Colony Bankcorp Inc: Form 10-Q for the period ended Sep 30, 2023

The purpose of this discussion and analysis is to focus on significant changes in the financial condition of Colony Bankcorp, Inc. and our wholly owned subsidiary, Colony Bank, from December 31, 2022 through September 30, 2023 and on our results of operations for the three and nine months ended September 30, 2023 and 2022. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto in the Company's 2022 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.

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 on Form 10-Q and the following:

• the impact of current and future economic and market conditions generally (including seasonality) and in the financial services industry, nationally and within our primary market areas, including the effects of inflationary pressures, changes in interest rates, slowdowns in economic growth, and 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 federal funds rate, the level and composition of 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 sensitive assets and 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;
• 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 impact of rising interest rates and inflation;
• 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 and changes in the prices, values and sales volumes of commercial and residential real estate;
• weakness in the real estate market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, and mortgage fee income;
• credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial and residential real estate loan portfolios;
• 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 modifications, the effects of judicial or regulatory requirements or guidance, and the possibility of the Bank being required to repurchase mortgage loans or indemnify buyers;
• our ability to attract sufficient loans that meet prudent credit standards, including in our construction and development, commercial and industrial and owner-occupied commercial real estate loan categories;
• our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;
• our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses ("ACL"), including the implementation of the Current Expected Credit Losses ("CECL") model;
• the adequacy of our reserves (including allowance for credit losses) 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 in Georgia and Alabama and neighboring markets;
• 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;
• 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;
• 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;
• 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, the impact of the U.S. credit rating downgrade, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;
• the risks relating to past acquisition including, without limitation: unexpected transaction costs, including the costs of integrating operations; the risks that the businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; the potential failure to fully or timely realize expected revenues and revenue synergies, including as the result of revenues being lower than expected;
• uncertainty related to the transition away from the London Inter-bank Offered Rate (“LIBOR”);
• continued or increasing competition from other financial institutions (including fintech companies), credit unions, and non-bank financial services 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, and the cost of defending against them and any reputational or other financial risks following such a cybersecurity incident ;
• 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, including the risk that the regulatory environment may not be conducive to or may prohibit the consummation of future mergers and/or business combinations, may increase the length of time and amount of resources required to consummate such transactions, and may reduce the anticipated benefit;
• 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 institution and outcome of litigation and other legal proceedings against us or to which we may become subject to;
• the impact of recent and future legislative and regulatory changes;
• examinations by our regulatory authorities;
• the effects of war or other conflicts (including the military conflict between Russia and Ukraine or the conflict in Israel and surrounding areas), 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;
• the 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;
• a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget; and
• other risks and factors identified in our 2022 Form 10-K, this Quarterly Report on Form 10-Q for the period ended September 30, 2023, and in any of the Company's other reports filed with the U.S. Securities and Exchange Commission and available on its website at www.sec.gov (http://www.sec.gov).

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.

Overview

The following discussion and analysis presents the more significant factors affecting the Company’s financial condition as of September 30, 2023 and December 31, 2022, and results of operations for each of the three and nine month periods ended September 30, 2023 and 2022. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report.

At September 30, 2023, the Company had total consolidated assets of $3.1 billion, total loans, net of $1.8 billion, total deposits of $2.6 billion, and stockholders’ equity of $238.7 million. The Company reported net income of $5.8 million, or $0.33 per diluted share, for the three months ended September 30, 2023 and $16.1 million, or $0.92 per diluted share, for the nine months ended September 30, 2023 compared to net income of $5.3 million, or $0.30 per diluted share, for the three months ended September 30, 2022 and $14.0 million, or $0.82 per diluted share, for the nine months ended September 30, 2022. The increase in net income for the three and nine months ended September 30, 2023 compared to the same periods ended September 30, 2022 was the result of the implementation and disciplined maintenance of expense controls to reduce noninterest expenses, primarily through a reduction in force in the first half of 2023 which continues to impact compensation expense, offset by decreases in mortgage fee income and gains on sales of SBA loans in the year to date period. In addition, increases can also be seen in wealth advisory and merchant services, equity investment income, gains on sales of assets along with SBA servicing and other related fee income,

