UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~June 30, ~~2022~~2023

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______

Commission File Number 001-39068

METROCITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Georgia	47-2528408
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

5114 Buford Highway Doraville, Georgia	30340
(Address of principal executive offices)	(Zip Code)

(770) 455-4989

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each Exchange on which registered
Common Stock, par value $0.01 per share	MCBS	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒	Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~November~~August 1, ~~2022,~~2023, the registrant had ~~25,308,824~~25,279,846 shares of common stock, par value $0.01 per share, issued and outstanding.

Table of Contents

METROCITY BANKSHARES, INC.

Quarterly Report on Form 10-Q

~~September~~June 30, ~~2022~~2023

TABLE OF CONTENTS

		Page
Part I.	Financial Information

Item l.	Financial Statements:
	Consolidated Balance Sheets as of ~~September~~June 30, ~~2022~~2023 (unaudited) and December 31, ~~2021~~2022	3
	Consolidated Statements of Income (unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	4
	Consolidated Statements of Comprehensive Income (unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	5
	Consolidated Statements of Shareholders’ Equity (unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	6
	Consolidated Statements of Cash Flows (unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	7
	Notes to Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3335
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5659
Item 4.	Controls and Procedures	5760

Part II.	Other Information

Item 1.	Legal Proceedings	5861
Item 1A.	Risk Factors	5861
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5861
Item 3.	Defaults Upon Senior Securities	5961
Item 4.	Mine Safety Disclosures	5961
Item 5.	Other Information	5961
Item 6.	Exhibits	5962
	Signatures	6063

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

METROCITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


	September 30,		December 31,		June 30,		December 31,
	2022		2021		2023		2022
	(Unaudited)				(Unaudited)
Assets:
Cash and due from banks	$	164,054	$	432,523	$	250,503	$	150,964
Federal funds sold		15,669		8,818		12,224		28,521
Cash and cash equivalents		179,723		441,341		262,727		179,485
Equity securities		10,452		11,386		10,358		10,300
Securities available for sale		19,978		25,733		18,696		19,245
Loans held for sale		—		—
Loans, less allowance for loan losses of $14,982 and $16,952, respectively		2,963,336		2,488,118
Loans, less allowance for credit losses of $18,091 and $13,888, respectively						3,002,623		3,041,801
Accrued interest receivable		11,732		11,052		13,877		13,171
Federal Home Loan Bank stock		15,619		19,701		15,534		17,493
Premises and equipment, net		13,664		13,068		16,374		14,257
Operating lease right-of-use asset		8,835		9,338		7,761		8,463
Foreclosed real estate, net		4,328		3,618		1,001		4,328
SBA servicing asset		8,324		10,234		8,018		7,085
Mortgage servicing asset, net		4,975		7,747		2,514		3,973
Bank owned life insurance		68,697		59,437		70,010		69,130
Interest rate derivatives						39,284		28,781
Other assets		38,776		5,385		6,310		9,727
Total assets	$	3,348,439	$	3,106,158	$	3,475,087	$	3,427,239

Liabilities:
Deposits:
Non-interest-bearing demand	$	602,246	$	592,444	$	575,301	$	611,991
Interest-bearing		1,968,607		1,670,576		2,123,181		2,054,847
Total deposits		2,570,853		2,263,020		2,698,482		2,666,838

Federal Home Loan Bank advances		375,000		500,000		325,000		375,000
Other borrowings		396		459		387		392
Operating lease liability		9,303		9,861		7,985		8,885
Accrued interest payable		1,489		204		3,859		2,739
Other liabilities		42,369		42,391		66,211		23,964
Total liabilities	$	2,999,410	$	2,815,935	$	3,101,924	$	3,077,818

Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding		—		—		—		—
Common stock, $0.01 par value, 40,000,000 shares authorized, 25,370,417 and 25,465,236 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		254		255
Common stock, $0.01 par value, 40,000,000 shares authorized, 25,279,846 and 25,169,709 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively						253		252
Additional paid-in capital		48,914		51,559		45,516		45,298
Retained earnings		279,475		238,577		301,752		285,832
Accumulated other comprehensive income (loss)		20,386		(168)
Accumulated other comprehensive income						25,642		18,039
Total shareholders' equity		349,029		290,223		373,163		349,421
Total liabilities and shareholders' equity	$	3,348,439	$	3,106,158	$	3,475,087	$	3,427,239

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2022

2021

2022

2021
Interest and dividend income:







Loans, including fees

$
37,263

$
29,127

$
101,032

$
77,355
Other investment income

1,011

196

2,214

525
Federal funds sold

23

1

29

4
Total interest income

38,297

29,324

103,275

77,884

Interest expense:

Deposits

6,964

968

10,487

2,879
FHLB advances and other borrowings

1,545

167

2,127

457
Total interest expense

8,509

1,135

12,614

3,336

Net interest income

29,788

28,189

90,661

74,548

Provision for loan losses

(1,703)

2,579

(1,599)

6,383

Net interest income after provision for loan losses

31,491

25,610

92,260

68,165

Noninterest income:

Service charges on deposit accounts

509

446

1,508

1,230
Other service charges, commissions and fees

2,676

4,147

8,482

11,422
Gain on sale of residential mortgage loans

—

—

2,017

—
Mortgage servicing income, net

(358)

132

(262)

(659)
Gain on sale of SBA loans

500

3,358

2,068

8,057
SBA servicing income, net

1,330

1,212

1,897

5,250
Other income

444

237

1,700

1,012
Total noninterest income

5,101

9,532

17,410

26,312

Noninterest expense:

Salaries and employee benefits

7,756

8,679

22,781

22,293
Occupancy and equipment

1,167

1,295

3,594

3,822
Data processing

270

257

808

848
Advertising

158

131

434

393
Other expenses

3,337

2,749

10,369

8,556
Total noninterest expense

12,688

13,111

37,986

35,912

Income before provision for income taxes

23,904

22,031

71,684

58,565
Provision for income taxes

7,011

5,149

19,262

14,309
Net income available to common shareholders

$
16,893

$
16,882

$
52,422

$
44,256

Earnings per share:

Basic

$
0.66

$
0.66

$
2.06

$
1.73
Diluted

$
0.66

$
0.66

$
2.04

$
1.71


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Interest and dividend income:
Loans, including fees	$	44,839	$	32,310	$	88,821	$	63,769
Other investment income		2,582		711		4,521		1,203
Federal funds sold		61		4		105		6
Total interest income		47,482		33,025		93,447		64,978

Interest expense:
Deposits		19,804		2,384		37,180		3,523
FHLB advances and other borrowings		2,708		421		5,064		582
Total interest expense		22,512		2,805		42,244		4,105

Net interest income		24,970		30,220		51,203		60,873

Provision for credit losses		(416)		—		(416)		104

Net interest income after provision for credit losses		25,386		30,220		51,619		60,769

Noninterest income:
Service charges on deposit accounts		464		518		913		999
Other service charges, commissions and fees		1,266		3,647		2,140		5,806
Gain on sale of residential mortgage loans		—		806		—		2,017
Mortgage servicing income, net		(51)		(5)		(147)		96
Gain on sale of SBA loans		1,054		—		3,023		1,568
SBA servicing income, net		1,388		(1,077)		3,202		567
Other income		640		764		1,646		1,256
Total noninterest income		4,761		4,653		10,777		12,309

Noninterest expense:
Salaries and employee benefits		7,103		7,929		13,469		15,025
Occupancy and equipment		1,039		1,200		2,253		2,427
Data processing		353		261		628		538
Advertising		165		126		311		276
Other expenses		2,874		3,603		5,552		7,032
Total noninterest expense		11,534		13,119		22,213		25,298

Income before provision for income taxes		18,613		21,754		40,183		47,780
Provision for income taxes		5,505		5,654		11,345		12,251
Net income available to common shareholders	$	13,108	$	16,100	$	28,838	$	35,529

Earnings per share:
Basic	$	0.52	$	0.63	$	1.15	$	1.40
Diluted	$	0.51	$	0.63	$	1.13	$	1.38

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2022		2021		2022		2021		2023		2022		2023		2022

Net income	$	16,893	$	16,882	$	52,422	$	44,256	$	13,108	$	16,100	$	28,838	$	35,529

Other comprehensive gain (loss):
Other comprehensive gain:

Unrealized holding losses on securities available for sale		(893)		(11)		(3,707)		(53)
Unrealized holding gains (losses) on securities available for sale										(150)		(1,330)		217		(2,814)
Net changes in fair value of cash flow hedges		19,332		(200)		31,113		(200)		16,478		4,423		11,345		11,781
Tax effect		(4,610)		54		(6,852)		65		(5,213)		(773)		(3,959)		(2,242)

Other comprehensive gain (loss)		13,829		(157)		20,554		(188)
Other comprehensive gain										11,115		2,320		7,603		6,725

Comprehensive income	$	30,722	$	16,725	$	72,976	$	44,068	$	24,223	$	18,420	$	36,441	$	42,254

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share data)

Accumulated

Common Stock

Additional

Other

Number of

Paid-in

Retained

Comprehensive


Shares

Amount

Capital

Earnings

Income (Loss)

Total
Three Months Ended:

Balance, July 1, 2022

25,451,125

$
255

$
49,831

$
266,426

$
6,557

$
323,069
Net income

—

—

—

16,893

—

16,893
Stock based compensation expense

—

—

689

—

—

689
Repurchase of common stock

(80,708)

(1)

(1,606)

—

—

(1,607)
Other comprehensive income

—

—

—

—

13,829

13,829
Dividends declared on common stock ($0.15 per share)

—

—

—

(3,844)

—

(3,844)
Balance, September 30, 2022

25,370,417

$
254

$
48,914

$
279,475

$
20,386

$
349,029

Balance, July 1, 2021

25,578,668

$
256

$
52,924

$
210,910

$
164

$
264,254
Net income

—

—

—

16,882

—

16,882
Stock based compensation expense

—

—

378

—

—

378
Repurchase of common stock

(113,432)

(1)

(2,121)

—

—

(2,122)
Other comprehensive loss

—

—

—

—

(157)

(157)
Dividends declared on common stock ($0.12 per share)

—

—

—

(3,081)

—

(3,081)
Balance, September 30, 2021

25,465,236

$
255

$
51,181

$
224,711

$
7

$
276,154

Nine Months Ended:












Balance, January 1, 2022

25,465,236

$
255

$
51,559

$
238,577

$
(168)

$
290,223
Net income

—

—

—

52,422

—

52,422
Stock based compensation expense

—

—

1,242

—

—

1,242
Vesting of restricted stock

101,097

1

(1)

—

—

—
Repurchase of common stock

(195,916)

(2)

(3,886)

—

—

(3,888)
Other comprehensive income

—

—

—

—

20,554

20,554
Dividends declared on common stock ($0.45 per share)

—

—

—

(11,524)

—

(11,524)
Balance, September 30, 2022

25,370,417

$
254

$
48,914

$
279,475

$
20,386

$
349,029

Balance, January 1, 2021

25,674,573

$
257

$
55,674

$
188,705

$
195

$
244,831
Net income

—

—

—

44,256

—

44,256
Stock based compensation expense

—

—

1,049

—

—

1,049
Vesting of restricted stock

101,472

1

(1)

—

—

—
Repurchase of common stock

(310,809)

(3)

(5,541)

—

—

(5,544)
Other comprehensive loss

—

—

—

—

(188)

(188)
Dividends declared on common stock ($0.32 per share)

—

—

—

(8,250)

—

(8,250)
Balance, September 30, 2021

25,465,236

$
255

$
51,181

$
224,711

$
7

$
276,154


								Accumulated
	Common Stock			Additional				Other
	Number of			Paid-in		Retained		Comprehensive
	Shares	Amount		Capital		Earnings		Income (Loss)		Total
Three Months Ended:
Balance, April 1, 2023	25,143,675	$	251	$	45,044	$	293,139	$	14,527	$	352,961
Net income	—		—		—		13,108		—		13,108
Stock based compensation expense	—		—		474		—		—		474
Vesting of restricted stock	136,171		2		(2)		—		—		—
Other comprehensive income	—		—		—		—		11,115		11,115
Dividends declared on common stock ($0.18 per share)	—		—		—		(4,495)		—		(4,495)
Balance, June 30, 2023	25,279,846	$	253	$	45,516	$	301,752	$	25,642	$	373,163

Balance, April 1, 2022	25,465,236	$	255	$	51,753	$	254,165	$	4,237	$	310,410
Net income	—		—		—		16,100		—		16,100
Stock based compensation expense	—		—		359		—		—		359
Vesting of restricted stock	101,097		1		(1)		—		—		—
Repurchase of common stock	(115,208)		(1)		(2,280)		—		—		(2,281)
Other comprehensive income	—		—		—		—		2,320		2,320
Dividends declared on common stock ($0.15 per share)	—		—		—		(3,839)		—		(3,839)
Balance, June 30, 2022	25,451,125	$	255	$	49,831	$	266,426	$	6,557	$	323,069

Six Months Ended:
Balance, January 1, 2023	25,169,709	$	252	$	45,298	$	285,832	$	18,039	$	349,421
Net income	—		—		—		28,838		—		28,838
Stock based compensation expense	—		—		772		—		—		772
Vesting of restricted stock	136,171		2		(2)		—		—		—
Repurchase of common stock	(26,034)		(1)		(552)		—		—		(553)
Impact of adoption of new accounting standard, net of tax⁽¹⁾	—		—		—		(3,801)		—		(3,801)
Other comprehensive income	—		—		—		—		7,603		7,603
Dividends declared on common stock ($0.36 per share)	—		—		—		(9,117)		—		(9,117)
Balance, June 30, 2023	25,279,846	$	253	$	45,516	$	301,752	$	25,642	$	373,163

Balance, January 1, 2022	25,465,236	$	255	$	51,559	$	238,577	$	(168)	$	290,223
Net income	—		—		—		35,529		—		35,529
Stock based compensation expense	—		—		553		—		—		553
Vesting of restricted stock	101,097		1		(1)		—		—		—
Repurchase of common stock	(115,208)		(1)		(2,280)		—		—		(2,281)
Other comprehensive income	—		—		—		—		6,725		6,725
Dividends declared on common stock ($0.30 per share)	—		—		—		(7,680)		—		(7,680)
Balance, June 30, 2022	25,451,125	$	255	$	49,831	$	266,426	$	6,557	$	323,069

(1)	Represents the impact of the adoption of Accounting Standards Update ("ASU") No. 2016-13: CECL.

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,				Six Months Ended June 30,
	2022		2021		2023		2022
Cash flow from operating activities:
Net income	$	52,422	$	44,256	$	28,838	$	35,529
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		2,665		2,173		1,249		1,416
Provision for loan losses		(1,599)		6,383
Provision for credit losses						(416)		104
Stock based compensation expense		1,242		1,049		772		553
Unrealized losses recognized on equity securities		934		7
Loss on sale of foreclosed real estate		15		93
Unrealized (gains) losses recognized on equity securities						(58)		608
(Gain) loss on sale of foreclosed real estate						(547)		15
Proceeds from sales of residential real estate loans		96,932		—		—		96,932
Gain on sale of residential mortgages		(2,017)		—		—		(2,017)
Origination of SBA loans held for sale		(32,077)		(95,764)		(67,803)		(23,391)
Proceeds from sales of SBA loans held for sale		34,145		103,821		70,826		24,959
Gain on sale of SBA loans		(2,068)		(8,057)		(3,023)		(1,568)
Increase in cash value of bank owned life insurance		(1,260)		(755)		(880)		(830)
Increase in accrued interest receivable		(680)		(66)
Decrease (increase) in SBA servicing rights		1,910		(1,273)
(Increase) decrease in accrued interest receivable						(706)		62
(Increase) decrease in SBA servicing rights						(933)		2,018
Decrease in mortgage servicing rights		2,772		4,398		1,459		1,657
Increase in other assets		(9,175)		(87)
Increase (decrease) in accrued interest payable		1,285		(14)
Decrease in other liabilities		(1,839)		(1,271)
Decrease (increase) in other assets						951		(10,101)
Increase in accrued interest payable						1,120		499
Increase in other liabilities						41,884		19,273
Net cash flow provided by operating activities		143,607		54,893		72,733		145,718

Cash flow from investing activities:
Purchases of securities available for sale		—		(1,034)
Purchases of equity securities		—		(1,000)
Proceeds from maturities, calls or paydowns of securities available for sale		1,992		2,539		731		1,489
Redemption (purchase) of Federal Home Loan Bank stock		4,082		(6,054)
Increase in loans, net		(569,300)		(732,246)
Redemption of Federal Home Loan Bank stock						1,959		4,082
Decrease (increase) in loans, net						34,306		(360,243)
Purchases of premises and equipment		(1,429)		(333)		(2,629)		(339)
Proceeds from sales of foreclosed real estate owned		41		189		4,109		41
Purchase of bank owned life insurance		(8,000)		(22,500)		—		(8,000)
Net cash flow used by investing activities		(572,614)		(760,439)
Net cash flow provided (used) by investing activities						38,476		(362,970)

Cash flow from financing activities:
Dividends paid on common stock		(11,493)		(8,232)		(9,053)		(7,640)
Repurchases of common stock		(3,888)		(5,544)		(553)		(2,281)
Increase in deposits, net		307,833		631,938		31,644		133,988
Decrease in other borrowings, net		(63)		(15)		(5)		(60)
Proceeds from Federal Home Loan Bank advances		475,000		270,000		275,000		375,000
Repayments of Federal Home Loan Bank advances		(600,000)		(80,000)		(325,000)		(500,000)
Net cash flow provided by financing activities		167,389		808,147
Net cash flow used by financing activities						(27,967)		(993)

~~See accompanying notes~~Continued to ~~unaudited consolidated financial statements.~~following page.

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METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,				Six Months Ended June 30,
	2022		2021		2023		2022

Net change in cash and cash equivalents		(261,618)		102,601		83,242		(218,245)
Cash and cash equivalents at beginning of period		441,341		150,688		179,485		441,341

Cash and cash equivalents at end of period	$	179,723	$	253,289	$	262,727	$	223,096

Supplemental schedule of noncash investing and financing activities:

Transfer of residential real estate loans to loans held for sale	$	94,915	$	—	$	—	$	94,915

Transfer of loan principal to foreclosed real estate, net of write-downs	$	766	$	812	$	235	$	—

Initial recognition of operating lease right-of-use assets	$	1,273	$	560

Initial recognition of operating lease liabilities	$	1,273	$	560

Supplemental disclosures of cash flow information - Cash paid during the year for:

Interest	$	11,329	$	3,350	$	41,124	$	3,606

Income taxes	$	23,432	$	17,932	$	7,473	$	14,453

See accompanying notes to unaudited consolidated financial statements.

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METROCITY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 30, ~~2022~~2023

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements include the accounts of MetroCity Bankshares, Inc. (“Company”) and its wholly-owned subsidiary, Metro City Bank (the “Bank”). The Company owns 100% of the Bank. The “Company” or “our,” as used herein, includes Metro City Bank unless the context indicates that we refer only to MetroCity Bankshares, Inc.

These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) followed within the financial services industry for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements.

The Company principally operates in one business segment, which is community banking.

In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to current year presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity or cash flows.

Operating results for the three and ~~nine month period~~six months ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2021.~~2022.

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, ~~2021,~~2022, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the “Company’s ~~2021~~2022 Form 10-K”). ~~There~~Aside from the adoption of ASU 2016-13 (which is further discussed below), there were no new accounting policies or changes to existing policies adopted during the first ~~nine~~six months of ~~2022~~2023 which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Contingencies

Due to the nature of their activities, the Company and its subsidiary are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of ~~September~~June 30, ~~2022.~~2023. Although the ultimate outcome of all claims and lawsuits outstanding as of ~~September~~June 30, ~~2022~~2023 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.

~~Recently Issued~~ Accounting ~~Pronouncements Not Yet~~Standards Adopted in 2023

In ~~June 2016,~~January 2023, the ~~Financial Accounting Standards Board (“FASB”) issued~~Company adopted ASU 2016-13, “Financial ~~Instruments -~~ Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ~~to replace~~”. This ASU significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the incurred loss ~~model~~approach with an expected loss model, ~~which is~~ referred to as the current expected credit loss (“CECL”) model.The ~~CECL model is applicable~~new standard will apply to ~~the measurement of~~financial assets subject to credit losses ~~on financial assets~~and measured at amortized cost ~~including loan receivables~~ and ~~held-to-maturity debt securities. It also applies to off-balance sheet~~certain off-balance-sheet credit exposures, which include, but are not ~~accounted~~limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. ASU 2016-13 simplifies the accounting for as insurance (loan commitments, standby letters of credit, financial guarantees, and similar instruments) and net investments in leases recognized by a lessor. For debt securities with other-than-temporary impairment (“OTTI”), the guidance will be applied prospectively. Existing purchased credit impaired (“PCI”) assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The assets will be grossed up for the allowance of expected credit losses for all PCD assets at the date of adoption and willcredit-

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~~continue~~impaired debt securities and loans and expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses. In addition, entities will need to ~~recognize~~disclose the ~~noncredit discount in interest income based on~~amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the ~~yield~~year of ~~such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. Adoption is~~origination. ASU No. 2016-13 was effective for interim and annual reporting periods beginning after December 15, 2022. ~~Early~~Upon adoption, ~~is permitted; however, we plan to adopt~~ ASU 2016-13 onprovides for a modified retrospective transition by means of a cumulative effect adjustment to equity as of the beginning of the period in which the guidance is effective.

The Company adopted ASU 2016-13 and all related subsequent amendments thereto effective January 1, ~~2023.~~2023 using the modified retrospective approach. The ~~Company~~adoption of this standard resulted in an increase to the allowance for credit losses on loans of $5.1 million and the creation of an allowance for unfunded commitments of $239,000. These one-time cumulative adjustments resulted in a $3.8 million decrease to retained earnings, net of a $1.5 million increase to deferred tax assets.

