What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-11 · 193 added, 179 removed, 622 unchanged (37% of the section changed)

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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.

We are a financial 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.

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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 Part II, Item 1A.

Risk Factors in this Form 10-Q.

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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

owns 100% of the Bank.

In September 2023, the Company elected to become a financial holding company.

As a financial holding company, the Company is subject to

regulation and supervision by the Federal Reserve.

The Company has no material operations and owns 100% of the Bank.

The Bank is a Virginia chartered commercial bank that commenced operations in 1852.

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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 June 30, 2023, we had total consolidated assets of $3.6 billion, gross loans of $2.0 billion, total deposits of $3.0 billion, and total shareholders’ equity of $290.1 million.

As of June 30, 2023, we had 407 full-time employees.

As of September 30, 2023, we had total consolidated assets of $3.6 billion, gross loans of $2.1 billion, total deposits of $3.0 billion, and total shareholders’ equity of $270.8 million.

As of September 30, 2023, we had 404 full-time employees.

None of our employees are covered by a collective bargaining agreement.

Pending Merger with Summit Financial Group, Inc.

On August 24, 2023, the Company and Summit Financial Group, Inc.

(“Summit”), entered into an Agreement and Plan of Reorganization and Plan of Merger pursuant to which Summit will merge with and into Burke & Herbert, with Burke & Herbert as the continuing corporation (the “merger”).

Immediately following the merger, Summit Community Bank, Inc., a West Virginia banking corporation (“SCB”) and a wholly-owned direct subsidiary of Summit, will merge with and into Burke & Herbert Bank & Trust Company, a Virginia banking corporation and a wholly-owned direct subsidiary of Burke & Herbert, with the Bank as the continuing bank (the “bank merger,” and together with the merger, the “mergers”).

In the merger, Summit shareholders will receive 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they own (the “exchange ratio”), subject to the payment of cash in lieu of fractional shares.

In addition, each share of Summit series 2021 preferred stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive one share of a newly created series of Burke & Herbert preferred stock having rights, preferences, privileges and voting powers and limitations and restrictions thereof that are not materially less or more favorable to the holders of the Summit series 2021 preferred stock.

Completion of the mergers is subject to receipt of the requisite approvals of the Company’s and Summit’s stockholders, receipt of all required regulatory approvals, and fulfillment of other customary closing conditions.

Recent Events in the Financial Services Industry

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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.

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 1, “Financial Information.”

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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.

In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a financial 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.

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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.

These final rules substantially revised the risk-based capital requirements applicable to financial 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.

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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 June 30, 2023, and December 31, 2022, the Bank complied with all regulatory capital standards and qualifies as “well capitalized”.

As of September 30, 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.

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therefore, a financial institution differs greatly from most commercial and industrial companies, which have significant investments in fixed assets or 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.

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.

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• 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

• Loan demand, utilization of credit commitments, and standby letters of credit,

• The impact on customers and changes in customer behavior due to changing business and economic conditions or regulatory or legislative initiatives,

• The possibility that the Summit merger will not close when expected or at all because required shareholder, regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, and

• Our ability to eventually and successfully integrate into our operations Summit’s assets, liabilities or systems we acquired, as well as new management personnel or customers, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto.

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.

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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 June 30, 2023, and June 30, 2022, and the selected income statement data for the three months and six months ended June 30, 2023, and June 30, 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.

As of the Three Months Ended June 30, As of the Six Months Ended June 30,

The selected balance sheet data as of September 30, 2023, and September 30, 2022, and the selected income statement data for the three months and nine months ended September 30, 2023, and September 30, 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.

As of the Three Months Ended September 30,

As of the Nine Months Ended September 30,

(In thousands, except ratios, share and per share data) 2023 2022 2023 2022

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Total shareholders’ equity 270,819 255,471 270,819 255,471

As of or for the Three Months Ended June 30,

As of or for the Six Months Ended June 30,

As of or for the Three Months Ended September 30,

As of or for the Nine Months Ended September 30,

2023 2022 2023 2022

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Book value (at period end) $ 36.46 $ 34.40 $ 36.46 $ 34.40

As of or for the Three Months Ended June 30,

As of or for the Six Months Ended June 30,

As of or for the Three Months Ended September 30,

As of or for the Nine Months Ended September 30,

2023 2022 2023 2022

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Number of full-time equivalent employees 404 399 404 399

(1) Dividend payout ratio represents per share dividends declared divided by diluted earnings per share.

(1) The 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.

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(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.

(5) The 2023 capital ratios are for Burke & Herbert Financial Services Corp.

and the 2022 capital ratios are for Burke & Herbert Bank & Trust Company.

Results of Operations

Results of Operations for the Six Months Ended June 30, 2023, and 2022

Consolidated net income for the six months ended June 30, 2023, was $13.6 million compared to $19.5 million earned during the six months ended June 30, 2022.

The $6.0 million, or 30.6%, decrease in net income is primarily the result of a large recapture of provision expense in the first half of 2022.

Net interest income decreased by $0.5 million to $48.6 million for the six months ended June 30, 2023, compared to $49.1 million for the six months ended June 30, 2022.

The main driver for this decrease was higher deposit and borrowing interest expense, partially offset by higher interest income due to balance sheet growth in loans.

For the six months ended June 30, 2023, the Company recorded credit loss expense of $0.7 million compared to a recapture of provision of $5.2 million for the six months ended June 30, 2022.

