What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-13 compared with 2024-05-10 · 415 added, 197 removed, 549 unchanged (53% of the section changed)

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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.

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

Burke & Herbert 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 Burke & Herbert.

In September 2023, Burke

& Herbert elected financial holding company status.

As a financial holding company, Burke & Herbert is subject to regulation and supervision by the Federal Reserve.

Burke & Herbert has no material operations and owns 100% of the Bank.

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

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

The Bank offers a full range of business and personal financial solutions designed to meet customers’ banking, borrowing, and investment needs and has over 20 branches throughout the Northern Virginia region and commercial loan offices in Fredericksburg, Loudoun County, and Richmond, Virginia, and in Bethesda, Maryland.

Merger with Summit Financial Group, Inc.

Effective on the Closing Date, Burke & Herbert completed the M erger with Summit, pursuant to the August 24, 2023 Merger Agreement.

Pursuant to the Merger Agreement, on the Closing Date, (i) Summit merged with and into Burke & Herbert through the Merger, and (ii) immediately following the Merger, SCB merged with and into the Bank, with the Bank as the surviving bank.

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, 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.

Summit results of operations are included from the Closing Date forward.

The Bank’s primary market area includes northern Virginia and West Virginia, and it has over 75 branches and other commercial loan offices across Delaware, Kentucky, Maryland, Virginia, and West Virginia.

The Company’s branch locations accept business and consumer deposits from a diverse customer base.

The Company’s deposit products include checking, savings, and term certificate accounts.

The Company’s loan portfolio includes commercial and consumer loans, a substantial portion of which are secured by real estate.

The Bank derives a significant portion of its income from interest received on loans and investments.

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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 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.

As of June 30, 2024, we had total consolidated assets of $7.8 billion, gross loans of $5.6 billion, total deposits of $6.6 billion, and total shareholders’ equity of $693.1 million.

As of June 30, 2024, we had 850 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

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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.

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.

Business Combination and Goodwill

For acquisitions, we are required to record the assets acquired, including identified intangible assets such as core deposit intangibles, and the liabilities assumed at their respective fair values.

The difference between consideration and the net fair value of assets acquired is recorded as goodwill.

Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values.

The allowance for credit losses for PCD loans is recognized within acquisition accounting.

The allowance for credit losses for non-PCD assets is recognized as provision for credit losses in the same reporting period as the acquisition.

Fair value adjustments are amortized or accreted into the income statement over the estimated life of the acquired assets or assumed liabilities.

The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the acquisition.

The use of different assumptions could produce significantly different valuation results, which could have material positive or negative effects on our results of operations.

The carrying value of goodwill recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired.

An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill.

The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors.

In addition, we engage third party specialists to assist in the development of fair values.

Preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

Adjustments recorded during this period are recognized in the current reporting period.

Management uses various valuation methodologies to estimate the fair value of these assets and liabilities, and often involves a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued.

Examples of such items include loans, deposits, identifiable intangible assets, and certain other assets and liabilities.

Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of assets, including goodwill and liabilities, which could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides.

Allowance for Credit Losses

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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.

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.

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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.

The qualitative factors applied at June 30, 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.

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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.

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.

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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

The Bank’s exposure to commercial real estate at June 30, 2024, was $2.5 billion or 45.3% 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 June 30, 2024, was 32.6%, not including owner-occupied commercial real estate and acquisition, construction & development.

Including owner-occupied commercial real estate and acquisition, construction & development, total exposure was at $3.6 billion or 65.0% of our total gross loans and 46.7% of total assets at June 30, 2024.

Loan balances by portfolio segment amortized cost (in thousands) and by percentage of our total gross loan portfolio at June 30, 2024, were as follows:

June 30, 2024

Amortized Cost Percentage

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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).

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 June 30, 2024 (in thousands).

Commercial Real Estate by Collateral Type and Geographic Location

VA MD DC Other Total Percentage

VA WV MD DC Other Total Percentage

Retail Real Estate $ 287,723 $ 64,765 $ 137,319 $ 42,110 $ 48,418 $ 580,335 22.8 %

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

Multi-Family 227,908 105,067 44,800 84,230 26,713 488,718 19.2

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Hotels/Motels 124,780 53,723 66,626 52,357 77,704 375,190 14.7

Industrial/Warehouse 202,797 4,222 20,921 — — 227,940 9.0

Self-Storage 67,962 29,883 1,500 — 33,029 132,374 5.2

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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 %

VA WV MD DC Other Total Percentage

Office Buildings/Condos $ 69,160 $ 30,923 $ 21,671 $ 635 $ 14,398 $ 136,787 21.8 %