Net interest income on a tax equivalent basis was $19.8 million for the third quarter of 2023 compared to $21.0 million for the third quarter of 2022. Net interest income on a tax equivalent basis for the nine months ended September 30, 2023 was $59.9 million, compared to $59.6 million for the nine months ended September 30, 2022. Quarter over quarter there was a decrease of $1.2 million and only a slight increase in year to date comparisons. Increases can be seen in both income on interest earning assets offset by expenses on interest bearing liabilities due to the significant rise in interest rates period over period along with increases in FHLB advances. Income on interest earning assets increased $8.9 million to $32.8 million for the third quarter of 2023, and $26.8 million to $92.3 million for the nine month period ended September 30, 2023, each compared to the respective periods in 2022. Expense on interest bearing liabilities increased $10.1 million to $13.0 million for the third quarter of 2023, and $26.5 million to $32.3 million for the nine month period ended September 30, 2023, each compared to the respective periods in 2022.

Provision for credit losses for the three and nine months ended September 30, 2023 was $1.0 million and $2.1 million, which represents $1.0 million and $2.2 million in provision for credit losses on loans and $0 and $91,000 in release of credit losses on unfunded commitments, respectively. This is compared to $1.3 million and $2.5 million for the same periods in 2022, which represents provision for loan losses. For the third quarter of 2023, there were net charge-offs of $698,000 compared to $101,000 for the same period in 2022. Net charge-offs for the first nine months of 2023 were $898,000 compared to $198,000 for the same period in 2022. This uptick in loan charge-offs for both periods pertains to the non-government guaranteed portion of a limited number of loans within our Small Business Specialty Lending division. Colony’s allowance for credit losses on loans was $17.4 million, or 0.93% of total loans at September 30, 2023, compared to $16.1 million, or 0.93% of total loans, at December 31, 2022. At September 30, 2023 and December 31, 2022, nonperforming assets were $10.1 million and $6.4 million, or 0.33% and 0.22% of total assets, respectively.

Noninterest income of $9.7 million for the third quarter of 2023 represents an increase of $1.6 million, or 19.30%, from the third quarter of 2022, primarily related to increases in insurance commissions, equity investment income and income on wealth advisory services which are included in other noninterest income. Noninterest income of $26.3 million for the nine months ended September 30, 2023 was down $1.0 million, or 3.69% compared to the same period in 2022. This decrease was primarily due to decreases in both mortgage fee income and SBSL loan sales. See "Table 3 - Noninterest income" for more detail and discussion on the primary drivers to the variances in noninterest income.

For the three months ended September 30, 2023, noninterest expense was $20.9 million, a decrease of $486,000, or 2.27%, from the same period in 2022. For the nine months ended September 30, 2023, noninterest expense was $63.5 million, a decrease of $4.2 million, or 6.16%, from the same period in 2022. Decreases in noninterest expense were a result of overall decreases in salaries and employee benefits expenses related to lower commissions and bonus expenses. Data processing expense also decreased as a result of cost savings upon renewal of the core processing contract. See "Table 4 - Noninterest expense" for more detail and discussion on the primary drivers to the decrease in noninterest expense.

In June 2023, the Company entered into two interest rate swap agreements with notional amounts of $25.0 million each. Both were designated as cash flow hedges to mitigate against rising interest rates and help protect funding costs in future quarters.

CECL Adoption

On January 1, 2023, the Company adopted ASC Topic 326 which replaced 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 a decrease of the allowance for credit losses on loans of $53,000, the creation of an allowance for unfunded commitments of $1.7 million and a reduction of retained earnings of $1.2 million, net of the increase in deferred tax assets of $410,000.

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 Notes 1 and 3 of our consolidated financial statements as of September 30, 2023, included elsewhere in this Form 10-Q, for additional information on the on the allowance for credit losses and the allowance for unfunded commitments.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. We have identified certain of its accounting policies as “critical accounting policies,” consisting of those related to business combinations, allowance for credit losses and income taxes. In determining which accounting policies are critical in nature, we have identified the policies that require significant judgment or involve complex estimates. It is management's practice to discuss critical accounting policies with the Board of Directors' Audit Committee on a periodic basis, including the development, selection, implementation and disclosure of the critical accounting policies. The application of these policies has a significant impact on the Company’s unaudited interim consolidated financial statements. Our financial results could differ significantly if different judgments or estimates are used in the application of these policies. All accounting policies described in Note 1 of our consolidated financial statements as of December 31, 2022, which are included in the Company’s 2022 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance. Other than our methodology for estimating allowance for credit losses (mentioned below), there have been no significant changes to the Significant Accounting Policies as described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2022, which are included in the Company’s 2022 Form 10-K.

