Atlantic Union Bankshares Corp (AUB) FY 2023 MD&A

ITEM 7. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis provides information about the major components of our results of operations and financial condition, liquidity, and capital resources. This discussion and analysis should be read in conjunction with our “Consolidated Financial Statements” and our “Notes to the Consolidated Financial Statements,” which include our significant accounting policies, presented in Item 8 “Financial Statements and Supplementary Data” contained in this Form 10-K. Amounts are rounded for presentation purposes; however, some of the percentages presented are computed based on unrounded amounts.

In management’s discussion and analysis, we provide certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are a supplement to GAAP, which we use to prepare our financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, our non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. We use the non-GAAP financial measures discussed herein in our analysis of our performance. Management believes that these non-GAAP financial measures provide additional understanding of our ongoing operations, enhance the comparability of our results of operations with prior periods and show the effects of significant gains and charges in the periods presented without the impact of items or events that may obscure trends in our underlying performance. Non-GAAP financial measures may be identified with the symbol (+) and may be labeled as adjusted. Refer to the “Non-GAAP Financial Measures” section within this Item 7 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable GAAP financial measures.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements based on the application of accounting and reporting policies in accordance with GAAP and general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, which require the use of estimates, assumptions, and judgments, which may prove inaccurate or are subject to variations. Changes in underlying factors, estimates, assumptions, or judgements could result in material changes in our consolidated financial position and/or results of operations.

Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the allowance for loan and lease losses and fair value measurements as accounting policies that require the most difficult, subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change. Therefore, we evaluate these accounting policies and related critical accounting estimates on an ongoing basis and update them as needed. Management has discussed these accounting policies and the critical accounting estimates summarized below with the Audit Committee of the Board of Directors.

Our significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

Allowance for Loan and Lease Losses

The ALLL represents the estimated balance that we consider adequate to absorb expected credit losses over the expected contractual life of the loan portfolio. We estimate our ALLL using a loan-level probability of default/loss given default methodology for all loans.

Effective September 30, 2023, we implemented certain changes to our ALLL estimation methodology. These changes did not have a significant impact on the overall ALLL estimate. For information regarding our ALLL methodology before September 30, 2023, see Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of our 2022 Form 10-K.

Determining the appropriateness of the ALLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors

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then prevailing, may result in significant changes in the ALLL in future periods. There are both internal factors (i.e., loan balances, credit quality, and the contractual lives of loans) and external factors (i.e., economic conditions such as trends in housing prices, interest rates, gross domestic product, inflation, and unemployment) that can impact the ALLL estimate.

We consider a number of external economic variables in developing the ALLL. Before September 30, 2023, the most significant of these external economic variables was the Virginia unemployment rate. We now consider various national economic variables in developing the ALLL, including the national unemployment rate, national gross domestic product, the national commercial real estate pricing index, the national home price index, and national retail sales. We use the national unemployment rate in all of our models regardless of the loan portfolio type, and we use a second economic variable in each cohort model depending on the loan portfolio type. The ALLL quantitative estimate is sensitive to changes in the economic variable forecasts during the two-year reasonable and supportable forecast period with a straight-line reversion over the next two years to long-term average loss factors. In determining forecasted expected losses, we use Moody’s economic variable forecasts and apply probability weights to the related economic scenarios. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ALLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ALLL because we consider a wide variety of factors and inputs in estimating the ALLL and changes in those factors and inputs may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that an improvement in one factor may offset deterioration in others.

We review the ALLL estimation process regularly for appropriateness as the economic and internal environment are constantly changing. While the ALLL estimate represents our current estimate of expected credit losses, due to uncertainty surrounding internal and external factors, there is potential that the estimate may not be adequate over time to cover credit losses in the portfolio. While we use available information to estimate expected losses on loans, future changes in the ALLL may be necessary based on changes in portfolio composition, portfolio credit quality, economic conditions and/or other factors.

Fair Value Measurements

We measure certain assets and liabilities at fair value on a recurring basis, including securities and derivative instruments. Fair value estimates are inherently subjective and involve significant assumptions, adjustments, and judgment including, among others, discount rates, rates of return on assets, cash flows, default rates, loss rates, terminal values and liquidation values. A significant change in assumptions may result in a significant change in fair value, which in turn, may result in a higher degree of financial statement volatility and could result in a significant impact on our results of operations, financial condition or disclosures of fair value information.

Under ASC 820, Fair Value Measurements, there is a three-level fair value hierarchy that requires the use of inputs that are observable or unobservable, when observable inputs are not available. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. As such, fair value measurements, particularly in level 2 and level 3 of the hierarchy, may require us to use significant assumptions that are subject to change. A change in one assumption could have a significant impact on the fair value estimate and certain assumptions may have offsetting impacts to one another. We prepare a supportable estimate in accordance with ASC 820 but changes in significant assumptions could have a significant impact on our Balance Sheet, Statements of Income, and/or fair value disclosures. For more information on our financial instruments and fair value assessment, refer to Note 1 “Summary of Significant Accounting Policies” and Note 13 “Fair Value Measurements” in this Form 10-K.

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RECENT ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT FULLY ADOPTED)

In November 2023, the FASB issued ASU No. 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires enhanced segment reporting disclosures. This guidance requires that interim disclosures align to the annual disclosure requirements and introduces additional disclosures intended to provide more insight into segment operations. The amendments are effective for fiscal years beginning after December 14, 2023, and interim periods within fiscal years beginning after December 15, 2024. We are evaluating the impact of ASU No. 2023-07 on our consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance requires enhanced disclosure for the rate reconciliation and income taxes paid disclosures and aligns the guidance to SEC Regulation S-X disclosure requirements. The amendments are effective for annual periods beginning after December 15, 2024. We are evaluating the impact of ASU No. 2023-09 on our consolidated financial statements.

RESULTS OF OPERATIONS

Industry Events

In the spring of 2023, the banking industry experienced significant volatility due to three high-profile bank failures. These bank failures resulted in significant concerns within the banking industry related to liquidity, deposit outflows, and unrealized losses on investment securities. These bank failures have reinforced the importance of maintaining access to diverse sources of funding and the benefits of a robust and stable deposit base. Volatility in the banking industry may persist if other industry participants experience similar high-profile financial challenges, if other banks are closed by federal or state banking regulators, or if other unforeseen sources of financial stress materialize.

In light of these bank closures and uncertainty in the banking industry, an uncertain interest rate environment, and the potential for recessionary conditions in the U.S. economy, we continue to actively monitor balance sheet trends, deposit flows, and liquidity needs to ensure we are able to meet the needs of our customers and maintain financial flexibility. As of December 31, 2023, we estimate that approximately 70.7% of our deposits were insured or collateralized, and that we maintained available liquidity sources to cover approximately 106% of uninsured and uncollateralized deposits. In addition, to further bolster our funding position, we augmented customer deposit growth by also increasing brokered deposits to $548.4 million at December 31, 2023.

Despite the uncertainty within the broader banking industry during 2023, our regulatory capital ratios continued to exceed the standards to be considered well-capitalized under regulatory requirements. See “Capital Resources” within this Item 7 for additional information about our regulatory capital.

We are continually monitoring the impact of various global and national events on our results of operations and financial condition, including inflation, rising interest rates and geopolitical conflicts. In an effort to combat inflation, the FOMC increased the Federal Funds target rates throughout 2022 and 2023 to its current range of 5.25% to 5.50%. While inflation has eased in 2023, it remains elevated over the FOMC’s long-run target of 2%. The FOMC has noted that it will continue to assess additional information and its implications for monetary policy, and in determining future actions with respect to the target rates, the FOMC will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. The FOMC also left open the potential for decreases to the target rates in 2024 and confirmed the continued reduction to the Federal Reserve’s holdings of U.S. Treasury securities and agency debt and agency MBS. These actions in 2023 helped drive the meaningful increase in our deposit costs that we continue to experience. The timing and impact of inflation, market interest rates, and the competitive landscape of deposits on our business and results of operations will depend on future developments, which are highly uncertain and difficult to predict. We will continue to deploy various asset liability management strategies to seek to manage our risk related to interest rate fluctuations. Refer to “Liquidity” within this Item 7 for additional information about our liquidity and “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this Form 10-K for additional information about our interest rate sensitivity.

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Strategic Initiatives

Pending Merger with American National Bankshares Inc.

On July 24, 2023, the Company and American National entered into a merger agreement. Under the merger agreement, American National will merge with and into the Company, with the Company continuing as the surviving entity. Immediately following the merger, American National Bank and Trust Company will merge with and into the Bank, with the Bank continuing as the surviving bank. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of American National common stock will be converted into the right to receive 1.35 shares of the Company’s common stock. The merger agreement was unanimously approved by the boards of directors of the Company and American National, and is subject to customary closing conditions, including receipt of required regulatory approvals. American National shareholders approved the merger agreement at a special shareholder meeting held on November 14, 2023. The proposed merger is expected to close in the second quarter of 2024.

During 2023, we incurred pre-tax merger related costs of approximately $3.0 million related to the proposed merger with American National.

Cost Savings Initiatives

As previously disclosed, we initiated a series of strategic cost saving measures in the second quarter of 2023 that are expected to reduce our annual expense run rate by approximately $17 million. As a result of these measures, we incurred pre-tax expenses of $12.6 million in 2023, principally composed of severance charges related to headcount reductions, costs related to modifying certain third-party vendor contracts, and charges for exiting certain leases.

Sale-Leaseback Transactions

On September 20, 2023, we executed a sale-leaseback transaction and sold 27 properties, which consisted of 25 branches and a drive thru and parking lot, each adjacent to a sold branch, to a single purchaser for an aggregate purchase price of $45.8 million. Concurrently, we entered into absolute net lease agreements with the purchaser under which we will lease each of the properties for an initial term of 17 years with specified renewal options. The sale-leaseback transaction resulted in a pre-tax gain of approximately $27.7 million during the third quarter of 2023, after transaction-related expenses.

In the fourth quarter of 2023, we sold one branch location to the same purchaser and concurrently entered into absolute net lease agreements with substantially similar terms as those discussed above. This additional sale-leaseback transaction resulted in a pre-tax gain of approximately $1.9 million during the fourth quarter of 2023, after transaction-related expenses.

AFS Securities Sales

Concurrent with the sale-leaseback transaction on September 20, 2023, we restructured a portion of our investment portfolio by selling low yielding AFS securities with a book value of $228.3 million, resulting in a pre-tax net loss of $27.7 million. The net proceeds from the securities sale transaction were reinvested into higher yielding AFS securities at the end of the third quarter of 2023.

During the first quarter of 2023, we executed a balance sheet repositioning strategy and sold AFS securities with a total book value of $505.7 million at a pre-tax loss of $13.4 million and used the net proceeds to reduce existing high costing FHLB borrowings.

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SUMMARY OF 2023 FINANCIAL RESULTS

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Executive Overview

Net Income & Performance Metrics

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Balance Sheet

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NET INCOME

Years Ended December 31, 2023 and 2022

Net income available to common shareholders was $190.0 million for 2023, a decrease of $32.7 million or 14.7% and represented diluted EPS of $2.53, compared to $222.6 million and $2.97, respectively, for 2022. The decrease was primarily driven by a $27.6 million decrease in noninterest income, a $26.6 million increase in noninterest expense, and a $12.6 million increase in the provision for credit losses. The increase in provision expense was due to increased uncertainty in the economic outlook, loan growth during 2023, an increase in net charge-offs, and an increase in the allowance on two individually assessed loans due to changes in borrower-specific circumstances. These changes were partially offset by a $26.8 million increase in net interest income, and a $7.4 million decrease in income tax expense.

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Adjusted operating earnings available to common shareholders(+) totaled $221.2 million for 2023, compared to $219.0 million for 2022, and diluted adjusted operating EPS(+) was $2.95 for 2023, compared to $2.92 for 2022.

Net interest income for 2023 totaled $611.0 million, an increase of $26.8 million or 4.6% from 2022. The increase in net interest income was primarily driven by higher loan yields due to rising market interest rates and loan growth. This increase was partially offset by an increase in interest expense due to increased deposit and borrowing costs because of higher short-term market interest rates, average interest bearing deposit growth, and higher average short-term borrowings.

Noninterest income decreased $27.6 million or 23.3% to $90.9 million for 2023, from $118.5 million for 2022, primarily driven by losses incurred on the sale of AFS securities, as well as decreases in fiduciary and asset management fees, mortgage banking income, and loan-related interest rate swap fees. These decreases in noninterest income were partially offset by increases in other operating income, service charges on deposit accounts, and other service charges, commissions, and fees. For additional details on noninterest income, refer to the section “Noninterest Income” included within this Item 7 of this Form 10-K.

Noninterest expense increased $26.6 million or 6.6% to $430.4 million for 2023, compared to $403.8 million for 2022, primarily driven by increases in other expenses, FDIC assessment premiums and other insurance, and salaries and benefits expense. These increases in noninterest expense were partially offset by decreases in amortization of intangible assets, professional services, loan-related expenses, technology and data processing, and occupancy expenses. For additional details on noninterest expense, refer to the section “Noninterest Expense” included within this Item 7 of this Form 10-K.

Years Ended December 31, 2022 and 2021

Net income available to common shareholders was $222.6 million for 2022, a decrease of $29.4 million or 11.7% and represented diluted EPS of $2.97, compared to $252.0 million and $3.26 respectively, for 2021. The decrease was primarily driven by a $79.9 million increase in the provision for credit losses to $19.0 million for 2022, compared to a negative provision of $60.9 million for the prior year, reflecting the impact of a higher ACL due to changes in the macroeconomic forecast and loan growth, and a $7.3 million decrease in noninterest income. These changes were partially offset by a $33.0 million increase in net interest income, a $15.4 million decrease in noninterest expenses, and a $9.4 million decrease in income tax expense. Adjusted operating earnings available to common shareholders(+) totaled $219.0 million for 2022, compared to $273.3 million for 2021, and diluted adjusted operating EPS(+) was $2.92 for 2022, compared to $3.53 for 2021.

Net interest income for 2022 totaled $584.3 million, an increase of $33.0 million or 6.0% compared to the prior year, primarily due to an increase in overall earning asset yields of 39 bps for 2022, driven by the impact of rising market interest rates on loans and taxable investment securities yields, and growth in average loans and average investment securities. This increase was partially offset by an increase in cost of funds of 19 bps for 2022, driven by higher deposit and borrowing costs.

Noninterest income decreased $7.3 million or 5.8% to $118.5 million for 2022, from $125.8 million for 2021, primarily due to decreases in mortgage banking income as mortgage loan origination volumes and gain on sale margins declined, and fiduciary and asset management fees as assets under management decreased due to the sale of DHFB. Partially offsetting these decreases in noninterest income were increases in loan-related interest rate swap fees due to higher transaction volumes, and other operating income primarily driven by the gain on sale of DHFB, and an increase in loan syndication, SBA 7a, and foreign exchange revenues, partially offset by a decline in equity method investment income and the impact of the gain in 2021 on the sale of Visa, Inc. Class B common stock.

Noninterest expense decreased $15.4 million or 3.7% to $403.8 million for 2022, from $419.2 million for 2021, primarily due to decreases in loss on debt extinguishment and in other expenses, primarily driven by a decrease in branch closing and facility consolidation costs and a gain related to the sale and leaseback of an office building, as well as decreases in amortization of intangible assets, occupancy expenses, furniture and equipment expenses, professional services, and marketing and advertising expense. These decreases in noninterest expense were partially offset by increases in salaries and benefits, technology and data processing, and FDIC assessment premiums and other insurance.

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NET INTEREST INCOME

Net interest income, which represents our principal source of revenue, is the amount by which our interest income exceeds our interest expense. Our net interest margin represents net interest income expressed as a percentage of our average earning assets. Changes in the volume and mix of our interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on our net interest income, net interest margin, and net income.

The following tables show interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid for the years ended December 31, (dollars in thousands):

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For 2023, net interest income was $611.0 million, an increase of $26.8 million from 2022. For 2023, net interest income (FTE) (+) was $625.9 million, an increase of $26.8 million from the prior year. For 2023, net interest margin increased 6 bps to 3.33% from 3.27% from 2022 and net interest margin (FTE) (+) increased 5 bps to 3.41% from 3.36% in the prior year. The increases in net interest income and net interest income (FTE) (+) were primarily driven by higher loan yields due to rising market interest rates and loan growth. These increases were partially offset by an increase in interest expense due to increased deposit and borrowing costs as a result of higher short-term market interest rates, higher average interest bearing deposits. and higher short-term borrowings to help fund loan growth.

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For 2022, net interest income was $584.3 million, an increase of $33.0 million from 2021. For 2022, net interest income (FTE) (+) was $599.1 million, an increase of $35.3 million from the prior year. The increases in net interest income and net interest income (FTE) (+) were primarily driven by higher loan yields on our variable rate loans due to rising market interest rates and loan growth and increases in investment income primarily due to higher yields on taxable securities driven by rising market interest rates and growth in the average balance of our investment portfolio. These increases were partially offset by an increase in interest expense due to increased deposit and borrowing costs as a result of higher short-term interest rates and additional borrowings related to the $250.0 million of 2.875% fixed-to-floating rate subordinated notes issued by the Company during the fourth quarter of 2021 and increased FHLB advances. For 2022, net interest margin increased 19 bps and net interest margin (FTE) (+) increased 21 bps, compared to 2021.

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The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the years ended December 31, (dollars in thousands):

AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

(1) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 21%.

(2 )Rates and yields are calculated from actual, not rounded amounts in thousands, which appear above.

(3 )Nonaccrual loans are included in average loans outstanding.

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The Volume Rate Analysis table below presents changes in our interest income (FTE)(+) and interest expense and distinguishes between the changes related to increases or decreases in our average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionally. Results, on a taxable equivalent basis, are as follows for the years ended December 31, (dollars in thousands):

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(1) The rate-related changes in interest income on loans, deposits, and other borrowings include the impact of lower accretion of the acquisition-related fair market value adjustments, which are detailed below.

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The impact of net accretion related to acquisition accounting fair value adjustments for the years ended December 31, are reflected in the following table (dollars in thousands):

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NONINTEREST INCOME

Years Ended December 31, 2023 and 2022

NM = Not Meaningful

For 2023, our noninterest income decreased $27.6 million or 23.3% to $90.9 million compared to $118.5 million for 2022, primarily driven by $41.0 million of losses incurred on the sale of AFS securities executed in the first and third quarters of 2023, partially offset by a $19.4 million increase in other operating income, which included gains related to sale-leaseback transactions during the third and fourth quarters of 2023, partially offset by a gain on the sale of DHFB in the second quarter of 2022.

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Our adjusted operating noninterest income(+) for 2023, which excludes losses on sale of securities ($41.0 million in 2023 and $3,000 in 2022), gains related to sale-leaseback transactions ($29.6 million in 2023), and the gain on sale of DHFB ($9.1 million in 2022), decreased $7.2 million or 6.5%, to $102.3 million, compared to $109.4 million for 2022. The decrease was primarily driven by a $4.7 million decrease in fiduciary and asset management fees due to a decrease in assets under management driven by the DHFB sale executed in the second quarter of 2022, a $4.3 million decrease in mortgage banking income due to a decline in mortgage loan origination volumes and decrease in gain on sale margins due to increases in market interest rates, a $2.1 million decrease in loan-related interest rate swaps primarily due to lower transaction volumes, and a $1.1 million decrease in other operating income primarily due to the impact from recoveries recognized in the prior year on several fully charged off acquired loans and a decline in equity method investment income, partially offset by increases in capital market transaction-related fees. These decreases were partially offset by a $3.2 million increase in service charges on deposit accounts due to growth and improved margins in treasury management services and higher Consumer Banking customer activity, and a $1.1 million increase in other service charges, commissions, and fees due primarily to a merchant services vendor contract signing bonus.

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Years Ended December 31, 2022 and 2021

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For 2022, our noninterest income decreased $7.3 million or 5.8% to $118.5 million from $125.8 million for 2021, due primarily to the decreases in mortgage banking income and fiduciary and asset management fees discussed below, partially offset by the increase in loan-related interest rate swap fees noted below.

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Our adjusted operating noninterest income(+) for 2022, which excludes, as applicable, the gain on sale of DHFB ($9.1 million in 2022), the gain on sale of Visa, Inc. Class B common stock ($5.1 million in 2021), and gains and losses on sale of securities (losses of $3,000 in 2022 compared to gains of $87,000 in 2021), declined by $11.1 million or 9.2% from the prior year, which was driven primarily by a $13.9 million decrease in mortgage banking income as mortgage loan origination volumes and gain on sale margins each declined due to the rapid rise in market interest rates in 2022, a $5.1 million decrease in fiduciary and asset management fees as assets under management decreased due to the sale of DHFB, and a $2.6 million decrease in other operating income primarily driven by a decline in equity method investment income. These decreases were partially offset by an increase in capital market transaction-related fees and by a $6.6 million increase in loan-related interest rate swap fees due to higher transaction volumes.

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NONINTEREST EXPENSE

Years Ended December 31, 2023 and 2022

NM = Not Meaningful

For 2023, our noninterest expense increased $26.6 million or 6.6% to $430.4 million, compared to $403.8 million for 2022, primarily driven by a $14.6 million increase in other expenses due mainly to expenses associated with strategic cost saving initiatives, the legal reserve related to our previously disclosed settlement with the CFPB, and merger-related costs associated with our pending merger with American National, partially offset by strategic branch closing and facility consolidation costs in 2022 not repeated in 2023, and a $9.6 million increase in FDIC assessment premiums and other insurance primarily due to the increase in the FDIC assessment rates, effective January 1, 2023 and a FDIC special assessment recognized in the fourth quarter of 2023.

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Our adjusted operating noninterest expense(+) for 2023, which excludes expenses associated with strategic cost saving initiatives ($12.6 million in 2023), amortization of intangible assets ($8.8 million in 2023 and $10.8 million in 2022), the legal reserve related to our previously disclosed settlement with the CFPB ($8.3 million in 2023), a FDIC special assessment ($3.4 million in 2023), merger-related costs associated with our pending merger with American National ($3.0 million in 2023), and strategic branch closing and facility consolidation costs ($5.5 million in 2022), increased $6.8 million or 1.8% to $394.3 million, compared to $387.5 million for 2022. The increase was primarily driven by a $6.3 increase in FDIC assessment premiums and other insurance primarily due to increase in the FDIC assessment rates discussed above, a $4.9 million increase in salaries and benefits expense, outside of severance charges related to headcount reductions from cost saving initiatives in the second quarter of 2023, and a $1.2 million increase in marketing and advertising expense. These increases were partially offset by a $1.2 million decrease in professional services related to strategic projects that occurred in the prior year, a $991,000 decrease in other expenses primarily due to a decrease in non-credit related losses on customer transactions, a $955,000 decrease in loan-related expenses primarily due a decrease

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in third-party loan servicing, a $888,000 decrease in technology and data processing due to the fee restructuring of a major contract, and a $867,000 decrease in occupancy expenses.

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Years Ended December 31, 2022 and 2021

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For 2022, our noninterest expense decreased $15.4 million or 3.7% to $403.8 million from $419.2 million for 2021, due primarily due to a $14.7 million loss on debt extinguishment related to balance sheet repositioning in 2021.

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Our adjusted operating noninterest expense(+) for 2022, which excludes amortization of intangible assets ($10.8 million in 2022 compared to $13.9 million in 2021), losses related to balance sheet repositioning ($14.7 million in 2021), and strategic branch closing and facility consolidation costs ($5.5 million in 2022 compared to $17.4 million in 2021), increased $14.3 million or 3.8% compared to 2021, due to a $14.0 million increase in salaries and benefits primarily driven by higher salaries, wages, and variable incentive compensation, a $3.2 million increase in technology and data processing expenses, which includes the write-down of obsolete software, a $2.1 million increase in other expenses, primarily driven by increases in teammate travel and training costs and non-credit related losses on customer transactions, partially offset by a gain related to the sale and leaseback of an office building, and a $759,000 increase in FDIC assessment premiums and other insurance. The increases in noninterest expense were partially offset by a $2.7 million decrease in occupancy expenses and a $1.1 million decrease in furniture and equipment expenses, partially reflecting the impact of our consolidation of 16 branches that we completed in March 2022, a $1.1 million decrease in professional services expenses due to a decrease in legal and consulting fees associated with various strategic initiatives, and a $639,000 decrease in marketing and advertising expense.

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SEGMENT RESULTS

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As discussed in Note 17 “Segment Reporting and Revenue” within Item 8 “Financial Statements and Supplementary Data” of this Form 10-K, effective as of the third quarter of 2022, we began segmenting our business into two primary reportable operating segments—Wholesale Banking and Consumer Banking—as these segments reflect how our chief operating decision makers are now evaluating our business, establishing the overall business strategy, allocating resources, and assessing business performance. We have included below the key metrics our chief operating decision makers use in evaluating our reportable operating segments. We restated our segment information for the year ended December 31, 2021 under the new basis with two reportable operating segments.

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Effective January 1, 2023, we made an organizational change to move certain lines of business in the wealth management division that primarily serve Wholesale Banking customers from the Consumer Banking segment to the Wholesale Banking segment. As a result, we reallocated $9.6 million of goodwill from the Consumer Banking segment to the Wholesale Banking segment and restated our prior segment information for the year ended December 31, 2022, based on this organizational change. Goodwill was evaluated for impairment prior to and immediately following the organizational change. Refer to Note 5 “Goodwill and Intangible Assets” within Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. In addition, we restated our prior segment operating results for the years ended

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December 31, 2022 and 2021, resulting in a reallocation of noninterest income ($12.5 million and $12.3 million, respectively) and noninterest expense ($16.0 million and $14.3 million, respectively) from the Consumer Banking segment to the Wholesale Banking segment.

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Wholesale Banking

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Our Wholesale Banking segment provides loan, leasing, and deposit services, as well as treasury management, SBA lending and capital market services to wholesale customers primarily throughout Virginia, Maryland, North Carolina, and South Carolina. These customers include commercial real estate and commercial and industrial customers. This segment also includes our equipment finance subsidiary, which has nationwide exposure. The private banking and trust businesses also reside in the Wholesale Banking segment.

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The following table presents operating results for the years ended December 31, for the Wholesale Banking segment (dollars in thousands):

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(1) Operating results include a reallocation from the Consumer Banking segment, due to the January 1, 2023 organizational change discussed in Note 17, “Segment Reporting and Revenue,” within Part II, Item 8 of this Form 10-K.

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Wholesale Banking income before income taxes decreased $59.5 million to $108.0 million for 2023, compared to $167.6 million for 2022. The decrease was primarily due to a decrease in our net interest income driven by spread compression on the deposit portfolio as a result of the rapid rise in interest rates, and an increase in the provision for credit losses due to increased uncertainty in the economic outlook and loan growth during 2023, higher net charge-offs, and an increase in the individually assessed allowance on two loans due to changes in borrower-specific circumstances. In addition, our noninterest expense increased in 2023 compared to 2022, primarily due to an increase in salaries and benefits expense, as well as an increase in FDIC assessment premiums and other insurance due to the increase in the FDIC assessment rates, effective January 1, 2023, and a FDIC special assessment recognized in the fourth quarter of 2023.

​

Wholesale Banking income before income taxes decreased $49.5 million to $167.6 million for 2022, compared to $217.1 million for 2021. The decrease was primarily driven by an increase in the provision for credit losses due to changes in the macroeconomic outlook and loan growth in 2022. In addition, our noninterest expense increased in 2022, primarily due to increases in salaries and wages, non-credit related losses on customer transactions, and teammate training and travel costs. These increases in the provision for credit losses and noninterest expense were partially offset by an increase in our noninterest income in 2022, primarily due to an increase in loan swap fees due to higher transaction volumes and an increase in capital market transaction-related fees.

The following table presents the key balance sheet metrics as of December 31, for the Wholesale Banking segment (dollars in thousands):

​

(1) Includes a reallocation of LHFI, net of deferred fees and costs, and total deposits from the Consumer Banking segment of $136.6 million and $258.7 million, respectively, due to the January 1, 2023 organizational change discussed in Note 17, “Segment Reporting and Revenue,” in Part II, Item 8 of this Form 10-K.

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LHFI, net of deferred fees and costs, for the Wholesale Banking segment increased $1.2 billion or 10.6% to $12.7 billion at December 31, 2023 compared to December 31, 2022, with growth reported in the commercial and industrial, multifamily real estate, and commercial real estate – non-owner occupied loan portfolios.

​

Wholesale Banking deposits increased $274.7 million or 4.5% to $6.4 billion at December 31, 2023 compared to December 31, 2022, primarily driven by an increase in interest checking accounts, partially offset by a decrease in demand deposits.

​

Consumer Banking

​

Our Consumer Banking segment provides loan and deposit services to consumers and small businesses throughout Virginia, Maryland, and North Carolina. Consumer Banking includes the home loan division and investment management and advisory services businesses.

​

The following table presents operating results for the years ended December 31, for the Consumer Banking segment (dollars in thousands):

​

(1) Operating results include a reallocation to the Wholesale Banking segment, due to the January 1, 2023 organizational change discussed in Note 17, “Segment Reporting and Revenue,” in Part II, Item 8 of this Form 10-K.

​

Consumer Banking income before income taxes increased $27.1 million to $80.7 million for 2023 compared to $53.5 million for 2022. The increase was primarily driven by an increase in our net interest income due to favorable funding credits on deposits and increased interest income attributable to the higher interest rate environment and higher average loan balances, partially offset by spread compression on the loan portfolio. Also contributing to the increase in net interest income was a decrease in the provision for credit losses primarily driven by runoff in the third-party lending and auto portfolios related to our decision to exit this business. The increase in our net interest income after provision for credit losses was partially offset by an increase in our noninterest expense primarily driven by an increase in salaries and benefits expense, as well as an increase in FDIC assessment premiums and other insurance due to the increase in the FDIC assessment rates, effective January 1, 2023, and a FDIC special assessment recognized in the fourth quarter of 2023. In addition, our noninterest income in 2023 decreased from 2022, primarily due to a decline in fiduciary and asset management fees driven by a decrease in assets under management primarily due to the sale of DHFB in the second quarter of 2022, and a continued decrease in mortgage banking income from the prior year due to a decline in mortgage loan origination volumes and a decline in gain on sale margins due to increases in market interest rates.

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Consumer Banking income before income taxes decreased $48.0 million to $53.5 million for 2022, compared to $101.5 million for 2021. The decrease was primarily driven by an increase in the provision for credit losses due to changes in the macroeconomic outlook and loan growth in 2022. In addition, our noninterest income decreased in 2022, primarily driven by a decrease in mortgage banking income due to a decline in mortgage origination volumes and gain on sale margins due to the rapid rise in market interest rates in 2022, and a decrease in fiduciary and asset management fees primarily due to the sale of DHFB.

​

The following table presents the key balance sheet metrics as of December 31, for the Consumer Banking segment (dollars in thousands):

​

(1) Includes a reallocation of LHFI, net of deferred fees and costs, and total deposits to the Wholesale Banking segment of $136.6 million and $258.7 million, respectively, due to the January 1, 2023 organizational change discussed in Note 17, “Segment Reporting and Revenue,” in Part II, Item 8 of this Form 10-K.

​

LHFI, net of deferred fees and costs, for the Consumer Banking segment decreased $31.2 million or 1.0% to $3.0 billion at December 31, 2023 compared to December 31, 2022. The decrease primarily occurred the auto loan portfolio due to the exit from our indirect automobile financing business during the second quarter of 2023, as part of our strategic cost savings initiatives.

​

Consumer Banking deposits increased $92.0 million or 0.9% to $9.8 billion at December 31, 2023 compared to December 31, 2022. The increase was primarily due to an increase in time deposits, partially offset by a decrease in demand deposits, interest checking accounts, savings accounts, and money market balances, as customers moved funds from lower to higher yield deposit products.

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INCOME TAXES

Our provision for income taxes is based on our results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, we report certain items of income and expense in different periods for financial reporting and tax return purposes. We recognize the tax effects of these temporary differences in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statements and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.

Our effective tax rate for the years ended December 31, 2023, 2022, and 2021 was 15.9%, 16.2%, and 17.2%, respectively. The decrease in the effective rate for 2023 compared to 2022 is primarily due to the higher proportion of tax-exempt income to pre-tax income.

BALANCE SHEET

Assets

At December 31, 2023, we had total assets of $21.2 billion, an increase of $705.1 million or 3.4% from December 31, 2022. The increase in total assets was primarily a result of a $1.2 billion increase in total LHFI (net of deferred fees and costs), partially offset by a $525.7 million decrease in our net investment securities portfolio due primarily to the sale of AFS securities in the first quarter of 2023.

​

LHFI (net of deferred fees and costs) were $15.6 billion at December 31, 2023, an increase of $1.2 billion or 8.2% from December 31, 2022. For additional information on our loan activity, please refer to the section “Loan Portfolio” included within this Item 7 and Note 3 “Loans and Allowance for Loan and Lease Losses” in the “Notes to Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

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Total investments at December 31, 2023 were $3.2 billion, a decrease of $525.7 million or 14.2% from December 31, 2022. AFS securities totaled $2.2 billion at December 31, 2023, a decrease of $510.6 million or 18.6% from December 31, 2022. At December 31, 2023, total net unrealized losses on the AFS securities portfolio were $384.3 million,

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compared to $462.5 million at December 31, 2022. HTM securities totaled $837.4 million at December 31, 2023, a $10.4 million decrease or 1.2% from December 31, 2022. Total net unrealized losses on the HTM securities portfolio were $29.3 million at December 31, 2023, compared to $45.8 million at December 31, 2022.

​

Liabilities and Stockholders’ Equity

At December 31, 2023, we had total liabilities of $18.6 billion, an increase of $521.5 million or 2.9% from December 31, 2022, primarily driven by an increase in total deposits, partially offset by a decrease in short-term borrowings.

Total deposits at December 31, 2023 were $16.8 billion, an increase of $886.5 million or 5.6% from December 31, 2022. Average deposits at December 31, 2023 increased $501.6 million or 3.0% from December 31, 2022. The increase in total deposits was primarily due to increases in interest bearing customer deposits and brokered deposits, partially offset by decreases in demand deposits. For additional information on deposits, refer to the section “Deposits” included within this Item 7 of this Form 10-K.

​

Total borrowings at December 31, 2023 were $1.3 billion, a decrease of $396.8 million or 23.2% compared to $1.7 billion at December 31, 2022. The decrease in borrowings was primarily due to paydowns of short-term borrowings due to deposit growth. For additional information on our borrowing activity, please refer to Note 8 “Borrowings” in the “Notes to Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

At December 31, 2023, our stockholders’ equity was $2.6 billion, an increase of $183.6 million or 7.7% from December 31, 2022. The net increase was primarily attributable to other comprehensive gains related to the decrease in unrealized losses in the AFS securities portfolio due to the impact of declining market interest rates, partially offset by the impact of retained earnings during 2023.

​

During 2023, we declared and paid dividends on our outstanding shares of Series A Preferred Stock of $687.52 per share (equivalent to $1.72 per outstanding depositary share). During 2023, we also declared and paid cash dividends of $1.22 per common share, an increase of $0.06 per share or 5.2% over 2022.

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SECURITIES

At December 31, 2023, we had total investments of $3.2 billion or 15.0% of total assets, compared to $3.7 billion or 18.1% of total assets at December 31, 2022. This decrease was primarily due to the sale of AFS securities in the first quarter of 2023, partially offset by the improvement in the fair value of the AFS securities portfolio due to the impact of lower market interest rates. We seek to diversify our investment portfolio to minimize risk, as we focus on purchasing MBS for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. The majority of our MBS are agency-backed securities, which have a government guarantee. For information regarding the hedge transaction related to AFS securities, see Note 10 “Derivatives” in “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

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The table below sets forth a summary of the AFS securities, HTM securities, and restricted stock as of December 31, (dollars in thousands):

​

The following table summarizes the weighted average yields(1) for AFS securities by contractual maturity date of the underlying securities as of December 31, 2023:

​

(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.

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​

The following table summarizes the weighted average yields(1) for HTM securities by contractual maturity date of the underlying securities as of December 31, 2023:

​

(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.

​

Weighted average yield is calculated as the tax-equivalent yield on a pro rata basis for each security based on its relative amortized cost.

​

As of December 31, 2023, we maintained a diversified municipal bond portfolio with approximately 67% of our holdings in general obligation issues and the majority of the remainder primarily backed by revenue bonds. Issuances within the State of Texas represented 19% of the total municipal portfolio; no other state had a concentration above 10%. Substantially all of our municipal holdings are considered investment grade. When purchasing municipal securities, we focus on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.

LOAN PORTFOLIO

LHFI, net of deferred fees and costs, were $15.6 billion and $14.4 billion at December 31, 2023 and 2022, respectively. Commercial real estate and commercial and industrial loans represented our largest loan categories at both December 31, 2023. and December 31, 2022.

The following table presents total and remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), net of deferred fees and costs, as of December 31, 2023 (dollars in thousands):

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We remain committed to originating soundly underwritten loans to qualifying borrowers within our markets. We seek to mitigate risks attributable to our most highly concentrated portfolios—commercial real estate and commercial and industrial —through our credit underwriting and monitoring processes, including oversight by a centralized credit administration function and credit policy and risk management committee, as well as through our seasoned bankers that focus on lending to borrowers with proven track records in markets that we are familiar with.

Our loan portfolio includes credit exposures in the commercial real estate market. Our non-owner occupied commercial real estate loans represented 26.7% of total LHFI at December 31, 2023, and included $775.0 million of non-owner occupied office loans, representing 5.0% of total LHFI at December 31, 2023. We proactively monitor our non-owner occupied office exposure and we believe the portfolio is geographically diverse and granular. We do not currently finance large, high-rise, or major metropolitan central business district office buildings.

ASSET QUALITY

Overview

At December 31, 2023, NPAs as a percentage of total LHFI were 0.24%, an increase of 5 bps from the prior year and included nonaccrual loans of $36.9 million. Our net charge-offs remain low at 0.05% of total loans for 2023, a 3 bps increase from the prior year. Our ACL at December 31, 2023 increased by $24.0 million from the prior year primarily due to increased uncertainty in the economic outlook, loan growth in 2023, and an increase in the allowance on two individually assessed loans due to changes in borrower-specific circumstances.

​

We continued to experience historically low levels of NPAs in 2023; however, the economic environment in our footprint could be impacted by elevated inflation, even as inflation rates begin to improve, and the potential impact of interest rate changes as the Federal Reserve continues to evaluate monetary policy moves, which could increase NPAs in future periods. We continue to refrain from originating or purchasing loans from foreign entities, and we selectively originate loans to higher risk borrowers. Our loan portfolio generally does not include exposure to option adjustable rate mortgage products, high loan-to-value ratio mortgages, interest only mortgage loans, subprime mortgage loans or mortgage loans with initial teaser rates, which are all considered higher risk instruments.

Nonperforming Assets

At December 31, 2023, our NPAs totaled $36.9 million, an increase of $9.8 million or 36.1% from December 31, 2022. NPAs as a percentage of total LHFI at December 31, 2023 were 0.24%, an increase of 5 bps from 0.19% at December 31, 2022. The increase in NPAs was primarily due to two new nonaccrual loans within the commercial real estate – non-owner occupied and commercial and industrial portfolios.

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The following table shows a summary of asset quality balances and related ratios as of and for the years ended December 31, (dollars in thousands):

​

NPAs include non-accrual loans, which totaled $36.9 million and $27.0 million at December 31, 2023 and December 31, 2022 respectively. The following table shows the activity in nonaccrual loans for the years ended December 31, (dollars in thousands):

​

The following table presents the composition of nonaccrual loans and the coverage ratio, which is the ALLL expressed as a percentage of nonaccrual loans, as of December 31, (dollars in thousands):

​

(1) Represents the ALLL divided by nonaccrual loans.

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Past Due Loans

At December 31, 2023, past due loans still accruing interest totaled $48.4 million or 0.31% of total LHFI, compared to $30.0 million or 0.21% of total LHFI at December 31, 2022. Of the total past due loans still accruing interest, $13.9 million or 0.09% of total LHFI were loans past due 90 days or more at December 31, 2023, compared to $7.5 million or 0.05% of total LHFI at December 31, 2022.

Troubled Loan Modifications

We adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, effective January 1, 2023 on a prospective basis. Refer to Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K for information on our accounting policy for loan modifications to borrowers experiencing financial difficulty and how we define TLMs.

As of December 31, 2023, we had TLMs with an amortized cost basis of $32.2 million and $180,000 in allowance for those loans. As of December 31, 2023, there were $716,000 of unfunded commitments on loans modified and designated as TLMs since January 1, 2023.

Troubled Debt Restructurings

After the adoption of ASU 2022-02, we no longer have TDRs. The below information is presented for December 31, 2022, prior to our adoption of ASU 2022-02.

A modification of a loan’s terms constituted a TDR if the creditor granted a concession that it would not have otherwise considered to the borrower for economic or legal reasons related to the borrower’s financial difficulties. Management strove to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reached nonaccrual status. These modified terms may have included rate reductions, extension of terms that were considered to be below market, conversion to interest only, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

The total recorded investment in TDRs at December 31, 2022 was $14.2 million of which $9.3 million or 65.3% were considered performing, while the remaining $4.9 million were considered nonperforming.

Net Charge-offs

For the year ended December 31, 2023, our net charge-offs were $7.6 million or 0.05% of total average loans, compared to $2.3 million or 0.02%, respectively, for the year ended December 31, 2022. The majority of our net charge-offs in 2023 related to two commercial loans within the commercial and industrial and commercial real estate portfolios that were charged-off in the first quarter of 2023.

Provision for Credit Losses

We recorded a provision for credit losses of $31.6 million for the year ended December 31, 2023, an increase of $12.6 million or 66.2% from the prior year. The provision for credit losses for the year ended December 31, 2023 reflected $29.0 million in provision for loan losses and $2.6 million in provision for unfunded commitments. The increased provision for credit losses is primarily due to increased uncertainty in the economic outlook, loan growth during 2023, an increase in net charge-offs, and an increase in the allowance on two individually assessed loans due to changes in borrower-specific circumstances.

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Allowance for Credit Losses

At December 31, 2023, the ACL was $148.5 million, comprised of an ALLL of $132.2 million and a reserve for unfunded commitments of $16.3 million. The ACL at December 31, 2023 increased by $24.0 million from December 31, 2022, primarily due to increased uncertainty in the economic outlook, loan growth during 2023, and an increase in the allowance on two individually assessed loans due to changes in borrower-specific circumstances.

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The following table summarizes the ACL as of December 31, (dollars in thousands):

​

The following table summarizes our net charge-off activity by loan segment for the years ended December 31, (dollars in thousands):

(1) Annualized

​

The following table summarizes the ALLL activity by loan segment and the percentage of the loan portfolio that the related ALLL covers as of December 31, (dollars in thousands):

(1) The percentage represents the loan balance divided by total loans.

​

The increase in the ALLL for the Commercial segment is primarily due to increased uncertainty in the economic outlook, loan growth during 2023, and an increase in the allowance on two individually assessed loans due to changes in borrower-specific circumstances. The decrease in the ALLL from the prior year for the Consumer segment reflects the impact of the runoff in the third-party lending and auto portfolios.

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DEPOSITS

As of December 31, 2023, our total deposits were $16.8 billion, an increase of $886.5 million or 5.6% compared to December 31, 2022. Total interest-bearing deposits consisted of interest checking accounts, money market, savings accounts, time deposits, and brokered deposits. Our time deposits balances with customers totaled $2.8 billion and accounted for 23.1% of total interest-bearing deposits at December 31, 2023, compared to $1.8 billion and 16.3% at December 31, 2022. We will use purchased brokered deposits as part of our overall liquidity management strategy on an as needed basis; brokered deposits were purchased in 2023 and 2022 through nationally recognized networks.

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The following table presents the deposit balances, including brokered deposits, by major category as of December 31, (dollars in thousands):

​

(1) Includes uninsured deposits of $5.8 billion and $6.3 billion as of December 31, 2023 and December 31, 2022, respectively, and collateralized deposits of $861.6 million and $951.9 million as of December 31, 2023 and December 31, 2022, respectively. Amounts are based on estimated amounts of uninsured deposits as of the reported period.

Maturities of time deposits in excess of FDIC insurance limits were as follows as of December 31, (dollars in thousands):

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CAPITAL RESOURCES

Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. Our management review our capital adequacy on an ongoing basis with reference to size, composition, and quality of our capital resources and consistency with regulatory requirements and industry standards. We seek to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, while allowing us to effectively leverage our capital to maximize return to shareholders.

On January 26, 2024, we announced that our Board of Directors declared a quarterly dividend on our outstanding shares of our Series A preferred stock. The dividend of $171.88 per share (equivalent to $0.43 per outstanding depositary share) is payable on March 1, 2024 to preferred shareholders of record as of February 15, 2024. Our Board of Directors also declared a quarterly dividend of $0.32 per share of common stock, which is payable on February 23, 2024 to common shareholders of record as of February 9, 2024.

Under the Basel III capital rules, we must comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 7.0% of risk-weighted assets; (ii) a Tier 1 capital ratio of 8.5% of risk-weighted assets; (iii) a total capital ratio of 10.5% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These ratios, with the exception of the leverage ratio, include a 2.5% capital conservation buffer, which is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

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On August 26, 2020, the federal bank regulatory agencies adopted a final rule that allowed us to phase in the impact of adopting the CECL methodology up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. We elected to phase in the regulatory capital impact as permitted under this final rule. The CECL transition amount is being phased out of regulatory capital over a three-year period that began in 2022 and ends in 2024.

The following table summarizes our regulatory capital and related ratios as of December 31, (dollars in thousands):

​

(1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio results for Common equity, Tier 1, and Total risk-based capital. The lowest of the three measures represents the Company’s capital conservation buffer ratio.

(+) Refer to “Non-GAAP Financial Measures” within this Item 7 for more information about this non-GAAP financial measure, including a reconciliation of this measure to the most directly comparable financial measure calculated in accordance with GAAP.

​

For more information about our off-balance sheet obligations and cash requirements refer to section “Liquidity” included within this Item 7.

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MARKET RISK

Interest Sensitivity

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. Our market risk is composed primarily of interest rate risk. Our ALCO is responsible for reviewing our interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk. Our Board of Directors reviews and approves the policies established by ALCO.

We monitor interest rate risk using three complementary modeling tools: static gap analysis, earnings simulation modeling, and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk models has limitations, taken together, they represent a reasonably comprehensive view of the magnitude of our interest rate risk, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. We use the static gap analysis, which measures aggregate re-pricing values, less often because it does not effectively consider the optionality embedded into many assets and liabilities and, therefore, we do not address it here. We use earnings simulation and economic value simulation models on a regular basis, which more effectively measure the cash flow and optionality impacts, and these models are discussed below.

We determine the overall magnitude of interest sensitivity risk and then we create policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These policies and practices are based on management’s expectations regarding future interest rate movements, the states of the national, regional

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and local economies, and other financial and business risk factors. We use simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on our net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.

Earnings Simulation Modeling

Management uses earnings simulation modeling to measure the sensitivity of our net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but we believe it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis noted above.

We derive the assumptions used in the model from historical trends and management’s outlook, including expected loan growth, loan prepayment rates, projected loan origination spreads, deposit growth rates, changes to deposit product betas and non-maturity deposit decay rates, and projected yields and rates. These assumptions may not be realized and unanticipated events and circumstances may also occur that cause the assumptions to be inaccurate. The model also does not take into account any future actions of management to mitigate the impact of interest rate changes. Our ALCO monitors the assumptions at least quarterly and periodically adjusts them as it deems appropriate. In the modeling, we assume that all maturities, calls, and prepayments in the securities portfolio are reinvested in like instruments, and we base the MBS prepayment assumptions on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. We also use different interest rate scenarios and yield curves to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the short-term market rate changes and these differences are reflected in the different rate scenarios. We adjust deposit betas, decay rates and loan prepayment speeds periodically in our models for non-maturity deposits and loans.

We use our earnings simulation model to estimate earnings in rate environments where rates are instantaneously shocked up or down around a “most likely” rate scenario, based on implied forward rates and futures curves. The analysis assesses the impact on net interest income over a 12-month period after an immediate increase or “shock” in rates, of 100 bps up to 300 bps. The model, under all scenarios, does not drop the index below zero.

The following table represents the interest rate sensitivity on our net interest income across the rate paths modeled for balances for the years ended December 31, (dollars in thousands):

​

​

If an institution is asset sensitive its assets reprice more quickly than its liabilities and net interest income would be expected to increase in a rising interest rate environment and decrease in a falling interest rate environment. If an institution is liability sensitive its liabilities reprice more quickly than its assets and net interest income would be expected to decrease in a rising interest rate environment and increase in a falling interest rate environment.

From a net interest income perspective, we were less asset sensitive as of December 31, 2023 compared to 2022. This shift is due, in part, to the changing market characteristics of certain loan and deposit products and, in part, due to various other balance sheet strategies. We expect net interest income to increase with an immediate increase or shock in market rates. In a decreasing interest rate environment, we expect a decline in net interest income as interest-earning assets re-price more quickly than interest-bearing deposits.

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Economic Value Simulation Modeling

We use economic value simulation modeling to calculate the estimated fair value of assets and liabilities over different interest rate environments. We calculate the economic values based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. We use the same assumptions in the economic value simulation model as in the earnings simulation model. The economic value simulation model uses instantaneous rate shocks to the balance sheet.

The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances as of December 31, (dollars in thousands):

​

​

As of December 31, 2023, our economic value of equity is generally less asset sensitive in a rising interest rate environment compared to its position as of December 31, 2022, primarily due to the composition of our Consolidated Balance Sheets and also due to the pricing characteristics and assumptions of certain deposits. A decrease in interest rates may have an adverse impact if our asset yields reprice faster than our deposits or if we are not able to reduce our deposit rates in a declining ratio scenario.

LIQUIDITY

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Our largest source of liquidity on a consolidated basis is the customer deposit base generated by our wholesale and consumer businesses. These deposits provide relatively stable and low-cost funding. Total deposits at December 31, 2023 were $16.8 billion, an increase of $886.5 million or 5.6% from December 31, 2022. Average deposits during the year ended December 31, 2023 were $16.7 billion, an increase of $202.2 million or 1.2% from the year ended December 31, 2022. Total deposits at December 31, 2023 increased from the prior year primarily due to increases in interest bearing customer deposits and brokered deposits, partially offset by decreases in demand deposits. Refer to “Deposits” within this Item 7 for additional information on this topic.

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Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, LHFS, and securities and loans maturing or re-pricing within one year. Additional sources of liquidity available to us include our capacity to borrow additional funds, when necessary, through federal funds lines with several correspondent banks, a line of credit with the FHLB, the Federal Reserve Discount Window, the purchase of brokered certificates of deposit, corporate line of credit with a large correspondent bank, and debt and capital issuance. Management believes our overall liquidity to be sufficient to satisfy our depositors’ requirements and to meet our customers’ credit needs.

Starting in the first quarter of 2023, we were eligible to borrow from the Federal Reserve’s BTFP, which provided additional contingent liquidity through the pledging of certain qualifying securities. The BTFP is a one-year program ending March 11, 2024 that allows us to borrow funds at any time during the term with no repayment penalty. As of December 31, 2023, liquidity of $522.9 million was available based on the par-value of qualifying securities from BTFP. We had not used the BTFP facility as of December 31, 2023.

We closely monitor changes in the industry and market conditions that may impact our liquidity and will use other borrowing means or other liquidity and funding strategies to fund our liquidity needs as needed. We are also closely tracking the potential impacts on our liquidity of declines in the fair value of our securities portfolio due to rising market interest rates and developments in the banking industry that may change the availability of traditional sources of liquidity or market expectations with respect to available sources and amounts of additional liquidity.

As of December 31, 2023, liquid assets totaled $5.8 billion or 27.6% of total assets, and liquid earning assets totaled $5.7 billion or 29.7% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As of December 31, 2023, loan payments of approximately $5.1 billion or 32.8% of total loans are expected within one year based on contractual terms, adjusted for expected prepayments, and approximately $341.5 million or 10.7% of total securities are scheduled to be paid down within one year based on contractual terms, adjusted for expected prepayments.

For additional information and the available balances on various lines of credit, please refer to Note 8 “Borrowings” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. For additional information on cash requirements for known contractual and other obligations, please refer to “Capital Resources” within this Item 7.

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Cash Requirements

Our cash requirements outside of lending transactions consist primarily of borrowings, debt, and capital instruments which are used as part of our overall liquidity and capital management strategy.  The cash required to repay these obligations will be sourced from future debt and capital issuances and from other general liquidity sources as described under “Liquidity” within this Item 7.

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The following table presents our contractual obligations related to our major cash requirements and the scheduled payments due at the various intervals over the next year and beyond as of December 31, 2023 (dollars in thousands):

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(1) Excludes related unamortized premium/discount and interest payments.

(2) Represents lease payments due on non-cancellable operating leases at December 31, 2023. Excluded from these tables are variable lease payments or renewals.

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For more information pertaining to the previous table, refer to Note 6 “Leases” and Note 8 “Borrowings” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

Off-Balance Sheet Obligations

In the normal course of business, we are party to financial instruments with off-balance sheet risk to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in our Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of our involvement in particular classes of financial instruments. For more information on these commitments, refer to Note 9 “Commitments and Contingencies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is represented by the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support off-balance sheet financial instruments with credit risk.

The following table represents our other commitments with balance sheet or off-balance sheet risk as of December 31, (dollars in thousands):

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(1) Includes unfunded overdraft protection.

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We are also a lessor in sales-type and direct financing leases for equipment, as noted in Note 6 “Leases” in the “Notes of the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. Our future commitments related to the aforementioned leases totaled $473 million and $296 million, respectively, at December 31, 2023 and 2022.

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Impact of Inflation and Changing Prices

Our financial statements included in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K below have been prepared in accordance with GAAP, which requires the financial position and operating results to be measured principally in terms of historic dollars without considering the change in the relative purchasing power of money over time due to inflation. Inflation affects our results of operations mainly through increased operating costs, but since nearly all of our assets and liabilities are monetary in nature, changes in interest rates generally affect our financial condition to a greater degree than changes in the rate of inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Management reviews pricing of our products and services, in light of current and expected costs due to inflation, to seek to mitigate the inflationary impact on our financial performance.

NON-GAAP FINANCIAL MEASURES

In this Form 10-K, we have provided supplemental performance measures on a tax-equivalent, tangible, operating, adjusted or pre-tax pre-provision basis. These non-GAAP financial measures are a supplement to GAAP, which we used to prepare our financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, our non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. We use the non-GAAP financial measures discussed herein in the analysis of our performance. Management believes that these non-GAAP financial measures provide additional understanding of our ongoing operations, enhance comparability of our results of operations with prior periods and show the effects of significant gains and charges in the periods presented without the impact of items or events that may obscure trends in our underlying performance.

We believe net interest income (FTE) and total revenue (FTE), which are used in computing net interest margin (FTE), provide valuable additional insight into the net interest margin by adjusting for differences in the tax treatment of interest income sources. The entire FTE adjustment is attributable to interest income on earning assets, which is used in computing the yield on earning assets. Interest expense and the related cost of interest-bearing liabilities and cost of funds ratios are not affected by the FTE components.

The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the years ended December 31, (dollars in thousands):

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Tangible assets and tangible common equity are used in the calculation of certain profitability, capital, and per share ratios. We believe tangible assets, tangible common equity and the related ratios are meaningful measures of capital adequacy because they provide a meaningful basis for period-to-period and company-to-company comparisons, which we believe will assist investors in assessing our capital and our ability to absorb potential losses. We believe tangible common equity is an important indication of our ability to grow organically and through business combinations as well as our ability to pay dividends and to engage in various capital management strategies.

The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures as of December 31, (dollars in thousands):

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Adjusted operating measures exclude, as applicable, expenses related to strategic cost saving initiatives (principally composed of severance charges related to headcount reductions, costs related to modifying certain third party vendor contracts, and charges for exiting certain leases), merger-related costs, a legal reserve associated with our previously disclosed settlement with the CFPB, a FDIC special assessment, strategic branch closing and related facility consolidation costs (principally composed of real estate, leases and other assets write downs, as well as severance and expense reduction initiatives), losses related to balance sheet repositioning (principally composed of losses on debt extinguishment), (loss) gain on sale of securities, gain on sale-leaseback transaction, gain on sale of DHFB, and gain on the sale of Visa, Inc. Class B common stock. We believe these non-GAAP adjusted measures provide investors with important information about our continuing results of operations.

The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the years ended December 31, (dollars in thousands, except per share amounts):

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Adjusted operating noninterest expense excludes, as applicable, expenses related to the amortization of intangible assets, strategic cost saving initiatives (principally composed of severance charges related to headcount reductions, costs related to modifying certain third party vendor contracts, and charges for exiting certain leases), merger-related costs, a legal reserve associated with our previously disclosed settlement with the CFPB, a FDIC special assessment, strategic branch closing and related facility consolidation costs (principally composed of real estate, leases and other assets write downs, as well as severance and expense reduction initiatives), and losses related to balance sheet repositioning (principally composed of losses on debt extinguishment). Adjusted operating noninterest income excludes, as applicable, (loss) gain on sale of securities, gain on sale-leaseback transaction, gain on sale of DHFB, and gain on the sale of Visa, Inc. Class B common stock. These measures are similar to the measures we use when analyzing corporate performance and are also similar to the measure we use for incentive compensation. We believe this adjusted measure provides investors with important information about the continuing economic results of our operations.

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The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the years ended December 31, (dollars in thousands):

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