For the six months ended June 30, 2022, the Company was able to recapture a provision that was booked to reflect the uncertainty of the COVID-19 pandemic and the sale of a non-performing loan note.

Results of Operations for the Nine Months Ended September 30, 2023, and 2022

Consolidated net income for the nine months ended September 30, 2023, was $17.6 million compared to $30.7 million for the nine months ended September 30, 2022.

The $13.0 million, or 42.6%, decrease in net income was primarily the result of a large recapture of provision expense in the first half of 2022 along with a decrease in net interest income and an increase in non-interest expense for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Net interest income decreased by $4.3 million to $71.5 million for the nine months ended September 30, 2023, compared to $75.8 million for the nine months ended September 30, 2022.

The main driver for this decrease was higher deposit and borrowing interest expense, partially offset by higher interest income from growth in loans in addition to increases in interest rates on loans and securities.

For the nine months ended September 30, 2023, the Company recorded credit provision expense of $1.0 million compared to a recapture of provision of $7.6 million for the nine months ended September 30, 2022.

For the nine months ended

September 30, 2022, the Company was able to recapture a provision related to the initial uncertainty of the COVID-19 pandemic and the sale of a non-performing loan note.

This non-performing loan had a specific reserve prior to the sale of the note.

For the current period, the adoption of CECL (which requires the Company to estimate provision of credit losses using an expected life-

time loss approach versus an incurred model), along with increased loan portfolio balances resulted in a higher credit expense for the six months ended June 30, 2023, compared to the six months ended, June 30, 2022.

Non-interest income increased by $0.2 million, or 2.6%, to $8.8 million for the six months ended June 30, 2023, as compared to $8.6 million for the six months ended June 30, 2022.

The increase in non-interest income was primarily due to increases in other non-interest income, including dividend income from FHLB stock that increased by $258 thousand and income from loan swap fees of $342 thousand, which were offset by a decrease in other non-interest income items of $138 thousand and a lower servicing release premium of $31 thousand in the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Non-interest expense increased by $2.2 million, or 5.5%, to $41.7 million for the six months ended June 30, 2023, as compared to $39.5 million for the six months ended June 30, 2022.

The increase was primarily due to higher salaries and employee benefits and higher legal, consulting, and audit fees arising from the filing of our initial Registration Statement and our other required filings.

For the current period, the adoption of CECL (which requires the Company to estimate provision of credit losses using an expected life-time loss approach versus an incurred model), along with increased loan portfolio balances resulted in a higher credit expense for the nine months ended September 30, 2023, compared to the nine months ended, September 30, 2022.

Non-interest income increased by $0.3 million, or 2.0%, to $13.1 million for the nine months ended September 30, 2023, as compared to $12.9 million for the nine months ended September 30, 2022.

The increase in non-interest income was primarily due to increases in other non-interest income, including dividend income from FHLB stock that increased by $236 thousand and income from loan swap fees of $414 thousand, which were partially offset by a decrease in other non-interest income items of $301 thousand and a decrease in service charges and fees of $171 thousand for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Non-interest expense increased by $4.7 million, or 7.8%, to $64.1 million for the nine months ended September 30, 2023, as compared to $59.5 million for the nine months ended September 30, 2022.

The increase was primarily due to higher employee benefit costs and higher legal, consulting, and audit fees related to the filing of our initial Registration Statement, and merger-related filings.

For the nine months ended September 30, 2023, the Company incurred $1.7 million of legal, consulting and audit fees related to the announced merger with Summit Financial Group, Inc.

Net Interest Income and Net Interest Margin

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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 $48.6 million for the six months ended June 30, 2023, compared to $49.1 million for the six months ended June 30, 2022.

The decrease in net interest income was primarily driven primarily by higher interest rates and slightly higher average balances on interest-bearing liabilities, mostly offset by higher interest rates on interest-earning assets.

A significant increase in cost of funds for both interest-bearing deposits and borrowed funds was the primary driver of the increase in interest expense.

This increase in interest expense was mostly offset by a substantial increase in interest income from securities and loans along with an increase in the volume of loans.

However, 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 2.96% for the six months ended June 30, 2023, compared to 3.02% for the six months ended June 30, 2022.

Net interest income totaled $71.5 million for the nine months ended September 30, 2023, compared to $75.8 million for the nine months ended September 30, 2022.

The decrease in net interest income was primarily driven by higher interest rates and slightly higher average balances on interest-bearing liabilities, mostly offset by higher interest rates on interest-earning assets.

A significant increase in cost of funds for both interest-bearing deposits and borrowed funds was the primary driver of the substantial increase in interest expense.

Interest income from loans and securities increased substantially as well for the nine months ended September 30, 2023, driven primarily by higher interest rates and an increase in the volume of loans.

However, this increase in interest income did not completely offset the increase in interest expense, which has increased due to the increased pace of rate hikes from the Federal Reserve resulting 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 2.90% for the nine months ended September 30, 2023, compared to 3.10% for the nine months ended September 30, 2022.

The decrease in tax-adjusted net interest margin was primarily driven by the increase in market rates that increased the cost of deposits and other borrowings in excess of the increase in interest income from interest-earning assets.

The yield for the loan portfolio was 4.94% for the six months ended June 30, 2023, compared to 3.89% for the six months ended June 30, 2022.

