What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 243 added, 159 removed, 268 unchanged (60% of the section changed)

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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.

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

Comparisons for the financial periods presented are impacted by the GrandSouth acquisition.

Overview and Highlights at and for Three Months Ended June 30, 2023

We earned net income of $29.4 million, or $0.71 diluted EPS, during the three months ended June 30, 2023 compared to net income of $36.6 million, or $1.03 diluted EPS, for the three months ended June 30, 2022.

Higher cost of funds was the primary driver to the lower income for the current year as compared to the prior year.

• Net interest income for the second quarter of 2023 was $87.0 million, an 11.1% increase from the $78.3 million recorded in the second 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.

• Net interest margin ("NIM") on a tax-equivalent basis decreased in the second quarter of 2023 to 3.08% from 3.18% for the second quarter of 2022 related to the higher cost of funds, partially offset by increases in market interest rates driving higher yields on loans and increased loan accretion.

• For the three months ended June 30, 2023, the Company recorded $3.7 million in provision for credit losses while no provision was recognized for the second quarter of 2022.

The amount recorded for the current quarter was driven in part by the loan growth experienced during the quarter, combined with updated economic forecasts projecting some deterioration in the key factors utilized in our CECL model calculation, primarily the commercial real estate index.

• Noninterest income for the three months ended June 30, 2023 decreased $3.0 million, or 17.5%, from the comparable period of 2022 primarily related to lower bankcard revenues and lower other gains.

• Noninterest expense increased $12.2 million, or 24.7%, for the quarter ended June 30, 2023, as compared to the prior year period driven by higher personnel expense, intangible amortization, merger expenses, and increased general operating expenses resulting from the GrandSouth acquisition.

Overview and Highlights at and for Six Months Ended June 30, 2023

We earned net income of $44.6 million, or $1.08 diluted EPS, during the six months ended June 30, 2023 compared to net income of $70.6 million, or $1.98 diluted EPS, for the six months ended June 30, 2022.

• Net interest income for six months ended June 30, 2023 was $179.5 million, a 15.7% increase from the $155.1 million recorded for the comparable period of 2022.

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

• NIM on a tax-equivalent basis was unchanged at 3.19% for both the six months ended June 30, 2023 and 2022 as higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion was offset by the higher cost of funds, also driven by increases in market rates and competition for deposits.

• For the six months ended June 30, 2023, the Company recorded $14.9 million in provision for credit losses which was directly related to:

(1) a one-time provision of $12.2 million for non-credit deteriorated loans;

and (2) a one-time initial provision for unfunded commitments of $1.9 million for loans acquired from GrandSouth.

The acquired loan provisions were partially offset by fluctuations in our CECL model calculation for loan balance changes and updated economic forecasts during the period.

• Noninterest income for the six months ended June 30, 2023 decreased $8.7 million, or 23.9%, from the comparable period of 2022 primarily related to lower bankcard revenues and declines in SBA loan sale gains.

• Noninterest expense increased $34.9 million, or 34.6%, for the six months ended June 30, 2023 as compared to the prior year period driven by higher personnel expense, intangible amortization, merger expenses, and increased general operating expenses resulting from the GrandSouth acquisition.

Total assets at June 30, 2023 amounted to $12.0 billion, a 13.3% increase from December 31, 2022, driven primarily by the acquisition of GrandSouth.

The primary balance sheet changes are presented below.

• Total loans amounted to $7.9 billion at June 30, 2023, with acquired balances contributing $1.02 billion and organic growth of $212.4 million, for an annualized organic growth rate (exclusive of acquired loans) of 5.5% from December 31, 2022.

• Total deposits were $10.2 billion at June 30, 2023, an increase of $941.0 million from December 31, 2022.

Acquired deposits contributed $1.05 billion while organic market growth (excluding wholesale funding) totaled $154.0 million since year end for an annualized growth rate of 3.1%.

Wholesale brokered deposits decreased $249.5 million from year end.

• Credit quality continued to be strong at June 30, 2023, with a NPA to total assets ratio of 0.30% as of June 30, 2023 down from 0.39% for the comparable period of 2022.

• Our liquidity ratio was 17.3% at June 30, 2023 and was in excess of 29.0% when including available off-balance sheet sources.

• We remain well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 12.75% and total risk-based capital ratio of 15.09%.

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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”).

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 SEC.

Allowance for Credit Losses on Loans and Unfunded Commitments

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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 the 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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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.

Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses.

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

Any subsequent changes in the ACL on PCD loans is recorded through the provision for credit losses.

We believe that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans as of the balance sheet date.

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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 forecasts.

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.

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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.

The ACL for PCD loans 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.

The ACL for non-PCD loans 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.

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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.

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.

During 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 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.

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 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.

Net interest income for the three months ended June 30, 2023 amounted to $87.0 million, an increase of $8.7 million, or 11.1%, from the $78.3 million recorded in the second quarter of 2022.

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

Average interest-earning assets for the second quarter of 2023 increased 14.8% from the comparable period of the prior year, with growth primarily in loans.

Somewhat offsetting the impact of the higher earning assets was the reduction in our NIM which, on a tax-equivalent basis, decreased from 3.18% for the second quarter of 2022 to 3.08% for the three months ended June 30, 2023.

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,

For the Three Months Ended June 30, 2023

($ in thousands) 2023 2022

Net interest income, as reported $ 86,985 78,270

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Net interest margin, tax-equivalent 3.08 % 3.18 %

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:

The following table presents an analysis of net interest income for the three months ended June 30, 2023 and 2022:

Average Balances and Net Interest Income Analysis

For the Three Months Ended March 31,

Three Months Ended June 30,

($ in thousands) Average

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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 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.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization in the amounts of $49,000, and $651,000 for three months ended June 30, 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 June 30, 2023 and 2022, respectively.

(3) Includes tax-equivalent adjustments of $699,000 and $669,000 for three months ended June 30, 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, higher earning asset volumes, arising from both the GrandSouth acquisition and organic growth, combined with an expansion in NIM, drove the increase in net interest income.

• Market interest rates increased 375 basis points between June 2022 and June 2023 to result in an average prime rate of 8.16% for three months ended June 30, 2023 compared to 3.94% for the prior year period.

• Average loan volumes for the three months ended June 30, 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 102 basis points to 5.26% for the second quarter of 2023, resulting in an increase in loan interest income of $37.9 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 June 30, 2023 increased $25.7 million compared to the same period in 2022.

Average interest-bearing deposit balances increased $845.5 million while rates on those deposits increased 157 basis points as compared to the same period in the prior year.

• The combination of higher rates on borrowings, up 216 basis points in the second quarter of 2023 from the second quarter of 2022 due to increasing market rates, and the increase in volume of borrowings between periods drove the $6.3 million increase in interest expense.

Average borrowings increased $416.0 million in the second 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 decrease in NIM was directly related to higher cost of funds, partially offset by higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion.

Net interest income for the six months ended June 30, 2023 amounted to $179.5 million, an increase of $24.3 million, or 15.7%, from the $155.1 million recorded in the six months ended June 30, 2022.

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

Our tax-equivalent NIM remained unchanged at 3.19% for the six months ended June 30, 2023 as compared to the same period in 2022 as discussed further below.

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.

For the Six Months Ended June 30, 2023

($ in thousands) 2023 2022

Net interest income, as reported $ 179,471 155,148

Tax-equivalent adjustment 1,399 1,366

Net interest income, tax-equivalent $ 180,870 156,514

Net interest margin, as reported 3.17 % 3.17 %

Net interest margin, tax-equivalent 3.19 % 3.19 %

The following table presents an analysis of net interest income for the six months ended June 30, 2023 and 2022.

Average Balances and Net Interest Income Analysis

Six Months Ended June 30,

($ in thousands) Average

Volume Average

Rate Interest

or Paid Average

Volume Average

Rate Interest

Loans (1) (2) $ 7,789,800 5.24 % $ 202,343 $ 6,100,246 4.27 % $ 129,279

Taxable securities 2,973,460 1.80 % 26,479 3,066,772 1.75 % 26,595

Non-taxable securities 297,789 1.52 % 2,250 294,257 1.47 % 2,152

Short-term investments, primarily interest-bearing cash 364,651 4.02 % 7,263 420,671 0.73 % 1,530

Total interest-earning assets 11,425,700 4.21 % $ 238,335 9,881,946 3.26 % 159,556

Cash and due from banks 94,239 120,691

Premises and equipment 151,877 135,768

Other assets 378,546 401,660

Total assets $ 12,050,362 $ 10,540,065

Interest bearing checking $ 1,491,401 0.30 % $ 2,199 $ 1,558,950 0.06 % $ 434

Money market deposits 3,113,201 1.87 % 28,867 2,586,527 0.12 % 1,584

Savings deposits 702,527 0.11 % 397 733,769 0.06 % 214

Time deposits >$100,000 838,287 2.59 % 10,770 534,300 0.18 % 487

Other time deposits 328,079 2.47 % 4,013 315,027 0.41 % 637

Total interest-bearing deposits 6,473,495 1.44 % 46,246 5,728,573 0.12 % 3,356

Borrowings 461,260 5.52 % 12,618 67,400 3.15 % 1,052

Total interest-bearing liabilities 6,934,755 1.71 % 58,864 5,795,973 0.15 % 4,408

Noninterest bearing checking 3,725,222 3,550,741

Other liabilities 96,228 43,098

Shareholders’ equity 1,294,157 1,150,253

Total liabilities and

shareholders’ equity $ 12,050,362 $ 10,540,065

Net yield on interest-earning assets and net interest income 3.17 % $ 179,471 3.17 % $ 155,148

Net yield on interest-earning assets and net interest income – tax-equivalent (3) 3.19 % $ 180,870 3.19 % $ 156,514

Interest rate spread 2.50 % 3.11 %

Average prime rate 7.92 % 3.62 %

(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 $406,000, and $2.0 million for six months ended June 30, 2023 and 2022, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $7.2 million and $4.6 million for six months ended June 30, 2023 and 2022, respectively.

(3) Includes tax-equivalent adjustments of $1.4 million and $1.4 million for six months ended June 30, 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, higher earning asset volumes, arising from both the GrandSouth acquisition and organic growth drove the increase in net interest income.

• Market interest rates increased 375 basis points between June 2022 and June 2023 to result in an average prime rate of 7.92% for six months ended June 30, 2023 compared to 3.62% for the prior year period.

• Average loan volumes for the six months ended June 30, 2023 were $1.7 billion higher than the same period in 2022 due to both the GrandSouth acquisition and organic growth.

In addition, interest rates on loans increased 97 basis points to 5.24% for the six months ended June 30, 2023, resulting in an increase in loan interest income of $73.1 million.

• Primarily due to higher market rates and increased average balances related in large part to the GrandSouth acquisition, deposit interest expense for the six months ended June 30, 2023 increased $42.9 million compared to the same period in 2022.

Average interest-bearing deposit balances increased $744.9 million while rates on those deposits increased 132 basis points as compared to the same period in the prior year.

• The combination of higher rates on borrowings, up 237 basis points for the six months ended June 30, 2023 as compared to the same period in 2022 due to increasing market rates, and the increase in volume of borrowings between periods drove the $11.6 million increase in interest expense.

Average borrowings increased $393.9 million for the six months ended June 30, 2023 as compared to the same period in 2022 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.

• NIM remained unchanged between the comparable periods as higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion was offset by the higher cost of funds, also driven by increases in market rates and competition for deposits.

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,

For the Three Months Ended June 30, For the Six Months Ended June 30,

($ in thousands) 2023 2022 2023 2022

Interest income – increased by accretion of loan discount on acquired loans

$ 3,118 1,671

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

Accretion of loan discount on acquired loans $ 3,159 1,545 6,277 3,216

Accretion of loan discount on retained SBA loans 426 730 874 1,397

Total interest income impact 3,585 2,275 7,151 4,613

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)

(Discount accretion) premium amortization of acquired deposits (878) 168 (1,897) 402

Discount accretion of acquired borrowings (212) (53) (420) (126)

Total net interest expense impact (1,090) 115 (2,317) 276

Total impact on net interest income $ 2,495 2,390 4,834 4,889

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.

The increase in loan discount accretion on acquired loa ns for the three and six months ended June 30, 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 as of the acquisition date.

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

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

At June 30, 2023 and 2022, unaccreted loan discounts on purchased loans amounted to $29.2 million and $14.0 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 March 31, 2023 and 2022, the unaccreted loan discount on SBA loans amounted to $4.0 million and $6.0 million, respectively.

At June 30, 2023 and 2022, the unaccreted loan discounts on SBA loans amounted to $3.8 million and $5.4 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.

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.

For the three months ended June 30, 2023, we recorded a $3.7 million provision for loan losses while no provision was recognized for the comparable period of 2022.

The provision for the current quarter was driven in part by the loan growth experienced during the period, combined with updated economic forecasts projecting some deterioration in the key factors utilized in our CECL model calculation, primarily the commercial real estate index.

The six months ended June 30, 2023 included a one-time loan loss provision of $12.2 million 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 year to date period which totaled $15.2 million.

In addition, a reversal of provision for unfunded commitments of $1.3 million was recorded for the three months ended June 30, 2023 related primarily to a reduction in the amount of available lines of credit outstanding.

The six months ended June 30, 2023 included a one-time initial provision for unfunded commitments of $1.9 million required for the GrandSouth acquisition which substantially offset the reversal recognized in the second quarter of 2023.

For the same period in 2022, there was a reversal of provision for unfunded commitments of $1.5 million, related primarily to fluctuations in commitment levels combined with updated loss rate factors.

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 $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.

Our noninterest income amounted to $14.2 million and $17.3 million for the three months ended June 30, 2023 and 2022, respectively, and $27.8 million and $36.5 million for the six months ended June 30, 2023 and 2022, respectively.

Included in noninterest income were nonrecurring amounts totaling $0.3 million and $1.6 million in other gains for the three months ended June 30, 2023 and 2022, respectively, and $0.5 million and $3.2 million for the six months ended June 30, 2023 and 2022, respectively.

The following table presents the primary components of noninterest income.

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

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

($ in thousands) 2023 2022 2023 2022

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Fees from presold mortgage loans

557 454 963 1,575

Commissions from sales of financial products 1,413 1,151 2,719 2,096

SBA consulting fees

409 704 930 1,484

SBA loan sale gains

696 841 951 4,102

Bank-owned life insurance ("BOLI") income 1,066 942 2,112 1,918

Core noninterest income 13,905 15,674 27,253 33,303

Other gains, net 330 1,590 518 3,212

Noninterest income $ 13,536 19,251

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.

Total noninterest income $ 14,235 $ 17,264 $ 27,771 $ 36,515

Service charges on deposit accounts increased $0.4 million, or 11.2%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, and increased $0.8 million, or 10.6% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, respectively.

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

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 $2.4 million, or 50.8%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 and decreased $4.6 million, or 48.0%, for the six months ended June 30, 2023 compared to the same period in 2022.

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

The increases in this line item for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 of $0.2 million, or 6.9%, and for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 of $1.3 million , or 23.4% , were due primarily 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 $0.6 million for the three months ended June 30, 2023, an increase of $0.1 million, or 22.7%, from the same time period in 2022.

Mortgage fees decreased $0.6 million, or 38.9% for the six months ended June 30, 2023 compared to the prior year period due to the general increase in market interest rates starting in 2022 which have resulted in continued lower volumes of home mortgage refinancing and new originations into 2023.

SBA loan sale gains decreased $0.1 million, or 17.2%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 and $3.2 million, or 76.8%, for the six months ended June 30, 2023 compared to the same period in 2022.

The decreases were related to slower loan originations combined with lower premiums available on SBA loan sales given the current market interest rates, resulting in lower volumes of loan sales in 2023.

Other gains, net for the three and six months ended June 30, 2022 consisted primarily of death benefits realized on BOLI policies.

There were no large or unusual transactions in the three and six months ended June 30, 2023 giving rise to gains or losses.

Noninterest Expenses

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.

Noninterest expenses totaled $61.6 million and $49.4 million for the three months ended June 30, 2023 and 2022, respectively, and $135.8 million and $100.9 million for the six months ended June 30, 2023 and 2022, respectively.

Included in noninterest expenses were nonrecurring merger and acquisition costs totaling $1.3 million and $0.7 million for the three months ended June 30, 2023 and 2022, respectively, and $13.5 million and $4.2 million for the six months ended June 30, 2023 and 2022, respectively.

The following table presents the primary components of noninterest expenses:

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

($ in thousands) 2023 2022 2023 2022

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Equipment related expenses 1,425 1,514 2,804 2,818

Merger and acquisition expenses 12,182 3,484

Amortization of intangible assets 2,145 1,017

Credit card rewards and other bankcard expenses 1,324 970 2,443 2,213

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Deposit related expenses 720 257 1,434 667

Foreclosed property losses (gains), net (35) (80)

Other operating expenses 7,322 5,286 15,580 9,962

Total $ 74,175 $ 51,465

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.

Core noninterest expense 58,210 48,000 118,093 95,044

Merger and acquisition expenses 1,334 737 13,516 4,221

Amortization of intangible assets 2,049 953 4,194 1,970

Foreclosed property losses (gains), net — (292) (35) (372)

Total noninterest expense $ 61,593 $ 49,398 $ 135,768 $ 100,863

In general, the 24.7% and 34.6% increases for the quarter and year to date period, respectively, in noninterest expenses were driven by by increased salary and benefit expense (up $4.7 million and $11.4 million for the three and six months ended June 30, 2023 as compared to the same periods in the prior year) and other facilities-related costs associated with the acquisition of eight GrandSouth branch locations and related branch and support personnel.

In addition, merger and acquisition expenses of $1.3 million and $13.5 million for the three and six months ended June 30, 2023, respectively, and higher intangible amortization, which increased $1.1 million and $2.2 million for the three and six months ended June 30, 2023 as compared to the same periods in the prior year, respectively, contributed the in the higher noninterest expense in the current year periods.

Also contributing to higher noninterest expense were increases in the three and six months ended June 30, 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.

Non-credit losses increased $1.1 million and $1.3 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in the prior year driven by an increase in check fraud experienced in the current year.

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

We recorded income tax expense of $7.9 million and $9.6 million for the three months ended June 30, 2023 and 2022, respectively.

Our effective tax rate increased to 21.1% from 20.7% for the three months ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 2023 and June 30, 2022, we recorded income tax expense of $12.0 million and $18.2 million, respectively.

Our effective tax rate increased to 21.3% from 20.5% for the six months ended June 30, 2023 and 2022, respectively.

The increase in effective tax rate between both 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 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.

Total assets at June 30, 2023 amounted to $12.0 billion, a $1.4 billion, or 13.3%, increase from December 31, 2022 due in large part to the GrandSouth acquisition, combined with organic growth during the year.

Total loans at June 30, 2023 amounted to $7.9 billion, a $1.2 billion, or 18.5%, 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 $212.4 million for the first six months of 2023 or an annualized growth rate of 5.5%.

The mix of our loan portfolio remained substantially the same at June 30, 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.

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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.

The Company's exposure to non-owner occupied commercial office loans represents approximately 5.7% of the total portfolio and the average size of these loans is $1.3 million.

Non-owner occupied office loans are generally in non-metro markets and the top 10 loans in this category represent less than 2% of the total loan portfolio.

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.

Total investment securities decreased $98.6 million from December 31, 2022 to $2.8 billion at June 30, 2023 due in large part to the utilization of cash flows from amortizing securities to fund loan growth.

The unrealized loss on available for sale securities totaled $440.1 million, representing an improvement of $3.9 million during the six months ended June 30, 2023.

The Company has the intent and ability to hold investments with unrealized losses until maturity or recovery of the amortized cost as market conditions change.

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 March 31, 2023 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 June 30, 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.

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%.

Total deposits amounted to $10.2 billion at June 30, 2023, an increase of $941.0 million, or 10.2%, from December 31, 2022.

Deposits acquired from GrandSouth contributed $1.05 billion while organic market growth (excluding wholesale funding) totaled $154.0 million since year end for an annualized growth rate of 3.1%.

Wholesale brokered deposits decreased $249.5 million from year end.

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

As of June 30, 2023, the estimated insured deposits totaled $6.5 billion or 63.6% of total deposits.

In addition, we had collateralized deposits at that date of $774.8 million such that approximately 71.2% of our total deposits were insured or collateralized at June 30, 2023.

Our deposit mix has remained 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 2023 to date other than from the acquired deposits driving a moderate change in mix.

June 30, 2023 December 31, 2022

($ in thousands) Amount Percentage Amount Percentage

Noninterest-bearing checking accounts $ 3,639,930 36 % 3,566,003 39 %

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Time deposits >$250,000 353,473 4 % 276,319 3 %

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

Total market deposits 10,156,188 100 % 8,965,618 97 %

Brokered deposits 12,381 — % 261,911 3 %

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($ in thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Nonperforming assets

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Allowance for credit losses to nonperforming loans 314.44 % 241.71 %

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

As shown in the table above, NPAs decreased from December 31, 2022 to June 30, 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.

At June 30, 2023, total nonaccrual loans amounted to $29.9 million, compared to $28.5 million at December 31, 2022 .

"Commercial and industrial" is the largest category of nonaccrual loans, at $11.3 million , or 37.8% of total nonaccrual loans, followed by "Commercial real estate - owner occupied" at $11.3 million , or 37.7% of total nonaccrual loans.

Included in those categories are nonaccrual SBA loans totaling $15.4 million at June 30, 2023, or 51.5%, of total nonaccrual loans which have $5.7 million in guarantees from the SBA.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans increased 14.6% to $55.4 million at June 30, 2023 compared to $48.3 million at December 31, 2022.

Special mention loans increased 8.5% from $39.0 million at December 31, 2022 to $42.3 million at June 30, 2023.

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

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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.

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.

Our ACL increased $18.3 million at June 30, 2023, as compared to year end, to a total of $109.2 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.

The balance of the change in the ACL was primarily a result of loan growth experienced during the period, combined with updated economic forecasts projecting some deterioration in the key factors utilized in our CECL model calculation, primarily the commercial real estate index.

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) Three Months Ended March 31, 2023 Twelve Months

($ in thousands) Six Months Ended June 30, 2023 Twelve Months

Ended December 31,

2022 Three Months Ended March 31, 2022

2022 Six Months Ended June 30, 2022

Loans outstanding at end of period $ 7,897,629 6,665,145 6,243,170

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The allowance for lending-related commitments on off-balance sheet credit exposures is adjusted as a provision for unfunded commitments 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.

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."

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 six months ended June 30, 2023, we recorded a reversal of provision for unfunded commitments of $0.3 million, which includes an initial provision of $1.9 million for the acquisition of GrandSouth and a provision reversal of $2.2 million related to fluctuations in the levels and mix of outstanding loan commitments.

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

The allowance for unfunded commitments of $13.0 million and $13.3 million at June 30, 2023 and December 31, 2022, respectively, are 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.

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.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our ACL and value of other real estate.

Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our ACL and the value of our collateral-dependent loans.

Such agencies may require us to recognize adjustments to the ACL based on their judgments about information available at the time of their examinations.

Liquidity, Commitments, and Contingencies

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Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments.

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

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.

Our securities portfolio has a high percentage of amortizing mortgage-backed securities generating monthly cash flows.

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

We also maintain available lines of credit from the FHLB and the Federal Reserve, as well as federal funds lines from several correspondent banks which are summarized below.

At June 30, 2023, the Company had three sources of readily available borrowing capacity:

• An approximately $928.4 million line of credit with the FHLB (of which $381.8 million and $221.8 million were outstanding at June 30, 2023 and December 31, 2022, respectively);

• An approximately $835.5 million line of credit through the Federal Reserve's discount window and its Bank Term Funding Program (of which none was outstanding at June 30, 2023 or December 31, 2022);

• Federal funds lines with several correspondent banks totaling $265.0 million (of which none were outstanding at June 30, 2023 or December 31, 2022).

Our overall on-balance sheet liquidity ratio was 17.3% at June 30, 2023.

compared to 26.0% at December 31, 2022.

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.

The decrease in on-balance sheet liquidity is primarily related to the higher level of investment securities pledged during the year to date to increase our borrowing availability.

Our total liquidity ratio, including the $1.6 billion in available lines of credit at quarter end was 29.0% as of June 30, 2023.

The increase in available lines during 2023 was a result of additional loan and security collateral being transferred to the FHLB and the Federal Reserve to enhance the levels of off-balance sheet liquidity availability to meet demands, as necessary.

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 March 31, 2023, and have no current plans to do so.

We have not engaged in significant derivative activities through June 30, 2023.

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 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 ("NCCOB").

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

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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Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The capital standards require us to maintain minimum ratios of “common equity tier 1” capital to total risk-weighted assets, “tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively.

The Federal Reserve's capital standards require us to maintain minimum ratios of “common equity tier 1” capital to total risk-weighted assets, “tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively.

Common equity tier 1 capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

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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.

The Company has elected to exclude 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.

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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.

At June 30, 2023, our capital ratios exceeded the regulatory minimum ratios discussed above.

The decrease in tier 1 capital ratios at June 30, 2023 as compared to year end is related primarily to the GrandSouth acquisition and organic asset growth.

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Risk-based capital ratios:

9 unchanged sentences

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.

At June 30, 2023, the Bank exceeded the minimum ratios established by the regulatory authorities.

In addition to 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 6.79% at June 30, 2023, an increase of 40 basis points from December 31, 2022 due to higher earnings and improvement the level of AOCI.

Stock Repurchase Plans

During the quarter ended June 30, 2023, the Company did not maintain, adopt, modify or terminate a stock repurchase plan operated under the provisions of Rules 10b-18 or Rule 10b5-1(c) of the SEC or otherwise.

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