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 30, 2022~~March 31, 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 1, 2022,~~May 2, 2023, the registrant had ~~25,308,824~~25,143,675 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 30, 2022~~March 31, 2023

TABLE OF CONTENTS

		Page
Part I.	Financial Information

Item l.	Financial Statements:
	Consolidated Balance Sheets as of ~~September 30, 2022~~March 31, 2023 (unaudited) and December 31, ~~2021~~2022	3
	Consolidated Statements of Income (unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	4
	Consolidated Statements of Comprehensive Income (unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	5
	Consolidated Statements of Shareholders’ Equity (unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	6
	Consolidated Statements of Cash Flows (unaudited) for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	7
	Notes to Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5651
Item 4.	Controls and Procedures	5752

Part II.	Other Information

Item 1.	Legal Proceedings	5853
Item 1A.	Risk Factors	5853
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5854
Item 3.	Defaults Upon Senior Securities	5954
Item 4.	Mine Safety Disclosures	5954
Item 5.	Other Information	5954
Item 6.	Exhibits	5954
	Signatures	6056

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,		March 31,		December 31,
	2022		2021		2023		2022
	(Unaudited)				(Unaudited)
Assets:
Cash and due from banks	$	164,054	$	432,523	$	216,167	$	150,964
Federal funds sold		15,669		8,818		7,897		28,521
Cash and cash equivalents		179,723		441,341		224,064		179,485
Equity securities		10,452		11,386		10,428		10,300
Securities available for sale		19,978		25,733		19,174		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 $18,947 and $13,888, respectively						2,993,073		3,041,801
Accrued interest receivable		11,732		11,052		13,642		13,171
Federal Home Loan Bank stock		15,619		19,701		17,659		17,493
Premises and equipment, net		13,664		13,068		15,165		14,257
Operating lease right-of-use asset		8,835		9,338		8,030		8,463
Foreclosed real estate, net		4,328		3,618		766		4,328
SBA servicing asset		8,324		10,234		7,791		7,085
Mortgage servicing asset, net		4,975		7,747		3,205		3,973
Bank owned life insurance		68,697		59,437		69,565		69,130
Interest rate derivatives						24,008		28,781
Other assets		38,776		5,385		12,443		9,727
Total assets	$	3,348,439	$	3,106,158	$	3,419,013	$	3,427,239

Liabilities:
Deposits:
Non-interest-bearing demand	$	602,246	$	592,444	$	577,282	$	611,991
Interest-bearing		1,968,607		1,670,576		2,066,811		2,054,847
Total deposits		2,570,853		2,263,020		2,644,093		2,666,838

Federal Home Loan Bank advances		375,000		500,000		375,000		375,000
Other borrowings		396		459		387		392
Operating lease liability		9,303		9,861		8,438		8,885
Accrued interest payable		1,489		204		3,681		2,739
Other liabilities		42,369		42,391		34,453		23,964
Total liabilities	$	2,999,410	$	2,815,935	$	3,066,052	$	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, 25,143,675 and 25,169,709 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively						251		252
Additional paid-in capital		48,914		51,559		45,044		45,298
Retained earnings		279,475		238,577		293,139		285,832
Accumulated other comprehensive income (loss)		20,386		(168)
Accumulated other comprehensive income						14,527		18,039
Total shareholders' equity		349,029		290,223		352,961		349,421
Total liabilities and shareholders' equity	$	3,348,439	$	3,106,158	$	3,419,013	$	3,427,239

See accompanying notes to unaudited consolidated financial statements.

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METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Interest and dividend income:
Loans, including fees	$	37,263	$	29,127	$	101,032	$	77,355	$	43,982	$	31,459
Other investment income		1,011		196		2,214		525		1,939		492
Federal funds sold		23		1		29		4		44		2
Total interest income		38,297		29,324		103,275		77,884		45,965		31,953

Interest expense:
Deposits		6,964		968		10,487		2,879		17,376		1,139
FHLB advances and other borrowings		1,545		167		2,127		457		2,356		161
Total interest expense		8,509		1,135		12,614		3,336		19,732		1,300

Net interest income		29,788		28,189		90,661		74,548		26,233		30,653

Provision for loan losses		(1,703)		2,579		(1,599)		6,383
Provision for credit losses										—		104

Net interest income after provision for loan losses		31,491		25,610		92,260		68,165
Net interest income after provision for credit losses										26,233		30,549

Noninterest income:
Service charges on deposit accounts		509		446		1,508		1,230		449		481
Other service charges, commissions and fees		2,676		4,147		8,482		11,422		874		2,159
Gain on sale of residential mortgage loans		—		—		2,017		—		—		1,211
Mortgage servicing income, net		(358)		132		(262)		(659)		(96)		101
Gain on sale of SBA loans		500		3,358		2,068		8,057		1,969		1,568
SBA servicing income, net		1,330		1,212		1,897		5,250		1,814		1,644
Other income		444		237		1,700		1,012		1,006		492
Total noninterest income		5,101		9,532		17,410		26,312		6,016		7,656

Noninterest expense:
Salaries and employee benefits		7,756		8,679		22,781		22,293		6,366		7,096
Occupancy and equipment		1,167		1,295		3,594		3,822		1,214		1,227
Data processing		270		257		808		848		275		277
Advertising		158		131		434		393		146		150
Other expenses		3,337		2,749		10,369		8,556		2,678		3,429
Total noninterest expense		12,688		13,111		37,986		35,912		10,679		12,179

Income before provision for income taxes		23,904		22,031		71,684		58,565		21,570		26,026
Provision for income taxes		7,011		5,149		19,262		14,309		5,840		6,597
Net income available to common shareholders	$	16,893	$	16,882	$	52,422	$	44,256	$	15,730	$	19,429

Earnings per share:
Basic	$	0.66	$	0.66	$	2.06	$	1.73	$	0.63	$	0.76
Diluted	$	0.66	$	0.66	$	2.04	$	1.71	$	0.62	$	0.76

See accompanying notes to unaudited consolidated financial statements.

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METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022

Net income	$	16,893	$	16,882	$	52,422	$	44,256	$	15,730	$	19,429

Other comprehensive gain (loss):
Other comprehensive (loss) gain:

Unrealized holding losses on securities available for sale		(893)		(11)		(3,707)		(53)
Unrealized holding gains (losses) on securities available for sale										368		(1,484)
Net changes in fair value of cash flow hedges		19,332		(200)		31,113		(200)		(5,134)		7,358
Tax effect		(4,610)		54		(6,852)		65		1,254		(1,469)

Other comprehensive gain (loss)		13,829		(157)		20,554		(188)
Other comprehensive (loss) gain										(3,512)		4,405

Comprehensive income	$	30,722	$	16,725	$	72,976	$	44,068	$	12,218	$	23,834

See accompanying notes to unaudited consolidated financial statements.

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METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share data)


								Accumulated											Accumulated
	Common Stock			Additional				Other				Common Stock			Additional				Other
	Number of			Paid-in		Retained		Comprehensive				Number of			Paid-in		Retained		Comprehensive
	Shares	Amount		Capital		Earnings		Income (Loss)		Total		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
Balance, January 1, 2023												25,169,709	$	252	$	45,298	$	285,832	$	18,039	$	349,421
Net income	—		—		—		16,893		—		16,893	—		—		—		15,730		—		15,730
Stock based compensation expense	—		—		689		—		—		689	—		—		298		—		—		298
Repurchase of common stock	(80,708)		(1)		(1,606)		—		—		(1,607)	(26,034)		(1)		(552)		—		—		(553)
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
Impact of adoption of new accounting standard, net of tax⁽¹⁾												—		—		—		(3,865)		—		(3,865)
Other comprehensive loss												—		—		—		—		(3,512)		(3,512)
Dividends declared on common stock ($0.18 per share)												—		—		—		(4,558)		—		(4,558)
Balance, March 31, 2023												25,143,675	$	251	$	45,044	$	293,139	$	14,527	$	352,961

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	25,465,236	$	255	$	51,559	$	238,577	$	(168)	$	290,223
Net income	—		—		—		52,422		—		52,422	—		—		—		19,429		—		19,429
Stock based compensation expense	—		—		1,242		—		—		1,242	—		—		194		—		—		194
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	—		—		—		—		4,405		4,405
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
Dividends declared on common stock ($0.15 per share)												—		—		—		(3,841)		—		(3,841)
Balance, March 31, 2022												25,465,236	$	255	$	51,753	$	254,165	$	4,237	$	310,410

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

See accompanying notes to unaudited consolidated financial statements.

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METROCITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2023		2022
Cash flow from operating activities:
Net income	$	52,422	$	44,256	$	15,730	$	19,429
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		2,665		2,173		705		711
Provision for loan losses		(1,599)		6,383
Provision for credit losses						—		104
Stock based compensation expense		1,242		1,049		298		194
Unrealized losses recognized on equity securities		934		7
Loss on sale of foreclosed real estate		15		93
Unrealized (gains) losses recognized on equity securities						(128)		362
(Gain) loss on sale of foreclosed real estate						(547)		15
Proceeds from sales of residential real estate loans		96,932		—		—		58,198
Gain on sale of residential mortgages		(2,017)		—		—		(1,211)
Origination of SBA loans held for sale		(32,077)		(95,764)		(36,969)		(23,391)
Proceeds from sales of SBA loans held for sale		34,145		103,821		38,938		24,959
Gain on sale of SBA loans		(2,068)		(8,057)		(1,969)		(1,568)
Increase in cash value of bank owned life insurance		(1,260)		(755)		(435)		(404)
Increase in accrued interest receivable		(680)		(66)		(471)		408
Decrease (increase) in SBA servicing rights		1,910		(1,273)
Increase in SBA servicing rights						(706)		(320)
Decrease in mortgage servicing rights		2,772		4,398		768		822
Increase in other assets		(9,175)		(87)		(33)		(810)
Increase (decrease) in accrued interest payable		1,285		(14)
Decrease in other liabilities		(1,839)		(1,271)
Increase in accrued interest payable						942		3
Increase in other liabilities						9,410		16,915
Net cash flow provided by operating activities		143,607		54,893		25,533		94,416

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		421		345
Redemption (purchase) of Federal Home Loan Bank stock		4,082		(6,054)
Increase in loans, net		(569,300)		(732,246)
(Purchase) redemption of Federal Home Loan Bank stock						(166)		3,895
Decrease (increase) in loans, net						43,673		(102,527)
Purchases of premises and equipment		(1,429)		(333)		(1,162)		(26)
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						46,875		(106,272)

Cash flow from financing activities:
Dividends paid on common stock		(11,493)		(8,232)		(4,526)		(3,821)
Repurchases of common stock		(3,888)		(5,544)		(553)		—
Increase in deposits, net		307,833		631,938
(Decrease) increase in deposits, net						(22,745)		119,121
Decrease in other borrowings, net		(63)		(15)		(5)		(54)
Proceeds from Federal Home Loan Bank advances		475,000		270,000		125,000		—
Repayments of Federal Home Loan Bank advances		(600,000)		(80,000)		(125,000)		(120,000)
Net cash flow provided by financing activities		167,389		808,147
Net cash flow used by financing activities						(27,829)		(4,754)

~~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,				Three Months Ended March 31,
	2022		2021		2023		2022

Net change in cash and cash equivalents		(261,618)		102,601		44,579		(16,610)
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	$	224,064	$	424,731

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

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	$	18,790	$	1,297

Income taxes	$	23,432	$	17,932	$	686	$	488

See accompanying notes to unaudited consolidated financial statements.