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

Retail 45,284 50,396 14,611 126 24,014 134,431 21.5

Private School 7,616 — — — 7,616 5.8

Industrial/Warehouse 49,586 16,672 1,798 — 16,147 84,203 13.4

Gas Stations 26,914 11,331 10,076 — 29,225 77,546 12.4

Restaurants 6,678 8,264 3,951 — 15,974 34,867 5.6

Churches/Religious Organizations 21,088 8,388 1,628 241 3,462 34,807 5.6

Coal, oil, gas, and natural resource extraction 927 10,493 — — 134 11,554 1.8

Private School 7,563 — — — — 7,563 1.2 %

Other 29,493 19,858 8,001 361 46,904 104,617 16.7

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Acquisition, Construction & Development by Collateral Type and Geographic Location

VA MD DC Other Total Percentage

VA WV MD DC Other Total Percentage

Multi-Family $ 11,560 $ 3,569 $ 26,599 $ 46,744 $ 57,332 $ 145,804 30.4 %

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

Land 56,808 32,113 11,174 61 12,584 112,740 23.5

Office Buildings/Condos 11,849 — 2,304 27,593 31,456 73,202 15.3

Self-Storage 8,004 569 22,336 — 21,767 52,676 11.0

Retail Real Estate 13,678 4,640 10,336 — 2,574 31,228 6.5

Storage 3,999 — — — 3,999 5.6

Residential For-Sale 5,500 5,257 882 3,822 3,008 18,469 3.8

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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 largest concentration of the Bank’s commercial real estate loans are in Virginia (approximately 45.7%) and the Bank 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 Building / Condo” collateral type is 16.9% 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;

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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.

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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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.

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.

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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 March 31, 2024, and December 31, 2023, the Bank complied with all regulatory capital standards and qualifies as “well capitalized”.

As of June 30, 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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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.

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.

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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 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,

The selected balance sheet data as of June 30, 2024, and June 30, 2023, and the selected income statement data for the three months and six months ended June 30, 2024, and June 30, 2023, have been derived from our consolidated financial statements included elsewhere in this Form 10-Q and in other filings we have submitted with the SEC and should be read in conjunction with the other information contained in this Form 10-Q.

As of the Three Months Ended June 30,

As of the Six Months Ended June 30,

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

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Total shareholders’ equity 693,126 290,072 693,126 290,072

As of or for the Three Months Ended March 31,

Common shareholders’ equity

682,713 290,072 682,713 290,072

As of or for the Three Months Ended June 30,

As of or for the Six Months Ended June 30,

2024 2023 2024 2023

Selected Operating Data:

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Total non-interest expenses 64,432 21,348 85,597 41,713

Income before income taxes 5,890 8,108

Income tax expense 678 584

Net income 5,212 7,524

Income (loss) before income taxes

(19,072) 6,855 (13,182) 14,963

Income tax expense (benefit)

(2,153) 821 (1,475) 1,405

Preferred stock dividends

Net income (loss) applicable to common shares

(17,144) 6,034 (11,932) 13,558

Per Share Data:

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14,932,169 7,428,710 14,932,169 7,428,710

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)

Basic net income (loss) per common share

$ (1.41) $ 0.81 $ (1.22) $ 1.82

Book value (at period end) $ 42.92 $ 39.01

As of or for the Three Months Ended March 31,

Diluted net income (loss) per common share

(1.41) 0.80 (1.22) 1.80

Dividends declared per common share

0.53 0.53 1.06 1.06

Common stock dividend payout ratio (1)

(37.59) % 66.25 % (86.89) % 58.89 %

Book value per common share (at period end)

$ 45.72 $ 39.05 $ 45.72 $ 39.05

As of or for the Three Months Ended June 30,

As of or for the Six Months Ended June 30,

2024 2023 2024 2023

Performance Ratios:

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Interest rate spread (2)

3.35 2.25 2.84 2.41

Net interest margin (3)

4.06 2.87 3.56 2.96

Efficiency ratio (4)

93.02 75.12 89.49 72.66

Capital Ratios:

Common equity tier 1 (CET 1) capital to risk-weighted assets 10.91 % 17.60 % 10.91 % 17.60 %

16.56 % 17.55 %

Total risk-based capital to risk-weighted assets 13.91 18.71 13.91 18.71

Tier 1 capital to risk-weighted assets 11.34 17.60 11.34 17.60

Tier 1 capital to average assets

Average equity to average assets

Tier 1 capital to average assets (leverage ratio)

9.04 11.20 9.04 11.20

Asset Quality Ratios:

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Number of full-time equivalent employees 850 407 850 407

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

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

(2) The interest rate spread represents the difference between the fully taxable-equivalent weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.