For available for sale (“AFS”) securities, the new CECL methodology replaces the other-than-temporary impairment model and requires the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline is ~~using a software solution supported by a third-party vendor in developing an expected~~determined to be other-than-temporary. There was no financial impact related to this implementation since the credit ~~loss model compliant with ASU 2016-13. The Company contracted with a third-party vendor to assist~~risk associated with our ~~CECL implementation and to help establish the necessary policies and procedures to be fully compliant with ASU 2016-13.~~securities portfolio is minimal. The Company has made ~~all critical~~a policy ~~elections~~election to exclude accrued interest from the amortized cost basis of AFS securities. Accrued interest receivable for AFS securities totaled $115,000 and ~~run parallel calculations~~$114,000 as of June 30, 2023 and December 31, 2022, respectively. This accrued interest receivable is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for ~~the previous two quarters. The Company~~troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is ~~also currently having its CECL model validated by an independent third party. We will continue to evaluate the impact~~experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this ~~new accounting standard through its effective date.~~guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics. See Note 3 below for further details.

The Company has further evaluated other Accounting Standards Updates issued during ~~2022~~2023 to date but does not expect updates other than those summarized above to have a material impact on the consolidated financial statements.

The following new accounting policies were adopted during the first half of 2023:

Allowance for Credit Losses – Available for Sale Securities

The impairment model for available for sale (“AFS”) securities differs from the CECL approach utilized by HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASU 2016-13 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been

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recorded through an allowance for credit losses is recognized in other comprehensive income. As of June 30, 2023, the Company determined that the unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note 2 below for further details.

Allowance for Credit Losses - Loans

Under the CECL model, the allowance for credit losses (“ACL”) on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The Company estimates the ACL on loans based on the underlying loans’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the allowance for credit losses through a charge to provision for credit losses. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. Loans are charged off against the ACL when management believes the collection of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the ACL when received.

The Company measures expected credit losses of loans on a collective (pool) basis, when the loans share similar risk characteristics. Depending on the nature of the pool of loans with similar risk characteristics, the Company uses the discounted cash flow (“DCF”) method and a qualitative approach as discussed further below.

The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for loan-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the loans that are reasonable and supportable, to the identified pools of loans with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to historical loss information on a straight-line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.

The Company has identified the following pools of loans with similar risk characteristics for measuring expected credit losses:

Construction and development – Loans in this segment primarily include real estate development loans for which payment is derived from the sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial real estate – Loans in this segment are primarily income-producing properties. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans. This loan segment includes farmland loans.

Commercial and industrial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased customer spending, will have an effect on the credit quality in this segment.

Single family residential mortgages – Loans in this segment include loans for residential real estate. Loans in this segment are dependent on credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality of this segment.

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Consumer and other – Loans in this segment are made to individuals and are secured by personal assets, as well as loans for personal lines of credit and overdraft protection. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality in this segment.

Discounted Cash Flow Method

The Company uses the discounted cash flow method to estimate expected credit losses for each of its loan segments. The Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on benchmark peer data.

The Company uses regression analysis of peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, the Company uses national data including gross domestic product, unemployment rates and home price indices (residential mortgage loans only) depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

Qualitative Factors

The Company also considers qualitative adjustments to the quantitative baseline discussed above. For example, the Company considers the impact of current environmental factors at the reporting date that did not exist over the period from which historical experience was used. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), local/regional economic trends and conditions, changes in underwriting standards, changes in collateral value, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans.

Individually Analyzed Loans

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the loan exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

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Allowance for Unfunded Commitments

The Company records an allowance for credit losses on unfunded loan commitments, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s Consolidated Statements of Income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur. The allowance for unfunded commitments totaled $241,000 as of June 30, 2023 and is included in Other Liabilities on the Company’s Consolidated Balance Sheets.

NOTE 2 – INVESTMENT SECURITIES

The amortized costs, gross unrealized gains and losses, and estimated fair values of securities available for sale as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized as follows:


	September 30, 2022								June 30, 2023
	Gross		Gross		Gross		Estimated		Gross		Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Obligations of U.S. Government entities and agencies	$	5,685	$	—	$	—	$	5,685	$	4,790	$	—	$	—	$	4,790
States and political subdivisions		8,133		—		(1,842)		6,291		8,097		—		(1,573)		6,524
Mortgage-backed GSE residential		9,814		—		(1,812)		8,002		9,067		—		(1,685)		7,382
Total	$	23,632	$	—	$	(3,654)	$	19,978	$	21,954	$	—	$	(3,258)	$	18,696


	December 31, 2021								December 31, 2022
	Gross		Gross		Gross		Estimated		Gross		Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Obligations of U.S. Government entities and agencies	$	6,949	$	—	$	—	$	6,949	$	5,059	$	—	$	—	$	5,059
States and political subdivisions		8,169		203		(11)		8,361		8,121		—		(1,718)		6,403
Mortgage-backed GSE residential		10,562		11		(150)		10,423		9,540		—		(1,757)		7,783
Total	$	25,680	$	214	$	(161)	$	25,733	$	22,720	$	—	$	(3,475)	$	19,245

The amortized costs and estimated fair values of investment securities available for sale at ~~September~~June 30, ~~2022~~2023 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Securities Available for Sale					Securities Available for Sale
	Amortized			Estimated		Amortized		Estimated
(Dollars in thousands)	Cost			Fair Value		Cost		Fair Value
Due in one year or less	$	—		$	—	$	—	$	—
Due after one year but less than five years		6,547			6,505		5,653		5,620
Due after five years but less than ten years		380			365		378		371
Due in more than ten years		6,891			5,106		6,856		5,323
Mortgage-backed GSE residential		9,814	��		8,002		9,067		7,382
Total	$	23,632		$	19,978	$	21,954	$	18,696

Accrued interest receivable for securities available for sale totaled $115,000 and $114,000 as of June 30, 2023 and December 31, 2022, respectively. This accrued interest receivable is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.

As of June 30, 2023, the Company had securities pledged to the Federal Reserve Bank Discount Window with a carrying amount of $13.9 million. There were no securities pledged as of ~~September 30, 2022 and~~ December 31, ~~2021~~2022 to secure borrowing lines, public deposits ~~and~~or repurchase agreements. There were no securities sold during the three ~~and nine~~or six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

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Information pertaining to securities with gross unrealized losses at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 aggregated by investment category and length of time that individual securities have been in a continuous loss position, are summarized in the table below.

September 30, 2022

Twelve Months or Less

Over Twelve Months


Gross

Estimated

Gross

Estimated

Unrealized

Fair

Unrealized

Fair
(Dollars in thousands)

Losses

Value

Losses

Value
States and political subdivisions

$
1,252

$
4,690

$
590

$
1,601
Mortgage-backed GSE residential

1,811

8,000

1

2
Total

$
3,063

$
12,690

$
591

$
1,603


	December 31, 2021								June 30, 2023
	Twelve Months or Less				Over Twelve Months				Twelve Months or Less				Over Twelve Months
	Gross		Estimated		Gross		Estimated		Gross		Estimated		Gross		Estimated
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(Dollars in thousands)	Losses		Value		Losses		Value		Losses		Value		Losses		Value
States and political subdivisions	$	11	$	2,201	$	—	$	—	$	—	$	—	$	1,573	$	6,524
Mortgage-backed GSE residential		150		9,530		—		—		—		—		1,685		7,382
Total	$	161	$	11,731	$	—	$	—	$	—	$	—	$	3,258	$	13,906

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.


	December 31, 2022
	Twelve Months or Less				Over Twelve Months
	Gross		Estimated		Gross		Estimated
	Unrealized		Fair		Unrealized		Fair
(Dollars in thousands)	Losses		Value		Losses		Value
States and political subdivisions	$	756	$	3,556	$	962	$	2,847
Mortgage-backed GSE residential		48		541		1,709		7,242
Total	$	804	$	4,097	$	2,671	$	10,089

At ~~September~~June 30, ~~2022,~~2023, the twenty securities available for sale (11 municipal securities and 9 mortgage-backed securities) with an unrealized loss have depreciated ~~20.36%~~18.98% from the Company’s amortized cost basis. ~~Three~~ All of these securities have been in a loss position for greater than twelve months.

~~State and political subdivisions.~~The ~~Company’s unrealized loss on eleven investments in state and political subdivision bonds relate to interest rate increases. Management currently~~Company does not believe ~~it is probable~~ that ~~it will be unable to collect all amounts due according to~~ the ~~contractual terms~~securities available for sale that were in an unrealized loss position as of ~~these investments. Because~~June 30, 2023 represent a credit loss impairment. As of June 30, 2023, there have been no payment defaults nor do we currently expect any future payment defaults. Furthermore, the Company does not ~~plan~~intend to sell these ~~investments,~~securities, and because it is not more likely than not that the Company will be required to sell these investments before the recovery of the par value, which may be at maturity, management does not consider these investments to be other-than-temporarily impaired at September 30, 2022.

~~Mortgage-backed GSE residential.~~ The Company’s unrealized loss on nine investments in residential GSE mortgage-backed securities was caused by interest rate increases. The contractual cash flows of the investment are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the security would not be settled at a price less than the amortized cost base of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has no immediate plans to sell the investment, and because it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost ~~base,~~basis, which may be ~~maturity, management does not consider this investment to be other-than-temporarily impaired~~ at ~~September 30, 2022.~~maturity.

Equity Securities

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had equity securities with carrying values totaling ~~$10.5~~$10.4 million and ~~$11.4~~$10.3 million, respectively. The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States. The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts.

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During the three ~~and nine~~ months ended ~~September~~June 30, 2023 and 2022, we recognized an unrealized ~~loss~~losses of ~~$327,000~~$70,000 and ~~$934,000,~~$245,000, respectively, in net income on our equity securities. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2021,~~2023 and 2022, we recognized an unrealized gain of $58,000 and an unrealized loss of ~~$7,000~~$608,000, respectively, in net income on our equity securities. ~~The~~These unrealized ~~loss is~~gains and losses are recorded in Other Expenses on the Consolidated Statements of Income.

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NOTE 3 – LOANS AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

Major classifications of loans at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized as follows:


	September 30,		December 31,		June 30,		December 31,
(Dollars in thousands)	2022		2021		2023		2022
Construction and development	$	51,300	$	38,857	$	51,759	$	47,779
Commercial real estate		608,700		520,488		625,111		657,246
Commercial and industrial		52,693		73,072		63,502		53,173
Residential real estate		2,274,679		1,879,012		2,289,050		2,306,915
Consumer and other		198		79		102		216
Total loans receivable		2,987,570		2,511,508		3,029,524		3,065,329
Unearned income		(9,252)		(6,438)		(8,810)		(9,640)
Allowance for loan losses		(14,982)		(16,952)
Allowance for credit losses						(18,091)		(13,888)
Loans, net	$	2,963,336	$	2,488,118	$	3,002,623	$	3,041,801

~~Included in the commercial and industrial loans are Paycheck Protection Program (“PPP”) loans totaling $1.6 million and $31.0 million as of September 30, 2022 and December 31 2021, respectively.~~

The Company is not committed to lend additional funds to borrowers with ~~non-accrual~~nonaccrual or restructured loans.

In the normal course of business, the Company may sell and purchase loan participations to and from other financial institutions and related parties. Loan participations are typically sold to comply with the legal lending limits per borrower as imposed by regulatory authorities. The participations are sold without recourse and the Company imposes no transfer or ownership restrictions on the purchaser.

The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this note. As of June 30, 2023, and December 31, 2022, accrued interest receivable for loans totaled $13.8 million and $13.1 million, respectively, and is included in the “accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.

Allowance for Credit Losses

As previously mentioned in Note 1, the Company’s January 1, 2023 adoption of ASU 2016-13 resulted in a significant change to our methodology for estimating the allowance for credit losses since December 31, 2022. As a result of this adoption, the Company recorded a $5.1 million increase to the allowance for credit losses as a cumulative-effect adjustment on January 1, 2023.

A summary of changes in the allowance for ~~loan~~credit losses by portfolio segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 is as follows:


	Three Months Ended September 30, 2022														Three Months Ended June 30, 2023
	Construction														Construction
	and		Commercial		Commercial		Residential		Consumer						and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total		Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Allowance for credit losses:
Beginning balance	$	140	$	3,539	$	4,219	$	8,678	$	6	$	96	$	16,678	$	45	$	6,088	$	1,021	$	11,792	$	1	$	—	$	18,947
Charge-offs		—		—		—		—		—		—		—		—		(231)		(221)		—		—		—		(452)
Recoveries		—		1		6		—		—		—		7		—		1		13		—		—		—		14
Provision		24		(510)		(1,970)		845		4		(96)		(1,703)
Provision expense																(15)		350		(160)		(593)		—		—		(418)
Ending balance	$	164	$	3,030	$	2,255	$	9,523	$	10	$	—	$	14,982	$	30	$	6,208	$	653	$	11,199	$	1	$	—	$	18,091

1215

Table of Contents


	Three Months Ended September 30, 2021														Three Months Ended June 30, 2022
	Construction														Construction
	and		Commercial		Commercial		Residential		Consumer						and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total		Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Allowance for credit losses:
Beginning balance	$	211	$	7,162	$	599	$	5,888	$	—	$	—	$	13,860	$	93	$	4,294	$	4,441	$	7,624	$	5	$	217	$	16,674
Charge-offs		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Recoveries		—		4		—		—		2		—		6		—		2		2		—		—		—		4
Provision		19		(3,246)		4,601		1,207		(2)		—		2,579
Provision expense																47		(757)		(224)		1,054		1		(121)		—
Ending balance	$	230	$	3,920	$	5,200	$	7,095	$	—	$	—	$	16,445	$	140	$	3,539	$	4,219	$	8,678	$	6	$	96	$	16,678


	Nine Months Ended September 30, 2022														Six Months Ended June 30, 2023
	Construction														Construction
	and		Commercial		Commercial		Residential		Consumer						and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total		Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Allowance for credit losses:
Beginning balance	$	100	$	4,146	$	4,989	$	7,717	$	—	$	—	$	16,952	$	124	$	2,811	$	1,326	$	9,626	$	1	$	—	$	13,888
Impact of adopting ASU 2016-13																(79)		3,275		(307)		2,166		—		—		5,055
Charge-offs		—		—		(390)		—		—		—		(390)		—		(231)		(221)		—		—		—		(452)
Recoveries		—		5		9		—		5		—		19		—		3		15		—		—		—		18
Provision		64		(1,121)		(2,353)		1,806		5		—		(1,599)
Provision expense																(15)		350		(160)		(593)		—		—		(418)
Ending balance	$	164	$	3,030	$	2,255	$	9,523	$	10	$	—	$	14,982	$	30	$	6,208	$	653	$	11,199	$	1	$	—	$	18,091


	Nine Months Ended September 30, 2021														Six Months Ended June 30, 2022
	Construction														Construction
	and		Commercial		Commercial		Residential		Consumer						and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total		Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for loan losses:
Allowance for credit losses:
Beginning balance	$	178	$	5,161	$	438	$	4,350	$	8	$	—	$	10,135	$	100	$	4,146	$	4,989	$	7,717	$	—	$	—	$	16,952
Charge-offs		—		(26)		(64)		—		—		—		(90)		—		—		(390)		—		—		—		(390)
Recoveries		—		10		—		—		7		—		17		—		4		3		—		5		—		12
Provision		52		(1,225)		4,826		2,745		(15)		—		6,383		40		(611)		(383)		961		1		96		104
Ending balance	$	230	$	3,920	$	5,200	$	7,095	$	—	$	—	$	16,445	$	140	$	3,539	$	4,219	$	8,678	$	6	$	96	$	16,678

1316

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Prior to the adoption of ASU 2016-13 on January 1, 2023, the Company calculated the allowance for credit losses under the incurred loss methodology. The following table presents, by portfolio segment, the balance in the allowance for credit losses disaggregated on the basis of the Company’s impairment measurement method and the related unpaid principal balance in loans under the incurred loss methodology as of December 31, 2022.


	December 31, 2022
	Construction
	and		Commercial		Commercial		Residential		Consumer
(Dollars in thousands)	Development		Real Estate		and Industrial		Real Estate		and Other		Unallocated		Total
Allowance for credit losses:
Individually evaluated for impairment	$	—	$	249	$	465	$	—	$	—	$	—	$	714
Collectively evaluated for impairment		124		2,562		861		9,626		1		—		13,174
Acquired with deteriorated credit quality		—		—		—		—		—		—		—
Total ending allowance balance	$	124	$	2,811	$	1,326	$	9,626	$	1	$	—	$	13,888
Loans:
Individually evaluated for impairment	$	—	$	23,767	$	1,122	$	5,037	$	—	$	—	$	29,926
Collectively evaluated for impairment		47,567		631,031		51,989		2,294,960		216		—		3,025,763
Acquired with deteriorated credit quality		—		—		—		—		—		—		—
Total ending loans balance	$	47,567	$	654,798	$	53,111	$	2,299,997	$	216	$	—	$	3,055,689

Impaired Loans

Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impaired loans were measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the estimated fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes were included in the allowance for credit losses.

Table of Contents

~~The following tables present,~~Impaired loans as of December 31, 2022, by portfolio segment, are as follows. The recorded investment consists of the unpaid total principal balance inplus accrued interest receivable.


	Unpaid		Recorded		Recorded
	Total		Investment		Investment		Total
(Dollars in thousands)	Principal		With No		With		Recorded		Related
December 31, 2022	Balance		Allowance		Allowance		Investment		Allowance
Construction and development	$	—	$	—	$	—	$	—	$	—
Commercial real estate		23,767		23,121		1,415		24,536		249
Commercial and industrial		1,122		155		997		1,152		465
Residential real estate		5,037		5,037		—		5,037		—
Total	$	29,926	$	28,313	$	2,412	$	30,725	$	714

Collateral-Dependent Loans

Collateral-dependent loans are loans for which foreclosure is probable or loans for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure. As of June 30, 2023, there were $10.3 million and $3.5 million of collateral-dependent loans which which were secured by residential and commercial real estate, respectively. The allowance for ~~loan~~credit losses ~~disaggregated on the basis of the Company’s impairment measurement method and the related unpaid principal balance in~~allocated to these loans as of ~~September~~June 30, ~~2022~~2023 was $460,000.

Past Due and Nonaccrual Loans

A primary credit quality indicator for financial institutions is delinquent balances. Delinquencies are updated on a daily basis and are continuously monitored. Loans are placed on nonaccrual status as needed based on repayment status and consideration of accounting and regulatory guidelines. Nonaccrual balances are updated and reported on a daily basis.

The following summarizes the Company’s past due and nonaccrual loans, by portfolio segment, as of June 30, 2023 and December 31, ~~2021.~~2022:

September 30, 2022

Construction

and

Commercial

Commercial

Residential

Consumer

(Dollars in thousands)

Development

Real Estate

and Industrial

Real Estate

and Other

Unallocated

Total
Allowance for loan losses:

Individually evaluated for impairment

$
—

$
113

$
459

$
—

$
—

$
—

$
572
Collectively evaluated for impairment

164

2,917

1,796

9,523

10

—

14,410
Total ending allowance balance

$
164

$
3,030

$
2,255

$
9,523

$
10

$
—

$
14,982
Loans:

��

Individually evaluated for impairment

$
—

$
22,532

$
1,141

$
4,464

$
—

$
—

$
28,137
Collectively evaluated for impairment

51,205

584,021

51,502

2,263,255

198

—

2,950,181
Total ending loans balance

$
51,205

$
606,553

$
52,643

$
2,267,719

$
198

$
—

$
2,978,318


							Accruing		Total				Total
(Dollars in thousands)							Greater than		Accruing				Financing
June 30, 2023	Current		30-59 Days		60-89 Days		90 Days		Past Due		Nonaccrual		Receivables
Construction and development	$	51,638	$	—	$	—	$	—	$	—	$	—	$	51,638
Commercial real estate		621,266		—		349		—		349		1,079		622,694
Commercial and industrial		61,624		—		101		—		101		1,615		63,340
Residential real estate		2,267,079		—		5,518		—		5,518		10,343		2,282,940
Consumer and other		102		—		—		—		—		—		102
Total	$	3,001,709	$	—	$	5,968	$	—	$	5,968	$	13,037	$	3,020,714

December 31, 2021

Construction

and

Commercial

Commercial

Residential

Consumer

(Dollars in thousands)

Development

Real Estate

and Industrial

Real Estate

and Other

Unallocated

Total
Allowance for loan losses:














Individually evaluated for impairment

$
—

$
242

$
434

$
—

$
—

$
—

$
676
Collectively evaluated for impairment

100

3,904

4,555

7,717

—

—

16,276
Acquired with deteriorated credit quality

—

—

—

—

—

—

—
Total ending allowance balance

$
100

$
4,146

$
4,989

$
7,717

$
—

$
—

$
16,952
Loans:














Individually evaluated for impairment

$
—

$
6,395

$
565

$
4,889

$
—

$
—

$
11,849
Collectively evaluated for impairment

38,567

512,253

71,419

1,870,903

—

79

2,493,221
Acquired with deteriorated credit quality

—

—

—

—

—

—

—
Total ending loans balance

$
38,567

$
518,648

$
71,984

$
1,875,792

$
—

$
79

$
2,505,070


							Accruing		Total				Total
(Dollars in thousands)							Greater than		Accruing				Financing
December 31, 2022	Current		30-59 Days		60-89 Days		90 Days		Past Due		Nonaccrual		Receivables
Construction and development	$	47,567	$	—	$	—	$	—	$	—	$	—	$	47,567
Commercial real estate		649,552		354		—		—		354		4,892		654,798
Commercial and industrial		52,485		—		310		180		490		136		53,111
Residential real estate		2,282,089		8,882		3,989		—		12,871		5,037		2,299,997
Consumer and other		216		—		—		—		—		—		216
Total	$	3,031,909	$	9,236	$	4,299	$	180	$	13,715	$	10,065	$	3,055,689

1418

Table of Contents

The following table presents an analysis of nonaccrual loans with and without a related allowance for credit losses as of June 30, 2023:


	Nonaccrual		Nonaccrual
(Dollars in thousands)	Loans With a		Loans Without a		Total
June 30, 2023	Related ACL		Related ACL		Nonaccrual Loans
Commercial real estate	$	233	$	846	$	1,079
Commercial and industrial		93		1,522		1,615
Residential real estate		—		10,343		10,343
Total	$	326	$	12,711	$	13,037

All payments received while a loan is on nonaccrual status are applied against the principal balance of the loan. The Company does not recognize interest income while loans are on nonaccrual status.

Credit Quality Indicators

The Company utilizes a ten grade loan risk rating system for its loan portfolio as follows:

●

Loans rated Pass – Loans in this category have low to average risk. There are six loan risk ratings (grades 1-6) included in loans rated Pass.

●

Loans rated Special Mention (grade 7) – Loans do not presently expose the Company to a sufficient degree of risk to warrant adverse classification, but do possess deficiencies deserving close attention.

●

Loans rated Substandard (grade 8) – Loans are inadequately protected by the current credit-worthiness and paying capability of the obligor or of the collateral pledged, if any.

●

Loans rated Doubtful (grade 9) – Loans which have all the weaknesses inherent in loans classified Substandard, with the added characteristic that the weaknesses make collections or liquidation in full, or on the basis of currently known facts, conditions and values, highly questionable or improbable.

●

Loans rated Loss (grade 10) – Loans classified Loss are considered uncollectible and such little value that their continuance as bankable assets is not warranted.

Loan grades are monitored regularly and updated as necessary based upon review of repayment status and consideration of periodic updates regarding the borrower’s financial condition and capacity to meet contractual requirements.

Table of Contents

Impaired loans as of September 30, 2022 and December 31, 2021, by portfolio segment, are as follows. The recorded investment consists of the unpaid total principal balance plus accrued interest receivable.

Unpaid

Recorded

Recorded

Total

Investment

Investment

Total

(Dollars in thousands)

Principal

With No

With

Recorded

Related
September 30, 2022

Balance

Allowance

Allowance

Investment

Allowance
Construction and development

$
—

$
—

$
—

$
—

$
—
Commercial real estate

22,532

22,520

741

23,261

113
Commercial and industrial

1,141

180

1,015

1,195

459
Residential real estate

4,464

4,464

—

4,464

—
Total

$
28,137

$
27,164

$
1,756

$
28,920

$
572

Unpaid

Recorded

Recorded

Total

Investment

Investment

Total

(Dollars in thousands)

Principal

With No

With

Recorded

Related
December 31, 2021

Balance

Allowance

Allowance

Investment

Allowance
Construction and development

$
—

$
—

$
—

$
—

$
—
Commercial real estate

6,395

5,451

957

6,408

242
Commercial and industrial

565

25

585

610

434
Residential real estate

4,889

4,889

—

4,889

—
Total

$
11,849

$
10,365

$
1,542

$
11,907

$
676

The average recorded investment in impaired loans and interest income recognized on the cash and accrual basis for the three and nine months ended September 30, 2022 and 2021, by portfolio segment, are summarized in the tables below.

Three Months Ended September 30,

2022

2021

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income
(Dollars in thousands)

Investment

Recognized

Investment

Recognized
Construction and development

$
—

$
—

$
—

$
—
Commercial real estate

22,978

184

4,457

45
Commercial and industrial

1,147

44

234

3
Residential real estate

5,350

20

4,963

13
Total

$
29,475

$
248

$
9,654

$
61

Nine Months Ended September 30,

2022

2021

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income
(Dollars in thousands)

Investment

Recognized

Investment

Recognized
Construction and development

$
—

$
—

$
—

$
—
Commercial real estate

13,153

346

5,303

202
Commercial and industrial

679

50

268

9
Residential real estate

5,340

51

6,147

30
Total

$
19,172

$
447

$
11,718

$
241

~~Table of Contents~~

Accruing

Total

Total
(Dollars in thousands)

Greater than

Accruing

Financing
September 30, 2022

Current

30-89 Days

90 Days

Past Due

Nonaccrual

Receivables
Construction and development

$
51,205

$
—

$
—

$
—

$
—

$
51,205
Commercial real estate

592,912

538

—

538

13,103

606,553
Commercial and industrial

52,126

384

—

384

133

52,643
Residential real estate

2,259,963

3,292

—

3,292

4,464

2,267,719
Consumer and other

198

—

—

—

—

198
Total

$
2,956,404

$
4,214

$
—

$
4,214

$
17,700

$
2,978,318

Accruing

Total

Total
(Dollars in thousands)

Greater than

Accruing

Financing
December 31, 2021

Current

30-89 Days

90 Days

Past Due

Nonaccrual

Receivables
Construction and development

$
38,567

$
—

$
—

$
—

$
—

$
38,567
Commercial real estate

514,179

752

—

752

3,717

518,648
Commercial and industrial

70,702

788

342

1,130

152

71,984
Residential real estate

1,859,615

11,287

—

11,287

4,890

1,875,792
Consumer and other

79

—

—

—

—

79
Total

$
2,483,142

$
12,827

$
342

$
13,169

$
8,759

$
2,505,070

~~The Company utilizes a ten grade loan rating system for its loan portfolio as follows:~~

●

~~Loans rated Pass – Loans in this category have low to average risk. There are six loan risk ratings (grades 1-6) included in loans rated Pass.~~

●

~~Loans rated Special Mention – Loans do not presently expose the Company to a sufficient degree of risk to warrant adverse classification, but do possess deficiencies deserving close attention.~~

●

~~Loans rated Substandard – Loans are inadequately protected by the current credit-worthiness and paying capability of the obligor or of the collateral pledged, if any.~~

●

Loans rated Doubtful – Loans which have all the weaknesses inherent in loans classified Substandard, with the added characteristic that the weaknesses make collections or liquidation in full, or on the basis of currently known facts, conditions and values, highly questionable or improbable.

●

~~Loans rated Loss – Loans classified Loss are considered uncollectible and such little value that their continuance as bankable assets is not warranted.~~

~~Table of Contents~~

The following table presents the loan portfolio's amortized cost by loan type, risk rating and year of origination as of June 30, 2023. There were no loans with a risk rating of Doubtful or Loss at June 30, 2023.


(Dollars in thousands)	Term Loan by Origination Year												Revolving
June 30, 2023	2023		2022		2021		2020		2019		Prior		Loans		Total Loans
Construction and development
Pass	$	404	$	10,727	$	21,380	$	1,202	$	17,684	$	241	$	—	$	51,638
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total construction and development	$	404	$	10,727	$	21,380	$	1,202	$	17,684	$	241	$	—	$	51,638
Commercial real estate
Pass	$	37,369	$	204,009	$	108,453	$	85,529	$	55,193	$	112,852	$	3,030	$	606,435
Special Mention		—		—		—		1,948		—		—		—		1,948
Substandard		—		600		—		1,163		10,808		1,740		—		14,311
Total commercial real estate	$	37,369	$	204,609	$	108,453	$	88,640	$	66,001	$	114,592	$	3,030	$	622,694

Commercial real estate:
Current period gross write offs	$	—	$	—	$	—	$	—	$	—	$	231	$	—	$	231

Commercial and industrial
Pass	$	7,715	$	15,451	$	5,221	$	3,464	$	2,984	$	3,753	$	21,002	$	59,590
Special Mention		—		—		—		369		231		1,297		—		1,897
Substandard		—		—		1,281		—		551		21		—		1,853
Total commercial and industrial	$	7,715	$	15,451	$	6,502	$	3,833	$	3,766	$	5,071	$	21,002	$	63,340

Commercial and industrial:
Current period gross write offs	$	—	$	—	$	142	$	—	$	79	$	—	$	—	$	221

Residential real estate
Pass	$	106,981	$	758,556	$	877,670	$	303,911	$	65,583	$	156,802	$	—	$	2,269,503
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		1,957		2,110		1,656		7,714		—		13,437
Total residential real estate	$	106,981	$	758,556	$	879,627	$	306,021	$	67,239	$	164,516	$	—	$	2,282,940
Consumer and other
Pass	$	102	$	—	$	—	$	—	$	—	$	—	$	��	$	102
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total consumer and other	$	102	$	—	$	—	$	—	$	—	$	—	$	—	$	102

Total loans	$	152,571	$	989,343	$	1,015,962	$	399,696	$	154,690	$	284,420	$	24,032	$	3,020,714

No revolving loans were converted to term loans during the six months ended June 30, 2023.

The following table presents the Company’s ~~loans, included purchased loans,~~loan portfolio by risk rating ~~based on the most recent information available:~~as of December 31, 2022:

Construction

(Dollars in thousands)

and

Commercial

Commercial

Residential

Consumer

September 30, 2022

Development

Real Estate

and Industrial

Real Estate

and Other

Total
Rating:












Pass

$
51,205

$
578,918

$
46,757

$
2,260,638

$
198

$
2,937,716
Special Mention

—

5,386

5,611

—

—

10,997
Substandard

—

22,249

275

7,081

—

29,605
Doubtful

—

—

—

—

—

—
Loss

—

—

—

—

—

—
Total

$
51,205

$
606,553

$
52,643

$
2,267,719

$
198

$
2,978,318


	Construction												Construction
(Dollars in thousands)	and		Commercial		Commercial		Residential		Consumer				and		Commercial		Commercial		Residential		Consumer
December 31, 2021	Development		Real Estate		and Industrial		Real Estate		and Other		Total
December 31, 2022													Development		Real Estate		and Industrial		Real Estate		and Other		Total
Rating:
Pass	$	38,567	$	499,135	$	64,226	$	1,870,902	$	79	$	2,472,909	$	47,567	$	628,165	$	48,848	$	2,292,568	$	216	$	3,017,364
Special Mention		—		13,884		7,053		—		—		20,937		—		3,677		3,897		—		—		7,574
Substandard		—		5,629		705		4,890		—		11,224		—		22,956		366		7,429		—		30,751
Doubtful		—		—		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	38,567	$	518,648	$	71,984	$	1,875,792	$	79	$	2,505,070	$	47,567	$	654,798	$	53,111	$	2,299,997	$	216	$	3,055,689

Loan Modifications to Borrowers Experiencing Financial Difficulty.

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt ~~Restructures:~~

~~The restructuring of a loan is considered a “troubled~~Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructuring” or “TDR” if both (i) the borrower is experiencing financial difficulties and (ii) the Company has granted a concession. Under certain circumstances, it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. When we have modified the terms of a loan, we usually either reduce or defer payments for a period of time. We have not forgiven any material principal amounts on any loan modifications to date. Nonperforming TDRs are generally placed on non-accrual under the same criteria as all other loans.

~~TDRs as of September 30, 2022 and December 31, 2021 quantified by loan type classified separately as accrual and nonaccrual are presented in the table below.~~

(Dollars in thousands)

September 30, 2022

Accruing

Nonaccrual

Total
Commercial real estate

$
9,429

$
233

$
9,662
Commercial and industrial

1,008

—

1,008
Total

$
10,437

$
233

$
10,670

(Dollars in thousands)

December 31, 2021

Accruing

Nonaccrual

Total
Commercial real estate

$
2,678

$
479

$
3,157
Commercial and industrial

20

—

20
Total

$
2,698

$
479

$
3,177

Our policy is to return nonaccrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers payment history of the borrower, but is not dependent upon a specific number of payments. The Company allocated a specific reserve of $572,000 and $242,000 as of September 30, 2022 and December 31, 2021, respectively, andrestructurings

1720

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(“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, payment deferrals, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

No loan modifications were made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023. No charge-offs of previously modified loans were recorded during the three and six months ended June 30, 2023.

recognized no partial charge offs on the TDR loans described above during the three and nine months ended September 30, 2022 and 2021. No TDRs defaulted during the three and nine months ended September 30, 2022 and 2021.

During the nine months ended September 30, 2022, we modified two commercial real estate loans and three commercial and industrial loans as trouble debt restructurings. The total recorded investment in these modified loans were $7.6 million as of September 30, 2022. We did not modify any loans as a troubled debt restructuring during the three months ended September 30, 2022 or the year ended December 31, 2021. At September 30, 2022, the Company did not have any commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either defer or decrease monthly payments for a temporary period of time. A summary of the types of concessions for loans classified as troubled debt restructurings are presented in the table below:

(Dollars in thousands)

September 30,

December 31,
Type of Concession

2022

2021
Deferral of payments

$
10,652

$
488
Extension of maturity date

18

2,689
Total TDR loans

$
10,670

$
3,177

The following table presents loans by portfolio segment modified as TDRs and the corresponding recorded investment, which includes accrued interest and fees, as of September 30, 2022 and December 31, 2021:

September 30, 2022

December 31, 2021
(Dollars in thousands)

Number of

Recorded

Number of

Recorded
Type

Loans

Investment

Loans

Investment
Commercial real estate

7

$
10,391

4

$
3,170
Commercial and industrial

4

1,061

1

20
Total

11

$
11,452

5

$
3,190

~~Modifications in Response to COVID-19~~

To help mitigate the adverse effects of COVID-19, loan customers were able to apply for a deferral of payments, or portions thereof, for up to three months. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral).

As of September 30, 2022, no loans were under approved payment deferrals. As of December 31, 2021, non-Small Business Administration (“SBA”) commercial loans and SBA loans with outstanding balances $8.1 million and $6.5 million ($1.6 million unguaranteed book balance), respectively, were under approved payment deferrals. No residential mortgages were under approved payment deferrals as of December 31, 2021.

~~Table of Contents~~

NOTE 4 – SBA AND USDA LOAN SERVICING

The Company sells the guaranteed portion of certain SBA and USDA loans it originates and continues to service the sold portion of the loan. The portion of the loans sold are not included in the financial statements of the Company. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the unpaid principal balances of serviced loans totaled ~~$489.1~~$493.6 million and ~~$543.0~~$465.1 million, respectively.

Activity for SBA loan servicing rights are as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2022		2021		2023		2022		2023		2022
Beginning of period	$	8,062	$	10,983	$	10,091	$	9,488	$	7,736	$	10,395	$	7,038	$	10,091
Change in fair value		73		(228)		(1,956)		1,267		282		(2,333)		980		(2,029)
End of period, fair value	$	8,135	$	10,755	$	8,135	$	10,755	$	8,018	$	8,062	$	8,018	$	8,062

Fair value at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 was determined using discount rates ranging from ~~6.32%~~5.96% to ~~14.23%~~14.74% and ~~7.57%~~8.21% to ~~12.25%~~19.30%, respectively, and prepayment speeds ranging from ~~13.39%~~12.74% to ~~17.40%~~18.08% and ~~14.43%~~13.12% to ~~17.12%~~17.60%, respectively, depending on the stratification of the specific right. Average default rates are based on the industry average for the applicable NAICS/SIC code.

The aggregate fair market value of the interest only strips included in SBA servicing assets was ~~$189,000~~$0 and ~~$143,000~~$47,000 at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of fair value measurement, risk characteristics including product type and interest rate, were used to stratify the originated loan servicing rights.

NOTE 5 – RESIDENTIAL MORTGAGE LOAN SERVICING

Residential mortgage loans serviced for others are not reported as assets. The outstanding principal of these loans at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$550.6~~$487.8 million and ~~$608.2~~$526.7 million, respectively.

~~Activity for mortgage loan servicing rights and the related valuation allowance are as follows:~~

(Dollars in thousands)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,
Mortgage loan servicing rights:

2022

2021

2022

2021
Beginning of period

$
6,090

$
9,529

$
7,747

$
12,991
Additions

—

—

760

—
Amortization expense

(1,115)

(1,356)

(3,695)

(4,415)
Valuation allowance

—

420

163

17
End of period, carrying value

$
4,975

$
8,593

$
4,975

$
8,593

(Dollars in thousands)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,
Valuation allowance:

2022

2021

2022

2021
Beginning balance

$
—

$
1,044

$
163

$
641
Additions expensed

—

—

—

603
Reductions credited to operations

—

(420)

(163)

(620)
Direct write-downs

—

—

—

—
Ending balance

$
—

$
624

$
—

$
624

The fair value of servicing rights was $7.6 million and $7.9 million at September 30, 2022 and December 31, 2021, respectively. Fair value at September 30, 2022 was determined by using a discount rate of 12.56%, prepayment speeds of 18.43%, and a weighted average default rate of 1.30%. Fair value at December 31, 2021 was determined using a discount rate of 13.50%, prepayment speeds of 21.79%, and a weighted average default rate of 1.22%.

1921

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Activity for mortgage loan servicing rights and the related valuation allowance are as follows:


(Dollars in thousands)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Mortgage loan servicing rights:	2023		2022		2023		2022
Beginning of period	$	3,205	$	6,925	$	3,973	$	7,747
Additions		—		347		—		760
Amortization expense		(691)		(1,270)		(1,459)		(2,580)
Valuation allowance		—		88		—		163
End of period, carrying value	$	2,514	$	6,090	$	2,514	$	6,090


(Dollars in thousands)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Valuation allowance:	2023		2022		2023		2022
Beginning balance	$	—	$	88	$	—	$	163
Additions expensed		—		—		—		—
Reductions credited to operations		—		(88)		—		(163)
Direct write-downs		—		—		—		—
Ending balance	$	—	$	—	$	—	$	—

The fair value of servicing rights was $7.1 million and $7.2 million at June 30, 2023 and December 31, 2022, respectively. Fair value at June 30, 2023 was determined by using a discount rate of 12.55%, prepayment speeds of 16.99%, and a weighted average default rate of 1.31%. Fair value at December 31, 2022 was determined by using a discount rate of 12.56%, prepayment speeds of 18.63%, and a weighted average default rate of 1.29%.

NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES & OTHER BORROWINGS

Advances from the Federal Home Loan Bank (“FHLB”) at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized as follows:

(Dollars in thousands)

September 30, 2022

December 31, 2021
Convertible advance maturing August 6, 2029; fixed rate of 0.85%

$
—

$
20,000
Convertible advance maturing November 7, 2029; fixed rate of 0.68%

—

30,000
Convertible advance maturing December 5, 2029; fixed rate of 0.75%

—

10,000
Convertible advance maturing February 1, 2030; fixed rate of 0.59%

—

20,000
Convertible advance maturing August 18, 2031; fixed rate of 0.025%

—

50,000
Convertible advance maturing October 7, 2031; fixed rate of 0.01%

—

50,000
Convertible advance maturing October 8, 2031; fixed rate of 0.01%

—

50,000
Convertible advance maturing October 20, 2031; fixed rate of 0.01%

—

150,000
Convertible advance maturing December 17, 2031; fixed rate of 0.01%

—

50,000
Convertible advance maturing December 23, 2031; fixed rate of 0.01%

—

50,000
Convertible advance maturing December 30, 2031; fixed rate of 0.01%

—

20,000
Convertible advance maturing June 16, 2032; fixed rate of 1.675%

50,000

—
Convertible advance maturing June 16, 2032; fixed rate of 1.905%

50,000

—
Convertible advance maturing June 23, 2032; fixed rate of 1.950%

100,000

—
Convertible advance maturing August 6, 2032; fixed rate of 1.892%

100,000

—
Convertible advance maturing May 12, 2037; fixed rate of 1.135%

75,000

—
Total FHLB advances

$
375,000

$
500,000


(Dollars in thousands)	June 30, 2023		December 31, 2022
Convertible advance maturing February 13, 2026; fixed rate of 4.184%	$	50,000	$	—
Convertible advance maturing May 7, 2027; fixed rate of 3.025%		50,000		—
Convertible advance maturing October 26, 2027; fixed rate of 3.530%		25,000		25,000
Convertible advance maturing January 25, 2028; fixed rate of 3.243%		50,000		—
Convertible advance maturing February 14, 2028; fixed rate of 3.625%		25,000		—
Convertible advance maturing May 8, 2028; fixed rate of 2.860%		50,000		—
Convertible advance maturing June 23, 2028; fixed rate of 3.655%		50,000		—
Convertible advance maturing June 16, 2032; fixed rate of 1.905%		—		50,000
Convertible advance maturing June 23, 2032; fixed rate of 1.950%		—		100,000
Convertible advance maturing August 6, 2032; fixed rate of 1.892%		—		100,000
Convertible advance maturing October 26, 2032; fixed rate of 3.025%		25,000		25,000
Convertible advance maturing May 12, 2037; fixed rate of 1.135%		—		75,000
Total FHLB advances	$	325,000	$	375,000

The FHLB advances outstanding at ~~September~~June 30, ~~2022~~2023 all have a conversion feature that allows the FHLB to call the advances ~~every~~after six months ($~~50.0 million), nine months ($225.0~~100.0 million) or one year ($~~100.0~~225.0 million). At ~~September~~June 30, 2023 and December 31, 2022, the Company had a line of credit with the FHLB, set as a percentage of total assets, with maximum borrowing capacity ~~from~~of $1.03 billion and $1.01 billion, respectively. The available borrowing amounts are collateralized by the Company’s FHLB ~~of $949.0 million based on the value of~~stock and pledged residential real estate loans, ~~pledged as collateral.~~which totaled $2.27 billion and $2.29 billion at June 30, 2023 and December 31, 2022, respectively.

At ~~September~~June 30, ~~2022,~~2023, the Company had unsecured federal funds lines available with correspondent banks of approximately $47.5 million. There were no advances outstanding on these lines at ~~September~~June 30, ~~2022.~~2023.

Table of Contents

At ~~September~~June 30, ~~2022,~~2023, the Company had Federal Reserve Discount Window funds available of approximately ~~$10.0~~$444.6 million. The funds are collateralized by a pool of construction and development, commercial real estate and commercial and industrial loans with carrying balances totaling ~~$32.7~~$523.7 million as of ~~September~~June 30, ~~2022.~~2023, as well as all of the Company’s municipal and mortgage backed securities. There were no outstanding borrowings on this line as of ~~September~~June 30, ~~2022.~~2023.

The Company sells the guaranteed portion of certain SBA loans it originates and continues to service the sold portion of the loan. The Company sometimes retains an interest only strip or servicing fee that is considered to be more than customary market rates. An interest rate strip can result from a transaction when the market rate of the transaction differs from the stated rate on the portion of the loan sold.

The sold portion of SBA loans that have an interest only strip are considered secured borrowings and are included in other borrowings. Secured borrowings at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 were ~~$396,000~~$387,000 and ~~$459,000,~~$392,000, respectively.

NOTE 7 – OPERATING LEASES

The Company has entered into various operating leases for certain branch locations with terms extending through ~~August 2032.~~April 2033. Generally, these leases have initial lease terms of ten years or less. Many of the leases have one or more renewal options which typically are for five years at the then fair market rental rates. We assessed these renewal options using a threshold of reasonably certain. For leases where we were reasonably certain to renew, those option periods were included within the lease term, and therefore, the measurement of the right-of-use (“ROU”) asset and lease liability. None of our leases included options to terminate the lease and none had initial terms of 12 months or less (i.e. short-term leases).

~~Table of Contents~~

Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets. The Company currently does not have any finance leases.

Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental collateralized borrowing rate provided by the FHLB at the lease commencement date. ROU assets are further adjusted for lease incentives, if any. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the Consolidated Statements of Income.

The components of lease cost for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2022		2021		2023		2022		2023		2022
Operating lease cost	$	480	$	561	$	1,496	$	1,669	$	368	$	511	$	909	$	1,016
Variable lease cost		43		40		130		125		44		43		88		87
Short-term lease cost		—		—		—		—		—		—		—		—
Sublease income		—		—		—		—		—		—		—		—
Total net lease cost	$	523	$	601	$	1,626	$	1,794	$	412	$	554	$	997	$	1,103

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Future maturities of the Company’s operating lease liabilities are summarized as follows:


(Dollars in thousands)
Twelve Months Ended:	Lease Liability		Lease Liability
September 30, 2023	$	2,028
September 30, 2024		1,902
September 30, 2025		1,736
September 30, 2026		1,479
September 30, 2027		1,230
After September 30, 2027		1,811
June 30, 2024			$	1,957
June 30, 2025				1,799
June 30, 2026				1,550
June 30, 2027				1,277
June 30, 2028				1,007
After June 30, 2028				1,091
Total lease payments		10,186		8,681
Less: interest discount		(883)		(696)
Present value of lease liabilities	$	9,303	$	7,985



Supplemental Lease Information	~~September~~June 30, ~~2022~~2023
Weighted-average remaining lease term (years)	~~5.8~~5.6
Weighted-average discount rate	~~3.11~~3.19	%


	Nine Months Ended September 30,				Six Months Ended June 30,
(Dollars in thousands)	2022		2021		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (cash payments)	$	1,420	$	1,474	$	1,029	$	920
Operating cash flows from operating leases (lease liability reduction)	$	1,219	$	1,229	$	898	$	790
Operating lease right-of-use assets obtained in exchange for leases entered into during the period	$	1,273	$	560	$	—	$	—

NOTE 8 – INTEREST RATE DERIVATIVES

During ~~the third and fourth quarters of~~ 2021 and ~~the first and second quarters of~~ 2022, the Company entered into ~~thirteen~~fourteen separate interest rate swap agreements with notional amounts totaling ~~$725.0~~$800.0 million. Six of the interest rate swaps are two-year forward three-year term swaps (five-year total term) where cash settlements begin in October 2023, January 2024 or April 2024. Four of the interest rate swaps are two-year forward two-year term swaps (four-year total term) where

~~Table of Contents~~

cash settlements begin in November 2023 or April 2024. Two of the interest rate swaps are a one-year forward two-year term swap (three-year total term) and a one-year forward three-year term swap (four-year term total) where cash settlements begin in May 2023 or July 2023. The two remaining interest rate ~~swap is a~~swaps are 3-year spot ~~swap~~swaps where cash settlements began in June 2022 and December 2022. The swap agreements were designated as cash flow hedges of our deposit accounts that are indexed to the Federal Funds Effective rate. The swaps are determined to be highly effective since inception and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps amounted to an unrealized gain of ~~$29.0~~$36.6 million and ~~$46,000~~$26.7 million and an unrealized loss of $0 and ~~$46,000~~$779,000 at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. These unrealized gains and losses are recorded in ~~Other Assets~~Interest Rate Derivatives and Other Liabilities on the Consolidated Balance Sheets. The Company expects the hedges to remain highly effective during the remaining terms of the swaps.

During October 2021, the Company entered into an interest rate cap agreement with a notional amount of $50.0 million and a cap rate of 2.50%. This interest rate cap is a two-year forward three-year term (five-year total term) where cash settlements begin on November 2023. The interest rate cap was designated as a cash flow hedge of our deposit accounts that are indexed to the Federal Funds Effective rate. The rate cap premium paid by the Company at inception will be amortized on a straight line basis to deposit interest expense over the total term of the interest rate cap agreement. The fair value of the interest rate cap amounted to an unrealized gain of ~~$2.3~~$2.7 million and ~~$321,000~~$2.1 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, and are recorded in ~~Other Assets~~Interest Rate Derivatives on the Consolidated Balance Sheets.

The Company is exposed to credit related losses in the event of the nonperformance by the counterparties to the interest rate swaps. The Company performs an initial credit evaluation and ongoing monitoring procedures for all counterparties and currently anticipates that all counterparties will be able to fully satisfy their obligation under the

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contracts. In addition, the Company may require collateral from counterparties in the form of cash deposits in the event that the fair value of the contracts are positive and such fair value for all positions with the counterparty exceeds the credit support thresholds specified by the underlying agreement. Conversely, the Company is required to post cash deposits as collateral in the event the fair value of the contracts are negative and are below the credit support thresholds. At ~~September~~June 30, ~~2022,~~2023, there were no cash deposits pledged as collateral by the Company. At June 30, 2023, the Company had $29.1 million of restricted cash obtained from the counterparties as collateral for the significant unrealized gains on our interest rate derivatives.

Summary information for the interest rate swaps designated as cash flow hedges is as follows:


	As of or for the		As of or for the		As of or for the
	Nine Months Ended		Six Months Ended		Year Ended
(Dollars in thousands)	September 30, 2022		June 30, 2023		December 31, 2022
Notional Amounts	$	725,000	$	800,000	$	800,000
Weighted-average pay rate		2.06%		2.28%		2.28%
Weighted-average receive rate		1.04%		4.76%		1.68%
Weighted-average maturity		4.3 years		4.2 years		4.2 years
Weighted-average remaining maturity		3.7 years		2.9 years		3.4 years
Net interest (expense) income	$	(194)
Net interest income (expense)			$	1,084	$	(163)

Summary information for the interest rate caps designated as cash flow hedges is as follows:


	As of or for the		As of or for the		As of or for the
	Nine Months Ended		Six Months Ended		Year Ended
(Dollars in thousands)	September 30, 2022		June 30, 2023		December 31, 2022
Notional Amounts	$	50,000	$	50,000	$	50,000
Rate Cap Premiums		619		413		474
Cap Rate		2.50%		2.50%		2.50%
Weighted-average maturity		5.0 years		5.0 years		5.0 years
Weighted-average remaining maturity		4.1 years		3.3 years		3.8 years
Net interest (expense) income	$	(93)
Net interest expense			$	(62)	$	(124)

~~Table of Contents~~

NOTE 9 – LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments where contract amounts represent credit risk as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 include:


	September 30,		December 31,		June 30,		December 31,
(Dollars in thousands)	2022		2021		2023		2022
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	40,325	$	61,345	$	64,849	$	62,334
Standby letters of credit	$	3,894	$	4,674	$	6,228	$	6,303

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit includes ~~$40.3~~$64.8 million of unused lines of credit and ~~$3.9~~$6.2 million for standby letters of credit as of ~~September~~June 30, ~~2022.~~2023. Commitments generally have fixed expiration dates or other termination

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clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty.

Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

The Company maintains cash deposits with a financial institution that during the year are in excess of the insured limitation of the Federal Deposit Insurance Corporation. If the financial institution were not to honor its contractual liability, the Company could incur losses. Management is of the opinion that there is not material risk because of the financial strength of the institution.

NOTE 10 – FAIR VALUE

Financial Instruments Measured at Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value

~~Table of Contents~~

measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following presents the assets and liabilities as of September 30, 2022 and December 31, 2021 which are measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, and the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded:

September 30, 2022

Total Gains
(Dollars in thousands)

Total

Level 1

Level 2

Level 3

(Losses)
Assets










Recurring fair value measurements:










Securities available for sale:










Obligations of U.S. Government entities and agencies

$
5,685

$
—

$
—

$
5,685


States and political subdivisions

6,291

—

6,291

—


Mortgage-backed GSE residential

8,002

—

8,002

—


Total securities available for sale

19,978

—

14,293

5,685



Equity securities

10,452

10,452

—

—

SBA servicing asset

8,135

—

—

8,135


Interest only strip

189

—

—

189


Interest rate derivatives

31,341

—

31,341

—

$
70,095

$
10,452

$
45,634

$
14,009

Nonrecurring fair value measurements:








Impaired loans

$
1,054

$
—

$
—

$
1,054

$
176

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December 31, 2021

Total Gains
(Dollars in thousands)

Total

Level 1

Level 2

Level 3

(Losses)
Assets










Recurring fair value measurements:










Securities available for sale:










Obligations of U.S. Government entities and agencies

$
6,949

$
—

$
—

$
6,949


States and political subdivisions

8,361

—

8,361

—


Mortgage-backed GSE residential

10,423

—

10,423

—


Total securities available for sale

25,733

—

18,784

6,949



Equity securities

11,386

11,386

—

—

SBA servicing asset

10,091

—

—

10,091


Interest only strip

143

—

—

143


Interest rate derivatives

367

—

367

—

$
47,720

$
11,386

$
19,151

$
17,183

Nonrecurring fair value measurements:








Impaired loans

$
947

$
—

$
—

$
947

$
(7)

Liabilities

Recurring fair value measurements:

Interest rate swaps

$
46

$
—

$
46

$
—

The following presents the assets and liabilities as of June 30, 2023 and December 31, 2022 which are measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, and the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded:


	June 30, 2023
									Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)
Assets
Recurring fair value measurements:
Securities available for sale:
Obligations of U.S. Government entities and agencies	$	4,790	$	—	$	—	$	4,790
States and political subdivisions		6,524		—		6,524		—
Mortgage-backed GSE residential		7,382		—		7,382		—
Total securities available for sale		18,696		—		13,906		4,790

Equity securities		10,358		10,358		—		—
SBA servicing asset		8,018		—		—		8,018
Interest rate derivatives		39,284		—		39,284		—
	$	76,356	$	10,358	$	53,190	$	12,808
Nonrecurring fair value measurements:
Collateral-dependent loans	$	2,629	$	—	$	—	$	2,629	$	(137)


	December 31, 2022
									Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)
Assets
Recurring fair value measurements:
Securities available for sale:
Obligations of U.S. Government entities and agencies	$	5,059	$	—	$	—	$	5,059
States and political subdivisions		6,403		—		6,403		—
Mortgage-backed GSE residential		7,783		—		7,783		—
Total securities available for sale		19,245		—		14,186		5,059

Equity securities		10,300		10,300		—		—
SBA servicing asset		7,038		—		—		7,038
Interest only strip		47		—		—		47
Interest rate derivatives		28,781		—		28,781		—
	$	65,411	$	10,300	$	42,967	$	12,144
Nonrecurring fair value measurements:
Impaired loans	$	1,045	$	—	$	—	$	1,045	$	229

Liabilities
Recurring fair value measurements:
Interest rate swaps	$	779	$	—	$	779	$	—

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The Company used the following methods and significant assumptions to estimate fair value:

Securities, Available for Sale: The Company carries securities available for sale at fair value. For securities where quoted prices are not available (Level 2), the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

The Company owns certain SBA investments for which the fair value is determined using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active.” This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades. Discounted cash flows are calculated by a third party using interest rate curves that are updated to incorporate current market conditions, including prepayment vectors and credit risk. During time when trading is more liquid, broker quotes are used to validate the model.

Equity Securities: The Company carries equity securities at fair value. Equity securities are measured at fair value using quoted market prices on nationally recognized and foreign securities exchanges (Level 1).

SBA Servicing Assets and Interest Only Strip: The fair values of the Company’s servicing assets are determined using Level 3 inputs. All separately recognized servicing assets and servicing liabilities are initially measured at fair value ~~initially~~ and at each reporting date and changes in fair value are reported in earnings in the period in which they occur.

The fair values of the Company’s interest-only strips are determined using Level 3 inputs. When the Company sells loans to others, it may hold interest-only strips, which is an interest that continues to be held by the transferor in the securitized receivable. It may also obtain servicing assets or assume servicing liabilities that are initially measured at fair value. Gain or loss on sale of the receivables depends in part on both (a) the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the interests that continue to be held by the transferor based on their relative fair value at the date of transfer, and (b) the proceeds received. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for interests that continue to be held by the transferor, so the Company generally estimates fair value based on the future expected cash flows estimated using

~~Table of Contents~~

management’s best estimates of the key assumptions — credit losses and discount rates commensurate with the risks involved.

Interest Rate Derivatives: Exchange-traded derivatives are valued using quoted prices and are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the Company’s derivative positions are valued by third parties using their valuation models and confirmed by the Company. Since the model inputs can be observed in a liquid market and the models do not require significant judgement, such derivative contracts are classified within Level 2 of the fair value hierarchy. The Company’s interest rate derivatives contracts (designated as cash flow hedges) are classified within Level 2.

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis.

~~Impaired~~Collateral-dependent and impaired loans:~~Impaired~~ Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. Prior to the adoption of ASU 2016-13, impaired loans were evaluated and valued at the time the loan iswas identified as impaired, at the lower of cost or fair value. Fair value isfor both collateral-dependent and impaired loans are measured based on the value of the collateral securing these loans and isare classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraisals may utilize a single valuation approach or a combination or approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Appraised values are reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.

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process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Appraised values are reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.

Changes in level 3 fair value measurements

The table below presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


	Obligations of		SBA						Obligations of		SBA
(Dollars in thousands)	U.S. Government		Servicing		Interest Only				U.S. Government		Servicing		Interest Only
Three Months Ended:	Entities and Agencies		Asset		Strip		Liabilities		Entities and Agencies		Asset		Strip		Liabilities
Fair value, July 1, 2022	$	5,900	$	8,062	$	154	$	—
Total gains included in income		—		73		35		—
Fair value, April 1, 2023									$	4,834	$	7,736	$	55	$	—
Total gains/(losses) included in income										—		282		(55)		—
Settlements		—		—		—		—		—		—		—		—
Prepayments/paydowns		(215)		—		—		—		(44)		—		—		—
Transfers in and/or out of level 3		—		—		—		—		—		—		—		—
Fair value, September 30, 2022	$	5,685	$	8,135	$	189	$	—
Fair value, June 30, 2023									$	4,790	$	8,018	$	—	$	—

Fair value, July 1, 2021	$	7,209	$	10,983	$	172	$	—
Fair value, April 1, 2022									$	6,729	$	10,395	$	159	$	—
Total losses included in income		—		(228)		(11)		—		—		(2,333)		(5)		—
Settlements		—		—		—		—		—		—		—		—
Prepayments/paydowns		(63)		—		—		—		(829)		—		—		—
Transfers in and/or out of level 3		—		—		—		—		—		—		—		—
Fair value, September 30, 2021	$	7,146	$	10,755	$	161	$	—
Fair value, June 30, 2022									$	5,900	$	8,062	$	154	$	—

Nine Months Ended:
Six Months Ended:
Fair value, January 1, 2023									$	5,059	$	7,038	$	47	$	—
Total gains/(losses) included in income										—		980		(47)		—
Settlements										—		—		—		—
Prepayments/paydowns										(269)		—		—		—
Transfers in and/or out of level 3										—		—		—		—
Fair value, June 30, 2023									$	4,790	$	8,018	$	—	$	—

Fair value, January 1, 2022	$	6,949	$	10,091	$	143	$	—	$	6,949	$	10,091	$	143	$	—
Total (losses)/gains included in income		—		(1,956)		46		—		—		(2,029)		11		—
Settlements		—		—		—		—		—		—		—		—
Prepayments/paydowns		(1,264)		—		—		—		(1,049)		—		—		—
Transfers in and/or out of level 3		—		—		—		—		—		—		—		—
Fair value, September 30, 2022	$	5,685	$	8,135	$	189	$	—

Fair value, January 1, 2021	$	9,306	$	9,488	$	155	$	—
Total gains included in income		—		1,267		6		—
Settlements		—		—		—		—
Prepayments/paydowns		(2,160)		—		—		—
Transfers in and/or out of level 3		—		—		—		—
Fair value, September 30, 2021	$	7,146	$	10,755	$	161	$	—
Fair value, June 30, 2022									$	5,900	$	8,062	$	154	$	—

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There were no gains or losses included in earnings for securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods presented above. The only activity for these securities were prepayments. There were no purchases, sales, or transfers into and out of Level 3. The following table presents quantitative information about recurring Level 3 fair value measures at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:


	Valuation	Unobservable	General
	Technique	Input	Range
~~September~~June 30, ~~2022:~~2023:
Recurring:
Obligations of U.S. Government entities and agencies	Discounted cash flows	Discount rate	~~0%-3%~~3%-5%
SBA servicing asset and interest only strip	Discounted cash flows	Prepayment speed	~~13.39%-17.40%~~12.74%-18.08%
		Discount rate	~~6.32%-14.23%~~5.96%-14.74%
Nonrecurring:
~~Impaired~~Collateral-dependent loans	Appraised value less estimated selling costs	Estimated selling costs	6%

December 31, ~~2021:~~2022:
Recurring:
Obligations of U.S. Government entities and agencies	Discounted cash flows	Discount rate	~~0%-3%~~3%-5%
SBA servicing asset and interest only strip	Discounted cash flows	Prepayment speed	~~14.43%-17.12%~~13.12%-17.60%
		Discount rate	~~7.57%-12.25%~~8.21%-19.30%
Nonrecurring:
Impaired Loans	Appraised value less estimated selling costs	Estimated selling costs	6%

The carrying amounts and estimated fair values of the Company’s financial instruments at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:


	Carrying			Estimated Fair Value at September 30, 2022							Carrying			Estimated Fair Value at June 30, 2023
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total		Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash, due from banks, and federal funds sold	$	179,723	$	—	$	179,723	$	—	$	179,723	$	262,727	$	—	$	262,727	$	—	$	262,727
Investment securities		30,430		10,452		14,293		5,685		30,430		29,054		10,358		13,906		4,790		29,054
FHLB stock		15,619		—		—		—		N/A		15,534		—		—		—		N/A
Loans, net		2,963,336		—		—		2,941,704		2,941,704		3,002,623		—		—		2,903,536		2,903,536
Accrued interest receivable		11,732		—		62		11,670		11,732		13,877		—				13,877		13,877
SBA servicing assets		8,135		—		—		8,135		8,135		8,018		—		—		8,018		8,018
Interest only strips		189		—		—		189		189
Mortgage servicing assets		4,975		—		—		7,608		7,608		2,514		—		—		7,104		7,104
Interest rate derivatives		31,341		—		31,341		—		31,341		39,284		—		39,284		—		39,284
Financial Liabilities:
Deposits		2,570,853		—		2,561,855		—		2,561,855		2,698,482		—		2,691,466		—		2,691,466
Federal Home Loan Bank advances		375,000		—		377,063		—		377,063		325,000		—		325,943		—		325,943
Other borrowings		396		—		396		—		396		387		—		387		—		387
Accrued interest payable		1,489		—		1,489		—		1,489		3,859		—		3,859		—		3,859

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	Carrying		Estimated Fair Value at December 31, 2021								Carrying		Estimated Fair Value at December 31, 2022
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total		Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash, due from banks, and federal funds sold	$	441,341	$	—	$	441,341	$	—	$	441,341	$	179,485	$	—	$	179,485	$	—	$	179,485
Investment securities		37,119		11,386		18,784		6,949		37,119		29,545		10,300		14,186		5,059		29,545
FHLB stock		19,701		—		—		—		N/A		17,493		—		—		—		N/A
Loans, net		2,488,118		—		—		2,561,269		2,561,269		3,041,801		—		—		2,999,520		2,999,520
Accrued interest receivable		11,052		—		100		10,952		11,052		13,171		—		98		13,073		13,171
SBA servicing asset		10,091		—		—		10,091		10,091		7,038		—		—		7,038		7,038
Interest only strips		143		—		—		143		143		47		—		—		47		47
Mortgage servicing assets		7,747		—		—		7,937		7,937		3,973		—		—		7,209		7,209
Interest rate derivatives		367		—		367		—		367		28,781		—		28,781		—		28,781
Financial Liabilities:
Deposits		2,263,020		—		2,263,246		—		2,263,246		2,666,838		—		2,658,837		—		2,658,837
Federal Home Loan Bank advances		500,000		—		501,450		—		501,450		375,000		—		376,575		—		376,575
Other borrowings		459		—		459		—		459		392		—		392		—		392
Accrued interest payable		204		—		204		—		204		2,739		—		2,739		—		2,739
Interest rate derivatives		46		—		46		—		46		779		—		779		—		779

NOTE 11 – REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. ~~The final rules implementing~~Under the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules,, the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on available for sale securities, if any, is not included in computing regulatory capital. Management believes as of ~~September~~June 30, ~~2022,~~2023 the Company and Bank meets all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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The Company’s actual capital amounts (in thousands) and ratios are also presented in the following table:


								To Be Well Capitalized										To Be Well Capitalized
					Minimum Capital Required -			Under Prompt Corrective							Minimum Capital Required -			Under Prompt Corrective
	Actual				Basel III			Action Provisions:			Actual				Basel III			Action Provisions:
(Dollars in thousands)	Amount		Ratio		Amount ≥	Ratio ≥		Amount ≥	Ratio ≥		Amount		Ratio		Amount ≥	Ratio ≥		Amount ≥	Ratio ≥
As of September 30, 2022:
As of June 30, 2023:
Total Capital (to Risk Weighted Assets)
Consolidated	$	335,300	16.94	%	207,839	10.5	%	N/A	N/A		$	357,834	17.59	%	213,589	10.5	%	N/A	N/A
Bank		329,625	16.65	%	207,821	10.5		197,924	10.0	%		357,220	17.56	%	213,585	10.5		203,414	10.0	%
Tier I Capital (to Risk Weighted Assets)
Consolidated		320,318	16.18	%	168,251	8.5	%	N/A	N/A			339,503	16.69	%	172,905	8.5	%	N/A	N/A
Bank		314,643	15.90	%	168,236	8.5		158,339	8.0	%		338,889	16.66	%	172,902	8.5		162,731	8.0	%
Common Tier 1 (CET1)
Consolidated		320,318	16.18	%	138,560	7.0	%	N/A	N/A			339,503	16.69	%	142,393	7.0	%	N/A	N/A
Bank		314,643	15.90	%	138,547	7.0		128,651	6.5	%		338,889	16.66	%	142,390	7.0		132,219	6.5	%
Tier 1 Capital (to Average Assets)
Consolidated		320,318	9.90	%	129,443	4.0	%	N/A	N/A			339,503	10.03	%	135,359	4.0	%	N/A	N/A
Bank		314,643	9.73	%	129,414	4.0		161,768	5.0	%		338,889	10.01	%	135,357	4.0		169,196	5.0	%
As of December 31, 2021:
As of December 31, 2022:
Total Capital (to Risk Weighted Assets)
Consolidated	$	297,108	17.77	%	175,564	10.5	%	N/A	N/A		$	338,185	16.68	%	212,932	10.5	%	N/A	N/A
Bank		287,258	17.18	%	175,525	10.5		167,166	10.0	%		336,866	16.61	%	212,915	10.5		202,777	10.0	%
Tier I Capital (to Risk Weighted Assets)
Consolidated		280,156	16.76	%	142,123	8.5	%	N/A	N/A			324,297	15.99	%	172,374	8.5	%	N/A	N/A
Bank		270,306	16.17	%	142,091	8.5		133,733	8.0	%		322,978	15.93	%	172,360	8.5		162,221	8.0	%
Common Tier 1 (CET1)
Consolidated		280,156	16.76	%	117,043	7.0	%	N/A	N/A			324,297	15.99	%	141,955	7.0	%	N/A	N/A
Bank		270,306	16.17	%	117,016	7.0		108,658	6.5	%		322,978	15.93	%	141,944	7.0		131,805	6.5	%
Tier 1 Capital (to Average Assets)
Consolidated		280,156	9.44	%	118,682	4.0	%	N/A	N/A			324,297	9.57	%	135,485	4.0	%	N/A	N/A
Bank		270,306	9.11	%	118,667	4.0		148,333	5.0	%		322,978	9.54	%	135,446	4.0		169,307	5.0	%

NOTE 12 – STOCK BASED COMPENSATION

The Company adopted the MetroCity Bankshares, Inc. 2018 Stock Option Plan (the “Prior Option Plan”) effective as of April 18, 2018, and the Prior Option Plan was approved by the Company’s shareholders on May 30, 2018. The Prior Option Plan provided for awards of stock options to officers, employees and directors of the Company. The Board of Directors of the Company determined that it was in the best interests of the Company and its shareholders to amend and restate the Prior Option Plan to provide for the grant of additional types of awards. Acting pursuant to its authority under the Prior Option Plan, the Board of Directors approved and adopted the MetroCity Bankshares, Inc. 2018 Omnibus Incentive Plan (the “2018 Incentive Plan”), which constitutes the amended and restated version of the Prior Option Plan. The Board of Directors has reserved 2,400,000 shares of Company common stock for issuance pursuant to awards granted under the 2018 Incentive Plan, any or all of which may be granted as nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance awards and other stock-based awards. In the event all or a portion of a stock award is forfeited, cancelled, expires, or is terminated before becoming vested, paid, exercised, converted, or otherwise settled in full, any unissued or forfeited shares again become available for issuance pursuant to awards granted under the 2018 Incentive Plan and do not count against the maximum number of reserved shares. In addition, shares of common stock deducted or withheld to satisfy tax withholding obligations will be added back to the share reserve and will again be available for issuance pursuant to awards granted under the plan. The 2018 Incentive Plan is administered by the Compensation Committee of our Board of Directors (the “Committee”). The determination of award recipients under the 2018 Incentive Plan, and the terms of those awards, will be made by the Committee. At ~~September~~June 30, ~~2022,~~2023, 240,000 stock options had been granted and ~~585,444~~774,437 shares of restricted stock had been issued under the 2018 Incentive Plan.

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Stock Options

A summary of stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 is presented below:


		Weighted			Weighted
		Average			Average
	Shares	Exercise Price		Shares	Exercise Price
Outstanding at January 1, 2022	240,000	$	12.70
Outstanding at January 1, 2023				240,000	$	12.70
Granted	—		—	—		—
Exercised	—		—	—		—
Forfeited	—		—	—		—
Outstanding at September 30, 2022	240,000	$	12.70
Outstanding at June 30, 2023				240,000	$	12.70

The Company recognized no compensation expense for stock options during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022 or the three months ended September 30, 2021. During the nine months ended September 30, 2021, the Company recognized compensation expense for stock options of $238,000.~~2023 and 2022. As of both ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, there was $0 of total unrecognized compensation cost related to options granted under the 2018 Incentive Plan. As of ~~September~~June 30, ~~2022,~~2023, all of the cost related to the outstanding stock options had been recognized.

Restricted Stock Units

The Company has periodically issued restricted stock units to its directors, executive officers and certain employees under the 2018 Incentive Plan. Compensation expense for restricted stock is based upon the grant date fair value of the shares and is recognized over the vesting period of the units. Shares of restricted stock units issued to officers and employees vest in equal annual installments on the first three anniversaries of the grant date. Shares of restricted stock units issued to directors vest 25% on the grant date and 25% on each of the first three anniversaries of the grant date.

A summary of restricted stock activity for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 is presented below:


		Weighted-			Weighted-
		Average Grant-			Average Grant-
Nonvested Shares	Shares	Date Fair Value		Shares	Date Fair Value
Nonvested at January 1, 2022	134,703	$	13.86
Nonvested at January 1, 2023				177,399	$	17.95
Granted	143,793		20.31	188,993		16.43
Vested	(101,097)		15.86	(136,171)		16.25
Forfeited	—		—	—		—
Nonvested at September 30, 2022	177,399	$	17.95
Nonvested at June 30, 2023				230,221	$	17.71

During the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized compensation expense for restricted stock of ~~$689,000~~$473,000 and ~~$378,000,~~$359,000, respectively. During the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized compensation expense for restricted stock of ~~$1.2 million~~$772,000 and ~~$811,000,~~$553,000, respectively. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, there was ~~$3.0~~$4.6 million and ~~$1.4~~$2.3 million, respectively, of total unrecognized compensation cost related to nonvested shares granted under the 2018 Incentive Plan. As of ~~September~~June 30, ~~2022,~~2023, the cost is expected to be recognized over a weighted-average period of ~~2.4~~2.6 years.

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NOTE 13 – EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
(Dollars in thousands, except per share data)	2022		2021		2022		2021		2023		2022		2023		2022
Basic earnings per share
Net Income	$	16,893	$	16,882	$	52,422	$	44,256	$	13,108	$	16,100	$	28,838	$	35,529

Weighted average common shares outstanding		25,433,307		25,507,814		25,452,398		25,607,986		25,188,567		25,459,003		25,166,746		25,462,102

Basic earnings per common share	$	0.66	$	0.66	$	2.06	$	1.73	$	0.52	$	0.63	$	1.15	$	1.40

Diluted earnings per share
Net Income	$	16,893	$	16,882	$	52,422	$	44,256	$	13,108	$	16,100	$	28,838	$	35,529

Weighted average common shares outstanding for basic earnings per common share		25,433,307		25,507,814		25,452,398		25,607,986		25,188,567		25,459,003		25,166,746		25,462,102
Add: Dilutive effects of restricted stock and options		268,716		221,229		279,606		197,494		288,576		270,153		302,195		284,589

Average shares and dilutive potential common shares		25,702,023		25,729,043		25,732,004		25,805,480		25,477,143		25,729,156		25,468,941		25,746,691

Diluted earnings per common share	$	0.66	$	0.66	$	2.04	$	1.71	$	0.51	$	0.63	$	1.13	$	1.38

There were no stock options or restricted stock excluded from the computation of diluted earnings per common share since they were antidilutive for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis is to focus on significant changes in the financial condition of MetroCity Bancshares, Inc. and our wholly owned subsidiary, Metro City Bank, from December 31, ~~2021~~2022 through ~~September~~June 30, ~~2022~~2023 and on our results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, ~~2021~~2022 included in our Annual Report on Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10-Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors discussed elsewhere in this quarterly report and the following:

●

~~business~~The impact of current and future economic and market conditions ~~particularly those affecting~~generally (including seasonality) and in the financial services industry, nationally and within our primary market ~~areas;~~areas, including the effects of inflationary pressures, changes in interest rates, slowdowns in economic growth, and the potential for high unemployment rates, as well as the financial stress on borrowers and changes to customer and client behavior (including the velocity of loan repayment) and credit risk as a result of the foregoing;

●

changes in interest rate environment (including changes to the ~~risk~~federal funds rate, the level and composition of ~~inflation~~deposits (as well as the cost of, and competition for, deposits), loan demand, liquidity and the values of loan collateral, securities and market fluctuations, and interest rate ~~increases resulting from monetary~~sensitive assets and ~~fiscal stimulus responses,~~liabilities), and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income;

●

recent adverse developments in the banking industry highlighted by high-profile bank failures and the ~~resulting effect of all~~potential impact of such ~~items~~developments on ~~our operations,~~customer confidence, liquidity and ~~capital position, and on~~regulatory responses to these developments (including increases in the ~~financial condition~~cost of our ~~borrowers~~deposit insurance assessments), our ability to effectively manage our liquidity risk and ~~other customers;~~any growth plans and the availability of capital and funding;

●

our ability to comply with applicable capital and liquidity requirements, including our ability to generate liquidity internally or raise capital on favorable terms, including continued access to the debt and equity capital markets;

●

the risk that a future economic downturn and contraction, including a recession, could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of rising interest rates, supply chain challenges and inflation;

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●

factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of various projects that we finance;

●

concentration of our loan portfolio in real estate loans;

●

changes in the prices, values and sales volumes of commercial and residential real estate;

●

weakness in the real estate market, including the secondary residential mortgage market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, profits on sales of mortgage loans, and the value of mortgage servicing rights;

●

credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial, residential real estate and SBA loan portfolios;

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●

negative impact in our mortgage banking services, including declines in our mortgage originations or profitability due to rising interest rates and increased competition and regulation, the Bank’s ~~or third party’s~~ failure to satisfy mortgage servicing obligations, loan ~~modificaitons,~~modifications, the effects of judicial or regulatory requirements or guidance, and the possibility of the Bank being required to repurchase mortgage loans or indemnify buyers;

●

our ability to attract sufficient loans that meet prudent credit standards, including in our construction and development, commercial and industrial and owner-occupied commercial real estate loan categories;

●

our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;

●

changes in interest rate environment, including changes to the federal funds rate, and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income;

●

our ability to successfully manage our credit risk and the sufficiency of our allowance for ~~loan~~credit losses (“~~ALL”~~ACL”);, including the implementation of the Current Expected Credit Losses (“CECL”) model;

●

the adequacy of our reserves (including ~~ALL)~~ACL) and the appropriateness of our methodology for calculating such reserves;

●

our ability to successfully execute our business strategy to achieve profitable growth;

●

the concentration of our business within our geographic areas of operation and to the general Asian-American population within our primary market areas;

●

our focus on small and mid-sized businesses;

●

our ability to manage our growth;

●

our ability to increase our operating efficiency;

●

significant turbulence or a disruption in the capital or financial markets and the effect of a fall in stock market prices on our investment securities;

●

~~liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;~~

●

~~failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;~~

●

risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;

●

~~a large percentage of our deposits are attributable to a relatively small number of customers;~~

●

inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk;

●

our ability to maintain expenses in line with current projections;

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●

the makeup of our asset mix and investments;

●

external economic, political and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, ~~System (“FRB”),~~ inflation or deflation, changes in the

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demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;

●

uncertainty related to the transition away from the London Inter-bank Offered Rate (“LIBOR”);

●

the ~~continued impact~~institution and outcome of ~~the COVID-19 pandemic on our business, including the impact of the actions taken by governmental authorities~~litigation and other legal proceeding against us or to try and contain the virus or address the impact of the virus on the United States economy (including, without limitations, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act), including the risk of inflation and interest rate increases resulting from monetary and fiscal stimulus responses;which we may become subject to;

●

~~adverse results from current or~~the impact of recent and future ~~litigation,~~legislative and regulatory changes;

●

examinations ~~or other legal and/or~~by our regulatory ~~actions related to the COVID-19 pandemic, including as a result of participation in and execution of government programs related to the COVID-19 pandemic, including, but not limited to, the PPP;~~authorities;

●

continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies (including fintech companies), many of which are subject to different regulations than we are;

●

challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;

●

restraints on the ability of the Bank to pay dividends to us, which could limit our liquidity;

●

increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

●

a failure in the internal controls we have implemented to address the risks inherent to the business of banking;

●

inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;

●

changes in our management personnel or our inability to retain motivate and hire qualified management personnel;

●

the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets, which may be impacted as a result of labor shortages;

●

our ability to identify and address cyber-security risks, fraud and systems ~~errors;~~errors, including the impact on our reputation and the costs and effects required to address such risks;

●

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;

●

disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;

●

an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;

●

fraudulent and negligent acts by our clients, employees or vendors and our ability to identify and address such acts;

●

risks related to potential acquisitions;

●

~~the expenses that we will incur to operate as a public company and our inexperience complying with the requirements of being a public company;~~

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●

the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;

●

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;

●

changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage;

●

changes in our accounting standards;

●

changes in tariffs and trade barriers;

●

changes in federal tax law or policy;

●

the effects of war or other conflicts (including Russia’s military action in Ukraine), acts of terrorism, acts of God, natural disasters, health emergencies, epidemics or pandemics, climate changes, or other catastrophic events that may affect general economic conditions;

●

risks related to environmental, social and governance ("ESG") strategies and initiatives, the scope and pace of which could alter the Company’s reputation and shareholder, associate, customer and third-party affiliations; and

●

other risks and factors identified in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, including those identified under the heading “Risk Factors”, and detailed from time to time in our other filings with the U.S. Securities and Exchange Commission.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Quarterly Report on Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

CECL Adoption

On January 1, 2023, the Company adopted ASC Topic 326 which replaces the incurred loss approach for measuring credit losses with an expected loss model, referred to the current expected credit loss ("CECL") model. CECL applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The adoption of this guidance resulted in an increase of the allowance for credit losses of $5.1 million, the creation of an allowance for unfunded commitments of $239,000 and a reduction of retained earnings of $3.8 million, net of the increase in deferred tax assets of $1.5 million.

The impact of utilizing the CECL approach to calculate the allowance for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the provision for credit losses, and therefore, greater volatility to our reported earnings. See Note 1 and Note 3 of our consolidated financial statements as of June 30, 2023, included elsewhere in this Form 10-Q, for additional information on the on the allowance for credit losses and the allowance for unfunded commitments.

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Critical Accounting Policies and Estimates

Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting policies to include the allowance for ~~loan~~credit losses, servicing assets, fair value of financial instruments and income taxes.

Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company's Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and Note 1 of our consolidated financial statements as of December 31, ~~2021~~2022 in the Company’s ~~2021~~2022 Form 10-K. AsOther than our methodology of ~~September 30, 2022,~~estimating allowance for credit losses (discussed below), there have been no significant changes ~~to our~~in the Company’s application of critical accounting ~~estimates.~~policies since December 31, 2022.

Reserve for Credit Losses

A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers.

The reserve for credit losses consists of the allowance for credit losses (“ACL”) and the allowance for unfunded commitments. As a result of our January 1, 2023 adoption of ASU No. 2016-13, and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2022. The standard replaced the “incurred loss” approach with an “expected loss” approach known as the Current Expected Credit Losses (“CECL”). The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”

The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for loan-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about future economic conditions that are reasonable and supportable. The allowance for unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit. This allowance is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur.

Management’s evaluation of the appropriateness of the reserve for credit losses is often the most critical of accounting estimates for a financial institution. Our determination of the amount of the reserve for credit losses is a critical accounting estimate as it requires significant reliance on the credit risk rating we assign to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows, reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. The reserve for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower, and industry), local/regional economic trends and conditions,

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changes in underwriting standards, changes in collateral values, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans.

Overview

MetroCity Bankshares, Inc. is a bank holding company headquartered in the Atlanta metropolitan area. We operate through our wholly-owned banking subsidiary, Metro City Bank, a Georgia state-chartered commercial bank that was founded in 2006. We currently operate 1920 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. As of ~~September~~June 30, ~~2022,~~2023, we had total assets of ~~$3.35~~$3.48 billion, total loans of ~~$2.98~~$3.02 billion, total deposits of ~~$2.57~~$2.70 billion and total shareholders’ equity of ~~$349.0~~$373.2 million.

We are a full-service commercial bank focused on delivering personalized service in an efficient and reliable manner to the small to medium-sized businesses and individuals in our markets, predominantly Asian-American communities in growing metropolitan markets in the Eastern U.S. and Texas. We offer a suite of loan and deposit products tailored to meet the needs of the businesses and individuals already established in our communities, as well as first generation immigrants who desire to establish and grow their own businesses, purchase a home, or educate their children in the United States. Through our diverse and experienced management team and talented employees, we are able to speak the language of our customers and provide them with services and products in a culturally competent manner.

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Selected Financial Data

The following table sets forth unaudited selected financial data for the most recent five quarters and for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. This data should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Item 1 and the information contained in this Item 2.

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	As of or for the Three Months Ended															As of or for the Nine Months Ended						As of or for the Three Months Ended															As of or for the Six Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
(Dollars in thousands, except per share data)	2022			2022			2022			2021			2021			2022			2021			2023			2023			2022			2022			2022			2023			2022
Selected income statement data:
Interest income	$	38,297		$	33,025		$	31,953		$	30,857		$	29,324		$	103,275		$	77,884		$	47,482		$	45,965		$	43,945		$	38,297		$	33,025		$	93,447		$	64,978
Interest expense		8,509			2,805			1,300			1,236			1,135			12,614			3,336			22,512			19,732			14,995			8,509			2,805			42,244			4,105
Net interest income		29,788			30,220			30,653			29,621			28,189			90,661			74,548			24,970			26,233			28,950			29,788			30,220			51,203			60,873
Provision for loan losses		(1,703)			—			104			546			2,579			(1,599)			6,383
Provision for credit losses																							(416)			—			(1,168)			(1,703)			—			(416)			104
Noninterest income		5,101			4,653			7,656			7,491			9,532			17,410			26,312			4,761			6,016			1,794			5,101			4,653			10,777			12,309
Noninterest expense		12,688			13,119			12,179			12,512			13,111			37,986			35,912			11,534			10,679			12,379			12,688			13,119			22,213			25,298
Income tax expense		7,011			5,654			6,597			6,609			5,149			19,262			14,309			5,505			5,840			9,353			7,011			5,654			11,345			12,251
Net income		16,893			16,100			19,429			17,445			16,882			52,422			44,256			13,108			15,730			10,180			16,893			16,100			28,838			35,529
Per share data:
Basic income per share	$	0.66		$	0.63		$	0.76		$	0.69		$	0.66		$	2.06		$	1.73		$	0.52		$	0.63		$	0.40		$	0.66		$	0.63		$	1.15		$	1.40
Diluted income per share	$	0.66		$	0.63		$	0.76		$	0.68		$	0.66		$	2.04		$	1.71		$	0.51		$	0.62		$	0.40		$	0.66		$	0.63		$	1.13		$	1.38
Dividends per share	$	0.15		$	0.15		$	0.15		$	0.14		$	0.12		$	0.45		$	0.32		$	0.18		$	0.18		$	0.15		$	0.15		$	0.15		$	0.36		$	0.30
Book value per share (at period end)	$	13.76		$	12.69		$	12.19		$	11.40		$	10.84		$	13.76		$	10.84		$	14.76		$	14.04		$	13.88		$	13.76		$	12.69		$	14.76		$	12.69
Shares of common stock outstanding		25,370,417			25,451,125			25,465,236			25,465,236			25,465,236			25,370,417			25,465,236			25,279,846			25,143,675			25,169,709			25,370,417			25,451,125			25,279,846			25,451,125
Weighted average diluted shares		25,702,023			25,729,156			25,719,035			25,720,128			25,729,043			25,732,004			25,805,480			25,477,143			25,405,855			25,560,138			25,702,023			25,729,156			25,468,941			25,746,691
Performance ratios:
Return on average assets		2.07	%		2.16	%		2.52	%		2.33	%		2.61	%		2.25	%		2.59	%		1.55	%		1.87	%		1.19	%		2.07	%		2.16	%		1.71	%		2.34	%
Return on average equity(1)		20.56			20.65			26.94			24.80			25.23			22.57			23.09			14.87			18.09			11.57			20.56			20.65			16.47			23.67
Dividend payout ratio		22.75			23.85			19.76			20.52			18.24			21.98			18.64			34.77			28.98			37.55			22.75			23.85			31.61			21.62
Yield on total loans		5.11			4.95			5.00			4.93			5.16			5.03			5.19			5.95			5.85			5.50			5.11			4.95			5.90			4.98
Yield on average earning assets		4.94			4.65			4.34			4.32			4.75			4.65			4.79			5.90			5.77			5.43			4.94			4.65			5.84			4.49
Cost of average interest bearing liabilities		1.51			0.56			0.24			0.24			0.28			0.79			0.32			3.74			3.30			2.49			1.51			0.56			3.52			0.40
Cost of deposits		1.48			0.55			0.27			0.27			0.28			0.79			0.30			3.88			3.48			2.61			1.48			0.55			3.69			0.41
Net interest margin		3.84			4.26			4.16			4.15			4.57			4.08			4.59			3.10			3.30			3.58			3.84			4.26			3.20			4.21
Efficiency ratio⁽¹⁾⁽²⁾		36.37			37.62			31.79			33.71			34.76			35.15			35.61			38.79			33.11			40.26			36.37			37.62			35.84			34.57
Asset quality data (at period end):
Net charge-offs/(recoveries) to average loans held for investment																							0.06	%		(0.00)	%		(0.01)	%		(0.00)	%		(0.00)	%		0.03	%		0.03	%
Nonperforming assets to gross loans and OREO																							0.78			0.64			0.80			1.09			1.22			0.78			1.22
ACL to nonperforming loans																							79.88			101.22			68.88			53.25			54.79			79.88			54.79
ACL to loans held for investment																							0.60			0.63			0.45			0.50			0.60			0.60			0.60

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Net charge-offs to average loans held for investment		0.00	%		0.00	%		0.06	%		0.01	%		0.00	%		0.02	%		0.00	%
Nonperforming assets to gross loans and OREO		1.09			1.22			0.63			0.61			0.55			1.09			0.55
ALL to nonperforming loans		53.25			54.79			134.39			143.69			189.44			53.25			189.44
ALL to loans held for investment		0.50			0.60			0.66			0.67			0.69			0.50			0.69
Balance sheet and capital ratios:
Gross loans held for investment to deposits		116.21	%		115.86	%		105.72	%		110.98	%		112.15	%		116.21	%		112.15	%		112.27	%		114.27	%		114.94	%		116.21	%		115.86	%		112.27	%		115.86	%
Noninterest bearing deposits to deposits		23.43			25.87			25.84			26.18			30.32			23.43			30.32			21.32			21.83			22.95			23.43			25.87			21.32			25.87
Investment securities to assets																							0.84			0.87			0.86			0.91			1.02			0.84			1.02
Common equity to assets		10.42			10.20			9.88			9.34			10.04			10.42			10.04			10.74			10.32			10.20			10.42			10.20			10.74			10.20
Leverage ratio		9.90			10.31			9.46			9.44			10.34			9.90			10.34			10.03			9.72			9.57			9.90			10.31			10.03			10.31
Common equity tier 1 ratio		16.18			16.70			17.24			16.76			16.61			16.18			16.61			16.69			16.55			15.99			16.18			16.70			16.69			16.70
Tier 1 risk-based capital ratio		16.18			16.70			17.24			16.76			16.61			16.18			16.61			16.69			16.55			15.99			16.18			16.70			16.69			16.70
Total risk-based capital ratio		16.94			17.60			18.22			17.77			17.64			16.94			17.64			17.59			17.51			16.68			16.94			17.60			17.59			17.60
Mortgage and SBA loan data:
Mortgage loans serviced for others	$	550,587		$	589,500		$	605,112		$	608,208		$	669,358		$	550,587		$	669,358		$	487,787		$	506,012		$	526,719		$	550,587		$	589,500		$	487,787		$	589,500
Mortgage loan production		255,662			326,973			162,933			237,195			368,790			745,568			958,995			72,830			43,335			88,045			255,662			326,973			116,165			489,901
Mortgage loan sales		—			37,928			56,987			—			—			94,915			—			—			—			—			—			37,928			—			94,915
SBA loans serviced for others		489,120			504,894			528,227			542,991			549,818			489,120			549,818			493,579			485,663			465,120			489,120			504,894			493,579			504,894
SBA loan production		22,193			21,407			50,689			52,727			85,265			94,289			233,107			16,110			15,352			42,419			22,193			21,407			42,349			72,096
SBA loan sales		8,588			—			22,898			30,169			37,984			31,486			94,541			30,298			36,458			—			8,588			—			66,756			22,898

(1)	Excluding average accumulated other comprehensive income, our return on average equity for the three months ended June 30, 2023 and 2022 was 15.50% and 20.90%, respectively, and for the six months ended June 30, 2023 and 2022 was 17.27% and 23.81%, respectively.

(2)	Represents noninterest expense divided by total revenue (net interest income and total noninterest income).

~~Results of Operations~~

We recorded net income of $16.9 million for the three months ended September 30, 2022 compared to $16.9 million for the same period in 2021, a slight increase of $11,000, or 0.1%. For the nine months ended September 30, 2022, we recorded net income of $52.4 million compared to $44.3 million for the nine months ended September 30, 2021, an increase of $8.1 million, or 18.5%.

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Recent Industry Developments

During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust. The Company’s total deposits increased by 1.2% from December 31, 2022, to $2.70 billion at June 30, 2023. The Company’s uninsured deposits represented 30.7% of total deposits at June 30, 2023 compared to 32.5% of total deposits at December 31, 2022. The Company also took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources in response to these recent developments. Furthermore, the Company’s capital remains strong with common equity Tier 1 and total capital ratios of 16.69% and 17.59 %, respectively, as of June 30, 2023.

Results of Operations

We recorded net income of $13.1 million for the three months ended June 30, 2023 compared to $16.1 million for the same period in 2022, a decrease of $3.0 million, or 18.6%. This decrease was due to a decrease in net interest income of $5.3 million, offset by an increase in noninterest income of $108,000, a decrease in noninterest expense of $1.6 million, a decrease in income tax expense of $149,000 and a decrease in provision for credit losses of $416,000.

For the six months ended June 30, 2023, we recorded net income of $28.8 million compared to $35.5 million for the six months ended June 30, 2022, a decrease of $6.7 million, or 18.8%. This decrease was due to a decrease in net interest income of $9.7 million and a decrease in noninterest income of $1.5 million, offset by a decrease in noninterest expense of $3.1 million, a decrease in income tax expense of $906,000 and a decrease in provision for credit losses of $520,000.

Basic and diluted earnings per common share for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$0.66~~$0.52 and $0.51 compared to ~~$0.66~~$0.63 for both the basic and diluted earnings per common share for the same period in ~~2021.~~2022. For the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, basic and diluted earnings per common share was ~~$2.06~~$1.15 and ~~$2.04,~~$1.13, respectively, compared to ~~$1.73~~$1.40 and ~~$1.71~~$1.38 for the same period a year ago, respectively.

Interest Income

Interest income totaled ~~$38.3~~$47.5 million for the three months ended ~~September~~June 30, ~~2022,~~2023, an increase of ~~$9.0~~$14.5 million, or ~~30.6%~~43.8%, from the three months ended ~~September~~June 30, ~~2021,~~2022, primarily due to an increase in average loan balances of ~~$650.7 million. We also recognized PPP fee income of $145,000 during~~$408.7 million coupled with a 100 basis points increase in the ~~three months ended September 30, 2022 compared to PPP fee income of $1.9 million during the three months ended September 30, 2021.~~loan yield. The increase in average loans is due to an increase of ~~$94.3~~$7.7 million in average construction and development loans, an increase of $78.1 million in average commercial real estate loans and an increase of ~~$623.9~~$329.5 million in average residential mortgage loans, offset by a decrease of ~~$15.2 million in average construction and development loans and a decrease of $52.2~~$6.6 million in commercial and industrial loans. As compared to the three months ended ~~September~~June 30, ~~2021,~~2022, the yield on average interest-earning assets increased by 19125 basis points to ~~4.94%~~5.90% from ~~4.75%~~4.65% with the yield on average loans ~~decreasing~~increasing by ~~five~~100 basis points and the yield on average total investments increasing by ~~183~~399 basis points.

Interest income was ~~$103.3~~$93.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$77.9~~$65.0 million for the same period in ~~2021,~~2022, an increase of ~~$25.4~~$28.4 million, or ~~32.6%~~43.8%, primarily due to the increase in average loan balances of ~~$694.7~~$453.1 million. The increase in average loans is due to an increase of ~~$78.7~~$8.1 million in average construction and development loans, an increase of $100.4 million in average commercial real estate loans and an increase of ~~$706.3~~$357.0 million in average residential mortgage loans, offset by a decrease of ~~$13.4 million in average construction and development loans and a decrease of $76.9~~$12.4 million in average commercial and industrial loans. As compared to the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the yield on average interest-earning assets ~~decreased~~increased by 14135 basis points to ~~4.65%~~5.84% from ~~4.79%~~4.49% with the yield on average loans ~~decreasing~~increasing by 1692 basis points and the yield on average total investments increasing by 66417 basis points.

Interest Expense

Interest expense for the three months ended ~~September~~June 30, ~~2022~~2023 increased ~~$7.4~~$19.7 million, or ~~649.7%~~702.6%, to ~~$8.5~~$22.5 million compared to interest expense of ~~$1.1~~$2.8 million for the three months ended ~~September~~June 30, ~~2021,~~2022, primarily due to a ~~$486.5 million increase in average interest-bearing deposit balances coupled with a 120~~333 basis points increase in deposit ~~costs.~~costs and a 225 basis points increase in borrowing costs coupled with a $291.9 million increase in

Table of Contents

average interest-bearing deposits and a $124.2 million increase in average borrowings. The ~~120~~333 basis points increase in deposit costs included a ~~151~~371 basis point increase in the yield on average money market deposits and a 77329 basis points increase in the yield on average time deposits. Average time deposits increased by $538.0 million while average money market deposits ~~increased by $422.3 million while average time deposits~~ decreased by ~~$6.5~~$209.7 million. Interest expense totaled ~~$12.6~~$42.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, an increase of ~~$9.3~~$38.1 million, or ~~278.1%~~929.1%, compared to the same period in ~~2021,~~2022, primarily due to a ~~$515.6~~328 basis points increase in deposit costs and a 231 basis points increase in borrowing costs coupled with a $300.1 million increase in average interest-bearing ~~deposit balances coupled with a 49 basis points increase in deposit costs.~~deposits.

Average borrowings outstanding for the three months ended ~~September~~June 30, ~~2022~~2023 increased by ~~$134.7~~$124.2 million with an increase in rate of ~~135~~225 basis points compared to the three months ended ~~September~~June 30, ~~2021.~~2022. Average borrowings outstanding for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 increased by ~~$221.7~~$30.0 million with an increase in rate of 35231 basis points compared to the same period in ~~2021.~~2022.

Net Interest Margin

The net interest margin for the three months ended ~~September~~June 30, ~~2022~~2023 decreased ~~by 73~~by116 basis points to ~~3.84%~~3.10% from ~~4.57%~~4.26% for the three months ended ~~September~~June 30, ~~2021,~~2022, primarily due to a ~~123~~318 basis ~~points~~point increase in the cost of average interest-bearing liabilities of ~~$2.24~~$2.42 billion, offset by a 19125 basis point increase in the yield on average interest-earning assets of ~~$3.08~~$3.23 billion. Average earning assets for the three months ended ~~September~~June 30, ~~2022~~2023 increased by ~~$631.2~~$381.5 million from the same period in ~~2021,~~2022, primarily due to a ~~$650.7~~$408.7 million increase in average ~~loans.~~loans, offset by a $24.0 million decrease in average interest-earning cash accounts. Average interest-bearing liabilities for the three months ended ~~September~~June 30, ~~2022~~2023 increased by ~~$621.2~~$416.1 million from the ~~three months ended September 30, 2021,~~same period in 2022, driven by an increase in average interest-bearing deposits of ~~$486.5~~$291.9 million and an increase in average borrowings of ~~$134.7~~$124.2 million.

~~Table of Contents~~

The net interest margin for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 decreased by 51101 basis points to ~~4.08%~~3.20% from ~~4.59%~~4.21% for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, primarily due to a 14312 basis point ~~decrease in the yield of average interest-earnings assets of $2.97 billion and a 47 basis points~~ increase in the cost of average interest-bearing liabilities of ~~$2.14~~$2.03 billion, offset by a 135 basis point increase in the yield on average interest-earning assets of $3.23 billion. Average earning assets increased by ~~$798.9~~$311.0 million, primarily due to a ~~$694.7~~$453.1 million increase in average loans, ~~and~~offset by a ~~$85.9~~$138.5 million ~~increase~~decrease in average interest-earning cash accounts. Average interest-bearing liabilities increased by ~~$737.3~~$330.2 million, primarily driven by an increase in average interest-bearing deposits of ~~$515.6~~$300.1 million, as well as an increase in average borrowings of ~~$221.7~~$30.0 million.

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve. The decline in our net interest margin is primarily the result of our increasing deposit costs.

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Average Balances, Interest and Yields

The following tables present, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin.


	Three Months Ended September 30,												Three Months Ended June 30,
	2022						2021						2023						2022
	Average		Interest and		Yield /		Average		Interest and		Yield /		Average		Interest and		Yield /		Average		Interest and		Yield /
(Dollars in thousands)	Balance		Fees		Rate		Balance		Fees		Rate		Balance		Fees		Rate		Balance		Fees		Rate
Earning Assets:
Federal funds sold and other investments⁽¹⁾	$	151,177	$	903	2.37	%	$	188,296	$	111	0.23	%	$	169,976	$	2,445	5.77	%	$	193,955	$	560	1.16	%
Investment securities		34,792		131	1.49			17,244		86	1.98			32,525		198	2.44			35,754		155	1.74
Total investments		185,969		1,034	2.21			205,540		197	0.38			202,501		2,643	5.24			229,709		715	1.25
Construction and development		38,636		530	5.44			53,871		727	5.35			40,386		555	5.51			32,647		414	5.09
Commercial real estate		601,370		9,905	6.53			507,039		7,648	5.98			654,021		14,362	8.81			575,917		8,403	5.85
Commercial and industrial		50,605		909	7.13			102,813		2,576	9.94			47,836		1,119	9.38			54,423		915	6.74
Residential real estate		2,201,186		25,885	4.67			1,577,276		18,144	4.56			2,282,264		28,777	5.06			1,952,730		22,545	4.63
Consumer and other		137		34	98.46			208		32	61.04			153		26	68.16			266		33	49.76
Gross loans⁽²⁾		2,891,934		37,263	5.11			2,241,207		29,127	5.16			3,024,660		44,839	5.95			2,615,983		32,310	4.95
Total earning assets		3,077,903		38,297	4.94			2,446,747		29,324	4.75			3,227,161		47,482	5.90			2,845,692		33,025	4.65
Noninterest-earning assets		158,579						123,888						167,506						146,669
Total assets		3,236,482						2,570,635						3,394,667						2,992,361
Interest-bearing liabilities:
NOW and savings deposits		186,459		338	0.72			115,775		59	0.20			160,967		839	2.09			197,460		102	0.21
Money market deposits		1,179,954		5,189	1.74			757,654		432	0.23			956,598		10,370	4.35			1,166,272		1,860	0.64
Time deposits		499,577		1,437	1.14			506,049		477	0.37			927,478		8,595	3.72			389,449		422	0.43
Total interest-bearing deposits		1,865,990		6,964	1.48			1,379,478		968	0.28			2,045,043		19,804	3.88			1,753,181		2,384	0.55
Borrowings		375,405		1,545	1.63			240,704		167	0.28			371,000		2,708	2.93			246,779		421	0.68
Total interest-bearing liabilities		2,241,395		8,509	1.51			1,620,182		1,135	0.28			2,416,043		22,512	3.74			1,999,960		2,805	0.56
Noninterest-bearing liabilities:
Noninterest-bearing deposits		599,902						600,388						558,907						611,763
Other noninterest-bearing liabilities		69,131						84,568						66,037						67,979
Total noninterest-bearing liabilities		669,033						684,956						624,944						679,742
Shareholders' equity		326,054						265,497						353,680						312,659
Total liabilities and shareholders' equity	$	3,236,482					$	2,570,635					$	3,394,667					$	2,992,361
Net interest income			$	29,788					$	28,189					$	24,970					$	30,220
Net interest spread					3.43						4.47						2.16						4.09
Net interest margin					3.84						4.57						3.10						4.26

(1)	Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.

(2)	Average loan balances include nonaccrual loans and loans held for sale.

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	Nine Months Ended September 30,												Six Months Ended June 30,
	2022						2021						2023						2022
	Average		Interest and		Yield /		Average		Interest and		Yield /		Average		Interest and		Yield /		Average		Interest and		Yield /
(Dollars in thousands)	Balance		Fees		Rate		Balance		Fees		Rate		Balance		Fees		Rate		Balance		Fees		Rate
Earning Assets:
Federal funds sold and other investments⁽¹⁾	$	247,348	$	1,860	1.01	%	$	161,420	$	260	0.22	%	$	157,733	$	4,250	5.43	%	$	296,230	$	956	0.65	%
Investment securities		35,789		383	1.43			17,493		269	2.06			32,737		376	2.32			36,295		253	1.41
Total investments		283,137		2,243	1.06			178,913		529	0.40			190,470		4,626	4.90			332,525		1,209	0.73
Construction and development		33,985		1,322	5.20			47,380		1,874	5.29			39,745		1,078	5.47			31,621		792	5.05
Commercial real estate		575,664		26,195	6.08			496,957		22,069	5.94			663,015		28,341	8.62			562,598		16,290	5.84
Commercial and industrial		56,772		2,900	6.83			133,703		7,054	7.05			47,473		2,149	9.13			59,906		1,991	6.70
Residential real estate		2,021,332		70,504	4.66			1,315,043		46,254	4.70			2,286,955		57,199	5.04			1,929,915		44,619	4.66
Consumer and other		203		111	73.11			187		104	74.36			160		54	68.06			236		77	65.80
Gross loans⁽²⁾		2,687,956		101,032	5.03			1,993,270		77,355	5.19			3,037,348		88,821	5.90			2,584,276		63,769	4.98
Total earning assets		2,971,093		103,275	4.65			2,172,183		77,884	4.79			3,227,818		93,447	5.84			2,916,801		64,978	4.49
Noninterest-earning assets		149,157						115,784						171,295						144,368
Total assets		3,120,250						2,287,967						3,399,113						3,061,169
Interest-bearing liabilities:
NOW and savings deposits		190,390		515	0.36			105,139		158	0.20			163,948		1,487	1.83			192,388		178	0.19
Money market deposits		1,144,337		7,706	0.90			651,158		1,143	0.23			967,714		20,029	4.17			1,126,233		2,517	0.45
Time deposits		443,632		2,266	0.68			506,445		1,578	0.42			902,280		15,664	3.50			415,196		828	0.40
Total interest-bearing deposits		1,778,359		10,487	0.79			1,262,742		2,879	0.30			2,033,942		37,180	3.69			1,733,817		3,523	0.41
Borrowings		363,170		2,127	0.78			141,435		457	0.43			386,996		5,064	2.64			356,951		582	0.33
Total interest-bearing liabilities		2,141,529		12,614	0.79			1,404,177		3,336	0.32			2,420,938		42,244	3.52			2,090,768		4,105	0.40
Noninterest-bearing liabilities:
Noninterest-bearing deposits		600,045						548,844						568,888						600,117
Other noninterest-bearing liabilities		68,144						78,685						56,142						67,642
Total noninterest-bearing liabilities		668,189						627,529						625,030						667,759
Shareholders' equity		310,532						256,261						353,145						302,642
Total liabilities and shareholders' equity	$	3,120,250					$	2,287,967					$	3,399,113					$	3,061,169
Net interest income			$	90,661					$	74,548					$	51,203					$	60,873
Net interest spread					3.86						4.47						2.32						4.09
Net interest margin					4.08						4.59						3.20						4.21

(1)	Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.

(2)	Average loan balances include nonaccrual loans and loans held for sale.

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Rate/Volume Analysis

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volumes and rate have been allocated to volume.


	Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021						Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
	Increase (Decrease) Due to Change in:						Increase (Decrease) Due to Change in:
(Dollars in thousands)	Volume		Yield/Rate		Total Change		Volume		Yield/Rate		Total Change
Earning assets:
Federal funds sold and other investments⁽¹⁾	$	92	$	700	$	792	$	74	$	1,811	$	1,885
Investment securities		85		(40)		45		(123)		166		43
Total investments		177		660		837		(49)		1,977		1,928
Construction and development		(209)		12		(197)		105		36		141
Commercial real estate		1,260		997		2,257		1,170		4,789		5,959
Commercial and industrial		(1,104)		(563)		(1,667)		(127)		331		204
Residential real estate		7,444		297		7,741		4,231		2,001		6,232
Consumer and Other		4		(2)		2		(7)		—		(7)
Gross loans⁽²⁾		7,395		741		8,136		5,372		7,157		12,529
Total earning assets		7,572		1,401		8,973		5,323		9,134		14,457
Interest-bearing liabilities:
NOW and savings deposits		56		223		279		(18)		755		737
Money market deposits		578		4,179		4,757		(418)		8,928		8,510
Time deposits		93		867		960		1,659		6,514		8,173
Total interest-bearing deposits		727		5,269		5,996		1,223		16,197		17,420
Borrowings		140		1,238		1,378		844		1,443		2,287
Total interest-bearing liabilities		867		6,507		7,374		2,067		17,640		19,707
Net interest income	$	6,705	$	(5,106)	$	1,599	$	3,256	$	(8,506)	$	(5,250)

(1)	Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.

(2)	Average loan balances include nonaccrual loans and loans held for sale.

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	Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021						Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
	Increase (Decrease) Due to Change in:						Increase (Decrease) Due to Change in:
(Dollars in thousands)	Volume		Yield/Rate		Total Change		Volume		Yield/Rate		Total Change
Earning assets:
Federal funds sold and other investments⁽¹⁾	$	526	$	1,074	$	1,600	$	3,273	$	94	$	3,367
Investment securities		325		(211)		114		(3,357)		3,407		50
Total investments		851		863		1,714		(84)		3,501		3,417
Construction and development		(480)		(72)		(552)		180		106		286
Commercial real estate		3,473		653		4,126		3,012		9,039		12,051
Commercial and industrial		(4,043)		(111)		(4,154)		(486)		644		158
Residential real estate		25,109		(859)		24,250		8,774		3,806		12,580
Consumer and Other		(1)		8		7		(20)		(3)		(23)
Gross loans⁽²⁾		24,058		(381)		23,677		11,460		13,592		25,052
Total earning assets		24,909		482		25,391		11,376		17,093		28,469
Interest-bearing liabilities:
NOW and savings deposits		172		185		357		(27)		1,336		1,309
Money market deposits		1,881		4,682		6,563		(475)		17,987		17,512
Time deposits		(31)		719		688		2,757		12,079		14,836
Total interest-bearing deposits		2,022		5,586		7,608		2,255		31,402		33,657
Borrowings		1,112		558		1,670		99		4,383		4,482
Total interest-bearing liabilities		3,134		6,144		9,278		2,354		35,785		38,139
Net interest income	$	21,775	$	(5,662)	$	16,113	$	9,022	$	(18,692)	$	(9,670)

(1)	Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.

(2)	Average loan balances include nonaccrual loans and loans held for sale.

Provision for ~~Loan~~Credit Losses

The provision for credit losses reflects our internal calculation and judgment of the appropriate amount of the allowance for credit losses. The adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” or “CECL” has significantly changed the methodology of how we measure credit losses (see Note 1 to the Consolidated Financial Statements for more information). We maintain the allowance for credit losses at levels we believe are appropriate to cover our estimate of expected credit losses over the life of loans in the portfolio as of the end of the reporting period. The allowance for credit losses is determined through detailed quarterly analyses of our loan portfolio. The allowance for credit losses is based on our loss experience, changes in the economic environment, reasonable and supportable forecasts, as well as an ongoing assessment of credit quality and environmental factors not reflective in historical loss rates. Additional qualititative factors that are considered in determining the amount of the allowance for credit losses are concentrations of credit risk (geographic, large borrower, and industry), local/regional economic trends and conditions, changes in underwriting standards, changes in collateral value, experience and depth of lending staff, trends in delinquencies, and the volume and terms of loans.

We recorded a credit provision ~~for loan losses~~ of ~~$1.7 million and $1.6 million~~$416,000 during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to $0 and $104,000 provision expense ~~of $2.6 million and $6.4 million~~ during the same periods in ~~2021.~~2022. The credit provision ~~for loan losses~~ recorded during the ~~three and nine months ended September 30, 2022~~first half of 2023 was due oto the ~~release of additional~~decrease in reserves allocated for the uncertainties in our loan portfolio caused by the ongoing COVID-19 pandemic. The risks associated with some of these uncertainties have declined during the past few quarters as the COVID-19 pandemic continues to pose less and less risk to our borrowers. During the three and nine months ended September 30, 2021, the provision recorded was primarily related to the additional reserves added for the uncertainties caused by the COVID-19 pandemic,individually analyzed loans, as well as a decrease in the ~~significant growth in~~general reserves allocated to our residential mortgage loan ~~portfolio.~~portfolio as the outlook for the national housing price index improved during the second quarter 2023. Our ~~ALL~~ACL as a percentage of gross loans for the periods ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ was ~~0.50% and 0.69%, respectively.~~0.60% for both periods. Our ~~ALL~~ACL as a percentage of gross loans is relatively lower than our peers due to our high percentage of residential mortgage loans, which tend to have lower allowance for ~~loan~~credit loss ratios compared to other commercial or consumer loans due to their low LTVs.

See the section captioned “Allowance for ~~Loan~~Credit Losses” elsewhere in this document for further analysis of our provision for ~~loan~~credit losses.

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Noninterest Income

Noninterest income for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$5.1~~$4.8 million, ~~a decrease~~an increase of ~~$4.4 million,~~$108,000, or ~~46.5%~~2.3%, compared to ~~$9.5~~$4.7 million for the three months ended ~~September~~June 30, ~~2021.~~2022. Noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$17.4~~$10.8 million, a decrease of ~~$8.9~~$1.5 million, or ~~33.8%~~12.4%, compared to ~~$26.3~~$12.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

The following table sets forth the major components of our noninterest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:

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	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands)	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change		2023		2022		$ Change		% Change		2023		2022		$ Change		% Change
Noninterest income:
Service charges on deposit accounts	$	509	$	446	$	63	14.1	%	$	1,508	$	1,230	$	278	22.6	%	$	464	$	518	$	(54)	(10.4)	%	$	913	$	999	$	(86)	(8.6)	%
Other service charges, commissions and fees		2,676		4,147		(1,471)	(35.5)			8,482		11,422		(2,940)	(25.7)			1,266		3,647		(2,381)	(65.3)			2,140		5,806		(3,666)	(63.1)
Gain on sale of residential mortgage loans		—		—		—	—			2,017		—		2,017	100.0			—		806		(806)	(100.0)			—		2,017		(2,017)	(100.0)
Mortgage servicing income, net		(358)		132		(490)	(371.2)			(262)		(659)		397	60.2			(51)		(5)		(46)	920.0			(147)		96		(243)	(253.1)
Gain on sale of SBA loans		500		3,358		(2,858)	(85.1)			2,068		8,057		(5,989)	(74.3)			1,054		—		1,054	100.0			3,023		1,568		1,455	92.8
SBA servicing income, net		1,330		1,212		118	9.7			1,897		5,250		(3,353)	(63.9)			1,388		(1,077)		2,465	(228.9)			3,202		567		2,635	464.7
Other income		444		237		207	87.3			1,700		1,012		688	68.0			640		764		(124)	(16.2)			1,646		1,256		390	31.1
Total noninterest income	$	5,101	$	9,532	$	(4,431)	(46.5)	%	$	17,410	$	26,312	$	(8,902)	(33.8)	%	$	4,761	$	4,653	$	108	2.3	%	$	10,777	$	12,309	$	(1,532)	(12.4)	%

Service charges on deposit accounts ~~increased $63,000,~~decreased $54,000, or ~~14.1%~~10.4%, to ~~$509,000~~$464,000 for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$446,000~~$518,000 for the same three months during ~~2021.~~2022. Service charges on deposit accounts were ~~$1.5 million~~$913,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$1.2 million~~$999,000 for the same period in ~~2021, an increase~~2022, a decrease of ~~$278,000,~~$86,000, or ~~22.6%~~8.6%. These ~~increases~~decreases were primarily attributable to ~~increased~~lower analysis charges, overdraft fees and ~~overdraft~~wire transfer fees.

Other service charges, commissions and fees decreased ~~$1.5~~$2.4 million, or ~~35.5%~~65.3%, to ~~$2.7~~$1.3 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$4.1~~$3.6 million for the three months ended ~~September~~June 30, ~~2021.~~2022. Other service charges, commissions and fees decreased ~~$2.9~~$3.7 million, or ~~25.7%~~63.1%, to ~~$8.5~~$2.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$11.4~~$5.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. These decreases were mainly attributable to lower application, processing, underwriting and origination fees earned from our origination of residential mortgage loans as mortgage volume declined during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same periods in ~~2021.~~2022. Mortgage loan originations totaled ~~$255.7~~$72.8 million and ~~$745.6~~$116.2 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, respectively, compared to ~~$368.8~~$327.0 million and ~~$959.0~~$489.9 million during the same periods in ~~2021.~~2022.

Total gain on sale of loans was ~~$500,000~~$1.1 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$3.4 million~~$806,000 for the same period of ~~2021, a decrease~~2022, an increase of ~~$2.9 million,~~$248,000 or ~~85.1%~~30.8%. Total gain on sale of loans was ~~$4.1~~$3.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$8.1~~$3.6 million for the same period of ~~2021,~~2022, a decrease of ~~$4.0 million,~~$562,000, or ~~49.3%~~15.7%.

We recorded no gain on sale of residential mortgage loans during the three and six months ended ~~September~~June 30, ~~2022~~2023 as no residential mortgage loans were sold during these periods. Gain on sale of residential mortgage loans totaled $806,000 for the ~~period.~~three months ended June 30, 2022 as we sold $37.9 million in residential mortgage loans during the period with an average premium of 2.13%. Gain on sale of residential mortgage loans totaled $2.0 million for the ~~nine~~six months ended ~~September~~June 30, 2022 as we sold $94.9 million in residential mortgage loans during the period with an average premium of 2.13%. ~~We recorded no gain on sale of residential mortgage loans during the three and nine months ended September 30, 2021 as no mortgage loans were sold during these periods.~~

Gain on sale of SBA loans totaled ~~$500,000 and $2.1~~$1.1 million for the three ~~and nine~~ months ended ~~September~~June 30, ~~2022 compared to $3.4 million and $8.1 million for the same periods in 2021. We~~2023 as we sold ~~$8.6 million and $31.5~~$30.3 million in SBA loans during the quarter with an average premium of 5.24%. We recorded no gain on sale of SBA loans during the three ~~and nine~~ months ended ~~September~~June 30, 2022 as no SBA loans were sold during the period. Gain on sale of SBA loans totaled $3.0 million for the six months ended June 30, 2023 compared to $1.6 million for the same period in 2022. We sold $66.8

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million during the six months ended June 30, 2023 with average premiums of 6.10% compared to $22.9 million sold during the same period in 2022 with average premiums of ~~6.96% and 8.45%, respectively. We sold $38.0 million and $94.5 million in SBA loans during the three and nine months ended September 30, 2021 with average premiums of 10.38% and 10.72%, respectively.~~9.00%.

Mortgage loan servicing income, net of amortization, decreased by ~~$490,000, or 371.2%,~~$46,000 to an expense balance of ~~$358,000~~$51,000 during the three months ended ~~September~~June 30, 2022 compared to income of $132,000 for the same period of 2021. Mortgage loan servicing income increased by $397,000, or 60.2%, to an expense balance of $262,000 during the nine months ended September 30, 20222023 compared to an expense balance of ~~$659,000~~$5,000 for the same period of ~~2021.~~2022. Mortgage loan servicing income decreased by $243,000 to an expense balance of $147,000 during the six months ended June 30, 2023 compared to income of $96,000 for the same period of 2022. The changes in mortgage loan servicing income were primarily due to ~~the increase~~decreases in mortgage servicing fees and capitalized mortgage servicing assets, ~~and~~offset by the decrease in mortgage servicing ~~amortization, offset by a decrease in mortgage servicing fees.~~amortization. Included in mortgage loan servicing income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~$758,000~~$640,000 and ~~$2.5~~$1.3 million,

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respectively, in mortgage servicing fees compared to ~~$1.1 million~~$830,000 and ~~$3.7~~$1.8 million for the same periods in ~~2021,~~2022, respectively, and capitalized mortgage servicing assets of $0 ~~and $761,000~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022, respectively,~~2023 compared to $0$347,000 and $761,000 for the same periods in ~~2021.~~2022. These amounts were offset by mortgage loan servicing asset amortization of ~~$1.1 million~~$691,000 and ~~$3.7~~$1.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, respectively, compared to ~~$1.4~~$1.3 million and ~~$4.4~~$2.6 million during the same periods in ~~2021, respectively.~~2022. During the three and six months ended ~~September~~June 30, ~~2022,~~2023, we did not record a fair value impairment on our mortgage servicing assets compared to a fair value impairment ~~recovery~~recoveries of ~~$420,000~~$88,000 and $163,000 recorded during the three and six months ended ~~September 30, 2021. During the nine months ended September~~June 30, 2022, we recorded a fair value impairment recovery of $163,000 on our mortgage servicing assets compared to a fair value impairment recovery of $17,000 recorded during the nine months ended September 30, 2021.respectively. Our total residential mortgage loan servicing portfolio was ~~$550.6~~$487.8 million at ~~September~~June 30, ~~2022~~2023 compared to ~~$669.4~~$589.5 million at ~~September~~June 30, ~~2021.~~2022.

SBA servicing income ~~net~~ increased by ~~$118,000,~~$2.5 million, or ~~9.7%~~228.9%, to ~~$1.3~~$1.4 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$1.2~~an expense balance of $1.1 million for the three months ended ~~September~~June 30, ~~2021.~~2022. SBA servicing income was ~~$1.9~~$3.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$5.3 million~~$567,000 for the same period in ~~2021, a decrease~~2022, an increase of ~~$3.4~~$2.6 million, or ~~63.9%~~464.7%. Our total SBA loan servicing portfolio was ~~$489.1~~$493.6 million as of ~~September~~June 30, ~~2022~~2023 compared to ~~$549.8~~$504.9 million as of ~~September~~June 30, ~~2021.~~2022. Our SBA servicing rights are carried at fair value and the inputs used to calculate fair value change from period to period. During the three months ended ~~September~~June 30, ~~2022~~2023, we recorded a ~~$111,000~~$282,000 fair value increase to our SBA servicing rights compared to a ~~$225,000~~$2.3 million fair value charge to our SBA servicing rights during the three months ended ~~September~~June 30, ~~2021.~~2022. During the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, we recorded a ~~$1.9 million~~$980,000 fair value ~~charge~~increase to our SBA servicing rights compared to a ~~$1.3~~$2.0 million ~~increase~~fair value charge during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Other noninterest income ~~increased~~decreased by ~~$207,000~~$124,000, or 16.2%, to ~~$444,000~~$640,000 for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$237,000~~$764,000 for the three months ended ~~September~~June 30, ~~2021.~~2022. Other noninterest income was ~~$1.7~~$1.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$1.0~~$1.3 million for the same period in ~~2021,~~2022, an increase of ~~$688,000.~~$390,000, or 31.1%. The increase was mainly due to a gain on sale of foreclosed real estate of $547,000 recorded during the six months ended June 30, 2023 compared to a loss on sale of $15,000 recorded during the same period in 2022. The largest component of other noninterest income is the income on bank owned life insurance which totaled ~~$431,000~~$445,000 and ~~$297,000,~~$426,000, respectively, for the three months ended ~~September~~June 30, 2023 and 2022, and ~~2021,~~$880,000 and ~~$1.3 million and $754,000,~~$830,000, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

Noninterest Expense

Noninterest expense for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$12.7~~$11.5 million compared to $13.1 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$423,000,~~$1.6 million, or ~~3.2%~~12.1%. Noninterest expense for the ~~nine~~six months ended ~~September~~

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June 30, ~~2022~~2023 was ~~$38.0~~$22.2 million compared to ~~$35.9~~$25.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$2.1~~$3.1 million, or ~~5.8%~~12.2%.

The following table sets forth the major components of our noninterest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands )	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change		2023		2022		$ Change		% Change		2023		2022		$ Change		% Change
Noninterest Expense:
Salaries and employee benefits	$	7,756	$	8,679	$	(923)	(10.6)	%	$	22,781	$	22,293	$	488	2.2	%	$	7,103	$	7,929	$	(826)	(10.4)	%	$	13,469	$	15,025	$	(1,556)	(10.4)	%
Occupancy and equipment		1,167		1,295		(128)	(9.9)			3,594		3,822		(228)	(6.0)			1,039		1,200		(161)	(13.4)			2,253		2,427		(174)	(7.2)
Data processing		270		257		13	5.1			808		848		(40)	(4.7)			353		261		92	35.2			628		538		90	16.7
Advertising		158		131		27	20.6			434		393		41	10.4			165		126		39	31.0			311		276		35	12.7
Other expenses		3,337		2,749		588	21.4			10,369		8,556		1,813	21.2			2,874		3,603		(729)	(20.2)			5,552		7,032		(1,480)	(21.0)
Total noninterest expense	$	12,688	$	13,111	$	(423)	(3.2)	%	$	37,986	$	35,912	$	2,074	5.8	%	$	11,534	$	13,119	$	(1,585)	(12.1)	%	$	22,213	$	25,298	$	(3,085)	(12.2)	%

Salaries and employee benefits expense for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$7.8~~$7.1 million compared to ~~$8.7~~$7.9 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$923,000,~~$826,000, or ~~10.6%~~10.4%. ~~This decrease was mainly attributable to decreased salary costs during the quarter and lower commissions paid to our loan officers.~~ Salaries

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and employee benefits expense for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$22.8~~$13.5 million compared to ~~$22.3~~$15.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$488,000,~~$1.6 million, or ~~2.2%~~10.4%. ~~This increase was mainly~~These decreases were partially attributable to ~~increased salary costs and employee benefits, partially offset by~~ lower commissions paid to our loan officers as loan volume declined during the ~~nine~~three and six months ended ~~September~~June 30, 2023 compared to the same periods in 2022.

Occupancy and equipment expense for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$1.2~~$1.0 million compared to ~~$1.3~~$1.2 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$128,000,~~$161,000, or ~~9.9%~~13.4%. Occupancy and equipment expense for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$3.6~~$2.3 million compared to ~~$3.8~~$2.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$228,000,~~$174,000, or ~~6.0%~~7.2%. These decreases were primarily due to lower ~~rent~~depreciation expense and ~~depreciation.~~rent expense.

Data processing expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 remained relatively flat compared to the same periods in ~~2021.~~2022.

Advertising expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 remained relatively flat compared to the same periods in ~~2021.~~2022.

Other expenses for the three months ended ~~September~~June 30, ~~2022~~2023 were ~~$3.3~~$2.9 million compared to ~~$2.7~~$3.6 million for the three months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$588,000,~~$729,000, or ~~21.4%~~20.2%. Other operating expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~$10.4~~$5.6 million compared to ~~$8.6~~$7.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$1.8~~$1.5 million, or ~~21.2%~~21.0%. ~~This increase was~~These decreases were primarily due to ~~higher professional fees~~lower FDIC deposit insurance premiums, security expense and ~~communication expenses, as well as increased operating and customer service expenses, partially offset by lower~~ loan and other real estate owned ~~expenses.~~related expenses, as well as fair value gains on our equity securities, partially offset by higher professional fees. Included in other expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 were directors’ fees of approximately ~~$426,000~~$287,000 and ~~$331,000,~~$285,000, respectively.

Income Tax Expense

Income tax expense for the three months ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ was ~~$7.0~~$5.5 million and ~~$5.1~~$5.7 million, respectively. The Company’s effective tax rates were ~~29.3%~~29.6% and ~~23.4%~~26.0% for the three months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively. The significant increase in the effective tax rate during the three months ended September 30, 2022 was due to additional income tax expense of $1.4 million recorded during the quarter for the re-allocation of state income tax apportionment schedules for prior year’s tax returns.

Income tax expense for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ was ~~$19.3~~$11.3 million and ~~$14.3~~$12.3 million, respectively. The Company’s effective tax rates were ~~26.9%~~28.2% and ~~24.4%~~25.6% for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively.

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In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law, creating a 15% corporate alternative minimum tax on profits of corporations based on average annual adjusted financial statement income effective for tax years beginning January 1, 2023. We do not anticipate a material impact on our financial position or results of operations from the IRA.

Financial Condition

Total assets increased ~~$242.3~~$47.8 million, or ~~7.8%~~1.4%, to ~~$3.35~~$3.48 billion at ~~September~~June 30, ~~2022~~2023 as compared to ~~$3.11~~$3.43 billion at December 31, ~~2021.~~2022. The increase in total assets was primarily attributable to increases in cash and cash equivalents of $83.2 million, interest rate derivatives of $10.5 million and premises and equipment of $2.1 million, partially offset by decreases in loans of ~~$473.2 million, federal funds sold of $6.9 million, bank owned life insurance of $9.3~~$35.0 million and other assets of ~~$33.4~~$3.4 million, ~~partially offset by a $268.5 million decrease~~as well as an increase in ~~cash and due from banks.~~the allowance for credit losses of $4.2 million.

Loans

Gross loans ~~increased $476.1~~decreased $35.8 million, or ~~19.0%~~1.2%, to ~~$2.99~~$3.03 billion as of ~~September~~June 30, ~~2022~~2023 as compared to ~~$2.51~~$3.07 billion as of December 31, ~~2021.~~2022. Our loan ~~growth~~decline during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was comprised of an increase of ~~$12.4~~$4.0 million, or ~~32.0%~~8.3%, in construction and development loans, ~~an increase~~a decrease of ~~$88.2~~$32.1 million, or ~~16.9%~~4.9%, in

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commercial real estate loans, ~~a decrease~~an increase of ~~$20.4~~$10.3 million, or ~~27.9%~~19.4%, in commercial and industrial loans, ~~an increase~~a decrease of ~~$395.7~~$17.9 million, or ~~21.1%~~0.8%, in residential real estate loans and ~~an increase~~a decrease of ~~$119,000,~~$114,000, or ~~150.6%~~52.8%, in consumer and other loans. ~~Included in commercial and industrial loans are PPP loans totaling $1.6 million and unearned PPP fees of $31,000 as of September 30, 2022.~~ There were no loans classified as held for sale as of ~~September~~June 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

The following table presents the ending balance of each major category in our loan portfolio held for investment at the dates indicated.


	September 30, 2022				December 31, 2021				June 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Construction and development	$	51,300	1.7	%	$	38,857	1.6	%	$	51,759	1.7	%	$	47,779	1.6	%
Commercial real estate		608,700	20.4	%		520,488	20.7	%		625,111	20.6	%		657,246	21.4	%
Commercial and industrial		52,693	1.8	%		73,072	2.9	%		63,502	2.1	%		53,173	1.7	%
Residential real estate		2,274,679	76.1	%		1,879,012	74.8	%		2,289,050	75.6	%		2,306,915	75.3	%
Consumer and other		198	—	%		79	—	%		102	—	%		216	—	%
Gross loans	$	2,987,570	100.0	%	$	2,511,508	100.0	%	$	3,029,524	100.0	%	$	3,065,329	100.0	%
Less unearned income		(9,252)				(6,438)				(8,810)				(9,640)
Total loans held for investment	$	2,978,318			$	2,505,070			$	3,020,714			$	3,055,689

SBA Loan Servicing

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we serviced ~~$489.1~~$493.6 million and ~~$543.0~~$465.1 million, respectively, in SBA loans for others. We carried a servicing asset of ~~$8.3~~$8.0 million and ~~$10.2~~$7.1 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. See Note 4 of our consolidated financial statements as of ~~September~~June 30, ~~2022,~~2023, included elsewhere in this Form 10-Q, for additional information on the activity for SBA loan servicing rights for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

Residential Mortgage Loan Servicing

As of ~~September~~June 30, ~~2022,~~2023, we serviced ~~$550.6~~$487.8 million in residential mortgage loans for others compared to ~~$608.2~~$526.7 million as of December 31, ~~2021.~~2022. We carried a servicing asset, net of amortization, of ~~$5.0~~$2.5 million and ~~$7.7~~$4.0 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Amortization relating to the mortgage loan servicing asset was ~~$1.1~~$691,000 and $1.5 million ~~and $3.7 million, respectively,~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, respectively, compared to ~~$1.4~~$1.3 million and ~~$4.4~~$2.6 million for the same periods in ~~2021.~~2022. During the three and six months ended ~~September~~June 30, ~~2022,~~2023, we did not record a fair value impairment on our mortgage servicing asset compared to ~~a $420,000~~ fair value impairment ~~recovery~~recoveries of $88,000 and $163,000 recorded for the same ~~period~~periods in 2021. During the nine months ended September 30, 2022, we recorded a fair value impairment recovery of $163,000 on our mortgage servicing asset compared to a $17,000 fair value impairment recovery recorded for the same period in 2021.2022. See Note 5 of our consolidated financial statements as of ~~September~~June 30, ~~2022,~~2023, included elsewhere in this

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Form 10-Q, for additional information on the activity for mortgage loans servicing rights for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

Asset Quality

Nonperforming Loans

Asset quality remained relatively strong during the ~~third~~second quarter of ~~2022~~2023 as our nonperforming loans to total loans remained low at ~~0.94%~~0.75% as of ~~September~~June 30, ~~2022.~~2023. Nonperforming loans were ~~$28.1~~$22.6 million at ~~September~~June 30, ~~2022~~2023 compared to ~~$11.8~~$20.2 million at December 31, ~~2021.~~2022. The increase from December 31, ~~2021~~2022 to ~~September~~June 30, ~~2022~~2023 was ~~primarily~~ attributable to ~~an $8.9~~a $3.0 million increase in nonaccrual loans offset by a $308,000 decrease in accruing restructured loans and a ~~$7.7 million increase~~$180,000 decrease in ~~accruing troubled debt restructured loans. The majority of this increase is related to two commercial real estate loan relationships that both have sufficient collateral~~loans past due ninety days and ~~low loan-to-value ratios; therefore, no specific reserves are needed for these loans at this time.~~still accruing. We did not recognize any interest income on nonaccrual loans during the ~~three and nine~~six months ended ~~September~~June 30, ~~2022~~2023 or the year ended December 31, ~~2021.~~2022.

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The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and ~~loans modified under TDRs.~~accruing restructured loans. Nonaccrual loans at ~~September~~June 30, ~~2022~~2023 comprised of ~~$13.1~~$1.1 million of commercial real estate loans, ~~$133,000~~$1.6 million in commercial and industrial loans and ~~$4.5~~$10.3 million in residential real estate loans. Nonaccrual loans at December 31, ~~2021~~2022 comprised of ~~$3.7~~$4.9 million in commercial real estate loans, ~~$152,000~~$136,000 in commercial and industrial loans, and ~~$4.9~~$5.0 million in residential real estate loans.

					��
(Dollars in thousands)	September 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022
Nonaccrual loans	$	17,700		$	8,759		$	13,037		$	10,065
Past due loans 90 days or more and still accruing		—			342			—			180
Accruing troubled debt restructured loans		10,437			2,697
Accruing restructured loans								9,611			9,919
Total nonperforming loans		28,137			11,798			22,648			20,164
Foreclosed real estate		4,328			3,618			1,001			4,328
Total nonperforming assets	$	32,465		$	15,416		$	23,649		$	24,492
Nonperforming loans to gross loans		0.94	%		0.47	%		0.75	%		0.66	%
Nonperforming assets to total assets		0.97	%		0.50	%		0.68	%		0.71	%
Allowance for loan losses to nonperforming loans		53.25	%		143.69	%
Allowance for credit losses to nonperforming loans								79.88	%		68.88	%

In March 2020, regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID–19. The agencies confirmed with the staff of the FASB that short–term modifications made on a good faith basis in response to the COVID–19 pandemic to borrowers who were current prior to any relief, are not to be considered troubled debt restructurings. As of September 30, 2022, we had no non-SBA commercial loans, SBA loans or residential mortgages under an approved payment deferral plan. As of December 31, 2021, we had two non-SBA commercial loans with outstanding balances of $8.1 million who were under approved payment deferrals. As of December 31, 2021, we had approved payment deferrals for four SBA loans with outstanding gross loan balances totaling $6.5 million ($1.6 million unguaranteed book balance). We had no residential mortgages under approved payment deferrals as of December 31, 2021.

Allowance for ~~Loan~~Credit Losses

The allowance for ~~loan~~credit losses was ~~$15.0~~$18.1 million at ~~September~~June 30, ~~2022~~2023 compared to ~~$17.0~~$13.9 million at December 31, ~~2021, a decrease~~2022, an increase of ~~$2.0~~$4.2 million, or ~~11.6%.~~30.3 %. The ~~decrease~~increase was ~~mainly~~ due to the ~~credit provision~~CECL adoption during the first quarter of 2023, offset by a decrease in reserves allocated to individually analyzed loans and $452,000 in charge-offs recorded during the ~~three~~six months ended ~~September~~June 30, ~~2022~~2023. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was probable a loss event was incurred.

We maintain a reserve for credit losses that consist of two components, the allowance for credit losses and the allowance for unfunded commitments, The allowance for credit losses provides for the ~~release~~risk of ~~additional reserves allocated for the uncertainties~~credit losses expected in our loan portfolio ~~caused~~and is based on loss estimates derived from a comprehensive quarterly evaluation. The evaluation reflects analyses of individual borrowers for impairment coupled with analysis of historical loss experience in various loan pools that have been grouped based on similar risk characteristics, supplemented as necessary by ~~the ongoing COVID-19 pandemic.~~credit judgment that considers observable trends, conditions, reasonable and supportable forecasts, and other relevant environmental and economic factors. The COVID-19 provision was recorded in 2020 and 2021 for the uncertainties in our loan portfolio caused by the COVID-19 pandemic. The risks associated with some of these uncertainties have declined during the past few quarters as the COVID-19 pandemic continues to pose less and less risk to our borrowers. The Company is not required to implement the provisionslevel of the allowance for credit losses is adjusted by recording an expense or credit through the provision for credit losses. The level of the allowance for unfunded commitments is adjusted by recording an expense or credit in other noninterest expense. The allowance for unfunded commitments was created upon adoption of CECL ~~accounting standard issued by the FASB in the ASU No. 2016-13 until~~on January 1, 2023 and ~~is continuing to account for the allowance for loan losses under the incurred loss model.~~

~~In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review~~had a balance of impaired commercial and industrial, commercial real estate, construction and land development loans, and (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors. Provisions for loan losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.

~~It is the policy~~$241,000 as of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. The FDIC and Georgia Department of Banking and Finance also review the allowance for loan losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if economic conditions and the real estate market in our market areas were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.June 30, 2023.

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The following table provides an analysis of the allowance for ~~loan~~credit losses, provision for ~~loan~~credit losses and net charge-offs for the periods presented below:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands )	2022			2021			2022			2021			2023			2022			2023			2022
Balance, beginning of period	$	16,678		$	13,860		$	16,952		$	10,135		$	18,947		$	16,674		$	13,888		$	16,952
CECL adoption (Day 1) impact														—			—			5,055			—
Charge-offs:
Construction and development		—			—			—			—			—			—			—			—
Commercial real estate		—			—			—			26			231			—			231			390
Commercial and industrial		—			—			390			64			221			—			221			—
Residential real estate		—			—			—			—			—			—			—			—
Consumer and other		—			—			—			—			—			—			—			—
Total charge-offs		—			—			390			90			452			—			452			390
Recoveries:
Construction and development		—			—			—			—			—			—			—			—
Commercial real estate		1			4			5			10			1			2			3			4
Commercial and industrial		6			—			9			—			13			2			15			3
Residential real estate		—			—			—			—			—			—			—			—
Consumer and other		—			2			5			7			—			—			—			5
Total recoveries		7			6			19			17			14			4			18			12
Net charge-offs/(recoveries)		(7)			(6)			371			73
Net (recoveries)/charge-offs														438			(4)			434			378
Provision for loan losses		(1,703)			2,579			(1,599)			6,383			(418)			—			(418)			104
Balance, end of period	$	14,982		$	16,445		$	14,982		$	16,445		$	18,091		$	16,678		$	18,091		$	16,678
Total loans at end of period	$	2,987,570		$	2,368,487		$	2,987,570		$	2,368,487		$	3,029,524		$	2,777,236		$	3,029,524		$	2,777,236
Average loans⁽¹⁾		2,891,934			2,241,207			2,678,474			1,993,270			3,024,660			2,597,019			3,037,348			2,571,633
Net charge-offs to average loans		0.00	%		0.00	%		0.02	%		0.00	%		0.06	%		0.00	%		0.03	%		0.03	%
Allowance for loan losses to total loans		0.50	%		0.69	%		0.50	%		0.69	%
Allowance for credit losses to total loans														0.60	%		0.60	%		0.60	%		0.60	%

(1)	Excludes loans held for sale.

Management believes the allowance for ~~loan~~credit losses is adequate to provide for losses inherent in the loan portfolio as of ~~September~~June 30, ~~2022.~~2023.

Deposits

Total deposits increased ~~$307.8~~$31.6 million, or ~~13.6%~~1.2%, to ~~$2.57~~$2.70 billion at ~~September~~June 30, ~~2022~~2023 compared to ~~$2.26~~$2.67 billion at December 31, ~~2021.~~2022. The increase was ~~primarily~~ due to ~~the $146.7 million increase in money market accounts,~~ a ~~$137.8~~$135.5 million increase in time deposits, offset by a ~~$23.1~~$59.9 million ~~increase~~decrease in interest-bearing demand deposits, ~~and~~ a ~~$9.8~~$36.7 million ~~increase~~decrease in noninterest-bearing ~~demand~~ deposits, ~~offset by~~ a ~~$9.5~~$5.7 million decrease in savings ~~accounts. The increase~~accounts and a $1.6 million decrease in money market ~~accounts was partially due to the increase of $114.2 million in brokered money market balances during the nine months ended September 30, 2022.~~accounts. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021, 23.4%~~2022, 21.3% and ~~26.2%~~22.9% of total deposits, respectively, were comprised of noninterest-bearing demand accounts and ~~76.6%~~78.7% and ~~73.8%~~77.1%, respectively, of interest-bearing deposit accounts.

We had ~~$559.5~~$498.1 million of brokered deposits, or ~~21.8%~~18.5% of total deposits, at ~~September~~June 30, ~~2022~~2023 compared to ~~$425.1~~$523.7 million, or ~~18.8%~~19.6% of total deposits, at December 31, ~~2021.~~2022. We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on

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competitive interest rate conditions and other factors and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from the Federal Home Loan Bank.

~~Table~~Uninsured deposits were 30.7% of ~~Contents~~total deposits at June 30, 2023, compared to 32.5% and 28.5% at December 31, 2022 and June 30, 2022, respectively. As of June 30, 2023, we had $1.19 billion of available borrowing capacity at the Federal Home Loan Bank ($702.5 million), Federal Reserve Discount Window ($444.6 million) and various other financial institutions (fed fund lines totaling $47.5 million).

The following table summarizes our average deposit balances and weighted average rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.


	Three Months Ended September 30,									Three Months Ended June 30,
	2022					2021				2023					2022
	Average		Weighted			Average		Weighted		Average		Weighted			Average		Weighted
(Dollars in thousands )	Balance		Average Rate			Balance		Average Rate		Balance		Average Rate			Balance		Average Rate
Noninterest-bearing demand	$	599,902		—	%	$	600,388	—	%	$	558,907		—	%	$	611,763	—	%
Interest-bearing demand deposits		161,447		0.80			85,966	0.20			146,445		2.28			166,817	0.21
Savings and money market deposits		718,454		1.60			371,234	0.35			549,720		3.37			746,879	0.63
Brokered money market deposits		486,512		1.87			416,229	0.11			421,400		5.47			450,036	0.63
Time deposits		499,577		1.14			506,049	0.37			927,478		3.72			389,449	0.43
Total interest-bearing deposits		1,865,990		1.48			1,379,478	0.28			2,045,043		3.88			1,753,181	0.55
Total deposits	$	2,465,892		1.12		$	1,979,866	0.19		$	2,603,950		3.05		$	2,364,944	0.40


	Nine Months Ended September 30,									Six Months Ended June 30,
	2022					2021				2023					2022
	Average		Weighted			Average		Weighted		Average		Weighted			Average		Weighted
(Dollars in thousands )	Balance		Average Rate			Balance		Average Rate		Balance		Average Rate			Balance		Average Rate
Noninterest-bearing demand	$	600,045		—	%	$	548,844	—	%	$	568,888		—	%	$	600,117	—	%
Interest-bearing demand deposits		161,249		0.39			77,516	0.20			147,848		2.01			161,148	0.18
Savings and money market deposits		723,706		0.85			337,904	0.36			553,592		3.29			726,375	0.47
Brokered money market deposits		449,772		0.93			340,877	0.11			430,222		5.16			431,098	0.40
Time deposits		443,632		0.68			506,445	0.44			902,280		3.50			415,196	0.40
Total interest-bearing deposits		1,778,359		0.79			1,262,742	0.30			2,033,942		3.69			1,733,817	0.41
Total deposits	$	2,378,404		0.59		$	1,811,586	0.21		$	2,602,830		2.88		$	2,333,934	0.30

Borrowed Funds

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential real estate loans. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we had ~~maximum~~available borrowing capacity from the FHLB of ~~$949.0~~$702.5 million and ~~$826.9~~$633.6 million, respectively. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we had ~~$375.0~~$325.0 million and ~~$500.0~~$375.0 million, respectively, of outstanding advances from the FHLB.

In addition to our advances with the FHLB, we maintain federal funds agreements with our correspondent banks. Our available borrowings under these agreements were $47.5 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. We did not have any advances outstanding under these agreements as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

Liquidity and Capital Resources

Liquidity

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while

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maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.

~~Table of Contents~~

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we had $47.5 million of unsecured federal funds lines with no amounts advanced. In addition, ~~we have access to~~ the ~~FRB’s discount window in the amount~~Company had Federal Reserve Discount Window funds available of ~~$10.0~~approximately $444.6 million ~~with no borrowings outstanding as of September~~and $28.0 million at June 30, ~~2022~~2023 and December 31, ~~2021.~~2022, respectively. The FRB discount window line is collateralized by a pool of construction and development, commercial real estate ~~loans~~ and commercial and industrial loans with carrying balances totaling ~~$32.7~~$523.7 million as of ~~September~~June 30, 2023, as well as all of the Company’s municipal and mortgage backed securities. There were no outstanding borrowings on this line as of June 30, 2023 and December 31, 2022.

At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we had ~~$375.0~~$325.0 million and ~~$500.0~~$375.0 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had ~~$574.0~~$702.5 million and ~~$326.9~~$633.6 million of additional borrowing availability with the FHLB as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

Capital Requirements

The Company and the Bank are required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.

The table below summarizes the capital requirements applicable to the Company and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Company’s and the Bank’s capital ratios as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. As of December 31, ~~2021,~~2022, the FDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events since December 31, ~~2021~~2022 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession, its reported and regulatory capital ratios could be adversely impacted in future periods.

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							Regulatory								Regulatory
							Capital Ratio								Capital Ratio
							Requirements		Minimum						Requirements		Minimum
							including		Requirement						including		Requirement
							fully phased-		for "Well						fully phased-		for "Well
					Regulatory		in Capital		Capitalized"						in Capital		Capitalized"
					Capital Ratio		Conservation		Depository						Conservation		Depository
	September 30, 2022		December 31, 2021		Requirements		Buffer		Institution		June 30, 2023		December 31, 2022		Buffer		Institution
Total capital (to risk-weighted assets)
Consolidated	16.94	%	17.77	%	8.00	%	10.50	%	N/A		17.59	%	16.68	%	10.50	%	N/A
Bank	16.65	%	17.18	%	8.00		10.50		10.00	%	17.56	%	16.61	%	10.50		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	16.18	%	16.76	%	6.00	%	8.50	%	N/A		16.69	%	15.99	%	8.50	%	N/A
Bank	15.90	%	16.17	%	6.00		8.50		8.00	%	16.66	%	15.93	%	8.50		8.00	%
CETI capital (to risk-weighted assets)
Consolidated	16.18	%	16.76	%	4.50	%	7.00	%	N/A		16.69	%	15.99	%	7.00	%	N/A
Bank	15.90	%	16.17	%	4.50		7.00		6.50	%	16.66	%	15.93	%	7.00		6.50	%
Tier 1 capital (to average assets)
Consolidated	9.90	%	9.44	%	4.00	%	4.00	%	N/A		10.03	%	9.57	%	4.00	%	N/A
Bank	9.73	%	9.11	%	4.00		4.00		5.00	%	10.01	%	9.54	%	4.00		5.00	%

Dividends

On ~~October~~July 19, ~~2022,~~2023, the Company declared a cash dividend of ~~$0.15~~$0.18 per share, payable on ~~November 10, 2022,~~August 11, 2023, to common shareholders of record as of ~~November 2, 2022.~~August 3, 2023. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management’s credit evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.

See Note 9 of our consolidated financial statements as of ~~September~~June 30, ~~2022,~~2023, included elsewhere in this Form 10-Q, for more information regarding our off-balance sheet arrangements as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.

Interest Rate Risk

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and ~~LIBOR~~Federal funds effective (basis risk).

Our board of directors establishes broad policy limits with respect to interest rate risk. As part of this policy, the asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, the ALCO focuses on ensuring a stable and steadily increasing flow of net interest income through managing the size and mix of the balance sheet. The management of interest rate risk is an active process which encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

Evaluation of Interest Rate Risk

We use income simulations, an analysis of core funding utilization, and economic value of equity (EVE) simulations as our primary tools in measuring and managing interest rate risk. These tools are utilized to quantify the potential earnings impact of changing interest rates over a two year simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities.

There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Bank’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Bank’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.

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Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios, the collective impact of which will enable the Bank to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.

We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run three standard and plausible comparing current or flat rates with a +/- 200 basis point ramp in rates over 12 months. These rate scenarios are considered appropriate as they are neither too modest (e.g. +/- 100 basis points) or too extreme (e.g. +/- 400 basis points) given the economic and rate cycles which have unfolded in the last 25 years. This analysis also provides the foundation for historical tracking of interest rate risk. The impact of interest rate derivatives, such as interest rate swaps and caps, is included in the model.

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are presented in the following table:


	Net Interest Income Sensitivity								Net Interest Income Sensitivity
	12 Month Projection				24 Month Projection				12 Month Projection				24 Month Projection
(Ramp in basis points)	+200		-100		+200		-100		+200		-200		+200		-200
September 30, 2022	(3.80)	%	2.80	%	9.30	%	9.80	%
December 31, 2021	(3.60)	%	(1.20)	%	(8.70)	%	(10.30)	%
June 30, 2023									1.90	%	0.20	%	20.50	%	10.80	%
December 31, 2022									(1.60)	%	2.50	%	21.60	%	12.90	%

We also model the impact of rate changes on our Economic Value of Equity, or EVE. We base the modeling of EVE based on interest rate shocks as shocks are considered more appropriate for EVE, which accelerates future interest rate risk into current capital via a present value calculation of all future cashflows from the bank’s existing inventory of assets and liabilities. Our simulation model incorporates interest rate shocks of +/- 100, 200, and 300 basis points. The results of the model are presented in the table below:


	Economic Value of Equity Sensitivity								Economic Value of Equity Sensitivity
(Shock in basis points)	+300		+200		+100		-100		+200		+100		-100		-200
September 30, 2022	(15.20)	%	(10.00)	%	(5.10)	%	5.80	%
December 31, 2021	(8.90)	%	(3.60)	%	(0.20)	%	(11.90)	%
June 30, 2023									(11.60)	%	(5.80)	%	6.70	%	12.90	%
December 31, 2022									(11.90)	%	(5.90)	%	6.90	%	13.10	%

Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September~~June 30, ~~2022.~~2023. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of ~~September~~June 30, ~~2022.~~2023.

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Changes in Internal Control over Financial Reporting

During the quarter ended ~~September~~June 30, ~~2022,~~2023, there was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company is continually monitoring and assessing changes in processes and activities to determine any potential impact on the design and operating effectiveness of internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to various legal proceedings such as claims and lawsuits arising in the course of our normal business activities. Although the ultimate outcome of all claims and lawsuits outstanding as of ~~September~~June 30, ~~2022~~2023 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on our business, results of operations or financial condition.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Part I – Item 1A – Risk Factors” of the Company’s ~~2021~~2022 Form 10-K, and as disclosed in “Part II – Item 1A. – Risk Factors” of our Quarterly Reports on Form 10-Q for the preiod ended March 31, 2023, which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.

There are no material changes during the period covered by this Report to the risk factors previously disclosed in the Company’s ~~2021~~2022 Form ~~10-K.~~10-K and the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~The following table summarizes the repurchases of our common shares for the three months ended September 30, 2022.~~Not applicable.

Total Number of

Shares Repurchased

Maximum Number of

as Part of Publicly

Shares That May Yet Be

Total Number of

Average Price Paid

Announced

Purchased Under


Shares Repurchased

Per Share

Plans or Programs

the Plans or Programs
July 1, 2022 to July 31, 2022

3,335

19.82

3,335

570,648
August 1, 2022 to August 31, 2022

5,837

19.99

5,837

564,811
September 1, 2022 to September 30, 2022

71,536

19.88

71,536

493,275
Total

80,708

19.89

80,708

493,275

On May 5, 2022, the Company announced that the Board of Directors of the Company approved the adoption of a share repurchase program authorizing the Company to repurchase up to 689,191 shares of the Company’s outstanding shares of common stock. The share repurchase program began on May 6, 2022 and will end on April 30, 2023. The repurchases will be made in compliance with all Securities and Exchange Commission rules, including Rule 10b-18, and other legal requirements and may be made in part under Rule 10b5-1 plans, which permits stock repurchases when the Company might otherwise be precluded from doing so. Repurchases can be made from time-to-time in the open market or through privately negotiated transactions depending on market and/or other conditions. The repurchase program may be modified, suspended or discontinued at any time.

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Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

~~None.~~On May 9, 2023, Don T.P. Leung, director and Vice Chairman of the Board of Directors of the Company, adopted a trading plan intended to satisfy the conditions under Rule 10b5-1(c) of the Exchange Act. Mr. Leung’s plan is for the sale of up to 300,000 shares of our common stock beginning on or after August 9, 2023 in amounts and prices determined in accordance with formulas set forth in the plan and terminates on the earlier of the date all the shares under the plan are sold or August 8, 2024.

During the second quarter of 2023, none of our other executive officers or directors adopted Rule 10b5-1 trading plans and none of our directors or executive officers terminated a Rule 10b5-1 trading plan or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).

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Item 6. Exhibits


Exhibit No.		Description of Exhibit

3.1		Restated Articles of Incorporation of MetroCity Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed September 4, 2019 (File No. 333-233625)
3.2		Amended and Restated Bylaws of MetroCity Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed September 4, 2019 (File No. 333-233625)
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File - the cover page has been formatted in Inline XBRL and contained within the Inline XBRL Instance Document in Exhibit 101

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	METROCITY BANKSHARES, INC.

Date: ~~November~~August 4, ~~2022~~2023	By:	/s/ Nack Y. Paek
		Nack Y. Paek
		Chief Executive Officer

Date: ~~November~~August 4, ~~2022~~2023	By:	/s/ Lucas Stewart
		Lucas Stewart
		Chief Financial Officer

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			Total Number of
			Shares Repurchased	Maximum Number of
			as Part of Publicly	Shares That May Yet Be
	Total Number of	Average Price Paid	Announced	Purchased Under
	Shares Repurchased	Per Share	Plans or Programs	the Plans or Programs
July 1, 2022 to July 31, 2022	3,335	19.82	3,335	570,648
August 1, 2022 to August 31, 2022	5,837	19.99	5,837	564,811
September 1, 2022 to September 30, 2022	71,536	19.88	71,536	493,275
Total	80,708	19.89	80,708	493,275