What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 169 added, 157 removed, 354 unchanged (48% of the section changed)

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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.

As a result, the Company issued 5,032,834 shares of the Company's 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.

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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.

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

We earned net income of $29.9 million, or $0.73 diluted EPS, during the three months ended September 30, 2023 compared to net income of $37.9 million, or $1.06 diluted EPS, for the three months ended September 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 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:

• Net interest income for the third quarter of 2023 was $84.7 million, a 0.7% decrease from the $85.3 million recorded in the third quarter of 2022.

The decrease in net interest income from the prior year period was driven by higher cost of funds, partially offset by higher earning assets related to both the GrandSouth acquisition and organic growth.

• Net interest margin ("NIM") on a tax-equivalent basis decreased in the third quarter of 2023 to 2.97% from 3.40% for the third 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.

• Noninterest income for the three months ended September 30, 2023 decreased $1.7 million, or 10.3%, from the comparable period of 2022 primarily related to lower bankcard revenues and lower other gains.

• Noninterest expense increased $13.5 million, or 27.8%, for the quarter ended September 30, 2023, as compared to the prior year period driven by higher personnel expense, intangible amortization, and increased general operating expenses resulting from the GrandSouth acquisition.

Overview and Highlights at and for Nine Months Ended September 30, 2023

We earned net income of $74.5 million, or $1.81 diluted EPS, during the nine months ended September 30, 2023 compared to net income of $108.5 million, or $3.04 diluted EPS, for the nine months ended September 30, 2022.

• Net interest income for nine months ended September 30, 2023 was $264.2 million, a 9.9% increase from the $240.5 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, partially offset by lower NIM between periods.

• NIM on a tax-equivalent basis decreased to 3.12% for the nine months ended September 30, 2023 from 3.27% for the nine months ended September 30, 2022 related to higher cost of funds driven by increases in market rates and competition for deposits.

Higher rates on interest-bearing liabilities were partially offset by increased loan yields from market rate increases and pricing on new loans, combined with increased loan discount accretion.

• For the nine months ended September 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.

• Noninterest income for the nine months ended September 30, 2023 totaled $42.9 million, a decrease of $10.5 million, or 19.6%, from the comparable period of 2022 primarily related to lower bankcard revenues, declines in SBA loan sale gains and lower other gains.

• Noninterest expense increased $48.4 million, or 32.4%, to $198.0 million for the nine months ended September 30, 2023 as compared to the prior year period driven by higher personnel expense, merger expenses, and increased general operating expenses resulting from the GrandSouth acquisition.

Total assets at September 30, 2023 amounted to $12.0 billion, a 12.7% 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.

• Total loans amounted to $8.0 billion at September 30, 2023, with acquired balances contributing $1.02 billion and organic growth of $341.8 million, for an annualized organic growth rate (exclusive of acquired loans) of 5.9% from December 31, 2022.

• Total deposits were $10.2 billion at September 30, 2023, an increase of $1.0 billion from December 31, 2022.

Acquired deposits contributed $1.05 billion while organic market growth (excluding wholesale funding) totaled $220.7 million since year end for an annualized growth rate of 3.0%.

Wholesale brokered deposits decreased $249.4 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.

• Credit quality continued to be strong at September 30, 2023, with a NPA to total assets ratio of 0.32% as of September 30, 2023 down from 0.39% for the comparable period of 2022.

• Our on-balance sheet liquidity ratio was 14.4% at September 30, 2023.

Available off-balance sheet sources totaled $2.2 billion at quarter end, resulting in a total liquidity ratio of 30.2%.

• We remain well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 12.93% and total risk-based capital ratio of 15.26%.

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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 SEC.

Allowance for Credit Losses on Loans and Unfunded Commitments

The following should be read in conjunction with our significant accounting policies as presented in Note 1 of the 2022 Annual Report on Form 10-K filed with the SEC.

Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments

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

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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.

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.

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

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.

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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.

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.

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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 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 most recent annual assessment which occurred in the fourth quarter of 2022, we concluded that it was more likely than not that the fair value exceeded its carrying value.

Current Accounting Matters

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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.

Net interest income for the three months ended September 30, 2023 amounted to $84.7 million, a decrease of $0.6 million, or 0.7%, from the $85.3 million recorded in the third quarter of 2022.

The decrease was primarily driven by higher cost of funds, partially offset by higher average earning assets from both the GrandSouth acquisition and organic growth.

Average interest-earning assets for the second quarter of 2023 increased 13.7% 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.

Somewhat offsetting the impact of the higher earning assets was the reduction in our NIM which, on a tax-equivalent basis, decreased from 3.40% for the third quarter of 2022 to 2.97% for the three months ended September 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.

For the Three Months Ended June 30, 2023

For the For the Three Months Ended September 30,

($ in thousands) 2023 2022

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Net interest margin, tax-equivalent 2.97 % 3.40 %

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

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

Average Balances and Net Interest Income Analysis

Three Months Ended June 30,

Three Months Ended September 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 $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.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization in the amounts of $52,000, and $753,000 for three months ended September 30, 2023 and 2022, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $3.2 million and $2.6 million for three months ended September 30, 2023 and 2022, respectively.

(3) Includes tax-equivalent adjustments of $740,000 and $692,000 for three months ended September 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.

Overall, as demonstrated in the table above, despite the higher earning asset volumes arising from both the GrandSouth acquisition and organic growth, the compression in NIM drove the decrease in net interest income.

• Market interest rates increased 225 basis points between September 2022 and September 2023 to result in an average prime rate of 8.43% for three months ended September 30, 2023 compared to 5.35% for the prior year period.

• Average loan volumes for the three months ended September 30, 2023 were $1.5 billion higher than the same period in 2022.

In addition to higher volumes arising from both the GrandSouth acquisition and organic loan growth, interest rates on loans increased 83 basis points to 5.32% for the third quarter of 2023, resulting in an increase in loan interest income of $34.3 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 September 30, 2023 increased $30.8 million compared to the same period in 2022.

Average interest-bearing deposit balances increased $1.1 billion while rates on those deposits increased 182 basis points as compared to the same period in the prior year.

• The combination of higher rates on borrowings, up 189 basis points in the third quarter of 2023 from the third quarter of 2022 due to increasing market rates and the increase in volume of borrowings between periods drove the $5.4 million increase in interest expense.

Average borrowings increased $328.6 million in the third 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.

Net interest income for the nine months ended September 30, 2023 amounted to $264.2 million, an increase of $23.7 million, or 9.9%, from the $240.5 million recorded in the nine months ended September 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.

Our tax-equivalent NIM fell to 3.12% for the nine months ended September 30, 2023 from 3.27% for the nine months ended September 30, 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

For the For the Nine Months Ended September 30,

($ in thousands) 2023 2022

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Net interest margin, tax-equivalent 3.12 % 3.27 %

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

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

Average Balances and Net Interest Income Analysis

Six Months Ended June 30,

Nine Months Ended September 30,

($ in thousands) Average

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Savings deposits 683,741 0.14 % 705 739,927 0.06 % 324

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

Other time deposits 773,755 2.56 % 14,807 528,006 0.21 % 839

Time deposits >$250,000 338,797 2.73 % 6,907 301,274 0.41 % 931

Total interest-bearing deposits 6,527,112 1.62 % 78,887 5,668,785 0.12 % 5,204

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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 $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.

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 $458,000, and $2.8 million for nine months ended September 30, 2023 and 2022, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $10.4 million and $7.2 million for nine months ended September 30, 2023 and 2022, respectively.

(3) Includes tax-equivalent adjustments of $2.1 million and $2.1 million for nine months ended September 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.

Overall, as demonstrated in the table above, higher earning asset volumes, arising from both the GrandSouth acquisition and organic growth, partially offset by the reduction in NIM, drove the increase in net interest income.

• Market interest rates increased 225 basis points between September 2022 and September 2023 to result in an average prime rate of 8.09% for nine months ended September 30, 2023 compared to 4.20% for the prior year period.

• Average loan volumes for the nine months ended September 30, 2023 were $1.6 billion higher than the same period in 2022 due to both the GrandSouth acquisition and organic loan growth.

In addition, interest rates on loans increased 92 basis points to 5.27% for the nine months ended September 30, 2023, resulting in an increase in loan interest income of $107.3 million.

• Primarily due to higher market rates and increased average balances related in large part to the GrandSouth acquisition, deposit interest expense for the nine months ended September 30, 2023 increased $73.7 million compared to the same period in 2022.

Average interest-bearing deposit balances increased $858.3 million while rates on those deposits increased 150 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.

• The combination of higher rates on borrowings, up 211 basis points for the nine months ended September 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 $17.0 million increase in interest expense on borrowings.

Average borrowings increased $371.9 million for the nine months ended September 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 decreased 15 basis points 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 more than 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.

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,

($ in thousands) 2023 2022 2023 2022

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Total impact on net interest income $ 2,279 2,608 7,113 7,497

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.

The increase in loan discount accretion on acquired loa ns for the three and nine months ended September 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 June 30, 2023 and 2022, unaccreted loan discounts on purchased loans amounted to $29.2 million and $14.0 million, respectively.

At September 30, 2023 and 2022, unaccreted loan discounts on purchased loans amounted to $26.5 million and $12.5 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 June 30, 2023 and 2022, the unaccreted loan discounts on SBA loans amounted to $3.8 million and $5.4 million, respectively.

At September 30, 2023 and 2022, the unaccreted loan discounts on SBA loans amounted to $4.0 million and $4.6 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.

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.

For the three months ended September 30, 2023, we recorded a $1.2 million provision for loan losses while $5.1 million 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 prepayment speed estimates which are a key assumption in the CECL model.

The higher interest rate environment has resulted in slower prepayment speed estimates, thus increasing the projected ACL required.

Loss driver assumptions were also updated with the lower loss rate estimates resulting in offsetting reductions to the ACL reserve estimate.

The nine months ended September 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 $16.4 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.

The balance of the change was related to the updated prepayment speeds previously discussed.

In addition, a reversal of provision for unfunded commitments of $1.2 million was recorded for the three months ended September 30, 2023 related primarily to a reduction in the amount of available lines of credit outstanding.

The nine months ended September 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 third quarter of 2023.

For the same period in 2022, there was a reversal of provision for unfunded commitments of $1.2 million, related primarily to fluctuations in commitment levels combined with updated loss rate factors.

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Noninterest Income

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.

Our noninterest income amounted to $15.2 million and $16.9 million for the three months ended September 30, 2023 and 2022, respectively, and $42.9 million and $53.4 million for the nine months ended September 30, 2023 and 2022, respectively.

Included in noninterest income were amounts totaling $0.9 million and $2.7 million in other gains for the three months ended September 30, 2023 and 2022, respectively, and $1.4 million and $6.0 million for the nine months ended September 30, 2023 and 2022, respectively.

Other gains are considered "non-core" as they are generally outside the normal course of business.

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 June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

($ in thousands) 2023 2022 2023 2022

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Total noninterest income $ 15,177 $ 16,912 $ 42,948 $ 53,427

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.

Service charges on deposit accounts increased $0.5 million, or 11.9%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, and increased $1.6 million, or 14.1% for the nine months ended September 30, 2023 compared to the nine months ended September 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 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.

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 $0.8 million, or 25.6%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and decreased $5.3 million, or 42.6%, for the nine months ended September 30, 2023 compared to the same period in 2022.

The decrease was 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 ATM charges, wire transfer fees, safety deposit box rentals, fees from sales of personalized checks, and check cashing fees.

Revenue fluctuates based primarily on customer activity, number of accounts and volume of transactions in each period.

Also included in this category is SBA guarantee servicing fees and related servicing rights amortization which fluctuate based on the volume of and prepayment speeds on SBA loans serviced which have slowed down in the current year.

The increase in this item for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 of $0.8 million , or 9.4%, was due in large part to lower MSR amortization expense given the current high interest rate environment.

Fees from presold mortgage loans amounted to $0.3 million for the three months ended September 30, 2023, a decrease of $0.1 million, or 13.6%, from the same time period in 2022.

Mortgage fees decreased $0.7 million, or 34.0%, for the nine months ended September 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 increased $0.6 million, or 129.9%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 while year to date results continue to lag with a decrease of $2.5 million, or 55.2%, for the nine months ended September 30, 2023 compared to the same period in 2022 due primarily to slower loan originations earlier in the current year combined with lower premiums available on SBA loan sales given the current market conditions.

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

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

Noninterest Expenses

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.

Noninterest expenses totaled $62.2 million and $48.7 million for the three months ended September 30, 2023 and 2022, respectively, and $198.0 million and $149.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Included in noninterest expenses were merger and acquisition costs totaling zero and $0.5 million for the three months ended September 30, 2023 and 2022, respectively, and $13.5 million and $4.8 million for the nine months ended September 30, 2023 and 2022, respectively.

The merger and acquisition costs were primarily related to the GrandSouth acquisition and are considered "non-core" as they are outside the normal course of business.

It is not expected that there will be material additional merger and acquisition charges.

The following table presents the primary components of noninterest expenses:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

($ in thousands) 2023 2022 2023 2022

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Total noninterest expense $ 62,224 $ 48,700 $ 197,992 $ 149,563

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.

In general, the 27.8% and 32.4% increases for the quarter and year to date period, respectively, in noninterest expenses were driven by by increased salary and benefit expense (up $7.4 million and $18.8 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year) and other facilities and support-related costs associated with the acquisition of eight GrandSouth branch locations and related branch and support personnel.

In addition, contributing to the higher noninterest expense in the current year periods were merger and acquisition expenses of zero and $13.5 million for the three and nine months ended September 30, 2023, respectively, and higher intangible amortization related to the GrandSouth acquisition, which increased $1.1 million and $3.3 million for the three and nine months ended September 30, 2023 as compared to the same periods in the prior year, respectively.

Also contributing to higher noninterest expense were increases in the three and nine months ended September 30, 2023 for data processing, professional fees, software expense, and advertising, as well as travel and training (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.

Included in the increase for "other operating expenses" is FDIC insurance premiums which increased $1.4 million and $3.4 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year.

The higher FDIC insurance premiums were a function of acquired deposits from GrandSouth combined with the general FDIC rate increase effective January 1, 2023.

Non-credit losses increased $0.7 million and $2.1 million for the three and nine months ended September 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.

We recorded income tax expense of $7.8 million and $10.2 million for the three months ended September 30, 2023 and 2022, respectively.

Our effective tax rate was 20.6% and 21.2% for the three months ended September 30, 2023 and 2022, respectively.

For the nine months ended September 30, 2023 and September 30, 2022, we recorded income tax expense of $19.8 million and $28.4 million, respectively.

Our effective tax rate was 21.0% and 20.8% for the nine months ended September 30, 2023 and 2022, respectively.

The fluctuations in effective tax rate between periods was attributable primarily to the amount of merger and acquisition expenses recorded each period resulting in non-deductible adjustments for tax purposes.

FINANCIAL CONDITION

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.

Total assets at September 30, 2023 amounted to $12.0 billion, a $1.4 billion, or 12.7%, increase from December 31, 2022 due in large part to the GrandSouth acquisition, combined with organic growth during the year.

Total loans at September 30, 2023 amounted to $8.0 billion, a $1.4 billion, or 20.4%, 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 $341.8 million for the first nine months of 2023 or an annualized growth rate of 5.9%.

The mix of our loan portfolio remained substantially the same at September 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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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 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 stable source of income.

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

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 $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.

Total investment securities decreased $220.3 million from December 31, 2022 to total $2.6 billion at September 30, 2023 due to the utilization of cash flows from amortizing securities to fund loan growth.

There were no purchases of investment securities during the the nine months ended September 30, 2023 and sales were limited to those investment securities acquired from GrandSouth which were liquidated at their recorded fair value upon close of the transaction or shortly thereafter.

There was no gain or loss recorded on the sale of acquired securities.

The unrealized loss on available for sale securities totaled $521.7 million, representing a deterioration (higher unrealized loss) of $77.6 million during the nine months ended September 30, 2023.

The Company has the intent to hold, and will not be required to sell, 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 June 30, 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 September 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 $10.2 billion at June 30, 2023, an increase of $941.0 million, or 10.2%, from December 31, 2022.

Total deposits amounted to $10.2 billion at September 30, 2023, an increase of $1.0 billion, or 10.9%, from December 31, 2022.

Deposits acquired from GrandSouth contributed $1.05 billion while organic market growth (excluding wholesale funding) totaled $220.7 million since year end for an annualized growth rate of 3.0%.

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 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.

Brokered deposits decreased $249.4 from year end.

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

As of September 30, 2023, the estimated insured deposits totaled $6.4 billion or 63.0% of total deposits.

In addition, we had collateralized deposits at that date of $804.6 million such that approximately 70.9% of our total deposits were insured or collateralized at September 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

September 30, 2023 December 31, 2022

($ in thousands) Amount Percentage Amount Percentage

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($ in thousands)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Nonperforming assets

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Nonperforming assets to total assets 0.32 % 0.36 %

Allowance for credit losses to total loans 1.35 % 1.36 %

Allowance for credit losses to nonaccrual loans 402.46 % 319.03 %

Allowance for credit losses to nonperforming loans 287.71 % 241.71 %

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

As shown in the table above, total NPAs increased slightly from year end related primarily to the $0.5 million increase in foreclosed real estate as of September 30, 2023.

At September 30, 2023, total nonaccrual loans amounted to $26.9 million, a decrease of $1.6 million from $28.5 million at December 31, 2022 .

Modifications to borrowers experiencing financial distress, which replaced the accounting for TDRs, increased as additional loans have been modified throughout the year.

"Commercial and industrial" is the largest category of nonaccrual loans, at $9.8 million , or 36.4% of total nonaccrual loans, followed by "Commercial real estate - owner occupied" at $8.0 million , or 29.7% 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.

Included in those categories are nonaccrual SBA loans totaling $14.3 million at September 30, 2023, or 53.3%, 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 6.0% to $51.4 million at September 30, 2023 compared to $48.5 million at December 31, 2022.

The majority of the increase was attributable to commercial real estate and home equity loans.

Special mention loans declined 5.6%

from $39.0 million at December 31, 2022 to $36.8 million at September 30, 2023.

The majority of the decrease was attributable to commercial real estate loans.

Allowance for Credit Losses and Loan Loss Experience

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

Fluctuations in the ACL each period are based on loan mix and growth, changes in the levels of nonperforming loans, charge-off and recovery activity, 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 $17.2 million at September 30, 2023, as compared to year end, to a total of $108.2 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 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.

Increases in the ACL related to loan growth and updated prepayment speed estimates in the CECL model were offset by net charge-off activity during the period.

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

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

($ in thousands) Nine Months Ended September 30, 2023 Twelve Months

Ended December 31,

2022 Six Months Ended June 30, 2022

2022 Nine Months Ended September 30, 2022

Loans outstanding at end of period $ 8,027,037 6,665,145 6,525,286

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Recoveries of loans previously charged-off as a percent of loans charged-off 37.56 % 90.55 % 79.99 %

Allowance for Unfunded Commitments

In addition to the ACL on loans, we maintain an allowance for lending-related commitments such as unfunded loan commitments.

We estimate expected credit losses associated with these commitments over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable.

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 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.

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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.

See “Critical Accounting Policies – Allowance for Credit Losses on Loans

and Allowance for 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 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.

Allowance for Unfunded Commitments

In addition to the ACL on loans, we maintain an allowance for lending-related commitments such as unfunded loan commitments.

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 nine months ended September 30, 2023, we recorded a reversal of provision for unfunded commitments of $1.5 million, which includes an initial provision of $1.9 million for the acquisition of GrandSouth and a provision reversal of $3.4 million related to decreases in the levels and fluctuations in the mix of outstanding loan commitments.

For the comparable period of 2022, we recognized a reversal of provision for unfunded commitments of $1.2 million related to lower levels of unfunded commitments for the period.

The allowance for unfunded commitments of $11.8 million and $13.3 million at September 30, 2023 and December 31, 2022, respectively, are classified on the Consolidated Balance Sheets within "Other liabilities."

Liquidity, Commitments, and Contingencies

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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.

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

• An approximately $1.4 billion line of credit with the FHLB (of which $301.7 million and $221.8 million were outstanding at September 30, 2023 and December 31, 2022, respectively);

• An approximately $825.9 million line of credit through the Federal Reserve's discount window and its Bank Term Funding Program (of which none was outstanding at September 30, 2023 or December 31, 2022);

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

Our overall on-balance sheet liquidity ratio was 14.4% at September 30, 2023.

compared to 26.0% at December 31, 2022.

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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.

Our total liquidity ratio, including the $2.2 billion in available lines of credit at quarter end, was 30.2% as of September 30, 2023.

The increase in available lines of credit 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 June 30, 2023.

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

Capital Resources

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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 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.

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 allowance for unfunded commitments.

The Company has elected to exclude AOCI related primarily to available for sale securities from common equity tier 1 capital.

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

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.

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

The common equity Tier 1 and Tier 1 to risk-weighted assets capital ratios at September 30, 2023 declined as compared to year end related primarily to the GrandSouth acquisition and organic asset growth.

The increase in the Tier 1 leverage ratio as of September 30, 2023 as compared to that of year end is related to Tier 1 capital growing at a faster rate than quarterly average tangible assets.

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Risk-based capital ratios:

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

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

At September 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.

AOCI is included in the Company’s tangible common equity to tangible assets ratio which was 6.49% at September 30, 2023, an increase of ten 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.

During the quarter ended September 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