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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-07 · 209 added, 256 removed, 218 unchanged (68% of the section changed)

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

On October 15, 2021 we completed the acquisition of Select Bancorp, Inc.

("Select") which was headquartered in Dunn, North Carolina and which contributed total assets of $1.8 billion, total loans of $1.3 billion, and total deposits of $1.6 billion as of the acquisition date.

As such, comparisons for the financial periods presented are impacted by our acquisition of Select.

On June 21, 2022, we announced an agreement to acquire GrandSouth Bancorporation ("GrandSouth"), headquartered in Greenville, South Carolina, in an all-stock transaction.

The terms of the agreement provide that each share of GrandSouth common and preferred stock issued and outstanding immediately prior to the effective time of the acquisition will be converted into 0.91 shares of the Company's common stock.

We have received all regulatory approvals for the transaction.

Approval by GrandSouth's shareholders remains pending and is expected in the fourth quarter of 2022.

The acquisition is expected to close in early January 2023.

GrandSouth operates eight branches throughout South Carolina and currently has $1.3 billion in total assets, $995.1 million in loans, and $1.1 billion in deposits.

Overview and Highlights at and for Three Months Ended September 30, 2022

We earned net income of $37.9 million, or $1.06 diluted EPS, during the three months ended September 30, 2022 compared to net income of $27.6 million, or $0.97 diluted EPS, for the three months ended September 30, 2021.

The main drivers to the increase in net income are presented below.

Refer also to additional discussion in the Results of Operations section following.

• Net interest income for the third quarter of 2022 was $85.3 million, a 45.7% increase from the $58.6 million recorded in the third quarter of 2021.

The increase in net interest income from the prior year period was driven by higher earning assets related to both organic growth and the Select acquisition.

• Also contributing to the increase in net interest income was the higher net interest margin ("NIM") which increased in the third quarter of 2022 to 3.40% from 3.03% for the third quarter of 2021 related to the increase in market interest rates driving higher yields on loans, while our cost of funds has remained low and was essentially unchanged from the same period of the prior year.

• For the three months ended September 30, 2022, the Company recorded $5.1 million in provision for credit losses.

This is compared to a release of provisions of $1.4 million for the third quarter of 2021.

Fluctuations each period are based on loan growth during the period, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, and other assumptions and inputs to the CECL model.

• Noninterest income for the three months ended September 30, 2022 increased slightly, up $0.4 million, or 2.4%, from the comparable period of 2021 with higher service charges and other gains offset by lower loan sale gains, consulting income and other fees.

• Noninterest expense increased $7.9 million, or 19.3%, for the quarter ended September 30, 2022, as compared to the prior year period driven by higher operating expenses resulting from the Select acquisition.

Total assets at September 30, 2022 amounted to $10.5 billion, a 0.1% increase from December 31, 2021.

The primary balance sheet changes are presented below.

Refer also to additional discussion in the Financial Condition section following.

• Total loans amounted to $6.5 billion at September 30, 2022, an increase of $443.6 million, a 9.7% annualized growth rate, from December 31, 2021 due to organic growth in all markets.

Organic growth for the third quarter of 2022 amounted to $282.1 million.

• Total investment securities decreased $261.8 million from December 31, 2021 to total $2.9 billion at September 30, 2022, as cash flows were utilized to fund loan growth.

Also contributing to the decline was the increase in unrealized losses on available for sale securities which totaled $464.6 million at September 30, 2022.

• Total deposits amounted to $9.2 billion at September 30, 2022, an increase of $104.6 million, or 1.1%, from December 31, 2021.

While deposits have continued to grow for the year to date period, the third quarter of 2022 realized a decline in total deposits of $130.5 million as market rates for deposits have become more competitive and customer behaviors may be shifting from activity experienced during the COVID-19 pandemic.

Recent Developments and Acquisitions

On January 1, 2023, we acquired GrandSouth, a community bank headquartered in Greenville, South Carolina, in an all-stock transaction.

The terms of the merger agreement provided that each share of common and preferred stock of GrandSouth issued and outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the Company's common stock.

As a result, the Company issued 5,032,834 shares of the Company common stock effective January 1, 2023.

In addition, GrandSouth common stock options outstanding at the merger effective time were converted to options to acquire 0.91 shares of the Company's common stock resulting in 542,345 options with an average exercise price of approximately $20.14.

The GrandSouth acquisition contributed $1.02 billion in loans and $1.05 billion in deposits, with eight branches in South Carolina being added to the Company's branch network.

The acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the the high-growth markets of the state including Greenville, Charleston and Columbia.

Overview and Highlights at and for Three Months Ended March 31, 2023

We earned net income of $15.2 million, or $0.37 diluted EPS, during the three months ended March 31, 2023 compared to net income of $34.0 million, or $0.95 diluted EPS, for the three months ended March 31, 2022.

As noted above, we acquired GrandSouth on January 1, 2023 which has significantly impacted comparison for the financial periods presented.

The primary driver of the reduced earnings for the first quarter of 2023 as compared to the same period last year was the charges associated with the Company's acquisition of GrandSouth, including merger expenses totaling $12.2 million and a one-time loan loss provision of $12.2 million to establish an initial allowance for credit losses for acquired loans in accordance with our CECL model.

Highlights of the results for the quarter are presented below (refer also to additional discussion in the "Results of Operations" and "Financial Condition" sections following).

• Net interest income for the first quarter of 2023 was $92.5 million, a 20.3% increase from the $76.9 million recorded in the first quarter of 2022.

The increase in net interest income from the prior year period was driven by higher earning assets related to both the GrandSouth acquisition and organic growth.

• Net interest margin ("NIM") on a tax-equivalent basis increased in the first quarter of 2023 to 3.31% from 3.21% for the first quarter of 2022 related to the increase in market interest rates driving higher yields on loans and increased loan accretion, which offset higher cost of funds.

• For the three months ended March 31, 2023, the Company recorded $11.5 million in provision for credit losses.

This is compared to a provision of $3.5 million for the first quarter of 2022.

The amount recorded for the current quarter was directly related to a one-time provision of $12.2 million for non-credit deteriorated loans acquired from GrandSouth, partially offset by fluctuations in our CECL model calculation for loan balance changes and updated economic forecasts during the first quarter of 2023.

• Noninterest income for the three months ended March 31, 2023 decreased $5.7 million, or 29.7%, from the comparable period of 2022 primarily related to lower SBA and mortgage loan sale gains, and lower other gains for 2022 BOLI death benefits.

• Noninterest expense increased $22.7 million, or 44.1%, for the quarter ended March 31, 2023, as compared to the prior year period driven by merger and acquisition costs of $12.2 million, higher intangible amortization, and higher operating expenses in general resulting from the GrandSouth acquisition.

• Total assets at March 31, 2023 amounted to $12.4 billion, a 16.4% increase from December 31, 2022, driven primarily by the acquisition of GrandSouth.

• Total loans amounted to $7.8 billion at March 31, 2023, with acquired balances contributing $1.02 billion and organic growth of $113.7 million, for an annualized growth rate (exclusive of acquired loans) of 5.9% from December 31, 2022.

• Total deposits amounted to $10.4 billion at March 31, 2023, an increase of $1.1 billion from December 31, 2022.

Acquired deposits contributed $1.05 billion while organic growth totaled $95.2 million for the quarter, an annualized organic growth rate (exclusive of acquired deposits) of 3.7%.

• Credit quality continued to be strong at March 31, 2023, with decreases in NPAs for the fifth straight quarter.

The NPA to total assets ratio declined to 0.25% as of March 31, 2023 from 0.46% for the comparable period of 2022.

• Our liquidity ratio increased to 26.2% at March 31, 2023 and was in excess of 30% when including available off-balance sheet sources.

• We remain well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 12.53% and total risk-based capital ratio of 14.88%.

• Accumulated other comprehensive loss increased $333.1 million related to higher unrealized losses on available for sale securities due to increased market rates experienced starting in March 2022.

Overview and Highlights for Nine Months Ended September 30, 2022

Total net income of $108.5 million, or $3.04 diluted EPS, was reported during the nine months ended September 30, 2022 compared to net income of $85.1 million, or $2.99 diluted EPS, for the nine months ended September 30, 2021.

The main drivers to the increase in net income are presented below.

Refer also to additional discussion in the Results of Operations section following.

• Net interest income for the nine months ended September 30, 2022 was $240.5 million, a 39.4% increase from the $172.6 million recorded in the nine months ended September 30, 2021.

The increase in net interest income from the prior year period was due in large part to higher earning assets related to both organic growth and the Select acquisition completed in the fourth quarter of 2021.

Also contributing to the increase in net interest income was the higher NIM which increased 10 basis points in 2022 as compared to the prior year.

• For the nine months ended September 30, 2022, we recorded a provision for credit losses of $8.6 million based on loan growth for the period and CECL model assumptions including deterioration economic forecasts.

This is compared to a reversal of the provision for credit losses of $1.4 million for the comparable period of 2021.

• Noninterest income declined $5.1 million, or 8.8%, from the prior year period primarily due to a $7.0 million decrease in mortgage banking income related to lower levels of activity due to market rate increases.

Other decreases in SBA consulting and loan sale gains where more than offset by higher service changes and other income income related to higher level of accounts and transactions arising from the Select acquisition.

• Noninterest expense increased $27.7 million, or 22.7%, for the nine months ended September 30, 2022 as compared to the same period in the prior year.

Included in the current year period was $4.8 million in merger and acquisition expenses primarily related to computer system conversion costs resulting from the Select acquisition.

The balance of the increase in noninterest expenses was driven by higher operating expenses resulting from the Select acquisition.

Critical Accounting Policies and Estimates

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We have identified the accounting policies discussed below as being more sensitive in terms of judgments and estimates taking into account their overall potential impact to our consolidated financial statements.

The following should be read in conjunction with our significant accounting policies are presented in Note 1 of the 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

Allowance for Credit Losses on Loans and Unfunded Commitments

The allowance for credit losses represents management’s current estimate of credit losses for the remaining estimated life of financial instruments.

The ACL represents management’s current estimate of credit losses for the remaining estimated life of financial instruments.

We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the portfolio.

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and (5) it requires estimation of a reasonable and supportable forecast period for credit losses.

Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to end of a loan’s estimated life.

Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate

current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to the end of a loan’s estimated life.

Our ACL is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses.

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To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.

Purchased credit deteriorated ("PCD") loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination as of the acquisition date.

PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination as of the acquisition date.

At acquisition, an allowance on PCD assets is booked directly to the ACL.

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Actual losses incurred may differ materially from our estimates.

For example, inflationary pressures and recessionary concerns leading to macroeconomic deterioration of the economy, higher unemployment and declines in real estate and other asset valuations could affect our loss experience and assumptions utilized in our model.

We estimate expected credit losses on unfunded commitments to extend credit over the contractual period in which we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable.

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The methodology is based on a loss rate approach that starts with the probability of funding based on historical experience.

Similar to methodology discussed above related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecast.

Goodwill and Other Intangible Assets

Similar to methodology discussed above related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecasts.

Additional information on the loan portfolio and ACL can be found in the “Nonperforming Assets” and “Allowance for Credit Losses and Loan Loss Experience” sections below.

Business Combinations and Goodwill

We believe that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies.

Accounting Standards Codification 350-10 establishes standards for the amortization of acquired intangible assets, generally over the estimated useful life of the related assets, and impairment assessment of goodwill.

At September 30, 2022, we had core deposit and other intangibles of $13.9 million subject to amortization and $364.3 million of goodwill, which is not subject to amortization.

Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed.

Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.

An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment.

During 2022 there were no triggers warranting interim impairment assessments and for the 2021 annual assessment, we concluded that it was more likely than not that the fair value exceeded its carrying value.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represent the estimated value of the long-term deposit relationships acquired in the transaction.

Pursuant to applicable accounting guidance, we recognize assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values as of the acquisition date, with the related transaction costs expensed in the period incurred.

Specified items such as acquired operating lease assets and liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with accounting guidance that results in measurements that may differ from fair value.

Determining the fair value of assets acquired and liabilities assumed often involves estimates based on internal or third-party valuations which include appraisals, discounted cash flow analysis, or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples of earnings, or other relevant factors.

The determination of fair value may require us to make point-in-time estimates about discount rates, future expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to assess.

While we use the best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction.

Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions:

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The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible.

The estimated useful lives are periodically reviewed for reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization.

The estimated useful lives are periodically reviewed for

reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization.

We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

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Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.

The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income.

Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise.

The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination.

Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions that were described previously in the "Allowance for Credit Losses on Loans" foregoing section.

Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default.

The actual cash flows on these loans could differ materially from the fair value estimates.

The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans.

Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances.

Similarly, premiums or discounts on acquired debt are accreted or amortized to interest expense over their remaining lives.

Actual accretion or amortization of premiums and discounts from a business acquisition may differ materially from our estimates impacting our operating results.

Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.

An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment.

During three months ended March 31, 2023 , there were no triggers warranting interim impairment assessments and for the 2022 annual assessment, we concluded that it was more likely than not that the fair value exceeded its carrying value.

Current Accounting Matters

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Net interest income is also influenced by external factors such as local economic conditions, competition for loans and deposits, and market interest rates.

Net interest income for the three months ended September 30, 2022 amounted to $85.3 million, an increase of $26.8 million, or 45.7%, from the $58.6 million recorded in the third quarter of 2021.

Net interest income on a tax-equivalent basis for the three months ended September 30, 2022 amounted to $86.0 million, an increase of $26.9 million, or 45.5%, from the $59.1 million recorded in the third quarter of 2021.

For internal purposes, we evaluate our NIM on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income then dividing by total average earning assets.

We believe that analysis of NIM on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.

The following table presents an analysis of net interest income for the three months ended September 30, 2022 and 2021.

Net interest income for the three months ended March 31, 2023 amounted to $92.5 million, an increase of $15.6 million, or 20.3%, from the $76.9 million recorded in the first quarter of 2022.

The increase was primarily driven by higher average earning assets from both the GrandSouth acquisition and organic growth.

Also contributing to the higher net interest income was the increase in our NIM which, on tax-equivalent basis, increased from 3.21% for the first quarter of 2022 to 3.31% for the three months ended March 31, 2023.

internal purposes, we evaluate our NIM on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income then dividing by total average earning assets.

We believe that analysis of NIM on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.

The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.

($ in thousands) Three Months Ended March 31,

Net interest income, as reported $ 92,486 76,878

Tax-equivalent adjustment 700 697

Net interest income, tax-equivalent $ 93,186 77,575

Net interest margin, as reported 3.28 % 3.18 %

Net interest margin, tax-equivalent 3.31 % 3.21 %

Overall, as demonstrated in the table below, higher earning asset volumes, arising from both organic growth and the GrandSouth acquisition, combined with an expansion in NIM, drove the increase in net interest income.

• Market interest rates increased 450 basis points between March 2022 and March 2023 to result in an average prime rate of 7.69% for three months ended March 31, 2023 compared to 3.29% for the prior year period.

• Average loan volumes for the three months ended March 31, 2023 were $1.7 billion higher than the same period in 2022.

In addition to higher volumes arising from both the GrandSouth acquisition and organic growth, interest rates on loans increased 92 basis points to 5.22% for the first quarter of 2023, resulting in an increase in loan interest income of $35.2 million.

• Primarily due to higher market rates and increased average balances related in large part to the GrandSouth acquisition, deposit interest expense for the three months ended March 31, 2023 increased $17.1 million compared to the same period in 2022.

Average interest-bearing deposit balances increased $643.2 million while rates on those deposits increased 107 basis points as compared to the same period in the prior year.

• The combination of higher rates on borrowings, up 257 basis points in the first quarter of 2023 from the first quarter of 2022 due to increasing market rates, and the increase in volume of borrowings between periods drove the $5.3 million increase in interest expense for this category.

Average borrowings increased $371.2 million in the first quarter of 2023 due in large part to the higher levels of short-term borrowings utilized as needed to fund loan growth and manage fluctuations in deposit balances.

• The increase in NIM was directly related to higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion which offset the higher cost of funds between the comparative periods.

The following table presents an analysis of net interest income for the three months ended March 31, 2023 and 2022:

Average Balances and Net Interest Income Analysis

For the Three Months Ended September 30,

For the Three Months Ended March 31,

($ in thousands) Average

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Savings deposits 728,918 0.07 % 129 721,911 0.06 % 108

Time deposits >$100,000 494,707 0.32 % 394 504,437 0.44 % 558

Other time deposits 884,668 2.55 % 5,553 545,309 0.18 % 245

Total interest-bearing deposits 5,551,159 0.13 % 1,848 4,551,460 0.14 % 1,626

Borrowings 110,180 3.99 % 1,108 60,822 2.45 % 375

Total interest-bearing liabilities 5,661,339 0.21 % 2,956 4,612,282 0.17 % 2,001

Noninterest-bearing checking 3,748,119 2,728,815

Other liabilities 69,912 59,244

Shareholders’ equity 1,087,763 918,986

Total liabilities and

shareholders’ equity $ 10,567,133 $ 8,319,327

Net yield on interest-earning assets and net interest income 3.38 % $ 85,334 3.00 % $ 58,553

Net yield on interest-earning assets and net interest income – tax-equivalent (3) 3.40 % $ 86,026 3.03 % $ 59,129

Interest rate spread 3.28 % 2.94 %

Average prime rate 5.35 % 3.25 %

(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $0.8 million, and $1.9 million for three months ended September 30, 2022 and 2021, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $2.6 million and $1.2 million for three months ended September 30, 2022 and 2021, respectively.

(3) Includes tax-equivalent adjustments of $0.7 million and $0.6 million for three months ended September 30, 2022 and 2021, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

Overall, as demonstrated in the table above, net interest income grew $26.8 million for the three months ended September 30, 2022 from the comparable period of the prior year.

Higher earning asset volumes, from both organic growth and the Select acquisition, combined with an expansion in NIM, drove the increase.

Rates on interest-bearing deposits remained stable year-over-year while rated on borrowings increased relative to higher market rates.

• Market interest rates increased 300 basis points between March and September 2022 to result in an average prime rate of 5.35% for three months ended September 30, 2022 compared to 3.25% for the prior year period.

• Average loan volumes for the three months ended September 30, 2022 were $1.6 billion higher than the same period in 2021.

In addition to higher volumes, interest rates on loans increased 40 basis points to 4.49% for the third quarter of 2022, to result in an increase in loan interest income of $21.3 million.

• Interest income on total investment securities increased $5.5 million for the three months ended September 30, 2022 when compared to the same period in 2021 related primary to the higher yields on the portfolio as reinvestment rates increased between the periods.

Average volumes increased $910.5 million between periods contributing to the increase in interest income.

• Higher average balances in interest-bearing deposits of $1.0 billion drove a $0.2 million increase in deposit interest expense for the three months ended September 30, 2022 compared to the same period in 2021.

Rates for the same periods remained essentially unchanged.

• The combination of higher rates on borrowings, up 154 basis points from the third quarter of 2021 as compared to the third quarter of 2022, related to increasing market rates, and the increase in volume of borrowings between periods drove the $0.7 million increase in interest expense for this category.

Starting in the third quarter of 2022, short-term borrowings were utilized as needed to fund loan growth and manage fluctuations in deposit balances.

• The increase in NIM was in large part the result of market rate increases and improved pricing on new loans.

Net interest income for the nine months ended September 30, 2022 amounted to $240.5 million, an increase of $67.9 million, or 39.4%, from the $172.6 million recorded in the nine months ended September 30, 2021.

Net interest income on a tax-equivalent basis for the nine months ended September 30, 2022 amounted to $242.5 million, an increase of $68.5 million, or 39.3%, from the $174.1 million recorded in the nine months ended September 30, 2021.

The following table presents an analysis of net interest income for the nine months ended September 30, 2022 and 2021.

Average Balances and Net Interest Income Analysis

For the Nine Months Ended September 30,

($ in thousands) Average

Volume Average

Rate Interest

or Paid Average

Volume Average

Rate Interest

Loans (1) (2) $ 6,197,915 4.35 % $ 201,518 $ 4,728,258 4.36 % $ 154,325

Taxable securities 3,070,745 1.74 % 40,045 2,030,491 1.45 % 22,081

Non-taxable securities 296,132 1.48 % 3,267 131,263 1.51 % 1,487

Short-term investments, primarily interest-bearing cash 366,529 1.10 % 3,016 453,267 0.53 % 1,809

Total interest-earning assets 9,931,321 3.34 % $ 247,846 7,343,279 3.27 % 179,702

Cash and due from banks 110,007 83,115

Premises and equipment 135,476 122,605

Other assets 372,405 373,918

Total assets $ 10,549,209 $ 7,922,917

Interest bearing checking $ 1,548,935 0.06 % $ 684 $ 1,278,103 0.07 % $ 685

Money market deposits 2,550,643 0.13 % 2,426 1,764,857 0.18 % 2,330

Savings deposits 739,927 0.06 % 324 579,595 0.08 % 338

Time deposits >$250,000 313,377 2.01 % 1,556 335,240 0.41 % 341

Other time deposits 298,112 0.26 % 590 219,031 0.34 % 563

Total interest-bearing deposits 6,428,091 1.19 % 18,918 5,784,916 0.12 % 1,771

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(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $2.8 million, and $7.5 million for nine months ended September 30, 2022 and 2021, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $7.2 million and $6.2 million for nine months ended September 30, 2022 and 2021, respectively.

(3) Includes tax-equivalent adjustments of $2.1 million and $1.5 million for nine months ended September 30, 2022 and 2021, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization in the amounts of $0.4 million, and $1.4 million for three months ended March 31, 2023 and 2022, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $3.6 million and $2.3 million for three months ended March 31, 2023 and 2022, respectively.

(3) Includes tax-equivalent adjustments of $0.7 million and $0.7 million for three months ended March 31, 2023 and 2022, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax-exempt status.

This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

Overall, as demonstrated in the table above, net interest income grew $67.9 million for the nine months ended September 30, 2022 from the comparable period of the prior year.

Higher earning asset volumes, from both organic growth and the Select acquisition, combined with an expansion in NIM, drove the increase.

• Average loan volumes for the nine months ended September 30, 2022 were $1.5 billion higher than the same period in 2021.

Interest rates on loans remained fairly stable between periods as increases in market rates during 2022 were offset by a decline of $5.2 million in PPP loan fee accretion for 2022 as compared to 2021.

The combination of factors resulted in an increase in loan interest income of $47.2 million.

• Higher average volume of $1.2 billion on total securities resulted in an increase of $19.7 million in interest income for the nine months ended September 30, 2022 when compared to the same period in 2021.

Also contributing to the increase in interest income was the higher yields on the taxable portfolio as reinvestment rates increased between the periods.

• Lower interest rates paid on deposits drove a $0.8 million decrease in deposit interest expense for the nine months ended September 30, 2022 compared to the same period in 2021.

Reductions in rates on deposits more than offset the $1.3 billion increase in average volume for total interest-bearing deposits.

• Starting in the third quarter of 2022, short-term borrowings were utilized as needed to fund loan growth and manage fluctuations in deposit balances.

In addition, higher market interest rates drove the increase in rates on borrowings, up 104 basis points for nine months ended September 30, 2022 as compared to the prior year period.

and resulted in an increase of $1.0 million increase in interest expense for this category.

• The increase in NIM was in large part the result of higher market rates and lower deposit pricing, partially offset by lower PPP loan fee accretion.

Our NIM for all periods benefited from net accretion income, primarily associated with purchase accounting premiums/discounts on loans, deposits and borrowings associated with acquisitions.

Presented in the table below is the amount of accretion which increased net interest income in each time period presented.

Three Months Ended September 30, Nine Months Ended September 30,

Our NIM for all periods benefited from net accretion income, primarily associated with purchase accounting discounts on loans, and premiums/discounts on deposits and borrowings associated with acquisitions.

Presented in the table below is the amount of purchase accounting adjustments which impacted net interest income in each time period presented.

Three Months Ended March 31,

($ in thousands) 2023 2022

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Interest income - increased by accretion of loan discount on retained SBA loans

1,032 697 2,428 2,004

Total interest income impact 3,566 2,338

Interest expense – reduced by premium amortization of deposits

Interest expense – increased by discount accretion of borrowings

(64) (45) (190) (133)

Interest expense – (increased) reduced by (discount accretion) premium amortization of acquired deposits (1,019) 234

Interest expense – increased by discount accretion of acquired borrowings (82) (73)

Total net interest expense impact (1,101) 161

Total impact on net interest income $ 2,465 2,499

The increase in loan discount accretion on purchased loans fo r both the three months and the nine months ended September 30, 2022 as compared to the same periods in the prior year is related to the Select acquisition.

The increase in loan discount accretion on acquired loans fo r the three months ended March 31, 2023 as compared to the same period in the prior year was related to the GrandSouth acquisition which added $23.9 million in accretable discount.

Generally, the level of loan discount accretion will decline each year due to the natural paydowns in acquired loan portfolios.

At September 30, 2022 and 2021, unaccreted loan discount on purchased loans amounted to $12.5 million and $4.8 million, respectively.

In addition to the loan discount accretion recorded on acquired loans, we record accretion on the discounts associated with the retained unguaranteed portions of SBA loans sold in the secondary market.

At March 31, 2023 and 2022, unaccreted loan discount on purchased loans amounted to $32.4 million and $15.6 million, respectively.

In addition to the loan discount accretion recorded on acquired loans, we recorded accretion on the discounts associated with the retained unguaranteed portions of SBA loans sold in the secondary market.

The level of SBA loan discount accretion will vary relative to fluctuations in the SBA loan portfolio.

At September 30, 2022 and 2021, unaccreted loan discount on SBA loans amounted to $4.6 million and $6.6 million, respectively.

Amortization of net deferred loan fees also impacts interest income.

During the nine months ended September 30, 2022, we amortized net deferred PPP fees of $2.6 million as interest income compared to $7.8 million for the nine months ended September 30, 2021.

At September 30, 2022, there were no remaining deferred PPP origination fees.

At March 31, 2023 and 2022, the unaccreted loan discount on SBA loans amounted to $4.0 million and $6.0 million, respectively.

Provision for Credit Losses and Provision for Unfunded Commitments

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The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined under CECL.

A provision for credit losses of $5.1 million was recorded for the three months ended September 30, 2022 and $8.6 million was recorded for the nine months ended September 30, 2022 based on loan growth during each period, updated economic forecasts impacting loss drivers, and other assumptions and inputs to the CECL model.

Also based on the CECL model results and fluctuations in asset quality trends, a reversal provision of $1.4 million was required for the three and nine months ended September 30, 2021.

In addition, a $0.3 million provision for unfunded commitments was recorded for the three months ended September 30, 2022, and a reversal provision of $1.2 million was recorded for the nine months ended September 30, 2022, related primarily to the fluctuations in the levels and mix of outstanding loan commitments.

There was a $1.0 million and $3.0 million provision for unfunded commitments for the three and nine months ended September 30, 2021, respectively.

Effective January 1, 2023, a one-time loan loss provision of $12.2 million was recorded to establish an initial ACL for non-PCD loans acquired from GrandSouth in accordance with our CECL model.

This was the primary contributor to the provision for the three months ended March 31, 2023 which totaled $11.5 million, with the difference related to reversals during the quarter resulting from updated economic forecast inputs driving lower loss rate assumptions, primarily due to slightly improved unemployment and GDP forecasts for the first quarter of 2023.

This is compared to a total provision of $3.5 million for the three months ended March 31, 2022 based on the CECL model related to loan growth for that period and changes in economic forecasts in the model.

In addition, a $1.1 million provision for unfunded commitments was recorded for the three months ended March 31, 2023, related primarily to the initial reserve for unfunded commitments of $1.9 million required for the GrandSouth acquisition.

There was a $1.5 million reversal of provision for unfunded commitments for the three months ended March 31, 2022 related primarily to fluctuations in commitment levels.

Additional discussion of our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses and Loan Loss Experience" sections following.

Noninterest Income

Our noninterest income amounted to $16.9 million and $16.5 million for the three months ended September 30, 2022 and 2021, respectively, and $53.4 million and $58.6 million for the nine months ended September 30, 2022 and 2021, respectively.

Included in noninterest income was nonrecurring amounts totaling $2.7 million and $50,000 in other gains for the three months ended September 30, 2022 and 2021, respectively, and $6.0 million and $1.5 million in other gains for the nine months ended September 30, 2022 and 2021, respectively.

Our noninterest income amounted to $13.5 million and $19.3 million for the three months ended March 31, 2023 and 2022, respectively.

Included in noninterest income were nonrecurring amounts totaling $0.2 million and $1.6 million in other gains for the three months ended March 31, 2023 and 2022, respectively.

The following table presents the primary components of noninterest income.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

The drivers of larger fluctuations between periods are discussed below the table.

For the Three Months Ended March 31,

($ in thousands) 2023 2022

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Fees from presold mortgage loans

376 2,096 1,951 8,914

Commissions from sales of insurance and financial products

1,391 1,198 3,487 5,854

Commissions from sales of financial products 1,306 945

SBA consulting fees

479 1,128 1,963 6,079

SBA loan sale gains

479 1,655 4,581 6,981

Bank-owned life insurance ("BOLI") income 1,046 976

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Noninterest income $ 13,536 19,251

Service charges on deposit accounts increased $1.0 million, or 29.8%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, and increased $2.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase was driven by the higher number of new customers and transaction accounts generating fees from both organic growth and the Select acquisition.

Other service charges and fees - bankcard interchange income, net represents interchange income from debit and credit card transactions, net of associated interchange expense, and decreased $1.4 million, or 31.7%, for the three months ended September 30, 2022 as compared to the prior year period, and increased $0.2 million for the nine months ended September 30, 2022 compared to the prior year period.

The decrease is a result of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 limitation on debit card interchange fees.

Because the Company exceeded $10 billion in total assets at December 31, 2021, the interchange fee limitation became effective for us July 1, 2022.

Higher volumes of accounts and transactions have partially offset the rate limitation.

Service charges on deposit accounts increased $0.4 million, or 10.0%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

The increase was driven by the higher number of new customers and transaction accounts generating fees from both organic growth and the GrandSouth acquisition.

Partially offsetting the growth as compared to the prior year period was lower NSF charges as the Company discontinued charging consumers for this service effective February 1, 2023.

Other service charges and fees - bankcard interchange income, net represents interchange income from debit and credit card transactions, net of associated interchange expense, and decreased $2.1 million, or 45.2%, for the three months ended March 31, 2023 as compared to the prior year period.

The decrease is a result of the Durbin Amendment limitation on debit card interchange fees becoming applicable to the Company in mid-2022.

Other service charges and fees - other includes items such as SBA guarantee servicing fees and related servicing rights amortization, ATM charges, wire transfer fees, safety deposit box rentals, fees from sales of personalized checks, and check cashing fees.

The increase in this line item for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 of $1.2 million, or 60.4%, and the increase of $2.5 million for the nine months ended September 30, 2022 compared to the prior year period, was primar ily due to growth in the number of accounts and related transaction activity, as well as the Bank's deposit base increases.

Fees from presold mortgage loans amounted to $0.4 million for the three months ended September 30, 2022, a decline of $1.7 million, or 82.1%, from the same time period in 2021, and a $7.0 million decrease for the nine months ended September 30, 2022 compared to the prior year period.

The decrease was due to the general increase in market interest rates and related decline in home mortgage refinancings and new originations during 2022 as compared to the prior year.

Commissions from sales of insurance and financial products for the three months ended September 30, 2022 increased $0.2 million from the same period in 2021.

There was a decrease of $2.4 million for the nine months ended September 30, 2022 compared to the prior year period which was directly related to the sale of the majority of the assets of our property and casualty insurance subsidiary in June 2021.

SBA consulting fees decreased for the three months ended September 30, 2022, compared to the same period in 2021 by $0.6 million, or 57.5%, and decreased $4.1 million for the nine months ended September 30, 2022 compared to the prior year period.

The declines in fees were directly related to the wind-down of the PPP loan program and lower related revenues earned in the current year periods.

SBA loan sale gains decreased $1.2 million, or 71.1%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 and declined $2.4 million for the nine months ended September 30, 2022 compared to the prior year period.

The lower gains were related to the timing of sales and the volume of originated loans available to be sold in each period.

Other gains, net for the third quarter of 2022 consisted primarily of a settlement of a prior year cash letter processing differences.

Also included in other gains for the nine months ended September 30, 2022 were death benefits realized on BOLI policies.

Other gains for the nine months ended September 20, 2021 are primarily related to the sale of the the majority of the assets of our property and casualty insurance subsidiary in June 2021.

The increase in this line item for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 of $1.0 million, or 45.5%, was primar ily due to the GrandSouth acquisition and the resulting growth in the number of accounts and related transaction activity, as well as increases in the Bank's organic deposit base.

Fees from presold mortgage loans amounted to $0.4 million for the three months ended March 31, 2023, a decline of $0.7 million, or 63.8%, from the same time period in 2022.

The decrease was due to the general increase in market interest rates starting in 2022 which have resulted in continued lower volumes of home mortgage refinancings and new originations into 2023.

SBA loan sale gains decreased $3.0 million, or 92.2%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The decrease was related to slower loan originations and the lower premiums available on SBA loan sales given the current market interest rates, resulting in the Company retaining a higher percentage of originations in the first quarter of 2023.

Other gains, net for the first quarter of 2022 consisted primarily of death benefits realized on BOLI policies and the execution of loans held for sale during the quarter.

There were no large or unusual transactions in the first quarter of 2023 giving rise to gains or losses.

Noninterest Expenses

Noninterest expenses totaled $48.7 million and $40.8 million for the three months ended September 30, 2022 and 2021, respectively, and $149.6 million and $121.9 million for the nine months ended September 30, 2022 and 2021, respectively.

Included in noninterest expense was nonrecurring merger and acquisition costs totaling $0.5 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively.

Merger and acquisition costs totaled $4.8 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively.

The following table presents the primary components of noninterest expense.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Noninterest expenses totaled $74.2 million and $51.5 million for the three months ended March 31, 2023 and 2022, respectively.

Included in noninterest expenses were nonrecurring merger and acquisition costs totaling $12.2 million and $3.5 million for the three months ended March 31, 2023 and 2022, respectively.

The following table presents the primary components of noninterest expenses:

For the Three Months Ended March 31,

($ in thousands) 2023 2022

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Total $ 74,175 $ 51,465

In general, the increase in noninterest expenses was driven by higher operating expenses from personnel, locations, number of accounts, and higher level of activity resulting from the Select acquisition completed in the fourth quarter of 2021.

Merger and acquisition expenses amounted to $4.8 million for the nine months ended September 30, 2022 and primarily related to March 2022 core system conversion costs incurred for the Select acquisition.

Total personnel expense increased $3.5 million, or 13.8%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Total personnel expense increased $12.6 million for the nine months ended September 30, 2022 compared to the prior year period.

The increase for each period was a direct result of the incremental number of associates from the Select acquisition, combined with regular annual salary increases.

Also contributing to the increases were higher insurance claims and costs in 2022 compared to the prior year.

We recorded income tax expense of $10.2 million for the three months ended September 30, 2022 and $7.0 million for the three months ended September 30, 2021.

Our effective tax rates increased to 21.2% from 20.1% for the three months ended September 30, 2022 and 2021, respectively.

The increase in effective tax rate between quarterly periods was attributable to the utilization of additional federal disaster credits in the third quarter of 2021.

For the nine months ended September 30, 2022 and 2021, we recorded income tax expense of $28.4 million and $22.5 million, respectively.

Our effective tax rates remained stable at 20.8% for the nine months ended September 30, 2022 compared to 20.9% for the comparable period of the prior year.

In general, the 44.1% increase in noninterest expenses was driven by merger and acquisition expenses of $12.2 million and higher intangible amortization, which increased $1.1 million as a result of the GrandSouth acquisition, and additional core deposit intangibles added.

The primary factors driving the remaining increases between the periods included:

• Higher salary and benefit expenses, up $6.7 million related primarily to the eight acquired GrandSouth branch locations and related branch and support personnel.

Also contributing to the increase is the filling of numerous existing vacant positions starting in the fourth quarter of 2022.

• A one-time charge of $2.4 million, included in "other operating expenses", for the estimated termination costs associated with the Company's pension plan which we anticipate exiting during the fourth quarter of 2023.

• Increases in the first quarter of 2023 for data processing, professional fees, software expense, and advertising, as well as FDIC insurance, travel and training (all included in "other operating expenses") related to the GrandSouth acquisition, including the transition of new customers and overlapping pre-conversion costs associated with the core processing system prior to the full system integration late in the quarter.

We recorded income tax expense of $4.2 million for the three months ended March 31, 2023 and $8.7 million for the three months ended March 31, 2022.

Our effective tax rate increased to 21.6% from 20.4% for the three months ended March 31, 2023 and 2022, respectively.

The increase in effective tax rate between quarterly periods was attributable primarily to the merger and acquisition expenses which were non-deductible for tax purposes, thus increasing our federal taxable income in the current period.

FINANCIAL CONDITION

Total assets at September 30, 2022 amounted to $10.5 billion, a nominal increase from December 31, 2021 as growth in loans was funded by existing cash and investments shifting the balance sheet mix somewhat.

Total loans at September 30, 2022 amounted to $6.5 billion, a 7.3% increase from December 31, 2021, and total deposits amounted to $9.2 billion, a 1.1% increase from December 31, 2021.

For the nine months ended September 30, 2022, the net increase in loans was $443.6 million, or 7.3%, related primarily to core growth and loans amounted to 62.1% of total assets as compared to 57.9% of total assets at December 31, 2021 .

We experienced organic growth in most of our loan categories, with commercial real estate, 1-4 family first mortgages, and construction categories experiencing the largest growth.

The mix of our loan portfolio remained substantially the same at September 30, 2022 compared to December 31, 2021.

Total assets at March 31, 2023 amounted to $12.4 billion, a $1.7 billion, or 16.4%, increase from December 31, 2022 due in large part to the GrandSouth acquisition, combined with organic loan and deposit growth during the quarter.

Total loans at March 31, 2023 amounted to $7.8 billion, a $1.1 billion, or 17.0%, increase from December 31, 2022 related primarily to the GrandSouth acquisition which contributed $1.02 billion to the increase.

Organic growth (exclusive of acquired loans) amounted to $113.7 million for the first quarter of 2023 or an annualized growth rate of 5.9%.

The mix of our loan portfolio remained substantially the same at March 31, 2023 compared to December 31, 2022.

The majority of our real estate loans were personal and commercial loans where real estate provides additional security for the loan.

Note 4 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

We have no notable concentrations in geographies or industries, including in office or hospitality categories.

The composition of our investment portfolio remained substantially the same as at December 31, 2022, and continues to reflect our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income.

Total investment securities decreased $261.8 million from December 31, 2021 to total $2.9 billion at September 30, 2022.

as cash flows were utilized to fund loan growth.

Also contributing to the decline was the increase in unrealized losses on available for sale securities which totaled $464.6 million at September 30, 2022.

The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

Total investment securities decreased $26.1 million from December 31, 2022 to total $2.8 billion at March 31, 2023 due in large part to the utilization of cash flows from amortizing securities to fund loan growth.

Unrealized losses on available for sale securities improved $35.3 million during the quarter ended March 31, 2023.

Note 3 to the consolidated financial statements presents additional detailed information regarding our mix of investments and the unrealized losses for each category.

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We have no significant concentration of bond holdings from one state or local government entity.

We have evaluated the unrealized losses on individual securities at September 30, 2022 and determined them to be of a temporary nature due primarily to interest rate factors and not credit quality concerns.

We have evaluated the unrealized losses on individual securities at March 31, 2023 and determined them to be of a temporary nature due primarily to interest rate factors and not credit quality concerns.

In arriving at this conclusion, we reviewed third-party credit ratings and considered the severity of the impairment.

For the nine months ended September 30, 2022, we continued to experience growth in our deposit base, with total deposits increasing by $104.6 million, or 1.1%, from December 31, 2021.

Deposit growth was primarily in transaction accounts (checking and money market products), which we believe to be related to our ongoing deposit growth initiatives, as well as the build up in liquidity during the pandemic.

Total deposits amounted to $10.4 billion at March 31, 2023, an increase of $1.1 billion, or 12.4%, from December 31, 2022.

The primary driver of this increase was the GrandSouth acquisition, which contributed $1.05 billion to the growth.

Organic growth (exclusive of acquired loans) amounted to $95.2 million for the first quarter of 2023 or an annualized growth rate of 3.7%.

We continue to have a diversified and granular deposit base which has remained stable with continued growth in core deposits, primarily noninterest-bearing checking accounts and money market accounts.

As of March 31, 2023, the estimated total insured or collateralized deposits were approximately 69% of our total deposits.

Our deposit mix has remained fairly consistent historically and has not significantly changed with the addition of GrandSouth as presented in the table below.

There has been no notable shift in deposits from noninterest-bearing to interest-bearing during the quarter other than from the acquired deposits driving a moderate change in mix.

March 31, 2023 December 31, 2022

($ in thousands) Amount % of

Total Amount % of

Noninterest-bearing checking accounts $ 3,763,637 36 % 3,566,003 39 %

Interest-bearing checking accounts 1,526,333 15 % 1,514,166 16 %

Money market accounts 3,126,571 30 % 2,416,146 26 %

Savings accounts 705,669 7 % 728,641 8 %

Other time deposits 624,444 6 % 464,343 5 %

Time deposits >$250,000 342,447 3 % 276,319 3 %

Total customer deposits 10,089,101 97 % 8,965,618 97 %

Brokered deposits 283,497 3 % 261,911 3 %

Total deposits $ 10,372,598 100 % 9,227,529 100 %

Nonperforming Assets

Nonperforming assets include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed real estate.

Nonperforming assets are summarized as follows:

NPAs are defined as nonaccrual loans, modifications to borrowers in financial distress, loans past due 90 or more days and still accruing interest, foreclosed real estate, and prior to the adoption of ASU 2022-02, accruing TDRs.

NPAs are summarized as follows:

($ in thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Nonperforming assets

Nonaccrual loans $ 28,059 28,514

Modifications to borrowers in financial distress 2,224 —

TDRs – accruing — 9,121

Accruing loans >90 days past due — 1,004

Total nonperforming loans 30,283 37,635

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Allowance for credit losses to nonperforming loans 351.34 % 241.71 %

As shown in the table above, nonperforming assets decreased from December 31, 2021 to September 30, 2022, with improvements noted in all categories.

At September 30, 2022, total nonaccrual loans amounted to $28.7 million, compared to $34.7 million at December 31, 2021 .

"Real estate-mortgage-comm ercial and other" is the largest category of nonaccrual loans, at $11.5 million, or 40.1%, of total nonaccrual loans, followed by "Commercial, financial, and agricultural" at $11.4 million, or 39.6%, of total nonaccrual loans.

Included in those categories are nonaccrual SBA loans totaling $15.6 million at September 30, 2022, or 54.4%, of total nonaccrual loans, that have $5.8 million in guarantees from the SBA.

TDRs are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties.

At September 30, 2022, total accruing TDRs amounted to $11.4 million, compared to $13.9 million at December 31, 2021, with the decrease being attributed to several large commercial TDR pay-offs or charge-offs during the period which more than offset the new TDRs added during the year to date period.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans declined 9.4% to $50.7 million at September 30, 2022 compared to $56.0 million at December 31, 2021.

Special mention loans decreased 23.3% from $43.1 million at December 31, 2021 to $33.1 million at September 30, 2022.

The majority of the improvements were in the commercial real estate and 1-4 family mortgage categories.

Total foreclosed real estate amounted to $0.7 million at September 30, 2022 and $3.1 million at December 31, 2021.

Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and favorable overall asset quality.

During the nine months ended September 30, 2022, we recorded sales of six foreclosed properties partially offset by the addition of one foreclosed property.

We believe that the fair values of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented.

As shown in the table above, NPAs decreased from December 31, 2022 to March 31, 2023.

The decline was due in part to the Company's adoption of ASU 2022-02 which eliminated the accounting for TDRs and replaced it with disclosures of loan modifications for borrowers experiencing financial difficulty.

At March 31, 2023, total nonaccrual loans amounted to $28.1 million, compared to $28.5 million at December 31, 2022 .

" Real estate mortgage - commercial and other" is the largest category of nonaccrual loans, at $12.2 million, or 43.3%, of total nonaccrual loans, followed by "Commercial, financial, and agricultural" at $10.8 million, or 38.4%, of total nonaccrual loans.

Included in those categories are nonaccrual SBA loans totaling $15.0 million at March 31, 2023, or 53.4%, of total nonaccrual loans, that have $5.8 million in guarantees from the SBA.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans increased 5.3% to $51.1 million at March 31, 2023 compared to $48.5 million at December 31, 2022.

Special mention loans increased 15.3% from $39.0 million at December 31, 2022 to $44.9 million at March 31, 2023.

The majority of the increase was attributable to commercial real estate loans acquired from GrandSouth.

Allowance for Credit Losses and Loan Loss Experience

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We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the ACL.

We have no foreign loans and few agricultural loans, and do not engage in significant lease financing or highly leveraged transactions.

We have no foreign loans and do not engage in significant lease financing or highly leveraged transactions.

Commercial loans are diversified among a variety of industries.

The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan.

The majority of our real estate loans are primarily

personal and commercial loans where real estate provides additional security for the loan.

Collateral for virtually all of these loans is located within our principal market area.

For the nine months ended September 30, 2022 and 2021, we recorded a provision for credit losses of $8.6 million and a reversal of provision for credit losses totaling $1.4 million, respectively.

The increase in provision for 2022 as compared to the prior year period was primarily due to growth in the loan portfolio which accounted for approximately half of the higher provision in 2022.

Also contributing to the increase was the economic forecast inputs to our CECL model driving higher loss rate assumptions, primarily due to higher unemployment forecasts and deteriorating Commercial Real Estate Index forecasts given the developing uncertain economic environment.

Fluctuations in the ACL each period are based on loan mix and growth, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model, and as occurred in 2023, adjustments for acquired loan portfolios.

Our ACL increased $15.4 million at March 31, 2023, as compared to year end, to a total of $106.4 million.

The increase was driven by the acquisition of GrandSouth as discussed previously in the "Provision for Credit Losses" section above and in Note 4 to the accompanying consolidated financial statements.

Purchase accounting adjustments included a "Day 1" ACL of $5.6 million recorded for PCD loans and an initial "Day 2" provision for loan losses of $12.2 million related to non-PCD loans in the GrandSouth portfolio.

The balance of the change in the ACL was primarily a result of updated economic forecast inputs to our CECL model driving lower loss rate assumptions, primarily due to slightly improved unemployment and GDP forecasts.

For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, ACL, charge-offs and recoveries, and key ratios:

Loan Ratios, Loss and Recovery Experience

($ in thousands) Nine Months Ended September 30, 2022 Twelve Months

($ in thousands) Three Months Ended March 31, 2023 Twelve Months

Ended December 31,

2021 Nine Months Ended September 30, 2021

2022 Three Months Ended March 31, 2022

Loans outstanding at end of period $ 7,798,963 6,665,145 6,064,698

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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.

For the nine months ended September 30, 2022, we recorded a reversal of the provision for unfunded commitments of $1.2 million related to fluctuations in the levels and mix of outstanding loans commitments.

For the comparable period of 2021, a $3.0 million provision for unfunded commitments was required related to higher levels of unfunded commitments for the period.

The allowance for unfunded commitments of $12.3 million and $13.5 million at September 30, 2022 and December 31, 2021, respectively, is classified on the balance sheet within "Other liabilities".

For the three months ended March 31, 2023, we recorded a provision for unfunded commitments of $1.1 million, which includes an initial provision of $1.9 million for the acquisition of GrandSouth and a provision reversal of $0.9 million related to fluctuations in the levels and mix of outstanding loan commitments.

For the comparable period of 2022, a reversal of $1.5 million provision for unfunded commitments was required related to lower levels of unfunded commitments for the period.

The allowance for unfunded commitments of $14.4 million and $13.3 million at March 31, 2023 and December 31, 2022, respectively, is classified on the balance sheet within "Other liabilities."

We believe the ACL is adequate at each period end presented.

It must be emphasized, however, that the determination of the allowances using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans.

No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the ACL or future charges to earnings.

in the ACL or future charges to earnings.

See “Critical Accounting Policies – Allowance for Credit Losses on Loans and Unfunded Commitments” in Note 1 to the 2022 Annual Report on Form 10-K filed with the SEC for more information.

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Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash.

Since the beginning of the COVID-19 pandemic in early 2020, we have seen our liquidity levels increase, with increases in deposits account balances leading to higher cash and investment securities levels.

In addition to internally generated liquidity sources, we have the ability to obtain borrowings under:

1) an approximately $857 million line of credit with the FHLB (of which $160.9 million and $2.0 million were outstanding at September 30, 2022 and December 31, 2021, respectively);

2) federal funds lines with several correspondent banks totaling $265 million (of which none was outstanding at September 30, 2022 or December 31, 2021);

and 3) an approximately $161 million line of credit through the Federal Reserve's discount window (of which none was outstanding at September 30, 2022 or December 31, 2021).

Unused and available lines of credit amounted to $1.1 billion at September 30, 2022.

Our overall liquidity is essentially the same as at December 31, 2021 with our liquid assets (cash and unpledged securities) as a percentage of our unpledged deposits and borrowings at 26.7% at September 30, 2022.

In addition, we have available lines of credit from the FHLB and Federal Reserve, as well as federal funds lines from several correspondent banks which are summarized below.

At March 31, 2023, the Company had three sources of readily available borrowing capacity:

• An approximately $862.1 million line of credit with the FHLB (of which $506.8 million and $221.8 million were outstanding at March 31, 2023 and December 31, 2022, respectively);

• Federal funds lines with several correspondent banks totaling $265.0 million (of which none were outstanding at March 31, 2023 or December 31, 2022);

• An approximately $166.2 million line of credit through the Federal Reserve's discount window (of which none was outstanding at March 31, 2023 or December 31, 2022).

Our overall liquidity increased slightly from December 31, 2022 with our liquidity ratio of 26.2% at March 31, 2023.

We define our liquidity ratio as net liquid assets (cash, unpledged securities and other marketable assets) as a percentage of our net liabilities (unpledged deposits and borrowings).

Our total liquidity ratio, including the $786.4 million in available lines of credit at quarter end was 30.5% as of March 31, 2023.

We have identified approximately $980 million in commercial real estate loans which are eligible to be pledged to the FHLB and will provide us additional availability under that line of credit.

Also, we have investment securities which we can pledge at either the Federal Reserve or the FHLB to increase our borrowing capacity.

We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future.

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Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics.

We have not engaged in significant derivative activities through September 30, 2022, and have no current plans to do so.

We have not engaged in significant derivative activities through March 31, 2023, and have no current plans to do so.

Capital Resources

The Company is regulated by the Federal Reserve and is subject to the securities registration and public reporting regulations of the SEC.

Our banking subsidiary, First Bank, is also regulated by the Federal Reserve and the North Carolina Office of the Commissioner of Banks.

We must comply with regulatory capital requirements established by the Federal Reserve.

Our banking subsidiary is also regulated by the Federal Reserve and the North Carolina Office of the Commissioner of Banks.

We must comply with regulatory capital requirements established by the

Federal Reserve.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

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Tier 1 capital is comprised of common equity tier 1 capital plus "additional tier 1 capital", which includes non-cumulative perpetual preferred stock and trust preferred securities.

Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is o ur ACL.

Total risk-based capital is comprised of tier 1 capital plus qualifying subordinated debentures, and certain adjustments, the largest of which is our ACL and reserve for unfunded commitments.

The Company has elected to exclude accumulated other comprehensive income ("AOCI") related primarily to available for sale securities from common equity tier 1 capital.

Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in Federal Reserve regulations.

In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators.

The Federal Reserve has not advised us of any requirement specifically applicabl e to us .

At September 30, 2022, our capital ratios exceeded the regulatory minimum ratios discussed above.

The Federal Reserve has not advised us of any requirement specifically applicable to us.

At March 31, 2023, our capital ratios exceeded the regulatory minimum ratios discussed above.

The decrease in total risk-based capital at March 31, 2023 as compared to year end is related primarily to asset growth and the GrandSouth acquisition.

The following table presents the capital ratios for the Company and the regulatory minimums discussed above for the periods indicated:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Risk-based capital ratios:

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Minimum required Tier 1 leverage capital 4.00 % 4.00 %

First Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above.

At September 30, 2022, First Bank exceeded the minimum ratios established by the regulatory authorities.

The Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above.

At March 31, 2023, the Bank exceeded the minimum ratios established by the regulatory authorities.

In additional the the regulatory capital requirements, we monitor the Company's tangible common equity ratio which is a non-GAAP measurement calculated as total capital less intangible assets, as a percent of total assets net of intangible assets.

AOCI is included in the Company’s tangible common equity to tangible assets ratio which was 6.60% at March 31, 2023, an increase of 21 basis points from December 31, 2022.

AOCI at March 31, 2023 improved $27.9 million compared to year end reflecting the reduction in unrealized loss on available for sale securities resulting from the favorable impact of interest rate changes during the first quarter.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis