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Item 5. Market for Registrant’s Common Equity

2024-03-01 compared with 2023-02-28 · 204 added, 273 removed, 509 unchanged (48% of the section changed)

MARKET FOR REGISTRANT ’

S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is listed on the New York Stock Exchange under the symbol “SFBS.”

As of February 22, 2023, there were 512 holders of record of our common stock.

MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is listed on the New York Stock Exchange under the symbol “SFBS.” As of February 27, 2024, there were 466 holders of record of our common stock.

As of the close of business on February 27, 2024, the price of our common stock was $62.44 per share.

On December 19, 2023, our board of directors increased our quarterly cash dividend from $0.28 per share to $0.30 per share.

Subject to the board of directors’

approval and applicable regulatory requirements, we expect to continue paying cash dividends on a quarterly basis.

Subject to the board of directors’ approval and applicable regulatory requirements, we expect to continue paying cash dividends on a quarterly basis.

The principal source of our cash flow, including cash flow to pay dividends, comes from dividends that the Bank pays to us as its sole shareholder.

Statutory and regulatory limitations apply to the bank’s payment of dividends to us, as well as our payment of dividends to our stockholders.

For a more complete discussion on the restrictions on dividends, see “Supervision and Regulation - Payment of Dividends”

Statutory and regulatory limitations apply to the Bank’s payment of dividends to us, as well as our payment of dividends to our stockholders.

For a more complete discussion on the restrictions on dividends, see “Supervision and Regulation - Payment of Dividends” in Item 1.

Recent Sales of Unregistered Securities

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Purchases of Equity Securities by the Registrant and Affiliated Purchasers

We made no repurchases of our equity securities, and no “affiliated purchasers”

(as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) purchased any shares of our equity securities during the fourth quarter of the fiscal year ended December 31, 2022.

Equity Compensation Plan Information

The following table sets forth certain information as of December 31, 2022 relating to stock options, restricted stock and performance shares granted under our 2009 Amended and Restated Stock Incentive Plan and other options or restricted shares issued outside of such plans, if any.

Plan Category

Number of Securities To Be Issued Upon Exercise of Outstanding Awards (1)

Weighted-average Exercise Price of Outstanding Awards (2)

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans

Equity Compensation Plans Approved by Security Holders

Equity Compensation Plans Not Approved by Security Holders

Includes 280,000 shares related to stock options, 141,580 shares related to non-vested restricted stock and 23,852 shares related to performance shares (assuming attainment of the maximum payout rate as set forth by the performance criteria).

Excludes restricted shares and performance shares which are exercised for no consideration.

We made no repurchases of our equity securities, and no “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) purchased any shares of our equity securities during the fourth quarter of the fiscal year ended December 31, 2023.

Performance Graph

The following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the performance graph by reference therein.

The Company is replacing the S&P 600 Financials index with the KBW Nasdaq Regional Banking index [KRX].

The Company believes the specific focus of the KBW Nasdaq Regional Banking index on regional banks allows for a stronger direct peer comparison with the Company’s stockholder returns.

MANAGEMENT ’

S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following graph shows a comparison of the five-year cumulative total stockholder return for the Company, the KBW Nasdaq Regional Banking Index (KRX), and the Standard and Poor's 600 (S&P 600).

The following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates the performance graph by reference therein.

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section of the Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “

Management's Discussion and Analysis of Financial Condition and Results of Operations ”

in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of the Company ’

s financial statements with a narrative from the perspective of management on the Company ’

s financial condition, results of operations, liquidity and certain other factors that may affect future results.

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the Company ’ s financial statements with a narrative from the perspective of management on the Company ’ s financial condition, results of operations, liquidity and certain other factors that may affect future results.

In certain instances, parenthetical references are made to relevant sections of the Notes to Consolidated Financial Statements to direct the reader to a further detailed discussion.

This section should be read in conjunction with the Consolidated Financial Statements included in this Annual Report on Form 10-K.

This section should be read in conjunction with the Consolidated Financial Statements included in this Form 10-K.

We are a bank holding company within the meaning of the BHC Act headquartered in Birmingham, Alabama.

Through our wholly-owned subsidiary bank, we operate full service banking offices located in Alabama, Florida, Georgia, North Carolina, South Carolina, and Tennessee.

Through our wholly-owned subsidiary bank, we operate full service banking offices located in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, and Virginia.

We also operate loan production offices in Florida.

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2023 Highlights

Diluted earnings per common share of $4.61 in 2022 increased $0.79, or 21%, from 2021.

Diluted earnings per common share of $3.79 in 2023 decreased $0.82, or 18%, from 2022.

Average loans of $11.60 billion for 2023 increased $1.04 billion, or 10%, from a year ago.

Average deposits of $12.26 billion for 2023 increased $434.6 million, or 4%, from a year ago.

Net interest income of $470.9 million in 2022 increased $86.4 million, or 22%, from 2021.

Net interest margin of 3.32% in 2022 increased 38 basis points from 2.94% in 2021.

Noninterest income of $33.4 million in 2022 decreased $93,000, or 0.3%, from 2021, primarily due to decreases in mortgage banking income and losses on sale of securities.

Noninterest expense of $157.8 million in 2022 increased $24.7 million, or 19%, from 2021, primarily driven by increases in salaries and third-party processing expenses.

Net interest income of $410.9 million in 2023 decreased $60.0 million, or 13%, from 2022.

Net interest margin of 2.81% in 2023 decreased 51 basis points from 3.32% in 2022.

Noninterest income of $30.4 million in 2023 decreased $2.9 million, or 9%, from 2022, primarily due to an interest rate cap that matured in May of 2023.

Noninterest expense of $178.1 million in 2023 increased $20.2 million, or 13%, from 2022, primarily driven by increases in salaries and FDIC assessments.

Results of Operations

The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2023 and 2022 and results of operations for each of the years then ended.

Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on February 25, 2022 ( 2021 FORM 10-K ) for a discussion and analysis of the more significant factors that affected periods prior to 2021.

Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on February 25, 2023 ( 2022 FORM 10-K ) for a discussion and analysis of the more significant factors that affected periods prior to 2022.

Net Income Available to Common Stockholders

Net income available to common stockholders was $206.8 million for the year ended December 31, 2023, compared to $251.4 million for the year ended December 31, 2022.

As discussed herein, this increase in net income is primarily attributable to an increase in net interest income, partially offset by an increase in noninterest expense.

As discussed herein, this decrease in net income was primarily attributable to a decrease in net interest income, and an increase in noninterest expense, partially offset by a decrease in provision for credit losses.

