FIRST BANCORP /NC/ 10-K

Item 8. Financial Statements and Supplementary Data First Bancorp and Subsidiaries Consolidated Balance Sheets December 31, 2023 and 2022 ($ in thousands) 2023 2022 Assets Cash and due from banks, noninterest-bearing $ 100,891 101,133 Due from banks, interest-bearing 136,964 169,185 Total cash and cash equivalents 237,855 270,318 Securities available for sale 2,189,379 2,314,493 Securities held to maturity (fair values of $ 449,623 in 2023 and $ 432,528 in 2022) 533,678 541,700 Presold mortgages and SBA loans in process of settlement 2,667 1,282 Loans 8,150,102 6,665,145 Allowance for credit losses on loans ( 109,853 ) ( 90,967 ) Net loans 8,040,249 6,574,178 Premises and equipment, net 150,957 134,187 Operating right-of-use lease assets 17,063 18,733 Accrued interest receivable 37,351 29,710 Goodwill 478,750 364,263 Other intangible assets, net 32,858 12,675 Bank-owned life insurance 183,897 164,592 Other assets 210,238 198,918 Total assets $ 12,114,942 10,625,049 Liabilities Deposits: Noninterest-bearing deposits $ 3,379,876 3,566,003 Interest-bearing deposits 6,651,723 5,661,526 Total deposits 10,031,599 9,227,529 Borrowings 630,158 287,507 Accrued interest payable 5,699 2,738 Operating lease liabilities 17,833 19,391 Other liabilities 57,273 56,288 Total liabilities 10,742,562 9,593,453 Commitments and contingencies (see Note 12) Shareholders’ Equity Preferred stock, no par value per share. Authorized: 5,000,000 shares Issued & outstanding: none in 2023 and 2022 — — Common stock, no par value per share. Authorized: 60,000,000 shares Issued & outstanding: 41,109,987 shares in 2023 and 35,704,154 shares in 2022 963,990 725,153 Retained earnings 716,420 648,418 Stock in rabbi trust assumed in acquisition ( 1,385 ) ( 1,585 ) Rabbi trust obligation 1,385 1,585 Accumulated other comprehensive loss ( 308,030 ) ( 341,975 ) Total shareholders’ equity 1,372,380 1,031,596 Total liabilities and shareholders’ equity $ 12,114,942 10,625,049 See accompanying notes to consolidated financial statements. 66 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2023, 2022 and 2021 ($ in thousands, except per share data) 2023 2022 2021 Interest Income Interest and fees on loans $ 418,668 278,027 219,013 Interest on investment securities: Taxable interest income 52,276 53,536 32,076 Tax-exempt interest income 4,485 4,387 2,402 Other, principally overnight investments 13,330 5,007 2,427 Total interest income 488,759 340,957 255,918 Interest Expense Interest on deposits 114,866 11,349 7,881 Interest on borrowings 27,235 4,754 1,642 Total interest expense 142,101 16,103 9,523 Net interest income 346,658 324,854 246,395 Provision for loan losses 19,750 12,600 9,611 (Reversal of) provision for unfunded commitments ( 1,937 ) ( 200 ) 5,420 Total provision for credit losses 17,813 12,400 15,031 Net interest income after provision for credit losses 328,845 312,454 231,364 Noninterest Income Service charges on deposit accounts 16,800 15,523 12,317 Other service charges, commissions and fees 22,270 26,294 25,516 Presold mortgage loan gains 1,613 2,102 10,975 Commissions from sales of insurance and financial products 5,503 5,195 6,947 SBA consulting fees 1,803 2,608 7,231 SBA loan sale gains 2,489 5,076 7,329 Bank-owned life insurance 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 Noninterest Expense Salaries 114,377 96,321 86,815 Employee benefits 25,474 21,397 16,434 Total personnel expense 139,851 117,718 103,249 Occupancy expense 14,963 12,796 11,528 Equipment related expenses 6,027 5,808 4,492 Merger and acquisition expenses 13,695 5,072 16,845 Intangibles amortization 8,003 3,684 3,531 Other operating expenses 71,840 50,142 45,011 Total noninterest expense 254,379 195,220 184,656 Income before income taxes 131,956 185,219 120,319 Income tax expense 27,825 38,283 24,675 Net income $ 104,131 146,936 95,644 Earnings per common share: Basic $ 2.54 4.12 3.19 Earnings per common share: Diluted 2.53 4.12 3.19 Weighted average common shares outstanding: Basic 40,746,772 35,485,620 29,876,151 Diluted 41,164,834 35,674,730 30,027,785 See accompanying notes to consolidated financial statements. 67 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, 2023, 2022 and 2021 ($ in thousands) 2023 2022 2021 Net income $ 104,131 146,936 95,644 Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period, pretax 43,343 ( 411,996 ) ( 53,752 ) Tax (expense) benefit ( 9,279 ) 94,677 12,352 Reclassification to realized losses — — 1,237 Tax benefit — — ( 284 ) Postretirement plans: Net (gains) losses arising during period ( 607 ) 695 872 Tax expense (benefit) 141 ( 159 ) ( 201 ) Amortization of unrecognized net actuarial (gains) losses ( 545 ) ( 288 ) 592 Tax expense (benefit) 126 66 ( 136 ) Reclassification of net actuarial losses due to settlement to realized losses 998 — — Tax benefit ( 232 ) — — Other comprehensive income (loss) 33,945 ( 317,005 ) ( 39,320 ) Comprehensive income (loss) $ 138,076 ( 170,069 ) 56,324 See accompanying notes to consolidated financial statements. 68 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Shareholders’ Equity Years Ended December 31, 2023, 2022 and 2021 ($ in thousands, except per share data) Common Stock Retained Earnings Stock in rabbi trust assumed in acquisition Rabbi trust obligation Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Shares Amount Balances, January 1, 2021 28,579 $ 400,582 478,489 ( 2,243 ) 2,243 14,350 893,421 Adoption of new accounting standard ( 17,051 ) ( 17,051 ) Net income 95,644 95,644 Cash dividends declared ($ 0.80 per common share) ( 24,208 ) ( 24,208 ) Change in Rabbi Trust Obligation 440 ( 440 ) — Equity issued pursuant to acquisition 7,070 324,389 324,389 Stock repurchases ( 107 ) ( 4,036 ) ( 4,036 ) Stock withheld for payment of taxes ( 18 ) ( 786 ) ( 786 ) Stock-based compensation 105 2,522 2,522 Other comprehensive income ( 39,320 ) ( 39,320 ) Balances, December 31, 2021 35,629 722,671 532,874 ( 1,803 ) 1,803 ( 24,970 ) 1,230,575 Net income 146,936 146,936 Cash dividends declared ($ 0.88 per common share) ( 31,392 ) ( 31,392 ) Change in Rabbi Trust Obligation 218 ( 218 ) — Stock withheld for payment of taxes ( 25 ) ( 840 ) ( 840 ) Stock-based compensation 100 3,322 3,322 Other comprehensive loss ( 317,005 ) ( 317,005 ) Balances, December 31, 2022 35,704 725,153 648,418 ( 1,585 ) 1,585 ( 341,975 ) 1,031,596 Net income 104,131 104,131 Cash dividends declared ($ 0.88 per common share) ( 36,129 ) ( 36,129 ) Change in Rabbi Trust Obligation 200 ( 200 ) — Equity issued pursuant to acquisition 5,033 229,489 229,489 Stock option exercises 237 4,519 4,519 Stock withheld for payment of taxes ( 23 ) ( 743 ) ( 743 ) Stock-based compensation 159 5,572 5,572 Other comprehensive loss 33,945 33,945 Balances, December 31, 2023 41,110 $ 963,990 716,420 ( 1,385 ) 1,385 ( 308,030 ) 1,372,380 See accompanying notes to consolidated financial statements. 69 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2023, 2022 and 2021 ($ in thousands) 2023 2022 2021 Cash Flows From Operating Activities Net income $ 104,131 146,936 95,644 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses and unfunded commitments, net 17,813 12,400 15,031 Net security premium amortization 9,337 12,005 14,058 Deferred tax benefit ( 782 ) ( 1,810 ) ( 4,800 ) Loan discount accretion ( 13,277 ) ( 5,622 ) ( 8,814 ) Deposit and debt discount (premium) accretion (amortization), net 3,943 ( 340 ) ( 47 ) Foreclosed property (gains) losses/write-downs, net ( 150 ) ( 372 ) 24 Losses on sales of securities available for sale, net — — 1,237 Other gains, net ( 1,857 ) ( 4,069 ) ( 1,648 ) Bank-owned life insurance income ( 4,350 ) ( 3,847 ) ( 2,885 ) Net amortization of deferred loan fees ( 1,225 ) ( 301 ) ( 1,994 ) Depreciation of premises and equipment 7,754 6,859 6,187 Amortization of operating lease right-of-use assets 2,100 1,986 1,937 Repayments of lease obligations ( 1,988 ) ( 1,801 ) ( 1,814 ) Stock-based compensation expense 5,125 2,982 2,268 Amortization of intangible assets 8,003 3,684 3,531 Amortization and impairment of SBA servicing assets 1,356 2,800 2,272 Fees/gains from sales of presold mortgages and SBA loans ( 4,102 ) ( 7,178 ) ( 18,304 ) Originations of presold mortgage loans in process of settlement ( 84,696 ) ( 104,596 ) ( 326,019 ) Proceeds from sales of presold mortgage loans in process of settlement 84,957 124,181 359,300 Origination of SBA loans for sale ( 52,787 ) ( 74,452 ) ( 88,304 ) Proceeds from sales of SBA loans 39,930 119,549 79,125 Increase in accrued interest receivable ( 1,904 ) ( 3,814 ) ( 773 ) Decrease in other assets 12,435 11,352 17,412 Increase (decrease) in accrued interest payable 2,579 2,131 ( 683 ) (Decrease) increase in other liabilities ( 949 ) ( 8,009 ) 394 Net cash provided by operating activities 131,396 230,654 142,335 Cash Flows From Investing Activities Purchases of securities available for sale ( 1,169 ) ( 354,765 ) ( 1,572,355 ) Purchases of securities held to maturity — ( 39,004 ) ( 271,169 ) Proceeds from maturities, calls and principal repayments of securities available for sale 165,358 251,314 358,259 Proceeds from maturities, calls and principal repayments of securities held to maturity 3,453 6,500 13,642 Proceeds from sales of securities available for sale 111,863 — 106,484 Purchases of Federal Reserve and FHLB stock ( 58,688 ) ( 48,159 ) ( 93 ) Redemptions of Federal Reserve and FHLB stock 43,797 30,915 2,136 Purchases of bank owned life insurance — — ( 25,000 ) Proceeds from bank owned life insurance death benefits 137 8,312 — Purchases of other investments ( 9,754 ) ( 7,990 ) ( 3,434 ) Net increase in loans ( 466,488 ) ( 558,398 ) ( 97,559 ) Proceeds from sales of foreclosed properties 967 2,904 3,995 Purchases of premises and equipment ( 4,421 ) ( 5,287 ) ( 9,402 ) Proceeds from sales of premises and equipment 970 299 313 Net cash received in acquisition activities 22,610 — 208,992 Net cash received in disposition activities — — 11,314 Net cash used by investing activities ( 191,365 ) ( 713,359 ) ( 1,273,877 ) Cash Flows From Financing Activities Net (decrease) increase in deposits ( 244,339 ) 103,494 1,258,193 Advances from other borrowings 3,348,000 1,252,000 — Repayment of other borrowings ( 3,044,991 ) ( 1,032,133 ) ( 5,729 ) Cash dividends paid – common stock ( 34,940 ) ( 30,660 ) ( 22,228 ) Repurchases of common stock — — ( 4,036 ) Proceeds from stock option exercises 4,519 — — Payment of taxes related to stock withheld ( 743 ) ( 840 ) ( 786 ) Net cash provided by financing activities 27,506 291,861 1,225,414 (Decrease) increase in Cash and Cash Equivalents ( 32,463 ) ( 190,844 ) 93,872 Cash and Cash Equivalents, Beginning of Year 270,318 461,162 367,290 Cash and Cash Equivalents, End of Year $ 237,855 270,318 461,162 (Continued) 70 Table of Contents First Bancorp and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2023, 2022 and 2021 (Continued) ($ in thousands) 2023 2022 2021 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest $ 135,704 14,312 10,206 Cash paid during the period for income taxes 29,734 39,722 32,506 Non-cash: Unrealized gain (loss) on securities available for sale, net of taxes 34,064 ( 317,319 ) ( 41,400 ) Non-cash: Foreclosed loans transferred to foreclosed real estate 1,036 119 2,285 Non-cash: Accrued dividends at period end 9,046 7,857 7,125 Non-cash: Initial recognition of operating lease right-of-use assets and liabilities 260 — 2,191 Non-cash: Revision of operating lease right-of-use assets and operating lease liabilities ( 562 ) — — Non-cash: Derecognition of intangible assets related to sale of insurance operations — — ( 10,229 ) Acquisition of GrandSouth Bancorporation See Note 2 — — See accompanying notes to consolidated financial statements. 71 Table of Contents First Bancorp and Subsidiaries Notes to Consolidated Financial Statements December 31, 2023 Summary Note 1. Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of First Bancorp (the “Company”) and its wholly owned subsidiary First Bank (the “Bank”). The Bank has three wholly owned subsidiaries that are fully consolidated, SBA Complete, Inc. (“SBA Complete”) Magnolia Financial, Inc. ("Magnolia Financial"), and First Troy SPE, LLC. The Company is a bank holding company. The principal activity of the Company is the ownership and operation of the Bank, a state chartered bank with its main office in Southern Pines, North Carolina. SBA Complete specializes in providing consulting services for financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. Magnolia Financial is a business financing company that makes loans throughout the southeastern United States. First Troy SPE, LLC was formed in order to hold and dispose of certain real estate foreclosed upon by the Bank. The Company is also the parent company for a series of statutory trusts that were formed for the purpose of issuing trust preferred debt securities. The trusts are not consolidated for financial reporting purposes as they are variable interest entities and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the 2022 and 2021 consolidated financial statements to be comparable to 2023. These reclassifications had no effect on net income. Subsequent events have been evaluated through the date of filing this Annual Report Form 10-K. Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. The most significant estimates made by the Company in the preparation of its consolidated financial statements are the determination of the allowance for credit losses on loans, the allowance for unfunded commitments, the accounting and impairment testing related to intangible assets, the fair value determination for acquired assets and liabilities, and the resulting accretion or amortization of purchase accounting premiums or discounts. Business Combinations – The Company accounts for business combinations using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value. The Company typically issues common stock and/or pays cash for an acquisition, depending on the terms of the acquisition agreement. The value of common shares issued is determined based on the market price of the stock as of the closing of the acquisition. Cash and Cash Equivalents - The Company considers all highly liquid assets with original maturities of 90 days or less, such as cash on hand, noninterest-bearing and interest-bearing amounts due from banks and federal funds sold, to be “cash equivalents.” Securities - Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” ("HTM") and carried at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” ("AFS") and carried at fair value, with unrealized holding gains and losses being reported as other comprehensive income or loss and reported as a separate component of shareholders’ equity. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts are generally amortized and accreted into income on a level yield basis, with premiums being amortized to the earliest call date and discounts being accreted to the stated maturity date. Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification method. A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income. 72 Table of Contents Allowance for Credit Losses ("ACL") - Securities Held to Maturity - The Company measures expected credit losses on HTM debt securities on a pooled basis in accordance with Accounting Standards Codification ("ASC") 326 ("CECL"). The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. The CECL assumptions, including reasonable and supportable forecast periods, reversion method, and prepayments as applicable, are consistent with those utilized for the ACL on loans as discussed further below. Virtually all of the mortgage-backed securities held by the Company are issued by government-sponsored enterprises ("GSEs"). These securities are either explicitly guaranteed by the U.S. government or guaranteed by GSEs that have credit ratings and perceived credit risk comparable to the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Substantially all of the state and local government securities held by the Company are highly rated by major rating agencies. Accrued interest receivable of $ 4.2 million and $ 4.3 million at December 31, 2023 and December 31, 2022, respectively, on HTM debt securities was excluded from the estimate of credit losses. Allowance for Credit Losses - Securities Available for Sale - For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL. For debt securities AFS that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses on AFS securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income. Changes in the ACL under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable of $ 5.2 million and $ 5.7 million at December 31, 2023 and December 31, 2022, respectively, on AFS debt securities was excluded from the estimate of credit losses. Presold Mortgages in Process of Settlement - As a part of normal business operations, the Company originates residential mortgage loans that have been pre-approved by secondary investors to be sold on a best efforts basis. The terms of the loans are set by the secondary investors, and the purchase price that the investor will pay for the loan is agreed to prior to the funding of the loan by the Company. Loans are transferred to the investor in a short period following funding in accordance with the agreed-upon terms. The Company records gains from the sale of these loans on the settlement date of the sale equal to the difference between the proceeds received and the carrying amount of the loan. Additionally, the Company records gains for loans in the process of closing, based on the changes in fair value of the loans and related commitments. Between the initial funding of the loans by the Company and the subsequent reimbursement by the investors, the Company carries the loans on its balance sheet at fair value. Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to these loans totaled $ 28.0 million at December 31, 2023 and $ 19.7 million at December 31, 2022, and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date. The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using 73 Table of Contents the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured. Purchased Financial Assets with Credit Deterioration ("PCD") - Loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. In determining whether an acquired loan is a PCD loan, the Company considers internal loan grades, delinquency status, and other relevant factors. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. The initial amortized cost of PCD loans is determined by reducing the loans par value by the initial ACL, with any difference between the resulting amount and the loans purchase price or acquisition date fair value recorded as a non-credit-related discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the ACL recorded through provision expense. Allowance for Credit Losses - Loans - The ACL is an estimate that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial assets. The level of the allowance is determined under the CECL methodology and includes management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, reasonable and supportable forecasts, and other pertinent factors. Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums, and deferred loan fees and costs. Accrued interest receivable is presented separately on the consolidated balance sheets and excluded from the estimate of credit losses. Loans are charged off when the Company determines that such financial assets are deemed uncollectible. The ACL is increased through provision for loan losses and decreased by charge-offs, net of recoveries. The ACL is measured on a collective basis for pools of loans with similar risk characteristics. The Discounted Cash Flow (“DCF”) method is utilized for substantially all pools, with discounted cash flows computed for each loan in a pool based on its individual characteristics (e.g. maturity date, payment amount, interest rate, etc.), and the results are aggregated at the pool level. A probability of default and loss given default, as adjusted for recoveries, are applied to the discounted cash flows for each pool, while considering prepayment and principal curtailment assumptions driven by each loan's collateral type. When the DCF method is used to determine the ACL, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The Company has identified the following primary pools for measuring expected credit losses. There are additional sub-segmentations within each pool, including risk categories. • Owner occupied commercial real estate loans - Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business. The Company generally requires loan to value of 80 % or lower and debt service coverage of 1.30 x or better. Terms outside of these guidelines will have strengths to mitigate additional risk. • Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily dependent on lease income generated from the underlying collateral. The Company generally requires loan to value of 80 % or lower, debt service coverage of 1.30 x or better and overall lease terms to match or extend beyond the term of the loan. • Consumer real estate mortgage loans - Consumer real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower and may be affected by changes in general economic conditions. The Company generally requires a debt-to-income below 40 % on all home equity lines of credit with loan to 74 Table of Contents value generally 80 % or less and a minimum credit score of 660 . Portfolio mortgage loans will vary depending on the product, but generally require credit scores of 640 or greater, debt to income below 50 % and loan to value maximum of 90 %. • Construction and land development loans - This pool includes loans where the repayment is dependent on the successful completion and eventual sale, refinance or operation of the related real estate project and are thus impacted by market demand and real estate valuations. Construction and land development loans include 1-4 family construction projects and commercial construction projects. Residential construction loans for resale generally have a loan to value of 85 % or lower. Loan to value would generally be under 80 % for commercial speculative construction projects. Owner occupied and non-owner occupied commercial construction projects are underwritten to standard guidelines discussed above. • Commercial and industrial loans - These loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Commercial and Industrial loans generally require debt service coverage of 1.25 x or better. The Company typically limits equipment and accounts receivable to loan to value of 80 % and eligible inventory limited to 40 % loan to value. • Consumer and other loans - Consumer and other loans include all loans issued to individuals not included in the consumer real estate mortgage classification, including automobile loans, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured and repayment is primarily dependent on the personal cash flow of the borrower which may be impacted by changes in economic conditions and unemployment. The Company generally limits consumer loans to those clients with a minimum 660 credit score and debt-to-income below 40 %. Loan to value will vary based on the collateral type and useful life. In determining the proper level of default rates and loss given default, management has determined that the loss experience of the Company provides the best basis for its assessment of expected credit losses. It therefore utilizes its own historical credit loss experience by each loan segment over an economic cycle, while excluding loss experience from certain acquired institutions (i.e., failed banks). Management considers forward-looking information in estimating expected credit losses. For substantially all segments of loans, the Company incorporates two or more macroeconomic drivers using a statistical regression modeling methodology. The Company subscribes to a third-party service which provides a quarterly macroeconomic baseline forecast and alternative scenarios for the United States economy. The baseline forecast, which incorporates an equal probability of the United States economy performing better or worse than the projection, along with the alternative scenarios, are evaluated by management to determine the best forecast to use for macroeconomic factors in the model. Management has also evaluated the appropriateness of the reasonable and supportable forecast scenarios utilized for each period and has made adjustments as needed. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long-term mean of historical factors over 12 quarters using a straight-line approach. The Company generally utilizes a four-quarter forecast and a 12-quarter reversion period to the long-term average, which is then held static for the remainder of the forecast period. Included in its systematic methodology to determine its ACL on loans, management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process. These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model results). Each period the Company considers qualitative factors that are relevant within the qualitative framework that includes the following: 1) changes in lending policies, procedures, and strategies, 2) changes in the nature and volume of the portfolio, 3) staff experience, 4) changes in volume and trends in classified loans, delinquencies, and nonaccrual loans, 5) concentration risk, 6) trends in underlying collateral value, 7) external factors, including competition and legal and regulatory factors, 8) changes in the quality of the Company's loan review system, and 9) economic conditions not already captured. Allowance for Credit Losses - Off-Balance Sheet Credit Exposure - The Company estimates expected credit losses on commitments to extend credit over the contractual period (unfunded commitments) in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable by the Company. The allowance for unfunded commitments, which is reflected within "Other liabilities" on the consolidated balance sheets is adjusted for as an increase or decrease to the provision for credit losses 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 allowance is calculated 75 Table of Contents using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund. Financial Difficulty Modifications ("FDM") - A loan that is refinanced or restructured by the Company when a borrower is experiencing financial difficulty is generally considered a FDM. Such modification is evaluated to determine if the changes to the loan result in a new loan or a continuation of the existing loan, and to determine the appropriate treatment of deferred loan fees/costs, (i.e. to recognize in income if considered a new loan or to continue amortization if determined to be a continuation of the loan). The ACL on a FDM is measured using the same method as all other loans held for investment. FDMs that share similar risk characteristics and consistently discounted based on the post-modification effective rate. Troubled Debt Restructurings ("TDR") - Prior to the adoption of Accounting Standards Update ("ASU") 2022-02 on January 1, 2023, a TDR was generally considered a loan for which the terms were modified resulting in a more than insignificant concession, and for which the borrower was experiencing financial difficulties. The ACL on a TDR was measured using the same method as all other loans held for investment, except that the original interest rate was used to discount the expected cash flows, not the rate specified within the restructuring. Small Business Administration ("SBA") Loans Held for Sale and SBA Retained Loan Discount – All SBA loans originated are underwritten and documented as prescribed by the SBA. SBA loans are generally fully amortizing and have maturity dates and amortizations of up to 25 years. The portion of SBA loans originated that are guaranteed and intended for sale on the secondary market may be classified as held for sale if the Company intends to sell them in the near future and generally has acceptable bids for such loans. SBA loans classified as held for sale are carried at the lower of cost or fair value. The Company generally sells the guaranteed portion of the SBA loan as soon as it is eligible to be sold and retains the servicing right. When the guaranteed portion of an SBA loan is sold, the Company allocates the carrying basis of the loan between the guaranteed portion of the loan sold, the unguaranteed portion of the loans retained, and the servicing asset based on their relative fair values. A gain is recorded for the difference between the proceeds received from the sale and the basis allocated to the sold portion. The relative fair value allocation results in a discount that is recorded on the unguaranteed portion of the loan that is retained. The discount is amortized as a yield adjustment over the life of the loan, so long as the loan performs. SBA Servicing Assets - When the Company sells the guaranteed portion of an SBA loan, the Company continues to perform the servicing on the loan and collects a fee related to the sold portion of the loan. A SBA servicing asset is recorded for the fair value of that fee based on an analysis of discounted cash flows that incorporates estimates of (1) market servicing costs, (2) market-based prepayment rates, and (3) market profit margins. SBA servicing assets are included in “Other intangible assets” on the consolidated balance sheets. SBA servicing assets are initially recorded at fair value and amortized against income over the lives of the related loans as a reduction of servicing fee income, generally five years . SBA servicing asset amortization expense is recorded in noninterest income as an offset to SBA servicing fees within the line item "Other service charges, commissions and fees" on the consolidated statement of income. SBA servicing assets are tested for impairment on a quarterly basis by comparing their estimated fair values, aggregated by year of origination, to the related carrying values. Changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could result in impairment or reversal of impairment of these servicing assets and, as such, impact the Company's financial condition and results of operations. Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over financial assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Recorded within noninterest expense as "Occupancy expense" on the consolidated statements of income, depreciation, computed by the straight-line method, is charged to operations over the estimated useful lives of the properties or, in the case of leasehold improvements, over the term of the lease, if shorter. Land is carried at cost. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current operations and are recorded within noninterest expense on the "Other operating expenses" line on the consolidated statements of income. 76 Table of Contents Goodwill and Other Intangible Assets - Business combinations are accounted for using the acquisition method of accounting. Identifiable intangible assets, primarily core deposit intangibles ("CDI"), are recognized separately and are amortized over their estimated useful lives, which for the Company has generally been five to ten years and at an accelerated rate. Goodwill is recognized in business combinations to the extent that the price paid exceeds the fair value of the net assets acquired, including any identifiable intangible assets. Goodwill is not amortized, but rather is subject to fair value impairment tests on at least an annual basis. Foreclosed Properties - Foreclosed properties consists primarily of real estate acquired by the Company through legal foreclosure or deed in lieu of foreclosure. The property is initially carried at the lower of cost or the estimated fair value of the property less estimated selling costs. If there are subsequent declines in fair value, which is reviewed routinely by management, the property is written down to its fair value through a charge to expense recorded within noninterest expense on the "Other operating expenses" line in the consolidated statements of income. Capital expenditures made to improve the property are capitalized. Costs of holding real estate, such as property taxes, insurance, and maintenance, less related revenues during the holding period, are recorded as expense as they are incurred. Foreclosed properties are included in the "Other assets" line on the consolidated balance sheets and totaled $ 0.9 million and $ 0.7 million at December 31, 2023 and 2022, respectively. Bank-Owned Life Insurance – The Company has purchased life insurance policies on certain current and past key employees and directors where the insurance policy benefits and ownership are retained by the employer. These policies are recorded at their cash surrender value. Income from these policies and changes in the net cash surrender value are recorded within noninterest income as “Bank-owned life insurance income” on the consolidated statements of income. Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are more likely than not expected to be realized based upon available evidence. Other Investments – The Company accounts for its investments in limited partnerships and limited liability companies (“LLCs”) using the equity method of accounting if the percentage ownership and degree of management influence in the investments warrants such accounting treatment. Under the equity method of accounting, the Company records its initial investment at cost. Subsequently, the carrying amount of the investment is increased or decreased to reflect the Company’s share of income or loss of the investee, recorded within noninterest income as "Other gains, net" on the consolidated statements of income. The Company’s recognition of earnings or losses from an equity method investment is based on the Company’s ownership percentage in the investee and the investee’s earnings on a quarterly basis. The investees generally provide their financial information during the quarter following the end of a given period. The Company’s policy is to record its share of earnings or losses on equity method investments in the quarter the financial information is received. All of the Company’s investments in limited partnerships and LLCs and their market values are not readily available. The Company’s management evaluates its investments in investees for impairment based on the investee’s ability to generate cash through its operations or obtain alternative financing, and other subjective factors. There are inherent risks associated with the Company’s investments in such companies, which may result in income statement volatility in future periods. At December 31, 2023 and 2022, the Company’s investments in limited partnerships and LLCs totaled $ 27.6 million and $ 18.5 million, respectively, and are included in "Other assets" on the consolidated balance sheets. Federal Home Loan Bank ("FHLB") Stock - The Company is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried at cost and is recorded in "Other assets" on the consolidated balance sheets. Cash dividends are reported as income, recorded within interest income in the "Other, principally overnight investments" line on the consolidated statements of income. Federal Reserve Bank ("Federal Reserve", "FRB") Stock - The Company is a member of its regional Federal Reserve and is required to own stock based on its level of capital. Federal Reserve stock is carried at cost and is 77 Table of Contents recorded in "Other assets" on the consolidated balance sheets. Cash dividends are reported as income, recorded within interest income in the "Other, principally overnight investments" line on the consolidated statements of income. Loan Commitments and Related Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Leases - The Company leases certain branch locations and administrative offices which are generally classified as operating leases with right-of-use assets being included in other assets and the associated lease obligations being included in other liabilities. For leases where the Company is the lessee that have initial terms greater than one year, right-of-use assets and corresponding lease liabilities are reported on the balance sheet. Leases with an initial term of less than one year are not recorded on the balance sheet, rather, the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Operating lease expense is recognized on a straight-line basis over the lease term and included in "Occupancy expense" on the consolidated statements of income. Stock-Based Compensation - Restricted stock awards are the primary form of equity grant utilized by the Company. Compensation cost is based on the fair value of the award, which is the closing price of the Company's common stock on the date of the grant. Restricted stock awards issued by the Company typically have vesting periods with service conditions. Compensation cost is recognized as expense over the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period. Because of the insignificant amount of forfeitures the Company has experienced, forfeitures are recognized as they occur. Earnings Per Share ("EPS") Amounts - Basic EPS is calculated by dividing net income, less income allocated to participating securities, by the weighted average number of common shares outstanding during the period, excluding unvested shares of restricted stock. For the Company, participating securities are comprised of unvested shares of restricted stock. Diluted EPS is computed by assuming the issuance of common shares for all potentially dilutive common shares outstanding during the reporting period. For the periods presented, the Company’s potentially dilutive common stock issuances related to unvested shares of restricted stock, dilutive stock options and contingently issuable shares which are determined using the treasury stock method. If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded. Fair Value of Financial Instruments - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument, as more fully described in Note 14. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Impairment - Goodwill is evaluated for impairment on at least an annual basis, and more often if a triggering event is identified, by comparing the estimated fair value of the reporting unit to its related carrying value. If the carrying value of a reporting unit exceeds its fair value, the Company utilizes various valuation techniques to determine whether the implied fair value of the goodwill exceeds its carrying value. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recorded in an amount equal to that excess. The Company reviews all other long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s policy is that an impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Any long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. To date, the Company has not recorded any impairment write-downs of its long-lived assets or goodwill. 78 Table of Contents Comprehensive Income (Loss) - Comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards, primarily unrealized gain (loss) on available for sale securities and unrealized and realized gains and losses on postretirement benefit plans. Variable Interest Entities - The Company's statutory trust subsidiaries (First Bancorp Capital Trust II, Trust III and Trust IV, Carolina Capital Trust, New Century Statutory Trust I, and GrandSouth Capital Trust I), (collectively "the Trusts") qualify as variable interest entities. Notes issued by the Company to the Trusts in return for the proceeds from the issuance of the trust preferred securities have terms that are substantially the same as the corresponding trust preferred securities. As qualified variable interest entities, the Trusts' balance sheet and statement of operations have never been consolidated with those of the Company because the Company is not the primary beneficiary. Further, the Company has no exposure to loss of the operations of the Trusts as the Company is limited to the repayment of the underlying obligations and would not absorb the losses of the Trusts if losses were to occur. The trust preferred securities qualify as capital for regulatory capital adequacy requirements. Segment Reporting - Accounting standards require management to report selected financial and descriptive information about reportable operating segments that exceed certain thresholds. The standards also require related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. The Company’s operations are substantially all within a single banking segment, and the financial statements presented herein reflect the combined results of all of its operations with that segment. The Company has no foreign operations or customers. Derivative Instruments and Hedging Activities - The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps to accommodate certain commercial loan customers, with offsetting positions to dealers under a back-to-back swap program. All derivative instruments are recorded on the consolidated balance sheets as either an asset (included in "Other assets") or liability (included in "Other liabilities") at their fair value. The Company has master netting agreements with the counterparties with which it does business, but reflects gross assets and liabilities at fair value on the consolidated balance sheets. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. The Company classifies its derivative financial instruments as either (1) a hedge of an exposure to changes in the fair value of a recorded asset or liability (“fair value hedge”), (2) a hedge of an exposure to changes in the cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”), or (3) derivatives not designated as accounting hedges ("undesignated hedges"). As of December 31, 2023, the Company has only entered into derivatives classified as undesignated hedges for which changes in fair value are recognized in current period earnings in either noninterest income or noninterest expense. The Company also originates certain residential mortgage loans with the intention of selling these loans. The Company enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments which are entered into as part of an economic hedging strategy to manage exposure related to mortgage loans held for sale. Recent Accounting Pronouncements Accounting Standards Adopted in 2023 ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage D isclosures ." The amendments contained in this ASU eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This ASU also requires entities to disclose current period gross write-offs by year of origination for financing receivables. The Company adopted ASU 2022-02 effective January 1, 2023 using a modified retrospective transition approach for the amendments related to the recognition and measurement of TDRs. The impact of the adoption resulted in an immaterial change to the ACL, thus no adjustment to retained earnings was recorded. Disclosures have been updated in Note 4 to comply with the ASU as required. In addition, TDR disclosures are presented in Note 4 for comparative periods only and are not required to be updated in current periods. 79 Table of Contents ASU 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." This ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security, and, therefore, is not considered in measuring fair value. The Company adopted ASU 2022-03 January 1, 2023 with no material impact on its financial statements. ASU 2022-06 , " Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ." ASU 2022-06 deferred the sunset date of the London Interbank Offered Rate ("LIBOR") to December 31, 2024, after which entities will no longer be permitted to apply the relief prescribed in ASU 2020-04, Reference Rate Reform (Topic 848); moreover, it applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2022-06 was adopted in the third quarter of 2023 with no material effect on its financial statements. Accounting Standards Pending Adoption ASU 2023-02 , “ Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method ” permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. This update is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The adoption of ASU 2023-02 is not expected to have a significant impact on the Company's consolidated financial statements. ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" amended existing guidance to improve disclosures about a public entity’s reportable segments and provide more detailed information about a reportable segment’s expenses. ASU 2023-07 clarifies that an entity which has a single reportable segment is to provide all the disclosures required by Topic 280 and ASU 2023-07. The amendment is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The adoption of ASU 2023-07 is not expected to have a significant impact on the Company's consolidated financial statements. ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” amended existing guidance to improve the transparency of income tax disclosures, including disclosure of specific categories in the rate reconciliation, providing additional information for certain reconciling items, and providing details on income taxes paid. The amendments are effective for annual periods beginning after December 15, 2024. The adoption of ASU 2023-09 is not expected to have a significant impact on the Company's consolidated financial statements. Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board, ("FASB") or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows. Note 2. Acquisitions On January 1, 2023, the Company completed its acquisition of 100 % of GrandSouth Bancorporation ("GrandSouth"), in an all-stock transaction pursuant to the Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), dated June 21, 2022, between the Company and GrandSouth. At the closing of the transaction, GrandSouth merged into the Company. Following the merger of the Company and GrandSouth, GrandSouth Bank, a wholly-owned subsidiary of GrandSouth, merged into the Bank with the Bank being the surviving entity. The results of GrandSouth are included beginning on the January 1, 2023 acquisition date. Pursuant to the Merger Agreement, each share of common and preferred stock of GrandSouth issued and outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the Company's common stock. As a result, the Company issued 5,032,834 shares of the Company common stock effective January 1, 2023. In addition, GrandSouth common stock options outstanding at the merger effective time were converted to options to acquire 0.91 shares of the Company's common stock resulting in 542,345 options with an average exercise price of approximately $ 20.14 . The total consideration transferred at the close of the transaction was $ 229.5 million which was determined based on the number of shares issued and the closing market price of the Company's stock immediately prior to the merger effective time of $ 42.84 . In addition to the stock issued, the fair value of the converted stock options calculated in accordance with ASC 805-30-55 was included in the total consideration of the transaction. 80 Table of Contents As a result of the merger, eight branches in South Carolina were added to the Company's branch network. The acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the high-growth markets of the state including Greenville, Charleston and Columbia. Significant synergies were anticipated to be gained from the acquisition, with asset growth and revenue enhancement opportunities from the new markets and expanded customer base. Accordingly, the Company recognized goodwill in the transaction related primarily to the reasons noted, as well as the positive earnings of GrandSouth. This transaction was accounted for using the acquisition method of accounting for business combinations, and accordingly, the assets acquired, intangible assets identified, and liabilities assumed of GrandSouth were recorded based on estimates of fair values as of January 1, 2023. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. Estimated fair values were based on management’s best estimates, using the information available at the date of acquisition, including the use of third-party valuation specialists. Management has finalized the valuations of all acquired assets and liabilities assumed in the GrandSouth acquisition. The following table summarizes the estimated fair value of acquired assets, identified intangible assets, and liabilities assumed as of January 1, 2023. Following the table is a discussion of valuation approaches utilized in estimating the fair values. The $ 114.5 million in goodwill that resulted from this transaction is non-deductible for tax purposes. ($ in thousands) Fair Value Estimate Assets acquired: Cash and cash equivalents $ 22,610 Securities available for sale 112,363 Loans, gross 996,833 Allowance for credit losses ( 5,610 ) Premises and equipment 20,268 Core deposit intangible 28,840 Operating right-of-use assets 732 Other assets 27,163 Total 1,203,199 Liabilities assumed: Deposits 1,045,308 Borrowings 38,800 Other liabilities 4,089 Total 1,088,197 Net identifiable assets acquired 115,002 Less: Total consideration 229,489 Goodwill recorded related to acquisition of GrandSouth $ 114,487 The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed included in the table above. Cash and cash equivalents: This consists primarily of cash and due from banks, and interest-bearing deposits with banks. The carrying amount of these assets was a reasonable estimate of fair value based on the short-term nature of these assets. Securities available for sale: Fair value of securities was measured based on quoted market prices, where available. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. Substantially all of the securities acquired from GrandSouth were liquidated at their recorded fair value upon close of the transaction or shortly thereafter. There was no gain or loss recorded on the sale of acquired securities. Loans: Fair value of loans acquired was based on a discounted cash flow methodology that considered factors including loan type and related collateral, classification status, remaining term of the loan, fixed or variable interest rate, amortization status, and current discount rates. Expected cash flows were derived using inputs consistent with 81 Table of Contents management's assessment of credit risk for allowance measurement, including estimated future credit losses and estimated prepayments. A total fair value mark of $ 29.5 million was recorded. PCD loans were determined based primarily on internal grades, delinquency status, and other evidence of credit deterioration. The Company calculated the initial allowance of $ 5.6 million on PCD loans in accordance with its CECL model and reclassified that amount from the fair value mark to establish the initial ACL on PCD loans. The following table presents additional information related to the acquired loan portfolio at the acquisition date: ($ in thousands) January 1, 2023 PCD Loans: Par value $ 152,487 Allowance for credit losses ( 5,610 ) Non-credit discount ( 1,370 ) Purchase price 145,507 Non-PCD Loans: Fair Value 845,716 Gross contractual amounts receivable 865,132 Estimate of contractual cash flows not expected to be collected 22,542 Premises: Land and buildings held for use were valued at appraised values, which reflected considerations of recent disposition values for similar property types with adjustments for characteristics of individual properties. Intangible assets: The CDI asset represents the value of the relationships with deposit customers. The fair value for the CDI asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of deposit base, net maintenance cost attributable to customer deposits and an estimate of the cost associated with alternative funding sources. The discount rates used for CDI assets were based on market rates. The CDI is being amortized over ten years utilizing the sum of the months digits accelerated method, which results in a weighted-average amortization period of approximately 41 months. Lease Assets and Lease Liabilities: Lease assets and lease liabilities were measured using a methodology that involved estimating the future lease payments over the remaining lease term with discounting using a discount rate. The lease term was determined for individual leases based on management's assessment of the probability of exercising existing renewal options. Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis applying interest rates currently offered to the contractual interest rates on such time deposits. Borrowings: The fair values of long-term debt instruments were estimated based on quoted market prices for instrument if available, or for similar instruments if not available. Supplemental Pro Forma Financial Information The following table presents certain pro forma information as if GrandSouth had been acquired on January 1, 2022. These results combine the historical results of GrandSouth with the Company’s results and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2022. Merger-related costs related to this acquisition of $ 13.7 million for 2023 were recorded by the Company and were excluded from the pro forma information below. In addition, no adjustments have been made to such pro forma information to eliminate the provision for loan losses recorded by GrandSouth in the amount of $ 2.2 million for 2022. Pro forma information for the year 2023 was adjusted to eliminate the following: 1) the non-PCD provision for loan losses recorded on the acquisition date of $ 12.2 million and 2) the initial recording of a provision for credit losses associated with GrandSouth’s unfunded commitments of $ 1.9 million. If the GrandSouth acquisition had occurred at the beginning of 2022, the acquisition date credit loss reserve amounts would have been included in the fair value measurements of GrandSouth and also included in the goodwill calculation. 82 Table of Contents The following table also discloses the impact of the acquisition of GrandSouth from the acquisition date of January 1, 2023 through December 31, 2023. These amounts are included in the Company’s consolidated financial statements as of and for the year ended December 31, 2023. Merger-related costs have been excluded from these amounts and the provisions for credit loss amounts associated with non-PCD loans and unfunded commitments that were discussed above have also been excluded. ($ in thousands, unaudited) Revenue Net Income Year Ended December 31, 2023 Actual GrandSouth results included in statement of income since acquisition date $ 58,301 $ 22,058 Year Ended December 31, 2022 Supplemental consolidated pro forma as if GrandSouth had been acquired on January 1, 2022 454,579 161,826 Note 3. Securities The book values and approximate fair values of investment securities at December 31, 2023 and 2022 are summarized as follows: 2023 2022 Amortized Cost Fair Value Unrealized Amortized Cost Fair Value Unrealized ($ in thousands) Gains (Losses) Gains (Losses) Securities available for sale: US Treasury securities $ 174,785 172,570 — ( 2,215 ) 174,420 168,758 — ( 5,662 ) Government-sponsored enterprise securities 71,964 60,266 — ( 11,698 ) 71,957 57,456 — ( 14,501 ) Mortgage-backed securities 2,323,674 1,937,784 30 ( 385,920 ) 2,467,839 2,045,000 4 ( 422,843 ) Corporate bonds 19,676 18,759 — ( 917 ) 44,340 43,279 — ( 1,061 ) Total available for sale $ 2,590,099 2,189,379 30 ( 400,750 ) 2,758,556 2,314,493 4 ( 444,067 ) Securities held to maturity: Mortgage-backed securities $ 12,085 11,447 — ( 638 ) 15,150 14,221 — ( 929 ) State and local governments 521,593 438,176 39 ( 83,456 ) 526,550 418,307 7 ( 108,250 ) Total held to maturity $ 533,678 449,623 39 ( 84,094 ) 541,700 432,528 7 ( 109,179 ) All of the Company’s mortgage-backed securities were issued by government-sponsored enterprises ("GSEs"), except for private mortgage-backed securities with a fair value of $ 0.7 million and $ 0.8 million as of December 31, 2023 and 2022, respectively. 83 Table of Contents The following table presents information regarding securities with unrealized losses at December 31, 2023: Securities in an Unrealized Loss Position for Less than 12 Months Securities in an Unrealized Loss Position for More than 12 Months Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses US Treasury securities $ — — 172,570 2,215 172,570 2,215 Government-sponsored enterprise securities — — 60,266 11,698 60,266 11,698 Mortgage-backed securities 1,117 5 1,945,830 386,553 1,946,947 386,558 Corporate bonds — — 17,008 917 17,008 917 State and local governments — — 432,476 83,456 432,476 83,456 Total temporarily impaired securities $ 1,117 5 2,628,150 484,839 2,629,267 484,844 The following table presents information regarding securities with unrealized losses at December 31, 2022: Securities in an Unrealized Loss Position for Less than 12 Months Securities in an Unrealized Loss Position for More than 12 Months Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses US Treasury securities $ 168,758 5,662 — — 168,758 5,662 Government-sponsored enterprise securities — — 57,456 14,501 57,456 14,501 Mortgage-backed securities 221,006 18,215 1,835,958 405,557 2,056,964 423,772 Corporate bonds 40,644 947 886 114 41,530 1,061 State and local governments 48,385 8,323 368,897 99,927 417,282 108,250 Total temporarily impaired securities $ 478,793 33,147 2,263,197 520,099 2,741,990 553,246 As of December 31, 2023, the Company's securities portfolio held 657 securities of which 632 securities were in an unrealized loss position. As of December 31, 2022, the Company's securities portfolio held 666 securities of which 644 securities were in an unrealized loss position. In the above tables, all of the securities that were in an unrealized loss position at December 31, 2023 and 2022 are bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. In arriving at this conclusion, the Company reviewed third-party credit ratings and considered the severity of the impairment. The state and local government investments are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation. The Company has no significant concentrations of bond holdings from any one state or local government entity. Nearly all of the Company's mortgage-backed securities were issued by Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), or SBA, each of which is a government agency or GSE and guarantees the repayment of its securities. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost. At December 31, 2023 and 2022, the Company determined that expected credit losses associated with HTM securities and AFS debt securities were insignificant. 84 Table of Contents The book values and approximate fair values of investment securities at December 31, 2023, by contractual maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities Available for Sale Securities Held to Maturity ($ in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Debt securities Due within one year $ 177,290 174,976 — — Due after one year but within five years 10,000 8,602 1,998 1,797 Due after five years but within ten years 78,135 67,018 129,097 110,785 Due after ten years 1,000 999 390,498 325,594 Mortgage-backed securities 2,323,674 1,937,784 12,085 11,447 Total securities $ 2,590,099 2,189,379 533,678 449,623 At December 31, 2023 and 2022, investment securities with carrying values of $ 971.3 million and $ 758.0 million, respectively, were pledged as collateral for public deposits. In addition, at December 31, 2023 and 2022, investment securities with carrying values of $ 679.0 million and zero , respectively, were pledged as collateral for FRB borrowings. At December 31, 2023 and 2022, there were no holdings of securities of any one issuer, other than the US Government and its agencies or GSEs, in an amount greater than 10% of shareholders' equity. In 2023 and 2022, there were no sales of investment securities with the exception of securities acquired from GrandSouth in 2023 which were subsequently liquidated as discussed in Note 2. There was no gain or loss associated with the sale of acquired securities. In 2021, the Company received proceeds from sales of securities of $ 106.5 million and recorded $ 1.2 million in net gains from the sales. Included in “Other Assets” in the consolidated balance sheets are investments in FHLB and Federal Reserve stock totaling $ 54.5 million and $ 39.6 million at December 31, 2023 and 2022, respectively. These investments do not have readily determinable fair values. The FHLB stock had a cost and fair value of $ 21.7 million and $ 14.7 million at December 31, 2023 and 2022, respectively, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. The Federal Reserve stock had a cost and fair value of $ 32.8 million and $ 24.9 million at December 31, 2023 and 2022, respectively, and is a requirement for Federal Reserve member bank qualification. Periodically, both the FHLB and Federal Reserve recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end. The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at December 31, 2023 was approximately 1.59 , which means the Company would receive approximately 19,615 Class A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value and is carried at zero . If a readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a credit to earnings. 85 Table of Contents Note 4. Loans, Allowance for Credit Losses, and Asset Quality Information The following is a summary of the major categories of total loans outstanding: December 31, 2023 December 31, 2022 ($ in thousands) Amount Percentage Amount Percentage Commercial and industrial $ 905,862 11 % 641,941 9 % Construction, development & other land loans 992,980 12 % 934,176 14 % Commercial real estate - owner occupied 1,259,022 16 % 1,036,270 16 % Commercial real estate - non owner occupied 2,528,060 31 % 2,123,811 32 % Multi-family real estate 421,376 5 % 350,180 5 % Residential 1-4 family real estate 1,639,469 20 % 1,195,785 18 % Home equity loans/lines of credit 335,068 4 % 323,726 5 % Consumer loans 68,443 1 % 60,659 1 % Subtotal 8,150,280 100 % 6,666,548 100 % Unamortized net deferred loan fees ( 178 ) ( 1,403 ) Total loans $ 8,150,102 6,665,145 Also included in the table above are SBA loans, generally originated under the SBA 7A loan program, with additional information on these loans presented in the table below. ($ in thousands) December 31, 2023 December 31, 2022 Guaranteed portions of SBA Loans included in table above $ 35,462 31,893 Unguaranteed portions of SBA Loans included in table above 107,784 116,910 Total SBA loans included in the table above $ 143,246 148,803 Sold portions of SBA loans with servicing retained - not included in table above $ 349,275 392,370 At December 31, 2023 and December 31, 2022, there were remaining unaccreted discounts on the retained portion of sold SBA loans amounting to $ 3.5 million and $ 4.3 million respectively. At December 31, 2023 and December 31, 2022, loans in the amount of $ 6.5 billion and $ 5.3 billion, respectively, were pledged as collateral for certain borrowings. Refer to Note 9 for further discussion. At December 31, 2023 and 2022, total loans included loans to executive officers and directors of the Company, and their associates, totaling approximately $ 63.7 million and $ 6.0 million, respectively. There were nine new loans and advances on existing loans totaling approximately $ 58.5 million for the year ended December 31, 2023 and repayments amounted to $ 0.8 million for that period. Available credit on related party loans totaled $ 2.7 million and $ 1.2 million at December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023 and 2022, unamortized discounts on all acquired loans totaled $ 24.0 million and $ 11.6 million, respectively. Loan discounts are generally amortized as yield adjustments over the respective lives of the loans, while the loans perform. 86 Table of Contents Nonperforming assets ("NPAs") are defined as nonaccrual loans, FDMs, loans past due 90 or more days and still accruing interest, foreclosed real estate, and prior to the adoption of ASU 2022-02 on January 1, 2023, TDRs. The following table summarizes the NPAs for each period presented: ($ in thousands) December 31, 2023 December 31, 2022 Nonperforming assets Nonaccrual loans $ 32,208 28,514 Modifications to borrowers in financial distress 11,719 — TDRs - accruing — 9,121 Total nonperforming loans 43,927 37,635 Foreclosed properties 862 658 Total nonperforming assets $ 44,789 38,293 At December 31, 2023 and 2022, the Company had $ 1.0 million and $ 0.8 million in residential mortgage loans in process of foreclosure, respectively. At December 31, 2023 and December 31, 2022, there was one loan with an immaterial commitment to lend additional funds to borrowers whose loans were nonperforming. The following table is a summary of the Company’s nonaccrual loans by major categories for the year ended December 31, 2023. ($ in thousands) Nonaccrual Loans with No Allowance Nonaccrual Loans with an Allowance Total Nonaccrual Loans Commercial and industrial $ 944 8,932 9,876 Construction, development & other land loans — 399 399 Commercial real estate - owner occupied 960 6,082 7,042 Commercial real estate - non owner occupied 6,121 1,082 7,203 Residential 1-4 family real estate — 4,843 4,843 Home equity loans/lines of credit 534 2,169 2,703 Consumer loans — 142 142 Total $ 8,559 23,649 32,208 The following table is a summary of the Company’s nonaccrual loans by major categories for the year ended December 31, 2022. ($ in thousands) Nonaccrual Loans with No Allowance Nonaccrual Loans with an Allowance Total Nonaccrual Loans Commercial and industrial $ 3,855 6,374 10,229 Construction, development & other land loans — 1,009 1,009 Commercial real estate - owner occupied 3,903 5,770 9,673 Commercial real estate - non owner occupied 1,107 1,725 2,832 Residential 1-4 family real estate 157 3,132 3,289 Home equity loans/lines of credit — 1,397 1,397 Consumer loans — 85 85 Total $ 9,022 19,492 28,514 There is no interest income recognized during the periods presented on nonaccrual loans. The Company follows its nonaccrual policy of reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. 87 Table of Contents The following table represents the accrued interest receivables written off by reversing interest income for the periods indicate. ($ in thousands) Year Ended December 31, 2023 Year Ended December 31, 2022 Commercial and industrial $ 225 102 Construction, development & other land loans 10 16 Commercial real estate - owner occupied 124 124 Commercial real estate - non owner occupied 186 15 Residential 1-4 family real estate 38 45 Home equity loans/lines of credit 57 20 Consumer loans 2 2 Total $ 642 324 The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2023. ($ in thousands) Accruing 30-59 Days Past Due Accruing 60- 89 Days Past Due Accruing 90 Days or More Past Due Nonaccrual Loans Accruing Current Total Loans Receivable Commercial and industrial $ 3,726 257 — 9,876 892,003 905,862 Construction, development & other land loans 241 256 — 399 992,084 992,980 Commercial real estate - owner occupied 906 404 — 7,042 1,250,670 1,259,022 Commercial real estate - non owner occupied 361 — — 7,203 2,520,496 2,528,060 Multi-family real estate — — — — 421,376 421,376 Residential 1-4 family real estate 18,868 3,401 — 4,843 1,612,357 1,639,469 Home equity loans/lines of credit 603 349 — 2,703 331,413 335,068 Consumer loans 270 131 — 142 67,900 68,443 Total $ 24,975 4,798 — 32,208 8,088,299 8,150,280 Unamortized net deferred loan fees ( 178 ) Total loans $ 8,150,102 88 Table of Contents The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2022. ($ in thousands) Accruing 30-59 Days Past Due Accruing 60- 89 Days Past Due Accruing 90 Days or More Past Due Nonaccrual Loans Accruing Current Total Loans Receivable Commercial and industrial $ 438 565 — 10,229 630,709 641,941 Construction, development & other land loans 238 1,687 — 1,009 931,242 934,176 Commercial real estate - owner occupied 124 48 — 9,673 1,026,425 1,036,270 Commercial real estate - non owner occupied 496 49 — 2,832 2,120,434 2,123,811 Multi-family real estate — — — — 350,180 350,180 Residential 1-4 family real estate 3,415 25 — 3,289 1,189,056 1,195,785 Home equity loans/lines of credit 457 371 — 1,397 321,501 323,726 Consumer loans 249 66 — 85 60,259 60,659 Total $ 5,417 2,811 — 28,514 6,629,806 6,666,548 Unamortized net deferred loan (fees) costs ( 1,403 ) Total loans $ 6,665,145 Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans on nonaccrual with a net book balance of $ 500,000 or greater for designation as collateral dependent loans, as well as certain other loans that may still be accruing interest and/or are less than $ 500,000 in size that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the ACL. The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2023. ($ in thousands) Residential Property Business Assets Land Commercial Property Total Collateral-Dependent Loans Commercial and industrial $ — 2,385 — — 2,385 Commercial real estate - owner occupied — — — 1,142 1,142 Commercial real estate - non owner occupied — — — 6,121 6,121 Home equity loans/lines of credit 534 — — — 534 Total $ 534 2,385 — 7,263 10,182 The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2022. ($ in thousands) Residential Property Business Assets Land Commercial Property Total Collateral-Dependent Loans Commercial and industrial $ — 6,394 — — 6,394 Commercial real estate - owner occupied — — — 4,578 4,578 Commercial real estate - non owner occupied — — — 2,145 2,145 Residential 1-4 family real estate 157 — — — 157 Total $ 157 6,394 — 6,723 13,274 Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the ACL based on the fair value of collateral. The ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. 89 Table of Contents The Company's policy is to obtain third-party appraisals on any significant pieces of collateral. For loans secured by real estate, the Company's policy is to write nonaccrual loans down to 90 % of the appraised value, which considers estimated selling costs. For real estate collateral that is in industries that are undergoing heightened stress, the Company often discounts the collateral values by an additional 10 % to 25 % due to additional discounts that are estimated to be incurred in a near-term sale. For non-real estate collateral secured loans, the Company generally writes nonaccrual loans down to 75 % of the appraised value, which provides for selling costs and liquidity discounts that are usually incurred when disposing of non-real estate collateral. For reviewed loans that are not on nonaccrual basis, the Company assigns a specific allowance based on the parameters noted above. There is no significant over-coverage of collateral for any of the loan types noted above. Fluctuations in the ACL each period are based on loan mix and growth, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model, and as occurred in 2023, adjustments for acquired loan portfolios. 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. The following tables presents the activity in the ACL on loans for each of the periods indicated. ($ in thousands) Beginning balance Initial ACL for acquired PCD loans Charge-offs Recoveries Provisions/(Reversals) Ending balance As of and for the year ended December 31, 2023 Commercial and industrial $ 17,718 5,197 ( 8,358 ) 1,393 5,277 21,227 Construction, development & other land loans 15,128 49 ( 120 ) 370 ( 1,487 ) 13,940 Commercial real estate - owner occupied 14,972 191 ( 144 ) 465 2,734 18,218 Commercial real estate - non owner occupied 22,780 51 ( 235 ) 737 1,583 24,916 Multi-family real estate 2,957 — — 13 855 3,825 Residential 1-4 family real estate 11,354 113 ( 4 ) 377 9,556 21,396 Home equity loans/lines of credit 3,158 8 ( 309 ) 98 384 3,339 Consumer loans 2,900 1 ( 1,005 ) 248 848 2,992 $ 90,967 5,610 ( 10,175 ) 3,701 19,750 109,853 ($ in thousands) Beginning balance Charge-offs Recoveries Provisions/(Reversals) Ending balance As of and for the year ended December 31, 2022 Commercial and industrial $ 16,249 ( 2,519 ) 756 3,232 17,718 Construction, development & other land loans 16,519 — 480 ( 1,871 ) 15,128 Commercial real estate - owner occupied 12,317 ( 214 ) 691 2,178 14,972 Commercial real estate - non owner occupied 16,789 ( 849 ) 1,281 5,559 22,780 Multi-family real estate 1,236 — 11 1,710 2,957 Residential 1-4 family real estate 8,686 — 17 2,651 11,354 Home equity loans/lines of credit 4,337 ( 43 ) 600 ( 1,736 ) 3,158 Consumer loans 2,656 ( 840 ) 207 877 2,900 $ 78,789 ( 4,465 ) 4,043 12,600 90,967 90 Table of Contents ($ in thousands) Beginning balance Initial ACL for acquired PCD loans Adjustment for implementation of CECL Charge-offs Recoveries Provisions/(Reversals) Ending balance As of and for the year ended December 31, 2021 Commercial and industrial $ 11,316 2,917 3,067 ( 3,722 ) 1,744 927 16,249 Construction, development & other land loans 5,355 165 6,140 ( 245 ) 948 4,156 16,519 Commercial real estate - owner occupied 10,608 307 ( 189 ) ( 362 ) 150 1,803 12,317 Commercial real estate - non owner occupied 11,465 1,181 380 ( 1,933 ) 371 5,325 16,789 Multi-family real estate 1,530 1 ( 448 ) — 12 141 1,236 Residential 1-4 family real estate 8,048 222 2,584 ( 273 ) 761 ( 2,656 ) 8,686 Home equity loans/lines of credit 2,375 92 2,580 ( 400 ) 578 ( 888 ) 4,337 Consumer loans 1,478 10 674 ( 667 ) 358 803 2,656 Unallocated 213 — ( 213 ) — — — — $ 52,388 4,895 14,575 ( 7,602 ) 4,922 9,611 78,789 Credit Quality Indicators The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type. 91 Table of Contents The following describes the Company’s internal risk grades in ascending order of likelihood of loss: Risk Grade Description Pass: 1 Loans with virtually no risk, including cash secured loans. 2 Loans with documented significant overall financial strength. These loans have minimum chance of loss due to the presence of multiple sources of repayment – each clearly sufficient to satisfy the obligation. 3 Loans with documented satisfactory overall financial strength. These loans have a low loss potential due to presence of at least two clearly identified sources of repayment – each of which is sufficient to satisfy the obligation under the present circumstances. 4 Loans to borrowers with acceptable financial condition. These loans could have signs of minor operational weaknesses, lack of adequate financial information, or loans supported by collateral with questionable value or marketability. 5 Loans that represent above average risk due to minor weaknesses and warrant closer scrutiny by management. Collateral is generally available and felt to provide reasonable coverage with realizable liquidation values in normal circumstances. Repayment performance is satisfactory. P (Pass) Consumer loans that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels. These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines. Special Mention: 6 Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Company. Classified: 7 An existing loan inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. 8 Loans that have a well-defined weakness that make the collection or liquidation in full highly questionable and improbable. Loss appears imminent, but the exact amount and timing is uncertain. 9 Loans that are considered uncollectible and are in the process of being charged-off. This grade is a temporary grade assigned for administrative purposes until the charge-off is completed. F (Fail) Consumer loans with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc. The tables below present the Company’s recorded investment in loans by credit quality indicators by year of origination or renewal as of the periods indicated. Acquired loans are presented in the year originated, not in the year of acquisition. In the tables that follow, substantially all of the "Classified" loans have grades of 7 or Fail, with those categories having similar levels of risk. Revolving lines of credit that converted to term loans during the years ended December 31, 2023 and December 31, 2022 totaled $ 25.9 million and $ 7.9 million, respectively. As presented in the tables that follow, as of December 31, 2023, the Company had $ 44.1 million in loans graded as Special Mention and $ 54.2 million in loans graded as Classified, which includes all nonaccrual loans at that date. As of December 31, 2022, the Company had $ 39.0 million in loans graded as Special Mention and $ 48.5 million in loans graded as Classified, which includes all nonaccrual loans at that date. 92 Table of Contents Term Loans by Year of Origination ($ in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total As of December 31, 2023 Commercial and industrial Pass $ 136,735 161,131 111,069 75,312 38,495 60,626 302,684 886,052 Special Mention 2,832 2,547 167 185 448 672 1,135 7,986 Classified 1,626 1,152 720 1,389 1,647 4,487 803 11,824 Total commercial and industrial 141,193 164,830 111,956 76,886 40,590 65,785 304,622 905,862 Gross charge-offs, YTD 171 1,036 713 537 821 1,547 3,533 8,358 Construction, development & other land loans Pass 563,998 231,450 90,374 16,662 11,598 5,816 70,852 990,750 Special Mention 489 273 59 — 2 4 19 846 Classified 657 708 — — 8 11 — 1,384 Total construction, development & other land loans 565,144 232,431 90,433 16,662 11,608 5,831 70,871 992,980 Gross charge-offs, YTD — — — — — 120 — 120 Commercial real estate - owner occupied Pass 210,449 323,852 299,135 196,343 92,452 86,784 23,198 1,232,213 Special Mention 338 2,533 271 817 5,755 2,253 — 11,967 Classified 4,456 1,505 1,721 895 2,288 3,904 73 14,842 Total commercial real estate - owner occupied 215,243 327,890 301,127 198,055 100,495 92,941 23,271 1,259,022 Gross charge-offs, YTD — — 49 — — 92 3 144 Commercial real estate - non owner occupied Pass 509,596 748,854 722,472 287,235 119,515 84,690 29,001 2,501,363 Special Mention 11,353 199 36 393 1,183 5,942 342 19,448 Classified 871 32 14 4,214 634 1,484 — 7,249 Total commercial real estate - non owner occupied 521,820 749,085 722,522 291,842 121,332 92,116 29,343 2,528,060 Gross charge-offs, YTD — — 235 — — — — 235 Multi-family real estate Pass 57,378 137,533 139,879 43,881 12,231 10,323 20,151 421,376 Special Mention — — — — — — — — Classified — — — — — — — — Total multi-family real estate 57,378 137,533 139,879 43,881 12,231 10,323 20,151 421,376 Gross charge-offs, YTD — — — — — — — — Residential 1-4 family real estate Pass 363,410 400,483 317,515 186,459 94,567 260,102 3,247 1,625,783 Special Mention 681 41 202 64 587 1,987 — 3,562 Classified 1,848 50 474 741 472 6,539 — 10,124 Total residential 1-4 family real estate 365,939 400,574 318,191 187,264 95,626 268,628 3,247 1,639,469 Gross charge-offs, YTD — — — — — 4 — 4 Home equity loans/lines of credit Pass 2,830 1,136 1,141 223 499 1,233 319,199 326,261 Special Mention 163 — 122 — — — 18 303 Classified 255 — 146 91 112 10 7,890 8,504 Total home equity loans/lines of credit 3,248 1,136 1,409 314 611 1,243 327,107 335,068 Gross charge-offs, YTD — — — — — — 309 309 Consumer loans Pass 16,497 12,906 4,999 2,173 432 429 30,757 68,193 Special Mention — — — — — — — — Classified 130 7 45 — 3 34 31 250 Total consumer loans 16,627 12,913 5,044 2,173 435 463 30,788 68,443 Gross charge-offs, YTD 34 79 73 23 — 1 795 1,005 Total loans $ 1,886,592 2,026,392 1,690,561 817,077 382,928 537,330 809,400 8,150,280 Unamortized net deferred loan fees ( 178 ) Total loans, net of deferred loan fees $ 8,150,102 Total gross charge-offs, year to date $ 205 1,115 1,070 560 821 1,764 4,640 10,175 93 Table of Contents Term Loans by Year of Origination ($ in thousands) 2022 2021 2020 2019 2018 Prior Revolving Total As of December 31, 2022 Commercial and industrial Pass $ 185,167 107,747 85,110 51,274 590 76,588 120,590 627,066 Special Mention 342 166 648 1,312 — 990 332 3,790 Classified 734 1,909 808 1,384 — 5,762 488 11,085 Total commercial and industrial 186,243 109,822 86,566 53,970 590 83,340 121,410 641,941 Construction, development & other land loans Pass 550,752 267,096 42,421 30,973 — 12,722 19,519 923,483 Special Mention 5,128 5 3,679 — — 100 13 8,925 Classified 656 107 38 899 — 44 24 1,768 Total construction, development & other land loans 556,536 267,208 46,138 31,872 — 12,866 19,556 934,176 Commercial real estate - owner occupied Pass 258,025 305,324 190,464 96,495 179 141,053 15,499 1,007,039 Special Mention 1,170 1,070 4,042 6,926 — 3,277 665 17,150 Classified 3,060 208 84 1,572 — 6,790 367 12,081 Total commercial real estate - owner occupied 262,255 306,602 194,590 104,993 179 151,120 16,531 1,036,270 Commercial real estate - non owner occupied Pass 718,696 747,653 319,708 141,284 — 168,096 21,159 2,116,596 Special Mention 545 44 394 1,363 — 1,180 — 3,526 Classified 420 1,057 — 884 — 1,328 — 3,689 Total commercial real estate - non owner occupied 719,661 748,754 320,102 143,531 — 170,604 21,159 2,123,811 Multi-family real estate Pass 119,922 133,701 59,452 9,669 — 15,212 12,224 350,180 Special Mention — — — — — — — — Classified — — — — — — — — Total multi-family real estate 119,922 133,701 59,452 9,669 — 15,212 12,224 350,180 Residential 1-4 family real estate Pass 317,282 274,756 186,102 98,559 185 301,885 1,379 1,180,148 Special Mention 1,189 127 110 470 — 2,416 — 4,312 Classified 763 251 221 359 — 9,072 659 11,325 Total residential 1-4 family real estate 319,234 275,134 186,433 99,388 185 313,373 2,038 1,195,785 Home equity loans/lines of credit Pass 869 1,091 349 237 — 2,020 309,786 314,352 Special Mention 175 — — — — 18 1,072 1,265 Classified 106 156 94 87 — 213 7,453 8,109 Total home equity loans/lines of credit 1,150 1,247 443 324 — 2,251 318,311 323,726 Consumer loans Pass 35,406 7,946 3,610 1,056 3 1,250 10,953 60,224 Special Mention — — — — — — — — Classified 320 31 3 1 — 25 55 435 Total consumer loans 35,726 7,977 3,613 1,057 3 1,275 11,008 60,659 Total loans $ 2,200,727 1,850,445 897,337 444,804 957 750,041 522,237 6,666,548 Unamortized net deferred loan fees ( 1,403 ) Total loans, net of deferred loan fees $ 6,665,145 Loan Modifications to Borrowers Experiencing Financial Difficulty Effective January 1, 2023, we adopted ASU 2022-02 which eliminated the accounting guidance for TDRs and requires disclosures for certain loan modifications when a borrower is experiencing financial difficulty. Occasionally, the Company modifies loans to borrowers in financial distress as a part of our loss mitigation activities. Various types of modification may be offered including principal forgiveness, term extension, payment delays, or interest rate reductions. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession may be granted. For loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. 94 Table of Contents The followings tables present the amortized cost basis at December 31, 2023 of the loans modified during the twelve months then ended for borrowers experiencing financial difficulty, by loan category and type of concession granted. Payment Delay Term Extension Combination - Interest Rate Reduction and Term Extension Total Percent of Total Class of Loans Commercial and industrial $ 2,590 251 — 2,841 0.31 % Construction, development & other land loans — 354 8 362 0.04 % Commercial real estate - owner occupied 210 4,245 — 4,455 0.35 % Commercial real estate - non owner occupied — 206 — 206 0.01 % Residential 1-4 family real estate — 735 — 735 0.04 % Home equity loans/lines of credit 557 2,436 121 3,114 0.93 % Consumer loans — 6 — 6 0.01 % Total $ 3,357 8,233 129 11,719 0.14 % For the twelve months ended December 31, 2023, there were no modifications for borrowers experiencing financial difficulty with principal forgiveness concessions. The following tables describes the financial effect for the twelve months ended December 31, 2023 of the modifications made for borrowers experiencing financial difficulty: Weighted Average Interest Rate Reduction Weighted Average Payment Delay (in months) Weighted Average Term Extension (in months) Commercial and industrial — % 4 31 Construction, development & other land loans 1.55 % 0 19 Commercial real estate - owner occupied — % 11 34 Commercial real estate - non owner occupied — % 0 13 Residential 1-4 family real estate — % 0 23 Home equity loans/lines of credit 2.40 % 13 49 Consumer loans — % 0 24 The Company closely monitors the performance of the loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of loans that have been modified in the last twelve months as of December 31, 2023: Payment Status (Amortized Cost Basis) Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Commercial and industrial $ 2,841 — — — Construction, development & other land loans 362 — — — Commercial real estate - owner occupied 4,455 — — — Commercial real estate - non owner occupied 206 — — — Residential 1-4 family real estate 656 79 — — Home equity loans/lines of credit 3,114 — — — Consumer loans 6 — — — Total $ 11,640 79 — — None of the modifications made for borrowers experiencing financial difficulty during the twelve months ended December 31, 2023 are considered to have had a payment default. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount. 95 Table of Contents TDR Disclosures Prior to the Adoption of ASU 2022-02 The restructuring of a loan was considered a TDR if both (i) the borrower was experiencing financial difficulties and (ii) the creditor had granted a concession. Concessions may have included interest rate reductions or below market interest rates, principal forgiveness, extension of terms and other actions intended to minimize potential losses. The vast majority of the Company’s TDRs modified during the years ended December 31, 2022 and 2021 related to interest rate reductions combined with extension of terms. The Company does not generally grant principal forgiveness. The Company’s TDRs can be classified as either nonaccrual or accruing based on the loan’s payment status. The TDRs that are nonaccrual are reported within the nonaccrual loan totals presented previously. The following tables present information related to loans modified in a TDR during periods as indicated. For the year ended December 31, 2022 ($ in thousands, except number of contracts) Number of Contracts Pre- Modification Restructured Balances Post- Modification Restructured Balances TDRs – Accruing Commercial and industrial 2 $ 143 143 Construction, development & other land loans 1 67 67 Residential 1-4 family real estate 2 75 78 TDRs – Nonaccrual Commercial and industrial 5 744 744 Commercial real estate - non owner occupied 1 72 72 Residential 1-4 family real estate 1 36 36 Total TDRs arising during period 12 $ 1,137 1,140 For the year ended December 31, 2021 ($ in thousands, except number of contracts) Number of Contracts Pre- Modification Restructured Balances Post- Modification Restructured Balances TDRs – Accruing Residential 1-4 family real estate 1 $ 33 33 TDRs – Nonaccrual Commercial and industrial 5 1,438 1,435 Construction, development & other land loans 1 75 75 Commercial real estate - owner occupied 3 553 553 Commercial real estate - non owner occupied 1 1,176 1,176 Residential 1-4 family real estate 1 263 263 Total TDRs arising during period 12 $ 3,538 3,535 The Company considered a TDR loan to have defaulted when it became 90 or more days delinquent under the modified terms, had been transferred to nonaccrual status, or had been transferred to foreclosed real estate. There were no accruing TDRs that were modified in the twelve months preceding December 31, 2022 and 2021 and that defaulted during the twelve months ended December 31, 2022 and 2021. 96 Table of Contents Concentration of Credit Risk The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions. Approximately 88 % of the Company's loan portfolio is secured by real estate and is therefore susceptible to changes in real estate valuations. Most of our business activity is with customers located within the markets where we have banking operations. While our exposure to credit risk is affected by changes in the economy within our markets, the risk is not significantly concentrated. The following table presents the total lending exposure for the counties with the largest percentage of our loan portfolio as of December 31, 2023 and 2022. No other market (as defined by county) had total loans outstanding in excess of 5% of the total portfolio at year end. Percentage of Loans Outstanding 2023 2022 Wake County, North Carolina 10.1 % 11.6 % New Hanover County, North Carolina 8.1 % 9.1 % Mecklenburg County, North Carolina 7.6 % 7.9 % Buncombe County, North Carolina 5.3 % 6.1 % Guilford County, North Carolina 5.0 % 5.0 % In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries, and geographic regions, the Company monitors exposure to credit risk that could arise from potential concentrations of lending products and practices The Company has determined that there is no concentration of credit risk associated with its lending policies or practices. Allowance for Unfunded Loan Commitments In addition to the ACL on loans, the Company maintains an allowance for lending-related commitments such as unfunded loan commitments and letters of credit. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for lending-related commitments on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the ACL on loans, and are discussed in Note 1. The allowance for unfunded loan commitments of $ 11.4 million and $ 13.3 million at December 31, 2023 and December 31, 2022, respectively, were included in "Other liabilities" on the consolidated balance sheets. The following table prese nts the balance and activity in the allowance for unfunded loan commitments for twelve months ended December 31, 2023 and December 31, 2022: ($ in thousands) December 31, 2023 December 31, 2022 Beginning balance $ 13,306 $ 13,506 Initial provision for credit losses on unfunded commitments acquired from GrandSouth 1,921 — Charge-offs — — Recoveries — — Reversal of provision for unfunded commitments ( 3,858 ) ( 200 ) Ending balance $ 11,369 $ 13,306 Allowance for Credit Losses - Securities Held Maturity The ACL for securities held to maturity was insignificant at December 31, 2023 and December 31, 2022. 97 Table of Contents Note 5. Premises and Equipment Premises and equipment at December 31, 2023 and 2022 consisted of the following: ($ in thousands) Estimated Useful Lives 2023 2022 Land $ 52,443 45,363 Buildings 15 to 40 years 127,985 114,884 Furniture and equipment 5 to 10 years 35,214 31,920 Vehicles 3 years 2,384 1,227 Leasehold improvements 5 to 39 years 1,644 1,644 Total cost 219,670 195,038 Less accumulated depreciation and amortization ( 68,713 ) ( 60,851 ) Total premises and equipment $ 150,957 134,187 Depreciation expense amounted to $ 7.8 million, $ 6.9 million, and $ 6.2 million for the years ended December 31, 2023, 2022, and 2021, respectively, and is recorded in occupancy expense. Note 6. Goodwill and Other Intangible Assets The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets and the carrying amount of unamortizable intangible assets as of the periods presented. December 31, 2023 December 31, 2022 ($ in thousands) Gross Carrying Amount Accumulated Amortization Net Amount Gross Carrying Amount Accumulated Amortization Net Amount Amortizable intangible assets: Customer lists $ 2,700 2,167 533 2,700 1,847 853 Core deposit intangibles 57,890 28,932 28,958 29,050 21,274 7,776 Other 100 83 17 100 58 42 Intangibles before servicing assets 60,690 31,182 29,508 31,850 23,179 8,671 SBA servicing assets 13,966 10,616 3,350 13,264 9,260 4,004 Total amortizable intangible assets $ 74,656 41,798 32,858 45,114 32,439 12,675 Unamortizable intangible assets: Goodwill $ 478,750 364,263 Customer lists are generally amortized over five years and core deposit intangibles are generally amortized over 10 years, both at an accelerated rate. In connection with the GrandSouth acquisition on January 1, 2023, the Company recorded $ 28.8 million in core deposit intangibles. Amortization expense of all other intangible assets, excluding the SBA servicing asset, totaled $ 8.0 million, $ 3.7 million, and $ 3.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. The portfolio of SBA loans serviced for others, which were not included in the accompanying consolidated balances sheets, was $ 349.3 million and $ 392.4 million, respectively, at December 31, 2023 and 2022. There were no other loans serviced for others in any year presented. During 2023, 2022 and 2021, the Company recorded $ 3.5 million, $ 3.4 million, and $ 3.9 million , respectively in SBA guaranteed servicing fee income. There was no impairment of SBA servicing assets at December 31, 2023 and $ 352 thousand as of December 31, 2022. Impairment charges or reversals are nominal in each year and are included with amortization expense in noninterest income as an offset to SBA servicing income. 98 Table of Contents A summary of the key assumptions used in the discounted cash flow method utilized to estimate the fair value of the SBA servicing asset were as follows: December 31, 2023 December 31, 2022 Prepayment rate assumption: Weighted average 19.05 % 15.58 % Range 9.27 % - 33.14 % 7.29 % - 32.38 % Discount rate: Weighted average 16.36 % 22.14 % Range 11.19 % - 22.51 % 14.44 % - 31.29 % Servicing cost 0.40 % 0.40 % The following table presents the changes in the SBA servicing assets for each period indicated. ($ in thousands) December 31, 2023 December 31, 2022 Beginning balance, net $ 4,004 5,472 Add: New servicing assets 702 1,332 Less: Amortization expense and impairment charges ( 1,356 ) ( 2,800 ) Ending balance, net $ 3,350 4,004 Goodwill is evaluated for impairment on at least an annual basis, with the annual evaluation occurring as of October 31st of each year. Goodwill is also evaluated for impairment any time there is a triggering event indicating that impairment may have occurred. No triggering events were identified during 2023 or 2022, and therefore, the Company did not perform interim impairment evaluations in either of those years. Each of the Company's goodwill impairment evaluations for the periods presented, including the most recent, which occurred in the fourth quarter of 2023, indicated that there was no goodwill impairment. The following table presents the changes in carrying amounts of goodwill: ($ in thousands) Total Goodwill Balance at December 31, 2021 $ 364,263 Net activity during 2022 — Balance at December 31, 2022 364,263 Additions from acquisition of GrandSouth 114,487 Balance at December 31, 2023 $ 478,750 The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets, excluding the SBA servicing assets. These amounts will be recorded as "Intangibles amortization expense" within the noninterest expense section of the consolidated statements of income. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets. ($ in thousands) Estimated Amortization Expense 2024 $ 6,604 2025 5,672 2026 4,704 2027 3,951 2028 3,197 Thereafter 5,380 Total $ 29,508 99 Table of Contents Note 7. Income Taxes The components of income tax expense (benefit) for the years ended December 31, 2023, 2022, and 2021 are as follows: ($ in thousands) 2023 2022 2021 Current - Federal $ 24,750 35,616 25,742 - State 3,857 4,477 3,733 Deferred - Federal ( 481 ) ( 1,658 ) ( 4,247 ) - State ( 301 ) ( 152 ) ( 553 ) Total $ 27,825 38,283 24,675 The following is a reconciliation of federal income tax expense at the statutory rate of 21% at December 31, 2023, December 31, 2022, and December 31, 2021, to the income tax provision reported in the financial statements. ($ in thousands) 2023 2022 2021 Tax provision at statutory rate $ 27,711 38,896 25,266 Increase (decrease) in income taxes resulting from: Tax-exempt interest income ( 2,175 ) ( 1,976 ) ( 1,589 ) Low income housing and other tax credits ( 630 ) ( 669 ) ( 1,229 ) Bank-owned life insurance income ( 920 ) ( 1,511 ) ( 589 ) Non-deductible interest expense 241 26 14 State income taxes, net of federal benefit 2,809 3,369 2,472 Nondeductible merger expenses 489 107 242 Change in valuation allowance ( 13 ) ( 20 ) ( 10 ) Nondeductible compensation 274 97 27 Other, net 39 ( 36 ) 71 Total $ 27,825 38,283 24,675 100 Table of Contents The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets, which are included in Other Assets on the consolidated balance sheets are as follows at December 31, 2023 and 2022: ($ in thousands) 2023 2022 Deferred tax assets: Allowance for credit losses on loans $ 25,431 20,900 Allowance for credit losses on unfunded commitments 2,632 3,057 Excess book over tax pension plan cost 403 365 Deferred compensation 1,453 638 Federal & state net operating loss and tax credit carryforwards 188 197 Accruals, book versus tax 3,462 4,404 Pension 23 — Unrealized losses on securities available for sale 92,767 102,046 Foreclosed real estate — 3 Basis differences in assets acquired in FDIC transactions 46 — Purchase accounting adjustments 4,691 2,982 Equity compensation 1,524 768 Partnership investments 773 652 Leases 178 151 SBA servicing asset 31 77 Gross deferred tax assets 133,602 136,240 Less: Valuation allowance ( 17 ) ( 30 ) Net deferred tax assets 133,585 136,210 Deferred tax liabilities: Loan fees ( 2,952 ) ( 3,102 ) Depreciable basis of fixed assets ( 7,070 ) ( 5,493 ) Amortizable basis of intangible assets ( 15,523 ) ( 10,047 ) Basis differences in assets acquired in FDIC transactions — ( 108 ) Trust preferred securities ( 388 ) ( 416 ) Pension — ( 12 ) Gross deferred tax liabilities ( 25,933 ) ( 19,178 ) Net deferred tax asset $ 107,652 117,032 The valuation allowances for 2023 and 2022 related to state net operating loss carryforwards. The realization of the remaining net deferred tax assets is determined to be more likely than not. The Company had no significant uncertain tax positions, and thus no reserve for uncertain tax positions has been recorded. Additionally, the Company determined that it has no material unrecognized tax benefits that if recognized would affect the effective tax rate. The Company’s general policy is to record tax penalties and interest as a component of “other operating expenses.” The Company is subject to routine audits of its tax returns by the Internal Revenue Service and various state taxing authorities. The Company’s tax returns are subject to income tax audit by federal and state agencies beginning with the year 2020. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority. Retained earnings at December 31, 2023 and 2022 included approximately $ 6.9 million representing pre-1988 tax bad debt reserve base year amounts for which no deferred income tax liability has been provided since these reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Bank’s stock. 101 Table of Contents Note 8. Deposits The following table lists the composition of the deposit portfolio as of the end of the respective years. ($ in thousands) December 31, 2023 December 31, 2022 Noninterest-bearing checking accounts $ 3,379,876 3,566,003 Interest-bearing checking accounts 1,411,142 1,514,166 Money market accounts 3,653,506 2,416,146 Savings accounts 608,380 728,641 Other time deposits 610,887 464,343 Time deposits >$250,000 355,209 276,319 Total customer deposits 10,019,000 8,965,618 Brokered Deposits - time deposits 12,599 261,911 Total deposits $ 10,031,599 9,227,529 At December 31, 2023, the scheduled maturities of time deposits were as follows: ($ in thousands) 2024 $ 901,211 2025 41,579 2026 21,160 2027 9,175 2028 4,727 Thereafter 843 $ 978,695 Deposits received from executive officers and directors and their associates totaled approximately $ 4.6 million and $ 2.0 million at December 31, 2023 and 2022, respectively. Deposit overdrafts of approximately $ 1.1 million and $ 0.8 million at December 31, 2023 and 2022 are included within "Loans" on the consolidated balance sheets. As of December 31, 2023 and 2022, the Company held $ 355.2 million and $ 276.3 million, respectively, in time deposits of more than $250,000 (which was the FDIC insurance limit for insured deposits as of December 31, 2023). Brokered deposits were $ 12.6 million and $ 261.9 million at December 31, 2023 and 2022, respectively. Total reciprocal deposits through the Certificate of Deposit Account Registry Services ("CDARS") and Insured Cash Sweep ("ICS") were $ 26.6 million and $ 10.3 million at December 31, 2023 and 2022, respectively. As of December 31, 2023, the estimated insured deposits totaled $ 6.3 billion or 63.3 % of total deposits, while approximately $ 3.7 billion of the Company's total deposits were uninsured deposits. In addition to insured deposits, there were deposits with a balance totaling $ 820.9 million at December 31, 2023 which were collateralized by investment securities such that approximately 71.5 % of our total deposits were insured or collateralized at that date. The Company’s deposit portfolio is not concentrated in deposits to any single customer or to a relatively small number of customers. Additionally, management is not aware of any concentrations of deposits to classes of customers or industries that would be similarly affected by economic conditions. The following table presents the counties with the largest share of our deposit base as of December 31, 2023 and 2022. No other market area (as defined by county) comprises more than 5% of our deposit base at the dates presented. Percentage of Total Deposits 2023 2022 Moore County, North Carolina 10.8 % 10.9 % Buncombe County, North Carolina 7.2 % 8.3 % Guilford County, North Carolina 5.0 % 6.0 % 102 Table of Contents Note 9. Borrowings and Borrowings Availability The following tables presents information regarding the Company’s outstanding borrowings at December 31, 2023 (dollars are in thousands) : Description Due Date Call Feature Balance at December 31, 2023 Interest Rate FHLB Principal Reducing Credit 6/26/2028 None $ 203 0.25 % fixed FHLB Principal Reducing Credit 7/17/2028 None 31 0.00 % fixed FHLB Principal Reducing Credit 8/18/2028 None 151 1.00 % fixed FHLB Principal Reducing Credit 8/22/2028 None 151 1.00 % fixed FHLB Principal Reducing Credit 12/20/2028 None 315 0.50 % fixed FHLB Fixed Rate Credit 1/16/2024 None 80,000 5.59 % fixed FHLB Fixed Rate Credit 2/27/2024 None 100,000 5.61 % fixed FHLB Fixed Rate Credit 3/20/2024 None 100,000 5.61 % fixed FRB Bank Term Funding Program 12/20/2024 None 224,000 4.85 % fixed FRB Bank Term Funding Program 12/27/2024 None 25,000 4.83 % fixed Trust Preferred Securities 1/23/2034 Quarterly by Company beginning 1/23/2009 10,310 8.30 % at 12/31/23 adjustable rate 3 month CME Term SOFR + 2.91 % Trust Preferred Securities 1/23/2034 Quarterly by Company beginning 1/23/2009 10,310 8.40 % at 12/31/23 adjustable rate 3 month CME Term SOFR + 3.01 % Trust Preferred Securities 9/20/2034 Quarterly by Company beginning 9/20/2009 12,372 7.78 % at 12/31/23 adjustable rate 3 month CME Term SOFR + 2.41 % Trust Preferred Securities 1/7/2035 Quarterly by Company beginning 1/7/2010 10,310 7.66 % at 12/31/23 adjustable rate 3 month CME Term SOFR + 2.00 % Trust Preferred Securities 6/15/2036 Quarterly by Company beginning 6/15/2011 25,774 7.04 % at 12/31/23 adjustable rate 3 month CME Term SOFR + 1.65 % Trust Preferred Securities 6/23/2036 Quarterly by Company beginning 6/23/2011 8,248 7.47 % at 12/31/23 adjustable rate 3 month CME Term SOFR + 2.11 % Subordinated Debentures 11/30/2028 Continuous by Company beginning 11/30/2023 10,000 9.09 % at 12/31/23 adjustable rate 3 month CME Term SOFR + 3.69 % Subordinated Debentures 11/15/2030 Continuous by Company beginning 11/15/2025 18,000 4.38 % fixed Total borrowings / weighted average rate as of December 31, 2023 635,175 5.57 % Unamortized discount on acquired borrowings ( 5,017 ) Total borrowings $ 630,158 103 Table of Contents The following table presents information regarding the Company’s outstanding borrowings at December 31, 2022 (dollars are in thousands) : Description Due date Call Feature Balance at December 31, 2022 Interest Rate FHLB Principal Reducing Credit 7/24/2023 None $ 32 1.00 % fixed FHLB Principal Reducing Credit 12/22/2023 None 912 1.25 % fixed FHLB Principal Reducing Credit 6/26/2028 None 214 0.25 % fixed FHLB Principal Reducing Credit 7/17/2028 None 38 0.00 % fixed FHLB Principal Reducing Credit 8/18/2028 None 158 1.00 % fixed FHLB Principal Reducing Credit 8/22/2028 None 159 1.00 % fixed FHLB Principal Reducing Credit 12/20/2028 None 329 0.50 % fixed FHLB Fixed Rate Credit 1/9/2023 None 50,000 4.15 % fixed FHLB Fixed Rate Credit 2/1/2023 None 80,000 4.25 % fixed FHLB Fixed Rate Credit 2/9/2023 None 50,000 4.35 % fixed FHLB Daily Rate Credit 8/23/2023 None 40,000 4.57 % fixed Trust Preferred Securities 1/23/2034 Quarterly by Company beginning 1/23/2009 10,310 7.06 % at 12/31/22 adjustable rate 3 month LIBOR + 2.65 % Trust Preferred Securities 1/23/2034 Quarterly by Company beginning 1/23/2009 10,310 7.16 % at 12/31/22 adjustable rate 3 month LIBOR + 2.75 % Trust Preferred Securities 9/20/2034 Quarterly by Company beginning 9/20/2009 12,372 6.90 % at 12/31/22 adjustable rate 3 month LIBOR + 2.15 % Trust Preferred Securities 1/7/2035 Quarterly by Company beginning 1/7/2010 10,310 6.08 % at 12/31/22 adjustable rate 3 month LIBOR + 2.00 % Trust Preferred Securities 6/15/2036 Quarterly by Company beginning 6/15/2011 25,774 6.16 % at 12/31/22 adjustable rate 3 month LIBOR + 1.39 % Total borrowings / weighted average rate as of December 31, 2022 290,918 4.82 % Unamortized discount on acquired borrowings ( 3,411 ) Total borrowings $ 287,507 All outstanding FHLB and FRB borrowings may be accelerated immediately by the FHLB and FRB, respectively, in certain circumstances, including material adverse changes in the condition of the Company or if the Company’s qualifying collateral amounts to less than that required under the terms of the borrowing agreement. In the above tables, at December 31, 2023, short-term borrowings (original maturity terms of less than twelve months) totaled $ 529.0 million and had a weighted average interest rate of 5.25 %. At December 31, 2022, short-term borrowings totaled $ 220.9 million and had a weighted average interest rate of 4.30 % . Trust Preferred Securities in the above tables are borrowings structured as trust preferred capital securities which were issued by various unconsolidated subsidiaries of the Company as discussed in Note 1. These unsecured debt securities qualify as Tier I capital for capital adequacy requirements. The Subordinated Debentures in the tables above are borrowings issued by GrandSouth and acquired by the Company on January 1, 2023. These unsecured debt securities qualify as Tier II capital for capital adequacy requirements. At December 31, 2023, the Company had several sources of readily available borrowing capacity: • A $ 1.3 billion line of credit with the FHLB that can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity needs. As of December 31, 2023, the line of credit is secured by a blanket lien on portions of the Company's real estate loan portfolio totaling approximately $ 2.3 billion and the Company's FHLB stock totaling $ 21.7 million. $ 280.9 million was outstanding on the line of credit at December 31, 2023 and $ 221.8 million was outstanding at December 31, 2022; 104 Table of Contents • A total of $ 265.0 million federal funds lines of credit with correspondent banks which allow the Company to purchase federal funds on an overnight, unsecured basis. None was outstanding at December 31, 2023 or 2022; • A $ 294.1 million line of credit through the Federal Reserve's Bank Term Funding Program, secured by specific investment securities, with $ 249.0 million outstanding at December 31, 2023; and • An approximately $ 561.6 million line of credit through the Federal Reserve's discount window borrowing program, which was secured at December 31, 2023 by a blanket lien on a portion of the Company’s commercial and consumer loan portfolios (excluding real estate collateral) totaling approximately$ 330.9 million and specific investment securities with a carrying value of $ 710.2 million. None was outstanding at December 31, 2023 or 2022, respectively. At December 31, 2023, the contractual maturities of borrowings were as follows for the years ending: ($ in thousands) FHLB Principal Reducing Credit FHLB Fixed Rate Credit FRB Bank Term Funding Program Trust Preferred Securities Subordinated Debentures Total 2024 $ — 280,000 249,000 — — 529,000 2025 — — — — — — 2026 — — — — — — 2027 — — — — — — 2028 851 — — — 10,000 10,851 Thereafter — — — 77,324 18,000 95,324 Total $ 851 280,000 249,000 77,324 28,000 635,175 Unamortized discount on acquired borrowings ( 5,017 ) Total borrowings 630,158 Note 10. Leases The Company enters into leases in the normal course of business. As of December 31, 2023, the Company leased 17 branch offices for which the land and buildings are leased and ten branch offices for which the land is leased but the building is owned. The Company also leases office space for several operational departments. All of the Company’s leases are operating leases and the lease agreements have maturity dates ranging from January 2024 through May 2076, some of which include options for multiple five - and ten-year extensions. The Company includes lease extension options in the lease term if, after considering relevant economic, market, and strategic factors, it is reasonably certain the Company will exercise the option. The weighted average remaining life of the lease term for these leases was 19.8 years as of December 31, 2023 and 19.6 years as of December 31, 2022. Certain of the Company's lease agreements include variable lease payments based on changes in inflation, with the impact of that factor being insignificant to the Company's total lease expense. As permitted by applicable accounting standards, the Company has elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company's consolidated balance sheets. The short-term lease cost for each period presented was insignificant. Leases are classified as either operating or finance leases at the lease commencement date, and as previously noted, all of the Company's leases have been determined to be operating leases. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its incremental borrowing rate, based on for a fully collateralized loan with a maturity similar to the lease term, at lease commencement to calculate the present value of lease payments when the rate implicit in the lease is not known. The weighted average discount rate for leases was 3.19 % and 2.97 % as of December 31, 2023 and 2022, respectively. 105 Table of Contents The right-of-use assets and lease liabilities were $ 17.1 million and $ 17.8 million as of December 31, 2023, respectively, and were $ 18.7 million and $ 19.4 million as of December 31, 2022, respectively. Total operating lease expense charged to operations under all operating lease agreements was $ 3.1 million in 2023, $ 2.9 million in 2022, and $ 2.6 million in 2021. These expenses are recorded within noninterest expense in the "Equipment related expenses" line on the consolidated statements of income. Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2023 for each of the five calendar years ending December 31, 2028 are as follows: ($ in thousands) 2024 $ 2,446 2025 1,914 2026 1,633 2027 1,359 2028 1,267 Thereafter 17,222 Total undiscounted lease payments 25,841 Less effect of discounting ( 8,008 ) Present value of estimated lease payments (lease liability) $ 17,833 Note 11. Employee Benefit Plans 401(k) Plan The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code ("IRC"). New employees who have met the age requirement are automatically enrolled in the plan at a 6 % deferral rate. The automatic deferral can be modified by the employee at any time. An eligible employee may contribute up to 15 % of annual salary to the plan, not to exceed IRC limits. For each of the years ended December 31, 2023, 2022, and 2021, the Company matched 100 % of the employee’s contribution up to 6 %. The Company’s matching contribution expense was $ 6.1 million, $ 4.9 million, and $ 4.3 million for the years ended December 31, 2023, 2022, and 2021, respectively. Although discretionary contributions by the Company are permitted by the plan, the Company did not make any such contributions in the years presented. The Company’s matching and discretionary contributions are made according to the same investment elections each participant has established for their deferral contributions. Pension Plan Historically, the Company offered a noncontributory defined benefit retirement plan (the “Pension Plan”) that qualified under Section 401(a) of the IRC. The Pension Plan provided for a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75 % of Final Average Annual Compensation ( five highest consecutive calendar years’ earnings out of the last ten years of employment) multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65 % of Final Average Annual Compensation in excess of the average social security wage base multiplied by years of service not in excess of 35 years. Benefits were fully vested after five years of service. Effective December 31, 2012, the Company froze the Pension Plan for all participants and has not made any contributions to the Pension Plan in any year presented. In March 2023, the Company’s Board of Directors (the "Board") approved a resolution to terminate the Pension Plan. During the second quarter of 2023, the Company commenced the Pension Plan termination process and on July 31, 2023, the Pension Plan was amended to terminate it as of that date. During the fourth quarter of 2023, the Pension Plan settled benefits through lump-sum payments of approximately $ 9.2 million to eligible participants electing that option and purchased annuity contracts from One America (the "Insurer") which irrevocably transferred to the Insurer approximately $ 19.5 million of the Pension Plan's obligations and related assets, thereby reducing the Pension Plan's obligations at December 31, 2023 to zero . The Insurer will administer all future payments to remaining participants of the Pension Plan. The Pension Plan's net funded position was sufficient to cover the lump sum payments and the purchase of the annuity contract, settling all benefit obligations with no additional funding required. As a result of this transaction, the Company recognized a one-time, non-cash pension settlement charge of $ 1.0 million. After the settlement of the benefit obligations and payment of expenses, the Company had excess assets in the Pension Plan of approximately $ 2.5 million. The Company has elected to utilize the remaining surplus 106 Table of Contents after payment of final administrative expenses for future contributions under the Company’s 401(k) plan. The assets will be held in the Pension Plan trust account until the contributions are made and are included in "Other assets" on the consolidated balance sheets. Prior to the termination of the Pension Plan, the investment objective was to ensure that there were sufficient assets to fund regular pension benefits payable to employees over the long-term life of the plan. Plan assets were allocated in a manner to closely duration-match the actuarial projected cash flows of the plan liabilities. In 2018, the Pension Plan adopted a liability-driven investment strategy to help meet the objectives. This strategy employed a structured fixed-income portfolio designed to reduce volatility in the Pension Plan’s future funding requirements and funding status. This was accomplished by using a blend of high quality corporate and government fixed-income securities, with both intermediate and long-term durations. The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as computed by the Company with assistance from its independent actuarial consultants, and its plan assets, with the difference between the two amounts representing the funded status of the Pension Plan as of the end of the respective year. ($ in thousands) 2023 2022 2021 Change in benefit obligation Benefit obligation at beginning of year $ 30,611 41,657 44,750 Service cost — — — Interest cost 1,451 1,043 981 Actuarial gain ( 1,470 ) ( 10,286 ) ( 2,041 ) Benefits paid, including lump sums ( 11,135 ) ( 1,803 ) ( 2,033 ) Transfer to insurer ( 19,457 ) — — Accumulated benefit obligation at end of year — 30,611 41,657 Change in plan assets Plan assets at beginning of year 33,655 44,904 48,167 Actual return on plan assets ( 547 ) ( 9,446 ) ( 1,230 ) Employer contributions — — — Benefits paid, including lump sums ( 11,135 ) ( 1,803 ) ( 2,033 ) Transfer to insurer ( 19,457 ) — — Plan assets at end of year 2,517 33,655 44,904 Funded status at end of year (1) $ 2,517 3,044 3,247 (1) - As of December 31, 2023, the Pension Plan was terminated and surplus assets were held in the Pension Plan's trust account until deployed as contributions to the Company's 401(k) Plan in 2024 and 2025. The following table presents information regarding the amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) at December 31, 2023 and 2022, as it relates to the Pension Plan. ($ in thousands) 2023 2022 Net actuarial loss $ — ( 1,497 ) Prior service cost — — Amount recognized in AOCI before tax effect — ( 1,497 ) Tax benefit — 344 Net amount recognized as decrease to AOCI $ — ( 1,153 ) 107 Table of Contents The following table reconciles the beginning and ending balances of AOCI at December 31, 2023 and 2022, as it relates to the Pension Plan: ($ in thousands) 2023 2022 Accumulated other comprehensive loss at beginning of fiscal year $ ( 1,153 ) ( 1,110 ) Net loss arising during period ( 693 ) ( 312 ) Recognition of net actuarial loss due to plan settlement 998 — Amortization of net unrecognized actuarial loss 1,192 256 Tax (benefit) expense of changes during the year, net ( 344 ) 13 Accumulated other comprehensive loss at end of fiscal year $ — ( 1,153 ) The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension Plan for the periods presented. As noted above, there are no remaining obligations of the Pension Plan and assets at December 31, 2023 represent the surplus cash held in the Pension Plan's trust account for contributions to be made to the Company's 401(k) plan during 2024 and 2025. ($ in thousands) 2023 2022 Prepaid pension cost as of beginning of fiscal year $ 4,542 4,689 Net periodic pension cost for fiscal year ( 2,025 ) ( 147 ) Actual employer contributions — — Prepaid pension asset as of end of fiscal year $ 2,517 4,542 Net pension cost for the Pension Plan included the following components for the years ended December 31, 2023, 2022, and 2021: ($ in thousands) 2023 2022 2021 Service cost – benefits earned during the period $ — — — Interest cost on projected benefit obligation 1,451 1,043 981 Expected return on plan assets ( 1,616 ) ( 1,152 ) ( 1,059 ) Net amortization and deferral 1,192 256 577 Recognized settlement loss 998 — — Net periodic pension cost $ 2,025 147 499 The components of net periodic benefit cost other than the service cost component are included in the line item "Other operating expenses" in the consolidated statements of income. The following assumptions were used in determining the actuarial information for the Pension Plan for the years ended December 31, 2023, 2022, and 2021: 2023 2022 2021 Discount rate used to determine net periodic pension cost 4.94 % 2.62 % 2.24 % Expected long-term rate of return on assets 4.94 % 2.62 % 2.24 % Discount rate used to calculate end of year liability disclosures (1) n/a 4.94 % 2.62 % (1) - As of December 31, 2023, there were no Pension Plan obligations or liabilities. The Company’s discount rate policy for the Pension Plan is based on a calculation of the Company’s expected pension payments, with those payments discounted using the FTSE yield curve (formerly called the Citigroup Pension Index yield curve) that matches the specific expected cash flows of the Pension Plan. As noted above, the remaining assets in the Pension Plan's trust account at December 31, 2023 represent the surplus cash held for contributions to be made to the Company's 401(k) plan during 2024 and 2025. The cash balance is held in an interest-bearing money market accounts and is considered a Level 1 fair value asset. The Pension Plan assets at December 31, 2022 included $ 194.0 thousand of cash and cash equivalents which consisted of interest-bearing money market accounts and is considered a Level 1 fair value asset. The Pension Plans' Level 2 assets totaled $ 33.5 million and consisted of fixed income commingled funds that primarily include investments in U.S. government securities and corporate bonds. The commingled funds are valued at the net asset value ("NAV") for the units in the fund. The NAV, as provided by the Trustee, is used as practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund. 108 Table of Contents Supplemental Executive Retirement Plan Historically, the Company sponsored a Supplemental Executive Retirement Plan (the “SERP”) for the benefit of certain senior management executives of the Company. The purpose of the SERP was to provide additional monthly pension benefits to ensure that each such senior management executive would receive lifetime monthly pension benefits equal to 3 % of his or her final average compensation multiplied by his or her years of service (maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60 % of his or her final average compensation. The amount of a participant’s monthly SERP benefit is reduced by (i) the amount payable under the Company’s Pension Plan (described above), and (ii) 50 % of the participant’s primary social security benefit. Final average compensation means the average of the five highest consecutive calendar years of earnings during the last ten years of service prior to termination of employment. The SERP is an unfunded plan. Payments are made from the general assets of the Company. Effective December 31, 2012, the Company froze the SERP to all participants. The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed by the Company’s independent actuarial consultants: ($ in thousands) 2023 2022 2021 Change in benefit obligation Benefit obligation at beginning of year $ 3,521 4,660 5,982 Service cost — — — Interest cost 158 112 119 Actuarial gain ( 86 ) ( 1,006 ) ( 1,119 ) Benefits paid ( 241 ) ( 245 ) ( 322 ) Accumulated benefit obligation at end of year 3,352 3,521 4,660 Plan assets — — — Funded status at end of year $ ( 3,352 ) ( 3,521 ) ( 4,660 ) The accumulated benefit obligation presented above is included in "Other liabilities" in the consolidated balance sheets at December 31, 2023 and 2022. The following table presents information regarding the amounts recognized in AOCI at December 31, 2023 and 2022, as it relates to the SERP: ($ in thousands) 2023 2022 Net (loss) gain $ ( 100 ) 1,551 Prior service cost — — Amount recognized in AOCI before tax effect ( 100 ) 1,551 Tax benefit (expense) 23 ( 356 ) Net amount recognized as (decrease) increase to AOCI $ ( 77 ) 1,195 The following table reconciles the beginning and ending balances of AOCI at December 31, 2023 and 2022, as it relates to the SERP: ($ in thousands) 2023 2022 Accumulated other comprehensive income at beginning of fiscal year $ 1,195 838 Net gain arising during period 86 1,007 Prior service cost — — Amortization of unrecognized actuarial loss ( 1,737 ) ( 544 ) Tax benefit (expense) related to changes during the year, net 379 ( 106 ) Accumulated other comprehensive (loss) income at end of fiscal year $ ( 77 ) 1,195 109 Table of Contents The following table reconciles the beginning and ending balances of the prepaid pension cost related to the SERP: ($ in thousands) 2023 2022 Accrued liability as of beginning of fiscal year $ ( 5,071 ) ( 5,748 ) Net periodic pension cost for fiscal year 1,579 432 Benefits paid 241 245 Accrued liability as of end of fiscal year $ ( 3,251 ) ( 5,071 ) Net pension cost for the SERP included the following components for the years ended December 31, 2023, 2022, and 2021: ($ in thousands) 2023 2022 2021 Service cost – benefits earned during the period $ — — — Interest cost on projected benefit obligation 158 112 119 Amortization of net actuarial (loss) gain ( 1,737 ) ( 544 ) 15 Net periodic pension cost $ ( 1,579 ) ( 432 ) 134 The components of net periodic benefit cost other than the service cost component are included in the line item "Other operating expenses" in the consolidated statements of income. The following table is an estimate of the benefits that will be paid in accordance with the SERP for each of the five calendar years ending December 31, 2027 and thereafter: ($ in thousands) Estimated benefit payments 2024 $ 240 2025 278 2026 280 2027 298 2028 288 2029-2033 1,322 The following assumptions were used in determining the actuarial information for the SERP for the years ended December 31, 2023, 2022, and 2021: 2023 2022 2021 Discount rate used to determine net periodic pension cost 4.90 % 2.48 % 2.04 % Discount rate used to calculate end of year liability disclosures 4.68 % 4.90 % 2.48 % The Company’s discount rate policy for the SERP is to use the FTSE yield curve that matches the expected cash flows of the SERP. Note 12. Commitments and Contingencies In the normal course of business, there are various outstanding commitments to extend credit that are not reflected in the financial statements. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Commitments may expire without being used. The following table presents the Company’s outstanding loan commitments, including credit cards, at December 31, 2023 and December 31, 2022. December 31, 2023 December 31, 2022 ($ in thousands) Fixed Rate Variable Rate Total Fixed Rate Variable Rate Total Loan commitments $ 442,916 179,934 622,850 681,486 211,071 892,557 Unused lines of credit 407,521 1,417,250 1,824,771 273,244 1,194,575 1,467,819 Total $ 850,437 1,597,184 2,447,621 954,730 1,405,646 2,360,376 In addition to loan commitments, at December 31, 2023 and 2022, the Company had $ 20.6 million and $ 20.2 million, respectively, in standby letters of credit outstanding. The Company has no carrying amount for these standby letters of credit at either of those dates. The nature of the standby letters of credit is a stand-alone 110 Table of Contents obligation made on behalf of the Company’s customers to suppliers of the customers to guarantee payments owed to the supplier by the customer. The standby letters of credit are generally for terms for one year, at which time they may be renewed for another year if both parties agree. The Company maintains an allowance for unfunded loan commitments which is included in "Other liabilities" in the consolidated balance sheets. The allowance for unfunded loan commitments is determined as part of the quarterly ACL analysis. The Company also periodically invests in limited partnerships and LLCs primarily for the purposes of fulfilling CRA requirements and obtaining tax credits. As of December 31, 2023, the Company had a remaining funding commitments of $ 26.3 million related to these investments. The Company, in the normal course of business, may be subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. The Company is not involved in any legal proceedings which, in management’s opinion, could have a material effect on the consolidated financial position of the Company. Note 13. Derivatives and Hedging Activities In the normal course of business, the Company is exposed to certain risk arising from both its business operations and economic conditions. As an element of its risk management strategies, the Company 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. To accommodate customers, the Company may 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 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. The Company's derivative instruments are carried at fair value and included in "Other assets" for derivatives with positive fair values and "Other liabilities" for derivatives with negative fair values on the consolidated balance sheets. The table below presents the fair value of Company’s derivative financial instruments as of the date indicated. As of December 31, 2023 Fair Value ($ in thousands) Notional Amount Derivative Assets Derivative Liabilities Derivatives not designated as hedging instruments: Customer interest rate contracts $ 13,000 $ 295 — Offsetting counterparty interest rate contracts 13,000 — 349 Total derivatives not designated as hedging instruments $ 295 349 The table below presents the gains and losses recognized in income related to derivative financial instruments that are not designated as hedging instruments. Gains and losses on interest rate swap undesignated hedges are included in "Other gains, net" on the consolidated statements of income for the date indicated. Gains (Losses) ($ in thousands) Year Ended December 31, 2023 Customer interest rate swaps and counterparty offsets $ ( 54 ) Total $ ( 54 ) The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2023. The Company’s interest rate swaps are subject to master netting arrangements between the Company and its counterparties, however, the Company has not made a policy election 111 Table of Contents to offset its derivative positions. The interest rate swaps with borrowers are cross collateralized with the underlying loan and, therefore, there is no posted collateral. Interest rate swap agreements with third-party counterparties contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold amount and receive collateral for agreements in a net asset position. As of December 31, 2023 Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheet Net Amounts of Assets presented in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Net Amount Interest rate swaps $ 295 — 295 — — 295 Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities presented in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Financial Instruments Cash Collateral Posted Net Amount Interest rate swaps $ 349 — 349 — 330 19 The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments which were immaterial at December 31, 2023 and 2022. Credit-risk-related Contingent Features The Company's agreements with its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivative counterparties also include provisions that if not met, could result in the Company being declared in default on its derivative obligations, including if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. The Company has provisions in its derivative counterparty agreement providing that if the Company fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. The Company manages its credit exposure on derivative transactions by entering into a bilateral credit support agreement with each non-customer counterparty. The credit support agreement requires collateralization of exposure beyond specified minimum threshold amounts. As of December 31, 2023, the fair value of derivatives in a net liability position, including accrued interest, was $ 349 thousand. As of December 31, 2023, the Company has minimum collateral posting thresholds with its derivative counterparty and has posted collateral of $ 330 thousand. Note 14. Fair Value of Financial Instruments Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. 112 Table of Contents The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2023. Description of Financial Instruments ($ in thousands) Fair Value at December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Recurring Securities available for sale: US Treasury securities $ 172,570 — 172,570 — Government-sponsored enterprise securities 60,266 — 60,266 — Mortgage-backed securities 1,937,784 — 1,937,784 — Corporate bonds 18,759 — 18,759 — Total available for sale securities 2,189,379 — 2,189,379 — Derivative financial assets 295 — 295 — Presold mortgages in process of settlement 2,667 — 2,667 — Derivative financial liabilities 349 — 349 — Nonrecurring Individually evaluated loans 1,953 — — 1,953 The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2022. Description of Financial Instruments ($ in thousands) Fair Value at December 31, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Recurring Securities available for sale: US Treasury securities $ 168,758 — 168,758 — Government-sponsored enterprise securities 57,456 — 57,456 — Mortgage-backed securities 2,045,000 — 2,045,000 — Corporate bonds 43,279 — 43,279 — Total available for sale securities 2,314,493 — 2,314,493 — Presold Mortgages in process of settlement 1,282 — 1,282 — Nonrecurring Impaired loans 9,590 — — 9,590 Foreclosed real estate 38 — — 38 The following is a description of the valuation methodologies used for instruments measured at fair value. Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by the Company's third-party bond accounting provider using matrix pricing. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, commercial mortgage-backed obligations, government-sponsored enterprise securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities may be classified within Level 3 of the hierarchy. 113 Table of Contents The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Presold Mortgages in Process of Settlemen t - The fair value is based on the committed price that an investor has agreed to pay for the loan which is considered a Level 2 input. Derivative financial assets and liabilities - The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These are considered a Level 2 input. Individually evaluated loans — Fair values for individually evaluated loans are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is generally determined by third-party appraisers using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Appraisals used in this analysis are generally obtained at least annually based on when the loans first became impaired, and thus the appraisals are not necessarily as of the period ends presented. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the consolidated statements of income. Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). Appraisals used in this analysis are generally obtained at least annually based on when the assets were acquired, and thus the appraisals are not necessarily as of the period ends presented. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the ACL. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the consolidated statements of income. For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2023, the significant unobservable inputs used in the fair value measurements were as presented in the tables below. ($ in thousands) Fair Value at December 31, 2023 Valuation Technique Significant Unobservable Inputs Range (Weighted Average) Individually evaluated loans - collateral-dependent $ 1,953 Appraised value Discounts applied for estimated costs to sell 10 % For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows: ($ in thousands) Fair Value at December 31, 2022 Valuation Technique Significant Unobservable Inputs Range (Weighted Average) Individually evaluated loans - collateral-dependent $ 5,680 Appraised value Discounts applied for estimated costs to sell 10 % Individually evaluated loans - valued at PV of expected cash flows 3,910 PV of expected cash flows Discount rates used in the calculation of PV of expected cash flows 5.5 % - 11.1 % ( 6.76 %) Foreclosed real estate 38 Appraised value Discounts applied for estimated costs to sell 10 % 114 Table of Contents In the above tables, weighted average discounts were calculated on relative fair value for underlying loans based on the range of discount rates applied. The discount applied for estimated costs to sell collateral on individually evaluated loans was 10%. The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31, 2023 and 2022 are as follows: December 31, 2023 December 31, 2022 ($ in thousands) Level in Fair Value Hierarchy Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Cash and due from banks, noninterest-bearing Level 1 $ 100,891 100,891 101,133 101,133 Due from banks, interest-bearing Level 1 136,964 136,964 169,185 169,185 Securities held to maturity Level 2 533,678 449,623 541,700 432,528 Total loans, net of allowance Level 3 8,040,249 7,379,079 6,574,178 6,240,870 Accrued interest receivable Level 1 37,351 37,351 29,710 29,710 Bank-owned life insurance Level 1 183,897 183,897 164,592 164,592 SBA servicing asset Level 3 3,351 4,049 4,004 4,721 Demand deposits, money market and savings Level 1 9,052,905 9,052,905 8,224,956 8,224,956 Time deposits Level 2 978,694 972,513 1,002,573 993,989 Borrowings Level 2 630,158 615,614 287,507 277,146 Accrued interest payable Level 1 5,699 5,699 2,738 2,738 Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense accounts, income taxes currently payable, and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Note 15. Stock-Based Compensation The Company recorded total stock-based compensation expense of $ 4.6 million, $ 3.0 million, and $ 2.3 million for the years ended December 31, 2023, 2022, and 2021, respectively, include in "Total personnel expense" on the accompanying consolidated statements of income. The Company recognized $ 1.1 million, $ 0.7 million, and $ 0.5 million of income tax benefits related to stock-based compensation expense in its income statement for the years ended December 31, 2023, 2022, and 2021, respectively. At December 31, 2023, the sole equity-based compensation plan for the Company is the First Bancorp 2014 Equity Plan (the "Equity Plan"), which was approved by shareholders on May 8, 2014. As of December 31, 2023, the Equity Plan had 205,498 shares remaining available for grant. The Equity Plan is intended to serve as a means to attract, retain, and motivate key employees and directors and to associate the interests of the Plan's participants with those of the Company and its shareholders. The Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted and unrestricted stock, restricted performance stock, and performance units. For the last several 115 Table of Contents years, the only equity-based compensation granted by the Company has been shares of restricted stock, as it relates to employees, and unrestricted stock as it relates to non-employee directors. Recent restricted stock awards to employees typically include service-related vesting conditions only. Compensation expense for these grants is recorded over the requisite service periods. Upon forfeiture, any previously recognized compensation cost is reversed. Upon a change in control (as defined in the Equity Plan), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested. Certain of the Company’s equity grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company recognizes compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for each incremental award. Compensation expense is based on the estimated number of stock awards that will ultimately vest. Over the past five years, there have been insignificant amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions will vest. The Company recognizes forfeitures as they occur. In addition to employee equity awards, the Company's practice is to grant unrestricted common shares to each non-employee director (currently 14 in total) in June of each year. These grants were each valued at approximately $ 37,500 in 2023 and $ 32,000 in 2022. Compensation expense associated with these director awards is recognized on the date of the award since there are no vesting conditions. On June 1, 2023, the Company granted 17,094 shares of common stock to non-employee directors ( 1,221 shares per director), at a fair market value of $ 30.69 per share, which was the closing price of the Company’s common stock on that date, which resulted in $ 525,000 in expense. On June 1, 2022, the Company granted 10,344 shares of common stock to non-employee directors ( 862 shares per director), at a fair market value of $ 37.12 per share, which was the closing price of the Company’s common stock on that date, which resulted in $ 384,000 in expense. The expense associated with director grants is classified as "Other operating expense" in the consolidated statements of income. The following table presents information regarding the activity during 2021, 2022, and 2023 related to the Company’s outstanding restricted stock: Long-Term Restricted Stock Shares Weighted Average Grant Date Fair Value Nonvested at January 1, 2021 172,105 $ 33.80 Granted during the period 104,414 40.56 Vested during the period ( 63,369 ) 39.82 Forfeited or expired during the period ( 6,819 ) 37.32 Nonvested at December 31, 2021 206,331 35.25 Granted during the period 95,960 38.09 Vested during the period ( 70,110 ) 36.69 Forfeited or expired during the period ( 9,169 ) 32.62 Nonvested at December 31, 2022 223,012 36.14 Granted during the period 143,380 37.08 Vested during the period ( 74,310 ) 29.43 Forfeited or expired during the period ( 791 ) 37.88 Nonvested at December 31, 2023 291,291 38.01 The total fair value of shares vested during 2023, 2022 and 2021 was $ 2.2 million, $ 2.6 million and $ 2.5 million, respectively. Total unrecognized compensation expense as of December 31, 2023 amounted to $ 5.0 million with a weighted average remaining term of 1.8 years. The Company expects to record $ 3.3 million of compensation expense in the next twelve months related to these nonvested awards that are outstanding at December 31, 2023. As discussed in Note 2, in conjunction with the GrandSouth acquisition, GrandSouth common stock options outstanding at January 1, 2023 became fully vested under the change in control provisions in the GrandSouth option plans and were converted into replacement options to acquire 0.91 shares of the Company's common stock. The Company issues new shares of common stock when options are exercised. 116 Table of Contents Stock option activity and related information is presented below as of and for the periods indicated: Options Outstanding Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value (thousands) Balance at January 1, 2023 — — Replacement options issued in conjunction with acquisition of GrandSouth 542,345 20.14 Exercised during the period ( 236,760 ) 19.09 Forfeited or expired during the period — — Outstanding at December 31, 2023 305,585 20.95 5.74 $ 4,907 Exercisable at December 31, 2023 305,585 20.95 5.74 $ 4,907 Stock options outstanding are summarized as follows as of December 31, 2023: Shares Range Weighted Average Price Weighted Average Remaining Life in Years 77,857 $ 13.79 - 18.18 15.69 3.51 120,500 $ 18.19 18.19 5.48 107,228 $ 18.20 - 31.32 27.88 7.64 305,585 20.95 5.74 The fair value of the replacement options issued in conjunction with the GrandSouth acquisition as of January 1, 2023 was measured using the Black-Scholes option pricing model. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted: For the twelve months ended December 31, 2023 Fair value per option, weighted average $ 24.85 Expected life (years) 1.4 - 4.7 Expected stock price volatility, weighted average 46.39 % Expected dividend yield 2.05 % Risk-free interest rate, weighted average 4.18 % Expected forfeiture rate — % The expected life is based on historical exercises and forfeitures experience of the grantees. The volatility is based on historical price volatility. The risk-free interest rate is based on a U.S. Treasury instrument with a life that is similar to the expected life of the option grant. At December 31, 2023, the Company had no unrecognized compensation expense related to stock options. All unexercised options expire ten years after the applicable original grant dates under the GrandSouth stock option plan. Note 16. Shareholders’ Equity Rabbi Trust Obligations With the acquisition of Carolina Bank in March 2017, the Company assumed a deferred compensation plan structured as a Rabbi Trust for certain members of Carolina Bank’s board of directors that is fully funded by Company common stock, which was valued at $ 7.7 million on the date of acquisition. Subsequent to this acquisition, approximately $ 6.8 million of the deferred compensation has been paid to the plan participants. The balances of the related asset and liability were $ 1.4 million and $ 1.6 million at December 31, 2023 and December 31, 2022, respectively, both of which are presented as components of shareholders’ equity. 117 Table of Contents Stock Repurchases Pursuant to authorizations by the Company's Board, the Company from time to time has repurchased shares of common stock in private transactions and in open-market purchases. The Company did not repurchase any shares of the Company's common stock during either 2023 or 2022. As of December 31, 2023, there was no share repurchase program in place. Note 17. Earnings Per Share The following is a reconciliation of the income (numerator) and shares (denominator) used in computing Basic and Diluted EPS: For Years Ended December 31, 2023 2022 2021 ($ in thousands except per share amounts) Income Shares Per Share Amount Income Shares Per Share Amount Income Shares Per Share Amount Basic EPS: Net income $ 104,131 $ 146,936 $ 95,644 Less: income allocated to participating securities ( 685 ) ( 779 ) ( 483 ) Basic EPS per common share $ 103,446 40,746,772 $ 2.54 $ 146,157 35,485,620 $ 4.12 $ 95,161 29,876,151 $ 3.19 Diluted EPS: Net income $ 104,131 40,746,772 $ 146,936 35,485,620 $ 95,644 29,876,151 Effect of Dilutive Securities — 418,062 — 189,110 — 151,634 Diluted EPS per common share $ 104,131 41,164,834 $ 2.53 $ 146,936 35,674,730 $ 4.12 $ 95,644 30,027,785 $ 3.19 For the year ended December 31, 2023 , there were no options that were anti-dilutive. There were no outstanding options in other year presented. Note 18. Accumulated Other Comprehensive Income (Loss) The components of AOCI for the Company are as follows: ($ in thousands) December 31, 2023 December 31, 2022 December 31, 2021 Unrealized loss on securities available for sale $ ( 400,720 ) ( 444,063 ) ( 32,067 ) Deferred tax asset 92,767 102,046 7,369 Net unrealized loss on securities available for sale ( 307,953 ) ( 342,017 ) ( 24,698 ) Postretirement plans (liability) asset ( 100 ) 54 ( 353 ) Deferred tax asset (liability) 23 ( 12 ) 81 Net postretirement plans (liability) asset ( 77 ) 42 ( 272 ) Total accumulated other comprehensive loss $ ( 308,030 ) ( 341,975 ) ( 24,970 ) 118 Table of Contents The following table discloses the changes in AOCI for the years ended December 31, 2023, 2022, and 2021 (all amounts are net of tax). ($ in thousands) Unrealized Gain (Loss) on Securities Available for Sale Postretirement Plans (Liability) Asset Total Beginning balance at January 1, 2021 $ 15,749 ( 1,399 ) 14,350 Other comprehensive (loss) income before reclassifications ( 41,400 ) 671 ( 40,729 ) Amounts reclassified from accumulated other comprehensive income 953 456 1,409 Net current-period other comprehensive (loss) income ( 40,447 ) 1,127 ( 39,320 ) Ending balance at December 31, 2021 ( 24,698 ) ( 272 ) ( 24,970 ) Other comprehensive (loss) income before reclassifications ( 317,319 ) 536 ( 316,783 ) Amounts reclassified from accumulated other comprehensive income — ( 222 ) ( 222 ) Net current-period other comprehensive (loss) income ( 317,319 ) 314 ( 317,005 ) Ending balance at December 31, 2022 ( 342,017 ) 42 ( 341,975 ) Other comprehensive income (loss) before reclassifications 34,064 ( 466 ) 33,598 Amounts reclassified from accumulated other comprehensive income — 347 347 Net current-period other comprehensive income (loss) 34,064 ( 119 ) 33,945 Ending balance at December 31, 2023 $ ( 307,953 ) ( 77 ) ( 308,030 ) Amounts reclassified from AOCI for Unrealized Gain (Loss) on Securities AFS represent realized securities gains or losses, net of tax effects. Amounts reclassified from AOCI for Postretirement Plans Asset (Liability) represent amortization of amounts included in AOCI, net of taxes, and are recorded in the "Other operating expenses" line item of the consolidated statements of income. Note 19. Regulatory Restrictions The Company is regulated by the Federal Reserve and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the Federal Reserve and the North Carolina Commissioner of Banks. The primary source of funds for the payment of dividends by the Company is dividends received from its subsidiary, the Bank. 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, 2023, approximately $ 1.1 billion of the Company’s investment in the Bank was restricted as to transfer to the Company without obtaining prior regulatory approval. There was no average reserve balance requirement under the requirements of the Federal Reserve at December 31, 2023. The Company and the Bank must comply with regulatory capital requirements established by the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 119 Table of Contents The Company’s and the Bank’s respective regulatory capital ratios as of December 31, 2023 and 2022, along with the minimum amounts required for capital adequacy purposes and to be well capitalized under prompt corrective action in effect at such times are presented below. There are no conditions or events since year-end that management believes have changed the Company’s or the Bank's classification. Actual Fully Phased-In Regulatory Guidelines Minimum To Be Well Capitalized Under Current Prompt Corrective Action Provisions ($ in thousands) Amount Ratio Amount Ratio Amount Ratio (must equal or exceed) (must equal or exceed) As of December 31, 2023 Common Equity Tier I Capital Ratio Company $ 1,187,027 13.20 % 629,376 7.00 % N/A N/A Bank 1,291,074 14.36 % 629,256 7.00 % 584,309 6.50 % Total Capital Ratio Company 1,397,502 15.54 % 944,064 10.50 % N/A N/A Bank 1,403,551 15.61 % 943,884 10.50 % 898,938 10.00 % Tier I Capital Ratio Company 1,257,834 13.99 % 764,242 8.50 % N/A N/A Bank 1,291,074 14.36 % 764,097 8.50 % 719,150 8.00 % Leverage Ratio Company 1,257,834 10.91 % 461,312 4.00 % N/A N/A Bank 1,291,074 11.20 % 461,248 4.00 % 576,560 5.00 % As of December 31, 2022 Common Equity Tier I Capital Ratio Company $ 1,010,369 13.02 % 543,403 7.00 % N/A N/A Bank 1,077,526 13.88 % 543,301 7.00 % 504,494 6.50 % Total Capital Ratio Company 1,171,084 15.09 % 815,104 10.50 % N/A N/A Bank 1,174,634 15.13 % 814,951 10.50 % 776,144 10.00 % Tier I Capital Ratio Company 1,073,958 13.83 % 659,846 8.50 % N/A N/A Bank 1,077,526 13.88 % 659,723 8.50 % 620,915 8.00 % Leverage Ratio Company 1,073,958 10.51 % 408,623 4.00 % N/A N/A Bank 1,077,526 10.55 % 408,569 4.00 % 510,712 5.00 % 120 Table of Contents Note 20. Revenue from Contracts with Customers All of the Company’s revenues that are in the scope of ASC Topic 606: Revenue from Contracts with Customers (“ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for years ended December 31, 2023, 2022, and 2021. Items outside the scope of ASC 606 are noted as such. For the Years Ended December 31, ($ in thousands) 2023 2022 2021 Noninterest income in-scope of ASC 606: Service charges on deposit accounts $ 16,800 15,523 12,317 Other service charges, commissions, and fees: Bankcard Interchange income, net 9,319 14,996 17,323 Other service charges and fees 6,405 5,683 4,352 Commissions from sales of insurance and financial products: Insurance income — — 2,725 Wealth management income 5,503 5,195 4,160 SBA consulting fees 1,803 2,608 7,231 Noninterest income (in-scope of ASC 606) 39,830 44,005 48,108 Noninterest income (out-of-scope of ASC 606) 17,660 23,980 25,503 Total noninterest income $ 57,490 67,985 73,611 A description of the Company’s revenue streams accounted for under ASC 606 is detailed below. Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees, which include services such as ATM usage fees, stop payment charges, statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Service charges on deposits are withdrawn from the customer’s account balance. Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. "Bankcard interchange income" is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange fees are offset with interchange expenses and are presented on a net basis. "Other service charges and fees" includes revenue from processing wire transfers, bill pay service, cashier’s checks, ATM surcharge fees, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Commissions from the sale of insurance and financial products: The Company earns commissions from the sale of wealth management products and also earned commissions from the sale of insurance policies until the sale of First Bank Insurance Services on June 30, 2021. Wealth management income primarily consists of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the financial product. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company also earns some fees from asset management, which is billed quarterly and due upon billing for services rendered in the most recent period, for which the performance obligation has been satisfied. Insurance income, which was earned by the Company until June 30, 2021, generally consisted of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Company recognized commission income from the sale of insurance policies when it acted as an agent between the 121 Table of Contents insurance company and the policyholder. The Company’s performance obligation was generally satisfied upon the issuance of the insurance policy and is due upon billing. SBA Consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees are based on a percentage of the dollar amount of the originated loans and are recorded when the performance obligation has been satisfied and are due upon billing. The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers. Note 21. Supplementary Income Statement Information Components of other noninterest income or noninterest expense exceeding 1% of total revenue for any of the years ended December 31, 2023, 2022, and 2021 are as follows: ($ in thousands) 2023 2022 2021 Total revenue threshold (1%) $ 5,462 4,089 3,295 Noninterest income: Other service charges, commissions, and fees – interchange fees, net $ 9,319 14,996 17,323 Noninterest expense: Other operating expenses – software costs 8,717 6,064 5,315 Other operating expenses – data processing expense 8,733 7,535 5,959 Other operating expenses – credit card rewards expense 3,841 547 3,431 Other operating expenses – FDIC insurance expense 6,982 2,913 2,332 Note 22. Condensed Parent Company Information Condensed financial data for the Company (parent company only) follows: CONDENSED BALANCE SHEETS As of December 31, ($ in thousands) 2023 2022 Assets Cash on deposit with bank subsidiary $ 4,597 5,611 Investment in subsidiaries 1,478,750 1,100,829 Premises and equipment 7 7 Other assets 379 22 Total assets $ 1,483,733 1,106,469 Liabilities and shareholders’ equity Subordinated debt $ 27,177 — Trust preferred securities 73,130 65,665 Other liabilities 11,046 9,208 Total liabilities 111,353 74,873 Shareholders’ equity 1,372,380 1,031,596 Total liabilities and shareholders’ equity $ 1,483,733 1,106,469 122 Table of Contents CONDENSED STATEMENTS OF INCOME Year Ended December 31, ($ in thousands) 2023 2022 2021 Interest income $ 116 48 24 Dividends from subsidiaries 32,700 17,400 25,300 Total income 32,816 17,448 25,324 Interest expense 7,945 2,926 1,455 Other expenses 2,057 1,693 5,345 Total expense 10,002 4,619 6,800 Income before income taxes and equity in undistributed income of subsidiaries 22,814 12,829 18,524 Income tax benefit ( 2,076 ) ( 960 ) ( 1,423 ) Income before equity in undistributed income of subsidiaries 24,890 13,789 19,947 Equity in undistributed income of subsidiaries 79,241 133,147 75,697 Net income $ 104,131 146,936 95,644 CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, ($ in thousands) 2023 2022 2021 Operating Activities: Net income $ 104,131 146,936 95,644 Equity in undistributed earnings of subsidiaries ( 79,241 ) ( 133,147 ) ( 75,697 ) (Increase) decrease in other assets ( 604 ) 4,055 3,924 Increase (decrease) in other liabilities 1,741 642 ( 859 ) Net cash provided by operating activities 26,027 18,486 23,012 Investing Activities: Net cash received in acquisitions 4,123 — 7,379 Net cash provided by investing activities 4,123 — 7,379 Financing Activities: Payment of common stock cash dividends ( 34,940 ) ( 30,660 ) ( 22,228 ) Repurchases of common stock — — ( 4,036 ) Proceeds from stock option exercises 4,519 — — Stock withheld for payment of taxes ( 743 ) ( 840 ) ( 786 ) Net cash used in financing activities ( 31,164 ) ( 31,500 ) ( 27,050 ) Net (decrease) increase in cash ( 1,014 ) ( 13,014 ) 3,341 Cash, beginning of year 5,611 18,625 15,284 Cash, end of year $ 4,597 5,611 18,625 123 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors First Bancorp Southern Pines, North Carolina Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of First Bancorp (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 28, 2024 expressed an adverse opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Credit Losses As described in Notes 1 and 4 to the Company's consolidated financial statements, the Company had a gross loan portfolio of approximately $8.2 billion and related allowance for credit losses of approximately $109.9 million as of December 31, 2023. The allowance for credit losses consists of quantitative and qualitative components. The Company considers historical default and loss experience, current and projected economic conditions, asset quality trends, and known and inherent risks in the portfolio to develop the quantitative component. This quantitative component is then adjusted for qualitative risk factors that involve management assessments and subjective assumptions that require a high degree of management’s judgment. 124 Table of Contents We identified management’s judgments and assumptions used in the determination of the qualitative factors as described in Note 1 and the selection of the appropriate macroeconomic forecasts to be used in the reasonable and supportable forecast period of the allowance for credit losses as a critical audit matter. Auditing these complex judgments and assumptions involved especially challenging auditor judgment due to the subjective nature of management’s qualitative assessment, inherent uncertainty involved in forecasting, and the nature and extent of audit effort required to address these matters, including the extent of specialized skills and knowledge needed. The primary procedures we performed to address this critical audit matter included: • Assessing the reasonableness of management’s significant judgments and assumptions related to the determination of the qualitative factors for collectively evaluated loans by assessing consistent application of evaluation and conclusions reached, including consideration of contradictory evidence. • Evaluating the relevance and reliability of data used in determining the qualitative factors by comparing the data to internally developed and third-party sources, and other audit evidence gathered. • Utilizing personnel with specialized skill and knowledge with evaluating the reasonableness of the macroeconomic forecasts used in the reasonable and supportable forecast period by comparing to third-party sources. Acquisition of GrandSouth Bancorporation As described in Note 2 to the Company’s consolidated financial statements, the Company completed its acquisition of GrandSouth Bancorporation on January 1, 2023, for a total purchase consideration of $229.5 million, with total assets acquired of $1.2 billion, liabilities assumed of $1.1 billion and resulting goodwill of $114.5 million. Determination of the acquisition date fair values of the assets acquired and liabilities assumed requires the Company to make significant estimates and assumptions. In determining the fair values of loans acquired, the Company must determine projected prepayment and discount rates, among other assumptions. We identified the determination of the projected prepayment and discount rate assumptions in the valuation of loans acquired as a critical audit matter. Auditing these significant assumptions involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including evaluating the appropriateness of the market data selected and use of specialized skill and knowledge needed. The primary procedures we performed to address this critical audit matter included: • Testing the completeness and accuracy of the loan level data utilized in the valuation of the acquisition date fair value of loans acquired by (i) evaluating the reliability of data utilized in the valuation of loans acquired and (ii) confirming loan level data with borrowers on a sample basis, and agreeing loan level data to supporting documentation. • Utilizing personnel with specialized skill and knowledge in valuation of loans to assist with evaluation of projected prepayment and discount rate assumptions used in the valuation of the loans acquired. This includes utilizing information obtained from market sources to test the assumptions and identify potential sources of disconfirming information. /s/ BDO USA, P.C. We have served as the Company's auditor since 2019. Philadelphia, Pennsylvania February 28, 2024 125 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors First Bancorp Southern Pines, North Carolina Opinion on Internal Control over Financial Reporting We have audited First Bancorp’s (the “Company’s”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated February 28, 2024 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to maintain effective information technology general controls in the areas of user access management and segregation of duties, within an application supporting the Company’s accounting and reporting processes, has been identified. As a result, many of the Company’s manual controls dependent upon the information derived from this information technology application were also ineffective, as segregation of duties was not appropriately designed. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 financial statements, and this report does not affect our report dated February 28, 2024 on those financial statements. 126 Table of Contents Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, P.C. Philadelphia, Pennsylvania February 28, 2024 127 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.