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 borrower.

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

Recent Industry Developments

During 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust. The Company’s total deposits increased by 4.03% as compared to December 31, 2022, to $2.59 billion at September 30, 2023 even though we continue to see mix and rate changes along with competition on deposit pricing. The Company’s uninsured deposits represented 28.21% of total Bank deposits at September 30, 2023 compared to 34.85% of total Bank 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 11.36% and 15.11%, respectively, as of September 30, 2023.

Results of Operations

We reported net income and diluted earnings per share of $5.8 million and $0.33, respectively, for the third quarter of 2023. This compares to net income and diluted earnings per share of $5.3 million and $0.30, respectively, for the same period in 2022. We reported net income and diluted earnings per share of $16.1 million and $0.92, respectively, for the first nine months of 2023. This compares to net income and diluted earnings per share of $14.0 million and $0.82, respectively, for the same period in 2022.

Net Interest Income

Net interest income, which is the difference between interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of total revenue. Management strives to optimize this income while balancing interest rate, credit and liquidity risks.

The banking industry uses two key ratios to measure relative profitability of net interest income. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of noninterest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company's balance sheet and is defined as net interest income as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and stockholders' equity.

Fully taxable equivalent net interest income for the third quarter of 2023 and 2022 was $19.8 million and $21.0 million, respectively. This decrease quarter over quarter can be seen in increases in rates paid on deposits and borrowings which outpaced the increases in rates on loans and securities. The net interest margin for the third quarter of 2023 and 2022 was 2.78% and 3.26%, respectively. This decrease in net interest margin for the third quarter of 2023 compared to the same period in 2022 is primarily a result of the increase in higher yields paid on deposits and borrowing that outpaced the increase in rates on loans and investments.

Fully taxable equivalent net interest income for the nine months ended September 30, 2023 and 2022 was $59.9 million and $59.6 million, respectively. This increase is primarily due to an increase in volume of interest earning assets which outpaced the volume in interest earning liabilities. The net interest margin for the nine months ended September 30, 2023 and 2022 was 2.87% and 3.19%, respectively. This decrease in net interest margin for the nine months ended September 30, 2023 compared to the same period in 2022 is primarily a a result of the increase in higher yields paid on deposits and borrowing that outpaced the increase in rates on loans and investments.

The following tables indicates the relationship between interest income and interest expense and the average amounts of assets and liabilities for the periods indicated. As shown in the tables, both average assets and average liabilities for the three and nine months ended September 30, 2023 increased compared to the same period in 2022. The increase in average assets was primarily driven by the increase in the loan portfolio of $329.9 million for the three months ended September 30, 2023 compared to the same period in 2022, which primarily reflects organic loan growth and an increase in deposits in banks and short term investments of $7.8 million, partially offset by a decrease of $66.1 million in the securities portfolio. The increase in average liabilities for the three months ended September 30, 2023 was funded through an increase in interest bearing deposits of $260.6 million and borrowings of $59.6 million. The increase in average assets was primarily driven by the increase in the loan portfolio of $384.7 million for the nine months ended September 30, 2023 compared to the same period in 2022, which primarily reflects organic loan growth, partially offset by a decrease of $61.5 million in the securities portfolio and a decrease in deposits in banks and short term investments of $33.6 million. The increase in average liabilities for the nine months ended September 30, 2023 was funded through an increase in interest bearing deposits of $219.0 million and borrowings of $119.4 million. The net interest spread, as well as the net interest margin, will continue to be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment.

The yield on total interest-bearing liabilities increased from 0.57% in the third quarter of 2022 to 2.26% in the third quarter of 2023. The yield on total interest-bearing liabilities increased from 0.41% for the nine months ended September 30, 2022 to 1.94% for the nine months ended September 30, 2023 due to increases in the federal funds interest rate during 2022 and 2023. Since September 2022, the Federal Reserve's Federal Open Market Committee ("FOMC") has raised the interest rate 225 basis points through September 30, 2023.

Table 1 - Average Balance Sheet and Net Interest Analysis

(dollars in thousands)

1. The average balance of loans includes the average balance of nonaccrual loans. Income on such loans is recognized and recorded on the cash basis. Taxable-equivalent adjustments totaling $54,000 and $33,000 for the quarters ended September 30, 2023 and 2022, respectively, are calculated using the statutory federal tax rate and are included in income and fees on loans. Accretion income of $36,000 and $122,000 for the quarters ended September 30, 2023 and 2022 are also included in income and fees on loans.

2. Taxable-equivalent adjustments totaling $128,000 and $83,000 for the quarters ended September 30, 2023 and 2022, respectively, are included in tax-exempt interest on investment securities.

Table 1 - Average Balance Sheet and Net Interest Analysis

(dollars in thousands)

3 The average balance of loans includes the average balance of nonaccrual loans. Income on such loans is recognized and recorded on the cash basis. Taxable-equivalent adjustments totaling $162,000 and $95,000 for the nine months ended September 30, 2023 and 2022, respectively, are calculated using the statutory federal tax rate and are included in income and fees on loans. Accretion income of $160,000 and $550,000 for the nine months ended September 30, 2023 and 2022 are also included in income and fees on loans.

4 Taxable-equivalent adjustments totaling $386,000 and $216,000 for the nine months ended September 30, 2023 and 2022, respectively, are included in tax-exempt interest on investment securities.

5 Federal Home Loan Bank advances interest expense includes $751,000 for the nine months ended September 30, 2022 and is the recognized mark on two advances that were acquired in the SouthCrest acquisition that were called early.

The following table presents the effect of net interest income for changes in the average outstanding volume amounts of interest-earning assets and interest-bearing liabilities and the rates earned and paid on these assets and liabilities for the nine month period ended September 30, 2023 compared to the nine month period ended September 30, 2022.

Table 2 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis

(dollars in thousands)

Provision for Credit Losses

The provision for credit losses is based on management's evaluation of probable, inherent losses in the loan portfolio and unfunded commitments and the corresponding analysis of the allowance for credit losses at quarter-end. Provision for credit losses for the three and nine months ended September 30, 2023 was $1.0 million and $2.1 million compared to $1.3 million and $2.5 million for the same periods in 2022, respectively. The amount of provision expense recorded in each period was the amount required such that the total allowance for credit losses reflected the appropriate balance, in the estimation of management, sufficient to cover expected credit losses over the expected life of a loan exposure and unfunded commitments where the likelihood is that funding will occur. The provision for credit losses for quarter ended September 30, 2023 includes $1.0 million in provision for credit losses on loans and $0 in release of credit losses on unfunded commitments. The provision for credit losses for the nine months ended September 30, 2023 includes $2.2 million in credit losses on loans and $91,000 in release of credit losses on unfunded commitments. See the section captioned “Loans and Allowance for Credit Losses” elsewhere in this discussion for further analysis of the provision for credit losses.

Noninterest Income

The following table represents the major components of noninterest income for the periods indicated.

(dollars in thousands)

For the three and nine months ended September 30, 2023, noninterest income increased $1.6 million and decreased $1.0 million, respectively compared to the same periods in 2022. The primary reason for the three month increase was due to increases in insurance commissions, equity investment income and income on wealth advisory services which are included in other noninterest income. The primary reason for the nine month decrease was due to decreases in both mortgage fee income and gains on sales of SBA loans offset by increases in insurance commissions, equity investment income and income on wealth advisory services which are included in other noninterest income.

Service charges on deposit accounts. For the three and nine months ended September 30, 2023, services charges on deposits was $2.2 million and $6.1 million compared to $2.1 million and $5.8 million for the same periods ended September 30, 2022, an increase of $96,000 and $318,000, respectively. These increases in service charges on deposits can be attributed to the Company's strong retail banking center footprint and our ability to continue to grow core deposits despite the challenging rate environment.

Mortgage Fee Income. For the three and nine months ended September 30, 2023, mortgage fee income was $1.7 million and $4.9 million compared to $1.7 million and $7.4 million for the same periods ended September 30, 2022, a minimal increase of $22,000, and decrease of $2.4 million, respectively. These variances in mortgage fee income were the result of rising interest rates which has caused a slowdown in the demand for mortgage products and thus a year to date decrease in mortgage fee income.

Gain on Sales of SBA loans. For the three and nine months ended September 30, 2023, net realized gains on the sale of the guaranteed portion of SBA loans totaled $1.3 million and $3.4 million compared to $1.2 million and $4.8 million in the same periods ended September 30, 2022, a slight increase of $53,000 and a decrease of $1.4 million, respectively. These variances are related to the shift in the Company's production towards adjustable rate portfolio products which caused a decrease in our secondary market production and in turn a year to date decrease in the gain on sales of SBA loans.

Interchange Fees. For the three and nine months ended September 30, 2023, interchange fee income was $2.2 million and $6.4 million compared to $2.2 million and $6.3 million for the same periods ended September 30, 2022, an increase of $23,000 and $62,000, respectively. These slight movements in interchange fees are the result of customer use of our MasterCard and Discover card programs whose buying habits can fluctuate between periods.

Insurance commissions. For the three and nine months ended September 30, 2023, insurance commissions were $509,000 and $1.4 million compared to $466,000 and $1.3 million for the same periods ended September 30, 2022, an increase of $43,000 and $82,000, respectively. These increases in insurance commissions are the result of increased volume in the Company's insurance division.

Other noninterest income. For the three and nine months ended September 30, 2023, other noninterest income was $1.5 million and $3.0 million compared to $258,000 and $782,000 for the same periods ended September 30, 2022, an increase of

$1.2 million, and $2.2 million, respectively. The increase in other noninterest income for the third quarter 2023 compared to 2022 was primarily attributable to an increase in wealth advisory and merchant services of $306,000, equity investment market valuation gains of $55,000 in the third quarter of 2023 compared to market valuation losses of $92,000 in the third quarter of 2022, and gains on sales of assets of $91,000 along with increases in SBA servicing and other related fee income. The increase in other noninterest income for the nine months ended September 30, 2023 compared to the same period in 2022 was attributable to an increase in wealth advisory and merchant services of $639,000, equity investment market valuation gains in the first nine months of 2023 of $149,000 compared to market valuation losses of $357,000 in the first nine months of 2022, and gains on sales of assets of $136,000 along with increases in SBA servicing and other related fee income.

Noninterest Expense

The following table represents the major components of noninterest expense for the periods indicated.

(dollars in thousands)

Noninterest expense decreased for the three and nine months ended September 30, 2023 by $486,000 and $4.2 million compared to the same periods in 2022, respectively. Decreases were seen in all categories except other noninterest expense for the three month period and in all but advertising and public relations and other noninterest expense for the nine month period.

Salaries and employee benefits. Salaries and employee benefits for the three and nine months ended September 30, 2023 was $12.0 million and $37.9 million compared to $12.2 million and $40.5 million and for the same periods ended September 30, 2022, a decrease of $181,000 and $2.6 million, respectively. These decreases in salaries and employee benefits expenses are related to a reduction in force initiative along with lower commissions and bonus expenses.

Information technology expenses. Information technology expense for the three and nine months ended September 30, 2023 was $2.1 million and $6.4 million compared to $2.5 million and $7.4 million for the same periods ended September 30, 2022, a decrease of $427,000 and $988,000, respectively. These decreases relate to a decrease in data processing expenses due to a renewed contract with the Company's core processor resulting in cost savings which is partially offset by increased software expenses.

Professional fees. Professional fees for the three and nine months ended September 30, 2023 was $752,000 and $2.3 million compared to $881,000 and $2.8 million for the same periods ended September 30, 2022, a decrease of $129,000 and $425,000, respectively. These decreases are the result of lower consulting and legal fees in 2023 compared to 2022 which included fees associated with the acquisition of SouthCrest Financial Group, Inc.

Advertising and public relations. Advertising and public relations expenses for the three and nine months ended September 30, 2023 was $766,000 and $2.4 million compared to $876,000 and $2.4 million for the same periods ended September 30, 2022, a decrease of $110,000 for the three month period and an increase of $26,000 for the nine month period, respectively. The decrease for the three month period can be attributed to the expense control initiative implemented in 2023. The increase for the nine month period is the result of a donation to the Georgia Scholarship Program during the first quarter of 2023.

Communications. Communications expenses for the three and nine months ended September 30, 2023 was $224,000 and $710,000 compared to $471,000 and $1,325,000 for the same periods ended September 30, 2022, a decrease of $247,000 and $615,000, respectively. The decrease for both periods is the result of telephone service contracts related to the acquisition of SouthCrest Financial Group, Inc. that were paid through the end of the contracts, one in June 2022 and the other in August 2022.

Other noninterest expenses. Other noninterest expense for the three and nine months ended September 30, 2023 was $3.5 million and $8.9 million compared to $2.8 million and $8.4 million for the same periods ended September 30, 2022, an increase of $633,000 and $532,000, respectively. These increases relate primarily to increased servicing rights valuation, city and county taxes, SBA broker fees and other loan related costs offset by decreases in travel and entertainment, printing and supplies and deposit related expenses.

Income Tax Expense

Income tax expense for the three and nine months ended September 30, 2023 was $1.7 million and $4.0 million compared to $1.1 million and $2.5 million for the same periods in 2022. The Company’s effective tax rates for the three and nine months ended September 30, 2023 were 22.2% and 19.7% compared to 17.4% and 15.2% for the three and nine months ended September 30, 2022. The largest driver of the difference is the tax exempt income primarily from BOLI and tax exempt interest along with the favorable tax impact of the donation made to the Georgia Scholarship Program during the first quarter of 2023 and Georgia state tax credits in 2022.

Balance Sheet Review

Total assets increased to $3.1 billion at September 30, 2023 from $2.9 billion at December 31, 2022.

Loans and Allowance for Credit Losses

At September 30, 2023, gross loans outstanding (excluding loans held for sale) were $1.9 billion, an increase of $127.9 million, or 7.4%, compared to $1.7 billion at December 31, 2022.

At September 30, 2023, approximately 65.2% of our loans are secured by commercial real estate. Our total commercial real estate loans have decreased slightly during 2023 as our focus has been shifted away from commercial real estate lending and more toward residential real estate and consumer which is driven by our marine and RV lending division. We continue to maintain competitive loan pricing and tightened credit standards.

The following table presents a summary of the loan portfolio as of September 30, 2023 and December 31, 2022.

(dollars in thousands)

The Company's risk mitigation processes include an independent loan review designed to evaluate the credit risk in the loan portfolio and to ensure credit grade accuracy. The analysis serves as a tool to assist management in assessing the overall credit quality of the loan portfolio and the adequacy of the allowance for credit losses. Loans classified as "substandard" are loans which are inadequately protected by the current credit worthiness and paying capacity of the borrower and/or the collateral pledged. These assets exhibit well-defined weaknesses or are showing signs there is a distinct possibility the Company will sustain some loss if the deficiencies are not corrected. These weaknesses may be characterized by past due performance, operating losses and/or questionable collateral values. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans but have an increased risk of loss. Loans classified as "loss" are those loans which are considered uncollectible and are in the process of being charged off.

The Company regularly monitors the composition of the loan portfolio as part of its evaluation over the adequacy of the allowance for credit losses. The Company focuses on the following loan categories: (1) construction, land & land development; (2) commercial, financial & agricultural; (3) other commercial real estate; (4) residential real estate; and (5) consumer and other.

The allowance for credit losses for loans is a reserve established through charges to earnings in the form of a provision for credit losses. The provision for credit losses for loans is based on management’s evaluation of the size and composition of the loan portfolio, the level of non-performing and past-due loans, historical trends of charged off loans and recoveries, prevailing economic conditions and other factors management deems appropriate. The Company’s management has established an allowance for credit losses for loans which it believes is adequate to cover expected credit losses over the expected life of a loan exposure and unfunded commitments where the likelihood is that funding will occur. Based on a credit evaluation of the loan portfolio, management presents a quarterly review of the allowance for credit losses for loans and allowance for credit losses on unfunded commitments to the Company’s Board of Directors, which primarily focuses on risk by evaluating individual loans in certain risk categories. These categories have also been established by management and take the form of loan grades. By grading the loan portfolio in this manner the Company’s management is able to effectively evaluate the portfolio by risk, which management believes is the most effective way to analyze the loan portfolio and thus analyze the adequacy of the allowance for credit losses on loans.

The allowance for credit losses on loans is established by examining (1) the large classified loans, nonaccrual loans and loans considered impaired and evaluating them individually to determine the specific reserve allocation and (2) the remainder of the loan portfolio to allocate a portion of the allowance based on past loss experience and the economic conditions for the particular loan category. The Company also considers other factors such as changes in lending policies and procedures; changes in national, regional and/or local economic and business conditions; changes in the nature and volume of the loan portfolio; changes in the experience, ability and depth of either the market president or lending staff; changes in the volume and severity of past-due and classified loans; changes in the quality of the loan review system; and other factors management deems appropriate.

The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The ACL is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.

The allowance for credit losses on loans was $17.4 million at September 30, 2023 compared to $15.2 million at September 30, 2022, an increase of $2.2 million, or 14.4%. The allowance for credit losses on loans as a percentage of loans was 0.93% and 0.96% at September 30, 2023 and 2022, respectively. The provision for credit losses was $1.0 million compared to $1.3 million for the three months ended September 30, 2023 and September 30, 2022, respectively. The provision for credit losses for the quarter ended September 30, 2023 includes $1.0 million in credit losses on loans and no change in credit losses on unfunded commitments. The provision for credit losses was $2.1 million compared to $2.5 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The provision for credit losses for the nine months ended September 30, 2023 includes $2.2 million in credit losses on loans and a release of $91,000 in credit losses on unfunded commitments. The amount of provision expense recorded in each period was the amount required such that the total allowance for credit losses reflected the appropriate balance, in the estimation of management, that was sufficient to cover expected credit losses on loans over the expected life of a loan exposure and unfunded commitments where the likelihood is that funding will occur. The primary reason for the decrease in allowance to loans as a percentage for loans and provision is primarily due to the Bank's slowdown in loan growth, with a portion of that loan growth being the funding of loan commitments that were previously reserved for under the CECL methodology..

Additional information about the Company’s allowance for credit losses is provided in Note 4 to our consolidated financial statements as of September 30, 2023, included elsewhere in this Quarterly Report on Form 10-Q.

The following table presents an analysis of the allowance for credit losses on loans as of and for the nine months ended September 30, 2023 and 2022:

(dollars in thousands)

* Percentage represents the loan balance in each category expressed as a percentage of total end of period loans.

The following table presents a summary of allowance for credit loss for the three and nine months ended September 30, 2023 and 2022.

(dollars in thousands)

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

Nonperforming Assets

Asset quality experienced a slight decrease during the first nine months of 2023. Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, repossessed personal property and other real estate owned ("OREO"). Nonaccrual loans totaled $9.3 million at September 30, 2023, an increase of $3.6 million, or 62.4%, from $5.7 million at December 31, 2022. There was one loan contractually past due 90 days or more and still accruing totaling $9 million at September 30, 2023. There was no repossessed personal property for either period presented. OREO totaled $812,000 at September 30, 2023 compared to $651,000 at December 31, 2022. As of September 30, 2023, total nonperforming assets as a percent of total assets increased to 0.33% compared with 0.22% at December 31, 2022. The increase in nonperforming assets was primarily due to the repurchase of the government guaranteed portion of nonperforming loans, which were repurchased as part of the liquidation process and have no expected losses.

Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent loan payments made on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as nonaccrual does not preclude the ultimate collection of loan principal or interest.

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell, at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for credit losses on loans. If the lesser of the fair value, less estimated costs to sell, or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.

Nonperforming assets at September 30, 2023 and December 31, 2022 were as follows:

(dollars in thousands)

The Company had two loans modified due to financial difficulty during the nine month period ended September 30, 2023. See Note 3 - Loans, for additional details on loan modifications.

Deposits

Deposits at September 30, 2023 and December 31, 2022 were as follows:

(dollars in thousands)

Total deposits increased $100.3 million to $2.59 billion at September 30, 2023 from $2.49 billion at December 31, 2022. As of September 30, 2023, 19.1% of total deposits were comprised of noninterest-bearing accounts and 80.9% were comprised of interest-bearing deposit accounts, compared to 22.8% and 77.2% as of December 31, 2022, respectively. The overall increase in our deposits is due primarily to the increase in rates the Company offers on its time deposit products coupled with the Company's diversified core deposit base and long customer relationships. An increase in brokered deposits used to fund loan growth has also contributed to the overall increase in deposits.

We had $148.7 million and $50.8 million in brokered deposits at September 30, 2023 and December 31, 2022, respectively. 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 FHLB.

The Company's estimated uninsured deposits were $740.0 million at September 30, 2023, or 28.21% of total Bank deposits compared to $882.2 million at December 31, 2022, or 34.85% of total Bank deposits. Adjusted uninsured deposit estimate (which excludes deposits collateralized by public funds and internal accounts) were $451.9 million at September 30, 2023, or 17.22% of total Bank deposits compared to $531.7 million at December 31, 2022, or 21.01% of total Bank deposits. Adjusted uninsured deposits represent a small percentage of our overall deposits, which increases the stability of our deposit base and lowers our overall funding risk.

Off-Balance Sheet Arrangements

The Company is a party to credit related 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, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit, is based on management’s credit evaluation of the borrower. The type of collateral held varies, but may include cash or cash equivalents, unimproved or improved real estate, personal property or other acceptable collateral.

See Note 7 to our consolidated financial statements as of September 30, 2023, included elsewhere in this Form 10-Q, for a table setting forth the financial instruments that were outstanding whose contract amounts represent credit risk and more information regarding our off-balance sheet arrangements as of September 30, 2023 and December 31, 2022.

Liquidity

An important part of the Bank's liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis.

The Bank's main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances and brokered deposits. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs. The Company also has access to the FRB Term Funding Program which offers loans to eligible depository institutions of up to one year in length.

To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances, the Company and the Bank have established multiple borrowing sources to augment their funds management. The Company has borrowing capacity through membership of the FHLB program. The Bank has also established overnight borrowing for Federal Funds purchased through various correspondent banks. There were no outstanding balances of Federal Funds purchased at September 30, 2023 and December 31, 2022, respectively.

Cash and cash equivalents at September 30, 2023 and December 31, 2022 were $141.3 million and $80.7 million, respectively. Cash and cash equivalents has increased since year end 2022, primarily due to increases in deposits. Management believes the various funding sources discussed above are adequate to meet the Company’s liquidity needs without any material adverse impact on our operating results.

Liquidity management involves the matching of cash flow requirements of customers and the ability of the Company to manage those requirements. These requirements of customers include, but are not limited to, deposits being withdrawn or providing assurance to borrowers that sufficient funds are available to meet their credit needs. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance we have in short-term assets at any given time will adequately cover any reasonably anticipated need for funds. Additionally, we maintain relationships with correspondent banks, which could provide funds on short notice, if needed. We have also invested in FHLB stock for the purpose of establishing credit lines with the FHLB. At September 30, 2023 and December 31, 2022, we had $185.0 million and $125.0 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $587.9 million and $574.7 million of additional borrowing availability with the FHLB at September 30, 2023 and December 31, 2022, respectively.

Other sources of liquidity include overnight borrowings from the Federal Reserve Discount Window, as well as access to the FRB Term Funding Program, of $54.3 million and $100.0 million, respectively, of which there was no outstanding balance on either facility at September 30, 2023. The Company also had unencumbered securities of $443.0 million, $84.8 million in FRB Reserves and $55.3 million in other cash and due from banks as of September 30, 2023. Unencumbered investment securities provide the ability to either be pledged as collateral with borrowing sources or sold and converted to cash.

The Company is a separate entity from the Bank, and as such it must provide for its own liquidity. The Company is responsible for the payment of dividends declared for its common shareholders and payment of interest and principal on any outstanding debt or trust preferred securities. These obligations are met through internal capital resources such as service fees and dividends from the Bank, which are limited by applicable laws and regulations.

Capital Resources

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, 2023 and December 31, 2022. The Company and the Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of September 30, 2023 and December 31, 2022. There have been no conditions or events since

September 30, 2023 that management believes would change this classification.

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The Company's primary market risk exposures are credit risk, interest rate risk, and to a lesser degree, liquidity risk. The Bank operates under an Asset Liability Management Policy which is approved by the ALCO, which is a Board committee that meets regularly. The policy outlines limits on interest rate risk in terms of changes in net interest income and changes in the net market values of assets and liabilities over certain changes in interest rate environments. These measurements are made through a simulation model which projects the impact of changes in interest rates on the Bank's assets and liabilities. The policy also outlines responsibility for monitoring interest rate risk and the process for the approval, implementation and monitoring of interest rate risk strategies to achieve the Bank's interest rate risk objectives.

The following table presents our interest sensitivity position at the dates indicated.

See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s 2022 Form 10-K for additional disclosures related to market and interest rate risk.

There are no material changes during the period covered by this Report to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” previously disclosed in the Company's 2022 Form 10-K.

Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Acting Chief Financial Officer, the Company has evaluated its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, the Company's Chief Executive Officer and Acting Chief Financial Officer has concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's senior management, including its Chief Executive Officer and Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended September 30, 2023, there were no changes 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.

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

There are no material changes during the period covered by this Report to the risk factors previously disclosed in the Company's 2022 Form 10-K and 2023 1Q Form 10-Q.