Burke & Herbert Financial Services Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our consolidated financial condition and results of operations of the Company should be read in conjunction with the preceding consolidated financial statements and notes presented in Item 1. Financial Statements of this Form 10-Q, as well as with the audited consolidated financial statements and notes for the year ended December 31, 2022, included in our Registration Statement on Form 10 filed with the SEC on February 28, 2023, as amended on April 4, 2023, April 20, 2023, and April 21, 2023, and as declared as effective by the SEC on April 21, 2023. Historical results of operations and the percentage relationships among any amounts included and any trends that may appear may not indicate trends in operations or results of operations for any future periods. We are a bank holding company, and we conduct all of our material business operations through the Bank. As a result, the discussion and analysis below primarily relate to activities conducted at the Bank. Disclosure Regarding Forward-Looking Statements This Form 10-Q contains statements that we believe are, or may be considered to be, “forward-looking statements”. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current beliefs, expectations, or assumptions regarding the future of the business, future plans and strategies, operational results, and other future conditions of the Company. All statements other than statements of historical fact included in this Form 10-Q regarding the prospects of our industry or our prospects, plans, financial position, or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “plans,” “expects” or “does not expect,” “is expected,” “look forward to,” “budget,” “scheduled,” “estimates,” “forecasts,” “will continue,” “intends,” “the intent of,” “have the potential,” “anticipates,” “does not anticipate,” “believes,” “should,” “should not,” or variations of such words and phrases that indicate that certain actions, events, or results “may,” “could,” “would,” “might,” or “will,” “be taken,” “occur,” or “be achieved,” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections, and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates, and intentions expressed in such forward-looking statements. Important risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company, as applicable, to be materially different from any expected future results, performance, or achievements expressed or implied by such forward-looking information and statements include, but are not limited to, the risks described in Par t II, Item 1A . Risk Factors in this Form 10-Q. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Form 10-Q, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-Q. We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. Overview Burke & Herbert Financial Services Corp. was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for the Bank. The Company commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. As a bank holding company, the Company is subject to regulation and supervision by the Federal Reserve. The Company has no material operations and 38 Table of Contents owns 100% of the Bank. The Bank is a Virginia chartered commercial bank that commenced operations in 1852. The Bank is supervised and regulated by the FDIC and the Virginia BFI. The Bank offers a full range of business and personal financial solutions designed to meet customers’ banking, borrowing, and investment needs and has over 20 branches throughout the Northern Virginia region and commercial loan offices in Fredericksburg, Loudoun County, and Richmond, Virginia, and in Bethesda, Maryland. The Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ACL to absorb expected credit losses on existing loans that may become uncollectible. The Bank establishes and maintains this ACL by charging a provision for credit losses against operating earnings. In order to maintain its operations and branch locations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section. As of March 31, 2023, we had total consolidated assets of $3.7 billion, gross loans of $2.0 billion, total deposits of $3.0 billion, and total shareholders’ equity of $289.8 million. As of March 31, 2023, we had 411 full-time employees. None of our employees are covered by a collective bargaining agreement. Recent Events in the Financial Services Industry During March 2023, the FDIC placed two large financial institutions under receivership, marking the third and fourth largest bank failures in U.S. history, primarily due to liquidity concerns. In May 2023, another financial institution failed that became the second largest bank failure in U.S. history. All of the deposits and substantially all of the assets of that institution were assumed by another financial institution. These failures have caused general uncertainty and concern regarding the adequacy of liquidity in the banking sector as a whole. Uncertainty may be compounded by the reach and depth of media attention, including social media, and its ability to disseminate concerns or rumors about any events of these kinds or other similar risks, and has in the past and may in the future lead to market-wide liquidity problems. These failures underscore the importance of maintaining diversified sources of funding as key measures to ensure the safety and soundness of a financial institution. While the Company did not experience significant unusual deposit withdrawals related to these recent events, we cannot be assured that similar unusual deposit withdrawal activity will not affect banks generally or affect our Bank in the future. The heightened focus on liquidity across the banking industry will continue to add to the already increasing competition for deposits as a source of core balance sheet funding, which is expected to cause the cost of funds at banks to continue to rise in the near-term. Should financial institutions experience shortfalls in core funding, the use of alternative sources of liquidity would most likely cause a further increase in funding costs, placing additional pressure on overall bank profitability across the sector. In response to events that occurred during the months of March and May 2023 and the attendant stress on economic agents, including various financial stock markets, the Company took multiple proactive measures to mitigate any potential financial and operational impacts. Such measures included, but were not limited to: • dissemination of internal communication to inform the Board and employees of current events and the Company’s condition and desired market response; • testing of available liquidity sources; • real-time analysis of our deposit composition and deposit concentrations; • assessment of our investment securities portfolio; and • stress testing of liquidity and capital metrics based on observed financial conditions with particular emphasis on the causes of such risk events. For further discussion see Item 1A, under the caption “Risk Factors” in our Registration Statement on Form 10 filed with the SEC on February 28, 2023, and as amended, and declared effective by the SEC on April 21, 2023. The measures taken 39 Table of Contents followed meetings convened by a subcommittee provided for in our Asset/Liability policy more fully described in Item 3 .- Quantitative and Qualitative Disclosures About Market Risk – M a r k e t R i s k . The Company’s key inputs and certain assumptions of the stress testing included, but were not limited to, uninsured deposits, deposit composition and deposit flows, borrowings and borrowing capacity, interest rate movements and sensitivity, unrealized losses in the investment securities portfolio, loan balances and loan demand, credit risks, and current allowances for credit losses. Results of the stress tests indicated capital levels that remained above the well-capitalized regulatory ratios and liquidity metrics remained within internal policy guidelines. For additional information related to capital, see Notes to the Consolidated Financial Statements – Note 8 . Regulatory Capital Matters . The Company intends to continue conducting such stress tests on an interim basis. As of the date of this filing, the Company believes that the recent events described herein will not have a material impact to the Company’s financial position. Critical Accounting Policies and Estimates Our accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory and general practices within the financial services industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgements that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments affect the amounts reported in the financial statements and accompanying notes and are based on information available as of the date of the financial statements, and, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions, and judgments inherent in those policies, are critical in understanding our financial statements. The more critical accounting estimates include accounting for credit losses and valuation methodologies. Additional disclosures regarding the effects of new pronouncements, ASU 2016-13 and ASU 2022-02, are included in this report in Note 1 , Nature of Business Activities and Significant Accounting Policies , to the consolidated financial statements under Part 1, Item, “ Financial Information. ” Liquidity Management Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. The Company assesses the need for liquidity in a variety of scenarios. Those scenarios may include projected growth, credit deterioration, deposit decay, interest rate changes, and a variety of other economic scenarios that can impact the liquidity position of the Company. These analyses are performed on a quarterly basis in conjunction with the Company’s Asset/Liability meetings, and findings are reported to the Asset/Liability Committee (the “ALCO”) and to the Board. From time to time, management may change the frequency of such testing or update certain inputs as a result of abnormal market conditions. Findings as a result of the Company’s prudent liquidity modeling may result in the change of certain products offered to customers or adjust the way the Company manages its balance sheet. Such changes could include adjusting interest rates offered on certain deposit products, changes to interest rates charged in lending activities, or the suspension of certain products and activities altogether. Times of significant economic stress may cause the mix of funding to shift and increase the likelihood of changes to certain products in order to manage the Company’s overall liquidity and capital position. The asset portion of the balance sheet provides liquidity primarily through unencumbered securities available-for-sale, loan principal and interest payments, maturities and prepayments of investment securities, and, to a lesser extent, sales of investment securities available-for-sale. Other short-term investments available to the Company that could act as potential sources of liquidity are federal funds sold, securities purchased under agreements to resell, and maturing interest-bearing deposits with other banks. The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts and through FHLB and other borrowings. Brokered deposits, federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings are additional sources of liquidity and basically represent the 40 Table of Contents Company’s incremental borrowing capacity. These sources of liquidity are used as necessary to fund asset growth and meet short-term liquidity needs. In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a bank holding company that is a separate legal entity from the Bank. The Company requires cash for various operating needs that could include payment of dividends to its shareholders, the servicing of debt, and the payment of general corporate expenses. The primary source of liquidity for the Company is dividends paid by the Bank. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits, and other such items. Any future dividends must be set forth in the Company’s capital plans before any dividends can be paid. Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. See Note 6 - Advances and Other Borrowings and Note 1 0 - Commitments and Contingencies , in Notes to Consolidated Financial Statements for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations. Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. In July 2013, the Federal Reserve published the final rules that established a new comprehensive capital framework for banking organizations, commonly referred to as Basel III. These final rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions. The final rule became effective January 1, 2015, for smaller, non-complex banking organizations with full implementation by January 1, 2019. The Basel III Capital Rules require the Holding Company and the Bank to maintain minimum Common Equity Tier 1 (“CET 1”), Tier 1, and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and counter-cyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “counter-cyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Holding Company or the Bank. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Additionally, federal banking laws require regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not satisfy minimum capital requirements. The extent of these powers depends upon whether the institution in question is “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized”, as such terms are defined under federal banking agency regulations. Depository institutions that do not meet minimum capital requirements will face constraints on payment of dividends, equity repurchases, and compensation based on the amount of shortfall. A depository institution that is not “well capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, may be subject to asset growth limitations, and may be required to submit capital restoration plans. As of March 31, 2023, and December 31, 2022, the Bank complied with all regulatory capital standards and qualifies as “well capitalized”. Note 8 - Regulatory Capital Matters in Notes to Consolidated Financial Statements contains additional discussion and analysis regarding the Company and the Bank’s regulatory capital requirements. Effects of Inflation The majority of assets and liabilities of a financial institution are monetary in nature; therefore, a financial institution differs greatly from most commercial and industrial companies, which have significant investments in fixed assets or 41 Table of Contents inventories that are greatly impacted by inflation. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also affects other expenses that tend to rise during periods of general inflation. Management believes the most significant potential impact of inflation on financial results is a direct result of the Company’s ability to manage the impact of changes in interest rates. Management attempts to maintain a balanced position between rate-sensitive assets and liabilities over an economic cycle in order to minimize the impact of interest rate fluctuations on net interest income. However, this goal can be difficult to completely achieve in times of rapidly changing interest rates and is one of many factors considered in determining the Company’s interest rate positioning. Key Factors Affecting Financial Performance We face a variety of risks that may impact various aspects of our financial performance from time to time. The extent of such impacts may vary depending on factors such as the current business and economic conditions, political and regulatory environment, and operational challenges. Many of these risks and our risk management strategies are described in more detail elsewhere in this Report as well as with the audited consolidated financial statements and notes for the year ended December 31, 2022, included in our Registration Statement on Form 10 filed with the SEC on February 28, 2023, as amended on April 4, 2023, April 20, 2023, and April 21, 2023, and as declared as effective by the SEC on April 21, 2023. Our success will depend upon, among other things, the following factors that we manage or control: • Effectively managing capital and liquidity, including: • Continuing to maintain and, over time, grow our deposit base as a low-cost stable funding source, • Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing, and liquidity standards, and • Actions we take within the capital and other financial markets, • Our ability to manage any material costs related to the execution of our strategic priorities, including increased employees, infrastructure, compliance, and other costs in a profitable manner over the long term, • Management of credit risk and interest rate risk in our portfolio, • Our ability to manage and implement strategic business objectives within the changing regulatory environment, • The impact of legal and regulatory-related contingencies, • The appropriateness of critical accounting estimates and related contingencies, • Our ability to manage operational risks related to new products and services, changes in processes and procedures, or the implementation of new technology, • The ability to make investments to promote compliance with existing and evolving regulatory requirements that will increase as the Company grows and will result in increased administrative expenses that we did not previously incur, which costs may materially increase our general and administrative expenses, and • The ability to execute our strategic objectives while satisfying the obligations associated with being a public company that will require significant resources and management attention and may divert management’s attention from our business operations. Our financial performance is also substantially affected by a number of external factors outside of our control, including the following: • Economic conditions, including the length and extent of the economic impacts of a pandemic, and the actions taken to mitigate and manage it, • The effect of climate change on our business and performance, including indirectly through impacts on our customers, 42 Table of Contents • The actions by the Federal Reserve, U.S. Treasury, and other government agencies, including those that impact money supply and market interest rates and inflation, • The level of, and direction, timing, and magnitude of movement in interest rates and the shape of the interest rate yield curve, • The functioning and other performance of, and availability of liquidity in U.S. and global financial markets, including capital markets, • The impact of tariffs and other trade policies of the U.S. and its global trading partners, • Changes in the competitive landscape, • Impacts of changes in federal, state, and local governmental policy, including on the regulatory landscape, capital markets, taxes, infrastructure spending, and social programs, • The impact of market credit spreads on asset valuations, • The ability of customers, counterparties, and issuers to perform in accordance with contractual terms, and the resulting impact on our asset quality, • Loan demand, utilization of credit commitments, and standby letters of credit, and • The impact on customers and changes in customer behavior due to changing business and economic conditions or regulatory or legislative initiatives. The impact of these items, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operation. For additional information on the risks we face, see Par t II, Item 1A . - Risk Factors . Selected Financial Data The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of March 31, 2023, and December 31, 2022, and the selected income statement data for the three months ended March 31, 2023, and March 31, 2022, have been derived from our consolidated financial statements included elsewhere in this Form 10-Q and should be read in conjunction with the other information contained in this Form 10-Q. 43 Table of Contents (In thousands, except ratios, share and per share data) March 31, 2023 December 31, 2022 Selected Financial Condition Data: Total assets $ 3,671,186 $ 3,562,898 Total cash and cash equivalents 116,939 50,295 Total investment securities, at fair value 1,362,785 1,371,757 Net loans 1,926,034 1,866,182 Company-owned life insurance 93,053 92,487 Premises and equipment, net 55,157 53,170 Total deposits 3,032,391 2,920,400 Advances and other borrowings 321,700 343,100 Total shareholders’ equity 289,783 273,453 As of or for the Three Months Ended March 31, 2023 2022 Selected Operating Data: Interest income $ 34,328 $ 24,252 Interest expense 9,554 781 Net interest income 24,774 23,471 Provision for (recapture of) credit losses 515 (2,638) Total non-interest income 4,214 4,115 Total non-interest expenses 20,365 19,165 Income before income taxes 8,108 11,059 Income tax expense 584 1,933 Net income 7,524 9,126 Per Share Data: Average shares of Common Stock outstanding, basic 7,426,638 7,424,059 Average shares of Common Stock outstanding, diluted 7,504,473 7,451,858 Total shares of Common Stock outstanding 7,427,840 7,424,320 Basic net income per share $ 1.01 $ 1.23 Diluted net income per share 1.00 1.23 Dividends declared per share 0.53 0.53 Dividend payout ratio (1) 53.00 % 43.09 % Book value (at period end) $ 39.01 $ 44.57 44 Table of Contents As of or for the Three Months Ended March 31, 2023 2022 Performance Ratios: Return on average assets 0.85 % 1.03 % Return on average equity 10.83 9.91 Interest rate spread (2) 2.58 2.84 Net interest margin (3) 3.06 2.89 Efficiency ratio (4) 70.25 69.47 Capital Ratios: Common equity tier 1 (CET 1) capital to risk-weighted assets (5) 17.55 % 17.47 % Total risk-based capital to risk-weighted assets (5) 18.65 18.72 Tier 1 capital to risk-weighted assets (5) 17.55 17.47 Tier 1 capital to average assets (5) 11.19 10.88 Average equity to average assets (5) 7.85 10.41 Asset Quality Ratios: Allowance coverage ratio 1.32 % 1.65 % Allowance for credit losses as a percentage of non-performing loans 791.87 113.81 Net charge-offs to average outstanding loans during the period 0.00 0.00 Non-performing loans as a percentage of total loans 0.17 1.45 Non-performing assets as a percentage of total assets 0.09 0.72 Other Data: Number of full-service branches 23 24 Number of full-time equivalent employees 411 392 (1) Dividend payout ratio represents per share dividends declared divided by diluted earnings per share. (2) The interest rate spread represents the difference between the fully taxable equivalent weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period. (3) The net interest margin represents fully taxable-equivalent net interest income as a percent of average interest-earning assets for the period. (4) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income. (5) Capital ratios are for Burke & Herbert Financial Services Corp. for 2023 and Burke & Herbert Bank & Trust Company for 2022. Results of Operations Results of Operations for the Three Months Ended March 31, 2023 and 2022 General Consolidated net income for the three months ended March 31, 2023, was $7.5 million compared to $9.1 million earned during the three months ended March 31, 2022. The $1.6 million, or 17.6%, decrease in net income is primarily the result of increases in non-interest expense and provision for credit losses offset by the increase in net interest income and lower income tax expense. Net interest income increased by $1.3 million to $24.8 million for the three months ended March 31, 2023, compared to $23.5 million for the three months ended March 31, 2022. The main drivers for this increase were balance sheet growth, specifically in loans, and higher interest rates offset by higher funding costs on both our deposits and borrowings. For the three months ended March 31, 2023, the Company recorded credit loss expense of $0.5 million compared to a recapture of provision losses of $2.6 million. For the three months ended March 31, 2022, the Company was able to recapture provision that was booked to reflect the uncertainty of the COVID-19 pandemic. For the current period, the adoption of CECL, which requires the Company to estimate provision of credit losses using an expected life-time approach versus an incurred model along with increased loan portfolio balances resulted in a higher credit expense for the three months ended March 31, 2023 compared to the three months ended, March 31, 2022. 45 Table of Contents Non-interest income increased by $99 thousand, or 2.4%, to $4.2 million for the three months ended March 31, 2023, as compared to $4.1 million for the three months ended March 31, 2022. The increase in non-interest income was primarily due to dividend income from FHLB stock that increased by $102 thousand and was offset by a lower servicing release premium of $37 thousand recognized in the three months ended March 31, 2023, compared to March 31, 2022. Non-interest expense increased by $1.2 million, or 6.3%, to $20.4 million for the three months ended March 31, 2023, as compared to $19.2 million for the three months ended March 31, 2022. The increase was primarily due to fees of $287 thousand paid by the Company due to entering into interest rate swaps designated as fair value hedges and higher legal and audit fees of $345 thousand arising from the filing of our initial Registration Statement. Net Interest Income and Net Interest Margin Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest margin, stated as a percentage, is the yield obtained by dividing the difference between interest income generated on earning assets and the interest expense paid on all funding sources by average earning assets. Fluctuations in interest rates as well as changes in the volume and mix of earnings assets and interest-bearing liabilities can impact net interest income and net interest margin. Management closely monitors both total net interest income and the net interest margin and seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Net interest income totaled $24.8 million for the three months ended March 31, 2023, compared to $23.5 million for the three months ended March 31, 2022. The increase in net interest income was primarily driven by a higher volume of interest-bearing assets and higher interest rates offset by higher volume of interest-bearing liabilities and higher interest rates. Loan interest income was the primary driver of increased net interest income due to both volume and rate. This increase in interest income was offset by the increased cost of funding through both deposits and borrowings. The increased pace of rate hikes from the Federal Reserve has resulted in higher deposit rates to retain depositors and increased the cost of borrowings from the FHLB and the Federal Reserve. The tax-adjusted net interest margin was 3.06% for the three months ended March 31, 2023, compared to 2.89% for the three months ended March 31, 2022. The increase in tax-adjusted net interest margin was primarily driven by the increase in market rates which increased the yield earned on marketable securities and our loan portfolio. However, this increase on the interest income was offset by a much faster increase in rates paid on the deposit portfolio and on our borrowings, resulting in a decrease in our net interest spread. The yield for the three months ended March 31, 2023, for the loan portfolio was 4.81% compared to 3.80% for the three months ended March 31, 2022. The increase was primarily the result of increasing loan production with higher interest rates in a rising rate environment. For the three months ended March 31, 2023, the tax-adjusted yield on the total investment securities portfolio was 3.45% compared to 2.18% for the three months ended March 31, 2022. The increase was primarily due to higher market interest rates which increased the effective rate earned on investment securities. The rate paid on interest-bearing deposits increased to 1.09% during the three months ended March 31, 2023, from 0.08% during the three months ended March 31, 2022. The increase was a result of market and economic conditions, which led to an increase in our offering rate for selected parts of our deposit portfolio. Increases in deposit rates rose at a faster pace due to the the increases in the Federal Funds Rate that occurred in the second half of 2022. Continuing increases by the Federal Reserve and in the market rates may negatively impact our cost of funds rate. The rate paid on FHLB and other borrowings for the three months ended March 31, 2023, was 4.70% compared to 0.60% for the corresponding period in 2022. The increase was due to the increase in short-term borrowing costs, driven by increases in the Federal Funds Rate during the year that may continue to increase our overall borrowing costs. The following table sets forth the major components of net interest income and the related yields and rates for the three months ended March 31, 2023, and March 31, 2022, for comparison (dollars in thousands). 46 Table of Contents For the Three Months Ended March 31, 2023 2022 Average Outstanding Balance Interest Income/Expense Rate Earned/Paid Average Outstanding Balance Interest Income/Expense Rate Earned/Paid Assets: Loans, gross (1)(2) $ 1,919,678 $ 22,760 4.81 % $ 1,756,461 $ 16,450 3.80 % Interest-bearing deposits and fed funds sold 43,973 308 2.84 57,870 19 0.13 Taxable securities 1,095,486 9,803 3.63 1,189,849 5,358 1.83 Tax-exempt securities (3) 272,783 1,845 2.74 380,464 3,070 3.27 Total securities 1,368,269 11,648 3.45 1,570,313 8,428 2.18 Total interest-earning assets 3,331,920 34,716 4.23 3,384,644 24,897 2.98 Non-interest-earning assets 257,675 201,451 Total assets $ 3,589,595 $ 3,586,095 Liabilities and shareholders’ equity: Deposits: Non-interest-bearing demand $ 923,039 $ 934,118 Interest-bearing demand 572,547 199 0.14 % 601,097 34 0.02 % Savings 1,018,851 2,673 1.06 1,120,207 191 0.07 Time 411,785 2,530 2.49 279,253 174 0.25 Total interest-bearing deposits 2,003,183 5,402 1.09 2,000,557 399 0.08 Total deposits 2,926,222 5,402 0.75 2,934,675 399 0.06 Borrowings: FHLB advances and other 358,124 4,153 4.70 257,051 382 0.60 Total interest-bearing liabilities 2,361,307 9,555 1.64 2,257,608 781 0.14 Non-interest-bearing liabilities 23,588 20,949 Equity 281,661 373,420 Total liabilities and equity $ 3,589,595 $ 3,586,095 Taxable-equivalent net interest income /net interest spread (4) 25,161 2.58 % 24,116 2.84 % Taxable-equivalent net interest margin (5) 3.06 % 2.89 % Taxable-equivalent net adjustment (387) (645) Net interest income $ 24,774 $ 23,471 Net interest-earning assets $ 970,613 $ 1,127,036 (1) Non-accrual loans are included in average loan balances. (2) Loan fees are included in the calculation of interest income. (3) Yields and interest income on tax-exempt assets are computed on a taxable-equivalent basis assuming a 21% tax rate. (4) The interest rate spread represents the difference between the fully taxable-equivalent weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period. (5) The net interest margin represents fully taxable-equivalent net interest income as a percent of average interest-earning assets for the period. Net interest margin as presented above is calculated by dividing fully tax-equivalent (“FTE”) net interest income by total average earning assets. Net interest income, on an FTE basis, is a non-GAAP financial measure that the Company believes to provide a more accurate picture of the interest margin for comparative purposes. Management believes FTE net interest income is a standard practice in the banking industry, and when net interest income is adjusted on an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on 47 Table of Contents net income. FTE net interest income is calculated by adding the tax benefit on certain financial interest earning assets, whose interest is tax-exempt, to total interest income then subtracting total interest expense. As a non-GAAP measure, FTE interest income should not be considered as a substitute for the nearest comparable GAAP measure, net interest income. The following table reconciles net interest income to FTE net interest income (in thousands). March 31, 2023 March 31, 2022 GAAP Financial Measurements Interest Income - Loans $ 22,760 $ 16,450 Interest Income - Securities taxable 9,802 5,358 Interest Income - Securities tax-exempt 1,458 2,426 Interest Income - Other interest income 308 18 Interest Expense - Deposits 5,401 400 Interest Expense - Borrowed funds 4,138 366 Interest Expense - Other 15 15 Total Net Interest Income $ 24,774 $ 23,471 Non-GAAP Financial Measurements Add: Tax Benefit on Tax-Exempt Interest Income - Securities $ 387 $ 645 Total Tax Benefit on Tax-Exempt Interest Income (1) 387 645 Tax-Equivalent Net Interest Income $ 25,161 $ 24,116 (1) Tax benefit was calculated using the federal statutory tax rate of 21%. Rate/Volume Analysis The following table sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in average balance multiplied by current period rates, and rate variances are equal to the increase or decrease in rate times prior period average balances. Variances attributable to both rate and volume changes are calculated by multiplying the change in rate by the change in average balance and are allocated to the volume variance. See table below (in thousands). Three Months Ended March 31, 2023, compared to March 31, 2022 Dollar Increase (Decrease) Due to Change in: Average Volume Average Rate Net Change Income from the interest-earning assets: Loans, gross $ 7,548 $ 18,041 $ 25,589 Securities (1) (6,976) 20,036 13,060 Interest-bearing deposits and fed funds sold (394) 1,565 1,171 Total interest income on interest-earning assets $ 178 $ 39,642 $ 39,820 Expense from the interest-bearing liabilities: Interest-bearing demand deposits $ (40) $ 703 $ 663 Savings deposits (1,079) 11,144 10,065 Time 3,729 5,827 9,556 Total interest expense on interest-bearing deposits $ 2,610 $ 17,674 $ 20,284 Borrowings $ 4,754 $ 10,542 $ 15,296 Taxable-equivalent net interest income $ (7,186) $ 11,426 $ 4,240 (1) Yields and interest income on tax-exempt securities have been computed on a taxable-equivalent basis. Interest Income Total interest income was $34.3 million for the three months ended March 31, 2023, compared to $24.3 million for the three months ended March 31, 2022, an increase of 41.2%. The increase in interest income was primarily driven by an increase in both rates and volume for the loan portfolio along with rates increasing for the securities portfolio. Interest income on loans and securities increased by $6.3 million and $3.5 million, respectively. 48 Table of Contents Interest Expense Total interest expense was $9.6 million for the three months ended March 31, 2023, compared to $0.8 million for three months ended March 31, 2022. The increase in interest expense was primarily driven by increasing rates for both deposits and borrowed funds. The average interest-bearing balances also increased, but primarily, the increase in interest rate expense was due to higher rates. Interest expense on interest-bearing deposits and borrowed funds increased by $5.0 million and $3.8 million, respectively. Provision for (Recapture of) Credit Losses The provision for credit losses was $0.5 million for the three months ended March 31, 2023, compared to a recapture of $2.6 million for the three months ended March 31, 2022. The increased provision expense was primarily due to the Company estimating credit losses using an expected life-time model versus an incurred model. Additionally, loan balances have risen significantly for the three months ended March 31, 2023, versus the three months ended March 31, 2022. See Note 4 - Allowance for Credit Losses in Notes to Consolidated Financial Statements for further information. Non-interest Income The following table sets forth the various components of our non-interest income for the periods indicated (in thousands): Three months ended March 31, Increase (Decrease) 2023 2022 Amount Percent Fiduciary and wealth management $ 1,337 $ 1,305 $ 32 2.5 % Service charges and fees 1,635 1,633 2 0.1 Net gains (losses) on securities — 104 (104) (100.0) Income from Company-owned life insurance 560 537 23 4.3 Other non-interest income 682 536 146 27.2 Total $ 4,214 $ 4,115 $ 99 2.4 % Non-interest income increased 2.4% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The increase was primarily driven by an increase in other non-interest income of $146 thousand and an increase in fiduciary and wealth management income of $32 thousand when compared to the three months ended March 31, 2022. The increase was partially offset by a decrease in net gains from securities of $104 thousand when compared to the prior year quarter. Non-interest Expense The following table sets forth the various components of our non-interest expense for the periods indicated (in thousands): Three months ended March 31, Increase (Decrease) 2023 2022 Amount Percent Salaries and wages $ 9,494 $ 9,529 $ (35) (0.4) % Pensions and other employee benefits 2,468 2,039 429 21.0 Occupancy 1,457 1,546 (89) (5.8) Equipment rentals, depreciation and maintenance 1,339 1,379 (40) (2.9) Other 5,607 4,672 935 20.0 Total $ 20,365 $ 19,165 $ 1,200 6.3 % Non-interest expense increased 6.3% for the year ended March 31, 2023, compared to March 31, 2022. The main drivers for this increase included pensions and other employee benefits which increased by $429 thousand and an increase of $935 thousand in other non-interest expense. The increase was partially offset by decreases in occupancy of $89 thousand, a decrease in salaries and wages of $35 thousand, and a decrease in equipment rentals, depreciation and maintenance of $40 thousand. Additionally, the Company incurred legal and consulting expenses associated with filing its Registration Statement and other required SEC filings. See Note 1 3 —Other Operating Expenses in Notes to Consolidated Financial Statements for further information on “Other” non-interest expense. Income Tax Expense Income tax expense was $0.6 million for the three months ended March 31, 2023, a decrease of $1.3 million from the tax provision for the three months ended March 31, 2022. The decrease was due to the Company being able to utilize 49 Table of Contents additional tax credits for the three months ended March 31, 2023. For the three months ended March 31, 2023, and March 31, 2022, our effective tax rates were 7.2% and 17.5%, respectively. Analysis of Financial Condition for the Period Ended March 31, 2023 and December 31, 2022 Assets increased by $108 million to $3.67 billion as of March 31, 2023, compared to $3.56 billion as of December 31, 2022. Loans increased by $60 million from $1.87 billion as of December 31, 2022, to $1.93 billion as of March 31, 2023. Deposits increased by $112 million and amounted to $3.03 billion at March 31, 2023, compared to $2.92 billion at December 31, 2022. This increase in deposits was partially offset by a decrease in borrowed funds of $21.4 million as of March 31, 2023, compared to December 31, 2022. Investment Securities Our investment policy is established and reviewed annually by the Board. We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, time deposits of federally insured institutions, certain bankers’ acceptances, and federal funds. Our securities are all classified as AFS. Our investments provide a source of liquidity because we can pledge them to support borrowed funds or can liquidate them to generate cash proceeds. Our investment portfolio is also a resource in managing interest rate risk, because the maturity and interest rate characteristics of this asset class can be modified to match changes in the loan and deposit portfolios. The majority of our AFS investment portfolio is comprised of obligations of states and municipalities and residential mortgage-backed securities. During the three months ended March 31, 2023, the unrealized losses on our holdings decreased from December 31, 2022, as the decrease in long-term interest rates had a positive impact on the value of our AFS portfolio. On January 1, 2023, the Company adopted the new CECL standard in accordance with ASU 2016-13, which changed the accounting framework by replacing the other-than-temporary impairment (“OTTI”) assessment with the recognition of an ACL. The Company determined that the declines in market value were due to increases in interest rates and market movements and not due to credit factors. Therefore, the Company has concluded that the unrealized losses for the AFS securities do not require an ACL at March 31, 2023. Under the prior OTTI framework, the Company did not record any cumulative OTTI expense as of December 31, 2022. The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. Management believes the structure of the Bank’s investment portfolio is appropriately aligned with the rest of the balance sheet to protect against significant and unexpected charges against earnings and capital. The following tables reflect the amortized cost and fair market values for the total portfolio for each category of investment for March 31, 2023, and December 31, 2022 (in thousands): March 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available-for-Sale U.S. Treasuries and government agencies $ 197,875 $ — $ 19,456 $ 178,419 Obligations of states and municipalities 547,896 44 79,578 468,362 Residential mortgage backed - agency 56,991 20 4,341 52,670 Residential mortgage backed - non-agency 349,123 12 27,985 321,150 Commercial mortgage backed - agency 59,409 58 1,635 57,832 Commercial mortgage backed - non-agency 190,542 97 7,414 183,225 Asset backed 95,317 101 2,819 92,599 Other 9,500 — 972 8,528 $ 1,506,653 $ 332 $ 144,200 $ 1,362,785 50 Table of Contents December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available-for-Sale U.S. Treasuries and government agencies $ 198,154 $ — $ 23,161 $ 174,993 Obligations of states and municipalities 550,590 12 96,695 453,907 Residential mortgage backed - agency 57,883 14 4,836 53,061 Residential mortgage backed - non-agency 365,983 2 26,690 339,295 Commercial mortgage backed - agency 61,810 75 1,952 59,933 Commercial mortgage backed - non-agency 191,709 10 8,420 183,299 Asset backed 101,791 49 3,214 98,626 Other 9,500 — 857 8,643 $ 1,537,420 $ 162 $ 165,825 $ 1,371,757 The investment maturity table below summarizes contractual maturities for our investment securities at March 31, 2023. The actual timing of principal payments may differ from remaining contractual maturities because obligors may have the right to repay certain obligations with or without penalties. The overall weighted average duration of the Company’s investment portfolio is 4.0 years at March 31, 2023. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security (dollars in thousands). Interest on securities below excludes tax-equivalent adjustments. March 31, 2023 One Year or Less One to Five Years Five to Ten Years After Ten Years Total Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Securities Available-for-Sale U.S. Treasuries and government agencies $ — — % $ 59,546 1.33 % $ 138,329 1.37 % $ — — % $ 197,875 1.36 % Obligations of states and municipalities 370 4.10 10,946 2.88 332,563 2.14 204,017 2.07 547,896 2.13 Residential mortgage backed - agency 42 4.38 33,445 4.96 23,504 1.81 — — 56,991 3.66 Residential mortgage backed - non-agency 32,335 1.92 209,368 3.98 92,764 3.57 14,656 4.50 349,123 3.71 Commercial mortgage backed - agency 215 6.54 52,815 4.90 6,379 4.47 — — 59,409 4.86 Commercial mortgage backed - non-agency 32,882 6.69 152,507 4.32 5,153 1.43 — — 190,542 4.65 Asset backed 2,296 2.57 51,622 5.46 41,399 5.68 — — 95,317 5.49 Other — — — — 9,500 4.34 — — 9,500 4.34 Total $ 68,140 4.28 % $ 570,249 4.05 % $ 649,591 2.44 % $ 218,673 2.23 % $ 1,506,653 3.10 % Lending Activities Our loan portfolio consists primarily of commercial real estate loans, but we offer a variety of products to meet the credit needs of our borrowers. The risks associated with lending activities differ among loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans and also impact the associated collateral. Additional discussion on the classes of loans the Company makes and related risks is included in Note 3 — Loans in Notes to Consolidated Financial Statements. The following tables set forth the composition of our loan portfolio as of the dates indicated (in thousands): March 31, 2023 December 31, 2022 Commercial real estate $ 1,154,210 $ 1,109,315 Owner-occupied commercial real estate 125,657 127,114 Acquisition, construction & development 99,886 94,450 Commercial & industrial 50,101 53,514 Single family residential (1-4 units) 518,775 499,362 Consumer non-real estate and other 3,109 3,466 1,951,738 1,887,221 Allowance for credit losses (25,704) (21,039) $ 1,926,034 $ 1,866,182 51 Table of Contents The loan portfolio at March 31, 2023 increased by $64.5 million primarily due to growth in our commercial and residential real estate loan production. The Company’s organic growth has occurred in both legacy and newer markets, principally in commercial real estate. The following table shows the maturity distribution for total loans outstanding as of March 31, 2023. The maturity distribution is grouped by remaining scheduled principal payments that are due in the following periods. The principal balance of loans are indicated by both fixed and floating rate categories in the table below (in thousands). March 31, 2023 Within One Year One Year to Five Years Five Years to 15 Years After 15 Years Fixed Rates Adjustable Rates Fixed Rates Adjustable Rates Fixed Rates Adjustable Rates Fixed Rates Adjustable Rates Total Loans: Commercial real estate $ 51,191 $ 28,045 $ 543,662 $ 74,984 $ 391,397 $ 64,223 $ 708 $ — $ 1,154,210 Owner-occupied commercial real estate 9,975 — 53,726 4,565 55,634 592 — 1,165 125,657 Acquisition, construction & development 22,366 20,778 2,329 47,780 6,034 599 — — 99,886 Commercial & industrial 374 2,564 35,044 9,106 2,433 580 — — 50,101 Total commercial loans 83,906 51,387 634,761 136,435 455,498 65,994 708 1,165 1,429,854 Single family residential (1-4 units) 3,071 13,090 12,484 17,774 19,231 10,218 260,227 182,680 518,775 Consumer non-real estate and other 298 81 1,119 766 449 — 21 375 3,109 Total loans $ 87,275 $ 64,558 $ 648,364 $ 154,975 $ 475,178 $ 76,212 $ 260,956 $ 184,220 $ 1,951,738 Asset Quality The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Credit Officer is responsible for establishing credit risk policies and procedures, including underwriting guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions. A loan is placed on non-accrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. The Company’s asset quality remained stable through the first quarter of 2023. The Company’s non-performing assets, which includes non-performing loans consisting of non-accrual loans, loans that are more than 90 days past due and still accruing, and other real estate owned as of March 31, 2023, totaled $3.2 million. The following table summarizes the Company’s non-performing assets as of March 31, 2023, and December 31, 2022 (in thousands): March 31, 2023 December 31, 2022 Non-accrual loans $ 3,246 $ 5,497 90 days past due and still accruing — — Total non-performing loans 3,246 5,497 Other real estate owned — — Total non-performing assets $ 3,246 $ 5,497 Allowance for Credit Losses Refer to the discussion in Note 1 . Nature of Business Activities and Significa nt Accounting Policies in Notes to Consolidated Financial Statements for management’s approach to estimating the ACL. The Company maintains the ACL at a level deemed adequate by management for expected credit losses. As disclosed in Note 1 and Note 4 , on January 1, 2023, the Company implemented CECL and increased the ACL, previously the allowance for credit losses, with a cumulative-effect adjustment to the ACL for credit losses of $4.4 million, which included a 52 Table of Contents cumulative-effect adjustment to the ACL for off-balance sheet exposures of $274.8 thousand. The Company’s ACL is calculated quarterly with any adjustment recorded to the provision for credit losses in the consolidated Statement of Income. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans including historical loss experiences, trends in delinquencies, non-performing loans and other risk assets, and qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. Gross charged-off loans were $17 thousand and $69 thousand for the three months ended March 31, 2023, and March 31, 2022, respectively. Gross recoveries totaled $34 thousand and $59 thousand for the three months ended March 31, 2023, and March 31, 2022, respectively. The ACL as a percentage of gross loans, net of unearned income, was 1.32% and 1.65% as of March 31, 2023, and March 31, 2022, respectively. The decrease in the allowance coverage ratio was due to one specific credit that increased the coverage ratio for the three months ended March 31, 2022. The Company recorded a provision of $0.5 million and a provision recapture of $2.6 million for the three months ended March 31, 2023, and March 31, 2022, respectively. The provision recapture for the three months ended March 31, 2022, was as a result of removing COVID-19 qualitative factors compared to the provision for credit losses for the three months ended March 31, 2023, resulting from the adoption of CECL. The following table summarizes the changes in the Company’s credit loss experience by portfolio as of (dollars in thousands): March 31, 2023 March 31, 2022 Loans outstanding at end of period $ 1,951,738 $ 1,760,308 Balance of allowance at beginning of year (21,039) (31,709) Impact of the adoption of CECL (4,125) Loans charged-off Commercial real estate — 21 Owner-occupied commercial real estate — — Acquisition, construction & development — — Commercial & industrial — 20 Residential — — Consumer non-real estate and other 17 28 Total loans charged-off 17 69 Recoveries of loans charged-off Commercial real estate 28 3 Owner-occupied commercial real estate — — Acquisition, construction & development — — Commercial & industrial — — Residential 3 47 Consumer non-real estate and other 3 9 Total recoveries of loans charged-off 34 59 Net loan charge-offs (recoveries) (17) 10 Provision for (recapture of) credit losses for the period 523 (2,638) Ending allowance $ (25,704) $ (29,061) Average loans outstanding during the period $ 1,919,678 $ 1,756,461 Allowance coverage ratio (1) 1.32 % 1.65 % Net charge-offs to average outstanding loans during the period (2) 0.00 % 0.00 % Allowance for credit losses as a percentage of non-performing loans (3) 791.87 113.81 (1) The allowance coverage ratio is calculated by dividing the ACL at the end of the period by gross loans, net of unearned income at the end of the period. (2) The Net charge-offs to average outstanding loans during the period is calculated by dividing total net loan charge-offs (recoveries) during the year by average gross loans outstanding during the year. 53 Table of Contents (3) The Allowance for credit losses as a percentage of non-performing loans ratio is calculated by dividing the ACL at the end of the period by non-accrual loans at the end of the period. The following table summarizes the ACL and the allowance for credit losses by portfolio with a comparison of the percentage composition in relation to total ACL and allowance for credit losses and total loans as of March 31, 2023, and December 31, 2022 (dollars in thousands). March 31, 2023 Allowance for credit losses Percent of Allowance in Each Category to Total Allocated ACL Percent of Loans in Each Category to Total Loans Commercial real estate $ 18,409 71.62 % 59.14 % Owner-occupied commercial real estate 556 2.16 6.44 Acquisition, construction & development 1,852 7.21 5.12 Commercial & industrial 700 2.72 2.57 Residential 4,030 15.68 26.58 Consumer non-real estate and other 157 0.61 0.16 Total $ 25,704 100.00 % 100.00 % December 31, 2022 Allowance for credit losses Percent of Allowance in Each Category to Total Allocated Allowance Percent of Loans in Each Category to Total Loans Commercial real estate $ 15,477 73.56 % 58.78 % Owner-occupied commercial real estate 635 3.02 6.74 Acquisition, construction & development 2,082 9.90 5.00 Commercial & industrial 438 2.08 2.84 Residential 2,379 11.31 26.46 Consumer non-real estate and other 28 0.13 0.18 Total $ 21,039 100.00 % 100.00 % Derivative Financial Instruments The Company utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. The Company recognizes derivative financial instruments at fair value as either other assets or other liabilities on the Consolidated Balance Sheets. The Company’s use of derivative financial instruments are described more fully in Note 9 — Derivatives in Notes to Consolidated Financial Statements. Off-Balance Sheet Arrangements The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit, and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and/or use these commitments. See Note 1 0 — Commitments and Contingencies in Notes to Consolidated Financial Statements for a discussion of credit extension commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Funding Activities The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. Deposits are the primary source of funds for lending and investing activities; however, the Company will use borrowings to meet liquidity needs and for temporary funding. Sources of borrowings include advances from the FHLB of Atlanta, 54 Table of Contents borrowings from correspondent banks and the Fed Discount Window. The Company also utilizes brokered time deposits. For more discussion of brokered time deposits, see the Deposits heading below this section. As of March 31, 2023, the Company has available unused borrowing capacity of $809.1 million through its available lines of credit with the FHLB of Atlanta and unsecured federal fund lines of credit from correspondent banking relationships. Advances on credit lines are secured by both securities and loans. The following table shows certain information regarding borrowings as of the three months ended March 31, 2023, and December 31, 2022, respectively (dollars in thousands): March 31, 2023 December 31, 2022 Balance at end of period $ 321,700 $ 343,100 Weighted average interest rate at end of period 4.63% 4.42% Deposits Total deposits increased by $112.0 million from December 31, 2022, to March 31, 2023, due to an increase in the balance of brokered time deposits. The Company issued brokered time deposits that amounted to $389.2 million at March 31, 2023, and $100.3 million at December 31, 2022, which are included in the table below. The following table sets forth the balance of each category of deposits as of the dates indicated (in thousands): March 31, 2023 December 31, 2022 Balance Balance Demand, non-interest-bearing $ 906,723 $ 960,692 Demand, interest-bearing 538,673 616,665 Money market and savings 998,813 1,044,152 Time deposits, other 588,182 298,891 Total interest-bearing 2,125,668 1,959,708 Total Deposits $ 3,032,391 $ 2,920,400 The Company continues to seek organic growth in both interest-bearing and non-interest-bearing deposits consistent with our relationship-based strategy. Management evaluates its utilization of brokered deposits, taking into consideration the interest rate curve and regulatory views on non-core funding sources, and balances this funding source with its funding needs based on growth initiatives. The Company has deposits that meet or exceed the FDIC insurance limit of $250,000 in the amounts of $715.1 million and $843.4 million at March 31, 2023, and December 31, 2022, respectively. The following table sets forth maturity ranges of time deposits as of March 31, 2023, that meet or exceed the FDIC insurance limit (in thousands). March 31, 2023 Due within 3 months or less $ 6,296 Due after 3 months and within 6 months 6,084 Due after 6 months and within 12 months 15,106 Due after 12 months 8,181 Total uninsured, time deposits $ 35,667 Shareholders’ Equity Total shareholders’ equity at March 31, 2023, was $289.8 million, compared to $273.5 million at December 31, 2022. Shareholders’ equity increased by $16.3 million in part due to a decrease in unrealized losses in the AFS securities portfolio since December 31, 2022. Accumulated other comprehensive income increased $15.7 million, primarily as a result of a decrease in unrealized losses on AFS investment securities. 55 Table of Contents