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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-07 · 194 added, 293 removed, 230 unchanged (68% of the section changed)

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

Recent Developments and Acquisitions

On January 1, 2023, we acquired GrandSouth, a community bank headquartered in Greenville, South Carolina, in an all-stock transaction.

The terms of the Merger Agreement provided that each share of common and preferred stock of GrandSouth issued and outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the Company's common stock.

As a result, the Company issued 5,032,834 shares of the Company's common stock effective January 1, 2023.

In addition, GrandSouth common stock options outstanding at the merger effective time were converted to options to acquire 0.91 shares of the Company's common stock resulting in 542,345 options with an average exercise price of approximately $20.14.

The GrandSouth acquisition contributed $1.02 billion in loans and $1.05 billion in deposits, with eight branches in South Carolina being added to the Company's branch network.

The acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the the high-growth markets of the state including Greenville, Charleston and Columbia.

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

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

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

We earned net income of $29.9 million, or $0.73 diluted EPS, during the three months ended September 30, 2023 compared to net income of $37.9 million, or $1.06 diluted EPS, for the three months ended September 30, 2022.

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

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

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

• Net interest margin ("NIM") on a tax-equivalent basis decreased in the third quarter of 2023 to 2.97% from 3.40% for the third quarter of 2022 related to the higher cost of funds, partially offset by increases in market interest rates driving higher yields on loans and increased loan accretion.

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

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

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

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

• Net interest income for nine months ended September 30, 2023 was $264.2 million, a 9.9% increase from the $240.5 million recorded for the comparable period of 2022.

The increase in net interest income was driven by higher earning assets related to both the GrandSouth acquisition and organic growth, partially offset by lower NIM between periods.

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

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

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

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

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

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

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

Total assets at September 30, 2023 amounted to $12.0 billion, a 12.7% increase from December 31, 2022, driven primarily by the acquisition of GrandSouth.

Comparisons for the financial periods presented are impacted by the GrandSouth acquisition which was completed on January 1, 2023 with the related core system conversion occurring in March 2023.

Overview and Highlights at and for Three Months Ended March 31, 2024

We earned net income of $25.3 million, or $0.61 diluted EPS, during the three months ended March 31, 2024 compared to net income of $15.2 million, or $0.37 diluted EPS, for the three months ended March 31, 2023.

The increase in net income in the the current year period as compared to the prior year period was related to higher merger and acquisition expense and the initial provision for credit losses related to the GrandSouth acquisition in the prior year, the elimination of such which more that offset the increase in interest expense during the three months ended March 31, 2024.

• Net interest income for the first quarter of 2024 was $79.2 million, a 14.3% decrease from the $92.5 million recorded in the first quarter of 2023.

The decrease in net interest income from the prior year period was driven by higher cost of funds, partially offset by higher yield on earning assets.

• Net interest margin ("NIM") on a tax-equivalent basis decreased in the first quarter of 2024 to 2.80% from 3.31% for the first quarter of 2023 as a result of the higher cost of funds and decreased loan accretion, partially offset by increases in market interest rates driving higher yields on loans and other earning assets.

• The decline in the provision for credit losses from the first quarter of 2023 was directly related to the GrandSouth acquisition for which an initial provision was recorded totaling $12.2 million.

• Noninterest income for the three months ended March 31, 2024 totaled $12.9 million which was a decrease of $0.6 million, or 4.4%, from the comparable period of 2023 and was primarily related to securities losses.

• Noninterest expense of $59.2 million for the quarter ended March 31, 2024 decreased $15.0 million, or 20.2%, from the three months ended March 31, 2023 which included $12.2 million of merger and acquisition expense resulting from the GrandSouth acquisition.

Total assets at March 31, 2024 amounted to $12.1 billion, a 0.2% decrease from December 31, 2023, and was driven primarily by intentional reductions in investment securities and loan balances, partially offset by higher interest-bearing cash balances.

The primary balance sheet changes are presented below.

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

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

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

Wholesale brokered deposits decreased $249.4 million from year end.

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

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

• Total loans amounted to $8.1 billion at March 31, 2024, reflecting a $73.6 million contraction from December 31, 2023.

• Total deposits were $10.3 billion at March 31, 2024, an increase of $271.7 million, or 2.71% , from December 31, 2023.

• Credit quality continued to be strong at March 31, 2024, with a NPA to total assets ratio of 0.39% as of March 31, 2024.

• Our on-balance sheet liquidity ratio was 15.5% at March 31, 2024.

Available off-balance sheet sources totaled $2.3 billion at quarter end, resulting in a total liquidity ratio of 31.4%.

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

Critical Accounting Policies and Estimates

• We remained well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 13.50% and total risk-based capital ratio of 15.85% at March 31, 2024.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with GAAP and with general practices followed by the banking industry.

Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation.

We have identified the accounting policies discussed below as being more sensitive in terms of judgments and estimates taking into account their overall potential impact to our consolidated financial statements.

