What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2023-11-09 · 285 added, 354 removed, 461 unchanged (58% of the section changed)

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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 (the “Registration Statement”).

Financial Statements of this Form 10-Q, as well as with the audited consolidated financial statements and notes for the year ended December 31, 2023, included in our Form 10-K filed with the SEC on March 22, 2024, and as amended on April 12, 2024 (the “Form 10-K”).

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.

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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 Item 1A, under the caption “Risk Factors” in our Registration Statement, and 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.

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.

In September 2023, the Company elected financial holding company status.

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.

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

The Bank is supervised and regulated by the FDIC and the Virginia BFI.

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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 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.

As of March 31, 2024, we had total consolidated assets of $3.7 billion, gross loans of $2.1 billion, total deposits of $3.0 billion, and total shareholders’ equity of $319.3 million.

As of March 31, 2024, we had 381 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

In response to the bank failures that occurred during 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.

Merger with Summit Financial Group, Inc.

Effective on May 3, 2024 (the “Closing Date”), Burke & Herbert, completed its previously announced merger with Summit Financial Group, Inc., a West Virginia corporation (“Summit”), pursuant to the Agreement and Plan of Reorganization and accompanying Plan of Merger dated August 24, 2023, between Burke & Herbert and Summit (the “Merger Agreement”).

Pursuant to the Merger Agreement, on the Closing Date, (i) Summit merged with and into Burke & Herbert, with Burke & Herbert continuing as the surviving corporation (the “Merger”), and (ii) immediately following the Merger, Summit Community Bank, Inc., a West Virginia chartered bank and a wholly-owned subsidiary of Summit (“SCB”), merged with and into Burke & Herbert Bank & Trust Company, a Virginia chartered bank and a wholly-owned subsidiary of Burke & Herbert (“Burke & Herbert Bank”), with Burke & Herbert Bank as the surviving bank (the “Bank Merger”).

In the merger, holders of Summit common stock outstanding at the effective time of the merger received 0.5043 shares of Burke & Herbert common stock for each share of Summit common stock they owned (the “exchange ratio”), subject to the payment of cash in lieu of fractional shares.

The total aggregate consideration payable in the Merger was approximately 7,405,772 shares of Burke & Herbert Common Stock.

Additionally, each share of the Summit Series 2021 Preferred Stock issued and outstanding was converted into the right to receive a share of the new Burke & Herbert Series 2021 Preferred Stock.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and conform to general practices within the industry in which we operate.

To prepare financial statements in conformity with GAAP, management makes estimates, assumptions, and judgments based on available information.

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.

Our most significant accounting policies are presented in the notes to the accompanying consolidated financial statements.

These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, we have identified the determination of the allowance for credit losses and income taxes to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new information becomes available.

Allowance for Credit Losses

The allowance for credit losses represents our estimate of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and projections including reasonable and supportable forecasts, reversion, and post-reversion forecasts.

It is a valuation account that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial asset.

Financial assets are charged-off against the allowance when management believes the uncollectibility of a financial asset is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The Company’s loan portfolio is the largest financial asset that is in scope of this critical accounting estimate.

Determining the amount of the allowance for credit losses is considered a critical accounting estimate, because it is based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts, and prepayment experience as related to credit contractual terms.

Management estimates the allowance balance using relevant available information from internal and external sources.

Historical credit loss experience provides the basis for the estimation of expected credit losses;

adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, and delinquency levels, as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.

The model methodology used for funded credits, along with taking into consideration the probability of drawdowns or funding on unfunded commitments and whether such commitments are irrevocable or not by the Company, is how the Company determines the allowance for credit losses for unfunded commitments.

These evaluations are conducted at least quarterly and more frequently, if deemed necessary.

The Company is using an internally developed model that produces an estimate of the allowance for credit losses as the lifetime expected credit losses of the loan portfolio.

This model uses a remaining useful life or WARM method within defined-contractual terms by federal call codes.

The model forecasts net charge-off rates by call codes using ordinary least squares (“OLS”) regression models that use macroeconomic variables to forecast the Company’s and peer banks’ net charge-off rates.

These models are used to produce reasonable and supportable forecasts of net charge-off rates.

The macroeconomic variables utilized by the Company include variables that meet defined criteria in forecasting credit losses for our loan portfolio.

These variables include, but are not limited to, unemployment rates, housing and commercial real estate prices, gross domestic product levels, equity market conditions or interest rates, as well as other variables that are portfolio-specific, such as those pertaining to commercial real estate or to residential loan portfolios.