Basic and diluted net income per common share were $3.80 and $3.79, respectively, for the year ended December 31, 2023, compared to $4.63 and $4.61, respectively, for the year ended December 31, 2022.

Return on average assets was 1.71% in 2022, compared to 1.53% in 2021, and return on average common stockholders’

equity was 20.73% in 2022, compared to 19.27% in 2021.

Return on average assets was 1.37% in 2023, compared to 1.71% in 2022, and return on average common stockholders’ equity was 15.13% in 2023, compared to 20.73% in 2022.

The following tables present a summary of our statements of income, including the percent change in each category, for the years ended December 31, 2023 compared to 2022, and for the years ended December 31, 2022 compared to 2021, respectively.

Year Ended December 31,

Change from the Prior Year

Change from the

(Dollars in Thousands)

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Provision for credit losses

Net interest income after provision for credit losses

Net interest income after

provision for credit losses

Noninterest income

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Dividends on preferred stock

Net income available to common stockholders

Net income available to

common stockholders

Year Ended December 31,

Change from the Prior Year

Change from the

(Dollars in Thousands)

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Provision for credit losses

Net interest income after provision for credit losses

Net interest income after

provision for credit losses

Noninterest income

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Dividends on preferred stock

Net income available to common stockholders

Net income available to

common stockholders

Performance Ratios

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Management seeks to optimize this revenue while balancing interest rate, credit, and liquidity risks.

The major factors which affect net interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities.

Our management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings.

Net interest income increased 22.5% for the year ended December 31, 2022 from the year ended December 31, 2021.

The increase in net interest income was mostly attributable to the rise in interest rates throughout the year compared to the low-rate environment in 2021.

Total interest expense increased by 178.0% year-over-year, with the increase in average rates paid on interest-bearing liabilities serving as the primary driver.

The major factors that affect net interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities.

Net interest income decreased 12.7% for the year ended December 31, 2023 from the year ended December 31, 2022.

The decrease in net interest income was mostly attributable to the increase in both the average balance and rates paid on interest-bearing liabilities.

Total average interest-bearing liabilities increased 19.7% year-over-year, while total interest expense increased by 355.0% year-over-year.

As demonstrated in the discussion of net interest margin below, average interest rate yields on average earning assets had a lesser impact on our interest income.

Average earning assets increased 8.3% in 2022 from 2021, which was primarily driven by an increase in loans.

All of our regional markets grew loans during 2022, and a majority of our regional markets grew deposits during 2022.

Average earning assets increased 3.1% in 2023 from 2022, which was primarily driven by an increase of $1.04 billion in average loans.

A majority of our regional markets grew loans during 2023.

Average interest-bearing liabilities increased 19.7% in 2023 from 2022.

The increase in interest-bearing deposits was mostly attributable to the organic growth of our deposit base, which was partially offset by outflows of PPP loan proceeds remaining in customer deposit accounts.

The increase in interest-bearing deposits was mostly attributable to the organic growth of our deposit base.

Net Interest Margin Analysis

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The net interest spread eliminates the effect of noninterest-earning assets as well as noninterest-bearing deposits and other noninterest-bearing funding sources and gives a direct perspective on the effect of market interest rate movements.

The net interest margin is an indication of the profitability of a company’s balance sheet and is defined as net interest revenue as a percentage of total average interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and stockholders’

The net interest margin is impacted by the average volumes of interest-sensitive assets and interest-sensitive liabilities and by the difference between the yield on interest-sensitive assets and the cost of interest-sensitive liabilities (spread).

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The net yield on earning assets is an indicator of effectiveness of our ability to manage the net interest margin by managing the overall yield on assets and cost of funding those assets.

The following table shows, for the years ended December 31, 2022, 2021 and 2020, the average balances of each principal category of our assets, liabilities and stockholders’

equity, and an analysis of net interest revenue, and the change in interest income and interest expense segregated into amounts attributable to changes in volume and changes in rates.

The following table shows, for the years ended December 31, 2023, 2022 and 2021, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue, and the change in interest income and interest expense segregated into amounts attributable to changes in volume and changes in rates.

This table is presented on a taxable equivalent basis, if applicable.

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Unrealized gains on securities

Total liabilities and stockholders'

Total liabilities and stockholders' equity

Net interest income

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Non-accrual loans are included in average loan balances in all periods.

Loan fees include accretion of PPP loan fees of $19,604 and $35,204, are included in interest income in 2022 and 2021, respectively.

Loan fees of $13,752, $19,605 and $35,204 are included in interest income in 2023, 2022 and 2021, respectively.

Loan fees include accretion of PPP loan fees of $40, $7,730 and $27,330 in 2023, 2022 and 2021, respectively.

Amortization of acquired loan premiums of $197, $161 and $71 is included in interest income in 2023, 2022 and 2021, respectively.

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Unrealized (losses) gains of $(70,960), $(30,770) and $25,276 are excluded from the yield calculation in 2023, 2022 and 2021, respectively.

Accretion on acquired CD premiums of $75 and $63 are included in interest expense in 2021 and 2020, respectively.

Accretion on acquired CD premiums of $75 are included in interest expense in 2021.

Net interest margin is net interest revenue divided by average interest-earning assets.

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The rate/volume variance is calculated as the change in rates times the change in average balances.

From 2021 to 2022, our asset volumes increased primarily as a result of the growth in loan balances as well as an increase in taxable debt securities, while the volume change from our liabilities remained relatively consistent.

The rate component was favorable as average rates paid on interest-bearing liabilities increased 62 basis points while yields on average earning assets increased 76 basis points.

From 2022 to 2023, our volume component was favorable as asset volumes increased primarily as a result of the growth in loan balances as well as an increase in taxable debt securities, while the volume change from our liabilities was primarily driven by growth in money market balances.

The rate component was unfavorable as average rates paid on interest-bearing liabilities increased 275 basis points while yields on average earning assets increased 162 basis points.

The two primary factors that make up the spread are the interest rates received on loans and the interest rates paid on deposits.

During 2022, we increased our deposit rates in response to interest rate increases made by the Federal Reserve Bank, compared to 2021, where rates remained relatively unchanged.

Our net interest spread and net interest margin were 1.83% and 2.81%, respectively, for the year ended December 31, 2023, compared to 2.96% and 3.32%, respectively, for the year ended December 31, 2022.

The increase in net interest spread and net interest margin was primarily attributable to increases in average loans, which increased $1.84 billion in 2022.

Our average interest-earning assets for the year ended December 31, 2022 increased $1.08 billion, or 8.3%, to $14.19 billion from $13.10 billion for the year ended December 31, 2021.