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

We have identified the determination of our ACL and related Allowance for Unfunded Commitments, as well as business combinations, related fair value measurements and goodwill

determination to be the accounting areas that require the most subjective or complex judgments, estimates, and assumptions, and where changes in those judgments, estimates, and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements.

The following should be read in conjunction with our significant accounting policies as presented in Note 1 of the 2023 Annual Report on Form 10-K filed with the SEC.

Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments

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

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

We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the portfolio.

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and (5) it requires estimation of a reasonable and supportable forecast period for credit losses.

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

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

The ACL is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast, and assumptions of probability of default and loss given default.

Loan balances considered uncollectible are charged-off against the ACL.

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

There are many factors affecting the ACL, some of which are quantitative, while others require qualitative judgment.

Although management believes its process for determining the ACL adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change.

To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.

PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination as of the acquisition date.

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

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

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

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

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

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

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

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

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

There have been no changes to the reasonable and supportable period or reversion period since year end.

Although management believes its process for determining the ACL adequately considers all the factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change.

To the extent actual outcomes differ from management estimates, additional provisions for credit losses could be required that could adversely affect our earnings or financial position in future periods.

PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date.

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

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

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

Actual losses incurred may differ materially from our estimates.

For example, inflationary pressures and recessionary concerns leading to macroeconomic deterioration of the economy, higher unemployment and declines in real estate and other asset valuations could affect our loss experience and assumptions utilized in our model.

For example, inflationary pressures and recessionary concerns leading to macroeconomic economic deterioration, higher unemployment and declines in real estate and other asset valuations could affect our loss experience and assumptions utilized in our model.

We estimate expected credit losses on unfunded commitments to extend credit over the contractual period in which we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable.

The allowance for off-balance sheet credit exposures, which is included in "Other liabilities" on the Consolidated Balance Sheets, is adjusted for as an increase or decrease to the provision for unfunded commitments.

The allowance for off-balance sheet credit exposures, which is included in "Other liabilities" on the consolidated balance sheets, is adjusted for as an increase or decrease to the provision for credit losses on the consolidated statements of income.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

The methodology is based on a loss rate approach that starts with the probability of funding based on historical experience.

Similar to methodology discussed above related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecasts.

Additional information on the loan portfolio and ACL can be found in the “Nonperforming Assets” and “Allowance for Credit Losses and Loan Loss Experience” sections below.

Similar to the methodology discussed above related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecasts.

Additional information on the loan portfolio and ACL can be found in the “Nonperforming Assets” and “Allowance for Credit Losses and Loan Loss Experience” sections following.

Business Combinations and Goodwill

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Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.

The ACL for PCD loans is recognized within business combination accounting with no initial impact to net income.

The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income.

Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise.

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

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

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

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

Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default.

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

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

Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed.

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

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

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

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

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

government intervention and regulatory updates;

the impact of recent events to financial performance and cost factors of the reporting unit;

performance of the Company's stock, and other relevant events.

During 2024 , there were no triggers warranting interim impairment assessments and, for the most recent annual assessment which occurred in the fourth quarter of 2023, we concluded that it was more likely than not that the fair value exceeded its carrying value.

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Net interest income is also influenced by external factors such as local economic conditions, competition for loans and deposits, and market interest rates.

Net interest income for the three months ended March 31, 2024 amounted to $79.2 million, a decrease of $13.3 million, or 14.3%, from the $92.5 million recorded in the first quarter of 2023.

The decrease was primarily driven by higher cost of funds, partially offset by higher yields on earning assets.

While average interest-earning assets for the first quarter of 2024 increased 0.5% from the comparable period of the prior year, the mix of assets shifted to higher earning assets, with average loans growing $375.0 million, or 4.85%, while taxable securities decreased $207.1 million, or 6.85%, and short term investments decreased $101.2 million, or 26.69%.The increase in the cost of interest bearing deposits of 114 basis points between the first quarter of 2023 and the first quarter of 2024 more than offset improvements from earning asset mix changes and higher yields.

This resulted in the reduction in our NIM which, on a tax-equivalent basis (see discussion below), decreased from 3.31% for the first quarter of 2023 to 2.80% for the three months ended March 31, 2024.

For internal purposes, we evaluate our NIM on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income then dividing by total average earning assets.

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

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

Average interest-earning assets for the second quarter of 2023 increased 13.7% from the comparable period of the prior year, with growth primarily in loans.

Somewhat offsetting the impact of the higher earning assets was the reduction in our NIM which, on a tax-equivalent basis, decreased from 3.40% for the third quarter of 2022 to 2.97% for the three months ended September 30, 2023.

The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.