The Company sources the macroeconomic variables and the macroeconomic variable forecasts that it uses in its ACL model from the Standard & Poor’s Global Market Intelligence and from CoStar Group.

The Company currently has set an initial reasonable and supportable period of two years with a subsequent straight-line loss-rate reversion for the following four quarters before then utilizing historical average loss rates in remaining periods of the modeled contractual terms.

Based on management’s analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond information used to calculate reasonable and supportable, reversion and post-reversion period forecasts on collectively evaluated loans.

As the reasonable and supportable and reversion period forecasts reflect the use of the macroeconomic variable loss drivers, management may consider that an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions, including those that utilize supplemental information relative to the macroeconomic variable loss drivers.

Qualitative adjustments considered by management include the following:

(i) management’s assessment of macroeconomic forecasts used in the model and how those forecasts align with management’s overall evaluation of current expected credit conditions;

(ii) organization specific risks such as credit concentrations, collateral specific risks, nature and size of the portfolio, and external factors that may ultimately impact credit quality;

and (iii) underwriting and delinquency trends.

The qualitative factors applied at March 31, 2024, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management’s assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model.

Management reviews supplemental data sources including historical net charge-off rates and data measuring other specific credit outcomes from its systems of record in supporting qualitative factors.

However, qualitative factor evaluations are inherently imprecise and require significant management judgement.

The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated taxes due.

The calculation of each component of the Company’s income tax provision is complex and requires the use of estimates and judgments in its determination.

As part of the Company’s evaluation and implementation of business strategies, consideration is given to the regulations and tax laws that apply to the specific facts and circumstances for any tax positions under evaluation.

Management closely monitors tax developments on both the federal and state level in order to evaluate the effect they may have on the Company’s overall tax

position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses.

In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company must consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and the results of recent operations.

A valuation allowance is recognized for a deferred tax asset if, based on the available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

See Note 8 — Income Taxes, in Notes to the December 31, 2023 Consolidated Financial Statements of the Company for additional information.

Non-GAAP Financial Measures

We prepare our financial statements in accordance with U.S.

GAAP and also present certain non-GAAP financial measures that exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with U.S.

Non-GAAP measures are provided as additional useful information to assess our financial condition and results of operations (including period-to-period operating performance).

These non-GAAP measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP measures with similar names used by other companies.

For more information, including the reconciliation of these non-GAAP financial measures to their corresponding GAAP financial measures, see the respective sections where the measures are presented.

Current Economic Environment in the Financial Services Industry

Commercial Real Estate Sector Concentration

The commercial real estate (“CRE”) sector has been impacted significantly by rising interest rates and higher vacancies, increasing the prospect of default that borrowers may face due to the record amount of upcoming maturities.

In addition, the office market continues to struggle with fewer employees in the office after the COVID-19 pandemic.

The Bank continues to monitor its commercial real estate portfolio by reviewing various credit risk and concentration reports.

The Bank’s exposure to commercial real estate at March 31, 2024, was $1.3 billion or 61.6% of its gross loan portfolio, not including owner-occupied commercial real estate and acquisition, construction & development.

Commercial real estate as a percent of total assets at March 31, 2024, was 35.3%, not including owner-occupied commercial real estate and acquisition, construction & development.

Including owner-occupied commercial real estate and acquisition, construction & development, total exposure was $1.5 billion or 71.2% of our total gross loans and 40.7% of total assets at March 31, 2024.

Loan balances by portfolio segment amortized cost (in thousands) and by percentage of our total gross loan portfolio at March 31, 2024, were as follows:

March 31, 2024

Amortized Cost Percentage

Commercial real estate $ 1,305,152 61.6 %

Owner-occupied commercial real estate 131,154 6.2

Acquisition, construction & development 72,022 3.4

Commercial & industrial 82,774 3.9

Single family residential (1-4 units) 524,804 24.8

Consumer non-real estate and other 2,249 0.1

Total gross loans $ 2,118,155 100.0 %

Monitoring of the CRE concentration is performed at both the loan level and at the portfolio level.

The Credit Risk Management team provides management and the board of directors with periodic reports on the credit portfolio, which include the CRE portfolio (including owner-occupied CRE and acquisition, construction & development loans).

These reports provide an assessment of asset quality and risk rating migration and monitor concentrations against the board approved concentration limits (including sub-limits).

The tables below present the Bank’s commercial real estate, owner-

occupied commercial real estate, and acquisition, construction & development portfolios by collateral type and geographic location as of March 31, 2024 (in thousands).

Commercial Real Estate by Collateral Type and Geographic Location

VA MD DC Other Total Percentage

Retail Real Estate $ 211,511 $ 111,204 $ 29,693 $ 8,966 $ 361,374 27.7 %

Industrial/Warehouse 189,849 20,264 — — 210,113 16.1

Multi-Family 123,068 19,602 39,573 901 183,144 14.0

Office Buildings/Condos 124,522 39,108 24,549 — 188,179 14.4

Hotels/Motels 36,384 39,844 52,767 13,779 142,774 10.9

Self-Storage 58,081 — — — 58,081 4.5

Nursing-Assisted Living 38,090 — — — 38,090 2.9

Restaurants 18,868 4,256 10,668 863 34,655 2.7

Gas Stations 7,420 1,676 14,882 — 23,978 1.8

Other 24,206 9,648 30,910 — 64,764 5.0

Total $ 831,999 $ 245,602 $ 203,042 $ 24,509 $ 1,305,152 100.0 %

Owner-Occupied Commercial Real Estate by Collateral Type and Geographic Location

VA MD DC Other Total Percentage

Industrial/Warehouse $ 38,694 $ 598 $ — $ 5,896 $ 45,188 34.5 %

Office Buildings/Condos 22,380 596 635 — 23,611 18.0

Churches/Religious Organizations 19,704 1,244 243 — 21,191 16.2

Retail 11,373 — 133 — 11,506 8.8

Private School 7,616 — — — 7,616 5.8

Gas Stations 5,335 1,088 — — 6,423 4.9

Restaurants 2,254 171 — — 2,425 1.8

Other 12,245 581 368 — 13,194 10.0

Total $ 119,601 $ 4,278 $ 1,379 $ 5,896 $ 131,154 100.0 %

Acquisition, Construction & Development by Collateral Type and Geographic Location

VA MD DC Other Total Percentage

Multi-Family $ — $ — $ 12,951 $ 14,515 $ 27,466 38.1 %

Industrial/Warehouse — 11,411 — — 11,411 15.8

Land 10,999 1,150 — — 12,149 16.9

Retail Real Estate — 7,153 — 1,658 8,811 12.2

Storage 3,999 — — — 3,999 5.6

Residential For-Sale 2,114 723 — — 2,837 3.9

Other 5,349 — — — 5,349 7.5

Total $ 22,461 $ 20,437 $ 12,951 $ 16,173 $ 72,022 100.0 %

CRE loans are monitored through various processes that include payment monitoring, financial reporting, and covenant compliance monitoring, and annual reviews for larger relationships.

Furthermore, construction loans are monitored throughout the life of the project and the construction loan administration function is centralized within the Credit Risk Management team.

Monitoring the market conditions is also an important component of prudent CRE risk management.

Quarterly construction progress reviews are also completed on all acquisition, construction & development loans.

For each loan, management reviews the adequacy of the construction budget, adequacy of the interest reserve, pace of construction, and review of any loan covenants.

The Bank believes its underwriting and monitoring standards for commercial real estate loans are sufficient to evaluate its loan portfolio and keep it from incurring significant losses.

The majority of the Bank’s commercial real estate loans are in

Virginia (approximately 64.6%) and within the Greater Washington, DC MSA area, and it does not have significant exposure to any economic areas of the country that are underperforming the national economy.

Additionally, the Bank’s overall exposure to the “Office” collateral type is 14.0% of total commercial real estate loans, including owner-occupied commercial real estate and acquisition, construction & development.

The Bank believes that the combined loan portfolio is well-diversified, generally seasoned, manageable, and will outperform the industry in terms of performance through the economic cycle;

however, our underwriting, review, and monitoring cannot eliminate all of the risks related to these loans.

For further discussion see Part II, Item 1A .

“Risk Factors” .

2023 Banking Failures and Ensuing Banking Industry Liquidity Concerns

In response to the bank failures that occurred during March and May 2023 and the attendant stress on economic agents, including various financial markets, the Company took multiple proactive measures to mitigate any potential financial and operational impacts.

Such measures included, but were not limited to:

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• 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.

The measures taken 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 – Market Risk .

For further discussion see Part II, Item 1A .

“Risk Factors” .

The measures taken 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 .

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.

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.

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.”

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 a periodic basis.

Liquidity Management

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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.

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.

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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 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.

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.

Applicable Basel III Capital Rules require the 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.

Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, the 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.

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

As of March 31, 2024, and December 31, 2023, 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 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.

Our success will depend upon, among other things, the following factors that we manage or control:

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• 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.

• The ability to execute our strategic objectives, including successfully integrating Summit’s operations, people, and technology with ours, and continuing to efficiently satisfy the obligations associated with being a public company, all of which 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,

• Economic conditions, including the length and extent of the economic impacts of events affecting the financial services market generally as well as pandemics and political instability and conflicts, and any actions taken to mitigate and manage such impacts,

• The effect of climate change on our business and performance, including indirectly through impacts on our customers,

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• 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.

• Our ability to successfully integrate into our operations Summit’s assets, liabilities, and systems, as well as new management personnel and 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 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,

The selected balance sheet data as of March 31, 2024, and March 31, 2023, and the selected income statement data for the three months ended March 31, 2024, and March 31, 2023, 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 March 31,

(In thousands, except ratios, share and per share data) 2024 2023

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Total shareholders’ equity 319,308 289,783

As of or for the Three Months Ended September 30,

As of or for the Nine Months Ended September 30,

2023 2022 2023 2022

As of or for the Three Months Ended March 31,

Selected Operating Data:

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Average shares of common stock outstanding, basic

7,433,481 7,426,638

Average shares of common stock outstanding, diluted

7,527,489 7,504,473

Total shares of common stock outstanding

7,440,025 7,427,840

Basic net income per share $ 0.70 $ 1.01

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Book value (at period end) $ 42.92 $ 39.01

As of or for the Three Months Ended September 30,

As of or for the Nine Months Ended September 30,

2023 2022 2023 2022

As of or for the Three Months Ended March 31,

Performance Ratios:

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Interest rate spread (2)

2.10 3.11 2.30 3.02

Net interest margin (3)

2.76 3.25 2.90 3.10

Efficiency ratio (4)

82.50 64.48 75.83 67.10

Capital Ratios:

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Total risk-based capital to risk-weighted assets

17.48 19.18 17.48 19.18

Tier 1 capital to risk-weighted assets

16.44 18.23 16.44 18.23

Tier 1 capital to average assets

11.32 11.03 11.32 11.03

Average equity to average assets

8.02 8.23 7.96 9.10

Asset Quality Ratios:

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Number of full-time equivalent employees 381 411

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

(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.

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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) 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 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 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

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 $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 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 1.70% 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 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

Loans, gross (1)(2)

$ 1,985,898 $ 74,485 5.01 % $ 1,758,267 $ 52,486 3.99 %

Interest-earning deposits and fed funds sold 55,870 1,858 4.45 48,232 248 0.69

Taxable securities 1,040,695 28,130 3.61 1,163,840 20,100 2.31

Tax-exempt securities (3)

267,135 5,371 2.69 381,216 9,146 3.21

Total securities 1,307,830 33,501 3.42 1,545,056 29,246 2.53

Total interest-earning assets 3,349,598 109,844 4.38 3,351,555 81,980 3.27

Non-interest-earning assets 248,292 224,770

Total assets $ 3,597,890 $ 3,576,325

Liabilities and shareholders’ equity:

Non-interest-bearing demand $ 887,711 $ 965,859

Interest-bearing demand 554,724 1,520 0.37 % 583,080 106 0.02 %

Savings 983,046 11,242 1.53 1,127,900 657 0.08

Time 559,453 13,946 3.33 285,577 960 0.45

Total interest-bearing deposits 2,097,223 26,708 1.70 1,996,557 1,723 0.12

Total deposits 2,984,934 26,708 1.20 2,962,416 1,723 0.08

FHLB advances and other 302,060 10,553 4.67 267,948 2,554 1.27

Total interest-bearing liabilities 2,399,283 37,261 2.08 2,264,505 4,277 0.25

Non-interest-bearing liabilities 24,485 20,355

Equity 286,411 325,606

Total liabilities and equity $ 3,597,890 $ 3,576,325

Taxable-equivalent net interest income /net interest spread (4)

72,583 2.30 % 77,703 3.02 %

Taxable-equivalent net interest margin (5)

2.90 % 3.10 %

Taxable-equivalent net adjustment (1,128) (1,921)

Net interest income $ 71,455 $ 75,782

Net interest-earning assets $ 950,315 $ 1,087,050

(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.

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.

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;

however, the adjustment to a FTE basis has no impact on 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 and then subtracting total interest expense.

As a non-GAAP measure, FTE net interest income should not be considered as a substitute for the nearest comparable GAAP measure, net interest income.

Net interest income shown elsewhere in this presentation is GAAP net interest income.

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

Nine Months Ended

September 30, 2023 September 30, 2022

GAAP Financial Measurements

Interest Income - Loans $ 74,485 $ 52,486

Interest Income - Securities taxable 28,130 20,101

Interest Income - Securities tax-exempt 4,243 7,224

Interest Income - Other interest income 1,858 248

Interest Expense - Deposits 26,708 1,723

Interest Expense - Borrowed funds 10,495 2,506

Interest Expense - Other 58 48

Total Net Interest Income $ 71,455 $ 75,782

Non-GAAP Financial Measurements

Tax Benefit on Tax-Exempt Interest Income - Securities $ 1,128 $ 1,921

Total Tax Benefit on Tax-Exempt Interest Income (1)

Tax-Equivalent Net Interest Income $ 72,583 $ 77,703

(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.

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.

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).

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

Dollar Increase (Decrease) Due to Change in:

Average Volume Average

Income from the interest-earning assets:

Loans, gross $ 11,356 $ 18,057 $ 29,413

Securities (1)

(8,125) 13,814 5,689

Interest-bearing deposits and fed funds sold 340 1,813 2,153

Total interest income on interest-earning assets 3,571 33,684 37,255

Expense from the interest-bearing liabilities:

Interest-bearing demand deposits (104) 1,994 1,890

Savings deposits (2,215) 16,367 14,152

Time deposits 9,841 7,521 17,362

Total interest expense on interest-bearing deposits 7,522 25,882 33,404

Borrowings 1,593 9,103 10,696

Total interest expense on interest-bearing liabilities 9,115 34,985 44,100

Taxable-equivalent net interest income

$ (5,544) $ (1,301) $ (6,845)

(1) Yields and interest income on tax-exempt securities have been computed on a taxable-equivalent basis.

Interest Income

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 $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 $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 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 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.

Non-interest Income

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

Nine Months Ended September 30, Increase (Decrease)

2023 2022 Amount Percent

Fiduciary and wealth management $ 3,996 $ 3,995 $ 1 0.0 %

Service charges and fees 4,959 5,130 (171) (3.3)

Net gains (losses) on securities (112) 63 (175) (277.8)

Income from company-owned life insurance 1,720 1,634 86 5.3

Other non-interest income 2,565 2,050 515 25.1

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

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):

Nine Months Ended September 30, Increase (Decrease)

2023 2022 Amount Percent

Salaries and wages $ 29,283 $ 29,240 $ 43 0.1 %

Pensions and other employee benefits 7,116 5,957 1,159 19.5

Occupancy 4,464 4,306 158 3.7

Equipment rentals, depreciation and maintenance 4,231 4,296 (65) (1.5)

Other 19,042 15,686 3,356 21.4

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

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 $1.9 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.

Results of Operations for the Three Months Ended March 31, 2024, and 2023

Consolidated net income for the three months ended March 31, 2024, was $5.2 million, compared to $7.5 million earned during the three months ended March 31, 2023.

The $2.3 million, or 30.7%, decrease in net income is primarily due to increased funding costs and merger-related costs that were partially offset by an increase in loan interest income, due to increased loan balances and higher rates, and a recapture of credit loss provision in the current quarter ended March 31, 2023.

Net interest income decreased by $2.6 million to $22.1 million for the three months ended March 31, 2024, compared to $24.8 million for the three months ended March 31, 2023.

The main driver for this decrease was higher funding costs on deposits, which was partially offset by higher interest income from higher rates and growth in loans.

For the three months ended March 31, 2024, the Company recorded credit loss provision recapture of $0.7 million compared to a provision of $0.5 million for the three months ended March 31, 2023.

For the three months ended March 31, 2024, the Company was able to recapture provision as a result of loan payoffs and loan upgrades that resulted in a lower percentage of credit watch list loans to total loans.

These loan payoffs and loan upgrades resulted in provision recapture from our ACL model even with new loan growth for the quarter.

Non-interest income increased slightly by $40.0 thousand, or 0.9%, to $4.3 million for the three months ended March 31, 2024, as compared to $4.2 million for the three months ended March 31, 2023.

The increase in non-interest income was primarily due to a small increase in fiduciary and wealth management income of $82.0 thousand, which was partially offset

by declines in other non-interest income categories in the three months ended March 31, 2024, compared to March 31, 2023.

Non-interest expense increased by $0.8 million, or 3.9%, to $21.2 million for the three months ended March 31, 2024, as compared to $20.4 million for the three months ended March 31, 2023.

The increase was primarily due to increases in other non-interest expenses of $0.9 million including higher legal, consulting, and audit fees arising from merger-related filings slightly offset by reduced employee benefit expenses and equipment and occupancy costs.

Net Interest Income and Net Interest Margin

4 unchanged sentences

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

Net interest income totaled $22.1 million for the three months ended March 31, 2024, compared to $24.8 million for the three months ended March 31, 2023.

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

The impact of higher rates on interest-bearing liabilities was partially offset by the increase in volume and rates of interest-earning assets.

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 2.76% for the three months ended September 30, 2023, compared to 3.25% for the three months ended September 30, 2022.

However, the current interest rate environment has resulted in higher deposit rates to retain depositors and increased the cost of borrowings from the FHLB and the Federal Reserve which has more than offset increases in interest income from higher rates and the increase in volume of loans.

The tax-adjusted net interest margin was 2.68% for the three months ended March 31, 2024, compared to 3.06% for the three months ended March 31, 2023.

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 5.15% 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 3.37% 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 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.

Increases in deposit rates rose at a faster pace due to the increases in the Federal Funds Rate that continued in the second half of 2022.

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 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 September 30, 2023, and September 30, 2022, for comparison (dollars in thousands).

For the Three Months Ended September 30,

The yield for the loan portfolio was 5.41% for the three months ended March 31, 2024, compared to 4.81% for the three months ended March 31, 2023.

The increase was primarily the result of increasing loan production with higher interest rates during the three months ended March 31, 2024, when compared to the prior period.

The tax-adjusted yield on the total investment securities portfolio was 3.43% for the three months ended March 31, 2024, compared to 3.45% for the three months ended March 31, 2023.

The small decrease was primarily due to payoffs and maturities of higher yielding securities that decreased the effective rate earned.

The rate paid on interest-bearing deposits increased to 2.41% during the three months ended March 31, 2024, from 1.09% during the three months ended March 31, 2023.

The large 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, specifically the time and money-market deposit accounts.

Additional increases in the market rates may negatively impact our cost of funds rate.

The rate paid on our borrowings for the three months ended March 31, 2024, was 4.82%, compared to 4.70% for the three months ended March 31, 2023.

The increase was due to the increase in short-term borrowing costs.

Further increases in market rates 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, 2024, and March 31, 2023, for comparison (dollars in thousands).

For the Three Months Ended March 31,

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

35 unchanged sentences

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.

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

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

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

September 30, 2023 September 30, 2022

March 31, 2024 March 31, 2023

GAAP Financial Measurements

14 unchanged sentences

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.

Interest income and interest expense for the three months ended March 31, 2024, and March 31, 2023, 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 September 30, 2023, compared to September 30, 2022

Three Months Ended March 31, 2024, compared to March 31, 2023

Dollar Increase (Decrease) Due to Change in:

17 unchanged sentences

Interest Income

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.

Total interest income was $38.7 million for the three months ended March 31, 2024, compared to $34.3 million for the three months ended March 31, 2023, an increase of 12.9%.

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

Interest income on loans increased by $5.3 million while interest income on securities decreased $1.0 million, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

Interest Expense

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 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.

Total interest expense was $16.6 million for the three months ended March 31, 2024, compared to $9.6 million for the three months ended March 31, 2023.

The increase in interest expense was primarily driven by increasing rates for both deposits and borrowed funds and an increased volume of time deposits, slightly offset by declines in volume of borrowings, interest-bearing demand deposits, and savings deposits.

Interest expense on interest-bearing deposits increased by $7.5 million while interest on borrowed funds decreased by $0.5 million due to volume, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

Provision for (Recapture of) Credit Losses

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.

The provision recapture of credit losses was $0.7 million for the three months ended March 31, 2024, compared to a provision of $0.5 million for the three months ended March 31, 2023.

The provision recapture was the result of loan payoffs and loan upgrades that resulted in a lower percentage of credit watch list loans to total loans.

These loan payoffs and loan upgrades resulted in provision recapture from our ACL model even with new loan growth for the quarter.

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

1 unchanged sentence

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

Three months ended September 30,

Three months ended March 31,

Increase (Decrease)

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Service charges and fees 1,606 1,635 (29) (1.8)

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

Net gains (losses) on securities — — — N/A

Income from company-owned life insurance 547 560 (13) (2.3)

1 unchanged sentence

Total $ 4,254 $ 4,214 $ 40 0.9 %

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 income increased 0.9% for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase was due to a small increase in fiduciary and wealth management income of $82.0 thousand, which was partially offset by declines in service charges and fees of $29.0 thousand and reduced income on company-owned life insurance of $13.0 thousand for the three months ended March 31, 2024.

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 September 30,

Three months ended March 31,

Increase (Decrease)

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Total $ 21,165 $ 20,365 $ 800 3.9 %

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.

Non-interest expense increased $0.8 million or 3.9% for the three months ended March 31, 2024, compared to March 31, 2023.

The main drivers for this increase include a large increase of $0.9 million in other non-interest expenses and smaller

increases in salaries and wages of $24.0 thousand and occupancy expenses of $81.0 thousand.

Increases were partially offset by declines in pensions and other employee benefits expense of $103.0 thousand and equipment rentals, depreciation and maintenance expenses of $58.0 thousand.

For the three months ended March 31, 2024, the Company incurred $633.0 thousand of legal, consulting, and audit fees related to the merger with Summit Financial Group, Inc.

that are included in other non-interest expense for the three months ended March 31, 2024.

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 $0.5 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.

Income tax expense was $0.7 million for the three months ended March 31, 2024, an increase of $0.1 million from the tax provision for the three months ended March 31, 2023.

The increase was due to a tax adjustment that resulted in a reduction of the tax expense for the three months ended March 31, 2023.

Removing that benefit would have resulted in a consistent effective tax rate for the three months ended March 31, 2024, and March 31, 2023.

For the three months ended March 31, 2024, and March 31, 2023, our effective tax rates were 11.5% and 7.2%, respectively.

Analysis of Financial Condition for the Period Ended March 31, 2024, and December 31, 2023

Assets increased by $78.8 million to $3.70 billion as of March 31, 2024, compared to $3.62 billion as of December 31, 2023.

Loans, net of ACL, increased by $31.1 million from $2.06 billion as of December 31, 2023, to $2.09 billion as of March 31, 2024.

Deposits decreased by $11.8 million and amounted to $2.99 billion at March 31, 2024, compared to $3.00 billion at December 31, 2023.

Borrowed funds increased by $88.0 million to $360.0 million as of March 31, 2024, compared to $272.0 million at December 31, 2023.

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 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.

During the three months ended March 31, 2024, the value of our securities portfolio increased $27.1 million from December 31, 2023, as a result of purchasing new securities and an insignificant change in unrealized losses during the period.

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 September 30, 2023.

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

Therefore, the Company has concluded that the unrealized losses for the AFS securities do not require an ACL at March 31, 2024, and at December 31, 2023.

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

September 30, 2023

The following tables reflect the amortized cost and fair market values for the total portfolio for each category of investment for March 31, 2024, and December 31, 2023 (in thousands):

March 31, 2024

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

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$ 1,372,575 $ 89 $ 124,225 $ 1,248,439

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

The investment maturity table below summarizes contractual maturities for our investment securities at March 31, 2024.

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 September 30, 2023.

The overall weighted average duration of the Company’s investment portfolio is 4.0 years at March 31, 2024.

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.

September 30, 2023

March 31, 2024

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):

September 30, 2023

March 31, 2024

December 31, 2023

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Loans, net $ 2,093,549 $ 2,062,455

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 September 30, 2023.

The loan portfolio, excluding ACL, at March 31, 2024, increased by $30.4 million primarily due to growth in commercial & industrial and acquisition, construction & development loans.

The Company’s organic growth has occurred in both legacy and newer markets.

The following table shows the maturity distribution for total loans outstanding as of March 31, 2024.

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).

September 30, 2023

The principal balances of loans are indicated by both fixed and floating rate categories in the table below (in thousands).

March 31, 2024

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

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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 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 September 30, 2023, totaled $2.9 million.

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

The Company’s non-performing loans total increased by $23.0 million from December 31, 2023, due to one loan that was 90 days past due and still accruing as of March 31, 2024.

The Company determined that the loan was well-secured and subsequent to March 31, 2024, the loan was current.

The following table summarizes the Company’s non-performing assets as of March 31, 2024, and December 31, 2023 (in thousands):

March 31, 2024 December 31, 2023

Non-accrual loans $ 4,315 $ 3,744

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Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated.

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

Gross charged-off loans were $30.0 thousand and $17.0 thousand for the three months ended March 31, 2024, and March 31, 2023, respectively.

Gross recoveries totaled $5.0 thousand and $34.0 thousand for the three months ended March 31, 2024, and March 31, 2023, respectively.

The ACL as a percentage of gross loans, net of unearned income, was 1.16% and 1.32% as of March 31, 2024, and March 31, 2023, respectively.

The Company recorded a provision recapture of $670 thousand and a provision of $0.5 million for the three months ended March 31, 2024, and March 31, 2023, respectively.

The provision recapture for March 31, 2024 was primarily the result of loan payoffs and certain loan upgrades offset by new loan originations during the quarter.

The following table summarizes the changes in the Company’s credit loss experience by portfolio as of the three and three months ended March 31, 2024, and March 31, 2023 (dollars in thousands):

Three months ended

March 31, 2024

March 31, 2023

Loans outstanding at end of period $ 2,118,155 $ 1,951,738

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Net charge-offs to average outstanding loans during the period (2)

0.00 0.00 0.00 0.18

Allowance for credit losses as a percentage of non-performing loans (3)

914.25 374.29 914.25 374.29

(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.

1 unchanged sentence

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

September 30, 2023

The following table summarizes the ACL by portfolio with a comparison of the percentage composition in relation to total ACL and total loans as of March 31, 2024, and December 31, 2023 (dollars in thousands).

March 31, 2024

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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December 31, 2023

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

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 $ 20,633 81.56 % 62.71 %

8 unchanged sentences

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.

The Company’s use of derivative financial instruments is described more fully in Note 9 — Derivatives in Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements

11 unchanged sentences

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

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.

As of March 31, 2024, the Company has available unused borrowing capacity of $704.2 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 September 30, 2023, and December 31, 2022, respectively (dollars in thousands):

September 30, 2023 December 31, 2022

The following table shows certain information regarding borrowings as of the three months ended March 31, 2024, and December 31, 2023, respectively (dollars in thousands):

March 31, 2024 December 31, 2023

Balance at end of period $ 360,000 $ 272,000

Weighted average interest rate at end of period 5.38% 4.75%

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”.

Total deposits decreased by $11.8 million from December 31, 2023, to March 31, 2024, due to a decrease in both non-interest-bearing and interest-bearing deposits of $7.6 million and $4.2 million, respectively.

However, excluding brokered deposits, the Company’s deposit balance increased by $6.4 million.

This increase is due to the Company continuing 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.

All of the Company’s brokered deposits are in the form of certificates of deposits that are insured by the FDIC.

The Company issued brokered CDs in tranches, with varying initial maturities from 18 months to 60 months and varying call options between 6 months and 12 months.

The Company has the ability to call all current issuances.

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

September 30, 2023

December 31, 2022

Balance Balance

March 31, 2024 December 31, 2023

Demand, non-interest-bearing $ 822,767 $ 830,320

1 unchanged sentence

Money market and savings 920,009 925,853

Brokered deposits

370,847 389,011

Time deposits, other 384,022 347,051

1 unchanged sentence

Total deposits $ 2,990,113 $ 3,001,881

The Company continues to seek organic growth in both interest-bearing and non-interest-bearing deposits consistent with our relationship-based strategy.

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

The following table sets forth the average balances of deposits and the average interest rates paid as of March 31, 2024 (dollars in thousands):

March 31, 2024

Average Balance

Average Rate Paid

Demand, non-interest-bearing $ 812,199 —

Demand, interest-bearing 489,779 0.63 %

Money market and savings 922,732 1.97 %

Brokered deposits

378,407 4.65 %

Time deposits, other 367,538 3.57 %

Total interest-bearing 2,158,456 2.41 %

Total deposits $ 2,970,655 1.75 %

The Company has deposits that meet or exceed the FDIC insurance limit of $250,000 in the amounts of $700.8 million and $677.3 million at March 31, 2024, and December 31, 2023, respectively.

The following table sets forth maturity ranges of time deposits as of March 31, 2024, that meet or exceed the FDIC insurance limit (in thousands).

March 31, 2024

Due within 3 months or less $ 41,379

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Shareholders’ Equity

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.

Total shareholders’ equity at March 31, 2024, was $319.3 million, compared to $314.8 million at December 31, 2023.

Shareholders’ equity increased by $4.6 million in part due to a decrease in accumulated other comprehensive income (loss) of $2.5 million from December 31, 2023, to March 31, 2024, primarily as a result of an increase in unrealized gains on cash flow hedges see Note 1 2 — Accumulated Other Comprehensive Income (Loss ) in Notes to Consolidated Financial Statements for more detail.

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