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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-08 · 197 added, 195 removed, 229 unchanged (63% of the section changed)

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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.

Overview and Highlights at and for Three Months Ended June 30, 2024

We earned net income of $28.7 million, or $0.70 diluted EPS, during the three months ended June 30, 2024 compared to net income of $29.4 million, or $0.71 diluted EPS, for the three months ended June 30, 2023.

The decrease in net income in the the current year period as compared to the prior year period was driven primarily by higher cost of funds, partially offset by a higher yield on interest earning assets and lower noninterest expenses.

• Net interest income for the second quarter of 2024 was $81.1 million, a 6.8% decrease from the $87.0 million recorded in the second 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.

• Net interest margin ("NIM") on a tax-equivalent basis decreased in the second quarter of 2024 to 2.87% from 3.08% for the second 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.

• We remained well-capitalized by all regulatory standards with a total common equity Tier 1 ratio of 13.99% and total risk-based capital ratio of 16.24% at June 30, 2024.

• The decline in the provision for credit losses in the second quarter of 2024 as compared to the second quarter of 2023 was related to a $593 thousand reduction in net charge off activity as well as generally improving economic forecasts that lead to a reduction in the reserves required for unfunded commitments.

• Noninterest income for the three months ended June 30, 2024 totaled $14.6 million which was an increase of $0.4 million, or 2.9%, from the comparable period of 2023 and was primarily related to an increase in SBA loan sale gains.

• Noninterest expense of $58.3 million for the quarter ended June 30, 2024 decreased $3.3 million, or 5.4%, from the three months ended June 30, 2023.

This decrease is attributable to the $1.3 million of merger and acquisition expense resulting from the GrandSouth acquisition during the three months ended June 30, 2023 and a $1.1 million decrease in other operating expenses.

Overview and Highlights at and for Six Months Ended June 30, 2024

We earned net income of $54.0 million, or $1.31 diluted EPS, during the six months ended June 30, 2024 compared to net income of $44.6 million, or $1.08 diluted EPS, for the six months ended June 30, 2023.

• Net interest income for six months ended June 30, 2024 was $160.3 million, a 10.7% decrease from the $179.5 million recorded for the comparable period of 2023.

The decrease in net interest income was driven by higher cost of funds, partially offset by higher yields on interest earning assets.

• NIM on a tax-equivalent basis decreased to 2.83% for the six months ended June 30, 2024 from 3.19% for the six months ended June 30, 2023 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, partially offset by lower loan discount accretion.

• For the six months ended June 30, 2024, the Company recorded $1.7 million in provision for credit losses as compared to $14.9 million for the six months ended June 30, 2023.

The higher provision in the 2023 period was directly related to the GrandSouth acquisition as follows:

(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.

• Noninterest income for the six months ended June 30, 2024 totaled $27.6 million, a decrease of $0.2 million, or 0.7%, from the comparable period of 2023 primarily related to increased securities losses of $1.2 million and a $597 thousand decrease in other service charges and fees, partially offset by an increase in SBA loan sale gains of $1.3 million.

• Noninterest expense decreased $18.3 million, or 13.5%, to $117.5 million for the six months ended June 30, 2024 as compared to the prior year period, primarily driven by a $13.5 million decrease in merger expenses resulting from the GrandSouth acquisition along with a $2.3 million decrease in other noninterest expense and a $2.1 million decrease in personnel expense.

Total assets at June 30, 2024 amounted to $12.1 billion, a 0.4% 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 $8.1 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.

• Total loans amounted to $8.1 billion at June 30, 2024, reflecting a contraction of $80.3 million from December 31, 2023.

• Total deposits were $10.5 billion at June 30, 2024, an increase of $456.2 million, or 4.55% , from December 31, 2023.

• Credit quality continued to be strong at June 30, 2024, with a NPA to total assets ratio of 0.37% as of June 30, 2024, consistent with that of December 31, 2023.

• Our on-balance sheet liquidity ratio was 16.3% at June 30, 2024.

Available off-balance sheet sources totaled $2.4 billion at quarter end, resulting in a total liquidity ratio of 34.2%.