The increase was primarily the result of increasing loan production with higher interest rates in a rising rate environment.

The tax-adjusted yield on the total investment securities portfolio was 3.45% for the six months ended June 30, 2023, compared to 2.35% for the six months ended June 30, 2022.

The yield for the loan portfolio was 5.01% for the nine months ended September 30, 2023, compared to 3.99% for the nine months ended September 30, 2022.

The increase was primarily the result of loan production with higher interest rates in a rising rate environment.

The tax-adjusted yield on the total investment securities portfolio was 3.42% for the nine months ended September 30, 2023, compared to 2.53% for the nine months ended September 30, 2022.

The increase was primarily due to higher market interest rates that increased the effective rate earned on investment securities and reduced the fair value of these investment securities.

The rate paid on interest-bearing deposits increased to 1.50% during the six months ended June 30, 2023, from 0.08% during the six months ended June 30, 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 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 our borrowings for the six months ended June 30, 2023, was 4.66%, compared to 0.71% for the corresponding period in 2022.

The rate paid on interest-bearing deposits increased to 1.70% during the nine months ended September 30, 2023, from 0.12% during the nine months ended September 30, 2022.

The increase was a result of market and economic conditions, which led to an increase in our paid rates for selected parts of our deposit portfolio.

Increases in deposit rates rose at a

faster pace due to the increases in the Federal Funds Rate that occurred in the second half of 2022.

Continuing rate increases by the Federal Reserve and in the market rates may negatively impact our cost of funds rate.

The rate paid on our borrowings for the nine months ended September 30, 2023, was 4.67%, compared to 1.27% 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.

Further increases in the Federal Funds Rate 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 six months ended June 30, 2023, and June 30, 2022, for comparison (dollars in thousands).

For the Six Months Ended June 30,

The following table sets forth the major components of net interest income and the related yields and rates for the nine months ended September 30, 2023, and September 30, 2022, for comparison (dollars in thousands).

For the Nine Months Ended September 30,

Average Outstanding Balance Interest Income/Expense Rate Earned/Paid Average Outstanding Balance Interest Income/Expense Rate Earned/Paid

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Taxable-equivalent 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.

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 a FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable;

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The following table reconciles GAAP net interest income to FTE net interest income (in thousands).

Six Months Ended

June 30, 2023 June 30, 2022

Nine Months Ended

September 30, 2023 September 30, 2022

GAAP Financial Measurements

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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.

Interest income and interest expense for the six months ended June 30, 2023, and June 30, 2022, are annualized using an actual days over calendar year method.

Interest income and interest expense for the nine months ended September 30, 2023, and September 30, 2022, are annualized using an actual days over calendar year method.

The 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.

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See table below (in thousands).

Six Months Ended June 30, 2023, compared to June 30, 2022

Nine Months Ended September 30, 2023, compared to September 30, 2022

Dollar Increase (Decrease) Due to Change in:

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Interest Income

Total interest income was $71.4 million for the six months ended June 30, 2023, compared to $50.8 million for the six months ended June 30, 2022, an increase of 40.7%.

The increase in interest income was primarily driven by an increase in both rates and volume for the loan portfolio along with increasing rates for the securities portfolio.

Interest income on loans and securities increased by $14.2 million and $5.3 million, respectively, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Total interest income was $108.7 million for the nine months ended September 30, 2023, compared to $80.1 million for the nine months ended September 30, 2022, an increase of 35.8%.

The increase in interest income was primarily driven by an increase in both higher interest rates and average volume for the loan portfolio along with increasing rates for the securities portfolio.

Interest income on loans and securities increased by $22.0 million and $5.0 million, respectively, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Interest Expense

Total interest expense was $22.9 million for the six months ended June 30, 2023, compared to $1.7 million for the six months ended June 30, 2022.

The increase in interest expense was primarily driven by increasing rates for both interest-bearing deposits and borrowed funds and by a lesser extent from balance increases in both deposits and borrowed funds.

Interest expense on interest-bearing deposits and borrowed funds increased by $14.7 million and $6.5 million, respectively, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Total interest expense was $37.3 million for the nine months ended September 30, 2023, compared to $4.3 million for the nine months ended September 30, 2022.

The increase in interest expense was primarily driven by increasing interest rates for both interest-bearing deposits and borrowed funds and by a lesser extent from balance increases in both deposits and borrowed funds.

Interest expense on interest-bearing deposits and borrowed funds increased by $25.0 million and $8.0 million, respectively, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Provision for (Recapture of) Credit Losses

The provision for credit losses was $0.7 million for the six months ended June 30, 2023, compared to a recapture of $5.2 million for the six months ended June 30, 2022.

The provision for credit losses was $1.0 million for the nine months ended September 30, 2023, compared to a recapture of $7.6 million for the nine months ended September 30, 2022.

The increased provision expense was partly due to the Company estimating credit losses using an expected life-time loss model versus an incurred model but primarily the result of a large recapture in 2022.

The provision recapture, in 2022, was as a result of removing COVID-19 qualitative factors and the sale of a non-performing loan note.

The provision recapture in 2022 was a result of reassessing COVID-19 qualitative factors and the sale of a non-performing loan note.

Proceeds obtained for this non-performing loan note were greater than the net of the loan note’s carrying value and specific reserve.

Additionally, loan balances have risen significantly for the six months ended June 30, 2023, versus the six months ended June 30, 2022.

Additionally, loan balances have risen significantly for the nine months ended September 30, 2023, versus the nine months ended September 30, 2022.

See Note 4 - Allowance for Credit Losses in Notes to Consolidated Financial Statements for further information.

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The following table sets forth the various components of our non-interest income for the periods indicated (in thousands):

Six Months Ended June 30, Increase (Decrease)

Nine Months Ended September 30, Increase (Decrease)

2023 2022 Amount Percent

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Total $ 13,128 $ 12,872 $ 256 2.0 %

Non-interest income increased 2.6% for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

The increase was primarily driven by an increase in other non-interest income of $434 thousand when compared to the six months ended June 30, 2022.

This increase was due to an increase of $258 thousand in dividends from the FHLB and an increase of $342 thousand from customer swap fees.

The increase was partially offset by the sale of securities which resulted in a loss for the six months ended as of June 30, 2023 resulting in a decrease of $215 thousand when compared to the prior year.

Non-interest income increased 2.0% for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

The increase was primarily driven by an increase in other non-interest income of $515 thousand when compared to the nine months ended September 30, 2022.

This increase in other non-interest income was primarily due to an increase of $236 thousand in dividends from the FHLB and an increase of $414 thousand from customer swap fees compared to the nine months ended September 30, 2022.

The increase in other non-interest income was partially offset by a decrease in other non-interest income items of $301 thousand for the nine months ended September 30, 2023.

The increase in total non-interest income was also offset by a decrease of $175 thousand in net gains/(losses) on securities and a decrease of $171 thousand in service charges and fees when compared to the nine months ended September 30, 2022.

Non-interest Expense

The following table sets forth the various components of our non-interest expense for the periods indicated (in thousands):

Six Months Ended June 30, Increase (Decrease)

Nine Months Ended September 30, Increase (Decrease)

2023 2022 Amount Percent

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Total $ 64,136 $ 59,485 $ 4,651 7.8 %

Non-interest expense increased 5.5% for the six months ended June 30, 2023, compared to June 30, 2022.

The main drivers for this increase included pensions and other employee benefits which increased by $934.0 thousand primarily due to increases in the costs of employee benefit plans and an increase of $1.1 million in other non-interest expense.

The increase was partially offset by a decrease in occupancy of $153 thousand.

Additionally, the Company incurred legal and consulting expenses associated with filing its Registration Statement and other required SEC filings that increased the total non-interest expense for the six months ended June 30, 2023.

Non-interest expense increased 7.8% for the nine months ended September 30, 2023, compared to September 30, 2022.

The main drivers for this increase included pensions and other employee benefits which increased by $1.2 million primarily due to increases in the costs of employee benefit plans and an increase of $3.4 million in other non-interest expense.

The Company incurred legal and consulting expenses associated with filing its initial Registration Statement and merger-related filings.

For the nine months ended September 30, 2023, the Company incurred $1.7 million of legal, consulting and audit fees related to the announced merger with Summit Financial Group, Inc.

that are included in other non-interest expense for the nine months ended September 30, 2023.

See Note 13 — Other Operating Expenses in Notes to Consolidated Financial Statements for further information on “Other” non-interest expense.

Income Tax Expense

Income tax expense was $1.4 million for the six months ended June 30, 2023, a decrease of $2.4 million from the tax provision for the six months ended June 30, 2022.

The decrease was due to the decrease in net income for the six months ended June 30, 2023, when compared to the prior year.

For the six months ended June 30, 2023, and June 30, 2022, our effective tax rates were 9.4% and 16.4%, respectively.

Results of Operations for the Three Months Ended June 30, 2023, and 2022

Consolidated net income for the three months ended June 30, 2023, was $6.0 million, compared to $10.4 million earned during the three months ended June 30, 2022.

The $4.4 million, or 42.0%, decrease in net income is primarily due to increased funding costs and the change in provision for credit losses that included a recapture of credit losses in the prior year quarter.

Net interest income decreased by $1.8 million to $23.8 million for the three months ended June 30, 2023, compared to $25.6 million for the three months ended June 30, 2022.

The main driver for this decrease was higher funding costs on both

our deposits and borrowings, which was partially offset by an increase in interest income due to both loan growth and higher yielding rates.

For the three months ended June 30, 2023, the Company recorded credit loss expense of $0.2 million compared to a recapture of provision losses of $2.5 million.

For the three months ended June 30, 2022, the Company was able to recapture provision that was booked to reflect the uncertainty of the COVID-19 pandemic and the sale of a non-performing loan note.

This non-performing loan had a specific reserve prior to the sale of the note.

For the current period, the increased loan growth and the adoption of CECL, which requires the Company to estimate provision of credit losses using an expected life-time loss approach versus an incurred model, resulted in a higher credit expense for the three months ended June 30, 2023, compared to the three months ended, June 30, 2022.

Non-interest income increased by $129 thousand, or 2.9%, to $4.6 million for the three months ended June 30, 2023, as compared to $4.5 million for the three months ended June 30, 2022.

The increase in non-interest income was primarily due to dividend income from FHLB stock that increased by $156 thousand in the three months ended June 30, 2023, compared to June 30, 2022.

Non-interest expense increased by $1.0 million, or 4.8%, to $21.3 million for the three months ended June 30, 2023, as compared to $20.4 million for the three months ended June 30, 2022.

The increase was primarily due to increases in personnel related expenses such as salary, pensions, and other employee benefits.

In addition, the Company incurred additional fees related to entering into interest rate swaps designated as fair value hedges and higher legal and audit fees arising from the filing of our initial Registration Statement and other required filings.

Income tax expense was $1.9 million for the nine months ended September 30, 2023, a decrease of $4.2 million from the tax provision for the nine months ended September 30, 2022.

The decrease was due to the decrease in net income for the nine months ended September 30, 2023, when compared to the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, and September 30, 2022, our effective tax rates were 9.6% and 16.5%, respectively.

Results of Operations for the Three Months Ended September 30, 2023, and 2022

Consolidated net income for the three months ended September 30, 2023, was $4.1 million, compared to $11.1 million earned during the three months ended September 30, 2022.

The $7.1 million, or 63.6%, decrease in net income is primarily

due to a recapture of provision expense in the prior year quarter, a decrease in net interest income, and an increase in non-interest expense compared to the prior year quarter ended September 30, 2022.

Net interest income decreased by $3.8 million to $22.9 million for the three months ended September 30, 2023, compared to $26.7 million for the three months ended September 30, 2022.

The main driver for this decrease was higher funding costs on both our deposits and borrowings, which was partially offset by higher interest income from growth in loans in addition to increases in interest rates on loans and securities.

For the three months ended September 30, 2023, the Company recorded credit loss expense of $0.2 million compared to a recapture of provision losses of $2.4 million.

For the three months ended September 30, 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 increased loan growth and the adoption of CECL, which requires the Company to estimate provision of credit losses using an expected life-time loss approach versus an incurred model, resulted in a higher credit expense for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

Non-interest income slightly increased by $28 thousand, or 0.7%, to $4.3 million for the three months ended September 30, 2023, as compared to $4.3 million for the three months ended September 30, 2022.

The increase in non-interest income was primarily due to small increases in most non-interest categories which were mostly offset by a decline in service charges and fees of $153 thousand in the three months ended September 30, 2023, compared to September 30, 2022.

Non-interest expense increased by $2.5 million, or 12.4%, to $22.4 million for the three months ended September 30, 2023, as compared to $20.0 million for the three months ended September 30, 2022.

The increase was primarily due to increases in other non-interest expenses including higher legal, consulting, and audit fees arising from merger-related filings.

The increase was also driven by increases in employee benefit expenses and occupancy related expenses when compared to the quarter ended September 30, 2022.

Net Interest Income and Net Interest Margin

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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 $23.8 million for the three months ended June 30, 2023, compared to $25.6 million for the three months ended June 30, 2022.

Net interest income totaled $22.9 million for the three months ended September 30, 2023, compared to $26.7 million for the three months ended September 30, 2022.

The decrease in net interest income was primarily driven by both higher interest rates and higher volume of interest-bearing liabilities.

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The tax-adjusted net interest margin was 2.87% for the three months ended June 30, 2023, compared to 3.15% for the three months ended June 30, 2022.

The tax-adjusted net interest margin was 2.76% for the three months ended September 30, 2023, compared to 3.25% for the three months ended September 30, 2022.

The decrease in tax-adjusted net interest margin was primarily driven by the increase in market rates that increased the cost of deposit and other borrowings in excess of the increase in the interest income from interest-earning assets.

The yield for the loan portfolio was 5.07% for the three months ended June 30, 2023, compared to 3.98% for the three months ended June 30, 2022.

The yield for the loan portfolio was 5.15% for the three months ended September 30, 2023, compared to 4.19% for the three months ended September 30, 2022.

The increase was primarily the result of increasing loan production with higher interest rates in a rising rate environment.

The tax-adjusted yield on the total investment securities portfolio was 3.45% for the three months ended June 30, 2023, compared to 2.53% for the three months ended June 30, 2022.

The tax-adjusted yield on the total investment securities portfolio was 3.37% for the three months ended September 30, 2023, compared to 2.89% for the three months ended September 30, 2022.

The increase was primarily due to higher market interest rates that increased the effective rate earned by reducing the fair value of the average outstanding balance of the investment securities.

The rate paid on interest-bearing deposits increased to 1.88% during the three months ended June 30, 2023, from 0.07% during the three months ended June 30, 2022.

The rate paid on interest-bearing deposits increased to 2.09% during the three months ended September 30, 2023, from 0.19% during the three months ended September 30, 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.

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Additional increases by the Federal Reserve and in the market rates may negatively impact our cost of funds rate.

The rate paid on our borrowings for the three months ended June 30, 2023, was 4.61%, compared to 0.82% for the corresponding period in 2022.

The rate paid on our borrowings for the three months ended September 30, 2023, was 4.69%, compared to 2.31% 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.

Further increases in the Federal Funds Rate 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 June 30, 2023, and June 30, 2022, for comparison (dollars in thousands).

For the Three Months Ended June 30,

The following table sets forth the major components of net interest income and the related yields and rates for the three months ended September 30, 2023, and September 30, 2022, for comparison (dollars in thousands).

For the Three Months Ended September 30,

Average Outstanding Balance Interest Income/Expense Rate Earned/Paid Average Outstanding Balance Interest Income/Expense Rate Earned/Paid

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however, the adjustment to a FTE basis has no impact on net income.

however, the adjustment to a FTE basis has no impact on

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.

3 unchanged sentences

Three Months Ended

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

GAAP Financial Measurements

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Interest income and interest expense for the three months ended June 30, 2023, and June 30, 2022, are annualized using an actual days over calendar year method.

Interest income and interest expense for the three months ended September 30, 2023, and September 30, 2022, are annualized using an actual days over calendar year method.

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.

1 unchanged sentence

See table below (in thousands).

Three Months Ended June 30, 2023, compared to June 30, 2022

Three Months Ended September 30, 2023, compared to September 30, 2022

Dollar Increase (Decrease) Due to Change in:

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Interest Income

Total interest income was $37.1 million for the three months ended June 30, 2023, compared to $26.5 million for the three months ended June 30, 2022, an increase of 39.8%.

The increase in interest income was primarily driven by an increase in both rates and volume for the loan portfolio along with increasing rates for the securities portfolio.

Interest income on loans and securities increased by $7.9 million and $1.8 million, respectively, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

Total interest income was $37.3 million for the three months ended September 30, 2023, compared to $29.3 million for the three months ended September 30, 2022, an increase of 27.4%.

The increase in interest income was primarily driven by an increase in both rates and volume for the loan portfolio.

Interest income on loans increased by $7.8 million and interest income on securities decreased $(0.2) million, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

Interest Expense

Total interest expense was $13.3 million for the three months ended June 30, 2023, compared to $0.9 million for the three months ended June 30, 2022.

Total interest expense was $14.4 million for the three months ended September 30, 2023, compared to $2.6 million for the three months ended September 30, 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 $9.7 million and $2.8 million, respectively, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The average interest-bearing balances of deposits 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 $10.3 million and $1.5 million, respectively, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Provision for (Recapture of) Credit Losses

The provision for credit losses was $0.2 million for the three months ended June 30, 2023, compared to a recapture of $2.5 million for the three months ended June 30, 2022.

The increased provision expense was primarily due to a recapture of provision that was booked to reflect the uncertainty of the COVID-19 pandemic and the sale of a non-performing loan note for three months ended June 30, 2022 and the Company estimating credit losses using an expected life-time loss model versus an incurred model for the three months ended June 30, 2023.

Additionally, loan balances have risen significantly for the three months ended June 30, 2023, versus the three months ended June 30, 2022.

The provision for credit losses was $0.2 million for the three months ended September 30, 2023, compared to a recapture of $2.4 million for the three months ended September 30, 2022.

The increased provision expense was primarily due to a recapture of provision that was booked to reflect the uncertainty of the COVID-19 pandemic for three months ended September 30, 2022 and the Company estimating credit losses using an expected life-time loss model versus an incurred model for the three months ended September 30, 2023.

Additionally, loan balances have risen significantly for the three months ended September 30, 2023, versus the three months ended September 30, 2022.

See Note 4 - Allowance for Credit Losses in Notes to Consolidated Financial Statements for further information.

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The following table sets forth the various components of our non-interest income for the periods indicated (in thousands):

Three months ended June 30, Increase (Decrease)

Three months ended September 30,

Increase (Decrease)

2023 2022 Amount Percent

1 unchanged sentence

Service charges and fees 1,583 1,736 (153) (8.8)

Net gains (losses) on securities (111) — (111) n/a

Net gains (losses) on securities (1) (41) 40 (97.6)

Income from company-owned life insurance 589 555 34 6.1

1 unchanged sentence

Total $ 4,289 $ 4,261 $ 28 0.7 %

Non-interest income increased 2.9% for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The increase was primarily driven by an increase in other non-interest income of $288 thousand through an increase in customer swap fees and increased dividend from the FHLB.

This increase was partially offset by the loss on the sale of securities in the three months ended June 30, 2023.

Non-interest income increased 0.7% for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

The increase was primarily driven by an increase in other non-interest income of $81 thousand, and a small increase in fiduciary and wealth management income as well as small increases in income from company-owned life insurance and a decline in losses on securities.

This increase was partially offset by a decline in service charges and fees in the three months ended September 30, 2023.

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 June 30, Increase (Decrease)

Three months ended September 30,

Increase (Decrease)

2023 2022 Amount Percent

5 unchanged sentences

Total $ 22,423 $ 19,952 $ 2,471 12.4 %

Non-interest expense increased 4.8% for the three months ended June 30, 2023, compared to June 30, 2022.

The main drivers for this increase are personal related expenses such as salary, pensions, and other employee benefits which increased by $810 thousand primarily due to increases in the costs of employee benefit plans.

In addition, the Company incurred additional expense related to entering into interest rate swaps designated as fair value hedges and higher legal and audit fees arising from the filing of our initial Registration Statement and other required filings

Non-interest expense increased $2.5 million or 12.4% for the three months ended September 30, 2023, compared to September 30, 2022.

The main drivers for this increase include an increase in employee benefit expenses, an increase in occupancy related expenses, and a large increase of $2.3 million in other non-interest expenses.

For the three months ended September 30, 2023, the Company incurred $1.6 million of legal, consulting, and audit fees related to the announced merger with Summit Financial Group, Inc.

that are included in other non-interest expense for the three months ended September 30, 2023.

See Note 13 — Other Operating Expenses in Notes to Consolidated Financial Statements for further information on “Other” non-interest expense.

Income Tax Expense

Income tax expense was $0.8 million for the three months ended June 30, 2023, a decrease of $1.1 million from the tax provision for the three months ended June 30, 2022.

The decrease was due to the decrease in net income for the three months ended June 30, 2023, when compared to the prior year three months ended June 30, 2022.

For the three months ended June 30, 2023, and June 30, 2022, our effective tax rates were 12.0% and 15.5%, respectively.

Analysis of Financial Condition for the Period Ended June 30, 2023, and December 31, 2022

Assets increased by $6.3 million to $3.57 billion as of June 30, 2023, compared to $3.56 billion as of December 31, 2022.

Loans, net of ACL, increased by $108.9 million from $1.87 billion as of December 31, 2022, to $1.98 billion as of June 30, 2023.

Deposits increased by $84.9 million and amounted to $3.01 billion at June 30, 2023, compared to $2.92 billion at December 31, 2022.

Borrowed funds decreased by $94.1 million to $249.0 million as of June 30, 2023, compared to $343.1 million at December 31, 2022.

Income tax expense was $0.5 million for the three months ended September 30, 2023, a decrease of $1.8 million from the tax provision for the three months ended September 30, 2022.

The decrease was due to the decrease in net income for the three months ended September 30, 2023, when compared to the prior year three months ended September 30, 2022.

For the three months ended September 30, 2023, and September 30, 2022, our effective tax rates were 10.3% and 16.7%, respectively.

Analysis of Financial Condition for the Period Ended September 30, 2023, and December 31, 2022

Assets increased by $22.3 million to $3.59 billion as of September 30, 2023, compared to $3.56 billion as of December 31, 2022.

Loans, net of ACL, increased by $178.3 million from $1.87 billion as of December 31, 2022, to $2.04 billion as of September 30, 2023.

Deposits increased by $65.2 million and amounted to $2.99 billion at September 30, 2023, compared to $2.92 billion at December 31, 2022.

Borrowed funds decreased by $44.1 million to $299.0 million as of September 30, 2023, compared to $343.1 million at December 31, 2022.

Investment Securities

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The majority of our AFS investment portfolio is comprised of obligations of states and municipalities and residential mortgage-backed securities.

During the six months ended June 30, 2023, the unrealized losses on our holdings decreased from December 31, 2022, as the decrease in long-term interest rate expectations, portfolio runoff, and rebalancing had a positive impact on the value of our AFS portfolio.

During the nine months ended September 30, 2023, the unrealized losses on our holdings increased from December 31, 2022, as the increase in long-term interest rate expectations, portfolio runoff, and rebalancing had a negative 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 June 30, 2023.

Therefore, the Company has concluded that the unrealized losses for the AFS securities do not require an ACL at September 30, 2023.

Under the prior OTTI framework, the Company did not record any cumulative OTTI expense as of December 31, 2022.

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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 June 30, 2023, and December 31, 2022 (in thousands):

June 30, 2023

The following tables reflect the amortized cost and fair market values for the total portfolio for each category of investment for September 30, 2023, and December 31, 2022 (in thousands):

September 30, 2023

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

8 unchanged sentences

Other 9,500 — 1,565 7,935

$ 1,402,600 $ 69 $ 150,479 $ 1,252,190

Total $ 1,400,481 $ 42 $ 176,128 $ 1,224,395

December 31, 2022

10 unchanged sentences

$ 1,537,420 $ 162 $ 165,825 $ 1,371,757

The investment maturity table below summarizes contractual maturities for our investment securities at June 30, 2023.

The investment maturity table below summarizes contractual maturities for our investment securities at September 30, 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 4.3 years at June 30, 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).

The overall weighted average duration of the Company’s investment portfolio is 4.0 years at September 30, 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.

June 30, 2023

September 30, 2023

One Year or Less One to Five Years Five to Ten Years After Ten Years Total

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The following tables set forth the composition of our loan portfolio as of the dates indicated (in thousands):

June 30, 2023

September 30, 2023

December 31, 2022

5 unchanged sentences

Consumer non-real estate and other 2,803 3,466

2,000,969 1,887,221

Loans, gross 2,070,616 1,887,221

Allowance for credit losses (26,111) (21,039)

Loans, net $ 2,044,505 $ 1,866,182

The loan portfolio, excluding ACL, at June 30, 2023, increased by $113.7 million primarily due to growth in our commercial and residential real estate loan production.

The loan portfolio, excluding ACL, at September 30, 2023, increased by $183.4 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 June 30, 2023.

The following table shows the maturity distribution for total loans outstanding as of September 30, 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).

June 30, 2023

September 30, 2023

Within One Year One Year to Five Years Five Years to 15 Years After 15 Years

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The Company’s asset quality remained stable through the second 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 June 30, 2023, totaled $2.9 million.

The following table summarizes the Company’s non-performing assets as of June 30, 2023, and December 31, 2022 (in thousands):

June 30, 2023 December 31, 2022

The following table summarizes the Company’s non-performing assets as of September 30, 2023, and December 31, 2022 (in thousands):

September 30, 2023 December 31, 2022

Non-accrual loans $ 2,856 $ 5,497

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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.

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 $104.0 thousand and $3.3 million for the three months ended June 30, 2023, and June 30, 2022, respectively, and $121.0 thousand and $3.4 million for the six months ended June 30, 2023, and June 30, 2022, respectively.

Gross recoveries totaled $9.0 thousand and $127.0 thousand for the three months ended June 30, 2023, and June 30, 2022, respectively, and $43.0 thousand and $186.0 thousand for the six months ended June 30, 2023, and June 30, 2022, respectively.

The ACL as a percentage of gross loans, net of unearned income, was 1.30% and 1.34% as of June 30, 2023, and June 30, 2022, respectively.

The Company recorded a provision of $310.0 thousand and a provision recapture of $2.5 million for the three months ended June 30, 2023, and June 30, 2022, respectively, and a provision of $833.0 thousand and a provision recapture of $5.2 million for the six months ended June 30, 2023, and June 30, 2022, respectively.

The provision recapture was as a result of removing COVID-19 qualitative factors and the sale of a non-performing loan note.

The following table summarizes the changes in the Company’s credit loss experience by portfolio as of the three and six months ended June 30, 2023, and 2022 (dollars in thousands):

Three months ended Six months ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Gross charged-off loans were $13.0 thousand and $54.0 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively, and $134.0 thousand and $3.4 million for the nine months ended September 30, 2023, and September 30, 2022, respectively.

Gross recoveries totaled $5.0 thousand and $33.0 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively, and $48.0 thousand and $219.0 thousand for the nine months ended September 30, 2023, and September 30, 2022, respectively.

The ACL as a percentage of gross loans, net of unearned income, was 1.26% and 1.20% as of September 30, 2023, and September 30, 2022, respectively.

The Company recorded a provision of $200 thousand and a provision recapture of $2.4 million for the three months ended September 30, 2023, and September 30, 2022, respectively, and a provision of $1.0 million and a provision recapture of $7.6 million for the nine months ended September 30, 2023, and September 30, 2022, respectively.

The provision recapture was as a result of removing COVID-19 qualitative factors and the sale of a non-performing loan note in the first half of 2022.

The following table summarizes the changes in the Company’s credit loss experience by portfolio as of the three and nine months ended September 30, 2023, and 2022 (dollars in thousands):

Three months ended Nine months ended

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

Loans outstanding at end of period $ 2,070,616 $ 1,751,827 $ 2,070,616 $ 1,751,827

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(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 June 30, 2023, and December 31, 2022 (dollars in thousands).

June 30, 2023

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 September 30, 2023, and December 31, 2022 (dollars in thousands).

September 30, 2023

Allowance for credit losses Percent of Allowance in Each Category to Total Allocated ACL Percent of Loans in Each Category to Total Loans

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For more discussion of brokered time deposits, see the Deposits heading below this section.

As of June 30, 2023, the Company has available unused borrowing capacity of $959.0 million through its available lines of credit with the FHLB of Atlanta and unsecured federal fund lines of credit from correspondent banking relationships.

As of September 30, 2023, the Company has available unused borrowing capacity of $883.5 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 June 30, 2023, and December 31, 2022, respectively (dollars in thousands):

June 30, 2023 December 31, 2022

The following table shows certain information regarding borrowings as of the three months ended September 30, 2023, and December 31, 2022, respectively (dollars in thousands):

September 30, 2023 December 31, 2022

Balance at end of period $ 299,000 $ 343,100

Weighted average interest rate at end of period 4.83% 4.42%

Total deposits increased by $84.9 million from December 31, 2022, to June 30, 2023, due to an increase in the balance of brokered time deposits.

The Company issued brokered time deposits that amounted to $389.1 million as of June 30, 2023, and $100.3 million at December 31, 2022, which are included in the table below.

Total deposits increased by $65.2 million from December 31, 2022, to September 30, 2023, due to an increase in the balance of brokered time deposits.

The Company has issued brokered time deposits that amounted to $389.0 million as of September 30, 2023, and $100.3 million at December 31, 2022, which are included in the table below within “Time deposits, other”.

The following table sets forth the balance of each category of deposits as of the dates indicated (in thousands):

June 30, 2023

September 30, 2023

December 31, 2022

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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 $681.9 million and $843.4 million at June 30, 2023, and December 31, 2022, respectively.

The following table sets forth maturity ranges of time deposits as of June 30, 2023, that meet or exceed the FDIC insurance limit (in thousands).

June 30, 2023

The Company has deposits that meet or exceed the FDIC insurance limit of $250,000 in the amounts of $670.7 million and $843.4 million at September 30, 2023, and December 31, 2022, respectively.

The following table sets forth maturity ranges of time deposits as of September 30, 2023, that meet or exceed the FDIC insurance limit (in thousands).

September 30, 2023

Due within 3 months or less $ 8,909

4 unchanged sentences

Shareholders’ Equity

Total shareholders’ equity at June 30, 2023, was $290.1 million, compared to $273.5 million at December 31, 2022.

Shareholders’ equity increased by $16.6 million in part due to a decrease in unrealized losses in the AFS securities portfolio since December 31, 2022.

Accumulated other comprehensive income increased $13.3 million from December 31, 2022, to June 30, 2023, primarily as a result of a decrease in unrealized losses on AFS investment securities.

Total shareholders’ equity at September 30, 2023, was $270.8 million, compared to $273.5 million at December 31, 2022.

Shareholders’ equity decreased by $2.6 million in part due to an increase in unrealized losses in the AFS securities portfolio since December 31, 2022.

Accumulated other comprehensive income decreased $6.7 million from December 31, 2022, to September 30, 2023, primarily as a result of an increase in unrealized losses on AFS investment securities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis