarily related to an increase in our loan portfolio as well as a reduction in deposit balances.

Securities: Debt securities available for sale were ~~$512.8~~$503.3 million at ~~June~~September 30, 2023 compared to $499.3 million at December 31, 2022. The balance at ~~June~~September 30, 2023 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio was ~~$340.4~~$330.0 million at ~~June~~September 30, 2023 compared to $348.8 million at December 31, 2022. Our held to maturity portfolio is comprised of U.S. Treasury securities and state, municipal and privately placed commercial bonds.

We classify privately placed municipal and commercial bonds as held to maturity as they are typically non-transferable in the bond market. In addition, we generally classify short-term U.S. Treasury securities as held to maturity. Typically the final maturity on these short-term Treasury securities is three years or less. Longer-term Treasury securities and all other marketable debt securities are generally classified as available for sale.

At ~~June~~September 30, 2023, the overall duration of our debt security available for sale portfolio was ~~3.07~~2.83 years and the overall duration of our debt security held to maturity portfolio was ~~1.84~~1.87 years and were similar to durations for these portfolios before the pandemic. Net unrealized losses on debt securities available for sale ~~decreased~~increased by ~~$1.0~~$2.5 million from ~~$40.0~~$40.1 million at December 31, 2022 to ~~$39.0~~$42.6 million at ~~June~~September 30, 2023. Net unrealized losses on debt securities held to maturity decreased by ~~$1.1 million~~$570,000 from $16.1 million at December 31, 2022 to ~~$15.0~~$15.5 million at ~~June~~September 30, 2023. Our overall bond portfolio will provide ~~$411.8~~$389.5 million in liquidity through maturities and scheduled paydowns over the next 24 months ending ~~June~~September 30, 2025.

Per U.S. generally accepted accounting principles, unrealized gains or losses on debt securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on debt securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).

Portfolio Loans and Asset Quality: Total portfolio loans increased by ~~$93.8~~$113.5 million in the first ~~six~~nine months of 2023 and were ~~$1.27~~$1.29 billion at ~~June~~September 30, 2023 compared to $1.18 billion at December 31, 2022. During the first ~~six~~nine months of 2023, our commercial portfolio increased by ~~$69.6~~$76.2 million. During the same period, our consumer portfolio decreased by ~~$1.8~~$3.9 million and our residential mortgage portfolio increased by ~~$26.1~~$41.3 million.

Mortgage loans originated for portfolio are typically adjustable rate loans as well as fixed rate loans that conform to secondary market requirements and have a term of fifteen years or less. However, given the significant increase in residential mortgage rates, we have increased the percentage of our longer term fixed rate mortgage production that we hold in portfolio as they will typically have lower duration due to refinancings that occur when interest rates decline. Mortgage loans originated for portfolio in the first ~~six~~nine months of 2023 increased ~~$9.4~~$19.7 million compared to the same period in 2022, from ~~$30.7~~$43.4 million in the first ~~six~~nine months of 2022 to ~~$40.1~~$63.1 million in the same period in 2023.

The volume of residential mortgage loans originated for sale in the first ~~six~~nine months of 2023 decreased ~~$15.9~~$22.1 million compared to the same period in 2022. Residential mortgage loans originated for sale were ~~$2.6~~$2.9 million in the first ~~six~~nine months of 2023 compared to ~~$18.5~~$25.0 million in the first ~~six~~nine months of 2022.

The following table shows our loan origination activity for loans to be held in portfolio during the first ~~six~~nine months of 2023 and 2022, broken out by loan type and also shows average originated loan size (dollars in thousands):

															Nine months ended September 30, 2023							Nine months ended September 30, 2022
																	Percent of							Percent of
	Six months ended June 30, 2023							Six months ended June 30, 2022							Portfolio		Total			Average		Portfolio		Total			Average
	Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size		Originations		Originations			Loan Size		Originations		Originations			Loan Size
Commercial real estate:
Residential developed	$	5,013		2.1	%	$	1,253	$	5,126		1.9	%	$	641	$	5,216		1.6	%	$	1,304	$	6,177		1.7	%	$	562
Unsecured to residential developers		—		—			—		—		—			—		—		—			—		—		—			—
Vacant and unimproved		4,387		1.8			366		9,262		3.5			1,323		8,977		2.7			748		10,162		2.8			1,270
Commercial development		—		—			—		—		—			—		—		—			—		—		—			—
Residential improved		20,694		8.6			431		39,227		14.7			665		35,440		10.7			466		46,652		12.6			583
Commercial improved		14,722		6.1			589		32,168		12.0			1,340		15,353		4.6			548		45,620		12.4			1,342
Manufacturing and industrial		16,247		6.7			2,031		49,246		18.5			2,736		16,886		5.1			1,689		55,138		14.9			2,506
Total commercial real estate		61,063		25.3			630		135,029		50.6			1,164		81,872		24.7			630		163,749		44.4			1,056
Commercial and industrial		120,190		49.8			1,398		68,250		25.6			644		153,803		46.5			1,337		115,730		31.3			827
Total commercial and commercial real estate		181,253		75.1			990		203,279		76.2			915		235,675		71.2			962		279,479		75.7			947
Consumer
Residential mortgage		40,123		16.6			295		30,690		11.5			320		63,053		19.1			306		43,381		11.8			319
Unsecured		5		—			—		—		—			—		5		—			5		—		—			—
Home equity		18,948		7.9			114		31,428		11.8			133		30,175		9.1			119		44,765		12.1			129
Other secured		981		0.4			31		1,306		0.5			57		2,135		0.6			44		1,616		0.4			39
Total consumer		60,057		24.9			179		63,424		23.8			178		95,368		28.8			187		89,762		24.3			172
Total loans	$	241,310		100.0	%	$	466	$	266,703		100.0	%	$	461	$	331,043		100.0	%	$	439	$	369,241		100.0	%	$	451

Overall, the commercial loan portfolio increased ~~$69.6~~$76.2 million in the first ~~six~~nine months of 2023. Our commercial and industrial portfolio increased by ~~$47.6~~$46.5 million while our commercial real estate loans increased by ~~$22.0~~$29.7 million. While overall originations as shown in the table above were down compared to the first ~~six~~nine months of 2022, our on-balance-sheet commercial loan balances grew since year end 2022. This largely resulted from the funding of various construction projects originating in 2022, adding new commercial loan relationships in 2023, and higher usage of approved commercial lines by our commercial borrowers. This utilization was up ~~$53.1~~$51.1 million from December 31, 2022 to ~~June~~September 30, 2023.

We also have a significant amount of unfunded commercial lines of credit, that can be drawn on by our commercial loan customers. The table below shows the total commitment, the unused portion and the percentage of unused to total commitment at ~~June~~September 30, 2023 and December 31, 2022 (dollars in thousands):

							September 30,			December 31,
	June 30, 2023			December 31, 2022			2023			2022
Commercial - Lines of credit commitments	$	1,045,319		$	1,021,795		$	1,034,085		$	1,021,795
Commercial - Unused portion of lines of credit		582,709			612,317			561,171			612,317
Commercial - Unused lines of credit to total commitment		55.74	%		60.07	%		54.27	%		59.93	%

Total commercial lines of credit commitments increased by ~~$23.5~~$12.3 million from December 31, 2022 to ~~June~~September 30, 2023.

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately ~~82.5%~~81.7% and 83.2% of the total loan portfolio at ~~June~~September 30, 2023 and December 31, 2022, respectively. Residential mortgage and consumer loans comprised approximately ~~17.5%~~18.3% and 16.8% of total loans at ~~June~~September 30, 2023 and December 31, 2022, respectively.

A further breakdown of the composition of the loan portfolio is shown in the table below (in thousands):

											September 30, 2023					December 31, 2022
	June 30, 2023					December 31, 2022							Percent of					Percent of
	Balance		Percent of Total Loans			Balance		Percent of Total Loans			Balance		Total Loans			Balance		Total Loans
Commercial real estate: (1)
Residential developed	$	4,437		0.3	%	$	7,234		0.6	%	$	5,040		0.4	%	$	7,234		0.6	%
Unsecured to residential developers		—		—			—		—			800		—			—		—
Vacant and unimproved		37,577		3.0			36,270		3.1			37,084		2.9			36,270		3.1
Commercial development		94		—			103		—			89		—			103		—
Residential improved		111,621		8.8			112,791		9.6			116,407		9.0			112,791		9.6
Commercial improved		260,394		20.5			259,281		22.0			257,673		20.0			259,281		22.0
Manufacturing and industrial		145,490		11.4			121,924		10.4			150,192		11.6			121,924		10.4
Total commercial real estate		559,613		44.0			537,603		45.7			567,285		43.9			537,603		45.7
Commercial and industrial		489,273		38.5			441,716		37.5			488,224		37.8			441,716		37.5
Total commercial and commercial real estate		1,048,886		82.5			979,319		83.2			1,055,509		81.7			979,319		83.2
Consumer
Residential mortgage		165,221		13.0			139,148		11.8			180,420		14.0			139,148		11.8
Unsecured		113		—			121		—			113		—			121		—
Home equity		54,568		4.3			56,321		4.8			51,798		4.0			56,321		4.8
Other secured		2,788		0.2			2,839		0.2			3,450		0.3			2,839		0.2
Total consumer		222,690		17.5			198,429		16.8			235,781		18.3			198,429		16.8
Total loans	$	1,271,576		100.0	%	$	1,177,748		100.0	%	$	1,291,290		100.0	%	$	1,177,748		100.0	%

Commercial real estate loans accounted for ~~44.0%~~43.9% and 45.7% of the total loan portfolio at ~~June~~September 30, 2023 and December 31, 2022, respectively, and consisted primarily of loans to business owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real estate portfolio by loans secured by residential and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are secured by properties that are in the process of development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.

The non-owner occupied portion of the commercial real estate portfolio totaled ~~$249.8~~$43.8 million at ~~June~~September 30, 2023. Of this total, ~~$43.9~~$29.7 million was secured by office property. Within this office property category, only ~~three~~nine loans totaling ~~$562,000~~$2.0 million come up for maturity or renewal in the next 18 months. All of these loans secured by office property are well-secured, performing and have acceptable occupancy rates under our standards.

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised ~~13.0%~~14.0% of portfolio loans at ~~June~~September 30, 2023 and 11.8% at December 31, 2022. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan-to-value loans) in an effort to continue to diversify our credit risk and deploy our excess liquidity.

The following table shows our residential mortgage loan portfolio broken down by fixed and variable rate (in thousands):

Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. This portfolio decreased by ~~$1.8~~$3.9 million to ~~$57.5~~$55.4 million at ~~June~~September 30, 2023 from $59.3 million at December 31, 2022. These other consumer loans comprised ~~4.5%~~4.3% of our portfolio loans at ~~June~~September 30, 2023 and 5.0% at December 31, 2022.

Given that current industry credit conditions are tightening, we expect industry pricing will increase in response to cost of funds increases and we will continue to respond accordingly.

Our loan portfolio is reviewed regularly by our senior management, our loan officers, and an internal loan review team that is independent of our loan originators and credit administration. An administrative loan committee consisting of senior management and seasoned lending and collections personnel meets quarterly to manage our internal watch list and proactively manage high risk loans.

When reasonable doubt exists concerning collectability of interest or principal of one of our loans, the loan is placed in nonaccrual status. Any interest previously accrued but not collected is reversed and charged against current earnings.

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At ~~June~~September 30, 2023, nonperforming assets totaled just ~~$72,000,~~$1,000, down ~~$2.3 million~~$77,000 from ~~$2.4 million~~$78,000 at December 31, 2022. There were no additions to other real estate owned in the first ~~six~~nine months of 2023 or in the first ~~six~~nine months of 2022. At ~~June~~September 30, 2023, there were no loans in foreclosure, so we expect there to be few, if any, additions to other real estate owned in the remainder of 2023. Proceeds from sales of foreclosed properties were $2.7 million in the first ~~six~~nine months of 2023, resulting in net realized gains on sales of $356,000. Proceeds from sales of foreclosed properties were $0$47,000 in the first ~~six~~nine months of 2022, resulting in no$47,000 in net realized gains ~~or losses~~ on sales. With the sale of foreclosed properties in the first ~~six~~nine months of 2023, we have no remaining other real estate owned at ~~June~~September 30, 2023.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. Nonperforming loans at ~~June~~September 30, 2023 consisted of ~~$72,000~~$1,000 of residential mortgage loans. As of ~~June~~September 30, 2023, nonperforming loans totaled ~~$72,000,~~$1,000, or ~~0.01%~~0.00008% of total portfolio loans, compared to $78,000, or 0.01% of total portfolio loans, at December 31, 2022.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $0 at ~~June~~September 30, 2023 and $2.3 million at December 31, 2022. All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.

The following table shows the composition and amount of our nonperforming assets (dollars in thousands):

							September 30,			December 31,
	June 30, 2023			December 31, 2022			2023			2022
Nonaccrual loans	$	72		$	78		$	1		$	78
Loans 90 days or more delinquent and still accruing		—			—			—			—
Total nonperforming loans (NPLs)		72			78			1			78
Foreclosed assets		—			2,343			—			2,343
Repossessed assets		—			—			—			—
Total nonperforming assets (NPAs)	$	72		$	2,421		$	1		$	2,421
NPLs to total loans		0.01	%		0.01	%		0.00008	%		0.01	%
NPAs to total assets		0.00	%		0.08	%		0.00004	%		0.08	%

We adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous troubled debt restructuring ("TDR") accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. The following table shows the balance of loans modified to borrowers experiencing financial difficulty as of ~~June~~September 30, 2023 (dollars in thousands):

Allowance for credit losses: The allowance for credit losses at ~~June~~September 30, 2023 was ~~$17.1~~$17.0 million, an increase of ~~$1.8~~$1.7 million from $15.3 million at December 31, 2022. The allowance for credit losses represented ~~1.35%~~1.32% of total portfolio loans at ~~June~~September 30, 2023 and 1.30% at December 31, 2022. The allowance for credit losses to nonperforming loan coverage ratio increased from ~~-19,596.2%~~19,596.2% at December 31, 2022 to ~~23,762.5%~~1,700,100.0% at ~~June~~September 30, 2023.

We adopted the Current Expected Credit Loss ("CECL") standard effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $1.5 million, $62,000 to establish a reserve for unfunded commitments and a $1.2 million decrease to retained earnings to reflect the cumulative effect of adoption of CECL, with the $323,000 tax impact portion being recorded as part of the deferred tax asset on our Consolidated Balance Sheet.

The table below shows the changes in certain credit metrics over the past five quarters (dollars in thousands):

																Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended			Quarter Ended
																September 30,			June 30,			March 31,			December 31,			September 30,
	Quarter Ended June 30, 2023			Quarter Ended March 31, 2023			Quarter Ended December 31, 2022			Quarter Ended September 30, 2022			Quarter Ended June 30, 2022			2023			2023			2023			2022			2022
Nonperforming loans	$	72		$	75		$	78		$	85		$	90		$	1		$	72		$	75		$	78		$	85
Other real estate owned and repo assets		—			—			2,343			2,343			2,343			—			—			—			2,343			2,343
Total nonperforming assets		72			75			2,421			2,428			2,433			1			72			75			2,421			2,428
Net charge-offs (recoveries)		(15	)		(33	)		(89	)		(190	)		(15	)		(42	)		(15	)		(33	)		(89	)		(190	)
Total delinquencies		158			277			172			84			197			—			158			277			172			84

At ~~June~~September 30, 2023, we had net loan recoveries in ~~thirty-two~~thirty-three of the past ~~thirty-four~~thirty-five quarters. Our total delinquencies were ~~$158,000~~$0 at ~~June~~September 30, 2023 and $172,000 at December 31, 2022. ~~Our delinquency percentage at June 30, 2023 was 0.01%.~~

The allowance for credit losses increased ~~$1.8~~$1.7 million in the first ~~six~~nine months of 2023. As discussed above, the increase in the first ~~six~~nine months of 2023 was primarily due to the effect of adopting CECL on January 1, 2023. We recorded a provision for credit losses expense of ~~$300,000~~$150,000 for the ~~six~~nine months ended ~~June~~September 30, 2023 compared to a provision benefit of $1.5 million for the same period of 2022. Net loan recoveries were ~~$48,000~~$90,000 for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to net loan recoveries of ~~$242,000~~$432,000 for the same period in 2022. The ratio of net charge-offs (recoveries) to average loans was -0.01% on an annualized basis for the first ~~six~~nine months of 2023 and ~~-0.06%~~-0.05% for the first ~~six~~nine months of 2022.

While we have experienced low levels of gross charge-offs over recent quarters, we recognize that future charge-offs and resulting provisions for credit losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets.

The allowance for credit losses accounting in effect at December 31, 2022 and all prior periods was based on our estimate of probable incurred loan losses as of the reporting date ("incurred loss" methodology). Under the CECL methodology, our allowance is based on the total amount of credit losses that are expected over the remaining life of the loan portfolio. Our estimate of credit losses under CECL is determined using a complex model that relies on historical loss information including our own history as well as peer loss history, reasonable and supportable economic forecasts, and various qualitative factors.

The primary risk elements with respect to our commercial loans are the financial condition of the borrower, sufficiency of collateral and timeliness of scheduled payments. We have a policy of reviewing periodic financial statements from commercial loan customers and have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to residential and consumer loans is the timeliness of scheduled payments. We have a reporting process that monitors past due loans and have adopted policies to pursue creditors' rights in order to preserve our collateral position. Over the past several years, consumer delinquency has been nominal.

Under CECL, for commercial loans not identified as collateral dependent, we estimate the CECL reserve based on the internal risk grade of such loans. We use a loan rating method based upon an eight point system. Loans are stratified between real estate secured and non-real estate secured. The real estate secured portfolio is further stratified by the type of real estate. Each stratified portfolio is assigned a loss allocation factor. A higher numerical grade assigned to a loan category generally results in a greater allocation percentage. Changes in risk grade of loans affect the amount of the allowance allocation.

We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing ~~(27.3%~~(30%), followed by Manufacturing ~~(14.8%~~(15%) and Retail Trade ~~(12.5%~~(12%).

The table below breaks down our commercial loan portfolio by industry type at ~~June~~September 30, 2023 and identifies the percentage of loans in each type that have a pass rating within our grading system (4 or better) and criticized rating (5 or worse) (dollars in thousands):

														Percent of			Percent Grade 4			Percent Grade 5
	Total		Percent of Total Loans			Percent Grade 4 or Better			Percent Grade 5 or Worse			Total		Total Loans			or Better			or Worse
Industry:
Agricultural Products	$	38,597		3.68	%		95.95	%		4.05	%	$	39,358		3.73	%		92.57	%		7.43	%
Mining and Oil Extraction		662		0.06	%		94.41	%		5.59	%		651		0.06	%		95.39	%		4.61	%
Construction		80,418		7.67	%		97.81	%		2.19	%		76,111		7.21	%		97.71	%		2.29	%
Manufacturing		155,312		14.81	%		97.97	%		2.03	%		159,959		15.15	%		97.90	%		2.10	%
Wholesale Trade		67,664		6.45	%		100.00	%		0.00	%		64,624		6.12	%		100.00	%		0.00	%
Retail Trade		130,710		12.46	%		99.96	%		0.04	%		131,064		12.42	%		99.97	%		0.03	%
Transportation and Warehousing		68,510		6.53	%		99.94	%		0.06	%		65,958		6.25	%		99.96	%		0.04	%
Information		548		0.05	%		5.66	%		94.34	%		448		0.04	%		0.00	%		100.00	%
Finance and Insurance		56,528		5.39	%		100.00	%		0.00	%		34,696		3.29	%		100.00	%		0.00	%
Real Estate and Rental and Leasing		285,951		27.26	%		99.89	%		0.11	%		316,957		30.03	%		99.74	%		0.26	%
Professional, Scientific and Technical Services		6,742		0.64	%		97.24	%		2.76	%		5,896		0.56	%		96.96	%		3.04	%
Management of Companies and Enterprises		1,072		0.10	%		100.00	%		0.00	%		2,011		0.19	%		100.00	%		0.00	%
Administrative and Support Services		24,009		2.29	%		98.27	%		1.73	%		25,721		2.44	%		98.26	%		1.74	%
Education Services		4,147		0.40	%		100.00	%		0.00	%		4,084		0.39	%		100.00	%		0.00	%
Health Care and Social Assistance		34,086		3.25	%		100.00	%		0.00	%		34,523		3.27	%		100.00	%		0.00	%
Arts, Entertainment and Recreation		4,536		0.43	%		93.41	%		6.59	%		4,797		0.45	%		93.83	%		6.17	%
Accommodations and Food Services		52,549		5.01	%		86.82	%		13.18	%		52,575		4.98	%		86.44	%		13.56	%
Other Services		36,845		3.51	%		100.00	%		0.00	%		35,737		3.39	%		96.19	%		3.81	%
Total commercial loans	$	1,048,886		100.00	%		98.54	%		1.46	%	$	1,055,509		100.00	%		98.22	%		1.78	%

Considering our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was ~~$13.9~~$13.7 million at ~~June~~September 30, 2023 (under CECL) and $12.8 million at December 31, 2022 (under incurred loss). The qualitative component of our allowance allocated to commercial loans was ~~$11.2~~$11.7 million at ~~June~~September 30, 2023 (under CECL) compared to $12.7 million at December 31, 2022 (under incurred loss). Under CECL, we use historical peer loss history so the quantitative component receives a higher allocation and, with the addition of reasonable and supportable forecast assumption under CECL in choosing the historical loss period, less qualitative allocations related to economic conditions are necessary.

Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan type. The determination of the allowance allocation percentage is based principally on peer historical loss experience under CECL. These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans. The homogeneous allowance for credit losses for consumer loans was ~~$3.1~~$3.3 million at ~~June~~September 30, 2023 (under CECL) and $2.2 million at December 31, 2022 (under incurred loss).

Allowance for credit losses allocated to loans identified as collateral dependent were ~~$2,000~~$0 at ~~June~~September 30, 2023 (under CECL). Allowance allocations for loans identified as impaired at December 31, 2022 (under incurred loss) were $295,000.

The allowance allocations are not intended to imply limitations on usage of the allowance for credit losses. The entire allowance for credit losses is available for any loan loss without regard to loan type.

See Note 1 - Significant Accounting Policies in this Form 10-Q for further descriptions of our allowance for credit loss estimation process. See also Note 3 - Loans in this Form 10-Q for further information regarding our loan portfolio and allowance.

Premises and Equipment: Premises and equipment totaled $39.4 million at September 30, 2023, down $907,000 from $40.3 million at December 31, 2022.

Bank-Owned Life Insurance: Bank-owned life insurance increased ~~$446,000~~$698,000 from December 31, 2022 to ~~June~~September 30, 2023 due to earnings on the underlying policies.

~~Premises and Equipment:~~ ~~Premises and equipment totaled $39.8 million at June 30, 2023, down $540,000 from $40.3 million at December 31, 2022.~~

Deposits and Other Borrowings: Total deposits decreased ~~$293.6~~$169.6 million to ~~$2.32~~$2.45 billion at ~~June~~September 30, 2023, as compared to $2.62 billion at December 31, 2022. While the Bank experienced a decline in deposit balances during the ~~six~~nine months ended ~~June~~September 30, 2023, most of the decline took place prior to early March 2023. We experienced a seasonal run up in business deposits of about $90 million in December 2022, which were withdrawn in January 2023. In addition, a couple of large business customers withdrew deposits totaling nearly $90 million in early March 2023 for specific designated purposes. We saw very little change in our deposit balances overall following the March 2023 news of certain bank failures and banking system disruption. Total deposits ~~decreased $9.4~~increased $124.0 million from ~~March 31,~~June 30, 2023 to ~~June~~September 30, 2023.

Our deposit base is primarily made up of many small accounts, and balances at ~~June~~September 30, 2023 were comprised of ~~45%~~42% personal customers and ~~55%~~58% business customers. Within our business customer base, there is no significant specific industry concentration. Our core deposits - which we define as deposits we have sourced within our local markets - represented 100% of our total deposits at ~~June~~September 30, 2023. Our total balances of ~~$2.32~~$2.45 billion at ~~June~~September 30, 2023 remain elevated, reflecting a ~~$616.2~~$740.2 million increase, or ~~36%~~43%, over pre-pandemic totals of $1.71 billion as of March 31, 2020.

Non-interest checking account balances decreased ~~$130.5~~$181.8 million during the ~~first six~~nine months ofended September 30, 2023. Interest bearing demand account balances decreased ~~$188.8~~$100.2 million and savings and money market account balances decreased ~~$119.7~~$75.0 million in the ~~first six~~nine months ofended September 30, 2023 as municipal and business customers have begun deploying their excess balances they carried during the pandemic, including stimulus funding. Certificates of deposits increased by ~~$145.4~~$187.4 million in the first ~~six~~nine months of 2023 reflecting our increases in offered interest rates, particularly in the 12-18 month term. We believe our success in maintaining the balances of personal and business checking and savings accounts was primarily attributable to our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our sophisticated product line.

Noninterest bearing demand accounts comprised ~~30%~~26.7% of total deposits at ~~June~~September 30, 2023 and ~~31%~~31.9% of total deposits at December 31, 2022. In recent years, because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types. We have begun to see some of these balances move to higher earning deposit types. Interest bearing demand, including money market and savings accounts, comprised ~~59%~~61.7% of total deposits at ~~June~~September 30, 2023 and ~~64%~~64.4% at December 31, 2022. Time deposits as a percentage of total deposits were ~~11%~~11.6% at ~~June~~September 30, 2023 and 4%3.7% at December 31, 2022.

Deposit balances in excess of the $250,000 FDIC insured limit totaled approximately ~~$952.9 million,~~$1.10 billion, or ~~41%~~45% of total deposits, at ~~June~~September 30, 2023 and approximately $1.21 billion, or ~~45%~~46% of total deposits, at December 31, 2022. We have sufficient liquid resources to cover all of the uninsured balances at ~~June~~September 30, 2023.

Borrowed funds at ~~June~~September 30, 2023 consisted of $30.0 million of Federal Home Loan Bank (“FHLB”) advances. Borrowed funds at December 31, 2022 consisted of $30.0 million of FHLB advances. At ~~June~~September 30, 2023, we had total borrowing capacity of ~~$964.2~~$964.5 million, including ~~$257.6~~$263.7 million in unused ~~availablity~~availability with the FHLB, $65.0 million in available fed funds facilities with correspondent banks, ~~$3.4~~$1.3 million in availability at the FRB Discount Window and the ~~$638.3~~$634.4 million in availability in the FRB Bank Term Funding Program.

Total shareholders' equity of ~~$263.8~~$269.9 million at ~~June~~September 30, 2023 reflected an increase of ~~$16.8~~$22.8 million from $247.0 million at December 31, 2022. The increase was primarily a result of net income of ~~$22.3~~$33.7 million earned in the first ~~six~~nine months of 2023 and a ~~positive~~negative swing of ~~$816,000~~$2.0 in accumulated other comprehensive income ("AOCI"), partially offset by ~~a payment~~payments of ~~$5.5~~$8.2 million in cash dividends to shareholders and a $1.2 million reduction from adoption of the ASU 2016-13 CECL standard on January 1, 2023. The ~~positive~~negative swing in AOCI was attributable to ~~a decrease~~changes in market interest rates on bonds during the first ~~six~~nine months of 2023 causing ~~an increase~~a decrease in market value on our investment securities available for sale. The Bank was categorized as “well capitalized” at ~~June~~September 30, 2023. The amount of capital retained by the Bank in excess of well capitalized minimums was ~~$131.4~~$139.7 million at ~~June~~September 30, 2023.

Capital guidelines for U.S. banks are commonly known as Basel III guidelines. The rules include a common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum CET1 ratio of 7.0%. The Basel III minimum ratio of Tier 1 capital to risk-weighted assets is 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5%), and the minimum total capital to risk-weighted assets ratio is 10.5% (with the capital conservation buffer), and Basel III requires a minimum leverage ratio of 4.0%. The capital ratios for the Company and the Bank under Basel III have continued to exceed the well capitalized minimum capital requirements.

The following table shows our regulatory capital ratios (on a consolidated basis) for the past several quarters:

																September 30,			June 30,			March 31,			December 31,			September 30,
Macatawa Bank Corporation	June 30, 2023			March 31, 2023			Dec 31, 2022			Sept 30, 2022			June 30, 2022			2023			2023			2023			2022			2022
Total capital to risk weighted assets		18.2	%		18.1	%		17.9	%		17.6	%		17.5	%		18.7	%		18.2	%		18.1	%		17.9	%		17.6	%
Common Equity Tier 1 to risk weighted assets		17.2			17.1			16.9			16.7			16.5			17.7			17.2			17.1			16.9			16.7
Tier 1 capital to risk weighted assets		17.2			17.1			16.9			16.7			16.5			17.7			17.2			17.1			16.9			16.7
Tier 1 capital to average assets		11.1			10.3			9.7			9.3			9.1			10.9			11.1			10.3			9.7			9.3

Liquidity of Macatawa Bank: The liquidity of a financial institution reflects its ability to manage a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus on developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for our investment and loan portfolios. Our sources of liquidity include our borrowing capacity with the FRB's discount window, the FHLB, federal funds purchased lines of credit and other secured borrowing sources with our correspondent banks, the FRB Bank Term Funding Program, loan payments by our borrowers, maturity and sales of our securities available for sale, maturities of our securities held to maturity, growth of our deposits, federal funds sold and other short-term investments, and the various capital resources discussed above.

Liquidity management involves the ability to meet the cash flow requirements of our customers. Our customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Our liquidity management involves periodic monitoring of our assets considered to be liquid and illiquid, and our funding sources considered to be core and non-core and short-term (less than 12 months) and long-term. We have established parameters that monitor, among other items, our level of liquid assets to short-term liabilities, our level of non-core funding reliance and our level of available borrowing capacity. We maintain a diversified wholesale funding structure and actively manage our maturing wholesale sources to reduce the risk of liquidity shortages. We have also developed a contingency funding plan to stress test our liquidity requirements arising from certain events that may trigger liquidity shortages, such as rapid loan growth in excess of normal growth levels or the loss of deposits and other funding sources under extreme circumstances.

We have actively pursued initiatives to maintain a strong liquidity position. ~~The Bank has reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average.~~ We have had no brokered deposits on our balance sheet since December 2011. We continue to maintain significant on-balance sheet liquidity. At ~~June~~September 30, 2023, ~~the Bank~~we held ~~$343.7~~$469.8 million of federal funds sold and other short-term investments. In addition, ~~the Bank~~we had available borrowing capacity from correspondent banks, including the Bank Term Funding Program, of approximately ~~$964.2~~$964.5 million as of ~~June~~September 30, 2023. Finally, because we have maintained the discipline of buying shorter-term bond durations in our investment securities portfolio, we have ~~$411.8~~$389.5 million in bond maturities and paydowns coming ~~into the Bank~~to us in the next 24 months ending ~~June~~September 30, 2025.

In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit. The level and fluctuation of these commitments is also considered in our overall liquidity management. At ~~June~~September 30, 2023, we had a total of ~~$726.0~~$715.1 million in unused lines of credit, ~~$102.6~~$83.5 million in unfunded loan commitments and ~~$12.2~~$10.0 million in standby letters of credit.

Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises. Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year. Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In 2022, the Bank paid dividends to the Company totaling $11.9 million. In the same period, the Company paid $10.9 million in dividends to its shareholders. On February 27, 2023, the Bank paid a dividend totaling $3.1 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on February 28, 2023 to shareholders of record on February 13, 2023. The cash distributed for this cash dividend payment totaled $2.7 million. On May 29, 2023, the Bank paid a dividend totaling $3.1 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on May 30, 2023 to shareholders of record on May 15, 2023. The cash distributed for this cash dividend payment totaled $2.7 million. On August 29, 2023, the Bank paid a dividend totaling $3.1 million to the Company in anticipation of the common share cash dividend of $0.08 per share paid on August 30, 2023 to shareholders of record on August 15, 2023. The cash distributed for this cash dividend payment totaled $2.7 million. The Company retained the remaining balance in each period for general corporate purposes. At ~~June~~September 30, 2023, the Bank had a retained earnings balance of ~~$121.9~~$130.4 million.

The Company’s cash balance at ~~June~~September 30, 2023 was ~~$8.4~~$8.7 million. The Company believes that it has sufficient liquidity to meet its cash flow obligations.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and future results could differ. The allowance for credit losses, ~~other real estate owned valuation,~~ loss contingencies ~~revenue recognition~~ and income taxes are deemed critical due to the required level of management judgment and the use of estimates, making them particularly subject to change.

Our methodology for determining the allowance for credit losses and the related provision for credit losses is described above in the "Allowance for Credit Losses" discussion. This area of accounting requires significant judgment due to the number of factors which can influence the collectability of a loan. Unanticipated changes in these factors could significantly change the level of the allowance for credit losses and the related provision for credit losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for credit losses, there can be no assurance that our analysis has properly identified all of the probable losses in our loan portfolio. As a result, we could record future provisions for credit losses that may be significantly different than the levels that we recorded in the first ~~six~~nine months of 2023.

Assets acquired through or instead of foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. New real estate appraisals are generally obtained at the time of foreclosure and are used to establish fair value. If fair value declines, a valuation allowance is recorded through expense. Estimating the initial and ongoing fair value of these properties involves a number of factors and judgments including holding time, costs to complete, holding costs, discount rate, absorption and other factors.

Loss contingencies are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. This, too, is an accounting area that involves significant judgment. Although, based upon our judgment, internal analysis, and consultations with legal counsel we believe that we have properly accounted for loss contingencies, future changes in the status of such contingencies could result in a significant change in the level of contingent liabilities and a related impact to operating earnings.

Noninterest revenue is recognized in accordance with contractual requirements and as we fulfill our obligations under contractual terms. Most of our noninterest revenue comes from services that are transaction based and such revenue is recognized as the related service is provided.

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. At ~~June~~September 30, 2023, we had gross deferred tax assets of ~~$12.2~~$12.9 million and gross deferred tax liabilities of ~~$2.5~~$2.7 million resulting in a net deferred tax asset of ~~$9.6~~$10.2 million. Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. We concluded at ~~June~~September 30, 2023 that no valuation allowance on our net deferred tax asset was required. Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.

Our primary market risk exposures are interest rate risk and liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Macatawa Bank has only limited agricultural-related loan assets, and therefore has no significant exposure to changes in commodity prices.

Our balance sheet has sensitivity, in various categories of assets and liabilities, to changes in prevailing rates in the U.S. for prime rate, mortgage rates, U.S. Treasury rates and various money market indexes. Our asset/liability management process aids us in providing liquidity while maintaining a balance between interest earning assets and interest bearing liabilities.

We utilize a simulation model as our primary tool to assess the direction and magnitude of variations in net interest income and the economic value of equity (“EVE”) resulting from potential changes in market interest rates. Key assumptions in the model include contractual cash flows and maturities of interest-sensitive assets and interest-sensitive liabilities, prepayment speeds on certain assets, and changes in market conditions impacting loan and deposit pricing. We also include pricing floors on discretionary priced liability products which limit how low various checking and savings products could go under declining interest rates. These floors reflect our pricing philosophy in response to changing interest rates.

We forecast the next twelve months of net interest income under an assumed environment of gradual changes in market interest rates under various scenarios. The resulting change in net interest income is an indication of the sensitivity of our earnings to directional changes in market interest rates. The simulation also measures the change in EVE, or the net present value of our assets and liabilities, under an immediate shift, or shock, in interest rates under various scenarios, as calculated by discounting the estimated future cash flows using market-based discount rates.

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of ~~June~~September 30, 2023 (dollars in thousands):

											Economic
											Value of		Percent			Net Interest		Percent
Interest Rate Scenario	Economic Value of Equity		Percent Change			Net Interest Income		Percent Change			Equity		Change			Income		Change
Interest rates up 200 basis points	$	383,276		(6.36	)%	$	93,587		1.48	%	$	396,181		(6.14	)%	$	100,041		2.23	%
Interest rates up 100 basis points		396,173		(3.21	)		92,903		0.74			408,847		(3.14	)		98,937		1.10
No change		409,301		—			92,221		—			422,095		—			97,856		—
Interest rates down 100 basis points		418,685		2.29			91,315		(0.98	)		433,229		2.64			96,009		(1.98	)
Interest rates down 200 basis points		411,954		0.65			89,487		(2.96	)		427,293		1.23			91,021		(6.98	)

If interest rates were to increase, this analysis suggests that we are positioned for an improvement in net interest income over the next twelve months. If interest rates were to decrease, this analysis suggests we would experience a reduction in net interest income over the next twelve months.

We also forecast the impact of immediate and parallel interest rate shocks on net interest income under various scenarios to measure the sensitivity of our earnings under extreme conditions.

The quarterly simulation analysis is monitored against acceptable interest rate risk parameters by the Asset/Liability Committee and reported to the Board of Directors.

In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; and client preferences.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company's are designed to do, and management necessarily was required to apply its judgment in evaluating whether the benefits of the controls and procedures that the Company adopts outweigh their costs.

Our CEO and CFO, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report, have concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

The following table provides information regarding the Company’s purchase of its own common stock during the ~~second~~third quarter of 2023. All employee transactions are under stock compensation plans. These include shares of Macatawa Bank Corporation common stock surrendered to satisfy tax withholding obligations that occur upon the vesting of restricted shares. The value of the shares withheld is determined based on the closing price of Macatawa Bank Corporation common stock at the date of vesting. The Company has no publicly announced repurchase plans or programs.

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.

		Page Number

Part I.	Financial Information:

	Item 1. Consolidated Financial Statements	4

	Notes to Consolidated Financial Statements	10

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	4144

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	5560

	Item 4. Controls and Procedures	5661

Part II.	Other Information:

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5762

	Item 6. Exhibits	5762

Signatures		5863

	Level 1:	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

	Level 2:	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

	Level 3:	Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
June 30, 2023
Single maturity fixed rate advances	$	10,000	February 2024		2.63	%
Putable advances		20,000	November 2024		1.81	%
	$	30,000

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2022
Single maturity fixed rate advances	$	10,000	February 2024		2.63	%
Putable advances		20,000	November 2024		1.81	%
	$	30,000

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
September 30, 2023
Single maturity fixed rate advance	$	10,000	February 2024		2.63	%
Putable advance		20,000	November 2024		1.81	%
	$	30,000

	Term Loans By Origination Year
June 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total


Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial development		—		—		—		—		—		—		—		—
Commercial improved		—		—		—		—		—		—		—		—
Manufacturing and industrial		—		—		—		—		—		—		—		—
Residential development		—		—		—		—		—		—		—		—
Residential improved		—		—		—		—		—		—		—		—
Vacant and unimproved		—		—		—		—		—		—		—		—
Total commercial		—		—		—		—		—		—		—		—

Residential mortgage		—		—		—		—		—		—		—		—
Consumer unsecured		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		43		43
Total consumer		—		—		—		—		—		—		43		43

Total loans		—		—		—		—		—		—		43		43

	*Term Loans By Origination Year*
													*Revolving*
September 30, 2023	*2023*		*2022*		*2021*		*2020*		*2019*		*Prior*		*Loans*		*Total*


Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial development		—		—		—		—		—		—		—		—
Commercial improved		—		—		—		—		—		—		—		—
Manufacturing and industrial		—		—		—		—		—		—		—		—
Residential development		—		—		—		—		—		—		—		—
Residential improved		—		—		—		—		—		—		—		—
Vacant and unimproved		—		—		—		—		—		—		—		—
Total commercial		—		—		—		—		—		—		—		—

Residential mortgage		—		—		—		—		—		—		—		—
Consumer unsecured		—		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		84		84
Total consumer		—		—		—		—		—		—		84		84

Total loans		—		—		—		—		—		—		84		84

	Fair			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
	Value			(Level 1)		(Level 2)			(Level 3)
June 30, 2023
Available for sale securities
U.S. Treasury and federal agency securities	$	240,181		$	—	$	240,181		$	—
U.S. Agency MBS and CMOs		116,149			—		116,149			—
Tax-exempt state and municipal bonds		34,611			—		34,611			—
Taxable state and municipal bonds		110,181			—		110,181			—
Corporate bonds and other debt securities		11,715			—		11,715			—
Other equity securities		1,300			—		1,300			—
Loans held for sale		—			—		—			—
Interest rate swaps		6,000			—		6,000			—
Total assets measured at fair value on recurring basis	$	520,137		$	—	$	520,137		$	—

Interest rate swaps		(6,000	)		—		(6,000	)		—
Total liabilities measured at fair value on recurring basis	$	(6,000	)	$	—	$	(6,000	)	$	—


December 31, 2022
Available for sale securities
U.S. Treasury and federal agency securities	$	224,634		$	—	$	224,634		$	—
U.S. Agency MBS and CMOs		113,818			—		113,818			—
Tax-exempt state and municipal bonds		36,710			—		36,710			—
Taxable state and municipal bonds		112,171			—		112,171			—
Corporate bonds and other debt securities		11,924			—		11,924			—
Other equity securities		1,304			—		1,304			—
Loans held for sale		215			—		215			—
Interest rate swaps		6,463			—		6,463			—
Total assets measured at fair value on recurring basis	$	507,239		$	—	$	507,239		$	—

Interest rate swaps		(6,463	)		—		(6,463	)		—
Total liabilities measured at fair value on recurring basis	$	(6,463	)	$	—	$	(6,463	)	$	—

				Quoted Prices in
				Active Markets		Significant Other			Significant
				for Identical		Observable			Unobservable
	Fair			Assets		Inputs			Inputs
	Value			(Level 1)		(Level 2)			(Level 3)
September 30, 2023
Available for sale securities
U.S. Treasury and federal agency securities	$	240,113		$	—	$	240,113		$	—
U.S. Agency MBS and CMOs		109,962			—		109,962			—
Tax-exempt state and municipal bonds		33,249			—		33,249			—
Taxable state and municipal bonds		108,209			—		108,209			—
Corporate bonds and other debt securities		11,744			—		11,744			—
Other equity securities		1,260			—		1,260			—
Loans held for sale		—			—		—			—
Interest rate swaps		6,812			—		6,812			—
Total assets measured at fair value on recurring basis	$	511,349		$	—	$	511,349		$	—

Interest rate swaps	$	(6,812	)	$	—	$	(6,812	)	$	—
Total liabilities measured at fair value on recurring basis	$	(6,812	)	$	—	$	(6,812	)	$	—


December 31, 2022
Available for sale securities
U.S. Treasury and federal agency securities	$	224,634		$	—	$	224,634		$	—
U.S. Agency MBS and CMOs		113,818			—		113,818			—
Tax-exempt state and municipal bonds		36,710			—		36,710			—
Taxable state and municipal bonds		112,171			—		112,171			—
Corporate bonds and other debt securities		11,924			—		11,924			—
Other equity securities		1,304			—		1,304			—
Loans held for sale		215			—		215			—
Interest rate swaps		6,463			—		6,463			—
Total assets measured at fair value on recurring basis	$	507,239		$	—	$	507,239		$	—

Interest rate swaps	$	(6,463	)	$	—	$	(6,463	)	$	—
Total liabilities measured at fair value on recurring basis	$	(6,463	)	$	—	$	(6,463	)	$	—

	June 30, 2023		December 31, 2022
Noninterest-bearing demand	$	704,409	$	834,879
Interest bearing demand		572,132		760,889
Savings and money market accounts		802,694		922,418
Certificates of deposit		242,310		96,956
	$	2,321,545	$	2,615,142

				Weighted
	Advance			Average
Principal Terms	Amount		Range of Maturities	Interest Rate
December 31, 2022
Single maturity fixed rate advance	$	10,000	February 2024		2.63	%
Putable advance		20,000	November 2024		1.81	%
	$	30,000

	September 30, 2023
			Outstanding		Percentage to
	Number of		Recorded		Total
	Loans		Balance		Loans
Commercial and industrial		3	$	266		0.05	%
Commercial real estate		3		493		0.09	%
Consumer		31		2,690		1.14	%
		37	$	3,449		0.27	%

	Total Number of Shares Purchased		Average Price Paid Per Share
Period
April 1 - April 30, 2023
Employee Transactions		—	$	—
May 1 - May 31, 2023
Employee Transactions		—	$	—
June 1 - June 30, 2023
Employee Transactions		807	$	9.57
Total for Second Quarter ended June 30, 2023
Employee Transactions		807	$	9.57

3.1	Restated Articles of Incorporation. Previously filed with the Commission on October 27, 2016 in Macatawa Bank Corporation’s Quarterly Report on Form 10-Q, Exhibit 3.1. Here incorporated by reference.
3.2	Bylaws. Previously filed with the Commission on February 19, 2015 in Macatawa Bank Corporation's Annual Report on Form 10-K for the year ended December 31, 2014, Exhibit 3.2. Here incorporated by reference.
4.1	Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference.
4.2	Bylaws. Exhibit 3.2 is here incorporated by reference.
4.3	Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the SEC upon request.
31.1	Certification of Chief Executive Officer.
31.2	Certification of Chief Financial Officer.
32.1	Certification pursuant to 18 U.S.C. Section 1350.
101.INS	Inline XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

	MACATAWA BANK CORPORATION

	/s/ Ronald L. Haan
	Ronald L. Haan
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ Jon W. Swets
	Jon W. Swets
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Dated: ~~July 27,~~October 26, 2023