For the For the Three Months Ended September 30,

($ in thousands) 2023 2022

Net interest income, as reported $ 84,702 85,334

Tax-equivalent adjustment 740 692

Net interest income, tax-equivalent $ 85,442 86,026

Net interest margin, as reported 2.95 % 3.38 %

Net interest margin, tax-equivalent 2.97 % 3.40 %

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

Average Balances and Net Interest Income Analysis

Three Months Ended September 30,

($ in thousands) Average

Volume Average

Rate Interest

or Paid Average

Volume Average

Rate Interest

Loans (1) (2) $ 7,939,783 5.32 % $ 106,514 $ 6,389,996 4.49 % $ 72,239

Taxable securities 2,885,443 1.78 % 12,936 3,078,561 1.73 % 13,450

Non-taxable securities 295,403 1.50 % 1,118 299,822 1.48 % 1,115

Short-term investments, primarily interest-bearing cash 284,678 4.58 % 3,283 260,009 2.27 % 1,486

Total interest-earning assets 11,405,307 4.31 % 123,851 10,028,388 3.49 % 88,290

Cash and due from banks 94,963 89,042

Premises and equipment 152,415 134,903

Other assets 353,093 314,800

Total assets $ 12,005,778 $ 10,567,133

Interest-bearing checking $ 1,448,603 0.55 % $ 2,007 $ 1,529,233 0.06 % $ 250

Money market deposits 3,530,532 2.63 % 23,397 2,480,043 0.13 % 841

Savings deposits 646,782 0.19 % 307 752,042 0.06 % 111

Other time deposits 646,798 2.48 % 4,037 515,625 0.27 % 352

Time deposits >$250,000 359,884 3.19 % 2,893 274,216 0.42 % 294

Total interest-bearing deposits 6,632,599 1.95 % 32,641 5,551,159 0.13 % 1,848

Borrowings 438,808 5.88 % 6,508 110,180 3.99 % 1,108

Total interest-bearing liabilities 7,071,407 2.20 % 39,149 5,661,339 0.21 % 2,956

Noninterest-bearing checking 3,547,447 3,748,119

Other liabilities 83,675 69,912

Shareholders’ equity 1,303,249 1,087,763

Total liabilities and

shareholders’ equity $ 12,005,778 $ 10,567,133

Net yield on interest-earning assets and net interest income 2.95 % $ 84,702 3.38 % $ 85,334

Net yield on interest-earning assets and net interest income – tax-equivalent (3) 2.97 % $ 85,442 3.40 % $ 86,026

Interest rate spread 2.11 % 3.28 %

Average prime rate 8.43 % 5.35 %

(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

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

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

(3) Includes tax-equivalent adjustments of $740,000 and $692,000 for three months ended September 30, 2023 and 2022, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax-exempt status.

This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

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

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

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

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

• Primarily due to higher market rates and increased average balances related in large part to the GrandSouth acquisition, deposit interest expense for the three months ended September 30, 2023 increased $30.8 million compared to the same period in 2022.

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

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

Average borrowings increased $328.6 million in the third quarter of 2023 due in large part to the higher levels of short-term borrowings utilized as needed to fund loan growth and manage fluctuations in deposit balances.

• The decrease in NIM was directly related to higher cost of funds, partially offset by higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion.

Net interest income for the nine months ended September 30, 2023 amounted to $264.2 million, an increase of $23.7 million, or 9.9%, from the $240.5 million recorded in the nine months ended September 30, 2022.

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

Our tax-equivalent NIM fell to 3.12% for the nine months ended September 30, 2023 from 3.27% for the nine months ended September 30, 2022 as discussed further below.

The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.

For the For the Nine Months Ended September 30,

We believe that analysis of NIM on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.

For the Three Months Ended March 31,

($ in thousands) 2024 2023

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Net interest margin, tax-equivalent 2.80 % 3.31 %

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

The following table presents an analysis of net interest income for the three months ended March 31, 2024 and 2023:

Average Balances and Net Interest Income Analysis

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands) Average

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(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan fee amortization (including deferred PPP fees), in the amounts of $458,000, and $2.8 million for nine months ended September 30, 2023 and 2022, respectively.

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

(3) Includes tax-equivalent adjustments of $2.1 million and $2.1 million for nine months ended September 30, 2023 and 2022, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and net deferred loan fee amortization in the amounts of $(103,000), and $357,000 for three months ended March 31, 2024 and 2023, respectively.

(2) Includes accretion of discount on acquired and SBA loans of $2.9 million and $3.6 million for three months ended March 31, 2024 and 2023, respectively.

(3) Includes tax-equivalent adjustments of $731,000 and $700,000 for three months ended March 31, 2024 and 2023, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax-exempt status.

This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

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

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

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

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

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

Overall, as demonstrated in the table above, despite the change in the mix of earning assets to higher yielding assets, the compression in NIM drove the decrease in net interest income.

• Market interest rates increased 50 basis points between March 2023 and March 2024 to result in an average prime rate of 8.50% for three months ended March 31, 2024 compared to 7.69% for the prior year period.

• Average loan volumes for the three months ended March 31, 2024 were $375.0 million higher than the same period in 2023.

In addition, interest rates on loans increased 23 basis points to 5.45% for the first quarter of 2024, resulting in an increase in interest income on loans of $10.4 million.