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(4) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income.

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.

Results of Operations

Results of Operations for the Six Months Ended June 30, 2024, and June 30, 2023

Net loss applicable to common shares for the six months ended June 30, 2024, was $11.9 million compared to net income applicable to common shares of $13.6 million for the six months ended June 30, 2023.

The $25.5 million decrease in net income applicable to common shares was primarily the result of merger related expenses and one-time CECL Day 2 provision for non-PCD assets acquired in the Merger for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Net interest income increased by $33.3 million to $81.9 million for the six months ended June 30, 2024, compared to $48.6 million for the six months ended June 30, 2023.

The main driver for this increase was the impact of the Merger.

For the six months ended June 30, 2024, the Company recorded credit provision expense of $23.2 million compared to a provision of $0.7 million for the six months ended June 30, 2023.

For the six months ended June 30, 2024, the Company recognized a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger, which resulted in a higher credit provision expense for the six months ended June 30, 2024, compared to the six months ended, June 30, 2023.

Non-interest income increased by $4.9 million, or 55.7%, to $13.8 million for the six months ended June 30, 2024, as compared to $8.8 million for the six months ended June 30, 2023, as a result of the Merger.

In addition, the Company liquidated the majority of the acquired securities portfolio that resulted in a gain on sale of securities of $0.6 million.

Non-interest expense increased by $43.9 million, or 105.2%, to $85.6 million for the six months ended June 30, 2024, compared to $41.7 million for the six months ended June 30, 2023.

The increase was primarily due to effect of the Merger and also included higher legal fees, consulting fees, audit fees, investment banking fees, software contract terminations, change-in-control salary and benefit payments, funding a charitable donation (as part of the Merger Agreement), and other expenses related to the Merger.

For the six months ended June 30, 2024, the Company incurred $24.4 million of expenses related to the Merger with Summit.

Net Interest Income and Net Interest Margin

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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.

Fluctuations in interest rates as well as changes in the volume and mix of earning 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).

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

Loans, gross (1)(2)

Net interest income totaled $81.9 million for the six months ended June 30, 2024, compared to $48.6 million for the six months ended June 30, 2023.

The increase in net interest income was primarily driven by the Merger which resulted in higher average balances of interest-earning assets beyond the higher average balances of interest-bearing liabilities.

The tax-adjusted net interest margin was 3.56% for the six months ended June 30, 2024, compared to 2.96% for the six months ended June 30, 2023.

The increase in tax-adjusted net interest margin was primarily driven by the effect of the Merger and the acquisition of additional, higher-yielding interest-earning assets.

The yield for the loan portfolio was 6.72% for the six months ended June 30, 2024, compared to 4.94% for the six months ended June 30, 2023.

The increase was primarily the result of the effect of the Merger which resulted in the acquisition of additional, higher-yielding loans.

The tax-adjusted yield on the total investment securities portfolio was 3.76% for the six months ended June 30, 2024, compared to 3.45% for the six months ended June 30, 2023.

The increase was partly due to higher yields in our investment portfolio in addition to the Merger, which resulted in the acquisition of additional securities with higher tax-adjusted yields.

The yield on interest-bearing deposits increased to 2.73% during the six months ended June 30, 2024, from 1.50% during the six months ended June 30, 2023.

The increase was a result of the Merger which resulted in the assumption of additional interest-bearing deposits with higher interest rates and to a lesser extent by higher market interest rates.

The yield on our short-term borrowings for the six months ended June 30, 2024, was 4.58%, compared to 4.66% for the six months ended June 30, 2023.

The decrease was due to the cash flow hedges that effectively lowered our yield on short-term borrowings.

The yield on our subordinated debt acquired in the Merger was 10.30%.

The following table sets forth the major components of net interest income and the related yields and rates for the six months ended June 30, 2024, and June 30, 2023, for comparison (dollars in thousands).

For the Six Months Ended June 30,

Average Outstanding Balance Interest Income/Expense Average Yield / Rate

Taxable loans (1)(2)

$ 3,283,909 $ 109,718 6.72 % $ 1,961,309 $ 48,060 4.94 %

Tax-exempt loans (1)(2)

1,520 42 5.56 — — N/A

Interest-earning deposits and fed funds sold 68,229 1,229 3.62 59,107 1,296 4.42

13 unchanged sentences

Total deposits 4,194,378 43,304 2.08 2,974,440 15,431 1.05

FHLB advances and other 307,446 3,683 4.82 358,124 4,153 4.70

Short-term borrowings

341,754 7,782 4.58 322,157 7,447 4.66

Subordinated debt borrowings

36,321 1,860 10.30 — — N/A

Total interest-bearing liabilities 3,562,632 52,946 2.99 2,395,300 22,878 1.93

12 unchanged sentences

(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.

(4) The interest rate spread represents the difference between the fully taxable-equivalent weighted-average yield on interest-earning assets and the weighted-average yield 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-taxable equivalent (“FTE”) net interest income by total average earning assets.

Net interest income, on an FTE basis, is a non-GAAP financial measure that the Company believes to provide a more accurate picture of the interest margin for comparative purposes.

Management believes FTE net interest income is a standard practice in the banking industry, and when net interest income is adjusted on an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable;

however, the adjustment to an FTE basis has no impact on 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).

Six Months Ended

June 30, 2024 June 30, 2023

GAAP Financial Measurements

Interest Income - Loans $ 109,718 $ 48,060

Interest Income - Tax-exempt loans 33 —

Interest Income - Securities taxable 19,873 19,221

Interest Income - Securities tax-exempt 3,917 2,867

Interest Income - Other interest income 1,301 1,296

Interest Expense - Deposits 43,304 15,431

Interest Expense - Borrowed funds 7,726 7,417

Interest Expense - Subordinated debt 1,860 —

Interest Expense - Other 56 30

Total Net Interest Income $ 81,896 $ 48,566

Non-GAAP Financial Measurements

Tax Benefit on Tax-Exempt Interest Income - Securities $ 1,050 $ 762

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

Tax-Equivalent Net Interest Income $ 82,946 $ 49,328

(1) Tax benefit was calculated using the federal statutory tax rate of 21%.

Yield/Rate and 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 six months ended June 30, 2024, and June 30, 2023, 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).

Six Months Ended June 30, 2024, compared to June 30, 2023

Dollar Increase (Decrease) Due to Change in:

Average Volume Average Yield / Rate

Income from the interest-earning assets:

Loans (1) , gross

$ 111,849 $ 7,077 $ 118,926

Securities (1)

1,720 4,072 5,792

Interest-bearing deposits and fed funds sold 588 (418) 170

Total interest income on interest-earning assets 114,157 10,731 124,888

Expense from the interest-bearing liabilities:

Interest-bearing demand deposits 12,053 10,972 23,025

Savings deposits 3,982 602 4,584

Time deposits 15,748 4,533 20,281

Total interest expense on interest-bearing deposits 31,783 16,107 47,890

Borrowings 5,785 (338) 5,447

Total interest expense on interest-bearing liabilities 37,568 15,769 53,337

Taxable-equivalent net interest income

$ 76,589 $ (5,038) $ 71,551

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

Interest Income

Total interest income was $134.8 million for the six months ended June 30, 2024, compared to $71.4 million for the six months ended June 30, 2023, an increase of 88.7%.

The increase in interest income was due to the effect of the Merger and the acquisition of additional interest-earning assets.

Interest income on loans increased by $61.7 million and interest income on securities increased $1.7 million, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Interest Expense

Total interest expense was $52.9 million for the six months ended June 30, 2024, compared to $22.9 million for the six months ended June 30, 2023.

The increase in interest expense was a result of the Merger and the assumption of additional interest-bearing liabilities.

Interest expense on interest-bearing deposits and borrowed funds increased by $27.9 million and $0.3 million, respectively, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Interest on subordinated debt assumed in the Merger was $1.9 million for the six months ended June 30, 2024.

Provision for (Recapture of) Credit Losses

The provision for credit losses was $23.2 million for the six months ended June 30, 2024, compared to a provision of $0.7 million for the six months ended June 30, 2023.

The increased provision expense was due to a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger and acquired commitments for unfunded commitments for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

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):

Six Months Ended June 30, Increase (Decrease)

2024 2023 Amount Percent

Fiduciary and wealth management $ 3,630 $ 2,642 $ 988 37.4 %

Service charges and fees 5,694 3,376 2,318 68.7

Net gains (losses) on securities 613 (111) 724 652.3

Income from company-owned life insurance 1,469 1,131 338 29.9

Other non-interest income 2,353 1,801 552 30.6

Total $ 13,759 $ 8,839 $ 4,920 55.7 %

Non-interest income increased 55.7% for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

The increase was primarily driven by the Merger.

The largest increase was a $2.3 million increase in service charges and fees for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

A majority of the securities acquired in the Merger were sold, resulting in gains of $0.6 million for the six months ended June 30, 2024, compared to losses of $0.1 million during the six months ended June 30, 2023.

Loan swap fees included in other non-interest income increased $0.1 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Other categories of non-interest income also increased due to the Merger, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Non-interest Expense

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

Six Months Ended June 30, Increase (Decrease)

2024 2023 Amount Percent

Salaries and wages $ 30,413 $ 19,416 $ 10,997 56.6 %

Pensions and other employee benefits 7,668 4,874 2,794 57.3

Occupancy 4,535 3,002 1,533 51.1

Equipment rentals, depreciation and maintenance 13,944 2,796 11,148 398.7

Other 29,037 11,625 17,412 149.8

Total $ 85,597 $ 41,713 $ 43,884 105.2 %

Non-interest expense increased $43.9 million or 105.2% for the six months ended June 30, 2024, compared to June 30, 2023.

The increase was primarily due to effect of the Merger and also included higher legal fees, consulting fees, audit fees, investment banking fees, software contract terminations, change-in-control salary and benefit payments, funding a charitable donation (as contemplated by the Merger Agreement), and other expenses related to the Merger.

For the six months ended June 30, 2024, the Company incurred $24.4 million of non-interest expense related to the Merger with Summit that are included in non-interest expense for the six months ended June 30, 2024.

Other non-interest expense included $9.5 million of these costs, while the remaining amount of the total is included in the other line items of non-interest expense.

See Note 1 6 — Business Combination in Notes to Consolidated Financial Statements for further information on Merger-related expenses and Note 13 — Other Operating Expenses in Notes to Consolidated Financial Statements for further information on “Other” non-interest expense.

Income Tax Expense (Benefit)

Income tax benefit was $1.5 million for the six months ended June 30, 2024, a decrease of $2.9 million from the tax provision for the six months ended June 30, 2023.

The decrease was due to the decrease in net income and resulting net loss for the six months ended June 30, 2024, when compared to the six months ended June 30, 2023.

For the six months ended June 30, 2024, the effective tax benefit was 11.2% while the effective tax rate was 9.4%, for June 30, 2023.

Results of Operations for the Three Months Ended June 30, 2024, and June 30, 2023

Net loss applicable to common shares for the three months ended June 30, 2024, was $17.1 million, compared to net income applicable to common shares of $6.0 million during the three months ended June 30, 2023.

The $23.2 million decrease was primarily the result of Merger related expenses and one-time CECL Day 2 provision for non-PCD assets acquired in the merger for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Net interest income increased by $36.0 million to $59.8 million for the three months ended June 30, 2024, compared to $23.8 million for the three months ended June 30, 2023.

The main driver for this increase was the impact of the Merger.

For the three months ended June 30, 2024, the Company recorded credit provision expense of $23.9 million compared to a provision of $0.2 million for the three months ended June 30, 2023.

For the three months ended June 30, 2024, the Company recognized a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger, which resulted in a higher credit provision expense for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Non-interest income increased by $4.9 million, or 105.5%, to $9.5 million for the three months ended June 30, 2024, as compared to $4.6 million for the three months ended June 30, 2023, as a result of the Merger.

In addition, the Company liquidated the majority of the acquired securities portfolio that resulted in a gain on sale of securities of $0.6 million.

Non-interest expense increased by $43.1 million, or 201.8%, to $64.4 million for the three months ended June 30, 2024, as compared to $21.3 million for the three months ended June 30, 2023.

For the three months ended June 30, 2024, the Company incurred $23.8 million of expenses related to the Merger with Summit.

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.

Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest-bearing liabilities can impact net interest income and net interest margin.

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 $59.8 million for the three months ended June 30, 2024, compared to $23.8 million for the three months ended June 30, 2023.

The increase in net interest income was primarily driven by the merger which resulted in higher average balances on interest-earning assets beyond the higher average balances on interest-bearing liabilities.

The tax-adjusted net interest margin was 4.06% for the three months ended June 30, 2024, compared to 2.87% for the three months ended June 30, 2023.

The increase in tax-adjusted net interest margin was primarily driven by the effect of the merger and the acquisition of additional, higher-yielding interest-earning assets.

The yield for the loan portfolio was 7.33% for the three months ended June 30, 2024, compared to 5.07% for the three months ended June 30, 2023.

The increase was primarily the result of the effect of the Merger which resulted in the acquisition of additional, higher-yielding loans.

The tax-adjusted yield on the total investment securities portfolio was 4.05% for the three months ended June 30, 2024, compared to 3.45% for the three months ended June 30, 2023.

The increase was partly due to higher yields in our investment portfolio in addition to the Merger, which resulted in the acquisition of additional securities with higher tax-adjusted yields.

The yield on interest-bearing deposits increased to 2.90% during the three months ended June 30, 2024, from 1.88% during the three months ended June 30, 2023.

The increase was a result of the Merger which resulted in the assumption of additional interest-bearing deposits with higher interest rates and to a lesser extent by higher market interest rates.

The yield on our short-term borrowings for the three months ended June 30, 2024, was 4.38%, compared to 4.61% for the three months ended June 30, 2023.

The decrease was due to cash flow hedges that effectively lowered our yield on short-term borrowings.

The yield on our subordinated debt assumed in the Merger was 10.30%.

The following table sets forth the major components of net interest income and the related yields and rates for the three months ended June 30, 2024, and June 30, 2023, for comparison (dollars in thousands).

For the Three Months Ended June 30,

Average Outstanding Balance Interest Income/Expense Average Yield / Rate

Loans, gross (1)(2)

$ 4,481,993 $ 81,673 7.33 % $ 2,002,482 $ 25,300 5.07 %

Tax-exempt loans (1)(2)

3,041 42 5.55 — — N/A

Interest-earning deposits and fed funds sold 94,765 833 3.54 74,074 988 5.35

Taxable securities 988,492 11,002 4.48 1,036,576 9,418 3.64

Tax-exempt securities (3)

426,092 3,235 3.05 266,402 1,784 2.69

Total securities 1,414,584 14,237 4.05 1,302,978 11,202 3.45

Total interest-earning assets 5,994,383 96,785 6.49 3,379,534 37,490 4.45

Non-interest-earning assets 484,149 243,498

Total assets $ 6,478,532 $ 3,623,032

Liabilities and shareholders’ equity:

Non-interest-bearing demand $ 1,207,443 $ 879,794

Interest-bearing demand 1,587,914 11,834 3.00 % 554,364 564 0.41 %

Savings 1,480,985 5,616 1.53 979,020 4,199 1.72

Time 1,141,758 12,923 4.55 608,949 5,267 3.47

Total interest-bearing deposits 4,210,657 30,373 2.90 2,142,333 10,030 1.88

Total deposits 5,418,100 30,373 2.25 3,022,127 10,030 1.33

Short-term borrowings

376,063 4,099 4.38 286,584 3,294 4.61

Subordinated debt borrowings

72,643 1,860 10.30 — — N/A

Total interest-bearing liabilities 4,659,363 36,332 3.14 2,428,917 13,324 2.20

Non-interest-bearing liabilities 129,884 24,036

Equity 554,485 290,285

Total liabilities and equity $ 6,478,532 $ 3,623,032

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

60,453 3.35 % 24,166 2.25 %

Taxable-equivalent net interest margin (5)

4.06 % 2.87 %

Taxable-equivalent net adjustment (688) (374)

Net interest income $ 59,765 $ 23,792

Net interest-earning assets $ 1,335,020 $ 950,617

(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.

(5) The net interest margin represents FTE 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.

1 unchanged sentence

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

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

3 unchanged sentences

Three Months Ended

March 31, 2024 March 31, 2023

June 30, 2024 June 30, 2023

GAAP Financial Measurements

Interest Income - Loans $ 81,673 $ 25,300

Interest Income - Tax-exempt loans 33 —

Interest Income - Securities taxable 10,930 9,419

3 unchanged sentences

Interest Expense - Borrowed funds 4,071 3,279

Interest Expense - Subordinated debt 1,860 —

Interest Expense - Other 28 15

5 unchanged sentences

(1) Tax benefit was calculated using the federal statutory tax rate of 21%.

Rate/Volume Analysis

Yield/Rate and Volume Analysis

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.

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

Three Months Ended June 30, 2024, compared to June 30, 2023

Dollar Increase (Decrease) Due to Change in:

Average Volume Average Rate Net Change

Average Volume Average Yield / Rate

Income from the interest-earning assets:

Loans (1) , gross

$ 219,348 $ 7,509 $ 226,857

Securities (1)

13 unchanged sentences

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.

Total interest income was $96.1 million for the three months ended June 30, 2024, compared to $37.1 million for the three months ended June 30, 2023, an increase of 158.9%.

The increase in interest income was due to the effect of the Merger and the acquisition of additional interest-earning assets.

Interest income on loans increased by $56.4 million and interest income on securities increased $2.7 million, for the three months ended June 30, 2024, compared to the three months ended June 30, 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.

Total interest expense was $36.3 million for the three months ended June 30, 2024, compared to $13.3 million for the three months ended June 30, 2023.

The increase in interest expense was a result of the Merger and the assumption of additional interest-bearing liabilities.

Interest expense on interest-bearing deposits and borrowed funds increased by $20.3 million and $0.8 million, respectively, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Interest on subordinated debt acquired in the Merger was $1.9 million for the three months ended June 30, 2024.

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.

The provision for credit losses was $23.9 million for the three months ended June 30, 2024, compared to a provision of $0.2 million for the three months ended June 30, 2023.

The increased provision expense was due to a one-time CECL Day 2 provision for non-PCD assets acquired in the Merger and acquired commitments for unfunded commitments for three months ended June 30, 2023, compared to the three months ended June 30, 2023.

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 March 31,

Three months ended June 30,

Increase (Decrease)

2 unchanged sentences

Service charges and fees 4,088 1,741 2,347 134.8

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

Net gains (losses) on securities 613 (111) 724 652.3

Income from company-owned life insurance 922 571 351 61.5

1 unchanged sentence

Total $ 9,505 $ 4,625 $ 4,880 105.5 %

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 income increased 105.5% for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase was primarily driven by the Merger.

The largest increase was a $2.3 million increase in service charges and fees for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

A portion of securities acquired in the Merger were sold, resulting in gains of $0.6 million for the three months ended June 30, 2023, compared to losses of $0.1 million during the three months ended June 30, 2023.

Loan swap fees included in other non-interest income increased $0.1 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Other categories of non-interest income also increased due to the Merger, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Non-interest Expense

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

Three months ended March 31,

Three months ended June 30,

Increase (Decrease)

6 unchanged sentences

Total $ 64,432 $ 21,348 $ 43,084 201.8 %

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 $0.7 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.

Non-interest expense increased $43.1 million or 201.8% for the three months ended June 30, 2024, compared to June 30, 2023.

For the three months ended June 30, 2024, the Company incurred $23.8 million of non-interest expense related to the Merger with Summit that are included in other non-interest expense for the three months ended June 30, 2024.

See Note 16 — Business Combination in Notes to Consolidated Financial Statements for further information on Merger-related expenses and Note 13 — Other Operating Expenses in Notes to Consolidated Financial Statements for further information on “Other” non-interest expense.

Income Tax Expense (Benefit)

Income tax benefit was $2.2 million for the three months ended June 30, 2024, a decrease of $3.0 million from the tax provision for the three months ended June 30, 2023.

The decrease was due to the decrease in net income and resulting net loss for the three months ended June 30, 2024, when compared to the three months ended June 30, 2023.

For the three months ended June 30, 2024, the effective tax benefit was 11.3% while the effective tax rate was 12.0% for June 30, 2023.

Analysis of Financial Condition for the Period Ended June 30, 2024, and December 31, 2023

Due mostly to the Merger, assets increased by $4.19 billion to $7.81 billion as of June 30, 2024, compared to $3.62 billion as of December 31, 2023.

Loans, net of ACL, increased by $3.49 billion from $2.06 billion as of December 31, 2023, to $5.55 billion as of June 30, 2024.

Deposits increased by $3.64 billion and amounted to $6.64 billion at June 30, 2024, compared to $3.00 billion at December 31, 2023.

Borrowed funds increased by $13.2 million to $285.2 million as of June 30, 2024, compared to $272.0 million at December 31, 2023.

Subordinated debt and subordinated debt owed to unconsolidated subsidiary trusts, which were assumed in the Merger, totaled $109.1 million at June 30, 2024, compared to zero at December 31, 2023.

Investment Securities

5 unchanged sentences

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.

During the six months ended June 30, 2024, the unrealized losses on our holdings remained mostly unchanged from December 31, 2023.

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.

Therefore, the Company has concluded that the unrealized losses for the AFS securities do not require an ACL at June 30, 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 March 31, 2024, and December 31, 2023 (in thousands):

March 31, 2024

The following tables reflect the amortized cost and fair market values for the total portfolio for each category of investment for June 30, 2024, and December 31, 2023 (in thousands):

June 30, 2024

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

21 unchanged sentences

$ 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 investment maturity table below summarizes contractual maturities for our investment securities at June 30, 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 overall weighted average duration of the Company’s investment portfolio is 4.5 years at June 30, 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

June 30, 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):

March 31, 2024

June 30, 2024

December 31, 2023

8 unchanged sentences

Loans, net $ 5,548,707 $ 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 loan portfolio, excluding ACL, at June 30, 2024, increased by $3.53 billion primarily due to the Merger.

The following table shows the maturity distribution for total loans outstanding as of June 30, 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

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

June 30, 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 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

The Company’s asset quality remained stable through the second quarter of 2024, but the nonaccrual loan balance increased $29.0 million from December 31, 2023 due to the merger.

The following table summarizes the Company’s non-performing assets as of June 30, 2024, and December 31, 2023 (in thousands):

June 30, 2024 December 31, 2023

Non-accrual loans $ 32,726 $ 3,744

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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.

On January 1, 2023, the Company implemented CECL and increased the ACL, previously the allowance for loan 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.

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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 $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

The Company recorded a provision of $20.1 million and a provision of $310.0 thousand on loans for the three months ended June 30, 2024, and June 30, 2023, respectively, and a provision of $19.4 million and a provision of $0.8 million on loans for the six months ended June 30, 2024, and June 30, 2023, respectively.

This additional provision expense was due to an increase in loans that were classified as non-PCD.

The Company also recorded a $23.9 million provision to establish an allowance for acquired PCD loans for the quarter ended June 30, 2024.

Gross charged-off loans were $611.0 thousand and $104.0 thousand for the three months ended June 30, 2024, and June 30, 2023, respectively, and $641.0 thousand and $121.0 thousand for the six months ended June 30, 2024, and June 30, 2023, respectively.

Gross recoveries totaled $12.0 thousand and $9.0 thousand for the three months ended June 30, 2024, and June 30, 2023, respectively, and $17.0 thousand and $43.0 thousand for the six months ended June 30, 2024, and June 30, 2023, respectively.

The ACL as a percentage of gross loans, net of unearned income, was 1.21% and 1.30% as of June 30, 2024, and June 30, 2023, respectively.

The following table summarizes the changes in the Company’s credit loss experience by portfolio as of the three and six months ended June 30, 2024, and 2023 (dollars in thousands):

Three months ended Six months ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

Loans outstanding at end of period $ 5,616,724 $ 2,000,969 $ 5,616,724 $ 2,000,969

1 unchanged sentence

Impact of the adoption of CECL — — (4,125)

Allowance established for acquired PCD Loans (23,910) — (23,910) —

Loans charged-off:

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

0.01 0.00 0.02 0.00

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

207.10 886.73 207.10 886.73

(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 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

The following table summarizes the ACL by portfolio with a comparison of the percentage composition in relation to total ACL and allowance for credit losses and total loans as of June 30, 2024, and December 31, 2023 (dollars in thousands).

June 30, 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 ACL Percent of Loans in Each Category to Total Loans

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

Commercial real estate $ 20,633 81.56 % 62.71 %

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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 has available secured lines of credit with the Federal Reserve Bank of Richmond, such as the Borrower-In-Custody program, the FHLB of Atlanta, and unsecured federal funds

lines of credit from correspondent banking relationships.

The Company also utilizes brokered time deposits.

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

As of March 31, 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.

As of June 30, 2024, the Company has available unused borrowing capacity of $2.2 billion through its available lines of credit with the FHLB of Atlanta, the Federal Reserve Borrower-In-Custody Program line, 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%

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 shows certain information regarding short-term borrowings as of the three months ended June 30, 2024, and December 31, 2023, respectively (dollars in thousands):

Balance at end of period June 30, 2024 December 31, 2023

Short-term borrowings $ 285,161 $ 272,000

Weighted average interest yield at end of period 4.38% 4.75%

The following table shows certain information regarding long-term debt as of the three months ended June 30, 2024, and December 31, 2023, respectively (dollars in thousands):

Balance at end of period June 30, 2024 December 31, 2023

Subordinated debentures, net $ 92,178 $ —

Subordinated debentures owed to unconsolidated subsidiary trusts 16,886 —

Total long-term debt $ 109,064 $ —

Weighted average interest yield at end of period 10.30% N/A

Total deposits increased by $3.6 billion from December 31, 2023, to June 30, 2024, primarily due to the completion of the Merger with Summit.

The Company has brokered time deposits that amounted to $403.7 million as of June 30, 2024, and $389.0 million at December 31, 2023.

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

June 30, 2024

December 31, 2023

Balance Balance

Demand, non-interest-bearing $ 1,397,030 $ 830,320

2 unchanged sentences

Brokered deposits 403,668 389,011

378,407 4.65 %

Time deposits, other 934,775 347,051

1 unchanged sentence

Total deposits $ 6,639,571 $ 3,001,881

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

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 $1.9 billion and $677.3 million at June 30, 2024, and December 31, 2023, respectively, with the increase being primarily attributable to the Merger.

The following table sets forth maturity ranges of time deposits as of June 30, 2024, that meet or exceed the FDIC insurance limit (in thousands).

June 30, 2024

Due within 3 months or less $ 100,355

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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.

Total shareholders’ equity at June 30, 2024, was $693.1 million, compared to $314.8 million at December 31, 2023.

Shareholders’ equity increased by $378.4 million mostly due to the Merger since December 31, 2023.

Accumulated other comprehensive income/(loss) decreased $3.1 million from December 31, 2023, to June 30, 2024, from $(103.5) million to $(100.4) million.

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