FIRST BANCORP /NC/ 10-Q

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition Recent Developments and Acquisitions On January 1, 2023, we acquired GrandSouth, a community bank headquartered in Greenville, South Carolina, in an all-stock transaction. The terms of the Merger Agreement provided that each share of common and preferred stock of GrandSouth issued and outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the Company's common stock. As a result, the Company issued 5,032,834 shares of the Company'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. The GrandSouth acquisition contributed $1.02 billion in loans and $1.05 billion in deposits, with eight branches in South Carolina being added to the Company's branch network. The acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the the high-growth markets of the state including Greenville, Charleston and Columbia. 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 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. Page 43 Index • 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. • 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 $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 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%. Page 44 Index • 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%. Critical Accounting Policies and Estimates The accounting principles we follow and our methods of applying these principles conform with GAAP and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. 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 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. We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the portfolio. We believe the accounting estimate related to the ACL is a “critical accounting estimate” as: (1) changes in it can materially affect the provision for credit losses and net income; (2) it requires management to predict borrowers’ likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions; (3) the value of underlying collateral must be estimated on collateral-dependent loans; (4) prepayment activity must be projected to estimate the life of loans that often are shorter than contractual terms; 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. Our ACL is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The ACL is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast, and assumptions of probability of default and loss given default. Loan balances considered uncollectible are charged-off against the ACL. There are many factors affecting the ACL, some of which are quantitative, while others require qualitative judgment. Although management believes its process for determining the ACL adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods. 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 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. Actual losses incurred may differ materially from our estimates. For example, inflationary pressures and recessionary concerns leading to macroeconomic deterioration of the economy, higher unemployment and declines in real estate and other asset valuations could affect our loss experience and assumptions utilized in our model. We estimate expected credit losses on unfunded commitments to extend credit over the contractual period in which we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable. The allowance for off-balance sheet credit exposures, which is included in "Other liabilities" on the Consolidated Balance Sheets, is adjusted for as an increase or decrease to the provision for unfunded commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The 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. 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. Page 45 Index Business Combinations and Goodwill 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. Specified items such as acquired operating lease assets and liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with accounting guidance that results in measurements that may differ from fair value. Determining the fair value of assets acquired and liabilities assumed often involves estimates based on internal or third-party valuations which include appraisals, discounted cash flow analysis, or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples of earnings, or other relevant factors. The determination of fair value may require us to make point-in-time estimates about discount rates, future expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to assess. While we use the best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. 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. We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above. 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 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 and Allowance for Unfunded Commitments" foregoing section. Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances. Similarly, premiums or discounts on acquired debt are accreted or amortized to interest expense over their remaining lives. Actual accretion or amortization of premiums and discounts from a business acquisition may differ materially from our estimates impacting our operating results. Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment. During 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. Page 46 Index Current Accounting Matters See Note 1 to the Consolidated Financial Statements for information about recently announced or adopted accounting standards. RESULTS OF OPERATIONS Net Interest Income Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). Changes in the net interest income are the result of changes in volume and the net interest spread which affects NIM. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. NIM refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest income is also influenced by external factors such as local economic conditions, competition for loans and deposits, and market interest rates. 