• Due to higher market rates and increased average balances, deposit interest expense for the three months ended March 31, 2024 increased $20.2 million compared to the same period in 2023.

Average interest-bearing deposit balances increased $337.8 million while rates on those deposits increased 114 basis points as compared to the same period in the prior year.

• The combination of higher rates on borrowings, up 211 basis points for the nine months ended September 30, 2023 as compared to the same period in 2022 due to increasing market rates, and the increase in volume of borrowings between periods drove the $17.0 million increase in interest expense on borrowings.

Average borrowings increased $371.9 million for the nine months ended September 30, 2023 as compared to the same period in 2022 due in large part to the higher levels of short-term borrowings utilized as needed to fund loan growth and manage fluctuations in deposit balances.

• NIM decreased 15 basis points between the comparable periods as higher loan yields from market rate increases and improved pricing on new loans, combined with increased loan discount accretion was more than offset by the higher cost of funds, also driven by increases in market rates and competition for deposits.

Our NIM for all periods benefited from net accretion income, primarily associated with purchase accounting discounts on loans, and premiums/discounts on deposits and borrowings associated with acquisitions.

Presented in the table below is the amount of purchase accounting adjustments which impacted net interest income in each time period presented.

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

• The combination of higher rates on borrowings, up 37 basis points in the first quarter of 2024 from the first quarter of 2023 due to increasing market rates, and the increase in volume of borrowings between periods drove the $2.4 million increase in interest expense on borrowings.

Average borrowings were $139.4 million higher in the first quarter of 2024 as compared to the first quarter of 2023 due in large part to the higher levels of short-term borrowings utilized to fund loan growth and manage fluctuations in deposit balances.

• The decrease in NIM was directly related to higher rates on liabilities driven by current market rates with repricing on our deposits occurring at a more rapid pace that the increase in yields on assets.

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

Presented in the table below is the amount of accretion which increased net interest income in each time period presented.

For the Three Months Ended March 31,

($ in thousands) 2024 2023

Accretion of loan discount on acquired loans $ 2,766 1,519 9,043 4,735

Accretion of loan discount on retained SBA loans 437 1,032 1,311 2,428

Interest income – increased by accretion of loan discount on acquired loans $ 2,437 3,118

Interest income - increased by accretion of loan discount on retained SBA loans 444 448

Total interest income impact 2,881 3,566

(Discount accretion) premium amortization of acquired deposits (709) 121 (2,606) 524

Discount accretion of acquired borrowings (215) (64) (635) (190)

Interest expense – increased by discount accretion of deposits (283) (1,019)

Interest expense – increased by discount accretion of borrowings (189) (82)

Total net interest expense impact (472) (1,101)

Total impact on net interest income $ 2,409 2,465

The increase in loan discount accretion on acquired loa ns for the three and nine months ended September 30, 2023 as compared to the same period in the prior year was related to the GrandSouth acquisition which added $23.9 million in accretable discount as of the acquisition date.

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

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

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

At March 31, 2024 and 2023, unaccreted loan discounts on purchased loans amounted to $21.6 million and $32.4 million, respectively.

The GrandSouth acquired portfolio comprised the majority of the remaining unaccreted loan discount at March 31, 2024.

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

The level of SBA loan discount accretion will vary relative to fluctuations in the SBA loan portfolio.

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

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

At March 31, 2024 and 2023, the unaccreted loan discounts on SBA loans amounted to $3.4 million and $4.0 million, respectively.

Provision for Credit Losses and Provision for Unfunded Commitments

The provisions for credit losses represents our current estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments.

Our estimate of credit losses is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses.

The provision for unfunded commitments represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances.

The allowance for unfunded commitments is included in "Other liabilities" in the Consolidated Balance Sheets.

The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined under CECL.

For the three months ended September 30, 2023, we recorded a $1.2 million provision for loan losses while $5.1 million was recognized for the comparable period of 2022.

The provision for the current quarter was driven in part by the loan growth experienced during the period, combined with updated prepayment speed estimates which are a key assumption in the CECL model.

The provision for credit losses is comprised of the provision for loan losses and the provision for unfunded commitments.

The provision recorded in each period represents the amount required such that the total ACL reflects the current estimate of life of loan credit losses in the loan portfolio and the allowance for unfunded

commitments reflects the current expected losses on unfunded loan commitments that are expected to result in outstanding loan balances.

Refer to the additional discussion previously under the "Critical Accounting Estimates" section.

The provision for credit losses was $1.2 million for the three months ended March 31, 2024 and $12.5 million in the comparable period in 2023.

The primary contributor to the higher provision for 2023 was the initial provision required for the loan portfolio acquired from GrandSouth.

The provision for credit losses recorded and related increase in the ACL for the first quarter of 2024 related in part to updated prepayment speed estimates which are a key assumption in the CECL model.

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

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

The nine months ended September 30, 2023 included a one-time loan loss provision of $12.2 million recorded to establish an initial ACL for non-PCD loans acquired from GrandSouth in accordance with our CECL model.

This was the primary contributor to the provision for the year to date period which totaled $16.4 million.

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

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

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

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

Additional discussion of our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses and Loan Loss Experience" sections following.

In addition, updated economic forecasts and loss driver inputs to the CECL mode have projected continued uncertainty in the economy demonstrated in higher projected unemployment rates, lower GDP, and increasing price indices for both commercial real estate and residential mortgages.

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

The calculated increases in the allowances were partially offset by the lower balances in the loan portfolio and the levels of unfunded commitments.

Additional discussion of the CECL method and our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience" sections following.

Noninterest Income

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

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

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

The following table presents the primary components of noninterest income.

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Our noninterest income amounted to $12.9 million and $13.5 million for the three months ended March 31, 2024 and 2023, respectively.

The lower noninterest income in the current quarter was primarily a result of the $1.0 million loss on the call of a bond which had an unamortized premium balance.

Details of the more significant components of noninterest income is presented in the table below.

For the Three Months Ended March 31,

($ in thousands) 2024 2023

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Other service charges and fees - other 3,298 3,338

Fees from presold mortgage loans

325 376 1,288 1,951

Presold mortgage loan fees and gains on sale 338 406

Commissions from sales of financial products 1,320 1,306

SBA consulting fees

478 479 1,408 1,963

SBA loan sale gains

1,101 479 2,052 4,581

Bank-owned life insurance ("BOLI") income 1,164 1,046

Core noninterest income 14,326 14,165 41,579 47,469

Securities losses, net (975) —

Other gains, net 459 188

Total noninterest income $ 12,938 13,536

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

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

Other service charges and fees - bankcard interchange income, net represents interchange income from debit and credit card transactions, net of associated interchange expense, and decreased $0.8 million, or 25.6%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and decreased $5.3 million, or 42.6%, for the nine months ended September 30, 2023 compared to the same period in 2022.

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

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

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

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

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

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

Mortgage fees decreased $0.7 million, or 34.0%, for the nine months ended September 30, 2023 compared to the prior year period due to the general increase in market interest rates starting in 2022 which have resulted in continued lower volumes of home mortgage refinancing and new originations into 2023.

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

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

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

Noninterest Expenses

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

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

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

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

The following table presents the primary components of noninterest expenses:

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Total noninterest expenses totaled $59.2 million and $74.2 million for the three months ended March 31, 2024 and 2023, respectively.

The primary contributor to the 20.2% decrease in noninterest expense for the first quarter of 2024 as compared to the same period of 2023 was the merger and acquisition costs of $12.2 million related to the GrandSouth acquisition.

Also contributing to lower noninterest expense in the three months ended March 31, 2024 were decreases in personnel expense of $1.8 million related in large part to overlapping personnel costs incurred until the conversion of GrandSouth's core system in mid-March 2023.

Other operating expenses declined $1.6 million primarily related to a $2.4 million charge for the estimated termination costs associated with the Company's pension plan.

The following table presents the primary components of noninterest expense

For the Three Months Ended March 31,

($ in thousands) 2024 2023

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Telephone and data lines 1,091 995

Software costs 1,860 1,590 6,163 4,452

Software licenses and other software costs 2,102 2,170

Data processing expense 2,164 2,412

Professional fees 1,685 1,450

Advertising and marketing expense 997 856 3,207 2,651

Advertising and marketing 890 1,120

Non-credit losses 576 865

Deposit related expenses 617 604 2,051 1,271

FDIC and corporate insurance costs 2,529 1,877

Other operating expenses 5,473 7,094

Core noninterest expense 60,367 47,263 178,470 142,307

Merger and acquisition expenses — 12,182

Amortization of intangible assets 1,759 2,145

Foreclosed property losses (gains), net (96) — (131) (372)

Foreclosed property gains, net (2) (35)

Total noninterest expense $ 59,187 74,175

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

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

Also contributing to higher noninterest expense were increases in the three and nine months ended September 30, 2023 for data processing, professional fees, software expense, and advertising, as well as travel and training (included in "other operating expenses") related to the GrandSouth acquisition, including the transition of new customers and overlapping pre-conversion costs associated with the core processing system prior to the full system integration late in the quarter.

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

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

Non-credit losses increased $0.7 million and $2.1 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in the prior year driven by an increase in check fraud experienced in the current year.

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

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

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

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

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

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

We recorded income tax expense of $6.5 million and $4.2 million for the three months ended March 31, 2024 and 2023, respectively.

Our effective tax rate was 20.5% and 21.6% for the three months ended March 31, 2024 and 2023, respectively.

The higher effective tax rate for 2023 was attributable primarily to merger and acquisition expenses recorded in that period related to the GrandSouth acquisition resulting in non-deductible adjustments for income tax purposes.

FINANCIAL CONDITION

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

Total loans at September 30, 2023 amounted to $8.0 billion, a $1.4 billion, or 20.4%, increase from December 31, 2022 related primarily to the GrandSouth acquisition which contributed $1.02 billion to the increase.

Organic growth (exclusive of acquired loans) amounted to $341.8 million for the first nine months of 2023 or an annualized growth rate of 5.9%.

The mix of our loan portfolio remained substantially the same at September 30, 2023 compared to December 31, 2022.

The majority of our real estate loans were personal and commercial loans where real estate provides additional security for the loan.

Total assets at March 31, 2024 amounted to $12.1 billion, a $23.3 million, or 0.2%, decrease from December 31, 2023 and was primarily related to intentional reductions in investment securities and loan balances, partially offset by higher interest-bearing cash balances.

Total loans at March 31, 2024 amounted to $8.1 billion, a $73.6 million, or 0.9%, decrease from December 31, 2023.

The mix of our loan portfolio remained substantially the same at March 31, 2024 as compared to December 31, 2023.

The majority of our real estate loans were personal mortgages and commercial loans where real estate provides additional security for the loan.

Note 4 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

We have no notable concentrations in geographies or industries, including in office or hospitality categories.

The Company's exposure to non-owner occupied commercial office loans represents approximately 5.8% of the total portfolio and the average size of these loans is $1.4 million.

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

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

At March 31, 2024, we had no notable concentrations in geographies or industries, including in office or hospitality categories.

The Company's exposure to non-owner occupied commercial office loans represented approximately 5.7% of the total portfolio at March 31, 2024, with the largest loan being $27.0 million and the average loan outstanding balance of $1.3 million.

Non-owner occupied office loans are generally in non-metro markets and the 10 largest loans in this category represented less than 2% of the total loan portfolio at March 31, 2024.

The composition of our investment portfolio remained substantially the same at March 31, 2024 as at December 31, 2023, and continued to reflect our investment strategy of maintaining an appropriate level of liquidity while providing a stable source of income.

The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

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

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

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

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

The Company has the intent to hold, and will not be required to sell, investments with unrealized losses until maturity or recovery of the amortized cost as market conditions change.

Note 3 to the consolidated financial statements presents additional detailed information regarding our mix of investments and the unrealized losses for each category.

Total investment securities decreased $108.9 million from December 31, 2023 to total $2.6 billion at March 31, 2024 as there have been no purchases to date in 2024 and cash flows from maturities, calls and amortizing securities continue to be utilized to fund loan growth and deposit fluctuations, or were invested in other short-term interest bearing assets.

no sales of investment securities during the the three months ended March 31, 2024, while the call of a security during the period resulted in a loss of $1.0 million related to the unamortized premium balance.

The unrealized loss on available for sale securities totaled $418.9 million at March 31, 2024.

Refer to Note 3 to the consolidated financial statements for additional detailed information regarding our mix of investments and the unrealized losses for each category.

We invest primarily in securities issued by GSEs including FHLMC, FNMA, GNMA, and SBA, each of which guarantees the repayment of the securities.

2 unchanged sentences

We have no significant concentration of bond holdings from one state or local government entity.

We have evaluated the unrealized losses on individual securities at September 30, 2023 and determined them to be of a temporary nature due primarily to interest rate factors and not credit quality concerns.

We evaluated the unrealized losses on individual securities at March 31, 2024 and determined them to be of a temporary nature due primarily to interest rate factors and not credit quality concerns.

In arriving at this conclusion, we reviewed third-party credit ratings and considered the severity of the impairment.

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

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

Brokered deposits decreased $249.4 from year end.

Total deposits amounted to $10.3 billion at March 31, 2024, an increase of $271.7 million, or 2.7%, from December 31, 2023.

Brokered deposits increased $183.5 million from year end, while organic growth from market deposits totaled $88.3 million.

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

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

In addition, we had collateralized deposits at that date of $804.6 million such that approximately 70.9% of our total deposits were insured or collateralized at September 30, 2023.

Our deposit mix has remained consistent historically and has not significantly changed with the addition of GrandSouth as presented in the table below.

There has been no notable shift in deposits from noninterest-bearing to interest-bearing during 2023 to date other than from the acquired deposits driving a moderate change in mix.

September 30, 2023 December 31, 2022

Our deposit mix has remained consistent historically and has not changed significantly and there has been no notable shift in deposits from noninterest-bearing to interest-bearing.

March 31, 2024 December 31, 2023

($ in thousands) Amount Percentage Amount Percentage

8 unchanged sentences

Total deposits $ 10,303,311 100 % 10,031,599 100 %

As of March 31, 2024, the estimated insured deposits totaled $6.4 billion or 61.8% of total deposits.

In addition, we had collateralized deposits at that date of $757.0 million such that approximately 69.2% of our total deposits were insured or collateralized at March 31, 2024.

Nonperforming Assets

NPAs are defined as nonaccrual loans, modifications to borrowers in financial distress, loans past due 90 or more days and still accruing interest, foreclosed real estate, and prior to the adoption of ASU 2022-02, accruing TDRs.

NPAs are defined as nonaccrual loans, modifications to borrowers in financial distress, loans past due 90 or more days and still accruing interest, and foreclosed real estate.

NPAs are summarized as follows:

($ in thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Nonperforming assets

1 unchanged sentence

Modifications to borrowers in financial distress 10,999 11,719

TDRs – accruing — 9,121

Total nonperforming loans 46,621 43,927

9 unchanged sentences

Allowance for credit losses to nonperforming loans 236.09 % 250.08 %

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

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

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

As shown in the table above, total NPAs at March 31, 2024 increased slightly to $47.5 million from year end level and related primarily to the $3.4 million increase in nonaccrual loans driven by a SBA loan relationship that was placed on nonaccrual and which is substantially covered by a guarantee from the SBA.

"Commercial and industrial" is the largest category of nonaccrual loans, at $12.7 million, or 35.7% of total nonaccrual loans, followed by "Commercial real estate - owner occupied" at $9.0 million, or 25.2% of total nonaccrual loans.

Included in those categories are nonaccrual SBA loans totaling $14.3 million at September 30, 2023, or 53.3%, of total nonaccrual loans which have $5.7 million in guarantees from the SBA.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans increased 6.0% to $51.4 million at September 30, 2023 compared to $48.5 million at December 31, 2022.

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

Special mention loans declined 5.6%

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

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

Allowance for Credit Losses and Loan Loss Experience

Our ACL is based on the total amount of loan losses that are expected over the remaining life of the loan portfolio.

Our estimate of credit losses on loans is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses.

The ACL is measured on a collective pool basis when similar risk characteristics exist based primarily on discounted cash flows computed for each loan in a pool based on its individual characteristics.

When we determine that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the ACL.

We have no foreign loans and do not engage in significant lease financing or highly leveraged transactions.

Commercial loans are diversified among a variety of industries.

The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan.

Collateral for virtually all of these loans is located within our principal market area.

Fluctuations in the ACL each period are based on loan mix and growth, changes in the levels of nonperforming loans, charge-off and recovery activity, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model, and as occurred in 2023, adjustments for acquired loan portfolios.

Our ACL increased $17.2 million at September 30, 2023, as compared to year end, to a total of $108.2 million.

The increase was driven by the acquisition of GrandSouth as discussed previously in the "Provision for Credit Losses" section above and in Note 4 to the accompanying consolidated financial statements.

Purchase accounting adjustments included a "Day 1" ACL of $5.6 million recorded for PCD loans and an initial "Day 2" provision for loan losses of $12.2 million related to non-PCD loans in the GrandSouth portfolio.

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

Included in those categories are nonaccrual SBA loans totaling $22.7 million at March 31, 2024, or 63.8%, of total nonaccrual loans which have $12.5 million in guarantees from the SBA.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans decreased 0.1% to $54.1 million at March 31, 2024 compared to $54.2 million at December 31, 2023.

The majority of the decrease was attributable to "Home equity loans/lines of credit", "Construction, development & other land loans", and "Residential 1-4 family real estate" loan categories, partially offset by an increase in commercial and industrial loans.

Special mention loans increased 27.7% from $44.1 million at December 31, 2023 to $56.3 million at March 31, 2024.

The majority of the increase was attributable to commercial real estate - owner occupied and construction, development & other land loans.

Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience

The total allowance for credit losses amounted to $110.1 million at March 31, 2024 compared to $109.9 million at December 31, 2023.

Fluctuations in the ACL are based on loan mix and growth, changes in the levels of

nonperforming loans, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model,

and as occurred in 2023, adjustments for acquired loan portfolios.

As discussed previously in the "Provision for Credit Losses and Provision for Unfunded Commitments" section, much of the change to the level of ACL during the period ended March 31, 2024 is attributed primarily to slower prepayment assumptions, updated economic forecasts which are a key assumption in the CECL model and which indicated a continued deterioration of the commercial real estate index, thus projecting a higher allowance for credit losses balance, partially offset by reductions in loan balances during the period.

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

We use systematic methodologies to determine the ACL for loans and the allowance for certain off-balance-sheet credit exposures.

We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio.

The ACL is calculated using collectively evaluated pools for loans with similar risk characteristics applying the discounted cash flow ("DCF") method.

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

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

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

Ended December 31,

2022 Nine Months Ended September 30, 2022

($ in thousands) Three Months Ended March 31, 2024 Twelve Months Ended December 31, 2023 Three Months Ended March 31, 2023

Loans outstanding at end of period $ 8,076,506 8,150,102 7,798,963

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Recoveries of loans previously charged-off as a percent of loans charged-off 25.01 % 36.37 % 37.73 %

We believe the ACL is adequate at each period end presented.

It must be emphasized, however, that the determination of the allowances using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans.

While our estimate of the ACL involves a high degree of judgment, we believe the ACL is adequate at each period end presented.

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

The amount of any changes could be significant if the assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios or if there is a significant change in the reasonable and supportable forecast or assumptions used to model our expected credit losses.

