Certain amounts in the 2022 financial statements have been reclassified to conform to the 2023 presentation. These reclassifications did not have an impact on net income or shareholders’ equity.

The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements for the year ended December 31, 2022 and are contained in the Company’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

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

In concurrence with the adoption of CECL, the Company also adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” effective January 1, 2023. The amendments in ASU 2022-02 enhanced disclosures for loan modifications made for borrowers experiencing financial difficulty and eliminated the Troubled Debt Restructurings (“TDR”) accounting guidance for financial institutions that have adopted CECL. See Note 8 (Modifications to Borrowers Experiencing Financial Difficulty) to the Company’s Notes to Consolidated Financial Statements for additional discussion of the adoption of ASU 2022-02.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $2.41 million, which is

presented as a reduction to net loans held for investment, and an increase in the allowance for credit losses on unfunded loan commitments of $9,000, which is recorded within Other Liabilities. The Company recorded an allowance for credit losses for held to maturity securities of $70,000, which is presented as a reduction to securities held to maturity. The Company recorded a net decrease to retained earnings of $1.9 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). As a practical expedient, the Company has excluded interest receivable from the credit loss analysis under CECL for all applicable financial instruments.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not necessary.

Allowance for credit losses	January 1, 2023 As Reported Under ASC 326		December 31, 2022 Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
	(dollars in thousands)
Assets
Securities held to maturity
State and political subdivisions	$	3	$	—	$	3
Corporate bonds		67		—		67
Securities held to maturity, total		70		—		70

Loans held for investment
Commercial		1,137		435		702
Real estate - commercial		1,777		760		1,017
Other real estate construction		306		177		129
Real estate 1-4 family construction		14		—		14
Real estate - residential		635		561		74
Home equity		652		277		375
Consumer loans		167		76		91
Other loans		9		4		5
Loans held for investment, total		4,697		2,290		2,407

Liabilities
Allowance for credit losses for unfunded commitments		150		141		9

Total	$	4,847	$	2,431	$	2,416

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

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

Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit loss related to the available for sale portfolio. Accrued interest receivable on available for sale debt securities, included in Interest Receivable in the consolidated balance sheets, totaled $2.0 million at March 31, 2023 and was excluded from the estimate of credit losses.

Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. Accrued interest receivable on held to maturity debt securities, included in Interest Receivable in the consolidated balance sheets, totaled $358,000 at March 31, 2023 and was excluded from the estimate of credit losses.

The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Management classifies the held to maturity portfolio into the following major security types: U.S. government agencies, state and political subdivisions and corporate bonds. All of the U.S. government agencies securities are issued by government-sponsored agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. As a result, no allowance for credit losses was recorded for these securities at March 31, 2023. The state and political subdivisions securities held by the Company are highly rated by major rating agencies. As such, there was minimal allowance for credit losses recorded at March 31, 2023 for state and political subdivisions securities.

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified segments for Consumer loans based on credit score and collateral and for Commercial loans based on risk grade and collateral. The allowance for credit losses for each segment is calculated using a Non-Discounted Cash Flow methodology. The Non-Discounted Cash Flow methodology incorporates macroeconomic forecasts to project expected losses. Significant macroeconomic factors used in estimating the expected losses include the National Unemployment Rate and the 10-Year T-Bill. A third-party forecast is utilized to project defaults for two years followed by a one year reversion period to the historical long run average economic forecast for the remainder of the portfolio life.

The Company individually reviews loans that are experiencing financial difficulty with total relationship exposure greater than or equal to $100,000 that are determined to be collateral dependent. These collateral dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

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

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that

funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.