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METROCITY BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2022~~MARCH 31, 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~~months ended ~~September 30, 2022~~March 31, 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~~three 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 30, 2022.~~March 31, 2023. Although the ultimate outcome of all claims and lawsuits outstanding as of ~~September 30, 2022~~March 31, 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~~Comnpany 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 $3.9 million decrease to retained earnings, net of a $1.4 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 $79,000 and ~~run parallel calculations~~$114,000 as of March 31, 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 quarter 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 March 31, 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 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 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are summarized as follows:


	September 30, 2022								March 31, 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	$	4,834	$	—	$	—	$	4,834
States and political subdivisions		8,133		—		(1,842)		6,291		8,109		—		(1,555)		6,554
Mortgage-backed GSE residential		9,814		—		(1,812)		8,002		9,338		—		(1,552)		7,786
Total	$	23,632	$	—	$	(3,654)	$	19,978	$	22,281	$	—	$	(3,107)	$	19,174


	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 30, 2022~~March 31, 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		5,697		5,676
Due after five years but less than ten years		380			365		379		375
Due in more than ten years		6,891			5,106		6,867		5,337
Mortgage-backed GSE residential		9,814	��		8,002		9,338		7,786
Total	$	23,632		$	19,978	$	22,281	$	19,174

As of March 31, 2023, the Company had securities pledged to the Federal Reserve Bank Discount Window with a carrying amount of $14.3 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~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

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Information pertaining to securities with gross unrealized losses at ~~September 30, 2022~~March 31, 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								March 31, 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	$	—	$	—	$	—	$	—	$	1,555	$	6,554
Mortgage-backed GSE residential		150		9,530		—		—		—		—		1,552		7,786
Total	$	161	$	11,731	$	—	$	—	$	—	$	—	$	3,107	$	14,340

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 30, 2022,~~March 31, 2023, the ~~twenty~~nineteen securities available for sale (11 municipal securities and 8 mortgage-backed securities) with an unrealized loss have depreciated ~~20.36%~~17.81% 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~~March 31, 2023 represent a credit loss impairment. As of March 31, 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 30, 2022~~March 31, 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 30,~~March 31, 2023 and 2022, we recognized an unrealized gain of $128,000 and an unrealized loss of ~~$327,000 and $934,000,~~$362,000, respectively, in net income on our equity securities. ~~During the three~~These unrealized gains and ~~nine months ended September 30, 2021, we recognized an unrealized loss of $7,000 in net income on our equity securities. The unrealized loss is~~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 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are summarized as follows:


	September 30,		December 31,		March 31,		December 31,
(Dollars in thousands)	2022		2021		2023		2022
Construction and development	$	51,300	$	38,857	$	49,209	$	47,779
Commercial real estate		608,700		520,488		639,951		657,246
Commercial and industrial		52,693		73,072		46,208		53,173
Residential real estate		2,274,679		1,879,012		2,285,902		2,306,915
Consumer and other		198		79		50		216
Total loans receivable		2,987,570		2,511,508		3,021,320		3,065,329
Unearned income		(9,252)		(6,438)		(9,300)		(9,640)
Allowance for loan losses		(14,982)		(16,952)
Allowance for credit losses						(18,947)		(13,888)
Loans, net	$	2,963,336	$	2,488,118	$	2,993,073	$	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 March 31, 2023, and December 31, 2022, accrued interest receivable for loans totaled $13.6 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~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ is as follows:


	Three Months Ended September 30, 2022														Three Months Ended March 31, 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	$	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		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Recoveries		—		1		6		—		—		—		7		—		2		2		—		—		—		4
Provision		24		(510)		(1,970)		845		4		(96)		(1,703)
Provision expense																—		—		—		—		—		—		—
Ending balance	$	164	$	3,030	$	2,255	$	9,523	$	10	$	—	$	14,982	$	45	$	6,088	$	1,021	$	11,792	$	1	$	—	$	18,947

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	Three Months Ended September 30, 2021														Three Months Ended March 31, 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	$	100	$	4,146	$	4,989	$	7,717	$	—	$	—	$	16,952
Charge-offs		—		—		—		—		—		—		—		—		—		(390)		—		—		—		(390)
Recoveries		—		4		—		—		2		—		6		—		2		1		—		5		—		8
Provision		19		(3,246)		4,601		1,207		(2)		—		2,579
Provision expense																(7)		146		(159)		(93)		—		217		104
Ending balance	$	230	$	3,920	$	5,200	$	7,095	$	—	$	—	$	16,445	$	93	$	4,294	$	4,441	$	7,624	$	5	$	217	$	16,674

Nine Months Ended 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:

Beginning balance

$
100

$
4,146

$
4,989

$
7,717

$
—

$
—

$
16,952
Charge-offs

—

—

(390)

—

—

—

(390)
Recoveries

—

5

9

—

5

—

19
Provision

64

(1,121)

(2,353)

1,806

5

—

(1,599)
Ending balance

$
164

$
3,030

$
2,255

$
9,523

$
10

$
—

$
14,982

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.

Nine Months Ended September 30, 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:














Beginning balance

$
178

$
5,161

$
438

$
4,350

$
8

$
—

$
10,135
Charge-offs

—

(26)

(64)

—

—

—

(90)
Recoveries

—

10

—

—

7

—

17
Provision

52

(1,225)

4,826

2,745

(15)

—

6,383
Ending balance

$
230

$
3,920

$
5,200

$
7,095

$
—

$
—

$
16,445


	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.

1316

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 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. 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 March 31, 2023, there were $23.7 million of collateral-dependent loans which are primarily secured by residential and commercial real estate, as well as equipment. 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 30, 2022~~March 31, 2023 was $488,000.

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 March 31, 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
March 31, 2023	Current		30-59 Days		60-89 Days		90 Days		Past Due		Nonaccrual		Receivables
Construction and development	$	49,046	$	—	$	—	$	—	$	—	$	—	$	49,046
Commercial real estate		623,034		12,774		—		—		12,774		1,569		637,377
Commercial and industrial		45,797		117		—		—		117		218		46,132
Residential real estate		2,260,549		9,648		1,941		—		11,589		7,277		2,279,415
Consumer and other		50		—		—		—		—		—		50
Total	$	2,978,476	$	22,539	$	1,941	$	—	$	24,480	$	9,064	$	3,012,020

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

1417

Table of Contents

The following table presents an analysis of nonaccrual loans with and without a related allowance for credit losses as of March 31, 2023:


	Nonaccrual		Nonaccrual
(Dollars in thousands)	Loans With a		Loans Without a		Total
March 31, 2023	Related ACL		Related ACL		Nonaccrual Loans
Commercial real estate	$	1,228	$	341	$	1,569
Commercial and industrial		93		125		218
Residential real estate		—		7,277		7,277
Total	$	1,321	$	7,743	$	9,064

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 March 31, 2023. There were no loans with a risk rating of Doubtful or Loss at March 31, 2023.


(Dollars in thousands)	Term Loan by Origination Year												Revolving
March 31, 2023	2023		2022		2021		2020		2019		Prior		Loans		Total Loans
Construction and development
Pass	$	363	$	9,296	$	19,843	$	1,209	$	18,092	$	243	$	—	$	49,046
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total construction and development	$	363	$	9,296	$	19,843	$	1,209	$	18,092	$	243	$	—	$	49,046
Commercial real estate
Pass	$	28,770	$	209,970	$	113,081	$	88,402	$	52,232	$	114,628	$	3,600	$	610,683
Special Mention		—		—		—		1,960		—		—		—		1,960
Substandard		—		604		—		1,169		10,812		12,149		—		24,734
Total commercial real estate	$	28,770	$	210,574	$	113,081	$	91,531	$	63,044	$	126,777	$	3,600	$	637,377
Commercial and industrial
Pass	$	1,379	$	16,187	$	5,434	$	2,696	$	3,253	$	4,206	$	8,924	$	42,079
Special Mention		—		—		1,373		375		598		1,354		—		3,700
Substandard		—		—		—		—		331		22		—		353
Total commercial and industrial	$	1,379	$	16,187	$	6,807	$	3,071	$	4,182	$	5,582	$	8,924	$	46,132
Residential real estate
Pass	$	36,319	$	782,002	$	899,623	$	315,247	$	69,156	$	168,902	$	—	$	2,271,249
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		1,187		1,218		1,192		4,569		—		8,166
Total residential real estate	$	36,319	$	782,002	$	900,810	$	316,465	$	70,348	$	173,471	$	—	$	2,279,415
Consumer and other
Pass	$	50	$	—	$	—	$	—	$	—	$	—	$	—	$	50
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total consumer and other	$	50	$	—	$	—	$	—	$	—	$	—	$	—	$	50

Total loans	$	66,881	$	1,018,059	$	1,040,541	$	412,276	$	155,666	$	306,073	$	12,524	$	3,012,020

No revolving loans were converted to term loans during the three months ended March 31, 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~~Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a ~~loan is considered a “troubled debt restructuring” or “TDR” if both (i) the~~ borrower is experiencing financial ~~difficulties and (ii)~~difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, 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 allocatedno longer establishes a specific reserve ~~of $572,000~~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 ~~$242,000 as of September 30, 2022 and December 31, 2021, respectively, and~~the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics.

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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 months ended March 31, 2023. No charge-offs of previously modified loans were recorded during the three months ended March 31, 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 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the unpaid principal balances of serviced loans totaled ~~$489.1~~$485.7 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 March 31,
(Dollars in thousands)	2022		2021		2022		2021		2023		2022
Beginning of period	$	8,062	$	10,983	$	10,091	$	9,488	$	7,038	$	10,091
Change in fair value		73		(228)		(1,956)		1,267		698		304
End of period, fair value	$	8,135	$	10,755	$	8,135	$	10,755	$	7,736	$	10,395

Fair value at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was determined using discount rates ranging from ~~6.32%~~8.20% to ~~14.23%~~15.97% and ~~7.57%~~8.21% to ~~12.25%~~19.30%, respectively, and prepayment speeds ranging from ~~13.39%~~12.09% to ~~17.40%~~17.36% 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~~$55,000 and ~~$143,000~~$47,000 at ~~September 30, 2022~~March 31, 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 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was ~~$550.6~~$506.0 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


(Dollars in thousands)	For the Three Months Ended March 31,
Mortgage loan servicing rights:	2023		2022
Beginning of period	$	3,973	$	7,747
Additions		—		413
Amortization expense		(768)		(1,310)
Valuation allowance		—		75
End of period, carrying value	$	3,205	$	6,925


(Dollars in thousands)	For the Three Months Ended March 31,
Valuation allowance:	2023		2022
Beginning balance	$	—	$	163
Additions expensed		—		—
Reductions credited to operations		—		(75)
Direct write-downs		—		—
Ending balance	$	—	$	88

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The fair value of servicing rights was ~~$7.6~~$6.9 million and ~~$7.9~~$7.2 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Fair value at ~~September 30, 2022~~March 31, 2023 was determined by using a discount rate of ~~12.56%~~12.55%, prepayment speeds of ~~18.43%~~17.99%, and a weighted average default rate of 1.30%. Fair value at December 31, ~~2021~~2022 was determined by using a discount rate of ~~13.50%~~12.56%, prepayment speeds of ~~21.79%~~18.63%, and a weighted average default rate of ~~1.22%~~1.29%.