No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the ACL or future charges to earnings.

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

and Allowance for Unfunded Commitments” in Note 1 to the 2022 Annual Report on Form 10-K filed with the SEC for more information.

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

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

Allowance for Unfunded Commitments

Refer also to “Critical Accounting Policies – Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments” in Note 1 to the 2023 Annual Report on Form 10-K filed with the SEC for more information.

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

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

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

The allowance for lending-related commitments on off-balance sheet credit exposures is adjusted as a component of the provision for credit losses expense.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

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

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

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

The allowance for unfunded commitments of $10.8 million and $14.4 million at March 31, 2024 and December 31, 2023, respectively, are classified on the consolidated balance sheets within "Other liabilities." The decline in the level of the allowance between periods was driven by the reduction in available lines of credit during three months ended March 31, 2024.

Liquidity, Commitments, and Contingencies

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

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

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

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

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

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

At March 31, 2024, the Company had three sources of readily available borrowing capacity:

• A line of credit with the FHLB of approximately $1.4 billion which can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by a blanket lien on most of our real estate loan portfolio, select securities from our investment portfolio, and our FHLB stock (of which $0.8 million and $280.9 million were outstanding at March 31, 2024 and December 31, 2023, respectively);

• Federal funds lines with several correspondent banks totaling $265.0 million, which provide for overnight unsecured federal funds purchased (of which none were outstanding at March 31, 2024 or December 31, 2023).

• A $292.6 million line of credit through the Federal Reserve's Bank Term Funding Program ("BTFP") secured by select investment securities (of which $231.0 million and $249.0 million was outstanding at March 31, 2024 and December 31, 2023, respectively).

Effective March 11, 2024, the Federal Reserve terminated the BTFP and no additional advances were available;

• A line of credit with the Federal Reserve through its discount window borrowing program of approximately $548.1 million which is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans) and specific investment securities.

All of this line was available at March 31, 2024 and December 31, 2023.

Our overall on-balance sheet liquidity ratio was 15.5% at March 31, 2024.

compared to 14.6% at December 31, 2023.

We define our liquidity ratio as net liquid assets (cash, unpledged securities and other marketable assets) as a percentage of our net liabilities (unpledged deposits and borrowings).

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

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

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

We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future.

Our total liquidity ratio, including the $2.3 billion in available lines of credit at quarter end, was 31.4% as of March 31, 2024.

The amount and timing of our contractual obligations and commercial commitments have not changed materially since December 31, 2023, the detail of w hich is presented in the "Contractual Obligations and Other Commercial Commitments" table of our 2023 Annual Report on Form 10-K.

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Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity.

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

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

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

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

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

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

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

At March 31, 2024, the Company's derivative financial instruments consisted entirely of customer back-to-back interest rate swaps which are not designated as hedges.

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

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

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

There have been no material changes from the derivative positions discussed in Note 13 of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

Capital Resources

The Company is regulated by the Federal Reserve and is subject to the securities registration and public reporting regulations of the SEC.

Our banking subsidiary is also regulated by the Federal Reserve and the North Carolina Office of the Commissioner of Banks ("NCCOB").

Our Bank is also regulated by the Federal Reserve and the North Carolina Office of the Commissioner of Banks ("NCCOB").

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

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

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

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

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

At March 31, 2024, our capital ratios exceeded the regulatory minimum ratios discussed above.

The capital ratios at March 31, 2024 increased as compared to year end related primarily to retention of earnings increasing capital, combined with loan reductions and shifts in asset mix to lower risk-weighted assets.

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Risk-based capital ratios:

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

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

In addition to the regulatory capital requirements, we monitor the Company's tangible common equity ratio which is a non-GAAP measurement calculated as total capital less intangible assets, as a percent of total assets net of intangible assets.

AOCI is included in the Company’s tangible common equity to tangible assets ratio which was 6.49% at September 30, 2023, an increase of ten basis points from December 31, 2022 due to higher earnings and improvement the level of AOCI.

At March 31, 2024, the Bank exceeded the minimum ratios established by the regulatory authorities.

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

The TCE ratio was 7.48% at March 31, 2024 compared to 7.42% at December 31, 2023.

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

($ in thousands) March 31, 2024 December 31, 2023

Reconciliation of Common Equity to TCE

Total shareholders' common equity $ 1,376,099 1,372,380

Goodwill and other intangibles (509,636) (511,608)

Tangible common equity $ 866,463 860,772

Reconciliation of Total Assets to Tangible Assets

Total assets $ 12,091,597 12,114,942

Goodwill and other intangibles (509,636) (511,608)

Tangible assets $ 11,581,961 11,603,334

TCE divided by Tangible Assets 7.48 % 7.42 %

Stock Repurchase Plans

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

During the quarter ended March 31, 2024, the Company did not maintain, adopt, modify or terminate a stock repurchase plan operated under the provisions of Rules 10b-18 or Rule 10b5-1(c) of the SEC or otherwise.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis