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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-28 · 354 added, 295 removed, 567 unchanged (53% of the section changed)

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This MD&A is intended to assist readers in understanding our results of operations and changes in financial position for the past three years.

This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Report.

It should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Report.

This discussion may contain forward-looking statements that involve risks and uncertainties.

Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors.

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company.

Overview and 2023 Highlights

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As of December 31, 2023, the Bank had a 118 branch network in North Carolina and South Carolina and 1,421 full-time equivalent employees.

We have grown organically as well as through strategic acquisitions as discussed above in "Recent Developments and Acquisitions".

We have grown organically as well as through strategic acquisitions as discussed previously in "Recent Developments and Acquisitions".

2023 Financial Highlights:

• Return on average assets was 1.39% for the year ended December 31, 2022, up from 1.13% for the prior year.

• Return on average assets was 0.87% for the year ended December 31, 2023, as compared to 1.39% for the prior year.

Return on average common equity of 8.05% was reported for the year ended December 31, 2023 as compared to 13.40% for the prior year.

• Our total assets at December 31, 2022 were $10.6 billion, a 1.1% increase from a year earlier, with growth in loans offset by reductions in other assets throughout the year.

• Total loans outstanding increased $583.4 million, or 9.6%, during the year and total loans were in excess of $6.6 billion at December 31, 2022.

• Credit quality continues to be strong with the NPA to total assets ratio at 0.36% as of December 31, 2022 and as compared to 0.50% at December 31, 2021.

Net charge offs as a percentage of average loans were 0.01% for 2022, down from 0.05% for the prior year.

• Our total assets at December 31, 2023 were $12.1 billion, a 14.0% increase from a year earlier, with growth driven by the GrandSouth acquisition, combined with organic loan growth during the year.

• Total loans outstanding increased $1.5 billion, or 22.3%, during the year, which included $1.02 billion of loans acquired from GrandSouth.

Loans totaled $8.2 billion at December 31, 2023.

• Credit quality continues to be strong with the NPA to total assets ratio at 0.37% as of December 31, 2023, as compared to 0.36% at December 31, 2022.

Net charge offs as a percentage of average loans were 0.08% for 2023, as compared to 0.01% for the prior year.

• Capital remains strong with a total CET1 ratio of 13.20%, up from 13.02% for the prior year, and total risk-based capital ratio of 15.54% as of December 31, 2023, as compared to 15.09% for the prior year.

Our TCE ratio was 6.39% at December 31, 2022.

• We earned net income of $104.1 million, or $2.53 diluted EPS, during 2023 compared to net income of $146.9 million, or $4.12 diluted EPS, in 2022.

The main drivers to the increase in net income were as follows:

• Net interest income increased $78.5 million, or 32%, driven by higher interest income, partially offset by increased interest expense.

Both of these increases were influences by higher market interest rates during the year.

The NIM on a tax-equivalent basis was 3.28% for 2022, an increase of 12 basis points from 2021.

The growth in average earning assets also contributed to the higher interest income.

• Interest income on loans increased $59.0 million related to a combination of higher volumes of average balances and increased yields.

Interest income on investment securities increased $23.4 million, also driven by higher average balances and higher yields.

• The increase in interest expense of $6.6 million was driven by higher market rates resulting in some repricing of our deposits.

Also contributing was the utilization of higher cost brokered deposits and short-term borrowings to fund loan demand and deposit fluctuations.

• Provision for loans losses for 2022 of $12.6 million was up from the $9.6 million provision in 2021 due to in part to loan growth experienced during the year.

Also contributing was the updated loss rates and economic forecasts used in our CECL model which have indicated increasing risk of economic deterioration, including higher unemployment rates and lower GDP projections, resulting in a higher ACL.

Refer to Provision for Loan Losses section below for further discussion.

• Noninterest income declined $5.6 million, which resulted primarily from an $8.9 million decrease in mortgage banking income related to lower levels of originations and sales activity.

Also a factor was the lower SBA-related revenues, including consulting fees and gains on sale, which was down $6.9 million year-over-year as a result of lower PPP-related revenue in 2022, as well as the timing and volume of loan originations available to be sold.

Somewhat offsetting these declines in revenue was higher service charges and other gains related to death benefits on BOLI policies.

The main drivers to the decrease in net income were as follows:

• Net interest income increased $21.8 million, or 6.7%, driven by higher interest income offset by increased interest expense.

The NIM on a tax-equivalent basis was 3.06% for 2023, a decrease of 22 basis points from the prior year.

Despite the growth in average earning assets, the market-driven increase in rates on liabilities occurred at a more rapid pace that the increase in yields on assets which resulted in the reduction in NIM for 2023.

• Total interest income increased $147.8 million in 2023 as compared to 2022, driven by higher interest income on loans of $140.6 million related to a combination of higher volumes of average balances and increased yields.

• The increase in interest expense of $126.0 million was driven by higher market rates which resulted in repricing of our deposits.

Also contributing to higher interest expense was the utilization of short-term borrowings to fund loan demand and deposit fluctuations and rate increases on our variable rate trust preferred debt.

• Provision for credit losses for 2023 of $17.8 million was up from $12.4 million in 2022 due primarily to the initial provision established for acquired non-PCD loans of $12.2 million, combined with organic loan growth experienced during the year.

Offsetting these increases were updated loss rates and improved economic forecasts used in our CECL model as discussed further in the "Provision for Loan Losses" section below.

• Noninterest income declined $10.5 million, which resulted primarily from lower other gains as 2022 contained several death benefit gains on our BOLI policies, lower SBA-related revenues, including consulting fees and gains on sale, which was down $3.4 million year-over-year, and lower bankcard revenues related to the Durbin limitations effective for us in July 2022.

Refer to "Noninterest Income" section below for further discussion.

• Noninterest expense increased $10.6 million, primarily related to the Select acquisition completed in the fourth quarter of 2021 driving higher operating expenses, including additional locations and personnel, as well as the increased number of customer accounts and transaction volume creating additional expense.

Somewhat offsetting the higher expenses was a reduction of $11.8 million in merger expenses year-over-year.

• Noninterest expense increased $59.2 million, primarily related to the GrandSouth acquisition completed January 1, 2023, driving higher operating expenses, including merger expenses of $13.7 million, additional branch locations and personnel, and an increased number of customer accounts and transaction volume creating additional expense.

Refer to "Noninterest Expense" section below for further discussion.

• Income tax expense was up $13.6 million relative to the higher pre-tax income.

The effective tax rate of 20.5% was fairly consistent with the prior year.

Current Economic Conditions and COVID-19 Impact

The lingering impact the COVID-19 pandemic continues to contribute to certain adverse and persistent macroeconomic consequences, including labor shortages and disruptions of global supply chains.

These issues, coupled with the growth in economic activity and in the demand for goods and services, have resulted in rising inflationary pressures and the risk of recession.

As a result of the current uncertain economic conditions, we could be subject to ongoing risks, which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations.

Our financial position and results of operations are susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors, and the decline in the value of assets held by us or securing our loans.

We have not realized significant negative impact on our loan portfolio or asset quality to date as a result of the pandemic impact.

However, the economic pressures and uncertainties arising from the recent expansion in economic activity, increased consumer demand and rising interest rates to combat inflation have resulted in, and may continue to result in, specific changes in consumer and business spending and borrowing habits, given the higher interest rate environment, which could making it difficult to grow assets and income.

The extent to which the current economic conditions and lingering impacts of COVID-19 have a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including actions taken by governmental authorities response to inflationary trends and recessionary risks.

Critical Accounting Policies and Estimates

• Income tax expense was down $10.5 million from the prior year relative to the lower pre-tax income.

The effective tax rate of 21.1% was up slightly from the prior year related to nondeductible merger expenses.

Current Economic Conditions

Since 2022, economic activity has shown continued growth with improving gross domestic product results, low unemployment and increased demand for goods and services.

Inflationary pressures continue to a certain degree, however, monetary policy actions taken by the Federal Reserve over the last eighteen months have resulted in a significantly lower inflation rate in 2023 as compared to the prior year.

While positive indicators are present, there continues to be some uncertainty in economic conditions, and as such, we could be subject to ongoing risks which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations.

Our financial position and results of operations are susceptible, among other factors, to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors, and the decline in the value of assets held by us or securing our loans.

We have not realized significant negative impact on our loan portfolio or asset quality to date as a result of the current economic conditions.

The extent to which the current economic conditions have a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including actions taken by governmental authorities response to inflationary trends and recessionary risks.

Critical Accounting 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 policies inherently have a greater reliance on the use of estimates, assumptions, or judgments and as such, have a greater possibility of producing results that could be materially different than originally reported.

We have identified the determination of our ACL as well as business combinations, related fair value measurements, and goodwill to be the accounting areas that require the most subjective or complex judgments, estimates, and assumptions, and where changes in those judgments, estimates, and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements.

We have identified the determination of our ACL and related Allowance for Unfunded Commitments, as well as business combinations, related fair value measurements and goodwill determination to be the accounting areas that require the most subjective or complex judgments, estimates, and assumptions, and where changes in those judgments, estimates, and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements.

Our most significant accounting policies are presented in Note 1 to the accompanying consolidated financial statements.

These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Allowance for Credit Losses on Loans

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.

Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments

While management uses the best information available to establish the ACL, future adjustments to the ACL and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in

making the estimates.

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:

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

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

Our ACL is assessed at each balance sheet date and adjustments are recorded in the provision for loan losses on the consolidated statements of income.

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 allowance adequately considers all the factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change.

There are both internal factors (i.e., loan balances, historical loss rates, credit quality, the contractual lives of loans), external factors (i.e., economic conditions such as trends in housing prices, interest rates, GDP, inflation, and unemployment), and assumptions of probability of default and loss given default by loan category, that can impact the ACL estimate.

One of the most significant assumptions is the macroeconomic scenario forecasts that determine the economic variables utilized in the ACL model.

Due to the inherent uncertainty in the macroeconomic forecasts, we evaluate a baseline scenario quarterly, as well as upside or downside macroeconomic scenarios to assess the most reasonable scenario based on review of the variable forecasts for each scenario, comparison to expectations, and sensitivity of variations in each scenario.

The most significant variable in the economic forecasts is the national unemployment rate and changes in unemployment forecasts can have significant impact to the estimated ACL.

Other economic variables include national GDP, the national commercial real estate pricing index and the national home price index.

We use the national unemployment rate in all of our models regardless of the loan portfolio type, and we use a second economic variable in each cohort model depending on the loan portfolio type.

The ACL quantitative estimate is sensitive to changes in the economic variable forecasts during the twelve-month reasonable and supportable forecast period with a straight-line reversion over the next three years to long-term average loss factors.

There have been no changes to the reasonable and supportable period or reversion period in any year presented.

Although management believes its process for determining the ACL adequately considers all the 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 loan losses could be required that could adversely affect our earnings or financial position in future periods.

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

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

Any subsequent changes in the ACL on PCD assets is recorded through the provision for loan losses on the consolidated statements of income.

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

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For example, inflationary pressures and recessionary concerns leading to macroeconomic economic deterioration, 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 the 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 sections of this Item 7 titled “Nonperforming Assets” and “Allowance for Credit Losses and Loan Loss Experience” below.

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.

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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.

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.

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

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

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 section above.

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

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

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.

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

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

ASC 350-10 establishes standards for an impairment assessment of goodwill.

At December 31, 2022, we had $364.3 million of goodwill.

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

Generally, absent potential impairment indicators, we perform an annual assessment of whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value.

Generally, absent potential

impairment indicators, we perform an annual assessment of whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value.

Impairment indicators considered include the condition of the economy and banking industry;

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

At December 31, 2023, we had $478.8 million of goodwill.

Recent Accounting Standards and Pronouncements

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Net interest income amounted to $346.7 million in 2023, an increase of $21.8 million, or 6.7%, from the $324.9 million in 2022.

The increase was due primarily to the increase in average earnings assets from both organic growth and the Select acquisition completed in October 2021.

For 2022, average interest-earning assets increased $2.1 billion, or 26.9%, including growth of $1.3 billion in average loans and $1.0 billion in average securities.

Also contributing to the higher net interest income was the expansion of our NIM which, on a tax-equivalent basis, increased from 3.16% in 2021 to 3.28% in 2022.

The increase was due primarily to the increase in average earnings assets from both organic growth and the GrandSouth acquisition completed in January 2023 which contributed $1.02 billion in total loans.

For 2023, average interest-earning assets increased $1.4 billion, or 14.5%, including growth of $1.6 billion in average loans, partially offset by lower average securities.

Offsetting the higher net interest income related to the increase in average earning assets was the compression of our NIM which, on a tax-equivalent basis, declined to 3.06% in 2023 from 3.28% in 2022.

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.

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Net interest margin, tax-equivalent 3.06 % 3.28 % 3.16 %

The increase in our NIM was driven by the rising market interest rates as the Federal Reserve's monetary policies resulted in a 425 basis point rise in short-term rates between March and December 2022.

As demonstrated in the Average Balances and Net Interest Income Analysis table below, our total yield on average earning assets increased 16 basis points while we were able to maintain a low total cost of funds.

The decrease in our NIM was driven by the rising market interest rates as the Federal Reserve's monetary policies resulted in a 100 basis point rise in short-term rates between January and July 2023, after rates had risen 425 basis points in 2022.

The market-driven increase in rates on our liabilities occurred at a more rapid pace that the increase in yields on our assets, thus our total yield on average earning assets increased 86 basis points while our cost of

funds increased 116 basis points, driving the compression in the NIM in 2023 as compared to the prior year.

Our mix of earning assets remained fairly stable between 2022 and 2023.

Refer to the Average Balances and Net Interest Income Analysis table below for additional discussion.

Our NIM for all periods benefited from the net accretion income, primarily associated with purchase accounting premiums/discounts associated with acquisitions.

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1,770 2,856 2,707

Interest expense – reduced by premium amortization of deposits

Total interest income impact 13,277 8,477 8,814

Interest expense – (increased) reduced by (discount accretion) premium amortization of deposits (3,101) 593 295

Interest expense – increased by discount accretion of borrowings

(842) (254) (249)

Total net interest expense impact (3,943) 339 46

Impact on net interest income $ 9,334 8,816 8,860

$ 8,816 8,860 6,247

The most significant component of the purchase accounting adjustments in each year was loan discount accretion on purchased loans.

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

Alternately, levels of accretion will increase as a result of acquisitions and related additions to loan discounts on acquired portfolios which are accreted to income as experienced in 2021 with the Select acquisition.

At December 31, 2022, 2021, and 2020, unaccreted loan discount on purchased loans amounted to $11.6 million, $17.2 million, and $8.9 million, respectively.

The Select acquired portfolio comprises the majority of the remaining unaccreted loan discount at December 31, 2022.

At December 31, 2023 and 2022, unaccreted loan discount on purchased loans amounted to $24.0 million and $11.6 million, respectively.

The GrandSouth acquired portfolio comprises the majority of the remaining unaccreted loan discount at December 31, 2023.

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

The level of SBA loan discount accretion will fluctuate relative to the SBA loan portfolio balances.

At December 31, 2022, 2021, and 2020, unaccreted loan discount on SBA loans amounted to $4.3 million, $6.0 million, and $7.3 million, respectively.

The following table presented the major components of the net interest income and NIM.

At December 31, 2023 and 2022, unaccreted loan discount on SBA loans amounted to $3.5 million and $4.3 million, respectively.

The following table presents the major components of the net interest income and NIM.

Average Balances and Net Interest Income Analysis

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296,287 1.51 % 4,485 296,803 1.48 % 4,387 162,878 1.49 % 2,402

Other interest-earning assets, primarily overnight funds

339,419 1.48 % 5,007 485,337 0.50 % 2,427 455,349 0.75 % 3,431

Short-term investments, primarily interest-bearing cash 314,537 4.24 % 13,330 339,419 1.48 % 5,007 485,337 0.50 % 2,427

Total interest-earning assets

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Liabilities and Equity

Interest-bearing checking accounts

$ 1,545,573 0.08 % $ 1,219 1,353,172 0.07 % 919 1,019,773 0.12 % 1,208

Money market accounts

2,515,897 0.22 % 5,610 1,923,614 0.16 % 3,158 1,367,851 0.34 % 4,632

Savings accounts

739,681 0.06 % 459 607,452 0.07 % 443 467,682 0.15 % 711

Interest-bearing checking $ 1,457,272 0.42 % $ 6,192 1,545,573 0.08 % 1,219 1,353,172 0.07 % 919

Money market deposits 3,355,992 2.34 % 78,643 2,515,897 0.22 % 5,610 1,923,614 0.16 % 3,158

Savings deposits 668,730 0.15 % 1,024 739,681 0.06 % 459 607,452 0.07 % 443

Other time deposits 737,330 2.58 % 19,023 551,852 0.46 % 2,541 432,506 0.39 % 1,722

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Total interest-bearing deposits 6,562,993 1.75 % 114,866 5,640,197 0.20 % 11,349 4,673,142 0.17 % 7,881

5,640,197 0.20 % 11,349 4,673,142 0.17 % 7,881 3,711,467 0.44 % 16,301

Short-term borrowings 374,254 5.15 % 19,289 52,446 3.45 % 1,808 — — % —

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7,037,105 2.02 % 142,101 5,758,001 0.28 % 16,103 4,736,343 0.13 % 9,523

Noninterest-bearing checking accounts

3,643,308 2,728,768 1,932,823

Noninterest-bearing checking 3,613,973 3,643,308 2,728,768

Total sources of funds 10,651,078 1.33 % 9,401,309 0.17 % 7,465,111 0.13 %

9,401,309 0.17 % 7,465,111 0.13 % 5,830,735 0.34 %

Other liabilities

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Overall, as demonstrated in the above table, net interest income grew $21.8 million in 2023.

Higher earning asset volumes were the primary driver of the increase in income.

In addition, market rate increases were a contributing factor as the Federal Reserve raised short-term rates 425 basis points during the year.

The Federal Reserve has continued to increase short-term interest rates into 2023 as they implement monetary policy in an effort to combat inflation.

Higher earning asset volumes were the primary driver of the increase in net interest income which was offset by increases in rates on interest-bearing liabilities.

• For 2023, higher loan volume was the primary contributor to increased interest income, driving $78.2 million of the increase.

Higher market rates contributed to an additional $62.5 million of loan interest income.

Variable rate loans comprise approximately 20% of the loan portfolio, accordingly, we are limited as to the magnitude of the impact we experience from each rate increase.

• Increases in both volume of average investment securities and yields on the portfolio resulted in additional interest income of $23.4 million in 2022.

• Average balances of other interest-earning assets (primarily overnight funds and presold mortgages held for sale) declined in 2022 and resulted in a $1.4 million decrease in interest income.

The impact of lower volumes was more than offset by the increase in market rates contributing $4.0 million in additional interest income for the year.

• The increase of $3.5 million in interest expense on deposits was a combination of higher volumes, primarily in money market deposit accounts and other time deposits, and higher rates on accounts as as we have begun to experience some pressure to reprice deposits given the increase in market rates.

Variable rate loans comprise approximately 19% of the loan portfolio and, accordingly, the magnitude of the impact we experience from each rate increase is limited.

• Decreases in the overall volume of average investment securities, somewhat offset by higher yields on the portfolio, resulted in decreased interest income of $1.2 million in 2023.

• Although partially offset by lower average balances, higher yields on other interest-earning assets (primarily interest-bearing cash balance) in 2023 resulted in a $8.3 million higher interest income for the year.

• The increase of $103.5 million in interest expense on deposits was driven by higher rates on accounts as we repriced deposits during the year in response to the market increases and to retain deposits to meet our funding needs, combined with higher volumes, primarily in money market deposit accounts and other time deposits.

• Higher levels of borrowings, primarily in short-term FHLB advances to fund loan demand and deposit fluctuations, resulted in an increase in borrowings interest expense of $16.1 million in 2023.

The more significant contributor to the increase in interest expense was the repricing of our variable rate trust preferred securities and the higher cost of short-term advances, which added $2.1 million to interest expense for the year.

This was coupled with the higher cost of short-term advances and increases on our variable rate trust preferred securities, which added $6.4 million to interest expense for the year.

Provision for Loan Losses and Provision for Unfunded Commitments

We implemented CECL effective January 1, 2021.

Prior to that, the provision for loan losses was based on the incurred loss impairment framework for loan losses under ASC 310-30 which represented an estimate of probable incurred losses in the loan portfolio at the end of each reporting period.

Under CECL, the provision 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 under CECL 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 loan losses and provision for unfunded commitments which represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances.

The provision for loan losses has been determined under ASC 326 since our implementation of CECL.

The provision for loan losses represents our current estimate of life of loan credit losses in the loan portfolio and the provision for unfunded commitments represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances.

Our estimate of credit losses under CECL 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 allowance for unfunded commitments, as well as the resulting provision for loan losses and provision for unfunded commitments.

The allowance for unfunded commitments is included in "Other liabilities" in the consolidated balance sheets.

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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 the CECL model.

The increase in the provision for the year ended December 31, 2022 as compared to the prior year was a combination of loan growth during the year, which increased $583.4 million, and updated economic forecasts and loss driver inputs to the CECL model.

We subscribe to a third-party service which provides a quarterly macroeconomic scenarios for the United States economy.

The primary contributor to the higher provision for 2023 was the 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.

The increase related to acquired and organic growth during the year was partially offset by updated economic forecasts and loss driver inputs to the CECL model.

We subscribe to a third-party service which provides quarterly macroeconomic scenarios for the United States economy.

For 2023, we utilized the baseline forecast, which incorporates an equal probability of the United States economy performing better or worse than the projection.

The economic forecasts throughout the year have projected general weakening of the economy demonstrated in higher projected unemployment rates, lower GDP, and declining price indices for both commercial real estate and residential mortgages.

These worsening economic projections translated to higher forecasted losses in our loan portfolio and a higher estimated ACL.

Also under the CECL method, in 2022 we recorded a reduction in the provision for unfunded commitments of $0.2 million compared to $5.4 million in provision for unfunded commitments for 2021.

The economic forecasts throughout the year have projected general improvement of the economy demonstrated in lower projected unemployment rates, improved GDP, and increasing price indices for both commercial real estate and residential mortgages.

These improving economic projections translated to lower forecasted losses in our loan portfolio and, thus a lower estimated ACL, exclusive of portfolio growth.

Also under the CECL method, in 2023 we recorded a reduction in the provision for unfunded commitments of $1.9 million compared to $0.2 million for 2022.

Changes in the level of provision each year are generally related to fluctuations in the level of available credit lines and updated loss drivers.

Additional discussion on the CECL method and 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.

Additional discussion of the CECL method and 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 $57.5 million in 2023, $68.0 million in 2022, and $73.6 million in 2021.

Management evaluates noninterest income on a non-GAAP basis that excludes items such as securities gains and losses and other miscellaneous gains and losses because we believe excluding those items results in a more meaningful reflection of noninterest income from recurring sources.

We refer to this as "adjusted noninterest income." A reconciliation of reported noninterest income to adjusted noninterest income is presented in the table below.

Adjusted noninterest income amounted to $60.6 million in 2022, $73.2 million in 2021, and $73.4 million in 2020.

Management evaluates noninterest income on a non-GAAP basis that excludes items such as securities gains and losses and other gains and losses because we believe excluding those items results in a more meaningful reflection of noninterest income from regular operations.

We refer to this as "adjusted noninterest income." Adjusted noninterest income amounted to $54.8 million in 2023, $60.6 million in 2022, and $73.2 million in 2021.

A reconciliation of reported noninterest income to adjusted noninterest income is presented in the table below.

Drivers of the more significant fluctuations follow the table.

Noninterest Income

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$ 16,800 15,523 12,317

Other service charges, commissions and fees - interchange income, net 14,996 18,480 14,142

Other service charges, commissions, and fees - other 11,298 7,036 5,955

Other service charges and fees -bankcard and interchange income, net 9,319 14,996 18,480

Other service charges - other 12,951 11,298 7,036

Fees from presold mortgage loans

1,613 2,102 10,975

Commissions from sales of insurance and financial products

5,195 6,947 8,848

Commissions from sales of financial products 5,503 5,195 6,947

SBA consulting fees

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2,489 5,076 7,329

Bank-owned life insurance income

3,847 2,885 2,533

Securities (losses) gains, net — (1,237) 8,024

Other gains (losses), net

7,340 1,648 (54)

Noninterest income

67,985 73,611 81,346

Bank-owned life insurance ("BOLI") income 4,350 3,847 2,885

Securities losses, net — — (1,237)

Other gains, net 2,662 7,340 1,648

Total noninterest income 57,490 67,985 73,611

Non-GAAP adjustments - exclude:

Securities losses (gains), net — 1,237 (8,024)

Other (gains) losses, net

(7,340) (1,648) 54

Securities losses, net — — 1,237

Other gains, net (2,662) (7,340) (1,648)

Adjusted noninterest income $ 54,828 60,645 73,200

Service charges on deposit accounts increased $1.3 million, or 8.2%, in 2023 as compared to 2022.

The increase in 2022 was primarily due to growth in the number of checking accounts generating fees, as well as higher NSF activity during the year.

In addition to the organic growth we experienced during the year, the acquisition of Select deposit accounts in the fourth quarter of 2021 contributed to the higher service charge income during 2022.

Total "Other service charges, commissions and fees - interchange income,net" from bankcard activity amounted to $15.0 million in 2022, a 18.9% decrease from the $18.5 million in 2021.

While the number of cards outstanding and volume of transactions continues to grow, we became subject to the Durbin Amendment limitations on interchange fees effective July 1, 2022.

The decrease in revenue is a direct result of the lower interchange fee per transaction for the last six months of the year.

We anticipate lower levels of interchange revenue going forward as we will continue to be subject to the Durbin Amendment limitations.

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

The increase in this item in 2022 of $4.3 million, or 60.6%, was primarily due to growth in the number of accounts and related transaction activity, as well as the Bank's deposit base increases.

Fees from presold mortgages amounted to $2.1 million in 2022, a decline of $8.9 million or 80.8% from 2021.

Mortgage loan refinancing and origination volumes declined significantly during the year due primarily to the rapid increases in mortgage interest rates.

Lower originations, combined with a higher percentage of mortgages retained in the portfolio during 2022 as compared to the prior year, resulted in the lower revenue from mortgage loan sales.

We anticipate lower revenue from sales of mortgage loans as long as the higher interest rate environment continues and originations are slower.

Commissions from sales of insurance and financial products amounted to $5.2 million in 2022, down $1.8 million from 2021.

The decrease is due to the sale of the majority of the assets of First Bank Insurance in June 2021.

The reduction in SBA consulting services in 2022 of $4.6 million, or 63.9%, is primarily related to the wind-down of the PPP loan program.

SBA Complete recognized $3.2 million in PPP fees during 2021 as compared to $355,000 in 2022.

SBA loan sale gains declined $2.3 million in 2022 related in part to lower loan originations in the current year as compared to 2021.

Also contributing to the lower fees was the expiration of the 90% SBA guarantee level effective during 2021 as a part of the CARES Act, which resulted in a lower portion of each loan being available to be sold in 2022.

The 33.3% increase in BOLI income in 2022 was related to the acquisition of Select in the fourth quarter of 2021 which had $31.1 million in BOLI assets as of the date of acquisition.

“Other gains (losses), net” amounted to a net gain of $7.3 million for 2022 related primarily to death benefits realized on BOLI.

The 2021 gain was related to the sale of First Bank Insurance during that year.

The increase in 2023 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 amounted to $9.3 million in 2023, a 37.9% decrease from the $15.0 million in 2022.

The decrease of $5.7 million was a direct result of the Durbin Amendment limitation on debit card interchange fees becoming applicable to the Company beginning in July 2022.

The reduction in interchange rates was partially offset by higher volumes of accounts and transactions.

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.

Also included in this category are 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 in 2023 of $1.7 million, or 14.6%, was due in part to the higher number of accounts and volume of transactions, combined with lower servicing right amortization expense given the current high interest rate environment.

SBA consulting fees and SBA loan sale gains both declined in 2023 primarily due to fewer third-party bank SBA clients, slower loan originations and lower premiums available on SBA loan sales given the market conditions during the year.

BOLI income increased 13.1% in 2023, primarily related to the acquisition of GrandSouth in the first quarter of 2023 which had $15.1 million in BOLI assets as of the date of acquisition.

Other gains, net amounted to a net gain of $2.7 million for 2023.

For 2022, the balance consisted primarily of death benefits realized on BOLI policies which were nominal in 2023.

Noninterest Expenses

Total noninterest expenses totaled $254.4 million, $195.2 million, and $184.7 million, for 2023, 2022, and 2021, respectively.

Management evaluates noninterest expense on a non-GAAP basis that excludes items such as merger and acquisition expense, amortization of intangible assets, and foreclosed property (gain) losses, because we believe excluding those items results in a more meaningful reflection of noninterest expense from regular operations.

We refer to this as "adjusted noninterest expense." The following table presents the primary components of noninterest expense and a reconciliation of reported noninterest expense to adjusted noninterest expense.

Noninterest Expenses

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Equipment related expenses 6,027 5,808 4,492

Merger and acquisition expenses 5,072 16,845 —

Amortization of intangible assets 3,684 3,531 3,956

Bankcard expenses 1,653 4,609 3,599

Credit card rewards and other bankcard expenses 5,288 1,653 4,609

Telephone and data lines 3,960 3,631 3,087

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Advertising and marketing 4,055 3,032 2,580

Corporate and FDIC insurance costs 4,858 3,986 3,136

Non-credit losses 4,766 2,730 1,136

FDIC and corporate insurance costs 9,257 4,858 3,986

Other operating expenses 21,805 16,661 15,322

Total $ 195,220 184,656 161,298

In general, between 2021 and 2022, the 5.7% increase in total noninterest expenses, as well as the increases in most of the individual expense line items in the above table, was driven by higher operating expense from additional personnel and locations, as well as increases in the number of customer accounts and transactions resulting from the Select acquisition which occurred in the fourth quarter of 2021.

We anticipate increases in operating expenses as we continue to grow organically and through acquisitions.

The more notable variances in expense categories for 2022 follows.

Total personnel expense increased $14.5 million, or 14.0% in 2022, as compared to the prior year.

Within personnel expense, salaries expense increased $9.5 million, or 10.9%, and benefits increased $5.0 million or 30.2%, driven by the addition of full time associates, combined with the increase in employee insurance costs related to higher claims paid under our self-insured health insurance plan.

Merger and acquisition expenses were down $11.8 million in 2022 as compared to the prior year.

2022 merger expenses were related to the GrandSouth acquisition and were comprised primarily of investment banking fees and other professional fees, and conversion services.

The 2021 expenses were related to the Select acquisition and were comprised primarily of investment banking fees and other professional fees, severance costs, contract termination fees, and data processing conversion expenses.

Merger and acquisition expenses 13,695 5,072 16,845

Amortization of intangible assets 8,003 3,684 3,531

Foreclosed property (gains) losses, net (150) (372) 24

Total noninterest expense 254,379 195,220 184,656

Non-GAAP adjustments - exclude:

Merger and acquisition expenses (13,695) (5,072) (16,845)

Amortization of intangible assets (8,003) (3,684) (3,531)

Foreclosed property (gains) losses, net 150 372 (24)

Adjusted noninterest expense $ 232,831 186,836 164,256

In general, the 30.3% increase in total noninterest expenses in 2023 as compared to 2022, was driven by the acquisition of eight GrandSouth branch locations and related branch and support personnel which resulted in higher salary and benefit expense (up $22.1 million, as compared to 2022) as well as other facilities (up $2.2 million from the prior year) and support-related costs.

The current year included merger and acquisition expenses of $13.7 million, an increase of $8.6 million from 2022, and higher intangible amortization which increased $4.3 million from the prior year, both of which were related to the GrandSouth acquisition.

While intangible amortization will continue, it is anticipated to be at a declining rate and we do not anticipate any additional merger and acquisition costs related to GrandSouth.

FDIC and corporate insurance costs increased $4.4 million in 2023 driven by the general FDIC rate increase effective January 1, 2023, combined with the acquired deposits from GrandSouth.

Non-credit losses increased $2.0 million as compared to the prior year driven by an increase in check fraud experienced in 2023.

The increase in bankcard expenses was related to higher volumes of customer accounts and transactions, combined with a 2022 rewards accrual reduction for expired benefits which resulted in lower expense in 2022 and a return to a more normal level of expense for 2023.

Also contributing to higher noninterest expense in 2023 were increases for software costs, data processing, professional fees, and advertising, as well as travel and training and franchise tax (both included in "other operating expenses") related to the GrandSouth acquisition, including the transition of new customers and higher account and transactions volumes.

We recorded income tax expense of $27.8 million in 2023, $38.3 million in 2022, and $24.7 million in 2021.

Our effective tax rates were fairly stable at 20.7% for 2022, 20.5% for 2021, and 21.0% for 2020.

We expect our effective tax rate to be approximately 21.0% in 2023.

Our effective tax rates were at 21.1% for 2023, 20.7% for 2022, and 20.5% for 2021.

The slight increase in effective tax rate for 2023 was attributable primarily to merger and acquisition expenses recorded resulting in non-deductible adjustments for tax purposes.

ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION

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The diversity of the economic bases of our market areas has historically provided a stable lending environment.

Total loans amounted to $6.7 billion at December 31, 2022, an increase of $583.4 million, or 9.6%, from December 31, 2021.

Net loan growth for the year was all organic growth as there were no acquisitions in 2022.

Total loans amounted to $8.2 billion at December 31, 2023, an increase of $1.5 billion, or 22.3%, from December 31, 2022.

The GrandSouth acquisition was completed on January 1, 2023 and contributed $1.02 billion in loans.

The acquired loan portfolio mix was similar in nature to our portfolio mix.

Loan growth for the year was as follows:

($ in thousands)

Loans at December 31, 2022 $ 6,665,145

Organic loan growth 464,883

Growth from acquisition 1,020,074

Loans at December 31, 2023 $ 8,150,102

Organic loan growth percentage 7.0 %

Total loan growth percentage 22.3 %

The following table provides a summary of the loan portfolio composition at each of the past five year ends.

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Loans Amount % of

Commercial, financial, and agricultural

$ 641,941 9 % 648,997 11 % 782,549 17 % 504,271 11 % 457,037 11 %

Real estate – construction, land development & other land loans

934,176 14 % 828,549 13 % 570,672 12 % 530,866 12 % 518,976 12 %

Real estate mortgage – residential (1-4 family) first mortgages 1,195,785 18 % 1,021,966 17 % 972,378 21 % 1,105,014 25 % 1,054,176 25 %

Real estate mortgage – home equity loans/lines of credit 323,726 5 % 331,932 5 % 306,256 6 % 337,922 8 % 359,162 8 %

Real estate mortgage – commercial and other 3,510,261 53 % 3,194,737 53 % 2,049,203 43 % 1,917,280 43 % 1,787,022 42 %

Commercial and industrial $ 905,862 11 % 641,941 9 % 648,997 11 % 782,549 17 % 504,271 11 %

Construction, development & other land loans 992,980 12 % 934,176 14 % 828,549 13 % 570,672 12 % 530,866 12 %

Commercial real estate - owner occupied 1,259,022 16 % 1,036,270 16 % 991,775 16 % 754,570 16 % 816,325 18 %

Commercial real estate - non owner occupied 2,528,060 31 % 2,123,811 32 % 1,813,849 31 % 1,096,781 23 % 893,776 20 %

Multi-family real estate 421,376 5 % 350,180 5 % 389,113 6 % 197,852 4 % 207,179 5 %

Residential 1-4 family real estate 1,639,469 20 % 1,195,785 18 % 1,021,966 17 % 972,378 21 % 1,105,014 25 %

Home equity loans/lines of credit 335,068 4 % 323,726 5 % 331,932 5 % 306,256 6 % 337,922 8 %

Consumer loans 68,443 1 % 60,659 1 % 57,238 1 % 53,955 1 % 56,172 1 %

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Except for construction, land development, and other land loans, the majority of our real estate loans are personal and commercial loans where cash flow from the borrower’s occupation or business is the primary repayment source, with the real estate pledged providing a secondary repayment source.

The largest component of our portfolio, commercial real estate loans, remained unchanged at 53% of the total portfolio at December 31, 2022 as compared to the prior year.

Residential real estate loans remained the second largest component at 18% of total loans at December 31, 2022.

This percentage is fairly stable with the prior year, but has declined somewhat over the last several years related to the increase in consumers refinancing their home loans and the Bank selling more residential loans in the secondary market prior to 2022.

Commercial, financial, and agricultural loans comprised 9% of total loans at December 31, 2022, down somewhat from the prior year end, but was in line with the historical level for this category.

The higher percentage for this category in 2020 was related to PPP loans made under the provisions of the CARES Act, which were forgiven in accordance with the PPP loan provisions from late 2020 through early 2022.

The largest component of our portfolio is non-owner occupied commercial real estate loans, followed by residential 1-4 family real estate and owner occupied commercial real estate loans.

As demonstrated in the table above, while there has been some variations in the relative percentage of each loan category to the total portfolio over the years, the nature of our portfolio has not changed drastically from the prior year or the historical averages.

percentage for commercial and industrial loan category in 2020 was an anomaly related to Paycheck Protection Program ("PPP") loans made under the provisions of the CARES Act, which were forgiven in accordance with the PPP loan provisions starting in late 2020 and through early 2022.

The percentage of residential real estate loans has declined somewhat over the last several years as consumers refinanced their home loans during the lower interest rate environment from 2020 through early 2022 and the Bank was able to sell more of these loans in the secondary market.

With the increase in interest rates starting in 2022, the refinance activity slowed and the Bank retained more loans in this category on the balance sheet.

A summary of scheduled loan maturities, based on contractual maturity dates, over certain time periods is presented below, with fixed rate loans and adjustable rate loans shown separately.

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Variable Rate Loans:

Commercial, financial, and agricultural $ 89,720 7.38 % 42,777 7.32 % 40,309 8.44 % 306 9.15 % 173,112 7.64 %

Real estate – construction, land development & other land loans 190,224 8.14 % 89,360 7.63 % 59,875 6.91 % 9,131 7.98 % 348,590 7.79 %

Real estate mortgage – residential (1-4 family) first mortgages 5,231 8.05 % 11,467 7.73 % 20,057 5.26 % 175,052 3.90 % 211,807 4.23 %

Real estate mortgage – home equity loans/lines of credit 21,627 7.56 % 24,604 7.83 % 266,472 7.60 % — — % 312,703 7.62 %

Real estate mortgage – commercial and other 72,561 7.58 % 76,090 7.28 % 48,862 6.47 % 88,538 7.25 % 286,051 7.21 %

Commercial and industrial $ 118,797 8.41 % 42,027 8.64 % 41,858 10.47 % 311 10.52 % 202,993 8.90 %

Construction, development & other land loans 177,259 9.06 % 167,350 8.33 % 2,672 7.85 % 2,649 9.10 % 349,930 8.70 %

Commercial real estate - owner occupied 18,922 8.96 % 34,543 8.08 % 26,069 7.50 % 65,715 9.34 % 145,249 8.67 %

Commercial real estate - non owner occupied 27,759 8.50 % 113,385 7.90 % 26,042 6.90 % 20,480 8.63 % 187,666 7.93 %

Multi-family real estate 1,658 7.82 % 3,399 8.32 % 15,217 7.60 % — — % 20,274 7.73 %

Residential 1-4 family real estate 4,306 9.39 % 27,749 8.08 % 27,255 6.50 % 272,189 4.38 % 331,499 4.80 %

Home equity loans/lines of credit 10,365 8.87 % 24,434 8.78 % 279,818 8.64 % 16 8.50 % 314,633 8.65 %

Consumer loans 5,672 9.34 % 2,491 10.79 % 19 8.13 % 814 10.84 % 8,996 10.13 %

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Fixed Rate Loans:

Commercial, financial, and agricultural 18,471 4.17 % 181,272 4.17 % 166,945 3.26 % 92,701 2.64 % 459,389 3.50 %

Real estate – construction, land development & other land loans 196,924 3.78 % 157,603 4.36 % 229,851 3.74 % 198 4.50 % 584,576 3.92 %

Real estate mortgage – residential (1-4 family) first mortgages 31,458 4.94 % 217,009 4.49 % 171,560 4.00 % 559,123 3.63 % 979,150 3.91 %

Real estate mortgage – home equity loans/lines of credit 981 6.20 % 3,688 5.12 % 4,753 4.99 % 205 6.45 % 9,627 5.19 %

Real estate mortgage – commercial and other 136,176 4.64 % 1,364,263 4.13 % 1,707,373 3.64 % 3,250 3.92 % 3,211,062 3.89 %

Commercial and industrial 146,477 17.22 % 264,361 4.89 % 181,722 3.62 % 101,485 2.95 % 694,045 6.97 %

Construction, development & other land loans 156,464 5.26 % 250,483 4.90 % 235,703 4.75 % — — % 642,650 4.93 %

Commercial real estate - owner occupied 53,858 4.94 % 540,464 4.64 % 512,324 4.11 % 86 8.50 % 1,106,732 4.41 %

Commercial real estate - non owner occupied 124,230 4.76 % 1,318,860 4.26 % 889,854 3.94 % 177 6.50 % 2,333,121 4.16 %

Multi-family real estate 10,062 4.56 % 232,889 4.02 % 158,150 3.76 % — — % 401,101 3.93 %

Residential 1-4 family real estate 38,134 5.21 % 328,154 4.71 % 161,044 4.35 % 775,094 3.74 % 1,302,426 4.08 %

Home equity loans/lines of credit 6,269 3.50 % 7,252 5.99 % 3,912 5.39 % 300 6.14 % 17,733 4.98 %

Consumer loans 19,720 6.07 % 29,546 7.47 % 7,188 7.29 % 2,392 16.78 % 58,846 7.95 %

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As of December 31, 2023, the percentages of variable rate loans and fixed rate loans as compared to total performing loans were 19% and 81%, respectively.

In recent years, the mix of variable rate loans to fixed rate loans has been shifting to more fixed rate loans given the low interest rate environment prior to 2022 and borrowers' preference to lock in low rates.

While fixed rate loans present risk to our Company, in particular in rising interest rate environment as we have experienced in 2022, we measure our interest rate risk closely.

In recent years, the mix of variable rate loans to fixed rate loans has been shifting to more fixed rate loans given the low interest rate environment prior to mid-2022 and borrowers' preference to lock in low rates.

While fixed rate loans present risk to our Company, in particular in rising interest rate environment as we have experienced starting in 2022 and into 2023, we measure our interest rate risk closely.

Refer to additional discussion in the section “Interest Rate Risk” below.

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Nonperforming Assets

NPAs include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed properties.

NPAs include 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.

Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because management has determined that the collection of interest is doubtful.

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and (3) principal charged-off, if appropriate, may necessitate additional provisions for loan losses that are charged against earnings.

As a matter of policy, we generally place all loans that are past due 90 or more days on nonaccrual basis.

There were no accruing loans that are past due 90 or more days at December 31, 2023 and December 31, 2022.

In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms.

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Nonaccrual loans $ 32,208 28,514 34,696 35,076 24,866

Restructured loans - accruing 9,121 13,866 9,497 9,053 13,418

Modifications to borrowers in financial distress 11,719 — — — —

TDRs - accruing — 9,121 13,866 9,497 9,053

Accruing loans >90 days past due — — 1,004 — —

Total nonperforming loans 43,927 37,635 49,566 44,573 33,919

Foreclosed properties 658 3,071 2,424 3,873 7,440

Foreclosed real estate 862 658 3,071 2,424 3,873

Total nonperforming assets $ 44,789 38,293 52,637 46,997 37,792

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Nonperforming loans to total loans 0.54 % 0.56 % 0.82 % 0.94 % 0.76 %

Nonperforming assets to total loans and foreclosed properties 0.57 % 0.87 % 0.99 % 0.85 % 1.02 %

Nonperforming assets to total loans and foreclosed real estate 0.55 % 0.57 % 0.87 % 0.99 % 0.85 %

Nonperforming assets to total assets 0.37 % 0.36 % 0.50 % 0.64 % 0.62 %

Allowance for credit losses to total loans 1.35 % 1.36 % 1.30 % 1.11 % 0.48 %

Allowance for credit losses to nonaccrual loans 341.07 % 319.03 % 227.08 % 149.36 % 86.05 %

As a matter of policy, we generally place all loans that are past due 90 or more days on nonaccrual basis.

There were no accruing loans that are past due 90 or more days at December 31, 2022.

At December 31, 2021, there were $1.0 million in this category related to two loans acquired from Select, one of which was renewed and the other of which was placed on nonaccrual in January 2022.

We continue to see improving trends in asset quality.

Our total nonperforming loans to total loans declined 26 basis points to 0.56% at December 31, 2022, while our total NPA ratio decreased 14 basis points to 0.36% at December 31, 2022.

The increase in NPAs in 2021 was a direct result of the Select acquisition, combined with the lingering impact of the Covid-19 pandemic.

Allowance for credit losses to nonperforming loans 250.08 % 241.71 % 158.96 % 117.53 % 63.09 %

Our asset quality continues to be strong as demonstrated by stable or improving trends in all ratios as presented in the table above.

Our total nonperforming loans to total loans was 0.54% at December 31, 2023, while our total NPA ratio was 0.37% at that date.

Additional discussion of the credit quality classification status of our loans is contained in Note 4 to our consolidated financial statements.

"Commercial and industrial" is the largest category of nonaccrual loans, at $9.9 million, or 30.7% of total nonaccrual loans, followed by "Commercial real estate - non owner occupied" at $7.2 million, or 22.4% of total nonaccrual loans and "Commercial real estate - owner occupied" at $7.0 million, or 21.9% of total nonaccrual loans.

As of December 31, 2023, SBA loans accounted for approximately $18.2 million of our nonaccrual loans, or 56.6%, of the total SBA portfolio, and carried guarantees from the SBA totaling $9.3 million.

This is compared to $16.8 million, or 9.8%, of the non-PPP SBA portfolio at December 31, 2021.

This is compared to $14.6 million, or 9.5%, of the SBA portfolio at December 31, 2022.

We continue to closely monitor the SBA loan portfolio and give it appropriate consideration when evaluating the adequacy of the ACL as those loans are generally considered inherently more risky than other loans in our portfolio.

Refer to additional discussion of the ACL below.

As shown in Note 4 to the consolidated financial statements, our accruing past due loans (30 or more days) have declined $7.8 million million to total $8.2 million at December 31, 2022.

As shown in Note 4 to the consolidated financial statements, our accruing past due loans (30 or more days) totaled $29.8 million at December 31, 2023, with the majority (74.8%) being in the residential 1-4 family real estate category with the increase related primarily to the timing of year end over a weekend.

We classify loans as “special mention” when there is a defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not corrected.

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These loans have a great risk of further deterioration and potential loss to the Bank.

Foreclosed properties includes primarily foreclosed real estate.

Total foreclosed real estate amounted to $0.7 million at December 31, 2022, down from $3.1 million in 2021.

The decrease is related to the sale of properties in 2022 as we continue to see active real estate markets and steady sales activity.

Only one property was added to foreclosed real estate during 2022 while we completed the sale of six properties during the year.

Total foreclosed real estate amounted to $0.9 million at December 31, 2023, compared to $0.7 million in 2022.

Six property were added to foreclosed real estate during 2023 and we completed the sale of six properties during the year.

Four of the 2023 additions were within the population that sold in 2023.

Allowance for Credit Losses and Loan Loss Experience

The total allowance for credit losses amounted to $109.9 million at December 31, 2023 compared to $91.0 million at December 31, 2022.

As discussed previously in the Provision for Loan Losses section, the increase in the ACL at December 31, 2022 as compared to the prior year was driven by the loan growth experienced during the year requiring an allowance be provided, combined with the deteriorating economic forecasts and loss driver inputs to the CECL model.

The economic forecasts provided by a third-party service for our CECL model calculations have projected general weakening of the economy demonstrated in higher projected unemployment rates, lower GDP, and declining price indices for both commercial real estate and residential mortgages.

These worsening economic projections translated to higher forecasted life of loan losses in our portfolio and a higher estimated ACL.

Fluctuations in the ACL 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.

As discussed previously in the Provision for Loan Losses section, much of the change to the level of ACL during the year ended December 31, 2023 is attributed to the acquisition of GrandSouth.

In addition to the initial allowance recorded for PCD loans of $5.6 million, the Company recorded an initial provision of $12.2 million related to the non-PCD loans in the GrandSouth portfolio.

The balance of the change was a result of loan growth during the year and updated prepayment speed estimates in the CECL model, which have slowed with market rate increases, thus requiring additional allowance for the estimated longer life of loans.

Somewhat offsetting the prepayment speed assumptions in the CECL model were updated economic forecasts which have generally projected improvement of the economy demonstrated in lower projected unemployment rates, improved GDP, and increasing price indices for both commercial real estate and residential mortgages.

The ACL reflects our estimate of life of loan expected credit losses that will result from the inability of our borrowers to make required loan payments.

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When a loan no longer shares similar risk characteristics with its segment, the loan is evaluated on an individual basis applying a DCF or asset approach for collateral-dependent loans.

Refer to Note 1 of the consolidated financial statements for a discussion of our CECL methodology used to determine the ACL.

Refer also to the discussion of the critical estimates utilized in the ACL in the prior section, Critical Accounting Estimates, and refer to Note 1 of the consolidated financial statements for a discussion of our CECL methodology used to determine the ACL.

Our assessment of the ACL involves uncertainty and judgment and is subject to change in future periods.

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The following table sets forth the allocation of the ACL by loan category at the dates indicated.

However, the ACL is available to absorb losses in all categories.

However, the ACL is available to absorb losses in any and all categories.

Allocation of the Allowance for Credit Losses

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Loan Category

Commercial, financial, and agricultural

$ 17,718 2.76 % 16,249 2.50 % 11,316 1.45 % 4,553 0.90 % 2,889 0.63 %

Real estate – construction, land development

15,128 1.62 % 16,519 1.99 % 5,355 0.94 % 1,976 0.37 % 2,243 0.43 %

Real estate mortgage – residential (1-4 family) first mortgages 11,354 0.95 % 8,686 0.85 % 8,048 0.83 % 3,832 0.35 % 5,197 0.49 %

Real estate mortgage - home equity loans/lines of credit 3,158 0.98 % 4,337 1.31 % 2,375 0.78 % 1,127 0.33 % 1,665 0.46 %

Real estate mortgage - commercial and other 40,709 1.16 % 30,342 0.95 % 23,603 1.15 % 8,938 0.47 % 7,983 0.45 %

Commercial and industrial $ 21,227 2.34 % 17,718 2.76 % 16,249 2.50 % 11,316 1.45 % 4,553 0.90 %

Construction, development & other land loans 13,940 1.40 % 15,128 1.62 % 16,519 1.99 % 5,355 0.94 % 1,976 0.37 %

Commercial real estate - owner occupied 18,218 1.45 % 14,972 1.44 % 12,317 1.24 % 10,608 1.41 % 5,186 0.64 %

Commercial real estate - non owner occupied 24,916 0.99 % 22,780 1.07 % 16,789 0.93 % 11,465 1.05 % 2,990 0.33 %

Multi-family real estate 3,825 0.91 % 2,957 0.84 % 1,236 0.32 % 1,530 0.77 % 762 0.37 %

Residential 1-4 family real estate 21,396 1.31 % 11,354 0.95 % 8,686 0.85 % 8,048 0.83 % 3,832 0.35 %

Home equity loans/lines of credit 3,339 1.00 % 3,158 0.98 % 4,337 1.31 % 2,375 0.78 % 1,127 0.33 %

Consumer loans 2,992 4.37 % 2,900 4.78 % 2,656 4.64 % 1,478 2.74 % 972 1.73 %

Total allocated 109,853 90,967 78,789 52,175 21,398

90,967 78,789 52,175 21,398 20,929

— n/a — n/a 213 n/a — n/a 110 n/a

$ 90,967 1.36 % 78,789 1.30 % 52,388 1.11 % 21,398 0.48 % 21,039 0.50 %

Unallocated — n/a — n/a — n/a 213 n/a — n/a

Total $ 109,853 1.35 % 90,967 1.36 % 78,789 1.30 % 52,388 1.11 % 21,398 0.48 %

"% of Loan Category" represents the ACL as a percent of the respective total loan categories presented previously in the Loan Portfolio Composition table.

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Net loan (charge-offs) recoveries

Commercial, financial, and agricultural $ (1,763) (1,978) (4,863) (1,493) (933)

Real estate – construction, land development & other land loans 480 703 1,501 722 3,939

Real estate mortgage – residential (1-4 family) first mortgages 17 488 276 48 (901)

Real estate mortgage – home equity loans/lines of credit 557 178 (37) 322 (347)

Real estate mortgage – commercial and other 920 (1,762) (347) (981) 44

Commercial and industrial $ (6,965) (1,763) (1,978) (4,863) (1,493)

Construction, development & other land loans 250 480 703 1,501 722

Commercial real estate - owner occupied 321 477 (212) (335) (220)

Commercial real estate - non owner occupied 502 432 (1,562) (24) (947)

Multi-family real estate 13 11 12 12 186

Residential 1-4 family real estate 373 17 488 276 48

Home equity loans/lines of credit (211) 557 178 (37) 322

Consumer loans (757) (633) (309) (579) (522)

Total net (charge-offs) recoveries $ (422) (2,680) (4,049) (1,904) 1,330

Total net charge-offs $ (6,474) (422) (2,680) (4,049) (1,904)

Average loans:

Commercial, financial, and agricultural $ 619,480 700,557 707,976 482,654 430,449

Real estate – construction, land development & other land loans 857,880 619,928 615,717 503,183 555,354

Real estate mortgage – residential (1-4 family) first mortgages 1,091,788 951,573 1,028,334 1,074,938 1,015,360

Real estate mortgage – home equity loans/lines of credit 326,592 300,291 316,593 346,331 366,416

Real estate mortgage – commercial and other 3,338,710 2,391,845 1,981,763 1,872,666 1,723,117

Commercial and industrial $ 865,043 619,480 700,557 707,976 482,654

Construction, development & other land loans 1,053,422 857,880 619,928 615,717 503,183

Commercial real estate - owner occupied 1,224,284 1,012,275 812,764 776,166 814,783

Commercial real estate - non owner occupied 2,464,389 1,968,944 1,322,685 1,012,182 860,783

Multi-family real estate 402,814 357,491 256,396 193,415 197,100

Residential 1-4 family real estate 1,482,941 1,091,788 951,573 1,028,334 1,074,938

Home equity loans/lines of credit 341,778 326,592 300,291 316,593 346,331

Consumer loans 67,957 58,830 54,197 52,360 66,559

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Allowance for credit losses as a percent of loans at end of year 1.35 % 1.36 % 1.30 % 1.11 % 0.48 %

Allowance for credit losses as a multiple of net charge-offs 215.56 29.40 12.94 11.24 n/m

Provision for loan losses as a percent of net charge-offs 2985.78 % 358.62% 865.37% 118.86% n/m

Allowance for credit losses as a multiple of net charge-offs 16.97 215.56 29.40 12.94 11.24

Provision for loan losses as a percent of net charge-offs 305.07 % 2,985.78 % 358.62% 865.37% 118.86%

Recoveries of loans previously charged-off as a percent of loans charged-off 36.37 % 90.55 % 64.75 % 52.38 % 69.79 %

Total net (charge-offs) recoveries as a percent of average loans (0.01 %) (0.05 %) (0.09 %) (0.04 %) 0.03 %

Total net charge-offs as a percent of average loans (0.08 %) (0.01 %) (0.05 %) (0.09 %) (0.04 %)

Net (charge-offs) recoveries by loan category as a percent of average loans:

Commercial, financial, and agricultural (0.28 %) (0.28 %) (0.69 %) (0.31 %) (0.22 %)

Real estate – construction, land development & other land loans 0.06 % 0.11 % 0.24 % 0.14 % 0.71 %

Real estate mortgage – residential (1-4 family) first mortgages — % 0.05 % 0.03 % — % (0.09 %)

Real estate mortgage – home equity loans/lines of credit 0.17 % 0.06 % (0.01 %) 0.09 % (0.09 %)

Real estate mortgage – commercial and other 0.03 % (0.07 %) (0.02 %) (0.05 %) — %

Commercial and industrial (0.81 %) (0.28 %) (0.28 %) (0.69 %) (0.31 %)

Construction, development & other land loans 0.02 % 0.06 % 0.11 % 0.24 % 0.14 %

Commercial real estate - owner occupied 0.03 % 0.05 % (0.03 %) (0.04 %) (0.03 %)

Commercial real estate - non owner occupied 0.02 % 0.02 % (0.12 %) — % (0.11 %)

Multi-family real estate — % — % — % 0.01 % 0.09 %

Residential 1-4 family real estate 0.03 % — % 0.05 % 0.03 % — %

Home equity loans/lines of credit (0.06 %) 0.17 % 0.06 % (0.01 %) 0.09 %

Consumer loans (1.11 %) (1.08 %) (0.57 %) (1.11 %) (0.78 %)

n/m – not meaningful

Our securities portfolio totaled $2.9 billion at December 31, 2022, compared to $3.1 billion at December 31, 2021.

AFS securities were $2.3 billion at December 31, 2022, compared to $2.6 billion at December 31, 2021.

HTM securities were $541.7 million at December 31, 2022, compared to $513.8 million at December 31, 2021.

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively 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.

Over 99% of our mortgage-backed securities, which include both AFS and HTM securities, are issued by GSEs or GNMA, and are traded in liquid secondary markets.

These securities are recorded on the balance sheet at fair value for the AFS portfolio and at cost for the HTM portfolio.

Our securities portfolio and the breakout of AFS and HTM securities is presented in the following table.

Securities Portfolio Composition

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Total securities $ 2,723,057 2,856,193 3,144,239

Average total securities during year $ 3,356,486 2,367,591 1,002,008

The decrease in securities for the year ended December 31, 2022 was primarily due the decrease in market valuations on AFS securities associated with the sharp increase in bond yields.

Also contributing to the decline was regular principal repayments received on mortgage-backed securities more than offsetting purchases early in the year.

Average total securities during year, at amortized cost $ 3,216,327 3,356,486 2,367,591

The decrease in securities for the year ended December 31, 2023 was primarily due to regular principal repayments received on mortgage-backed securities.

We made no notable purchases of investment securities during 2023 and we continue to utilize cash flows from amortizing investments to fund loan growth and fluctuations in deposits.

Also impacting the change in balances of AFS securities was the improvement in unrealized loss on AFS securities which was $400.7 million at December 31, 2023 as compared to $444.1 million at December 31, 2022.

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income.

Essentially all of our mortgage-backed securities, which include both AFS and HTM securities, are issued by GSEs or GNMA, and are traded in liquid secondary markets.

These securities are recorded on the balance sheet at fair value for the AFS portfolio and at cost for the HTM portfolio.

The table below presents the composition, tax equivalent yields, and remaining maturities of our securities as of December 31, 2023.

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(1) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.

(2) Yields have been computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security.

Weighted average yield for each maturity range has been computed on a fully taxable-equivalent basis using the amortized cost of each security in that range.

Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 23.15% tax rate.

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At December 31, 2023, of the $60.3 million in AFS GSE securities, $33.8 million were issued by the FFCB, $24.9 million were issued by the FHLMC, and the remaining $1.6 million were issued by the FHLB.

Nearly all of our $2.0 billion in AFS mortgage-backed securities at December 31, 2022 were issued by the FHLMC, FNMA, GNMA, or the SBA, each of which is a government agency or government-sponsored corporation and guarantees the repayment of the securities.

Included in this total are commerical mortgage-backed securities of $810.9 million.

Nearly all of our $1.9 billion in AFS mortgage-backed securities at December 31, 2023 were issued by the FHLMC, FNMA, GNMA, or the SBA, each of which is a government agency or a GSE and guarantees the repayment of the securities.

Included in this total are private-label commerical mortgage-backed securities of $0.7 million.

Mortgage-backed securities vary in their repayment in correlation with the underlying pools of mortgage loans.

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Deposits represent the primary funding source for our loans and investments.

Total deposits amounted to $9.2 billion at December 31, 2022, an increase of $0.1 billion, or 1.1%, from December 31, 2021.

Deposit growth for the year was entirely organic as there were no acquisitions during 2022.

While total deposits increased in 2022, we experienced a decline in retail customer deposits of 1.7% from the prior year end.

Brokered deposits were utilized as needed during the year to fund loan growth and fluctuations in deposit accounts.

We believe the decline in retail deposits was a result of customer behaviors shifting from the activity experienced during the pandemic, combined with the increase in market rates and resulting competition for deposits.

In addition, although the number of net new deposit accounts increased, the average balance per account declined year-over-year.

We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.

The following table presents summary of the deposit balances and mix at each of the past five year ends.

Total deposits amounted to $10.0 billion at December 31, 2023, an increase of $804.1 million, or 8.7%, from December 31, 2022.

The GrandSouth acquisition was completed on January 1, 2023 and contributed $1.05 billion in deposits.

The acquired deposit portfolio mix was similar in nature to our deposits, with the exception of a slightly higher percentage of money market accounts.

Deposit growth for the year is as follows:

($ in thousands)

Deposits at December 31, 2022 $ 9,227,529

Organic deposit contraction (245,808)

Growth from acquisition 1,049,878

Deposits at December 31, 2023 $ 10,031,599

Organic deposit contraction percentage (2.7) %

Total deposit growth percentage 8.7 %

The contraction in deposits, exclusive of acquired deposits during 2023 is directly related to a strategic decision to reduce brokered deposits during the year, which accounted for $249.3 million of the reduction in organic deposits as presented in the table above.

The balance of the difference, an increase of $3.5 million, indicates the stability of our retail and commercial core deposits during a year with uncertainty and volatility experienced in the banking industry.

We continue to have a diversified and granular deposit base which has remained a stable source of funding.

At December 31, 2023, noninterest-bearing deposits accounted for 34% of total deposits.

This is down slightly from the prior year, in part due to the GrandSouth acquired deposits mix combined with changes in consumer behavior, but continues to be in line with our historical trends and contributes to our low cost of funds.

The table below presents our historical deposit mix which has remained fairly consistent and continues to be predominately transaction and non-time deposit accounts.

As demonstrated in the below table, total time deposits have declined to 10% of total deposits at December 31, 2023 from 18% at December 31, 2019.

Such a shift in mix is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits and allows us to reprice these deposit categories at any time.

Approximately 92% of our time deposits mature within one year.

Deposit Composition

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Total deposits $ 10,031,599 100 % 9,227,529 100 % 9,124,629 100 % 6,273,596 100 % 4,931,355 100 %

Our deposit mix continues to be predominately transaction and non-time deposit accounts, with total time deposits declining from 21% of total deposits at December 31, 2018 to 11% at December 31, 2022.

Such a shift in mix is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits and allows us to reprice these deposit categories at any time.

Approximately 88% of our time deposits mature within one year.

As of December 31, 2022, we held approximately $3.5 billion in uninsured deposits, including $276.3 million of uninsured time deposits.

The table below presents maturities of time deposits of more than $250,000 as of December 31, 2022.

While our customer deposits have remained fairly stable, there continues to be competition for deposits and the market rate increases experienced starting in 2022 have resulted in changes in customer behavior driving the shift to money market accounts during 2023.

The number of net new deposit accounts continues to increase, however, we have seen the average balance per account decline as compared to the prior year.

We routinely engage in activities designed to grow and retain deposits, including emphasizing relationship banking to new and existing customers where borrowers are encouraged and normally expected to maintain deposit accounts with us;

deposits at rate levels that will attract and/or retain deposits;

and continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.

As of December 31, 2023, the estimated uninsured deposits we held totaled approximately $3.7 billion.

In addition, we held $355.2 million in time deposits which, by account, were in excess of the the FDIC insurance limit of $250,000.

Of these accounts, there was a total of $187.6 million which was in excess of $250,000.

This assessment of time deposit accounts does not evaluate total deposit relationships, account ownership types or other factors for determining the actual uninsured balances by customer.

The table below presents maturities of time deposits which by account are great than the FDIC insurance limit of $250,000 as of December 31, 2023.

As of December 31, 2023

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Months Over 12

Uninsured time deposits of more than $250,000 $ 72,133 85,194 84,171 34,821 276,319

At each of the past three year ends, we had no deposits issued through foreign offices, nor do we believe that we held any deposits of foreign depositors.

We typically utilize borrowings to provide balance sheet liquidity and to fund imbalances in our loan growth compared to our deposit growth.

Total borrowings at December 31, 2022 increased $220.1 million over the prior year end.

During 2022, FHLB advances increased $219.9 million related to short-term advances required to fund loan growth and fluctuations in deposit balances.

Time deposits greater than the FDIC insurance limit of $250,000 $ 151,321 98,241 91,210 14,437 355,209

In addition to insured deposits of $6.3 billion or 63.3% of total deposits, we had deposits collateralized by investment securities with balances totaling $820.9 million at December 31, 2023 such that approximately 71.5% of our total deposits were insured or collateralized at that date.

At each of the past three year ends, we had no deposits issued through foreign offices.

Deposits at December 31, 2023 from foreign depositors were nominal.

We typically utilize short-term borrowings to provide balance sheet liquidity and to fund imbalances in our loan growth compared to our deposit growth.

In addition, we have long-term debt in the form of trust preferred securities and subordinated debentures.

Total borrowings at December 31, 2023 increased $342.7 million from the prior year end.

FHLB advances comprised $59.0 million of the increase and FRB borrowings under the Bank Term Funding Program comprised $249.0 million of the increase.

The short-term advances were required to fund loan growth and fluctuations in deposit balances during 2023.

As a part of the GrandSouth acquisition, we acquired $8.2 million in trust preferred securities and subordinated debentures totaling $28.0 million.

Our borrowings outstanding as of the dates presented were as follows:

($ in thousands) December 31, 2023 December 31, 2022

FHLB advances - long-term $ 221,842 1,974

FHLB advances $ 280,851 221,842

FRB borrowings 249,000 —

Trust preferred capital issuances 77,324 69,076

Subordinated debentures 28,000 —

635,175 290,918

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$ 630,158 287,507

As noted in the table above, at December 31, 2022, we had $69.1 million of borrowings structured as trust preferred capital securities which qualify as capital for regulatory capital adequacy requirements.

The Company issued $46.4 million of these securities, $10.3 million was assumed in our acquisition of Carolina Bank, and $12.4 million was assumed in our acquisition of Select.

At December 31, 2022, the Company had three sources of readily available borrowing capacity:

• A line of credit with the FHLB of approximately $847.1 million which can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by our FHLB stock and a blanket lien on most of our real estate loan portfolio.

• Federal funds lines of credit from several correspondent banks totaling $265.0 million which provide for overnight unsecured federal funds purchased.

• A line of credit with the Federal Reserve of approximately $165.4 million which is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans).

As noted in the table above, at December 31, 2023, we had $77.3 million of borrowings structured as trust preferred capital securities which qualify as Tier I capital for regulatory capital adequacy requirements.

The Company issued $46.4 million of these securities with the balance assumed from several recent acquisitions, including GrandSouth as noted above.

The $28.0 million of unsecured subordinated debentures are borrowings issued by GrandSouth which we acquired and which qualify as Tier II capital for regulatory capital adequacy requirements.

At December 31, 2023, the Company had several sources of readily available borrowing capacity:

• A line of credit with the FHLB of approximately $1.3 billion which can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by a blanket lien

on most of our real estate loan portfolio, select securities from our investment portfolio, and our FHLB stock.

There was approximately $1.1 billion available under the FHLB line at year end based on pledged collateral.

• Federal funds lines of credit from several correspondent banks totaling $265.0 million which provide for overnight unsecured federal funds purchased, all of which was available at year end.

• A $294.1 million line of credit through the Federal Reserve's Bank Term Funding Program ("BTFP"), secured by specific investment securities, of which $45.1 million was available at year end.

Effective March 11, 2024, the Federal Reserve will terminate the BTFP and no additional advances will be available.

• A line of credit with the Federal Reserve through their discount window borrowing program of approximately $561.6 million which is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans) and specific investment securities.

All of this line was available at year end.

Refer to Note 9 to the consolidated financial statements for additional discussion of our borrowings.

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

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

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

Our overall liquidity started increasing in 2020 and continued into 2021 due to significant and continued deposit growth that outpaced our loan growth.

During 2022, we have managed our primary liquid assets (cash and AFS securities) to lower levels in order to meet loan demand and maximize our margins.

In addition during 2022, we have had decreases in retail deposit levels as market rates for deposits became more competitive and customer behaviors shifted from the activity experienced during the pandemic.

Our liquid assets as a percentage of our total deposits and borrowings amounted to 27.2% at December 31, 2022.

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.

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 December 31, 2023, the Company had several sources of readily available borrowing capacity as described above in the Borrowings section.

Liquidity is evaluated as both on-balance sheet (primarily cash and cash-equivalents, unpledged securities, and other marketable assets) and off-balance sheet (readily available lines of credit or other funding sources).

Our overall on-balance sheet liquidity ratio was 14.6% at December 31, 2023.

Our total liquidity ratio, including the $1.9 billion in available lines of credit, was 28.8% as of that date.

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 continue to manage liquidity sources and 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.

We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.

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In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows.

Certain of the outstanding commitments and contingent liabilities, such as commitments to extend credit, are not reflected in the financial statements.

Presented below is a summary of our contractual obligations and other commercial commitments outstanding as of December 31, 2023.

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Payments Due Per Period ($ in thousands)

Contractual Obligations

As of December 31, 2022 Less

Contractual Obligation as of December 31, 2023 Less

than 1 Year 1-3 Years 4-5 Years After 5 Years Total

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Amount of Commitment Expiration Per Period ($ in thousands)

Other Commercial Commitments

As of December 31, 2022 Less

Other Commercial Commitments as of December 31, 2023 Less

than 1 Year 1-3 Years 4-5 Years After 5 Years Total

6 unchanged sentences

$ 399,745 646,473 180,076 1,241,886 2,468,180

In the normal course of business there are various outstanding commitments and contingent liabilities such as commitments to extend credit, which are not reflected in the financial statements.

As presented in the table above, at December 31, 2023, we had $20.6 million in standby letters of credit outstanding.

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The payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by the customer to the supplier.

The maximum potential amount of future payments (undiscounted) we could be required to make under the guarantees in the event of nonperformance by the parties to whom credit or financial guarantees have been extended is represented by the contractual amount of the financial instruments discussed above.

In the event that we are required to honor a standby letter of credit, a note, already executed by the customer, becomes effective providing repayment terms and any collateral.

Over the past several years, we have had to honor only a few standby letters of credit, none of which resulted in any loss to the Company.

We expect any draws under existing commitments to be funded through normal operations.

It has been our experience that deposit withdrawals are generally able to be replaced with new deposits when needed.

Based on that assumption, management believes that he Bank can meet its contractual cash obligations and existing commitments from normal operations.

It has been our experience that deposit withdrawals are generally able to be replaced with new deposits when needed, or through short-term advances from the FHLB.

We believe that he Bank can meet its contractual cash obligations and existing commitments from normal operations.

Capital Resources and Shareholders’ Equity

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The two basic components that typically have the largest impact on our shareholders’ equity are net income, which increases shareholders’ equity, and dividends declared, which decrease shareholders’ equity.

Additionally, any stock issuances can significantly increase shareholders’ equity, including those associated with acquisitions, and any stock repurchases reduce shareholders’ equity.

Finally, fluctuations in the amount of AOCI, generally driven by market rate changes resulting in increases or decreases in unrealized gains/losses on AFS securities, can have a significant impact on total equity.

In 2022, the most significant factors that impacted our shareholders' equity were (1) $317.0 million reduction in equity related to changes in AOCI driven by higher unrealized losses on AFS securities;

(2) $146.9 million net income reported for 2022, which increased equity, and (3) common stock dividends declared of $31.4 million, which reduced equity.

As discussed in “Borrowings” above, we also currently have $69.1 million in trust preferred securities outstanding, all of which qualify as Tier I capital under regulatory standards.

Additionally, any stock issuances can significantly increase shareholders’ equity, including those associated with acquisitions such as in 2023, and any stock repurchases reduce shareholders’ equity.

Finally, fluctuations in the amount of AOCI, generally driven by market interest rate changes resulting in increases or decreases in unrealized gains/losses on AFS securities, can have a significant impact on total equity.

In 2023, the most significant factors that impacted our shareholders' equity were (1) $229.5 million of common stock issued for the acquisition of GrandSouth which increased equity;

(2) $104.1 million net income reported for 2023, which increased equity, (3) common stock dividends declared of $36.1 million, which reduced equity;

and (4) $33.9 million reduction in equity related to changes in AOCI driven by higher unrealized losses on AFS securities.

As discussed in “Borrowings” above, we also currently have $77.3 million in trust preferred securities outstanding, all of which qualify as Tier I capital under regulatory standards and $28.0 million of unsecured subordinated debentures which qualify as Tier II capital for regulatory capital adequacy requirements.

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.

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The Bank, as a North Carolina banking corporation, may declare dividends so long as such dividends do not reduce its capital below its applicable required capital (typically, the level of capital required to be deemed “adequately capitalized”).

As of December 31, 2022, approximately $830.8 million of the Company’s investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.

As of December 31, 2023, approximately $1.1 billion of the Company’s investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.

Our regulatory capital ratios as of December 31, 2023, 2022 and 2021 are presented in the table below.

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Allowable allowance for credit losses and unfunded commitments 112,491 97,126 88,692

Other Tier II Capital — — 582

Subordinated debentures eligible for Tier II capital treatment 27,177 — —

Tier II capital additions 139,668 97,126 88,692

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Total risk weighted assets $ 8,991,087 7,762,894 7,094,787

Adjusted fourth quarter average assets $ 10,215,571 10,144,760 7,001,834

Adjusted fourth quarter average tangible assets $ 11,532,812 10,215,571 10,144,760

Risk-based and Leverage capital ratios:

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The increase in capital levels in 2023 was related to the growth in net income.

In addition to regulatory capital ratios, we also closely monitor our ratio of TCE to tangible assets.

This ratio was 6.39% at December 31, 2022 compared to 8.38% at December 31, 2021, with the decline of 199 basis points related primarily to the higher unrealized loss on available for sale securities included in equity

In addition to regulatory capital ratios, we also closely monitor our ratio of TCE to tangible assets, which is a non-GAAP financial measure.

The TCE ratio was 7.42% at December 31, 2023 compared to 6.39% at December 31, 2022, with the increase of 103 basis points related primarily to the improvement in our AOCI unrealized loss on AFS securities included in equity.

The following table reconciles common equity to tangible common equity and provides the calculation of the TCE ratio:

($ in thousands) December 31, 2023 December 31, 2022

Reconciliation of Common Equity to TCE

Total shareholders' common equity $ 1,372,380 1,031,596

Goodwill and other intangibles (511,608) (376,938)

Tangible common equity $ 860,772 654,658

Reconciliation of Total Assets to Tangible Assets

Total assets $ 12,114,942 10,625,049

Goodwill and other intangibles (511,608) (376,938)

Tangible assets $ 11,603,334 10,248,111

TCE divided by Tangible Assets 7.42 % 6.39 %

See “Supervision and Regulation” under “Business” in Item 1.

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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.

We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities and subordinated debentures.

In the normal course of business, we are exposed to certain risk arising from both its business operations and economic conditions.

As an element of our risk management strategies, we may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

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

We did not engage in significant derivatives activities in 2022 and have no current plans to do so.

We do not engage in significant derivatives activities, however, in 2023 to accommodate customers, we implemented a program whereby we enter into interest rate swaps with certain commercial loan customers, with offsetting positions to dealers under a back-to-back swap program.

At December 31, 2023, the Company's derivative financial instruments consist entirely of customer back-to-back interest rate swaps which are not designated as hedges.

Under this program, the Company executes interest rate swaps with commercial banking customers to facilitate their risk management strategies.

Those interest rate swaps are simultaneously economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.

As the interest rate derivatives associated with this program are not designated as hedging instruments, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Refer to Note 13 of the consolidated financial statements for additional discussion of our derivative positions.

Current Accounting Matters

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See Note 1 to our consolidated financial statements for a discussion of recent rule proposals and changes.

Selected Consolidated Financial Data

Selected Financial Information

Year Ended December 31,

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Stated book value – common 33.38 28.89 34.54 31.26 28.80

Common shares outstanding at year end 41,109,987 35,704,154 35,629,177 28,579,335 29,601,264

Selected Balance Sheet Data (at year end)

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Net (charge-offs) recoveries to average total loans (0.08 %) (0.01 %) (0.05 %) (0.09 %) (0.04 %)

Note - During 2021, the Company completed a significant whole-bank acquisition impacting the comparisons for that year.

See additional discussion under "Mergers and Acquisitions" in Item 1.

Note - During both 2023 and 2021, the Company completed significant whole-bank acquisitions impacting the comparisons for each of those years.

See additional discussion under "Recent Developments and Acquisitions" in Item 1.

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-K

Item 7. Management’s Discussion and Analysis