~~Table of Contents~~

NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES & OTHER BORROWINGS

Advances from the Federal Home Loan Bank (“FHLB”) at ~~September 30, 2022~~March 31, 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)	March 31, 2023		December 31, 2022
Convertible advance maturing February 13, 2026; fixed rate of 4.184%	$	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 June 16, 2032; fixed rate of 1.905%		—		50,000
Convertible advance maturing June 23, 2032; fixed rate of 1.950%		100,000		100,000
Convertible advance maturing August 6, 2032; fixed rate of 1.892%		100,000		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	$	375,000	$	375,000

The FHLB advances outstanding at ~~September 30, 2022~~March 31, 2023 all have a conversion feature that allows the FHLB to call the advances every ~~six months ($50.0 million),~~ nine months ($~~225.0~~100.0 million) or one year ($~~100.0~~275.0 million). At ~~September 30,~~March 31, 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 March 31, 2023 and December 31, 2022, respectively.

At ~~September 30, 2022,~~March 31, 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 30, 2022.~~March 31, 2023.

At ~~September 30, 2022,~~March 31, 2023, the Company had Federal Reserve Discount Window funds available of approximately ~~$10.0~~$429.0 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~~$539.1 million as of ~~September 30, 2022.~~March 31, 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 30, 2022.~~March 31, 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 30, 2022~~March 31 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. 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).~~

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of our leases included options to terminate the lease and none had initial terms of 12 months or less (i.e. short-term leases). 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~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(Dollars in thousands)	2022		2021		2022		2021		2023		2022
Operating lease cost	$	480	$	561	$	1,496	$	1,669	$	541	$	505
Variable lease cost		43		40		130		125		44		44
Short-term lease cost		—		—		—		—		—		—
Sublease income		—		—		—		—		—		—
Total net lease cost	$	523	$	601	$	1,626	$	1,794	$	585	$	549

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
March 31, 2024			$	2,002
March 31, 2025				1,858
March 31, 2026				1,597
March 31, 2027				1,358
March 31, 2028				1,079
After March 31, 2028				1,302
Total lease payments		10,186		9,196
Less: interest discount		(883)		(758)
Present value of lease liabilities	$	9,303	$	8,438



Supplemental Lease Information	~~September 30, 2022~~March 31, 2023
Weighted-average remaining lease term (years)	~~5.8~~5.5
Weighted-average discount rate	~~3.11~~3.18	%


	Nine Months Ended September 30,				Three Months Ended March 31,
(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	$	513	$	487
Operating cash flows from operating leases (lease liability reduction)	$	1,219	$	1,229	$	447	$	416
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~~

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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 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~~$22.3 million and ~~$46,000~~$26.7 million and an unrealized loss of $0$1.2 million and ~~$46,000~~$779,000 at ~~September 30, 2022~~March 31, 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~~$1.7 million and ~~$321,000~~$2.1 million at ~~September 30, 2022~~March 31, 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 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 30, 2022,~~March 31, 2023, there were no cash deposits pledged as collateral by the Company.

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		Three Months Ended		Year Ended
(Dollars in thousands)	September 30, 2022		March 31, 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%		4.52%		1.68%
Weighted-average maturity		4.3 years		4.2 years		4.2 years
Weighted-average remaining maturity		3.7 years		3.1 years		3.4 years
Net interest (expense) income	$	(194)
Net interest income (expense) income			$	197	$	(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		Three Months Ended		Year Ended
(Dollars in thousands)	September 30, 2022		March 31, 2023		December 31, 2022
Notional Amounts	$	50,000	$	50,000	$	50,000
Rate Cap Premiums		619		444		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		3.6 years		3.8 years
Net interest (expense) income	$	(93)
Net interest expense			$	(31)	$	(124)

2223

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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 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 include:


	September 30,		December 31,		March 31,		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	$	69,030	$	62,334
Standby letters of credit	$	3,894	$	4,674	$	6,368	$	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~~$69.0 million of unused lines of credit and ~~$3.9~~$6.4 million for standby letters of credit as of ~~September 30, 2022.~~March 31, 2023. 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 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

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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~~March 31, 2023 and December 31, ~~2021~~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:


	September 30, 2022										March 31, 2023
									Total Gains										Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)		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			$	4,834	$	—	$	—	$	4,834
States and political subdivisions		6,291		—		6,291		—				6,554		—		6,554		—
Mortgage-backed GSE residential		8,002		—		8,002		—				7,786		—		7,786		—
Total securities available for sale		19,978		—		14,293		5,685				19,174		—		14,340		4,834

Equity securities		10,452		10,452		—		—				10,428		10,428		—		—
SBA servicing asset		8,135		—		—		8,135				7,736		—		—		7,736
Interest only strip		189		—		—		189				55		—		—		55
Interest rate derivatives		31,341		—		31,341		—				24,008		—		24,008		—
	$	70,095	$	10,452	$	45,634	$	14,009			$	61,401	$	10,428	$	38,348	$	12,625
Nonrecurring fair value measurements:
Impaired loans	$	1,054	$	—	$	—	$	1,054	$	176
Collateral-dependent loans											$	3,631	$	—	$	—	$	3,631	$	(165)

Liabilities
Recurring fair value measurements:
Interest rate swaps											$	1,170	$	—	$	1,170	$	—

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	December 31, 2021										December 31, 2022
									Total Gains										Total Gains
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		(Losses)		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			$	5,059	$	—	$	—	$	5,059
States and political subdivisions		8,361		—		8,361		—				6,403		—		6,403		—
Mortgage-backed GSE residential		10,423		—		10,423		—				7,783		—		7,783		—
Total securities available for sale		25,733		—		18,784		6,949				19,245		—		14,186		5,059

Equity securities		11,386		11,386		—		—				10,300		10,300		—		—
SBA servicing asset		10,091		—		—		10,091				7,038		—		—		7,038
Interest only strip		143		—		—		143				47		—		—		47
Interest rate derivatives		367		—		367		—				28,781		—		28,781		—
	$	47,720	$	11,386	$	19,151	$	17,183			$	65,411	$	10,300	$	42,967	$	12,144
Nonrecurring fair value measurements:
Impaired loans	$	947	$	—	$	—	$	947	$	(7)	$	1,045	$	—	$	—	$	1,045	$	229

Liabilities
Recurring fair value measurements:
Interest rate swaps	$	46	$	—	$	46	$	—			$	779	$	—	$	779	$	—

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

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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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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~~ months ended ~~September 30, 2022~~March 31, 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	$	—
Fair value, January 1, 2023									$	5,059	$	7,038	$	47	$	—
Total gains included in income		—		73		35		—		—		698		8		—
Settlements		—		—		—		—		—		—		—		—
Prepayments/paydowns		(215)		—		—		—		(225)		—		—		—
Transfers in and/or out of level 3		—		—		—		—		—		—		—		—
Fair value, September 30, 2022	$	5,685	$	8,135	$	189	$	—
Fair value, March 31, 2023									$	4,834	$	7,736	$	55	$	—

Fair value, July 1, 2021	$	7,209	$	10,983	$	172	$	—
Total losses included in income		—		(228)		(11)		—
Settlements		—		—		—		—
Prepayments/paydowns		(63)		—		—		—
Transfers in and/or out of level 3		—		—		—		—
Fair value, September 30, 2021	$	7,146	$	10,755	$	161	$	—

Nine Months Ended:
Fair value, January 1, 2022	$	6,949	$	10,091	$	143	$	—	$	6,949	$	10,091	$	143	$	—
Total (losses)/gains included in income		—		(1,956)		46		—
Settlements		—		—		—		—
Prepayments/paydowns		(1,264)		—		—		—
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		—		—		304		16		—
Settlements		—		—		—		—		—		—		—		—
Prepayments/paydowns		(2,160)		—		—		—		(220)		—		—		—
Transfers in and/or out of level 3		—		—		—		—		—		—		—		—
Fair value, September 30, 2021	$	7,146	$	10,755	$	161	$	—
Fair value, March 31, 2022									$	6,729	$	10,395	$	159	$	—

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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 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	Valuation	Unobservable	General
	Technique	Input	Range
~~September 30, 2022:~~March 31, 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%~~12.09%-17.36%
		Discount rate	~~6.32%-14.23%~~8.20%-15.97%
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 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are as follows:


	Carrying			Estimated Fair Value at September 30, 2022							Carrying			Estimated Fair Value at March 31, 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	$	224,064	$	—	$	224,064	$	—	$	224,064
Investment securities		30,430		10,452		14,293		5,685		30,430		29,602		10,428		14,340		4,834		29,602
FHLB stock		15,619		—		—		—		N/A		17,659		—		—		—		N/A
Loans, net		2,963,336		—		—		2,941,704		2,941,704		2,993,073		—		—		2,924,232		2,924,232
Accrued interest receivable		11,732		—		62		11,670		11,732		13,642		—		61		13,581		13,642
SBA servicing assets		8,135		—		—		8,135		8,135		7,736		—		—		7,736		7,736
Interest only strips		189		—		—		189		189		55		—		—		55		55
Mortgage servicing assets		4,975		—		—		7,608		7,608		3,205		—		—		6,893		6,893
Interest rate derivatives		31,341		—		31,341		—		31,341		24,008		—		24,008		—		24,008
Financial Liabilities:
Deposits		2,570,853		—		2,561,855		—		2,561,855		2,644,093		—		2,638,012		—		2,638,012
Federal Home Loan Bank advances		375,000		—		377,063		—		377,063		375,000		—		372,900		—		372,900
Other borrowings		396		—		396		—		396		387		—		387		—		387
Accrued interest payable		1,489		—		1,489		—		1,489		3,681		—		3,681		—		3,681
Interest rate derivatives												1,170		—		1,170		—		1,170

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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 30, 2022,~~March 31, 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 30, 2022~~March 31, 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 March 31, 2023:
Total Capital (to Risk Weighted Assets)
Consolidated	$	335,300	16.94	%	207,839	10.5	%	N/A	N/A		$	349,829	17.51	%	209,801	10.5	%	N/A	N/A
Bank		329,625	16.65	%	207,821	10.5		197,924	10.0	%		349,124	17.47	%	209,796	10.5		199,806	10.0	%
Tier I Capital (to Risk Weighted Assets)
Consolidated		320,318	16.18	%	168,251	8.5	%	N/A	N/A			330,643	16.55	%	169,839	8.5	%	N/A	N/A
Bank		314,643	15.90	%	168,236	8.5		158,339	8.0	%		329,938	16.51	%	169,835	8.5		159,844	8.0	%
Common Tier 1 (CET1)
Consolidated		320,318	16.18	%	138,560	7.0	%	N/A	N/A			330,643	16.55	%	139,867	7.0	%	N/A	N/A
Bank		314,643	15.90	%	138,547	7.0		128,651	6.5	%		329,938	16.51	%	139,864	7.0		129,874	6.5	%
Tier 1 Capital (to Average Assets)
Consolidated		320,318	9.90	%	129,443	4.0	%	N/A	N/A			330,643	9.72	%	136,114	4.0	%	N/A	N/A
Bank		314,643	9.73	%	129,414	4.0		161,768	5.0	%		329,938	9.70	%	136,109	4.0		170,136	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 30, 2022,~~March 31, 2023, 240,000 stock options had been granted and 585,444 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~~three months ended ~~September 30, 2022~~March 31, 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 March 31, 2023				240,000	$	12.70

The Company recognized no compensation expense for stock options during the three ~~and nine~~ months ended ~~September 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.~~March 31, 2023 and 2022. As of both ~~September 30, 2022~~March 31, 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 30, 2022,~~March 31, 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~~three months ended ~~September 30, 2022~~March 31, 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	—		—
Vested	(101,097)		15.86	—		—
Forfeited	—		—	—		—
Nonvested at September 30, 2022	177,399	$	17.95
Nonvested at March 31, 2023				177,399	$	17.95

During the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company recognized compensation expense for restricted stock of ~~$689,000~~$298,000 and ~~$378,000, respectively. During the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense for restricted stock of $1.2 million and $811,000,~~$194,000, respectively. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, there was ~~$3.0~~$2.0 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 30, 2022,~~March 31, 2023, the cost is expected to be recognized over a weighted-average period of ~~2.4~~2.0 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
	September 30,				September 30,				March 31,
(Dollars in thousands, except per share data)	2022		2021		2022		2021		2023		2022
Basic earnings per share
Net Income	$	16,893	$	16,882	$	52,422	$	44,256	$	15,730	$	19,429

Weighted average common shares outstanding		25,433,307		25,507,814		25,452,398		25,607,986		25,144,683		25,465,236

Basic earnings per common share	$	0.66	$	0.66	$	2.06	$	1.73	$	0.63	$	0.76

Diluted earnings per share
Net Income	$	16,893	$	16,882	$	52,422	$	44,256	$	15,730	$	19,429

Weighted average common shares outstanding for basic earnings per common share		25,433,307		25,507,814		25,452,398		25,607,986		25,144,683		25,465,236
Add: Dilutive effects of restricted stock and options		268,716		221,229		279,606		197,494		261,172		253,799

Average shares and dilutive potential common shares		25,702,023		25,729,043		25,732,004		25,805,480		25,405,855		25,719,035

Diluted earnings per common share	$	0.66	$	0.66	$	2.04	$	1.71	$	0.62	$	0.76

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~~ months ended ~~September 30, 2022~~March 31, 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 30, 2022~~March 31, 2023 and on our results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 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, 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”),~~the possibility that the U.S. could default on its debt obligations, inflation or deflation, changes in the

~~Table of Contents~~

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;

●

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 $3.9 million, net of the increase in deferred tax assets of $1.4 million.

Going forward, 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 March 31, 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 (mentioned 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 19 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. As of ~~September 30, 2022,~~March 31, 2023, we had total assets of ~~$3.35~~$3.42 billion, total loans of ~~$2.98~~$3.01 billion, total deposits of ~~$2.57~~$2.64 billion and total shareholders’ equity of ~~$349.0~~$353.0 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 months ended September 30, 2022 and 2021.~~quarters. 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


September 30,

June 30,

March 31,

December 31,

September 30,

September 30,

September 30,

(Dollars in thousands, except per share data)

2022

2022

2022

2021

2021

2022

2021

Selected income statement data:















Interest income

$
38,297

$
33,025

$
31,953

$
30,857

$
29,324

$
103,275

$
77,884

Interest expense

8,509

2,805

1,300

1,236

1,135

12,614

3,336

Net interest income

29,788

30,220

30,653

29,621

28,189

90,661

74,548

Provision for loan losses

(1,703)

—

104

546

2,579

(1,599)

6,383

Noninterest income

5,101

4,653

7,656

7,491

9,532

17,410

26,312

Noninterest expense

12,688

13,119

12,179

12,512

13,111

37,986

35,912

Income tax expense

7,011

5,654

6,597

6,609

5,149

19,262

14,309

Net income

16,893

16,100

19,429

17,445

16,882

52,422

44,256

Per share data:

Basic income per share

$
0.66

$
0.63

$
0.76

$
0.69

$
0.66

$
2.06

$
1.73

Diluted income per share

$
0.66

$
0.63

$
0.76

$
0.68

$
0.66

$
2.04

$
1.71

Dividends per share

$
0.15

$
0.15

$
0.15

$
0.14

$
0.12

$
0.45

$
0.32

Book value per share (at period end)

$
13.76

$
12.69

$
12.19

$
11.40

$
10.84

$
13.76

$
10.84

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

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

Performance ratios:

Return on average assets

2.07
%

2.16
%

2.52
%

2.33
%

2.61
%

2.25
%

2.59
%
Return on average equity

20.56

20.65

26.94

24.80

25.23

22.57

23.09

Dividend payout ratio

22.75

23.85

19.76

20.52

18.24

21.98

18.64

Yield on total loans

5.11

4.95

5.00

4.93

5.16

5.03

5.19

Yield on average earning assets

4.94

4.65

4.34

4.32

4.75

4.65

4.79

Cost of average interest bearing liabilities

1.51

0.56

0.24

0.24

0.28

0.79

0.32

Cost of deposits

1.48

0.55

0.27

0.27

0.28

0.79

0.30

Net interest margin

3.84

4.26

4.16

4.15

4.57

4.08

4.59

Efficiency ratio⁽¹⁾

36.37

37.62

31.79

33.71

34.76

35.15

35.61

Asset quality data (at period end):

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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	%

																						As of or for the Three Months Ended
																						March 31,			December 31,			September 30,			June 30,			March 31,
(Dollars in thousands, except per share data)																						2023			2022			2022			2022			2022
Selected income statement data:
Interest income																						$	45,965		$	43,945		$	38,297		$	33,025		$	31,953
Interest expense																							19,732			14,995			8,509			2,805			1,300
Net interest income																							26,233			28,950			29,788			30,220			30,653
Provision for credit losses																							—			(1,168)			(1,703)			—			104
Noninterest income																							6,016			1,794			5,101			4,653			7,656
Noninterest expense																							10,679			12,379			12,688			13,119			12,179
Income tax expense																							5,840			9,383			7,011			5,654			6,597
Net income																							15,730			10,180			16,893			16,100			19,429
Per share data:
Basic income per share																						$	0.63		$	0.40		$	0.66		$	0.63		$	0.76
Diluted income per share																						$	0.62		$	0.40		$	0.66		$	0.63		$	0.76
Dividends per share																						$	0.18		$	0.15		$	0.15		$	0.15		$	0.15
Book value per share (at period end)																						$	14.04		$	13.88		$	13.76		$	12.69		$	12.19
Shares of common stock outstanding																							25,143,675			25,169,709			25,370,417			25,451,125			25,465,236
Weighted average diluted shares																							25,405,855			25,560,138			25,702,023			25,729,156			25,719,035
Performance ratios:
Return on average assets																							1.87	%		1.19	%		2.07	%		2.16	%		2.52	%
Return on average equity																							18.09			11.57			20.56			20.65			26.94
Dividend payout ratio																							28.98			37.55			22.75			23.85			19.76
Yield on total loans																							5.85			5.50			5.11			4.95			5.00
Yield on average earning assets																							5.77			5.43			4.94			4.65			4.34
Cost of average interest bearing liabilities																							3.30			2.49			1.51			0.56			0.24
Cost of deposits																							3.48			2.61			1.48			0.55			0.27
Net interest margin																							3.30			3.58			3.84			4.26			4.16
Efficiency ratio⁽¹⁾																							33.11			40.26			36.37			37.62			31.79
Asset quality data (at period end):
Net charge-offs/(recoveries) to average loans held for investment																							(0.00)	%		(0.01)	%		(0.00)	%		(0.00)	%		0.06	%
Nonperforming assets to gross loans and OREO		1.09			1.22			0.63			0.61			0.55			1.09			0.55			0.64			0.80			1.09			1.22			0.63
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
ACL to nonperforming loans																							101.22			68.88			53.25			54.79			134.39
ACL to loans held for investment																							0.63			0.45			0.50			0.60			0.66
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	%		114.27	%		114.94	%		116.21	%		115.86	%		105.72	%
Noninterest bearing deposits to deposits		23.43			25.87			25.84			26.18			30.32			23.43			30.32			21.83			22.95			23.43			25.87			25.84
Investment securities to assets																							0.87			0.86			0.91			1.02			1.11
Common equity to assets		10.42			10.20			9.88			9.34			10.04			10.42			10.04			10.32			10.20			10.42			10.20			9.88
Leverage ratio		9.90			10.31			9.46			9.44			10.34			9.90			10.34			9.72			9.57			9.90			10.31			9.46
Common equity tier 1 ratio		16.18			16.70			17.24			16.76			16.61			16.18			16.61			16.55			15.99			16.18			16.70			17.24
Tier 1 risk-based capital ratio		16.18			16.70			17.24			16.76			16.61			16.18			16.61			16.55			15.99			16.18			16.70			17.24
Total risk-based capital ratio		16.94			17.60			18.22			17.77			17.64			16.94			17.64			17.51			16.68			16.94			17.60			18.22
Mortgage and SBA loan data:
Mortgage loans serviced for others	$	550,587		$	589,500		$	605,112		$	608,208		$	669,358		$	550,587		$	669,358		$	506,012		$	526,719		$	550,587		$	589,500		$	605,112
Mortgage loan production		255,662			326,973			162,933			237,195			368,790			745,568			958,995			43,335			88,045			255,662			326,973			162,933
Mortgage loan sales		—			37,928			56,987			—			—			94,915			—			—			—			—			37,928			56,987
SBA loans serviced for others		489,120			504,894			528,227			542,991			549,818			489,120			549,818			485,663			465,120			489,120			504,894			528,227
SBA loan production		22,193			21,407			50,689			52,727			85,265			94,289			233,107			15,352			42,419			22,193			21,407			50,689
SBA loan sales		8,588			—			22,898			30,169			37,984			31,486			94,541			36,458			—			8,588			—			22,898

(1)	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 quarter 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 only decreased by 0.9% as compared to December 31, 2022, to $2.64 billion at March 31, 2023 as we experienced minimal deposit outflow in the first quarter. The Company’s uninsured deposits represented 31.9% of total deposits at March 31, 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 16.55% and 17.51%, respectively, as of March 31, 2023.

Results of Operations

We recorded net income of $15.7 million for the three months ended March 31, 2023 compared to $19.4 million for the same period in 2022, a decrease of $3.7 million, or 19.0%. Basic and diluted earnings per common share for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$0.66~~$0.63 and $0.62 compared to ~~$0.66~~$0.76 for both the basic and diluted earnings per common share for the same period in 2021. For the nine months ended September 30, 2022, basic and diluted earnings per common share was $2.06 and $2.04, respectively, compared to $1.73 and $1.71 for the same period a year ago, respectively.2022.

Interest Income

Interest income totaled ~~$38.3~~$46.0 million for the three months ended ~~September 30, 2022,~~March 31, 2023, an increase of ~~$9.0~~$14.0 million, or ~~30.6%~~43.9%, from the three months ended ~~September 30, 2021,~~March 31, 2022, primarily due to an increase in average loan balances of ~~$650.7 million. We also recognized PPP fee income of $145,000 during~~$498.0 million coupled with an 85 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~~$8.5 million in average construction and development loans, an increase of $123.0 million in average commercial real estate loans and an increase of ~~$623.9~~$384.9 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~~$18.3 million in commercial and industrial loans. As compared to the three months ended ~~September 30, 2021,~~March 31, 2022, the yield on average interest-earning assets increased by 19143 basis points to ~~4.94%~~5.77% from ~~4.75%~~4.34% with the yield on average loans ~~decreasing~~increasing by ~~five~~85 basis points and the yield on average total investments increasing by ~~183 basis points.~~

Interest income was $103.3 million for the nine months ended September 30, 2022 compared to $77.9 million for the same period in 2021, an increase of $25.4 million, or 32.6%, primarily due to the increase in average loan balances of $694.7 million. The increase in average loans is due to an increase of $78.7 million in average commercial real estate loans and an increase of $706.3 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 million in average commercial and industrial loans. As compared to the nine months ended September 30, 2021, the yield on average interest-earning assets decreased by 14 basis points to 4.65% from 4.79% with the yield on average loans decreasing by 16 basis points and the yield on average total investments increasing by 66405 basis points.

Interest Expense

Interest expense for the three months ended ~~September 30, 2022~~March 31, 2023 increased ~~$7.4~~$18.4 million, or ~~649.7%~~1,417.8%, to ~~$8.5~~$19.7 million compared to interest expense of ~~$1.1~~$1.3 million for the three months ended ~~September 30, 2021,~~March 31, 2022, primarily due to a ~~$486.5~~321 basis points increase in deposit costs and a 223 basis points increase in borrowing costs coupled with a $308.5 million increase in average interest-bearing deposit ~~balances coupled with a 120 basis points increase in deposit costs.~~balances. The ~~120~~321 basis points increase in deposit costs included a ~~151~~375 basis point increase in the yield on average money market deposits and a 77290 basis points increase in the yield on average time deposits. Average time deposits increased by $435.6 million while average money market deposits ~~increased by $422.3 million while average time deposits~~ decreased by ~~$6.5~~$106.8 million. Interest expense totaled $12.6 million for the nine months ended September 30, 2022, an increase of $9.3 million, or 278.1%, compared to the same period in 2021, primarily due to a $515.6 million increase in average interest-bearing deposit balances coupled with a 49 basis points increase in deposit costs.

Average borrowings outstanding for the three months ended ~~September 30, 2022 increased~~March 31, 2023 decreased by ~~$134.7~~$65.2 million with an increase in rate of ~~135~~223 basis points compared to the three months ended September 30, 2021. Average borrowings outstanding for the nine months ended September 30, 2022 increased by $221.7 million with an increase in rate of 35 basis points compared to the same period in 2021.March 31, 2022.

Net Interest Margin

The net interest margin for the three months ended ~~September 30, 2022~~March 31, 2023 decreased by 7386 basis points to ~~3.84%~~3.30% from ~~4.57%~~4.16% for the three months ended ~~September 30, 2021,~~March 31, 2022, primarily due to a ~~123~~306 basis ~~points~~point increase in the cost of average interest-bearing liabilities of ~~$2.24~~$2.43 billion, offset by a 19143 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 30, 2022~~March 31, 2023 increased by ~~$631.2~~$240.0 million from the same period in ~~2021,~~2022, primarily due to a ~~$650.7~~$498.0 million increase in average ~~loans.~~loans, offset by a $254.3 million decrease in average interest-earning cash accounts. Average interest-bearing liabilities for the three months ended ~~September 30, 2022~~March 31, 2023 increased by ~~$621.2~~$243.3 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~~$308.5 million, ~~and an increase~~offset by a decrease in average borrowings of ~~$134.7~~$65.2 million.

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The net interest margin for the nine months ended September 30, 2022 decreased by 51 basis points to 4.08% from 4.59% for the nine months ended September 30, 2021, primarily due to a 14 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 interest-bearing liabilities of $2.14 billion. Average earning assets increased by $798.9 million, primarily due to a $694.7 million increase in average loans and a $85.9 million increase in average interest-earning cash accounts. Average interest-bearing liabilities increased by $737.3 million, primarily driven by an increase in average interest-bearing deposits of $515.6 million, as well as an increase in average borrowings of $221.7 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.

~~Table of Contents~~

Average Balances, Interest and Yields

The following tables present, for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ 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 March 31,
	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	%	$	145,354	$	1,805	5.04	%	$	399,642	$	365	0.37	%
Investment securities		34,792		131	1.49			17,244		86	1.98			32,952		178	2.19			36,842		129	1.42
Total investments		185,969		1,034	2.21			205,540		197	0.38			178,306		1,983	4.51			436,484		494	0.46
Construction and development		38,636		530	5.44			53,871		727	5.35			39,097		523	5.43			30,583		377	5.00
Commercial real estate		601,370		9,905	6.53			507,039		7,648	5.98			672,109		13,979	8.44			549,132		7,887	5.82
Commercial and industrial		50,605		909	7.13			102,813		2,576	9.94			47,105		1,030	8.87			65,450		1,076	6.67
Residential real estate		2,201,186		25,885	4.67			1,577,276		18,144	4.56			2,291,699		28,422	5.03			1,906,847		22,074	4.69
Consumer and other		137		34	98.46			208		32	61.04			166		28	68.41			206		45	88.59
Gross loans⁽²⁾		2,891,934		37,263	5.11			2,241,207		29,127	5.16			3,050,176		43,982	5.85			2,552,218		31,459	5.00
Total earning assets		3,077,903		38,297	4.94			2,446,747		29,324	4.75			3,228,482		45,965	5.77			2,988,702		31,953	4.34
Noninterest-earning assets		158,579						123,888						175,110						142,042
Total assets		3,236,482						2,570,635						3,403,592						3,130,744
Interest-bearing liabilities:
NOW and savings deposits		186,459		338	0.72			115,775		59	0.20			166,962		648	1.57			187,259		75	0.16
Money market deposits		1,179,954		5,189	1.74			757,654		432	0.23			978,954		9,659	4.00			1,085,751		658	0.25
Time deposits		499,577		1,437	1.14			506,049		477	0.37			876,803		7,069	3.27			441,228		406	0.37
Total interest-bearing deposits		1,865,990		6,964	1.48			1,379,478		968	0.28			2,022,719		17,376	3.48			1,714,238		1,139	0.27
Borrowings		375,405		1,545	1.63			240,704		167	0.28			403,170		2,356	2.37			468,348		161	0.14
Total interest-bearing liabilities		2,241,395		8,509	1.51			1,620,182		1,135	0.28			2,425,889		19,732	3.30			2,182,586		1,300	0.24
Noninterest-bearing liabilities:
Noninterest-bearing deposits		599,902						600,388						578,978						588,343
Other noninterest-bearing liabilities		69,131						84,568						46,138						67,301
Total noninterest-bearing liabilities		669,033						684,956						625,116						655,644
Shareholders' equity		326,054						265,497						352,587						292,514
Total liabilities and shareholders' equity	$	3,236,482					$	2,570,635					$	3,403,592					$	3,130,744
Net interest income			$	29,788					$	28,189					$	26,233					$	30,653
Net interest spread					3.43						4.47						2.47						4.10
Net interest margin					3.84						4.57						3.30						4.16

(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.

~~Table of Contents~~

Nine Months Ended September 30,

2022

2021

Average

Interest and

Yield /

Average

Interest and

Yield /

(Dollars in thousands)

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
%
Investment securities

35,789

383

1.43

17,493

269

2.06

Total investments

283,137

2,243

1.06

178,913

529

0.40

Construction and development

33,985

1,322

5.20

47,380

1,874

5.29

Commercial real estate

575,664

26,195

6.08

496,957

22,069

5.94

Commercial and industrial

56,772

2,900

6.83

133,703

7,054

7.05

Residential real estate

2,021,332

70,504

4.66

1,315,043

46,254

4.70

Consumer and other

203

111

73.11

187

104

74.36

Gross loans⁽²⁾

2,687,956

101,032

5.03

1,993,270

77,355

5.19

Total earning assets

2,971,093

103,275

4.65

2,172,183

77,884

4.79

Noninterest-earning assets

149,157

115,784





Total assets

3,120,250

2,287,967





Interest-bearing liabilities:







NOW and savings deposits

190,390

515

0.36

105,139

158

0.20

Money market deposits

1,144,337

7,706

0.90

651,158

1,143

0.23

Time deposits

443,632

2,266

0.68

506,445

1,578

0.42

Total interest-bearing deposits

1,778,359

10,487

0.79

1,262,742

2,879

0.30

Borrowings

363,170

2,127

0.78

141,435

457

0.43

Total interest-bearing liabilities

2,141,529

12,614

0.79

1,404,177

3,336

0.32

Noninterest-bearing liabilities:







Noninterest-bearing deposits

600,045

548,844





Other noninterest-bearing liabilities

68,144

78,685





Total noninterest-bearing liabilities

668,189

627,529





Shareholders' equity

310,532

256,261





Total liabilities and shareholders' equity

$
3,120,250

$
2,287,967





Net interest income

$
90,661



$
74,548



Net interest spread





3.86





4.47

Net interest margin





4.08





4.59

~~(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

Increase (Decrease) Due to Change in:

(Dollars in thousands)

Volume

Yield/Rate

Total Change

Earning assets:







Federal funds sold and other investments⁽¹⁾

$
92

$
700

$
792

Investment securities

85

(40)

45

Total investments

177

660

837

Construction and development

(209)

12

(197)

Commercial real estate

1,260

997

2,257

Commercial and industrial

(1,104)

(563)

(1,667)

Residential real estate

7,444

297

7,741

Consumer and Other

4

(2)

2

Gross loans⁽²⁾

7,395

741

8,136

Total earning assets

7,572

1,401

8,973

Interest-bearing liabilities:







NOW and savings deposits

56

223

279

Money market deposits

578

4,179

4,757

Time deposits

93

867

960

Total interest-bearing deposits

727

5,269

5,996

Borrowings

140

1,238

1,378

Total interest-bearing liabilities

867

6,507

7,374

Net interest income

$
6,705

$
(5,106)

$
1,599

~~(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.~~

~~Table of Contents~~


	Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021						Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 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	$	(47)	$	1,528	$	1,481
Investment securities		325		(211)		114		(138)		146		8
Total investments		851		863		1,714		(185)		1,674		1,489
Construction and development		(480)		(72)		(552)		76		70		146
Commercial real estate		3,473		653		4,126		1,852		4,240		6,092
Commercial and industrial		(4,043)		(111)		(4,154)		(359)		313		(46)
Residential real estate		25,109		(859)		24,250		4,661		1,687		6,348
Consumer and Other		(1)		8		7		(17)		—		(17)
Gross loans⁽²⁾		24,058		(381)		23,677		6,213		6,310		12,523
Total earning assets		24,909		482		25,391		6,028		7,984		14,012
Interest-bearing liabilities:
NOW and savings deposits		172		185		357		(13)		586		573
Money market deposits		1,881		4,682		6,563		(116)		9,117		9,001
Time deposits		(31)		719		688		1,125		5,538		6,663
Total interest-bearing deposits		2,022		5,586		7,608		996		15,241		16,237
Borrowings		1,112		558		1,670		(305)		2,500		2,195
Total interest-bearing liabilities		3,134		6,144		9,278		691		17,741		18,432
Net interest income	$	21,775	$	(5,662)	$	16,113	$	5,337	$	(9,757)	$	(4,420)

(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 qualititavive 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~~no provision for ~~loan~~credit losses ~~of $1.7 million and $1.6 million~~ during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to provision expense of ~~$2.6 million and $6.4 million~~$104,000 during the same ~~periods~~period in ~~2021. The credit~~2022. Our ACL forecast outlook was relatively stable between the January 1, 2023 CECL implementation date and the period ended March 31, 2023. This resulted in only a slight increase in estimated reserves; however, the increase was offset by the decline in loan balances so no provision for ~~loan~~credit losses ~~recorded during the three and nine months ended September 30, 2022~~ was ~~due o the release~~

Table of additional 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, as well as the significant growth in our loan portfolio.Contents

needed. Our ~~ALL~~ACL as a percentage of gross loans for the periods ended ~~September 30,~~March 31, 2023 and 2022 was 0.63% and ~~2021 was 0.50% and 0.69%~~0.66%, respectively. 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.

Noninterest Income

Noninterest income for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$5.1~~$6.0 million, a decrease of ~~$4.4~~$1.6 million, or ~~46.5%~~21.4%, compared to ~~$9.5~~$7.7 million for the three months ended September 30, 2021. Noninterest income for the nine months ended September 30, 2022 was $17.4 million, a decrease of $8.9 million, or 33.8%, compared to $26.3 million for the nine months ended September 30, 2021.

March 31, 2022. The following table sets forth the major components of our noninterest income for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

~~Table of Contents~~


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,
(Dollars in thousands)	2022		2021		$ Change		% Change		2022		2021		$ 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	%	$	449	$	481	$	(32)	(6.7)	%
Other service charges, commissions and fees		2,676		4,147		(1,471)	(35.5)			8,482		11,422		(2,940)	(25.7)			874		2,159		(1,285)	(59.5)
Gain on sale of residential mortgage loans		—		—		—	—			2,017		—		2,017	100.0			—		1,211		(1,211)	100.0
Mortgage servicing income, net		(358)		132		(490)	(371.2)			(262)		(659)		397	60.2			(96)		101		(197)	195.0
Gain on sale of SBA loans		500		3,358		(2,858)	(85.1)			2,068		8,057		(5,989)	(74.3)			1,969		1,568		401	25.6
SBA servicing income, net		1,330		1,212		118	9.7			1,897		5,250		(3,353)	(63.9)			1,814		1,644		170	10.3
Other income		444		237		207	87.3			1,700		1,012		688	68.0			1,006		492		514	104.5
Total noninterest income	$	5,101	$	9,532	$	(4,431)	(46.5)	%	$	17,410	$	26,312	$	(8,902)	(33.8)	%	$	6,016	$	7,656	$	(1,640)	(21.4)	%

Service charges on deposit accounts ~~increased $63,000,~~decreased $32,000, or ~~14.1%~~6.7%, to ~~$509,000~~$449,000 for the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$446,000~~$481,000 for the same three months during 2021. Service charges on deposit accounts were $1.5 million for the nine months ended September 30, 2022 compared to $1.2 million for the same period in 2021, an increase of $278,000, or 22.6%. These increases were2022. This decrease was primarily attributable to ~~increased~~lower analysis fees and overdraft fees.

Other service charges, commissions and fees decreased ~~$1.5~~$1.3 million, or ~~35.5%~~59.5%, to ~~$2.7~~$874,000 for the three months ended March 31, 2023 compared to $2.2 million for the three months ended September 30, 2022 compared to $4.1 million for the three months ended September 30, 2021. Other service charges, commissions and fees decreased $2.9 million, or 25.7%, to $8.5 million for the nine months ended September 30, 2022 compared to $11.4 million for the nine months ended September 30, 2021. These decreases wereMarch 31, 2022. This decrease was 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~~ months ended ~~September 30, 2022~~March 31, 2023 compared to the same ~~periods~~period in ~~2021.~~2022. Mortgage loan originations totaled ~~$255.7 and $745.6~~$43.3 million during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$368.8 million and $959.0~~$162.9 million during the same ~~periods~~period in ~~2021.~~2022.

Total gain on sale of loans was ~~$500,000~~$2.0 million for the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$3.4~~$2.8 million for the same period of ~~2021,~~2022, a decrease of ~~$2.9 million,~~$810,000, or ~~85.1%. Total gain on sale of loans was $4.1 million for the nine months ended September 30, 2022 compared to $8.1 million for the same period of 2021, a decrease of $4.0 million, or 49.3%~~29.1%.

We recorded no gain on sale of residential mortgage loans during the three months ended ~~September 30, 2022~~March 31, 2023 as no residential mortgage loans were sold during the period. Gain on sale of residential mortgage loans totaled ~~$2.0~~$1.2 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 as we sold ~~$94.9~~$57.0 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~~$2.0 million for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$3.4 million and $8.1~~$1.6 million for the same ~~periods~~period in ~~2021.~~2022. We sold ~~$8.6 million and $31.5~~$36.5 million in SBA loans during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 with average premiums of ~~6.96% and 8.45%, respectively.~~6.80%. We sold ~~$38.0 million and $94.5~~$22.9 million in SBA loans during the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 with average premiums of ~~10.38% and 10.72%, respectively.~~9.00%.

Mortgage loan servicing income, net of amortization, decreased by ~~$490,000,~~$197,000, or ~~371.2%~~195.0%, to an expense balance of ~~$358,000~~$96,000 during the three months ended ~~September 30, 2022~~March 31, 2023 compared to income of ~~$132,000~~$101,000 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, 2022 compared to an expense balance of $659,000 for the same period of 2021.2022. The changes in mortgage loan servicing income were primarily due to ~~the increase~~decreases in ~~capitalized~~ mortgage servicing fees and capitalized mortage 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 months ended September 30, 2022 were $758,000 and $2.5 million,~~

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~~respectively,~~income for the three months ended March 31, 2023 were $672,000 in mortgage servicing fees compared to ~~$1.1 million and $3.7 million~~$923,000 for the same ~~periods~~period in ~~2021, respectively,~~2022 and capitalized mortgage servicing assets of $0 ~~and $761,000~~ for the three ~~and nine~~ months ended ~~September 30, 2022, respectively,~~March 31, 2023 compared to $0$413,000 for the same ~~periods~~period in ~~2021.~~2022. These amounts were offset by mortgage loan servicing asset amortization of ~~$1.1 million and $3.7 million~~$768,000 for the three ~~and nine~~ months ended ~~September 30, 2022, respectively,~~March 31, 2023 compared to ~~$1.4 million and $4.4~~$1.3 million during the same ~~periods~~period in ~~2021, respectively.~~2022. During the three months ended ~~September 30, 2022,~~March 31, 2023, we did not record a fair value impairment on our mortgage servicing assets compared to a fair value impairment recovery of ~~$420,000~~$75,000 recorded during the three months ended September 30, 2021. During the nine months ended September 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.March 31, 2022. Our total residential mortgage loan servicing portfolio was ~~$550.6~~$506.0 million at ~~September 30, 2022~~March 31, 2023 compared to ~~$669.4~~$605.1 million at ~~September 30, 2021.~~March 31, 2022.

SBA servicing income net increased by ~~$118,000,~~$170,000, or ~~9.7%~~10.3%, to ~~$1.3~~$1.8 million for the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$1.2~~$1.6 million for the three months ended ~~September 30, 2021. SBA servicing income was $1.9 million for the nine months ended September 30, 2022 compared to $5.3 million for the same period in 2021, a decrease of $3.4 million, or 63.9%.~~March 31, 2022. Our total SBA loan servicing portfolio was ~~$489.1~~$485.7 million as of ~~September 30, 2022~~March 31, 2023 compared to ~~$549.8~~$528.2 million as of ~~September 30, 2021.~~March 31, 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 30, 2022~~March 31, 2023 we recorded a ~~$111,000~~$708,000 fair value increase to our SBA servicing rights compared to a ~~$225,000 charge~~$323,000 increase to our SBA servicing rights during the three months ended September 30, 2021. During the nine months ended September 30, 2022, we recorded a $1.9 million fair value charge to our SBA servicing rights compared to a $1.3 million increase during the nine months ended September 30, 2021.March 31, 2022.

Other noninterest income increased by ~~$207,000~~$514,000, or 104.5%, to ~~$444,000~~$1.0 million for the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$237,000~~$492,000 for the three months ended ~~September 30, 2021. Other noninterest income~~March 31, 2022. The increase was ~~$1.7 million for~~mainly due to a gain on sale of foreclosed real estate of $547,000 recorded during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$1.0 million for~~a loss on sale of $15,000 recorded during the same period in ~~2021, an increase of $688,000.~~2022. The largest component of other noninterest income is the income on bank owned life insurance which totaled ~~$431,000~~$435,000 and ~~$297,000, respectively,~~$404,000 for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, and $1.3 million and $754,000, respectively, for the nine months ended September 30, 2022 and 2021.~~respectively.

Noninterest Expense

Noninterest expense for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$12.7~~$10.7 million compared to ~~$13.1~~$12.1 million for the three months ended ~~September 30, 2021,~~March 31, 2022, a decrease of ~~$423,000, or 3.2%. Noninterest expense for the nine months ended September 30, 2022 was $38.0 million compared to $35.9 million for the nine months ended September 30, 2021, an increase of $2.1~~$1.5 million, or ~~5.8%~~12.3%.

The following table sets forth the major components of our noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,
(Dollars in thousands )	2022		2021		$ Change		% Change		2022		2021		$ 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	%	$	6,366	$	7,096	$	(730)	(10.3)	%
Occupancy and equipment		1,167		1,295		(128)	(9.9)			3,594		3,822		(228)	(6.0)			1,214		1,227		(13)	(1.1)
Data processing		270		257		13	5.1			808		848		(40)	(4.7)			275		277		(2)	(0.7)
Advertising		158		131		27	20.6			434		393		41	10.4			146		150		(4)	(2.7)
Other expenses		3,337		2,749		588	21.4			10,369		8,556		1,813	21.2			2,678		3,429		(751)	(21.9)
Total noninterest expense	$	12,688	$	13,111	$	(423)	(3.2)	%	$	37,986	$	35,912	$	2,074	5.8	%	$	10,679	$	12,179	$	(1,500)	(12.3)	%

Salaries and employee benefits expense for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$7.8~~$6.4 million compared to ~~$8.7~~$7.1 million for the three months ended ~~September 30, 2021,~~March 31, 2022, a decrease of ~~$923,000,~~$730,000, or ~~10.6%~~10.3%. This decrease was ~~mainly~~partially 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 months ended September 30, 2022 was $22.8 million compared to $22.3 million for the nine months ended September 30, 2021, an increase of $488,000, or 2.2%. This increase was mainly 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 months ended ~~September 30, 2022.~~March 31, 2023.

Occupancy and equipment expense for the three months ended ~~September 30, 2022~~March 31, 2023 was $1.2 million compared to ~~$1.3~~$1.2 million for the three months ended ~~September 30, 2021,~~March 31, 2022, a slight decrease of ~~$128,000,~~$13,000, or ~~9.9%~~1.1%. ~~Occupancy and equipment expense for the nine months ended September 30, 2022~~This decrease was ~~$3.6 million compared to $3.8 million for the nine months ended September 30, 2021, a decrease of $228,000, or 6.0%. These decreases were primarily~~partially due to lower ~~rent expense and depreciation.~~depreciation expense.

Data processing expenses for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 remained relatively flat compared to the same ~~periods~~period in ~~2021.~~2022.

Advertising expenses for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 remained relatively flat compared to the same ~~periods~~period in ~~2021.~~2022.

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Other expenses for the three months ended ~~September 30, 2022~~March 31, 2023 were ~~$3.3~~$2.7 million compared to ~~$2.7~~$3.4 million for the three months ended ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$588,000,~~$751,000, or 21.4%. Other operating expenses for the nine months ended September 30, 2022 were $10.4 million compared to $8.6 million for the nine months ended September 30, 2021, an increase of $1.8 million, or 21.2%21.9%. This ~~increase~~decrease was primarily due to ~~higher professional fees~~lower FDIC deposit insurance premiums and ~~communication expenses,~~security expense, as well as ~~increased operating and customer service expenses,~~fair value gains on our equity securities, partially offset by ~~lower loan and~~higher other real estate owned expenses. Included in other expenses for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ were directors’ fees of approximately ~~$426,000~~$137,000 and ~~$331,000,~~$139,000, respectively.

Income Tax Expense

Income tax expense for the three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ was ~~$7.0~~$5.8 million and ~~$5.1~~$6.6 million, respectively. The Company’s effective tax rates were ~~29.3%~~27.1% and ~~23.4%~~25.3% for the three months ended ~~September 30,~~March 31, 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 months ended September 30, 2022 and 2021 was $19.3 million and $14.3 million, respectively. The Company’s effective tax rates were 26.9% and 24.4% for the nine months ended September 30, 2022 and 2021, respectively.

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~~decreased $8.2 million, or ~~7.8%~~0.2%, to ~~$3.35~~$3.42 billion at ~~September 30, 2022~~March 31, 2023 as compared to ~~$3.11~~$3.43 billion at December 31, ~~2021.~~2022. The ~~increase~~decrease in total assets was primarily attributable to ~~increases~~decreases in loans of ~~$473.2~~$43.7 million, federal funds sold of ~~$6.9~~$20.6 million, ~~bank owned life insurance~~interest rate derivatives of ~~$9.3~~$4.8 million and ~~other assets~~foreclosed real estate of ~~$33.4~~$3.6 million, as well as an increase in the allowance for credit losses of $5.1 million, partially offset by ~~a $268.5 million decrease~~increases in cash and due from ~~banks.~~banks of $65.2 million and other assests of $2.7 million.

Loans

Gross loans ~~increased $476.1~~decreased $44.0 million, or ~~19.0%~~1.4%, to ~~$2.99~~$3.02 billion as of ~~September 30, 2022~~March 31, 2023 as compared to ~~$2.51~~$3.07 billion as of December 31, ~~2021.~~2022. Our loan ~~growth~~decline during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was comprised of an increase of ~~$12.4~~$1.4 million, or ~~32.0%~~3.0%, in construction and development loans, ~~an increase~~a decrease of ~~$88.2~~$17.3 million, or ~~16.9%~~2.6%, in

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commercial real estate loans, a decrease of ~~$20.4~~$7.0 million, or ~~27.9%~~13.1%, in commercial and industrial loans, ~~an increase~~a decrease of ~~$395.7~~$21.0 million, or ~~21.1%~~0.9%, in residential real estate loans and ~~an increase~~a decrease of ~~$119,000,~~$166,000, or ~~150.6%~~76.9%, 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 30, 2022~~March 31, 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				March 31, 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	%	$	49,209	1.6	%	$	47,779	1.6	%
Commercial real estate		608,700	20.4	%		520,488	20.7	%		639,951	21.2	%		657,246	21.4	%
Commercial and industrial		52,693	1.8	%		73,072	2.9	%		46,208	1.5	%		53,173	1.7	%
Residential real estate		2,274,679	76.1	%		1,879,012	74.8	%		2,285,902	75.7	%		2,306,915	75.3	%
Consumer and other		198	—	%		79	—	%		50	—	%		216	—	%
Gross loans	$	2,987,570	100.0	%	$	2,511,508	100.0	%	$	3,021,320	100.0	%	$	3,065,329	100.0	%
Less unearned income		(9,252)				(6,438)				(9,300)				(9,640)
Total loans held for investment	$	2,978,318			$	2,505,070			$	3,012,020			$	3,055,689

SBA Loan Servicing

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we serviced ~~$489.1~~$485.7 million and ~~$543.0~~$465.1 million, respectively, in SBA loans for others. We carried a servicing asset of ~~$8.3~~$7.8 million and ~~$10.2~~$7.1 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. See Note 4 of our consolidated financial statements as of ~~September 30, 2022,~~March 31, 2023, included elsewhere in this

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Form 10-Q, for additional information on the activity for SBA loan servicing rights for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

Residential Mortgage Loan Servicing

As of ~~September 30, 2022,~~March 31, 2023, we serviced ~~$550.6~~$506.0 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~~$3.2 million and ~~$7.7~~$4.0 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Amortization relating to the mortgage loan servicing asset was ~~$1.1 million and $3.7 million, respectively,~~$768,000 for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$1.4 million and $4.4~~$1.3 million for the same ~~periods~~period in ~~2021.~~2022. During the three months ended ~~September 30, 2022,~~March 31, 2023, we did not record a fair value impairment on our mortgage servicing asset compared to a ~~$420,000~~$75,000 fair value impairment recovery recorded for the same period 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 30, 2022,~~March 31, 2023, included elsewhere in this Form 10-Q, for additional information on the activity for mortgage loans servicing rights for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

Asset Quality

Nonperforming Loans

Asset quality remained relatively strong during the ~~third~~first quarter of ~~2022~~2023 as our nonperforming loans to total loans remained low at ~~0.94%~~0.62% as of ~~September 30, 2022.~~March 31, 2023. Nonperforming loans were ~~$28.1~~$18.7 million at ~~September 30, 2022~~March 31, 2023 compared to ~~$11.8~~$20.2 million at December 31, ~~2021.~~2022. The ~~increase~~decrease from December 31, ~~2021~~2022 to ~~September 30, 2022~~March 31, 2023 was ~~primarily~~ attributable to ~~an $8.9~~a $1.0 million ~~increase~~decrease in nonaccrual loans, a $180,000 decrease in loans past due 90 days or more and still accruing, and a ~~$7.7 million increase~~$265,000 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 and low loan-to-value ratios; therefore, no specific reserves are needed for these loans at this time. We did not recognize any interest income on nonaccrual loans during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 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 30, 2022~~March 31, 2023 comprised of ~~$13.1~~$1.6 million of commercial real estate loans, ~~$133,000~~$218,000 in commercial and industrial loans and ~~$4.5~~$7.3 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			March 31, 2023			December 31, 2022
Nonaccrual loans	$	17,700		$	8,759		$	9,064		$	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								9,654			9,919
Total nonperforming loans		28,137			11,798			18,718			20,164
Foreclosed real estate		4,328			3,618			766			4,328
Total nonperforming assets	$	32,465		$	15,416		$	19,484		$	24,492
Nonperforming loans to gross loans		0.94	%		0.47	%		0.62	%		0.66	%
Nonperforming assets to total assets		0.97	%		0.50	%		0.57	%		0.71	%
Allowance for loan losses to nonperforming loans		53.25	%		143.69	%
Allowance for credit losses to nonperforming loans								101.22	%		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~~$19.0 million at ~~September 30, 2022~~March 31, 2023 compared to ~~$17.0~~$13.9 million at December 31, ~~2021, a decrease~~2022, an increase of ~~$2.0~~$5.1 million or ~~11.6%~~36.4%. The ~~decrease~~increase was ~~mainly~~entirely due to the ~~credit provision recorded~~CECL adoption during the ~~three months ended September 30, 2022~~first quarter of 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 by the ongoing COVID-19 pandemic. 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 provisions of the CECL accounting standard issued by the FASB in the ASU No. 2016-13 until 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 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~~estimates derived from a ~~level deemed appropriate by us.~~

~~It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio.~~comprehensive quarterly evaluation. 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.evaluation

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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 credit judgment that considers observable trends, conditions, reasonable and supportable forecasts, and other relevant environmental and economic factors. The level 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 allwance for unfunded commitments was created upon adoption of CECL on January 1, 2023 and had a balance of $239,000 as of March 31, 2023.

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 March 31,
(Dollars in thousands )	2022			2021			2022			2021			2023			2022
Balance, beginning of period	$	16,678		$	13,860		$	16,952		$	10,135		$	13,888		$	16,952
CECL adoption (Day 1) impact														5,055			—
Charge-offs:
Construction and development		—			—			—			—			—			—
Commercial real estate		—			—			—			26			—			390
Commercial and industrial		—			—			390			64			—			—
Residential real estate		—			—			—			—			—			—
Consumer and other		—			—			—			—			—			—
Total charge-offs		—			—			390			90			—			390
Recoveries:
Construction and development		—			—			—			—			—			—
Commercial real estate		1			4			5			10			2			2
Commercial and industrial		6			—			9			—			2			1
Residential real estate		—			—			—			—			—			—
Consumer and other		—			2			5			7			—			5
Total recoveries		7			6			19			17			4			8
Net charge-offs/(recoveries)		(7)			(6)			371			73
Provision for loan losses		(1,703)			2,579			(1,599)			6,383
Net (recoveries)/charge-offs														(4)			382
Provision for credit losses														—			104
Balance, end of period	$	14,982		$	16,445		$	14,982		$	16,445		$	18,947		$	16,674
Total loans at end of period	$	2,987,570		$	2,368,487		$	2,987,570		$	2,368,487		$	3,021,320		$	2,518,351
Average loans⁽¹⁾		2,891,934			2,241,207			2,678,474			1,993,270			3,050,176			2,533,254
Net charge-offs to average loans		0.00	%		0.00	%		0.02	%		0.00	%		0.00	%		0.06	%
Allowance for loan losses to total loans		0.50	%		0.69	%		0.50	%		0.69	%
Allowance for credit losses to total loans														0.63	%		0.66	%

(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 30, 2022.~~March 31, 2023.

Deposits

Total deposits ~~increased $307.8~~decreased $22.7 million, or ~~13.6%~~0.9%, to ~~$2.57~~$2.64 billion at ~~September 30, 2022~~March 31, 2023 compared to ~~$2.26~~$2.67 billion at December 31, ~~2021.~~2022. The ~~increase~~decrease was primarily due to ~~the $146.7~~a $82.5 million ~~increase~~decrease in money market accounts, a ~~$137.8~~$34.7 million ~~increase~~decrease in ~~time deposits, a $23.1 million increase in interest-bearing demand~~noninterest-bearing deposits and a ~~$9.8 million increase in noninterest-bearing demand deposits, offset by a $9.5~~$3.1 million decrease in savings ~~accounts.~~accounts, offset by a $93.2 million increase

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in time deposits and a $4.4 million increase interest-bearing demand deposits. The ~~increase~~decrease in money market accounts was partially due to the ~~increase~~decrease of ~~$114.2~~$64.8 million in brokered money market balances during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, 23.4%~~2022, 21.8% and ~~26.2%~~22.9% of total deposits, respectively, were comprised of noninterest-bearing demand accounts and ~~76.6%~~78.2% and ~~73.8%~~77.1%, respectively, of interest-bearing deposit accounts.

We had ~~$559.5~~$461.6 million of brokered deposits, or ~~21.8%~~17.5% of total deposits, at ~~September 30, 2022~~March 31, 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 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 31.9% of ~~Contents~~total deposits at March 31, 2023, compared to 32.5% and 27.4% at December 31, 2022 and March 31, 2022, respectively. As of March 31, 2023, we had $1.13 billion of available borrowing capacity at the Federal Home Loan Bank ($657.0 million), Federal Reserve Discount Window ($429.0 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~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

Three Months Ended September 30,

2022

2021


Average

Weighted

Average

Weighted

(Dollars in thousands )

Balance

Average Rate

Balance

Average Rate

Noninterest-bearing demand

$
599,902

—
%
$
600,388

—
%
Interest-bearing demand deposits

161,447

0.80

85,966

0.20

Savings and money market deposits

718,454

1.60

371,234

0.35

Brokered money market deposits

486,512

1.87

416,229

0.11

Time deposits

499,577

1.14

506,049

0.37

Total interest-bearing deposits

1,865,990

1.48

1,379,478

0.28

Total deposits

$
2,465,892

1.12

$
1,979,866

0.19


	Nine Months Ended September 30,									Three Months Ended March 31,
	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	—	%	$	578,978		—	%	$	588,343	—	%
Interest-bearing demand deposits		161,249		0.39			77,516	0.20			149,266		1.74			155,418	0.15
Savings and money market deposits		723,706		0.85			337,904	0.36			557,508		3.21			705,643	0.31
Brokered money market deposits		449,772		0.93			340,877	0.11			439,142		4.85			411,949	0.14
Time deposits		443,632		0.68			506,445	0.44			876,803		3.27			441,228	0.37
Total interest-bearing deposits		1,778,359		0.79			1,262,742	0.30			2,022,719		3.48			1,714,238	0.27
Total deposits	$	2,378,404		0.59		$	1,811,586	0.21		$	2,601,697		2.71		$	2,302,581	0.20

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 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we had ~~maximum~~available borrowing capacity from the FHLB of ~~$949.0~~$657.0 million and ~~$826.9 million,~~$633.6 billion, respectively. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we had $375.0 million ~~and $500.0 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 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. We did not have any advances outstanding under these agreements as of ~~September 30, 2022~~March 31, 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.

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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 30, 2022~~March 31, 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 $429.0 million ~~with no borrowings outstanding as of September 30, 2022 and December~~at March 31, ~~2021.~~2023. 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~~$539.1 million as of ~~September 30,~~March 31, 2023, as well as all of the Company’s municipal and mortgage backed securities. There were no outstanding borrowings on this line as of March 31, 2023 and December 31, 2022.

At ~~September 30, 2022~~both March 31, 2023 and December 31, ~~2021,~~2022, we had $375.0 million ~~and $500.0 million, respectively,~~ of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had ~~$574.0~~$657.0 million and ~~$326.9~~$633.6 million of additional borrowing availability with the FHLB as of ~~September 30, 2022~~March 31, 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 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of ~~September 30, 2022~~March 31, 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		March 31, 2023		December 31, 2022		Buffer		Institution
Total capital (to risk-weighted assets)
Consolidated	16.94	%	17.77	%	8.00	%	10.50	%	N/A		17.51	%	16.68	%	10.50	%	N/A
Bank	16.65	%	17.18	%	8.00		10.50		10.00	%	17.47	%	16.61	%	10.50		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	16.18	%	16.76	%	6.00	%	8.50	%	N/A		16.55	%	15.99	%	8.50	%	N/A
Bank	15.90	%	16.17	%	6.00		8.50		8.00	%	16.51	%	15.93	%	8.50		8.00	%
CETI capital (to risk-weighted assets)
Consolidated	16.18	%	16.76	%	4.50	%	7.00	%	N/A		16.55	%	15.99	%	7.00	%	N/A
Bank	15.90	%	16.17	%	4.50		7.00		6.50	%	16.51	%	15.93	%	7.00		6.50	%
Tier 1 capital (to average assets)
Consolidated	9.90	%	9.44	%	4.00	%	4.00	%	N/A		9.72	%	9.57	%	4.00	%	N/A
Bank	9.73	%	9.11	%	4.00		4.00		5.00	%	9.70	%	9.54	%	4.00		5.00	%

Dividends

On ~~October~~April 19, ~~2022,~~2023, the Company declared a cash dividend of ~~$0.15~~$0.18 per share, payable on ~~November 10, 2022,~~May 12, 2023, to common shareholders of record as of ~~November 2, 2022.~~May 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 30, 2022,~~March 31, 2023, included elsewhere in this Form 10-Q, for more information regarding our off-balance sheet arrangements as of ~~September 30, 2022~~March 31, 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 (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 30, 2022~~March 31, 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		-100		+200		-100
September 30, 2022	(3.80)	%	2.80	%	9.30	%	9.80	%
December 31, 2021	(3.60)	%	(1.20)	%	(8.70)	%	(10.30)	%
March 31, 2023									0.10	%	1.20	%	22.70	%	12.60	%
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		+300		+200		+100		-100
September 30, 2022	(15.20)	%	(10.00)	%	(5.10)	%	5.80	%
December 31, 2021	(8.90)	%	(3.60)	%	(0.20)	%	(11.90)	%
March 31, 2023									(20.70)	%	(14.00)	%	(7.00)	%	8.30	%
December 31, 2022									(17.80)	%	(11.90)	%	(5.90)	%	6.90	%

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 30, 2022.~~March 31, 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 30, 2022.~~March 31, 2023.

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Changes in Internal Control over Financial Reporting

During the quarter ended ~~September 30, 2022,~~March 31, 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 30, 2022~~March 31, 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, 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~~Other than the risk factor set forth below related to the recent negative developments in the banking industry, 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.

Recent negative developments in the banking industry could adversely affect our current and projected business operations and our financial condition and results of operations.

The recent bank failures and related negative media attention have generated significant market trading volatility among publicly traded bank holding companies and, in particular, regional banks like the Company. These developments have negatively impacted customer confidence in regional banks, which could prompt customers to maintain their deposits with larger financial institutions. Further, competition for deposits has increased in recent periods, and the cost of funding has similarly increased, putting pressure on our net interest margin. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. If we were required to raise additional capital in the current environment, any such capital raise may be on unfavorable terms, thereby negatively impacting book value and profitability. While we have taken actions to improve our funding, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.

We also anticipate increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition, the level of uninsured deposits, losses embedded in the held-to-maturity portion of our securities portfolio, contingent liquidity, CRE composition and concentration, capital position and our general oversight and internal control structures regarding the foregoing. As primarily a commercial bank, the Bank has an elevated degree of uninsured deposits compared to larger national banks or smaller community banks with a stronger focus on retail deposits, and also maintains a robust CRE portfolio. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.

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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.~~March 31, 2023.


			Total Number of					Total Number of
			Shares Repurchased	Maximum Number of				Shares Repurchased	Maximum Number of
			as Part of Publicly	Shares That May Yet Be				as Part of Publicly	Shares That May Yet Be
	Total Number of	Average Price Paid	Announced	Purchased Under	Total Number of	Average Price Paid		Announced	Purchased Under
	Shares Repurchased	Per Share	Plans or Programs	the Plans or Programs	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
January 1, 2023 to January 31, 2023					26,034	$	21.17	26,034	266,533
February 1, 2023 to February 28, 2023					—		—	—	—
March 1, 2023 to March 31, 2023					—		—	—	—
Total	80,708	19.89	80,708	493,275	26,034	$	19.89	26,034	266,533

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~~ended on ~~April 30,~~January 9, 2023. The repurchases ~~will be~~were made in compliance with all Securities and Exchange Commission rules, including Rule 10b-18, and other legal requirements and ~~may be~~were 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~~were 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.~~

~~Table of Contents~~

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

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

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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

5955

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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 4, 2022~~May 8, 2023	By:	/s/ Nack Y. Paek
		Nack Y. Paek
		Chief Executive Officer

Date: ~~November 4, 2022~~May 8, 2023	By:	/s/ Lucas Stewart
		Lucas Stewart
		Chief Financial Officer

6056


	As of or for the Three Months Ended															As of or for the Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
(Dollars in thousands, except per share data)	2022			2022			2022			2021			2021			2022			2021
Selected income statement data:
Interest income	$	38,297		$	33,025		$	31,953		$	30,857		$	29,324		$	103,275		$	77,884
Interest expense		8,509			2,805			1,300			1,236			1,135			12,614			3,336
Net interest income		29,788			30,220			30,653			29,621			28,189			90,661			74,548
Provision for loan losses		(1,703)			—			104			546			2,579			(1,599)			6,383
Noninterest income		5,101			4,653			7,656			7,491			9,532			17,410			26,312
Noninterest expense		12,688			13,119			12,179			12,512			13,111			37,986			35,912
Income tax expense		7,011			5,654			6,597			6,609			5,149			19,262			14,309
Net income		16,893			16,100			19,429			17,445			16,882			52,422			44,256
Per share data:
Basic income per share	$	0.66		$	0.63		$	0.76		$	0.69		$	0.66		$	2.06		$	1.73
Diluted income per share	$	0.66		$	0.63		$	0.76		$	0.68		$	0.66		$	2.04		$	1.71
Dividends per share	$	0.15		$	0.15		$	0.15		$	0.14		$	0.12		$	0.45		$	0.32
Book value per share (at period end)	$	13.76		$	12.69		$	12.19		$	11.40		$	10.84		$	13.76		$	10.84
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
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
Performance ratios:
Return on average assets		2.07	%		2.16	%		2.52	%		2.33	%		2.61	%		2.25	%		2.59	%
Return on average equity		20.56			20.65			26.94			24.80			25.23			22.57			23.09
Dividend payout ratio		22.75			23.85			19.76			20.52			18.24			21.98			18.64
Yield on total loans		5.11			4.95			5.00			4.93			5.16			5.03			5.19
Yield on average earning assets		4.94			4.65			4.34			4.32			4.75			4.65			4.79
Cost of average interest bearing liabilities		1.51			0.56			0.24			0.24			0.28			0.79			0.32
Cost of deposits		1.48			0.55			0.27			0.27			0.28			0.79			0.30
Net interest margin		3.84			4.26			4.16			4.15			4.57			4.08			4.59
Efficiency ratio⁽¹⁾		36.37			37.62			31.79			33.71			34.76			35.15			35.61
Asset quality data (at period end):