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 September 30, 2023 amounted to $84.7 million, a decrease of $0.6 million, or 0.7%, from the $85.3 million recorded in the third quarter of 2022. The decrease was primarily driven by higher cost of funds, partially offset by higher average earning assets from both the GrandSouth acquisition and organic growth. Average interest-earning assets for the second quarter of 2023 increased 13.7% from the comparable period of the prior year, with growth primarily in loans. Somewhat offsetting the impact of the higher earning assets was the reduction in our NIM which, on a tax-equivalent basis, decreased from 3.40% for the third quarter of 2022 to 2.97% for the three months ended September 30, 2023. The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis. For the For the Three Months Ended September 30, ($ in thousands) 2023 2022 Net interest income, as reported $ 84,702 85,334 Tax-equivalent adjustment 740 692 Net interest income, tax-equivalent $ 85,442 86,026 Net interest margin, as reported 2.95 % 3.38 % Net interest margin, tax-equivalent 2.97 % 3.40 % Page 47 Index 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 September 30, 2023 2022 ($ in thousands) Average Volume Average Rate Interest Earned or Paid Average Volume Average Rate Interest Earned or Paid Assets Loans (1) (2) $ 7,939,783 5.32 % $ 106,514 $ 6,389,996 4.49 % $ 72,239 Taxable securities 2,885,443 1.78 % 12,936 3,078,561 1.73 % 13,450 Non-taxable securities 295,403 1.50 % 1,118 299,822 1.48 % 1,115 Short-term investments, primarily interest-bearing cash 284,678 4.58 % 3,283 260,009 2.27 % 1,486 Total interest-earning assets 11,405,307 4.31 % 123,851 10,028,388 3.49 % 88,290 Cash and due from banks 94,963 89,042 Premises and equipment 152,415 134,903 Other assets 353,093 314,800 Total assets $ 12,005,778 $ 10,567,133 Liabilities Interest-bearing checking $ 1,448,603 0.55 % $ 2,007 $ 1,529,233 0.06 % $ 250 Money market deposits 3,530,532 2.63 % 23,397 2,480,043 0.13 % 841 Savings deposits 646,782 0.19 % 307 752,042 0.06 % 111 Other time deposits 646,798 2.48 % 4,037 515,625 0.27 % 352 Time deposits >$250,000 359,884 3.19 % 2,893 274,216 0.42 % 294 Total interest-bearing deposits 6,632,599 1.95 % 32,641 5,551,159 0.13 % 1,848 Borrowings 438,808 5.88 % 6,508 110,180 3.99 % 1,108 Total interest-bearing liabilities 7,071,407 2.20 % 39,149 5,661,339 0.21 % 2,956 Noninterest-bearing checking 3,547,447 3,748,119 Other liabilities 83,675 69,912 Shareholders’ equity 1,303,249 1,087,763 Total liabilities and shareholders’ equity $ 12,005,778 $ 10,567,133 Net yield on interest-earning assets and net interest income 2.95 % $ 84,702 3.38 % $ 85,334 Net yield on interest-earning assets and net interest income – tax-equivalent (3) 2.97 % $ 85,442 3.40 % $ 86,026 Interest rate spread 2.11 % 3.28 % Average prime rate 8.43 % 5.35 % (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 $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. Page 48 Index 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 nine months ended September 30, 2023 amounted to $264.2 million, an increase of $23.7 million, or 9.9%, from the $240.5 million recorded in the nine months ended September 30, 2022. The increase was driven by higher average earning assets from both the GrandSouth acquisition and organic growth. Our tax-equivalent NIM fell to 3.12% for the nine months ended September 30, 2023 from 3.27% for the nine months ended September 30, 2022 as discussed further below. The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis. For the For the Nine Months Ended September 30, ($ in thousands) 2023 2022 Net interest income, as reported $ 264,174 240,482 Tax-equivalent adjustment 2,139 2,058 Net interest income, tax-equivalent $ 266,313 242,540 Net interest margin, as reported 3.09 % 3.24 % Net interest margin, tax-equivalent 3.12 % 3.27 % Page 49 Index 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 Nine Months Ended September 30, 2023 2022 ($ in thousands) Average Volume Average Rate Interest Earned or Paid Average Volume Average Rate Interest Earned or Paid Assets Loans (1) (2) $ 7,840,344 5.27 % $ 308,857 $ 6,197,915 4.35 % $ 201,518 Taxable securities 2,943,798 1.79 % 39,415 3,070,745 1.74 % 40,045 Non-taxable securities 296,985 1.52 % 3,368 296,132 1.48 % 3,267 Short-term investments, primarily interest-bearing cash 337,701 4.18 % 10,546 366,529 1.10 % 3,016 Total interest-earning assets 11,418,828 4.24 % $ 362,186 9,931,321 3.34 % 247,846 Cash and due from banks 94,483 110,007 Premises and equipment 152,058 135,476 Other assets 369,968 372,405 Total assets $ 12,035,337 $ 10,549,209 Liabilities Interest bearing checking $ 1,476,979 0.38 % $ 4,205 $ 1,548,935 0.06 % $ 684 Money market deposits 3,253,840 2.15 % 52,263 2,550,643 0.13 % 2,426 Savings deposits 683,741 0.14 % 705 739,927 0.06 % 324 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 Borrowings 453,694 5.64 % 19,125 81,817 3.53 % 2,160 Total interest-bearing liabilities 6,980,806 1.88 % 98,012 5,750,602 0.17 % 7,364 Noninterest bearing checking 3,665,313 3,617,293 Other liabilities 91,997 52,130 Shareholders’ equity 1,297,221 1,129,184 Total liabilities and shareholders’ equity $ 12,035,337 $ 10,549,209 Net yield on interest-earning assets and net interest income 3.09 % $ 264,174 3.24 % $ 240,482 Net yield on interest-earning assets and net interest income – tax-equivalent (3) 3.12 % $ 266,313 3.27 % $ 242,540 Interest rate spread 2.36 % 3.17 % Average prime rate 8.09 % 4.20 % (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 $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 Page 50 Index 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 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 $371.9 million for the nine months ended September 30, 2023 as compared to the same period in 2022 due in large part to the higher levels of short-term borrowings utilized as needed to fund loan growth and manage fluctuations in deposit balances. • NIM decreased 15 basis points between the comparable periods as higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion was more than offset by the higher cost of funds, also driven by increases in market rates and competition for deposits. Our NIM for all periods benefited from net accretion income, primarily associated with purchase accounting discounts on loans, and premiums/discounts on deposits and borrowings associated with acquisitions. Presented in the table below is the amount of purchase accounting adjustments which impacted net interest income in each time period presented. For the Three Months Ended September 30, For the Nine Months Ended September 30, ($ in thousands) 2023 2022 2023 2022 Accretion of loan discount on acquired loans $ 2,766 1,519 9,043 4,735 Accretion of loan discount on retained SBA loans 437 1,032 1,311 2,428 Total interest income impact 3,203 2,551 10,354 7,163 (Discount accretion) premium amortization of acquired deposits (709) 121 (2,606) 524 Discount accretion of acquired borrowings (215) (64) (635) (190) Total net interest expense impact (924) 57 (3,241) 334 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 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 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 September 30, 2023 and 2022, the unaccreted loan discounts on SBA loans amounted to $4.0 million and $4.6 million, respectively. Page 51 Index Provision for Credit Losses and Provision for Unfunded Commitments The provisions for credit losses represents our current estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Our estimate of credit losses is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. The provision for unfunded commitments represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances. The allowance for unfunded commitments is included in "Other liabilities" in the Consolidated Balance Sheets. 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 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. 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. 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 $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 $6.0 million for the nine months ended September 30, 2023 and 2022, respectively. Other gains are considered "non-core" as they are generally outside the normal course of business. The following table presents the primary components of noninterest income. The drivers of larger fluctuations between periods are discussed below the table. For the Three Months Ended September 30, For the Nine Months Ended September 30, ($ in thousands) 2023 2022 2023 2022 Service charges on deposit accounts $ 4,661 4,166 13,012 11,407 Other service charges and fees - bankcard interchange income, net 2,239 3,009 7,190 12,532 Other service charges and fees - other 3,211 3,303 9,487 8,668 Fees from presold mortgage loans 325 376 1,288 1,951 Commissions from sales of financial products 1,207 1,391 3,926 3,487 SBA consulting fees 478 479 1,408 1,963 SBA loan sale gains 1,101 479 2,052 4,581 Bank-owned life insurance ("BOLI") income 1,104 962 3,216 2,880 Core noninterest income 14,326 14,165 41,579 47,469 Other gains, net 851 2,747 1,369 5,958 Total noninterest income $ 15,177 $ 16,912 $ 42,948 $ 53,427 Page 52 Index 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 $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 $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 $4.8 million for the nine months ended September 30, 2023 and 2022, respectively. The merger and acquisition costs were primarily related to the GrandSouth acquisition and are considered "non-core" as they are outside the normal course of business. It is not expected that there will be material additional merger and acquisition charges. The following table presents the primary components of noninterest expenses: Page 53 Index For the Three Months Ended September 30, For the Nine Months Ended September 30, ($ in thousands) 2023 2022 2023 2022 Salaries $ 29,394 24,416 87,391 71,669 Employee benefits 6,539 4,156 19,097 16,044 Total personnel expense 35,933 28,572 106,488 87,713 Occupancy expense 3,409 3,175 10,644 9,681 Equipment related expenses 1,594 1,672 4,398 4,490 Credit card rewards and other bankcard expenses 1,397 805 3,840 3,018 Telephone and data lines 996 929 2,973 2,719 Software costs 1,860 1,590 6,163 4,452 Data processing expense 2,098 1,790 6,370 5,811 Professional fees 1,765 1,117 4,631 3,295 Advertising and marketing expense 997 856 3,207 2,651 Non-credit losses 1,564 828 4,000 1,918 Deposit related expenses 617 604 2,051 1,271 Other operating expenses 8,137 5,325 23,705 15,288 Core noninterest expense 60,367 47,263 178,470 142,307 Merger and acquisition expenses — 548 13,506 4,769 Amortization of intangible assets 1,953 889 6,147 2,859 Foreclosed property losses (gains), net (96) — (131) (372) Total noninterest expense $ 62,224 $ 48,700 $ 197,992 $ 149,563 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. Income Taxes 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. Page 54 Index FINANCIAL CONDITION 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. Note 4 to the consolidated financial statements presents additional detailed information regarding our mix of loans. We have no notable concentrations in geographies or industries, including in office or hospitality categories. The Company's exposure to non-owner occupied commercial office loans represents approximately 5.8% of the total portfolio and the average size of these loans is $1.4 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 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 $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. We invest primarily in securities issued by GSEs including FHLMC, FNMA, GNMA, and SBA, each of which guarantees the repayment of the securities. Nearly all of our mortgage-backed securities are issued by GSEs and are traded in liquid secondary markets. The state and local government investments are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation. We have no significant concentration of bond holdings from one state or local government entity. We have evaluated the unrealized losses on individual securities at September 30, 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 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%. 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 $804.6 million such that approximately 70.9% of our total deposits were insured or collateralized at September 30, 2023. Our deposit mix has remained consistent historically and has not significantly changed with the addition of GrandSouth as presented in the table below. There has been no notable shift in deposits from noninterest-bearing to interest-bearing during 2023 to date other than from the acquired deposits driving a moderate change in mix. Page 55 Index September 30, 2023 December 31, 2022 ($ in thousands) Amount Percentage Amount Percentage Noninterest-bearing checking accounts $ 3,503,050 34 % 3,566,003 39 % Interest-bearing checking accounts 1,458,855 14 % 1,514,166 16 % Money market accounts 3,635,523 36 % 2,416,146 26 % Savings accounts 638,912 6 % 728,641 8 % Other time deposits 626,870 6 % 464,343 5 % Time deposits >$250,000 359,704 4 % 276,319 3 % Total market deposits 10,222,914 100 % 8,965,618 97 % Brokered deposits 12,489 — % 261,911 3 % Total deposits $ 10,235,403 100 % 9,227,529 100 % Nonperforming Assets NPAs are defined as nonaccrual loans, modifications to borrowers in financial distress, loans past due 90 or more days and still accruing interest, foreclosed real estate, and prior to the adoption of ASU 2022-02, accruing TDRs. NPAs are summarized as follows: ($ in thousands) September 30, 2023 December 31, 2022 Nonperforming assets Nonaccrual loans $ 26,884 28,514 Modifications to borrowers in financial distress 10,723 — TDRs – accruing — 9,121 Total nonperforming loans 37,607 37,635 Foreclosed real estate 1,235 658 Total nonperforming assets $ 38,842 38,293 Asset Quality Ratios Nonaccrual loans to total loans 0.33 % 0.43 % Nonperforming loans to total loans 0.47 % 0.56 % Nonperforming assets to total loans and foreclosed properties 0.48 % 0.57 % 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, 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 $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% Page 56 Index 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 Our ACL is based on the total amount of loan losses that are expected over the remaining life of the loan portfolio. Our estimate of credit losses on loans is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. The ACL is measured on a collective pool basis when similar risk characteristics exist based primarily on discounted cash flows computed for each loan in a pool based on its individual characteristics. When we determine that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the ACL. We have no foreign loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. 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, 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 $12.2 million related to non-PCD loans in the GrandSouth portfolio. Increases in the ACL related to loan growth and updated prepayment speed estimates in the CECL model were offset by net charge-off activity during the period. For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, ACL, charge-offs and recoveries, and key ratios: ($ in thousands) Nine Months Ended September 30, 2023 Twelve Months Ended December 31, 2022 Nine Months Ended September 30, 2022 Loans outstanding at end of period $ 8,027,037 6,665,145 6,525,286 Average amount of loans outstanding 7,840,344 6,293,280 6,197,915 Allowance for credit losses, at period end 108,198 90,967 86,587 Total charge-offs (7,575) (4,465) (4,008) Total recoveries 2,845 4,043 3,206 Net charge-offs $ (4,730) (422) (802) Ratios: Net charge-offs as a percent of average loans (annualized) 0.08 % 0.01 % 0.02 % Allowance for credit losses as a percent of loans at end of period 1.35 % 1.36 % 1.33 % Recoveries of loans previously charged-off as a percent of loans charged-off 37.56 % 90.55 % 79.99 % 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 Page 57 Index 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. 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 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 Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. 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 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 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); and, • 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. 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). 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 $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. Page 58 Index The amount and timing of our contractual obligations and commercial commitments have not changed materially since December 31, 2022, the detail of w hich is presented in the Contractual Obligations and Other Commercial Commitments table of our 2022 Annual Report on Form 10-K. In addition, we are not involved in any legal proceedings that, in our opinion, could have a material effect on our consolidated financial position. Off-Balance Sheet Arrangements and Derivative Financial Instruments Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities. Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through September 30, 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 ("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. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations. Under Basel III standards and capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 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. 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 allowance for unfunded commitments. 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. In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators. The Federal Reserve has not advised us of any requirement specifically applicable to us. 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: Page 59 Index September 30, 2023 December 31, 2022 Risk-based capital ratios: Common equity Tier 1 to Tier 1 risk weighted assets 12.93 % 13.02 % Minimum required Common Equity Tier 1 capital 7.00 % 7.00 % Tier I capital to Tier 1 risk weighted assets 13.71 % 13.83 % Minimum required Tier 1 capital 8.50 % 8.50 % Total risk-based capital to Tier II risk weighted assets 15.26 % 15.09 % Minimum required total risk-based capital 10.50 % 10.50 % Leverage capital ratio: Tier 1 capital to quarterly average total assets 10.72 % 10.51 % Minimum required Tier 1 leverage capital 4.00 % 4.00 % The Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above. 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 6.49% 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 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.