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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-07 · 197 added, 150 removed, 276 unchanged (56% 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 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.

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

We earned net income of $18.7 million, or $0.45 diluted EPS, during the three months ended September 30, 2024 compared to net income of $29.9 million, or $0.73 diluted EPS, for the three months ended September 30, 2023.

The decrease in net income in the current year period as compared to the prior year period was driven primarily by a $14.2 million increase in provision for credit losses, $13.0 million of which was related to anticipated impact from Hurricane Helene and a higher cost of funds, partially offset by a higher yield on interest earning assets, both of which were driven by the overall interest rate environment for the past year.

Adjusting for the impact from Hurricane Helene, our adjusted net income was $29.0 million, or $0.70 per diluted share, for the third quarter.

• Net interest income for the third quarter of 2024 was $83.0 million, a 2.0% decrease from the $84.7 million recorded in the third 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 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.

• Net interest margin ("NIM") on a tax-equivalent basis decreased in the third quarter of 2024 to 2.90% from 2.97% for the third 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.

Capital grew during the quarter with a total common equity Tier 1 ratio of 14.37%, Tier 1 risk-based capital ratio of 15.19% and total risk-based capital ratio of 16.65% at September 30, 2024, all growing for the quarter and from September 30, 2023.

• The provision for credit losses for the third quarter of 2024 was $14.2 million, driven by an incremental provision of $13.0 million related to the potential exposure from Hurricane Helene and $2.1 million of net charge-off activity, partially offset by generally improving economic forecasts that lead to a reduction in the reserves required for unfunded commitments.

See the "Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience" discussion in the Financial Condition section of Management's Discussion and Analysis.

• Noninterest income for the three months ended September 30, 2024 totaled $13.6 million which was a decrease of $1.6 million, or 10.5%, from the comparable period of 2023 and was primarily related to an decrease in Other income, net, related to the timing of the recognition of gain and loss from other investment activity, which does not include available for sale or held to maturity securities.

• Noninterest expense of $59.9 million for the quarter ended September 30, 2024 decreased $2.4 million, or 3.8%, from the three months ended September 30, 2023.

This decrease is attributable to a $2.4 million decrease in other operating expenses.

• These third quarter results include the potential impact of Hurricane Helene of $13.4 million, comprised of $13.0 million of provision for potential credit loss exposure in our footprint hardest hit by Helene, $0.3 million of estimated property damages and an additional $0.1 million of other impacts.

After considering the tax effect of these items, our net income was reduced by $10.3 million.

Overview and Highlights at and for Nine Months Ended September 30, 2024

We earned net income of $72.7 million, or $1.76 diluted EPS, during the nine months ended September 30, 2024 compared to net income of $74.5 million, or $1.81 diluted EPS, for the nine months ended September 30, 2023.

Adjusting for the potential impact from Hurricane Helene, our adjusted net income was $83.0 million, or $2.01 per diluted share, for the nine months ended September 30, 2024.

• Net interest income for the nine months ended September 30, 2024 was $243.4 million, a 7.9% decrease from the $264.2 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:

• NIM on a tax-equivalent basis decreased to 2.86% for the nine months ended September 30, 2024 from 3.12% for the nine months ended September 30, 2023 related to higher cost of funds driven by increases in market rates and competition for deposits.

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

• For the nine months ended September 30, 2024, the Company recorded $15.9 million in provision for credit losses as compared to $14.9 million for the nine months ended September 30, 2023.

The higher provision in 2024 was significantly impacted by the $13.0 million provision related to Hurricane Helene.

The 2023 provision was primarily driven by 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.

• Noninterest income for the nine months ended September 30, 2024 totaled $41.1 million, a decrease of $1.9 million, or 4.4%, from the comparable period of 2023 primarily related to decreased Other income, net of $1.9 million and increased securities losses of $1.2 million, partially offset by an increase in SBA loan sale gains of $1.3 million.

• Noninterest expense decreased $20.7 million, or 10.4%, to $177.3 million for the nine months ended September 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 $4.7 million decrease in other operating expenses and a $1.6 million decrease in personnel expense.

• These 2024 year to date results include the potential impact of Hurricane Helene of $13.4 million.

This comprised of $13.0 million of provision for potential credit loss exposure in our footprint hardest hit by Helene, $0.3 million of estimated property damages and an additional $0.1 million of other impacts.

After considering the tax effect of these items, our net income was reduced by $10.3 million.

Total assets at September 30, 2024 amounted to $12.2 billion, a 0.3% increase from December 31, 2023, and was driven primarily by higher interest-bearing cash balances, partially offset by a short term strategy to intentional reduce investment securities and loan balances.

The primary balance sheet changes are presented below.

• 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.

• Total loans amounted to $8.0 billion at September 30, 2024, reflecting a contraction of $136.6 million from December 31, 2023.

• Total deposits were $10.5 billion at September 30, 2024, an increase of $473.3 million, or 4.72% , from December 31, 2023.

• Credit quality continued to be strong at September 30, 2024, with NPAs of 0.38% of total assets as of September 30, 2024, up slightly from 0.37% at December 31, 2023.

• On-balance sheet liquidity ratio was 17.7% at September 30, 2024.

Available off-balance sheet sources totaled $2.4 billion at quarter end, resulting in a total liquidity ratio of 35.2%.

• Capital grew during the quarter, keeping us well-capitalized by all regulatory standards.

At September 30, 2024, our total common equity Tier 1 ratio was 14.37%, our Tier 1 risk-based capital ratio was 15.19% and our total risk-based capital ratio was 16.65%.

All capital ratios grew during the quarter and from September 30, 2023.

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.

information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements.

See the "Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience" discussion in the Financial Condition section of Management's Discussion and Analysis.

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.

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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 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.

Net interest income for the three months ended September 30, 2024 amounted to $83.0 million, a decrease of $1.7 million, or 2.0%, from the $84.7 million recorded in the third 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 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.

While average interest-earning assets for the third quarter of 2024 increased $83.9 million, or 0.7%, from the comparable period of the prior year, the mix of assets shifted to higher earning assets, with average loans growing $79.9 million and short term investments growing $400.0 million, while taxable securities decreased $391.5 million.

The increase in the cost of interest bearing deposits of 64 basis points between the third quarter of 2023 and the third 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 2.97% for the third quarter of 2023 to 2.90% for the third 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 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,

For the Three Months Ended September 30,

($ in thousands) 2024 2023

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Net interest margin, tax-equivalent 2.90 % 2.97 %

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

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

Average Balances and Net Interest Income Analysis

Three Months Ended June 30,

Three Months Ended September 30,

($ in thousands) Average

Volume Average

Rate Interest

Volume Interest

or Paid Average

Volume Average

Rate Interest

Volume Interest

or Paid Average

Loans (1) (2) $ 8,019,730 $ 111,076 5.51 % $ 7,939,783 $ 106,514 5.32 %

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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 (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.

Interest earned includes recognized net loan fees, including late fees, prepayment fees, and net deferred loan (cost)/fee amortization in the amounts of $(342,000), and $52,000 for three months ended September 30, 2024 and 2023, respectively.

(2) Includes accretion of discount on acquired loans of $2.0 million and $2.8 million for three months ended September 30, 2024 and 2023, respectively.

(3) Includes tax-equivalent adjustments of $722,000 and $740,000 for three months ended September 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 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.

• During 2023, the Federal Reserve increased the fed funds rate four times for a total of 100 basis points, in addition to the substantial increases made during 2022.

During 2024, the Federal Reserve did not change rates until mid September at which point the fed funds rate was reduced 50 basis points.

These changes resulted in a decrease of 50 basis points in fed funds rates between September 2023 and September 2024, with an average prime rate of 8.43% for three months ended September 30, 2024, a slight decrease from the prior year period.

During much of 2024, the market yield curve was inverted.

• Average loan volumes for the three months ended September 30, 2024 were $79.9 million higher than the same period in 2023.

In addition, interest rates on loans increased 19 basis points to 5.51% for the third quarter of 2024, resulting in an increase in interest income on loans of $4.6 million.

• Due to the impact of the aforementioned fed funds increases in 2022 and 2023 and the resulting increased market rates along with higher average balances, deposit interest expense for the three months ended September 30, 2024 increased $13.8 million compared to the same period in 2023.

Average interest-bearing deposit balances increased $500.6 million while rates on those deposits increased 64 basis points as compared to the same period in the prior year.

• 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.

• Average borrowings were $341.7 million lower in the third quarter of 2024 as compared to the third 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.

This decrease in volume of borrowings between periods was partially offset by higher rates on the remaining borrowings, with overall rates increasing 209 basis points in the third quarter of 2024 from the third quarter of 2023.

These changes resulted in the $4.6 million decrease in interest expense on borrowings.

• The decrease in NIM was directly related to higher rates on interest-bearing liabilities driven by the aforementioned short-term Federal Reserve rate increases in 2022 and 2023, the inverted yield curve in 2024 and the repricing of our deposits during the last year occurring at a more rapid pace than the increase in yields on interest-earning assets.

Net interest income for the nine months ended September 30, 2024 amounted to $243.4 million, a decrease of $20.7 million, or 7.9%, from the $264.2 million recorded in the nine months ended September 30, 2023.

As described above, the Federal Reserve actions from 2022 through 2024 affected market rates which had resulting impacts on the rates we paid or received in 2023 and 2024.

Similar to the impact during the three months ended September 30, 2024, the decrease for the nine months ended September 30, 2024 was also driven by higher cost of funds, partially offset by increased yields on interest-earning assets.

Our tax-equivalent NIM fell to 2.86% for the nine months ended September 30, 2024 from 3.12% for the nine months ended September 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,

For the Nine Months Ended September 30,

($ in thousands) 2024 2023

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Net interest margin, tax-equivalent 2.86 % 3.12 %

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

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

Average Balances and Net Interest Income Analysis

Six Months Ended June 30,

Nine Months Ended September 30,

($ in thousands) Average

Volume Average

Rate Interest

Volume Interest

or Paid Average

Volume Average

Rate Interest

Volume Interest

or Paid Average

Loans (1) (2) $ 8,064,480 $ 331,346 5.49 % $ 7,840,344 $ 308,857 5.27 %

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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 (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.

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 $(716,000), and $458,000 for nine months ended September 30, 2024 and 2023, respectively.

(2) Includes accretion of discount on acquired loans of $6.7 million and $9.0 million for nine months ended September 30, 2024 and 2023, respectively.

(3) Includes tax-equivalent adjustments of $2.2 million and $2.1 million for nine months ended September 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.

• During 2023, the Federal Reserve increased the fed funds rate four times for a total of 100 basis points, in addition to the substantial increases made during 2022.

During 2024, the Federal Reserve did not change rates until mid September at which point the fed funds rate was reduced 50 basis points.

These changes resulted in a decrease of 50 basis points in fed funds rates between September 2023 and September 2024, with an average prime rate of 8.48% for nine months ended September 30, 2024, compared to 8.09% for the prior year period.

During much of 2024, the market yield curve was inverted.

• Average loan volumes for the nine months ended September 30, 2024 were $224.1 million higher than the same period in 2023 due to organic loan growth.

In addition, interest rates on loans increased 22 basis points to 5.49% for the nine months ended September 30, 2024, resulting in an increase in loan interest income of $22.5 million.

• Primarily due to higher market rates as well as the increase in average balances, deposit interest expense for the nine months ended September 30, 2024 increased $51.4 million compared to the same period in 2023.

Average interest-bearing deposit balances increased $467.0 million while rates on those deposits increased 87 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.

• Interest expense on borrowings decreased $6.0 million for the nine months ended September 30, 2024 as compared to the same period in 2023 due to the $173.3 million decrease in the average volume of borrowings between periods, partially offset by a 61 basis point increase in the rates on those borrowings.

The lower balances were due in large part to a decreased reliance on short-term borrowings during 2024 as deposit growth provided additional liquidity.

The remaining borrowings are longer term in nature and carry higher interest rates than those that were paid off.

• NIM decreased 26 basis points between the comparable periods as higher loan yields and reduced cost of borrowings were more than offset by the higher cost of deposits, also driven by the increases in Fed funds rates during 2022 and 2023 and competition for deposits.

Our NIM for all periods presented benefited from the net accretion income arising from 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 June 30, For the Six Months Ended June 30,

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

($ in thousands) 2024 2023 2024 2023

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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 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.

Generally, the level of loan discount accretion will decline each year due to the natural reduction in outstanding balance of acquired loans.

At September 30, 2024 and 2023, unaccreted loan discounts on purchased loans amounted to $17.3 million and $26.5 million, respectively.

The GrandSouth acquired portfolio comprised the majority of the remaining unaccreted loan discount at September 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 June 30, 2024 and 2023, the unaccreted loan discounts on SBA loans amounted to $3.2 million and $3.8 million, respectively.

The level of SBA

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

At September 30, 2024 and 2023, the unaccreted loan discounts on SBA loans amounted to $3.3 million and $4.0 million, respectively.

Provision for Credit Losses and Provision for Unfunded Commitments

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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.

The provision for credit losses was $14.2 million and zero for the three months ended September 30, 2024 and 2023, respectively, and $15.9 million and $14.9 million for the nine months ended September 30, 2024 and 2023, respectively.

For the three months ended September 30, 2024 as compared to the same period in 2023, the higher provision was primarily due to the $13.0 million provision specifically attributed to Hurricane Helene.

Generally improving economic forecasts that lead to a reduction in the reserves required for unfunded commitments during the three months ended September 30, 2024, but the effect was not as impactful as was the case in the three months ended September 30, 2023 by $0.6 million.

For the nine months ended September 30, 2024 as compared to the same period in 2023, the higher provision was primarily due to the $13.0 million provision specifically attributed to Hurricane Helene and a $0.4 million increase in net charge off activity for the period, partially offset by generally improving economic forecasts that lead to a reduction in the reserves required for unfunded commitments.

The provision for the nine months ended September 30, 2023 was directly related to the GrandSouth acquisition, which consisted of:

(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.

Within the portions of Western North and South Carolina that were significantly impacted by Hurricane Helene, the Company identified borrowers with approximately $755 million of loans outstanding.

Given that the storm impacted the area just prior to September 30, 2024 and recovery continues in many communities, the Company performed analyses to identify possible impacts from the storm and has reserved accordingly based upon the information available at this time.

The Company applied increased reserve rates based upon severe economic factors to the approximately $755 million of loans in the path of Helene.

Additionally, the Company performed an initial evaluation of the largest commercial loans in its impacted markets and applied incremental reserves to those loans that were suspected of having higher potential property damage or economic impact from the storm The incremental provision related to the potential exposure from Hurricane Helene added 0.16% to the ACL as of September 30, 2024.

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 $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,

Our noninterest income amounted to $13.6 million and $15.2 million for the three months ended September 30, 2024 and 2023, respectively, and $41.1 million and $42.9 million for the nine months ended September 30, 2024 and 2023, respectively.

The lower noninterest income in the current quarter as compared to the same prior year period is primarily the result of lower "Other income, net," partially offset by an increase in "Presold mortgage loan fees and gains on sale." The decreased noninterest income for the nine months ended September 30, 2024 as compared to the same period in 2023 is a result of "Securities losses, net" in 2024 and lower "Other income, net," partially offset by increased "SBA loan sale gains." Details of the more significant components of noninterest income are presented in the table below.

For the three and nine months ended September 30, 2024, the change in "Other income, net" was related to the timing of the recognition of gain and loss from other investment activity, which does not include available for sale or held to maturity securities.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

($ in thousands) 2024 2023 2024 2023

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Securities losses, net — — (1,161) —

Other income 854 739 1,570 1,448

Other income, net (670) 1,329 900 2,777

Total noninterest income $ 13,579 $ 15,177 $ 41,076 $ 42,948

Noninterest Expenses

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.

Total noninterest expenses totaled $59.9 million and $62.2 million for the three months ended September 30, 2024 and 2023, respectively, and $177.3 million and $198.0 million for the nine months ended September 30, 2024 and 2023, respectively.

The primary contributors to the $2.4 million, or 3.8%, decrease in noninterest expense for the third quarter of 2024 as compared to the same period of 2023 were the $1.4 million decrease in "Other operating expenses", the $0.6 million decrease in "Non-credit losses," and the $0.5 million decrease in "Equipment related expenses," partially offset by an increase in "Total personnel expense" of $0.5 million.

The primary contributors to the $20.7 million decrease for the nine months ended September 30, 2024 as compared to the same period in 2023 were the $13.5 million decrease in "Merger and acquisition expenses," the $2.7 million decrease in "Other operating expenses," the $1.7 million decrease in "Non-credit losses," and the $1.6 million decrease in "Total personnel expenses." 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.

For the three and nine months ended September 30, 2024, there was an overall effort my management to cut costs and control expenses.

The following table presents the primary components of noninterest expenses.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

($ in thousands) 2024 2023 2024 2023

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Total noninterest expense $ 59,850 $ 62,224 $ 177,328 $ 197,992

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.

We recorded income tax expense of $3.9 million and $7.8 million for the three months ended September 30, 2024 and 2023, respectively.

Our effective tax rate was 17.2% and 20.6% for the three months ended September 30, 2024 and 2023, respectively.

The lower effective tax rate for 2024 was attributable primarily to decreased pretax income driven by the potential impact of Hurricane Helene.

For the nine months ended September 30, 2024 and 2023, we recorded tax expense of $18.6 million and $19.8 million, respectively.

Our effective tax rate was 20.4% and 21.0% for the nine months ended September 30, 2024 and 2023, respectively.

FINANCIAL CONDITION

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.

Total assets at September 30, 2024 amounted to $12.2 billion, a $38.5 million, or 0.3%, increase from December 31, 2023 and was primarily related to higher interest-bearing cash balances, partially offset by reductions in investment securities and loan balances.

Total loans at September 30, 2024 amounted to $8.0 billion, a decrease of $136.6 million, or 1.7%, from December 31, 2023.

The mix of our loan portfolio remained substantially the same at September 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 September 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 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 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.

At September 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 September 30, 2024, with the largest loan being $26.6 million and the average loan outstanding balance being $1.3 million.

Non-owner occupied office loans were generally in non-metro markets and the 10 largest loans in this category represented less than 2% of the total loan portfolio at September 30, 2024.

Total investment securities were $2.4 billion at September 30, 2024, a decrease of $293.8 million from December 31, 2023.

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

There were no sales of investment securities during the third quarter of 2024.

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.

The call of a security during the first quarter of 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.

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

Treasuries, of which $175.9 million was sold or matured during the first nine months of 2024 and Mortgage-backed securities, of which $34.6 million and $169.3 million were sold, matured or were paid down during the three and nine months ended September 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 unrealized loss on available for sale securities totaled $331.5 million at September 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 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.

The state and local government investments are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation.

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

We 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.

We evaluated the unrealized losses on individual securities at September 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 $10.5 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.

Total deposits amounted to $10.5 billion at September 30, 2024, an increase of $473.3 million, or 4.7%, from December 31, 2023.

Brokered deposits decreased $3.1 million from year end, while organic growth from customer deposits totaled $476.4 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.

June 30, 2024 December 31, 2023

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

September 30, 2024 December 31, 2023

($ in thousands) Amount Percentage Amount Percentage

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Total deposits $ 10,504,929 100 % $ 10,031,599 100 %

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.

As of September 30, 2024, the estimated insured deposits totaled $6.5 billion or 61.8% of total deposits.

In addition, we had collateralized deposits at that date of $730.8 million such that approximately 68.7% of our total deposits were insured or collateralized at September 30, 2024.

Nonperforming Assets

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($ in thousands)

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Nonperforming assets

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Allowance for credit losses to nonperforming loans 276.47 % 250.08 %

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.

As shown in the table above, total NPAs at September 30, 2024 increased slightly to $45.9 million from year end and related primarily to the $1.9 million increase in nonaccrual loans, partially offset by the $1.5 million decrease in modifications to borrowers in financial distress.

"Commercial and industrial" is the largest category of nonaccrual loans, at $10.3 million, or 30.2%, of total nonaccrual loans, followed by "Commercial real estate - owner occupied" at $10.1 million, or 29.6%, of total nonaccrual 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.

Included in various loan categories are nonaccrual SBA loans totaling $21.7 million at September 30, 2024, or 63.5% of total nonaccrual loans, and which have $11.8 million in guarantees from the SBA.

As reflected in Note 4 to the accompanying consolidated financial statements, total classified loans decreased 4.9% to $51.5 million at September 30, 2024 compared to $54.2 million at December 31, 2023.

The decrease resulted primarily from improvements in "Home equity loans/lines of credit" loans of $1.9 million and "Commercial real estate - owner occupied" loans of $1.8 million, partially offset by an increase in "Residential 1-4 family real estate" of $2.0 million.

Special mention loans increased 34.2% from $44.1 million at December 31, 2023 to $59.2 million at September 30, 2024.

The majority of the increase was attributable to "Commercial real estate - owner occupied" loans, which increased $14.7 million.

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

The total allowance for credit losses amounted to $110.1 million at June 30, 2024 compared to $109.9 million at December 31, 2023.

The total allowance for credit losses amounted to $122.7 million at September 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 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.

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 September 30, 2024 was primarily related to the provision of $13.0 million related to potential impact from Hurricane Helene, 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 as a percent of loans at September 30, 2024 was 1.53%, 16 basis points of which was attributable to the potential impact from Hurricane Helene.

Within the portions of Western North and South Carolina that were significantly impacted by Hurricane Helene, the Company identified borrowers with approximately $755 million of loans outstanding.

The following is a summary of the categories of those loans outstanding as of September 30, 2024:

($ in thousands) Balance

Commercial and industrial 10,481

Construction, development & other land loans 29,429

Commercial real estate - owner occupied 98,958

Commercial real estate - non owner occupied 284,825

Multi-family real estate 25,677

Residential 1-4 family real estate 266,554

Home equity loans/lines of credit 39,470

Consumer loans —

Total 755,394

The Company applied increased reserve rates based upon severe economic factors to the approximately $755 million of loans in the most impacted path of Helene.

Additionally, the Company performed an initial evaluation of the largest commercial loans in that area and applied incremental reserves to those loans that were suspected of having higher potential property damage or economic impact from the storm.

Due to the impact from from Hurricane Helene, the ACL on these impacted loans increased by $13.0 million, expanding the ACL as a percent of loans in the impacted markets from 1.29% to 3.01% as of September 30, 2024 and adding 0.16% to the overall ACL as a percent of total loans as of September 30, 2024.

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")

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) Six Months Ended June 30, 2024 Twelve Months Ended December 31, 2023 Six Months Ended June 30, 2023

($ in thousands) Nine Months Ended September 30, 2024 Twelve Months Ended December 31, 2023 Nine Months Ended September 30, 2023

Loans outstanding at end of period $ 8,013,538 $ 8,150,102 $ 8,027,037

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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.

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.

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

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

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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 $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.

The allowance for unfunded commitments of $9.3 million and $11.4 million at September 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 nine months ended September 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 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);

• 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 June 30, 2024 or December 31, 2023);

At September 30, 2024, the Company had the following sources of readily available borrowing capacity:

• An existing borrowing capacity with the FHLB of approximately $1.3 billion which can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by a blanket lien on most of our real estate loan portfolio, select securities from our investment portfolio, and our FHLB stock (of which $0.8 million and $280.9 million were outstanding at September 30, 2024 and December 31, 2023, respectively);

• A line of credit with the Federal Reserve through its discount window borrowing program of approximately $799.6 million which is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans) and specific investment securities.

All of this line was available at 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.

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

Our overall on-balance sheet liquidity ratio was 17.7% at September 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 $2.4 billion in available lines of credit at quarter end, was 34.2% as of June 30, 2024.

Our total liquidity ratio, including the $2.4 billion in available lines of credit at quarter end, was 35.2% as of September 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.

As of September 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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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 and subordinated debentures.

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 risks arising from both our business operations and economic conditions.

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

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 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.

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 September 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 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.

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

The capital ratios at September 30, 2024 increased as compared to 2023 year end ratios 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:

June 30, 2024 December 31, 2023 Minimum required

September 30, 2024 December 31, 2023 Minimum required

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 June 30, 2024, the Bank exceeded the minimum ratios established by the regulatory authorities.

At September 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 7.90% at June 30, 2024 compared to 7.56% at December 31, 2023.

The TCE ratio was 8.47% at September 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) June 30, 2024 December 31, 2023

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

Reconciliation of Common Equity to TCE

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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.

Any such repurchases 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 September 30, 2024, the Company did not make any such purchases.

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