• 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

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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

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

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

We believe the accounting estimate related to the ACL is a “critical accounting estimate” as:

(1) changes in it can materially affect the provision for credit losses and net income;

(2) it requires management to predict borrowers’ likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions;

(3) the value of underlying collateral must be estimated on collateral-dependent loans;

(4) prepayment activity must be projected to estimate the life of loans that often are shorter than contractual terms;

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

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

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

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 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 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 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

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

Pursuant to applicable accounting guidance, we recognize assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values as of the acquisition date, with the related transaction costs expensed in the period incurred.

Specified items such as acquired operating lease assets and liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with accounting guidance that results in measurements that may differ from fair value.

Determining the fair value of assets acquired and liabilities assumed often involves estimates based on internal or third-party valuations which include appraisals, discounted cash flow analysis, or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples of earnings, or other relevant factors.

The determination of fair value may require us to make point-in-time estimates about discount rates, future expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to assess.

While we use the best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction.

Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions:

customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates.

The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible.

The estimated useful lives are periodically reviewed for reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization.

We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset.

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

The ACL for PCD 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 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.

The actual cash flows on these loans could differ materially from the fair value estimates.

The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans.

Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances.

Similarly, premiums or discounts on acquired debt are accreted or amortized to interest expense over their remaining lives.

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

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.

Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.

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

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.

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.

There have been no material changes to the Company's significant accounting policies as discussed in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

Current Accounting Matters

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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.

Net interest income for the three months ended June 30, 2024 amounted to $81.1 million, a decrease of $5.9 million, or 6.8%, from the $87.0 million recorded in the second 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.

While average interest-earning assets for the second quarter of 2024 increased 0.3% from the comparable period of the prior year, the mix of assets shifted to higher earning assets, with average loans growing $220.3 million, or 2.81%, and short term investments growing $157.3 million, or 44.90%, while taxable securities decreased $333.4 million, or 11.40%.

The increase in the cost of interest bearing deposits of 86 basis points between the second quarter of 2023 and the second quarter of 2024 more than offset improvements from earning asset mix changes and higher yields.

This resulted in the reduction in our tax-equivalent NIM (see discussion below) from 3.08% for the second quarter of 2023 to 2.87% for the second quarter of 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.

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,

We believe that analysis of tax-equivalent NIM 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 June 30,

($ in thousands) 2024 2023

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Net interest margin, tax-equivalent 2.87 % 3.08 %

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

The following table presents an analysis of net interest income for the three months ended June 30, 2024 and 2023:

Average Balances and Net Interest Income Analysis

Three Months Ended March 31,

Three Months Ended June 30,

($ in thousands) Average

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

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and 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.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and net deferred loan (cost)/fee amortization in the amounts of $(271,000), and $49,000 for three months ended June 30, 2024 and 2023, respectively.

(2) Includes accretion of discount on acquired loans of $2.3 million and $3.2 million for three months ended June 30, 2024 and 2023, respectively.

(3) Includes tax-equivalent adjustments of $733,000 and $699,000 for three months ended June 30, 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, 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.

• Market interest rates increased 25 basis points between June 2023 and June 2024 to result in an average prime rate of 8.50% for three months ended June 30, 2024 compared to 8.16% for the prior year period.

• Average loan volumes for the three months ended June 30, 2024 were $220.3 million higher than the same period in 2023.

In addition, interest rates on loans increased 24 basis points to 5.50% for the second quarter of 2024, resulting in an increase in interest income on loans of $7.5 million.

• Due to higher market rates and increased average balances, deposit interest expense for the three months ended June 30, 2024 increased $17.4 million compared to the same period in 2023.

Average interest-bearing deposit balances increased $563.2 million while rates on those deposits increased 86 basis points as compared to the same period in the prior year.

• 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 volume of borrowings between periods, partially offset by higher rates on those borrowings, up 141 basis points in the second quarter of 2024 from the second quarter of 2023, as a result of increasing market rates, drove the $3.9 million decrease in interest expense on borrowings.

Average borrowings were $315.5 million lower in the second quarter of 2024 as compared to the second quarter of 2023 due in large part to the decreased utilization of short-term borrowings 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.

Net interest income for the six months ended June 30, 2024 amounted to $160.3 million, a decrease of $19.2 million, or 10.7%, from the $179.5 million recorded in the six months ended June 30, 2023.

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

Our tax-equivalent NIM fell to 2.83% for the six months ended June 30, 2024 from 3.19% for the six months ended June 30, 2023 as discussed further below.

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

For the Six Months Ended June 30,

($ in thousands) 2024 2023

Net interest income, as reported $ 160,300 $ 179,471

Tax-equivalent adjustment 1,464 1,399

Net interest income, tax-equivalent $ 161,764 $ 180,870

Net interest margin, as reported 2.81 % 3.17 %

Net interest margin, tax-equivalent 2.83 % 3.19 %

The following table presents an analysis of net interest income for the six months ended June 30, 2024 and 2023.

Average Balances and Net Interest Income Analysis

Six Months Ended June 30,

($ in thousands) Average

Volume Average

Rate Interest

or Paid Average

Volume Average

Rate Interest

Loans (1) (2) $ 8,087,101 5.48 % $ 220,181 $ 7,789,800 5.24 % $ 202,343

Taxable securities 2,703,441 1.79 % 24,019 2,973,460 1.80 % 26,479

Non-taxable securities 292,622 1.54 % 2,234 297,789 1.52 % 2,250

Short-term investments, primarily interest-bearing cash 392,790 4.56 % 8,913 364,651 4.02 % 7,263

Total interest-earning assets 11,475,954 4.47 % $ 255,347 11,425,700 4.21 % 238,335

Cash and due from banks 87,754 94,239

Premises and equipment 150,401 151,877

Other assets 369,132 378,546

Total assets $ 12,083,241 $ 12,050,362

Interest bearing checking $ 1,400,425 0.69 % $ 4,784 $ 1,491,401 0.30 % $ 2,199

Money market deposits 3,854,453 3.14 % 60,223 3,113,201 1.87 % 28,867

Savings deposits 581,339 0.22 % 625 702,527 0.11 % 397

Other time deposits 723,904 3.20 % 11,509 838,287 2.59 % 10,770

Time deposits >$250,000 363,640 3.73 % 6,738 328,079 2.47 % 4,013

Total interest-bearing deposits 6,923,761 2.44 % 83,879 6,473,495 1.44 % 46,246

Borrowings 372,987 6.02 % 11,168 461,260 5.52 % 12,618

Total interest-bearing liabilities 7,296,748 2.62 % 95,047 6,934,755 1.71 % 58,864

Noninterest bearing checking 3,331,811 3,725,222

Other liabilities 77,795 96,228

Shareholders’ equity 1,376,887 1,294,157

Total liabilities and

shareholders’ equity $ 12,083,241 $ 12,050,362

Net yield on interest-earning assets and net interest income 2.81 % $ 160,300 3.17 % $ 179,471

Net yield on interest-earning assets and net interest income – tax-equivalent (3) 2.83 % $ 161,764 3.19 % $ 180,870

Interest rate spread 1.85 % 2.50 %

Average prime rate 8.50 % 7.92 %

(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 (cost)/fee amortization (including deferred PPP fees), in the amounts of $(374,000), and $406,000 for six months ended June 30, 2024 and 2023, respectively.

(2) Includes accretion of discount on acquired loans of $4.7 million and $6.3 million for six months ended June 30, 2024 and 2023, respectively.

(3) Includes tax-equivalent adjustments of $1.5 million and $1.4 million for six months ended June 30, 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, the reduction in NIM, partially offset by higher earning asset volumes, drove the decrease in net interest income.

• Market interest rates increased 25 basis points between June 2023 and June 2024 to result in an average prime rate of 8.50% for six months ended June 30, 2024 compared to 7.92% for the prior year period.

• Average loan volumes for the six months ended June 30, 2024 were $297.3 million higher than the same period in 2023 due to organic loan growth.

In addition, interest rates on loans increased 24 basis points to 5.48% for the six months ended June 30, 2024, resulting in an increase in loan interest income of $17.8 million.

• Primarily due to higher market rates, deposit interest expense for the six months ended June 30, 2024 increased $37.6 million compared to the same period in 2023.

Average interest-bearing deposit balances increased $450.3 million while rates on those deposits increased 100 basis points as compared to the same period in the prior year.

• Interest expense on borrowings decreased $1.5 million for the six months ended June 30, 2024 as compared to the same period in 2023 due to the $88.3 million decrease in the average volume of borrowings between periods, partially offset by a 50 basis point increase in the rates on those borrowings.

The lower balances were due in large part to the lower levels of short-term borrowings being utilized to fund loan growth and manage fluctuations in deposit balances.

• NIM decreased 36 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 were 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 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,

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

($ in thousands) 2024 2023 2024 2023

Interest income – increased by accretion of loan discount on acquired loans $ 2,303 $ 3,159 $ 4,740 $ 6,277

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

Total interest income impact 2,303 3,159 4,740 6,277

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

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.

At June 30, 2024 and 2023, unaccreted loan discounts on purchased loans amounted to $19.3 million and $29.2 million, respectively.

The GrandSouth acquired portfolio comprised the majority of the remaining unaccreted loan discount at June 30, 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 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.

At June 30, 2024 and 2023, the unaccreted loan discounts on SBA loans amounted to $3.2 million and $3.8 million, respectively.

Provision for Credit Losses and Provision for Unfunded Commitments

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

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

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.

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 allowance for unfunded commitments.

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.

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.

Refer also to “Critical Accounting Estimates” in Item 7 of the 2023 Annual Report on Form 10-K filed with the SEC for more information.

The provision for credit losses was $0.5 million and $2.4 million for the three months ended June 30, 2024 and 2023, respectively, and $1.7 million and $14.9 million for the six months ended June 30, 2024 and 2023, respectively.

The lower provision in the second quarter was primarily due to a $593 thousand reduction in net charge off activity as well as generally improving economic forecasts that lead to a reduction in the reserves required for unfunded commitments.The primary contributor to the higher provision for the six months ended June 30, 2023 was the initial provision required for the loan portfolio acquired from GrandSouth.

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 $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,

Our noninterest income amounted to $14.6 million and $14.2 million for the three months ended June 30, 2024 and 2023, respectively and $27.6 million and $27.8 million for the six months ended June 30, 2024 and 2023, respectively.

The higher noninterest income in the current quarter as compared to the prior year is primarily the result of higher "SBA loan sale gains," partially offset by decreases in "Other service charges and fees" and "Securities losses, net." The decreased noninterest income for the six months ended June 30, 2024 as compared to the same period in 2023 is a result of "Securities losses, net" in 2024 and lower "Other service charges and fees," partially offset by increased "SBA loan sale gains" and "Bank-owned life insurance income." Details of the more significant components of noninterest income is presented in the table below.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

($ in thousands) 2024 2023 2024 2023

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Commissions from sales of financial products 1,377 1,413 2,697 2,719

SBA consulting fees

SBA loan sale gains

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

1,336 696 2,231 951

Bank-owned life insurance income 1,179 1,066 2,343 2,112

Securities losses, net (186) — (1,161) —

Other gains, net 459 188

Other income 854 739 1,570 1,448

Total noninterest income $ 14,648 $ 14,235 $ 27,586 $ 27,771

Noninterest Expenses

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,

Total noninterest expenses totaled $58.3 million and $61.6 million for the three months ended June 30, 2024 and 2023, respectively, and $117.5 million and $135.8 million for the six months ended June 30, 2024 and 2023, respectively.

The primary contributors to the 5.4% decrease in noninterest expense for the second quarter of 2024 as compared to the same period of 2023 were the Merger and acquisition costs of $1.3 million related to the GrandSouth acquisition, the $0.8 million decrease in Non-credit losses and the $0.5 million decrease in FDIC insurance costs.

The decrease for the six months ended June 30, 2024 as compared to the same period in 2023 was primarily the result of a decrease in Merger and acquisition costs of $13.5 million related to the GrandSouth acquisition, a reduction in Total personnel expenses of $2.1 million, a decrease in Other operating expenses of $1.3 million and a decrease in Non-credit losses of $1.1 million.

The decline in Other operating expenses was primarily related to a $2.4 million charge in 2023 for the estimated termination costs associated with the Company's pension plan.

The following table presents the primary components of noninterest expenses.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

($ in thousands) 2024 2023 2024 2023

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Non-credit losses 735 1,550 1,311 2,415

FDIC and corporate insurance costs 2,529 1,877

FDIC insurance costs 1,711 2,237 3,657 3,557

Corporate insurance costs 587 550 1,170 1,108

Other operating expenses 5,608 5,255 11,081 12,349

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Total noninterest expense $ 58,291 $ 61,593 $ 117,478 $ 135,768

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.

We recorded income tax expense of $8.2 million and $7.9 million for the three months ended June 30, 2024 and 2023, respectively.

Our effective tax rate was 22.2% and 21.1% for the three months ended June 30, 2024 and 2023, respectively.

The higher effective tax rate for 2024 was attributable primarily to variances in state income taxes.

For the six months ended June 30, 2024 and 2023, we recorded tax expense of $14.7 million and $12.0 million, respectively.

Our effective tax rate was 21.4% and 21.3% for the six months ended June 30, 2024 and 2023, respectively.

FINANCIAL CONDITION

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.

Total assets at June 30, 2024 amounted to $12.1 billion, a $54.1 million, or 0.4%, 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 June 30, 2024 amounted to $8.1 billion, a decrease of $80.3 million, or 1.0%, from December 31, 2023.

The mix of our loan portfolio remained substantially the same at June 30, 2024 as compared to December 31, 2023, with the exception of Construction, development & other land loans, which, as a percentage of the loan

portfolio, fell from 12% at December 31, 2023 to 9% at June 30, 2024.

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.

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.

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

At June 30, 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 June 30, 2024, with the largest loan being $26.8 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 June 30, 2024.

The composition of our investment portfolio remained substantially the same at June 30, 2024 as at December 31, 2023, with the exception of U.S.

Treasuries, $124.9 million and $175.9 million of which were sold or matured during the three and six months ended June 30, 2024, respectively, and Mortgage-backed securities, of which $104.0 million and $134.7 million were sold, matured or were paid down during the three and six months ended June 30, 2024, respectively.

The composition of the investment portfolio 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 $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.

Total investment securities were $2.4 billion at June 30, 2024, a decrease of $332.2 million from December 31, 2023.

During the three and six months ended June 30, 2024, the Company made no purchases of investment securities.

During the second quarter of 2024, the Company sold $142.9 million of available for sale investment securities at a $4.7 million loss that was substantially offset by the $4.5 million gain on sale of the VISA B shares during that quarter.

The call of a security during the first quarter of June 30, 2024 resulted in a loss of $975 thousand related to the unamortized premium balance.

In addition, the Company continues to utilize cash flows from investment securities to fund earning assets and repay borrowings and brokered deposits.

The unrealized loss on available for sale securities totaled $410.1 million at June 30, 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.

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

Nearly all of our mortgage-backed securities are issued by GSEs and are traded in liquid secondary markets.

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

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.

We evaluated the unrealized losses on individual securities at June 30, 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 $10.3 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.

Total deposits amounted to $10.5 billion at June 30, 2024, an increase of $456.2 million, or 4.5%, from December 31, 2023.

Brokered deposits increased $36.4 million from year end, while organic growth from customer deposits totaled $419.8 million.

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

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

June 30, 2024 December 31, 2023

($ in thousands) Amount Percentage Amount Percentage

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Time deposits >$250,000 389,281 4 % 355,209 4 %

Total market deposits 10,107,259 98 % 10,019,000 100 %

Total customer deposits 10,438,797 100 % 10,019,000 100 %

Brokered deposits 49,032 — % 12,599 — %

Total deposits $ 10,487,829 100 % $ 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.

As of June 30, 2024, the estimated insured deposits totaled $6.4 billion or 61.3% of total deposits.

In addition, we had collateralized deposits at that date of $762.2 million such that approximately 68.6% of our total deposits were insured or collateralized at June 30, 2024.

Nonperforming Assets

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($ in thousands)

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

Nonperforming assets

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Allowance for credit losses to nonperforming loans 252.44 % 250.08 %

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.

As shown in the table above, total NPAs at June 30, 2024 decreased slightly to $44.7 million from year end level and related primarily to the $1.2 million decrease in modifications to borrowers in financial distress, partially offset by the $0.9 million increase in nonaccrual loans.

"Commercial and industrial" is the largest category of nonaccrual loans, at $12.0 million, or 36.1%, of total nonaccrual loans, followed by "Commercial real estate - owner occupied" at $9.1 million, or 27.5%, of total nonaccrual loans.

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.

Included in various loan categories are nonaccrual SBA loans totaling $21.4 million at June 30, 2024, or 64.8% of total nonaccrual loans, and which have $12.4 million in guarantees from the SBA.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans decreased 10.7% to $48.4 million at June 30, 2024 compared to $54.2 million at December 31, 2023.

The decrease resulted from improvements in various loan categories, partially offset by an increase in Commercial and industrial loans.

Special mention loans increased 24.8% from $44.1 million at December 31, 2023 to $55.1 million at June 30, 2024.

The majority of the increase was attributable to Commercial real estate - owner occupied.

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.

The total allowance for credit losses amounted to $110.1 million at June 30, 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

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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.

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 June 30, 2024 was primarily related to slower prepayment assumptions and updated economic forecasts which are a key assumption in the CECL model and which indicated improvement in some factors, but also to a continued reduction of the commercial real estate pricing 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.

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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.

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

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) Three Months Ended March 31, 2024 Twelve Months Ended December 31, 2023 Three Months Ended March 31, 2023

($ in thousands) Six Months Ended June 30, 2024 Twelve Months Ended December 31, 2023 Six Months Ended June 30, 2023

Loans outstanding at end of period $ 8,069,848 $ 8,150,102 $ 7,897,629

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Allowance for credit losses as a percent of loans at end of period 1.36 % 1.35 % 1.38 %

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

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

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

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

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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 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.

The allowance for unfunded commitments of $9.9 million and $11.4 million at June 30, 2024 and December 31, 2023, respectively, is 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 reserve rates and balances of available lines of credit during the six months ended June 30, 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 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;

At June 30, 2024, the Company had the following 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 $826 thousand and $280.9 million were outstanding at June 30, 2024 and December 31, 2023, respectively);

• A line of credit with the Federal Reserve through its discount window borrowing program of approximately $770.7 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.

All of this line was available at both June 30, 2024 and December 31, 2023.

Our overall on-balance sheet liquidity ratio was 16.3% at June 30, 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).

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.

Our total liquidity ratio, including the $2.4 billion in available lines of credit at quarter end, was 34.2% as of June 30, 2024.

Not included in these ratios are the readily available sources of funds through brokered deposits.

As of June 30, 2024, our brokered deposits availability was $1.8 billion per our internal policy.

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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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.

In the normal course of business, we are exposed to certain risks arising from both our 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.

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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.

At June 30, 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.

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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.

We must comply with regulatory capital requirements established by the

Federal Reserve and the NCCOB.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

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

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.

At June 30, 2024, our capital ratios exceeded the regulatory minimum ratios discussed above.

The capital ratios at June 30, 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:

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023 Minimum required

Risk-based capital ratios:

Common equity Tier 1 to Tier 1 risk weighted assets 13.99 % 13.20 % 7.00 %

Minimum required Common Equity Tier 1 capital 7.00 % 7.00 %

Tier I capital to Tier 1 risk weighted assets 14.79 % 13.99 % 8.50 %

Minimum required Tier 1 capital 8.50 % 8.50 %

Total risk-based capital to Tier II risk weighted assets 16.24 % 15.54 % 10.50 %

Minimum required total risk-based capital 10.50 % 10.50 %

Leverage capital ratio:

Tier 1 capital to quarterly average total assets 11.24 % 10.91 % 4.00 %

Minimum required Tier 1 leverage capital 4.00 % 4.00 %

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

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

At June 30, 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 TCE ratio was 7.90% at June 30, 2024 compared to 7.56% 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

($ in thousands) June 30, 2024 December 31, 2023

Reconciliation of Common Equity to TCE

Total shareholders' common equity $ 1,404,342 $ 1,372,380

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

Goodwill and other intangibles, net of related taxes (490,439) (493,211)

Tangible common equity $ 913,903 $ 879,169

1 unchanged sentence

Total assets $ 12,060,805 $ 12,114,942

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

Goodwill and other intangibles, net of related taxes (490,439) (493,211)

Tangible assets $ 11,570,366 $ 11,621,731

1 unchanged sentence

Stock Repurchase Plans

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.

On January 30, 2024, the Board of Directors of the Company authorized the repurchase of up to $40 million in shares of the Company’s common stock.

If any such repurchases were to occur in the future, they would be made pursuant to a plan approved by and containing provisions about the timing, purchase prices and quantities purchased determined by management in its discretion.

During the quarter ended June 30, 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