Burke & Herbert Financial Services Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our consolidated financial condition and results of operations of the Company should be read in conjunction with the preceding consolidated financial statements and notes presented in Item 1. Financial Statements of this Form 10-Q, as well as with the audited consolidated financial statements and notes for the year ended December 31, 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. We are a financial holding company, and we conduct all of our material business operations through the Bank. As a result, the discussion and analysis below primarily relate to activities conducted at the Bank. Disclosure Regarding Forward-Looking Statements This Form 10-Q contains statements that we believe are, or may be considered to be, “forward-looking statements”. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current beliefs, expectations, or assumptions regarding the future of the business, future plans and strategies, operational results, and other future conditions of the Company. All statements other than statements of historical fact included in this Form 10-Q regarding the prospects of our industry or our prospects, plans, financial position, or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “plans,” “expects” or “does not expect,” “is expected,” “look forward to,” “budget,” “scheduled,” “estimates,” “forecasts,” “will continue,” “intends,” “the intent of,” “have the potential,” “anticipates,” “does not anticipate,” “believes,” “should,” “should not,” or variations of such words and phrases that indicate that certain actions, events, or results “may,” “could,” “would,” “might,” or “will,” “be taken,” “occur,” or “be achieved,” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections, and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates, and intentions expressed in such forward-looking statements. Important risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company, as applicable, to be materially different from any expected future results, performance, or achievements expressed or implied by such forward-looking information and statements include, but are not limited to, the risks described in Item 1A, under the caption “Risk Factors” in our Form 10-K, and in Part II, Item 1A. Risk Factors in this Form 10-Q. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Form 10-Q, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-Q. We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. Overview Burke & Herbert Financial Services Corp. was organized as a Virginia corporation on September 14, 2022, to serve as the holding company for the Bank. The Company commenced operations as a bank holding company on October 1, 2022, following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. 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 39 Table of Contents is a Virginia chartered commercial bank that commenced operations in 1852. The Bank is supervised and regulated by the FDIC and the Virginia BFI. The Bank offers a full range of business and personal financial solutions designed to meet customers’ banking, borrowing, and investment needs and has over 20 branches throughout the Northern Virginia region and commercial loan offices in Fredericksburg, Loudoun County, and Richmond, Virginia, and in Bethesda, Maryland. The Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ACL to absorb expected credit losses on existing loans that may become uncollectible. The Bank establishes and maintains this ACL by charging a provision for credit losses against operating earnings. In order to maintain its operations and branch locations, the Bank incurs various operating expenses, which are further described within the “Results of Operations” later in this section. As of March 31, 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. 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 40 Table of Contents 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. Income Taxes 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 41 Table of Contents 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. GAAP. 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- 42 Table of Contents 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 43 Table of Contents 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: • dissemination of internal communication to inform the Board and employees of current events and the Company’s condition and desired market response; • testing of available liquidity sources; • real-time analysis of our deposit composition and deposit concentrations; • assessment of our investment securities portfolio; and • stress testing of liquidity and capital metrics based on observed financial conditions with particular emphasis on the causes of such risk events. For further discussion see 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 a periodic basis. Liquidity Management Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. The Company assesses the need for liquidity in a variety of scenarios. Those scenarios may include projected growth, credit deterioration, deposit decay, interest rate changes, and a variety of other economic scenarios that can impact the liquidity position of the Company. These analyses are performed on a quarterly basis in conjunction with the Company’s Asset/Liability meetings, and findings are reported to the Asset/Liability Committee (the “ALCO”) and to the Board. From time to time, management may change the frequency of such testing or update certain inputs as a result of abnormal market conditions. Findings, as a result of the Company’s prudent liquidity modeling, may result in the change of certain products offered to customers or adjust the way the Company manages its balance sheet. Such changes could include adjusting interest rates offered on certain deposit products, changes to interest rates charged in lending activities, or the suspension of certain products and activities altogether. Times of significant economic stress may cause the mix of funding to shift and increase the likelihood of changes to certain products in order to manage the Company’s overall liquidity and capital position. The asset portion of the balance sheet provides liquidity primarily through unencumbered securities available-for-sale, loan principal and interest payments, maturities and prepayments of investment securities, and, to a lesser extent, sales of 44 Table of Contents investment securities available-for-sale. Other short-term investments available to the Company that could act as potential sources of liquidity are federal funds sold, securities purchased under agreements to resell, and maturing interest-bearing deposits with other banks. The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts and through FHLB and other borrowings. Brokered deposits, federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings are additional sources of liquidity and basically represent the Company’s incremental borrowing capacity. These sources of liquidity are used as necessary to fund asset growth and meet short-term liquidity needs. In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a financial holding company that is a separate legal entity from the Bank. The Company requires cash for various operating needs that could include payment of dividends to its shareholders, the servicing of debt, and the payment of general corporate expenses. The primary source of liquidity for the Company is dividends paid by the Bank. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits, and other such items. Any future dividends must be set forth in the Company’s capital plans before any dividends can be paid. Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. See Note 6 - Advances and Other Borrowings and Note 10 - Commitments and Contingencies , in Notes to Consolidated Financial Statements for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations. Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. 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 Company or the Bank. 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. Additionally, federal banking laws require regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not satisfy minimum capital requirements. The extent of these powers depends upon whether the institution in question is “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized”, as such terms are defined under federal banking agency regulations. Depository institutions that do not meet minimum capital requirements will face constraints on payment of dividends, equity repurchases, and compensation based on the amount of shortfall. A depository institution that is not “well capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, may be subject to asset growth limitations, and may be required to submit capital restoration plans. As of March 31, 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. 45 Table of Contents Effects of Inflation The majority of assets and liabilities of a financial institution are monetary in nature; therefore, a financial institution differs greatly from most commercial and industrial companies, which have significant investments in fixed assets or inventories that are greatly impacted by inflation. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher-than-normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also affects other expenses that tend to rise during periods of general inflation. Management believes the most significant potential impact of inflation on financial results is a direct result of the Company’s ability to manage the impact of changes in interest rates. Management attempts to maintain a balanced position between rate-sensitive assets and liabilities over an economic cycle in order to minimize the impact of interest rate fluctuations on net interest income. However, this goal can be difficult to completely achieve in times of rapidly changing interest rates and is one of many factors considered in determining the Company’s interest rate positioning. Key Factors Affecting Financial Performance We face a variety of risks that may impact various aspects of our financial performance from time to time. The extent of such impacts may vary depending on factors such as the current business and economic conditions, political and regulatory environment, and operational challenges. Many of these risks and our risk management strategies are described in more detail elsewhere in this Report as well as with the audited consolidated financial statements and notes for the year ended December 31, 2023, included in our Form 10-K. Our success will depend upon, among other things, the following factors that we manage or control: • Effectively managing capital and liquidity, including: • Continuing to maintain and, over time, grow our deposit base as a low-cost stable funding source, • Prudent liquidity and capital management to meet evolving regulatory capital, capital planning, stress testing, and liquidity standards, and • Actions we take within the capital and other financial markets, • Our ability to manage any material costs related to the execution of our strategic priorities, including increased employees, infrastructure, compliance, and other costs in a profitable manner over the long term, • Management of credit risk and interest rate risk in our portfolio, • Our ability to manage and implement strategic business objectives within the changing regulatory environment, • The impact of legal and regulatory-related contingencies, • The appropriateness of critical accounting estimates and related contingencies, • Our ability to manage operational risks related to new products and services, changes in processes and procedures, or the implementation of new technology, • The ability to make investments to promote compliance with existing and evolving regulatory requirements that will increase as the Company grows and will result in increased administrative expenses that we did not previously incur, which costs may materially increase our general and administrative expenses, and • The ability to execute our strategic objectives, 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 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, 46 Table of Contents • The effect of climate change on our business and performance, including indirectly through impacts on our customers, • The actions by the Federal Reserve, U.S. Treasury, and other government agencies, including those that impact money supply and market interest rates and inflation, • The level of, and direction, timing, and magnitude of movement in interest rates and the shape of the interest rate yield curve, • The functioning and other performance of and availability of liquidity in U.S. and global financial markets, including capital markets, • The impact of tariffs and other trade policies of the U.S. and its global trading partners, • Changes in the competitive landscape, • Impacts of changes in federal, state, and local governmental policy, including on the regulatory landscape, capital markets, taxes, infrastructure spending, and social programs, • The impact of market credit spreads on asset valuations, • The ability of customers, counterparties, and issuers to perform in accordance with contractual terms and the resulting impact on our asset quality, • Loan demand, utilization of credit commitments, and standby letters of credit, • The impact on customers and changes in customer behavior due to changing business and economic conditions or regulatory or legislative initiatives, • 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. For additional information on the risks we face, see Part II, Item 1A. - Risk Factors. 47 Table of Contents Selected Financial Data The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of March 31, 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 Selected Financial Condition Data: Total assets $ 3,696,390 $ 3,671,186 Total cash and cash equivalents 54,077 116,939 Total investment securities, at fair value 1,275,520 1,362,785 Net loans 2,093,549 1,926,034 Company-owned life insurance 94,755 93,053 Premises and equipment, net 61,576 55,157 Total deposits 2,990,113 3,032,391 Advances and other borrowings 360,000 321,700 Total shareholders’ equity 319,308 289,783 As of or for the Three Months Ended March 31, 2024 2023 Selected Operating Data: Interest income $ 38,745 $ 34,328 Interest expense 16,614 9,554 Net interest income 22,131 24,774 Provision for (recapture of) credit losses (670) 515 Total non-interest income 4,254 4,214 Total non-interest expenses 21,165 20,365 Income before income taxes 5,890 8,108 Income tax expense 678 584 Net income 5,212 7,524 Per Share Data: 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 Diluted net income per share 0.69 1.00 Dividends declared per share 0.53 0.53 Dividend payout ratio (1) 76.81 % 53.00 % Book value (at period end) $ 42.92 $ 39.01 48 Table of Contents As of or for the Three Months Ended March 31, 2024 2023 Performance Ratios: Return on average assets 0.58 % 0.85 % Return on average equity 6.67 10.83 Interest rate spread (2) 1.95 2.58 Net interest margin (3) 2.68 3.06 Efficiency ratio (4) 80.22 70.25 Capital Ratios: Common equity tier 1 (CET 1) capital to risk-weighted assets 16.56 % 17.55 % Total risk-based capital to risk-weighted assets 17.54 18.65 Tier 1 capital to risk-weighted assets 16.56 17.55 Tier 1 capital to average assets 11.36 11.19 Average equity to average assets 8.69 7.85 Asset Quality Ratios: Allowance coverage ratio 1.16 % 1.32 % Allowance for credit losses as a percentage of non-performing loans 91.99 791.87 Net charge-offs to average outstanding loans during the period 0.00 0.00 Non-performing loans as a percentage of total loans 1.26 0.17 Non-performing assets as a percentage of total assets 0.72 0.09 Other Data: Number of full-service branches 23 23 Number of full-time equivalent employees 381 411 (1) Dividend payout ratio represents per share dividends declared divided by diluted earnings per share. (2) The interest rate spread represents the difference between the fully taxable-equivalent weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period. (3) The net interest margin represents fully taxable-equivalent net interest income as a percent of average interest-earning assets for the period. (4) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income. Results of Operations for the Three Months Ended March 31, 2024, and 2023 General 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 49 Table of Contents 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 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 $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 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 5.41% 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). 50 Table of Contents For the Three Months Ended March 31, 2024 2023 Average Outstanding Balance Interest Income/Expense Rate Earned/Paid Average Outstanding Balance Interest Income/Expense Rate Earned/Paid Assets: Loans, gross (1)(2) $ 2,085,826 $ 28,045 5.41 % $ 1,919,678 $ 22,760 4.81 % Interest-earning deposits and fed funds sold 41,692 396 3.82 43,973 308 2.84 Taxable securities 989,875 8,943 3.63 1,095,486 9,803 3.63 Tax-exempt securities (3) 259,699 1,723 2.67 272,783 1,845 2.74 Total securities 1,249,574 10,666 3.43 1,368,269 11,648 3.45 Total interest-earning assets 3,377,092 39,107 4.66 3,331,920 34,716 4.23 Non-interest-earning assets 243,145 257,675 Total assets $ 3,620,237 $ 3,589,595 Liabilities and shareholders’ equity: Deposits: Non-interest-bearing demand $ 812,199 $ 923,039 Interest-bearing demand 489,779 765 0.63 % 572,547 199 0.14 % Savings 922,732 4,529 1.97 1,018,851 2,673 1.06 Time 745,945 7,637 4.12 411,785 2,530 2.49 Total interest-bearing deposits 2,158,456 12,931 2.41 2,003,183 5,402 1.09 Total deposits 2,970,655 12,931 1.75 2,926,222 5,402 0.75 Borrowings: FHLB advances and other 307,446 3,683 4.82 358,124 4,153 4.70 Total interest-bearing liabilities 2,465,902 16,614 2.71 2,361,307 9,555 1.64 Non-interest-bearing liabilities 27,718 23,588 Equity 314,418 281,661 Total liabilities and equity $ 3,620,237 $ 3,589,595 Taxable-equivalent net interest income /net interest spread (4) 22,493 1.95 % 25,161 2.58 % Taxable-equivalent net interest margin (5) 2.68 % 3.06 % Taxable-equivalent net adjustment (362) (387) Net interest income $ 22,131 $ 24,774 Net interest-earning assets $ 911,190 $ 970,613 (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 FTE net interest income by total average earning assets. Net interest income, on an FTE basis, is a non-GAAP financial measure that the Company believes to provide a more accurate picture of the interest margin for comparative purposes. Management believes FTE net interest income is a standard practice in the banking industry, and when net interest income is adjusted on an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on 51 Table of Contents net income. FTE net interest income is calculated by adding the tax benefit on certain financial interest earning assets, whose interest is tax-exempt, to total interest income then subtracting total interest expense. As a non-GAAP measure, FTE 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). Three Months Ended March 31, 2024 March 31, 2023 GAAP Financial Measurements Interest Income - Loans $ 28,045 $ 22,760 Interest Income - Securities taxable 8,943 9,802 Interest Income - Securities tax-exempt 1,361 1,458 Interest Income - Other interest income 396 308 Interest Expense - Deposits 12,931 5,401 Interest Expense - Borrowed funds 3,655 4,138 Interest Expense - Other 28 15 Total Net Interest Income $ 22,131 $ 24,774 Non-GAAP Financial Measurements Add: Tax Benefit on Tax-Exempt Interest Income - Securities $ 362 $ 387 Total Tax Benefit on Tax-Exempt Interest Income (1) 362 387 Tax-Equivalent Net Interest Income $ 22,493 $ 25,161 (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 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. Variances attributable to both rate and volume changes are calculated by multiplying the change in rate by the change in average balance and are allocated to the volume variance. See table below (in thousands). Three Months Ended March 31, 2024, compared to March 31, 2023 Dollar Increase (Decrease) Due to Change in: Average Volume Average Rate Net Change Income from the interest-earning assets: Loans, gross $ 2,283 $ 3,002 $ 5,285 Securities (1) (1,013) 30 (983) Interest-bearing deposits and fed funds sold (22) 110 88 Total interest income on interest-earning assets 1,248 3,142 4,390 Expense from the interest-bearing liabilities: Interest-bearing demand deposits (129) 696 567 Savings deposits (472) 2,328 1,856 Time deposits 3,606 1,501 5,107 Total interest expense on interest-bearing deposits 3,005 4,525 7,530 Borrowings (607) 137 (470) Total interest expense on interest-bearing liabilities 2,398 4,662 7,060 Taxable-equivalent net interest income $ (1,150) $ (1,520) $ (2,670) (1) Yields and interest income on tax-exempt securities have been computed on a taxable-equivalent basis. 52 Table of Contents Interest Income 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 $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 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. Non-interest Income The following table sets forth the various components of our non-interest income for the periods indicated (in thousands): Three months ended March 31, Increase (Decrease) 2024 2023 Amount Percent Fiduciary and wealth management $ 1,419 $ 1,337 $ 82 6.1 % Service charges and fees 1,606 1,635 (29) (1.8) Net gains (losses) on securities — — — N/A Income from company-owned life insurance 547 560 (13) (2.3) Other non-interest income 682 682 — 0.0 Total $ 4,254 $ 4,214 $ 40 0.9 % 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 March 31, Increase (Decrease) 2024 2023 Amount Percent Salaries and wages $ 9,518 $ 9,494 $ 24 0.3 % Pensions and other employee benefits 2,365 2,468 (103) (4.2) Occupancy 1,538 1,457 81 5.6 Equipment rentals, depreciation and maintenance 1,281 1,339 (58) (4.3) Other 6,463 5,607 856 15.3 Total $ 21,165 $ 20,365 $ 800 3.9 % 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 53 Table of Contents 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 $0.7 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 Our investment policy is established and reviewed annually by the Board. We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, time deposits of federally insured institutions, certain bankers’ acceptances, and federal funds. Our securities are all classified as AFS. Our investments provide a source of liquidity because we can pledge them to support borrowed funds or can liquidate them to generate cash proceeds. Our investment portfolio is also a resource in managing interest rate risk because the maturity and interest rate characteristics of this asset class can be modified to match changes in the loan and deposit portfolios. The majority of our AFS investment portfolio is comprised of obligations of states and municipalities and residential mortgage-backed securities. During the three months ended March 31, 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 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. 54 Table of Contents 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 Securities Available-for-Sale U.S. Treasuries and government agencies $ 196,742 $ — $ 19,211 $ 177,531 Obligations of states and municipalities 533,934 3 75,343 458,594 Residential mortgage backed - agency 47,108 — 4,114 42,994 Residential mortgage backed - non-agency 312,730 28 16,752 296,006 Commercial mortgage backed - agency 35,395 29 1,005 34,419 Commercial mortgage backed - non-agency 176,385 2 5,988 170,399 Asset backed 83,742 179 1,063 82,858 Other 14,179 — 1,460 12,719 Total $ 1,400,215 $ 241 $ 124,936 $ 1,275,520 December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available-for-Sale U.S. Treasuries and government agencies $ 197,026 $ — $ 17,955 $ 179,071 Obligations of states and municipalities 535,229 21 72,047 463,203 Residential mortgage backed - agency 47,074 — 4,836 42,238 Residential mortgage backed - non-agency 284,826 17 18,812 266,031 Commercial mortgage backed - agency 36,151 28 1,294 34,885 Commercial mortgage backed - non-agency 183,454 — 6,393 177,061 Asset backed 79,315 23 1,402 77,936 Other 9,500 — 1,486 8,014 Total $ 1,372,575 $ 89 $ 124,225 $ 1,248,439 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 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. March 31, 2024 One Year or Less One to Five Years Five to Ten Years After Ten Years Total Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Securities Available-for-Sale U.S. Treasuries and government agencies $ 29,986 1.61 % $ 141,415 1.30 % $ 25,341 1.36 % $ — — % $ 196,742 1.36 % Obligations of states and municipalities — — 29,704 2.39 342,328 2.08 161,902 2.12 533,934 2.11 Residential mortgage backed - agency 43 3.66 19,002 5.15 28,063 2.68 — — 47,108 3.67 Residential mortgage backed - non-agency 93,656 4.29 120,285 4.28 97,243 3.60 1,546 7.48 312,730 4.09 Commercial mortgage backed - agency 25 6.37 21,637 5.52 13,733 5.41 — — 35,395 5.48 Commercial mortgage backed - non-agency 60,657 6.32 110,594 4.02 5,134 1.43 — — 176,385 4.73 Asset backed 8,034 5.83 40,745 7.03 34,963 5.96 — — 83,742 6.47 Other — — — — 9,500 5.13 4,679 8.34 14,179 6.19 Total $ 192,401 4.57 % $ 483,382 3.56 % $ 556,305 2.71 % $ 168,127 2.35 % $ 1,400,215 3.22 % 55 Table of Contents Lending Activities Our loan portfolio consists primarily of commercial real estate loans, but we offer a variety of products to meet the credit needs of our borrowers. The risks associated with lending activities differ among loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans and also impact the associated collateral. Additional discussion on the classes of loans the Company makes and related risks is included in Note 3 — Loans in Notes to Consolidated Financial Statements. The following tables set forth the composition of our loan portfolio as of the dates indicated (in thousands): March 31, 2024 December 31, 2023 Commercial real estate $ 1,305,152 $ 1,309,084 Owner-occupied commercial real estate 131,154 131,381 Acquisition, construction & development 72,022 49,091 Commercial & industrial 82,774 67,847 Single family residential (1-4 units) 524,804 527,980 Consumer non-real estate and other 2,249 2,373 Loans, gross 2,118,155 2,087,756 Allowance for credit losses (24,606) (25,301) Loans, net $ 2,093,549 $ 2,062,455 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 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 Fixed Rates Adjustable Rates Fixed Rates Adjustable Rates Fixed Rates Adjustable Rates Fixed Rates Adjustable Rates Total Loans: Commercial real estate $ 116,996 $ 13,648 $ 624,128 $ 126,348 $ 328,544 $ 94,755 $ 733 $ — $ 1,305,152 Owner-occupied commercial real estate 3,509 235 60,520 9,125 52,882 565 3,193 1,125 131,154 Acquisition, construction & development 1,607 6,179 2,380 58,182 — — 3,053 621 72,022 Commercial & industrial 154 22,212 37,910 11,581 4,677 6,240 — — 82,774 Total commercial loans 122,266 42,274 724,938 205,236 386,103 101,560 6,979 1,746 1,591,102 Single family residential (1-4 units) 3,766 1,146 9,258 13,724 17,531 9,872 275,278 194,229 524,804 Consumer non-real estate and other 246 157 611 461 — — 384 390 2,249 Total loans $ 126,278 $ 43,577 $ 734,807 $ 219,421 $ 403,634 $ 111,432 $ 282,641 $ 196,365 $ 2,118,155 Asset Quality The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Credit Officer is responsible for establishing credit risk policies and procedures, including underwriting guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions. A loan is placed on non-accrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. 56 Table of Contents 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 Company’s non-performing assets, which includes non-performing loans consisting of non-accrual loans, loans that are more than 90 days past due and still accruing, and other real estate owned as of March 31, 2024, totaled $26.7 million. 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 90 days past due and still accruing 22,433 Total non-performing loans 26,748 3,744 Other real estate owned — Total non-performing assets $ 26,748 $ 3,744 Allowance for Credit Losses Refer to the discussion in Note 1. Nature of Business Activities and Significant Accounting Policies in Notes to Consolidated Financial Statements for management’s approach to estimating the ACL. The Company maintains the ACL at a level deemed adequate by management for expected credit losses. As disclosed in Note 1 and Note 4 , on January 1, 2023, the Company implemented CECL and increased the ACL, previously the allowance for credit losses, with a cumulative-effect adjustment to the ACL for credit losses of $4.4 million, which included a cumulative-effect adjustment to the ACL for off-balance sheet exposures of $274.8 thousand. The Company’s ACL is calculated quarterly with any adjustment recorded to the provision for credit losses in the consolidated Statement of Income. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, non-performing loans and other risk assets, and qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. Gross charged-off loans were $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. 57 Table of Contents 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 Balance of allowance at beginning of period (25,301) (21,039) Impact of the adoption of CECL — (4,125) Loans charged-off: Commercial real estate — — Owner-occupied commercial real estate — — Acquisition, construction & development — — Commercial & industrial — — Residential — — Consumer non-real estate and other 30 17 Total loans charged-off 30 17 Recoveries of loans charged-off: Commercial real estate (3) (28) Owner-occupied commercial real estate — — Acquisition, construction & development — — Commercial & industrial — — Residential (1) (3) Consumer non-real estate and other (1) (3) Total recoveries of loans charged-off (5) (34) Net loan charge-offs (recoveries) 25 (17) Provision for (recapture of) credit losses for the period (670) 523 Ending allowance $ (24,606) $ (25,704) Average loans outstanding during the period $ 2,085,826 $ 1,919,678 Allowance coverage ratio (1) 1.16 % 1.32 % Net charge-offs to average outstanding loans during the period (2) 0.00 0.00 Allowance for credit losses as a percentage of non-performing loans (3) 91.99 791.87 (1) The allowance coverage ratio is calculated by dividing the ACL at the end of the period by gross loans, net of unearned income at the end of the period. (2) The Net charge-offs to average outstanding loans during the period is calculated by dividing total net loan charge-offs (recoveries) during the year by average gross loans outstanding during the year. (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. 58 Table of Contents 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 Commercial real estate $ 18,977 77.12 % 61.61 % Owner-occupied commercial real estate 782 3.18 6.19 Acquisition, construction & development 674 2.74 3.40 Commercial & industrial 824 3.35 3.91 Residential 3,272 13.30 24.78 Consumer non-real estate and other 77 0.31 0.11 Total $ 24,606 100.00 % 100.00 % December 31, 2023 Allowance for credit losses Percent of Allowance in Each Category to Total Allocated ACL Percent of Loans in Each Category to Total Loans Commercial real estate $ 20,633 81.56 % 62.71 % Owner-occupied commercial real estate 783 3.09 6.29 Acquisition, construction & development 368 1.45 2.35 Commercial & industrial 645 2.55 3.25 Residential 2,797 11.05 25.29 Consumer non-real estate and other 75 0.30 0.11 Total $ 25,301 100.00 % 100.00 % Derivative Financial Instruments The Company utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. The Company recognizes derivative financial instruments at fair value as either other assets or other liabilities on the Consolidated Balance Sheets. The Company’s use of derivative financial instruments is described more fully in Note 9 — Derivatives in Notes to Consolidated Financial Statements. Off-Balance Sheet Arrangements The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit, and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and/or use these commitments. See Note 10 — Commitments and Contingencies in Notes to Consolidated Financial Statements for a discussion of credit extension commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Funding Activities The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. Deposits are the primary source of funds for lending and investing activities; however, the Company will use borrowings to meet liquidity needs and for temporary funding. Sources of borrowings include advances from the FHLB of Atlanta, borrowings from correspondent banks, and the Fed Discount Window. The Company also utilizes brokered time deposits. For more discussion of brokered time deposits, see the Deposits heading below this section. 59 Table of Contents 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 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% Deposits 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): March 31, 2024 December 31, 2023 Demand, non-interest-bearing $ 822,767 $ 830,320 Demand, interest-bearing 492,468 509,646 Money market and savings 920,009 925,853 Brokered deposits 370,847 389,011 Time deposits, other 384,022 347,051 Total interest-bearing 2,167,346 2,171,561 Total deposits $ 2,990,113 $ 3,001,881 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. 60 Table of Contents 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 Due after 3 months and within 6 months 31,798 Due after 6 months and within 12 months 31,741 Due after 12 months 3,127 Total uninsured, time deposits $ 108,045 Shareholders’ Equity 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. 61 Table of Contents