Average loans grew $1.84 billion, or 21.1%, average debt securities grew $723.9 million, or 72.7%, and average federal funds sold and interest-bearing balances with banks decreased $1.48 billion, or 43.9%.

Our average interest-bearing liabilities increased $266.7 million, or 3.1%, to $9.01 billion for the year ended December 31, 2022 from $8.74 billion for the year ended December 31, 2021.

Eight of our markets had an increase in total deposits during 2022.

The ratio of our average interest-earning assets to average interest-bearing liabilities increased from 149.9% for the year ended December 31, 2021 to 157.5% for the year ended December 31, 2022, as average noninterest-bearing deposits and stockholders’

equity grew by a combined $861.6 million, or 18.1%, from 2021 to 2022.

The decrease in net interest spread and net interest margin was primarily attributable to increases in average interest-bearing liabilities, which increased $1.77 billion in 2023.

Our average interest-earning assets for the year ended December 31, 2023 increased $434.6 million, or 3.1%, to $14.62 billion from $14.19 billion for the year ended December 31, 2022.

Average loans grew $1.04 billion, or 9.8%, average debt securities grew $164.4 million, or 9.6%, and average federal funds sold and interest-bearing balances with banks decreased $771.0 million, or 40.8%.

Our average interest-bearing liabilities increased $1.77 billion, or 19.7%, to $10.78 billion for the year ended December 31, 2023 from $9.01 billion for the year ended December 31, 2022.

The ratio of our average interest-earning assets to average interest-bearing liabilities decreased from 157.5% for the year ended December 31, 2022 to 135.6% for the year ended December 31, 2023, as average noninterest-bearing deposits and stockholders’ equity decreased by a combined $1.4 billion, or 24.9%, from 2022 to 2023.

Our average interest-earning assets produced a taxable equivalent yield of 5.56% for the year ended December 31, 2023, compared to 3.94% for the year ended December 31, 2022.

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Provision for Credit Losses

The provision for credit losses represents the amount determined by management to be necessary to maintain the allowance for credit losses (“ACL”) at a level capable of absorbing expected credit losses over the contractual life of loans in the loan portfolio.

See the section captioned “Allowance for Credit Losses”

located elsewhere in this item for additional discussion related to provision for credit losses.

The provision expense for credit losses increased 19.3% for the year ended December 31, 2022 when compared to the year-ended December 31, 2021. 

The increase in provision expense is primarily the result unfavorable economic projections used to inform loss driver forecasts with the ACL model. 

Nonperforming loans increased to $17.8 million, or 0.15% of total loans, at December 31, 2022 from $12.1 million, or 0.13% of total loans, at December 31, 2021. 

During 2022, we had net charged-off loans totaling $8.0 million, compared to net charged-off loans of $2.8 million for 2021. 

52% of the $8.0 million net charge-off in 2022 is represented by three loans.

The ratio of net charged-off loans to average loans was 0.06% for 2022 compared to 0.03% for 2021. 

The ACL for December 31, 2022 totaled $146.3 million, or 1.25% of loans, net of unearned income. 

See the section captioned “Allowance for Credit Losses” located elsewhere in this item for additional discussion related to provision for credit losses.

The provision expense for credit losses decreased 50.2% for the year ended December 31, 2023 when compared to the year-ended December 31, 2022.

The decrease in provision expense was primarily the result of lower loan growth during 2023 compared to 2022.

Nonperforming loans increased to $21.5 million, or 0.18% of total loans, at December 31, 2023 from $17.8 million, or 0.15% of total loans, at December 31, 2022.

During 2023, we had net charged-off loans totaling $11.7 million, compared to net charged-off loans of $7.6 million for 2022.

52% of the $7.6 million net charge-off in 2022 was represented by three loans.

In 2023, 62% of the $11.7 million net charge-off was represented by four loans.

The ratio of net charged-off loans to average loans was 0.10% for 2023 compared to 0.08% for 2022.

The ACL at December 31, 2023 totaled $153.3 million, or 1.32% of loans, net of unearned income.

The ACL totaled $146.3 million, or 1.25% of loans, net of unearned income, at December 31, 2022.

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Total noninterest income

Noninterest income decreased $93,000, or 0.3%, to $33.4 million in 2022 from $33.5 million in 2021.

Decreases in mortgage banking income and losses on sale of securities were largely offset by increases in credit card income and other operating income, namely the value of our interest rate cap.

Service charges on deposit accounts increased $1.2 million, or 17.5%, to $8.0 million in 2022 compared to $6.8 million 2021 due to analyzed costs that supported the growth in 2021.

Credit card income increased $2.6 million, or 35.0%, to $9.9 million in 2022 compared to $7.3 million in 2021. 

The number of credit card accounts increased 9.5% from 2021 to 2022 while the aggregate amount of spend on all credit card accounts increased 31%.

Mortgage banking income decreased $4.9 million, or 66.8%, to $2.4 million in 2022 compared to $7.3 million in 2021. 

The bank began retaining mortgage loans otherwise originated for sale beginning in the third quarter of 2021 and continuing until second quarter of 2022, to leverage our excess liquidity and increase yields on earning assets.

The increase in cash surrender value of bank-owned life insurance contracts decreased $164,000, or 2.5%, to $6.5 million in 2022 compared to $6.6 million 2021.

Other operating income increased 171.5% in 2022 compared to 2021, driven by an increase in our interest rate cap and a death benefit related to our bank-owned life insurance (“BOLI”) program.

The income recognized from our interest rate cap derivative increased from $1.0 million as of December 31, 2021 to $7.0 million as of December 31, 2022, primarily a result of rate hikes by the Federal Reserve during 2022.

Additionally, we recognized a $2.1 million death benefit related to a former employee in our BOLI program during the second quarter of 2022.

Noninterest income decreased $2.9 million, or 8.8%, to $30.4 million in 2023 from $33.4 million in 2022.

The decrease in noninterest income is primarily the result of a decrease in other operating income, due to the maturity of an interest rate cap which was partially offset by the losses on sale of securities in 2022.

Service charges on deposit accounts increased $387,000, or 4.8%, to $8.4 million in 2023 compared to $8.0 million 2022.

Credit card income decreased $1.3 million, or 13.0%, to $8.6 million in 2023 compared to $9.9 million in 2022.

Mortgage banking income increased $317,000, or 13.0%, to $2.8 million in 2023 compared to $2.4 million in 2022.

The increase in cash surrender value of bank-owned life insurance contracts increased $1.1 million, or 16.9%, to $7.6 million in 2023 compared to $6.5 million 2022.

Other operating income decreased 76.0% in 2023 compared to 2022, driven by a decrease in our interest rate cap.

The income recognized from our interest rate cap derivative decreased from $7.0 million for the year ended December 31, 2022, to $32,000 for the year ended December 31, 2023, as a result of the interest rate cap maturing during the second quarter of 2023.

Merchant service revenue increased $449,000, or 25.45%, to $2.2 million in 2023 compared to 2022.

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Total noninterest expenses

Noninterest expenses increased $24.7 million, or 18.6%, to $157.8 million for the year ended December 31, 2022 from $133.1 million for the year ended December 31, 2021.

Increased salaries and employee benefits expenses as well as increases in third party processing were the primary drivers of the increase in noninterest expense.

Salary and employee benefits expenses increased $10.2 million, or 15.1%, to $77.9 million in 2022 compared to 2021.

We had 571 full-time equivalent employees as of December 31, 2022 compared to 502 as of December 31, 2021.

Equipment and occupancy expense increased $915,000, or 8.0%, to $12.3 million in 2022 compared to 2021.

Third party processing and other services increased $11.0 million, or 67.1%, to $27.3 million in 2022 compared to 2021.

This increase in third party processing also includes Federal Reserve Bank charges related to correspondent bank settlement activities.

Professional services expense increased $386,000, or 9.9%, in 2022 compared to 2021.

FDIC assessments decreased $1.1 million, or 19.6%, to $4.6 million from 2021 to 2022.

Expenses on other real estate owned decreased $573,000 to $295,000 in 2022 compared to $868,000 in 2021.

Other operating expenses increased $3.9 million, or 14.4%, to $31.1 million in 2022 compared to 2021.

The primary driver of the increase in other operating expense was a settlement on a lawsuit and a write down of the value of a private investment leading to a $3.9 million increase in other operating expenses.

Changes in other operating expenses from 2021 to 2022 are detailed in Note 15 - “

Other Operating Income and Expenses, ”

to the Consolidated Financial Statements.

Noninterest expenses increased $20.2 million, or 12.8%, to $178.1 million in 2023 compared to $157.8 million in 2022.

Increased salaries and employee benefits expenses as well as increases in FDIC assessments were the primary drivers of the increase in noninterest expense.

Salary and employee benefits expenses increased $3.0 million, or 3.9%, to $81.0 million in 2023 compared to $78.0 million in 2022.

We had 591 full-time equivalent employees in 2023 compared to 571 in 2022.

Equipment and occupancy expense increased $2.0 million, or 16.0%, to $14.30 million in 2023 compared to $12.30 million in 2022.

Third party processing and other services increased $539,000, or 2.0%, to $27.9 million in 2023 compared to $27.3 million in 2022.

Professional services expense increased $1.6 million, or 38.3%, to $5.9 million in 2023 compared to $4.3 million in 2022.

FDIC assessments increased $11.0 million, or 242.0%, to $15.6 million in 2023 compared to $4.6 million in 2022.

The FDIC implemented a special assessment to recapitalize the Deposit Insurance Fund resulting in an expense of $7.2 million during 2023.

Expenses on other real estate owned decreased $248,000, or 84.1%, to $47,000 in 2023 compared to $295,000 in 2022.

Other operating expenses increased $2.3 million, or 7.3%, to $33.3 million in 2023 compared to $31.1 million in 2022.

Changes in other operating expenses from 2022 to 2023 are detailed in Note 15 - “ Other Operating Income and Expenses, ” to the Consolidated Financial Statements.

Income Tax Expense

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Our effective tax rates for 2023 and 2022 were 15.4% and 18.6%, respectively.

We recognized $12.6 million in credits during 2022 and $10.5 million during 2021, related to new investments in Federal New Market Tax Credits.

We recognized $17.7 million in credits related to new investments in Federal New Market Tax Credits during 2023 and $12.6 million during 2022.

We also recognized excess tax benefits as an income tax credit to our income tax expense from the exercise and vesting of stock options and restricted stock during 2023 of $1.5 million, compared to $1.3 million during 2022.

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Financial Condition

Total assets as of December 31, 2022, were $14.60 billion, a decrease of $853.1 million, or 5.5%, over total assets of $15.45 billion as of December 31, 2021.

Average assets for the year ended December 31, 2022 were $14.19 billion, an increase of $1.10 billion, or 8.3%, over average assets of $13.56 billion for the year ended December 31, 2021.

Growth in loans and debt securities, offset by decreases in interest-bearing balances with banks, and federal funds sold were the primary reasons for the decrease in ending and increase in average total assets.

Year-end 2022 loans were $11.69 billion, up $2.16 billion, or 12.6%, over year-end 2021 total loans of $9.53 billion.

Paycheck Protection Program (“PPP”) loans decreased from $230.2 million at December 31, 2021 to $2.0 million at December 31, 2022.

Excluding this decrease in PPP loans, total loans increased $2.38 billion, or 25.6%, during 2022.

Earning assets include loans, securities, short-term investments and bank-owned life insurance contracts. 

Total assets as of December 31, 2023, were $16.13 billion, an increase of $1.53 billion, or 10.5%, from total assets of $14.60 billion as of December 31, 2022.

Average assets for the year ended December 31, 2023 were $15.07 billion, an increase of $363.7 million, or 2.5%, over average assets of $14.70 billion for the year ended December 31, 2022.

Growth in loans and debt securities, offset by decreases in interest-bearing balances with banks, and federal funds sold were the primary reasons for the increase in ending and average total assets.

Year-end 2023 loans, were $11.66 billion, a decrease of $29.1 million, or 0.2% compared to $1.53 billion, over year-end 2022 total loans of $11.69 billion.

Earning assets include loans, securities, short-term investments and bank-owned life insurance contracts.

We maintain a higher level of earning assets in our business model than do our peers because we allocate fewer of our resources to facilities, ATMs, and cash and due-from-bank accounts used for transaction processing.

Earning assets as of December 31, 2022 were $14.37 billion, or 98.4% of total assets of $14.60 billion.

Earning assets as of December 31, 2021 were $15.29 billion, or 99.0% of total assets of $15.45 billion.

Earning assets as of December 31, 2023 were $15.85 billion, or 98.2% of total assets of $16.13 billion.

Earning assets as of December 31, 2022 were $14.37 billion, or 98.4% of total assets of $14.60 billion.

We believe this ratio is expected to generally continue at these levels, although it may be affected by economic factors beyond our control.

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Our investment strategy is to accept a lower immediate yield in the investment portfolio by targeting shorter term investments.

At December 31, 2022, mortgage-backed securities represented 44.8% of the investment portfolio, corporate debt represented 23.9% of the investment portfolio, state and municipal securities represented 1.3% of the investment portfolio, government agency securities represented 0.0%, and U.S.

At December 31, 2023, mortgage-backed securities represented 34.9% of the investment portfolio, corporate debt represented 18.5% of the investment portfolio, state and municipal securities represented 1.0% of the investment portfolio, and U.S.

Treasury securities represented 45.7% of the investment portfolio.

All of our investments in mortgage-backed securities are pass-through mortgage-backed securities. 

We  generally do not hold, and did not have at December 31, 2022, any structured investment vehicles or any private-label mortgage-backed securities. 

The amortized cost of securities in our portfolio totaled $1.74 billion at December 31, 2022, compared to $1.29 billion at December 31, 2021.

The following table presents the book value and weighted average yield of our securities as of December 31, 2022 by their stated maturities (this maturity schedule excludes security prepayment and call features).

All of our investments in mortgage-backed securities are pass-through mortgage-backed securities.

We generally do not hold, and did not have at December 31, 2023, any structured investment vehicles or any private-label mortgage-backed securities.

The amortized cost of securities in our portfolio totaled $1.95 billion at December 31, 2023, compared to $1.74 billion at December 31, 2022.

The following table presents the book value and weighted average yield of our securities as of December 31, 2023 by their stated maturities (this maturity schedule excludes security prepayment and call features).

Maturity of Debt Securities - Weighted Average Yield

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(2) Weighted Average Yield is calculated by taking the sum of each category of securities multiplied by the respective tax-equivalent yield for a given maturity, and dividing by the sum of the securities for the same maturity.

As of December 31, 2022, we had $1.5 million in federal funds sold, compared with $58.4 million at December 31, 2021.

As of December 31, 2023, we had $100.6 million in federal funds sold, compared with $1.5 million at December 31, 2022.

At year-end 2023, there were no holdings of securities of any issuer, other than the U.S.

government and its agencies, in an amount greater than 10% of stockholders’

During the fourth quarter of 2021, the bank began buying U.S.

Treasury Securities and Mortgage-backed securities to absorb excess liquidity.

The bank added $100 million per month, net of paydowns and maturities, of each of these categories of debt securities until the second quarter of 2022.

government and its agencies, in an amount greater than 10% of stockholders’ equity.

During the first two quarters of 2022, the bank added $100 million per month, net of paydowns and maturities, of U.S.

Treasury Securities.

The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure.

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The following is a condensed overview of changes in our loan portfolio.

Please see Note 3 - “

Loans ”

in the Notes to Consolidated Financial Statements included in Item 8.

Please see Note 3 - “ Loans ” in the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements and Supplementary Data elsewhere in this report for a more detailed analysis of our loan portfolio by type of loan.

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No collateral or personal guarantees were required from borrowers and neither the government nor lenders were permitted to charge the recipients any fees.

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act (“CAA”).

The CAA, among other things, extended the life of the PPP, effectively creating a second round of PPP loans for eligible businesses.

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As of December 31, 2023, we have received payment from the SBA on almost all of our loans totaling $1.5 billion.

We had total loans of approximately $11.7 billion at December 31, 2022.

We had total loans of approximately $11.66 billion at December 31, 2023.

A large majority of our loan customers are located within our market MSAs, as is the collateral for their loans.

With our loan portfolio concentrated in a limited number of markets, there is a risk that our borrowers’

ability to repay their loans from us could be affected by changes in local and regional economic conditions.

The following table details our loans at December 31, 2022, 2021 and 2020:

With our loan portfolio concentrated in a limited number of markets, there is a risk that our borrowers’ ability to repay their loans from us could be affected by changes in local and regional economic conditions.

The following table details our loans at December 31, 2023, 2022 and 2021:

(Dollars in Thousands)

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Allowance for credit losses

The following table details the percentage composition of our loan portfolio by type at December 31, 2022, 2021 and 2020:

The following table details the percentage composition of our loan portfolio by type at December 31, 2023, 2022 and 2021:

Commercial, financial and agricultural

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Total real estate - mortgage

The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2022:

The following table details maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2023:

After 5 years

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Average amount outstanding

Effective January 1, 2020, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326, Financial Instruments-Credit Losses (Topic  

Measurement of Credit Losses on Financial Instruments , which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with the current expected credit loss (“CECL”) model.

Upon the adoption of ASC 326 the total amount of the allowance for credit losses (“ACL”) on loans estimated using the CECL methodology decreased $2.0 million compared to the total amount of the allowance recorded as of December 31, 2019 using the prior incurred loss model.

Fluctuations in the estimated allowances by portfolio segment offset one another, for the most part, and, as a result, the overall estimated amount of ACL did not significantly change as a result of the change in methodology. 

Peer historical loss rates were utilized to better align with loss expectations given the Company’s low historical loss experience.

The ACL is established and maintained at levels needed to absorb anticipated credit losses from identified and otherwise inherent risks in the loan portfolio as of the balance sheet date.

In assessing the adequacy of the ACL, management considers its evaluation of the loan portfolio, past due loan experience, collateral values, current economic conditions and other factors considered necessary to maintain the allowance at an adequate level.

Our management feels that the allowance is adequate at December 31, 2022.

As described below under Recently Adopted Accounting Pronouncements, the Company adopted ASU 2016 - 13 , Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“CECL”) Accounting Standard Codification (“ASC”) 326 effective January 1, 2020.

The ACL for December 31, 2023 and 2022 was calculated under the CECL methodology and totaled $153.3 million and $146.3 million, or 1.32% and 1.25% of loans, net of unearned income, respectively.

Excluding PPP loans, the allowance for credit losses as a percentage of total loans at December 31, 2022 and 2021 was 1.25% and 1.25%, respectively.

The increase in the ACL as a percent of total loans at December 31, 2022 from December 31, 2021 is largely the result of a forecasted increase in the rate of unemployment, and $2.2 billion in net loan growth, excluding PPP loans, during 2022. 

This loan growth was primarily within our real estate –

mortgage and real estate –

construction loan categories which have increased $1.6 billion and $429 million, respectively. 

In 2021, we added a qualitative environmental factor to address the termination of the PPP for the effect it could have on various businesses that will need to be self-sustaining without the assistance of PPP as well as potential risk of nonpayment from SBA due to fraud within PPP loans. 

The balance of PPP loans decreased $228 million from $230 million at December 31, 2021 to $1.95 million at December 31, 2022 and the additional qualitative environmental factor was deemed no longer necessary.

Additionally, in 2021 a qualitative factor to address the risk associated with high loan growth within the West Central Florida market was established.

In 2022, management became satisfied that an allowance arising from pooled loan analysis alone was sufficient for the West Central Florida market and the qualitative factor was removed.

The increase in the ACL as a percent of total loans at December 31, 2023 from December 31, 2022 was largely the result of adjustments to qualitative factors in our construction land development and commercial real estate pools.

Net credit charge-offs to average loans were 0.10% for the year ended December 31, 2023, compared to 0.08% and 0.03% for the years ended December 31, 2022 and 2021, respectively.

Nonaccrual loans rose to $12.5 million, or 0.11% of total loans, at December 31, 2022 from $6.8 million, or 0.07% of total loans, at December 31, 2021, and were $14.0 million, or 0.17% of total loans, at December 31, 2020.

Nonaccrual loans increased to $19.3 million, or 0.17% of total loans, at December 31, 2023 from $12.5 million, or 0.11% of total loans, at December 31, 2022, and were $6.8 million, or 0.07% of total loans, at December 31, 2021.

At December 31, 2023, the nonaccrual balance increase was attributable to three owner-occupied loans representing a balance of $3.8 million, and a net increase of $2.9 million in 1-4 family mortgage nonaccruals.

At December 31, 2022, the nonaccrual increase was driven by one commercial and industrial (C&I) relationship and oneowner-occupied commercial relationship.

We maintain an ACL on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements.

The allowance is computed using a methodology similar to that used to determine the ACL, modified to take into account the probability of a drawdown on the commitment.  The ACL on unfunded loan commitments is classified as a liability account on the balance sheet within other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense.  The allowance for credit losses on unfunded commitments was $575,000 at December 31, 2022.

At December 31, 2021, the allowance for unfunded commitments was $1.3 million.

The allowance is computed using a similar methodology to the one used to determine the ACL, modified to account for the probability of a drawdown on the commitment.

The ACL on unfunded loan commitments is classified as a liability account on the balance sheet within other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense.

The allowance for credit losses on unfunded commitments was $575,000 as of December 31, 2023 and December 31, 2022.

The following table presents the allocation of the allowance for loan losses for each respective loan category with the corresponding percent of loans in each category to total loans.

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Real estate - mortgage

The Company assesses the adequacy of its allowance for credit losses ("ACL") at the end of each calendar quarter.

ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors.

The Company assesses the adequacy of its ACL at the end of each calendar quarter.

The level of ACL is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors.

The ACL is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries.

The ACL is believed adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio.

At December 31, 2023, we forecasted a slightly lower national unemployment rate and moderately higher national GDP compared to December 31, 2022.

At December 31, 2022, we forecasted a moderately higher national unemployment rate and significantly lower national GDP compared to December 31, 2021.

At December 31, 2021, we forecasted a national unemployment rate and national GDP growth rate similar to levels experienced just prior to the pandemic.

We expect the national unemployment rate to increase slightly and GDP growth rate to remain stable over the forecast period.

Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method.

For all loans utilizing the DCF method, the historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product.

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages.

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The Company considers factors that are relevant within the qualitative framework, which include the following:

lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions.

and other economic conditions and new markets.

Expected credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis.

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Specific allocations of the ACL for credit losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

PPP loans outstanding totaled $2.0 million and $230.2 million at December 31, 2022 and December 31, 2021, respectively, and are included within the Commercial, financial and agricultural loan category.

The bank has procedures and processes in place intended to ensure that losses do not exceed the potential amounts documented in the bank’s analysis of loans individually evaluated and reduce potential losses in the remaining performing loans within our real estate construction portfolio.

PPP loans outstanding totaled $56,000 and $2.0 million as of December 31, 2023 and 2022, respectively, and are included within the commercial, financial and agricultural loan category.

The Bank has procedures and processes in place intended to ensure that losses do not exceed the potential amounts documented in the Bank’s analysis of loans individually evaluated and reduce potential losses in the remaining performing loans within our real estate construction portfolio.

These include the following:

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Total 90+ days past due and accruing

Total nonperforming loans

Total nonperforming loans

Other real estate owned and repossessions

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Nonperforming loans to total loans

Nonperforming assets to total loans plus other

Nonperforming assets to total loans plus other real estate owned and repossessions

Nonperforming assets and restructured accruing loans to total loans plus other real estate owned and repossessions

Nonperforming assets to total loans plus other Nonperforming assets to total loans plus other real estate owned and repossessions

Nonperforming assets and restructured accruing loans to total loans plus other real estate owned and repossessions

The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-collateralized and in the process of collection.

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Interest income on nonaccrual loans is recognized only as received.

If we believe that a loan will not be collected in full, we will increase the ACL to reflect management’s estimate of any potential exposure or loss.

Generally, payments received on nonaccrual loans are applied directly to principal.

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As of December 31, 2023, we carry $2.1 million of accrued interest income on deferrals made to COVID-19 affected borrowers compared to $2.4 million at December 31, 2022.

At this time, we are unable to project the materiality of such an impact on future deferrals to COVID-19 affected borrowers, but we recognize the breadth of the economic impact may affect our borrowers’

ability to repay in future periods.

We rely on increasing our deposit base to fund loan and other asset growth.

Each of our markets is highly competitive.

We compete for local deposits by offering attractive products with competitive rates. 

We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack of an extensive branch network. 

Our management’s strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products. 

We compete for local deposits by offering attractive products with competitive rates.

We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack of an extensive branch network.

Our management’s strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products.

We have promoted electronic banking services by providing them without charge and by offering in-bank customer training.

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For Year Ended December 31,

Average Balance

Types of Deposits:

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Total deposits

At December 31, 2022 and December 31, 2021, we estimate that we had approximately $8.95 billion and $10.65 billion, respectively, in uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit.

The following table presents the maturities of our time deposits in excess of insurance limit as of December 31, 2022.

time deposits in excess of insurance limit

December 31, 2022

Time deposits otherwise uninsured with a maturity of:

(In Thousands)

3 months or less

Over 3 months through 6 months

Over 6 months through 12 months

Over 12 months

The uninsured deposit data for 2022, 2021, and 2020 reflect the deposit insurance impact of “combined ownership segregation”

of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

Total average deposits for the year ended December 31, 2022 were $11.83 billion, an increase of $625.2 million, or 5.6%, over total average deposits of $11.20 billion for the year ended December 31, 2021.

Average noninterest-bearing deposits increased by $726.7 million, or 48%, from $3.69 billion for the year ended December 31, 2021 to $4.42 billion for the year ended December 31, 2022.

At December 31, 2023 and December 31, 2022, we estimate that we had approximately $8.76 billion and $7.66 billion, respectively, in total uninsured deposits.

Included in the total uninsured deposits we estimate that we had approximately $607.3 million and $400.9 million, respectively, in uninsured time deposits.

These uninsured deposits represent the portion of deposit accounts that exceed FDIC insurance limits.

Included in our uninsured deposits as of December 31, 2023 and December 31, 2022, we estimate that we had approximately $2.2 billion and $758 million, respectively, in public funds.

While public fund balances that exceed FDIC limits are uninsured deposits, these deposits are collateralized by securities.

The uninsured deposit data for 2023 and 2022 reflect the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but do not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

Borrowed Funds

We had $698.0 million in unused federal funds lines of credit and $963.0 million in  available federal funds lines of credit with regional banks as of December 31, 2022, compared to $986.0 million 

for both as of December 31, 2021. 

The decrease in unused federal funds lines of credit was due to $265.0 million outstanding borrowings from these lines, and the decrease in available funds was the result of an acquisition of one of our counterparties by another bank during 2022. 

We had $880.0 million in unused and available federal funds lines of credit with regional banks as of December 31, 2023, compared to $963.0 million as of December 31, 2022.

These lines are subject to certain restrictions.

Federal funds purchased from correspondent banks averaged $1.53 billion, $1.16 billion and $627.6 million for 2022, 2021 and 2020, respectively.

Federal funds purchased from correspondent banks averaged $1.29 billion, $1.53 billion, and $1.16 billion for 2023, 2022 and 2021, respectively.

We paid average interest rates on these funds of 5.18%, 1.72%, and 0.21% for the same three years, respectively.

The maximum amount outstanding at a month-end during 2023 and 2022 was $1.47 billion and $1.44 billion, respectively.

Stockholders ’

Stockholders’

equity increased $145.9 million during 2022, to $1.30 billion at December 31, 2022 from $1.15 billion at December 31, 2021.

The increase in stockholders’

equity resulted primarily from net income of $251.4 million during the year ended December 31, 2022, less dividends paid or declared on our common stock of $52.7 million during the year ended December 31, 2022.

Stockholders ’ Equity

Stockholders’ equity increased $142.5 million during 2023, to $1.44 billion as of December 31, 2023 from $1.30 billion as of December 31, 2022.

The increase in stockholders’ equity resulted primarily from net income of $206.9 million during the year ended December 31, 2023, less dividends paid or declared on our common stock of $62.0 million during the year ended December 31, 2023.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial credit arrangements with off-balance sheet risk to meet the financing needs of our customers. 

These financial credit arrangements include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit and financial guarantees. 

Those credit arrangements involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. 

In the normal course of business, we are a party to financial credit arrangements with off-balance sheet risk to meet the financing needs of our customers.

These financial credit arrangements include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit and financial guarantees.

Those credit arrangements involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial credit arrangements.

All such credit arrangements bear interest at variable rates and we have no such credit arrangements which bear interest at fixed rates.

Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, credit card arrangements and standby letters of credit is represented by the contractual or notional amount of those instruments. 

We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

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Standby letters of credit and financial guarantees

Commitments to extend credit beyond current fundings are agreements to lend to a customer as long as there is no violation of any condition established in the contract. 

Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 

Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. 

We evaluate each customer’s creditworthiness on a case-by-case basis. 

The amount of collateral obtained if deemed necessary by us upon extension of credit is based on our management’s credit evaluation.

Commitments to extend credit beyond current fundings are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

We evaluate each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained if deemed necessary by us upon extension of credit is based on our management’s credit evaluation.

Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. 

Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. 

All letters of credit are due within one year or less of the original commitment date. 

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party.

Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.

All letters of credit are due within one year or less of the original commitment date.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The bank periodically enters into derivative contracts to manage exposures to movements in interest rates.

The bank purchased an interest rate cap in May of 2020 to limit exposures to increases in interest rates.

The interest rate cap is not designated as a hedging instrument but rather is a stand-alone derivative.

The interest rate cap has an original term of 3 years, a notional amount of $300 million and is tied to the one-month LIBOR rate with a strike rate of 0.50%.

The fair value of the interest rate cap is carried on the balance sheet in other assets and the change in fair value is recognized in noninterest income each quarter.

At December 31, 2022, the interest rate cap had a fair value of $4.2 million and remaining term of 0.3 years.

The bank has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery”

The Company periodically enters into derivative contracts to manage exposures to movements in interest rates.

The Company purchased an interest rate cap in May of 2020 to limit exposures to increases in interest rates.

The interest rate cap was not designated as a hedging instrument but rather as a stand-alone derivative.

The interest rate cap had an original term of three years, a notional amount of $300 million and was tied to the one-month LIBOR rate with a strike rate of 0.50%.

The fair value of the interest rate cap was carried on the Consolidated Balance Sheets in other assets and the change in fair value was recognized in noninterest income each quarter.

The interest rate cap had a fair value of $4.2 million and remaining term of 0.3 years at December 31, 2022, and expired on May 4, 2023.

The Bank has entered into agreements with secondary market investors to deliver loans on a “best efforts delivery” basis.

When a rate is committed to a borrower, it is based on the best price that day and locked with our investor for our customer for a 30-day period.

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Asset and Liability Management

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive”

and by monitoring an institution’s interest rate sensitivity “gap.”

An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

The interest rate sensitivity gap is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period.

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The asset liability committee uses a model to analyze the maturities of rate-sensitive assets and liabilities.

The model measures the “gap”

which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period.

Gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities.

If the ratio is greater than “one,”

then the dollar value of assets exceeds the dollar value of liabilities and the balance sheet is “asset sensitive.”

Conversely, if the value of liabilities exceeds the dollar value of assets, then the ratio is less than one and the balance sheet is “liability sensitive.”

Our internal policy requires our management to maintain the gap such that net interest margins will not change more than 10% if interest rates change by 100 basis points or more than 15% if interest rates change by 200 basis points.

If the ratio is greater than “one,” then the dollar value of assets exceeds the dollar value of liabilities and the balance sheet is “asset sensitive.” Conversely, if the value of liabilities exceeds the dollar value of assets, then the ratio is less than one and the balance sheet is “liability sensitive.” Our internal policy requires our management to maintain the gap such that net interest margins will not change more than 10% if interest rates change by 100 basis points or more than 15% if interest rates change by 200 basis points.

As of December 31, 2023, our gap was within such ranges.

See “—Quantitative and Qualitative Analysis of Market Risk”

below in Item 7A for additional information.

See “—Quantitative and Qualitative Analysis of Market Risk” below in Item 7A for additional information.

Liquidity and Capital Adequacy

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The following table illustrates, during the years presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of our average total assets for the period indicated.

Average assets totaled $14.70 billion in 2022 compared to $13.56 billion in 2021, and to $10.64 billion in 2020.

Average assets totaled $15.07 billion in 2023, compared to $14.70 billion in 2022, and $13.56 billion in 2021.

For the Year Ended

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The second is the liquidity of the Bank.

The management of liquidity at both levels is critical, because the Company and the bank have different funding needs and sources, and each are subject to regulatory guidelines and requirements. 

We are subject to general FDIC guidelines which require a minimum level of liquidity. 

Management believes our liquidity ratios meet or exceed these guidelines. 

The management of liquidity at both levels is critical because the Company and the Bank have different funding needs and sources, and each are subject to regulatory guidelines and requirements.

We are subject to general FDIC guidelines that require a minimum level of liquidity.

Management believes our liquidity ratios meet or exceed these guidelines.

Our management is not currently aware of any trends or demands that are reasonably likely to result in liquidity increasing or decreasing in any material manner.

The Bank’s main source of liquidity is customer interest-bearing and noninterest bearing deposit accounts.

The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts.

Our regular sources of funding are from the growth of our deposit base, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits.

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These actions include borrowing from existing correspondent banks, selling or participating loans and the curtailment of loan commitments and funding.

At December 31, 2022, our liquid assets, represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $3.65 billion.

Additionally, at such date we had available to us approximately $698.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements, to meet short term funding needs.

As of December 31, 2023, our liquid assets, represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $2.51 billion.

The Bank had loans pledged to both the FHLB and the Federal Reserve Bank of Atlanta which provided approximately $2.58 billion and $2.17 billion, respectively, in available funding.

The Bank’s policy limits on brokered deposits would allow for up to $4.03 billion in available funding for brokered deposits.

Additionally, the Bank had available to us approximately $888.0 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements, to meet short term funding needs.

As a separate entity from the bank, we also have separate liquidity obligations.

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However, our ultimate source of liquidity consists of dividends from the Bank, which are limited by applicable law and regulations.

In 2022 and 2021, the Bank paid dividends of $57.5 million and $46.0 million to us, respectively. 

For a detailed discussion on the regulatory limitation on Bank dividends, see “Supervision and Regulation - Payment of Dividends”

In 2023 and 2022, the Bank paid dividends of $62.5 million and $57.5 million, respectively.

For a detailed discussion on the regulatory limitation on Bank dividends, see “Supervision and Regulation - Payment of Dividends” in Item 1.

We believe these sources of funding are adequate to meet both our immediate (within the next 12 months) and our longer term anticipated funding needs.

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Capital Adequacy

As of December 31, 2022, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. 

To remain categorized as well-capitalized, we must maintain minimum common equity tier 1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as disclosed in the table below. 

Our management believes that we are well-capitalized under the prompt corrective action provisions as of December 31, 2022. 

In addition, the Alabama Banking Department has required that the Bank maintain a leverage ratio of 8.00%. 

The following table sets forth (i) the capital ratios of the Bank required by the FDIC to maintain “well-capitalized”

status and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of December 31, 2022.

As of December 31, 2023, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action.

To remain categorized as well-capitalized, we must maintain minimum common equity tier 1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as disclosed in the table below.

Our management believes that we are well-capitalized under the prompt corrective action provisions as of December 31, 2023.

In addition, the Alabama Banking Department has required that the Bank maintain a leverage ratio of 8.00%.

The following table sets forth (i) the capital ratios of the Bank required by the FDIC to maintain “well-capitalized” status and (ii) our actual ratios of capital to total regulatory or risk-weighted assets, as of December 31, 2023.

Well-Capitalized

Actual at December 31, 2023

CET 1 Capital Ratio

2 unchanged sentences

Leverage ratio

For a description of capital ratios see Note 14 - “

Regulatory Matters ”

to the Consolidated Financial Statements.

For a description of capital ratios see Note 14 - “ Regulatory Matters ” to the Consolidated Financial Statements.

Critical Accounting Estimates

8 unchanged sentences

The Company assesses the adequacy of its allowance for credit losses at the end of each calendar quarter.

ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors.

The level of allowance is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors.

The allowance is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries.

3 unchanged sentences

Our regulators may disagree with our assumptions and could require us to materially increase our allowance for credit losses.

Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), a probability of default / loss given default (“PD/LGD”) or a remaining life method. 

The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product. 

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages.

The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. 

See Note 1 –

Summary of Significant Accounting Policies ”

in the Notes to Consolidated Financial Statements included in Item 8.

The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors.

See Note 1 – “ Summary of Significant Accounting Policies ” in the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements and Supplementary Data elsewhere in this report.

3 unchanged sentences

Expected credit losses for loans that 

no  longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis.

Individual evaluations are performed for nonaccrual loans, loans rated substandard, and modified loans classified as troubled debt restructurings.

Specific allocations of the allowance for credit losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

Specific allocations of the allowance for credit losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

1 unchanged sentence

A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

In accordance with GAAP, the Company established a single model to address accounting for uncertain tax positions. 

GAAP clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. 

GAAP also provides guidance on derecognition measurement classification interest and penalties, accounting in interim periods, disclosure, and transition. 

GAAP provides a two-step process in the evaluation of a tax position. 

The first step is recognition. 

A company determines whether it is more likely than not that a tax position will be sustained upon examination, including a resolution of any related appeals or litigation processes, based upon the technical merits of the position. 

The second step is measurement. 

A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. 

Because of the uncertainty of estimates involved, the ultimate resolution may result in a payment that is different from the current estimate of the tax liabilities and can be significant to the Company’s consolidated financial position, results of operations or cash flows. 

In accordance with GAAP, the Company established a single model to address accounting for uncertain tax positions.

GAAP clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

GAAP also provides guidance on derecognition measurement classification interest and penalties, accounting in interim periods, disclosure, and transition.

GAAP provides a two-step process in the evaluation of a tax position.

The first step is recognition.

The second step is measurement.

A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

Adoption of Recent Accounting Pronouncements

New accounting standards are discussed in Note 1, “

Summary of Significant Accounting Policies ”

to the Consolidated Financial Statements.

New accounting standards are discussed in Note 1, “ Summary of Significant Accounting Policies ” to the Notes to Consolidated Financial Statements.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity