Atlantic Union Bankshares Corp (AUB) FY 2024 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 the following 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, fair value measurements, and acquisition accounting 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.

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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 and also consider the need to qualitatively adjust the expected credit losses for information not already captured in the loan-level probability of default/loss given default methodology based on a qualitative framework that adheres to the Interagency Policy Statement on Allowances for Credit Losses.

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 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. We 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 14 “Fair Value Measurements” 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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Acquisition Accounting

We account for mergers and acquisitions that qualify as a business combination under ASC 805, Business Combinations, which requires the use of the acquisition method of accounting. Under the acquisition method, we record all identifiable assets acquired, including intangible assets and the liabilities assumed at their fair values as of the acquisition date. Determining fair values of net assets acquired often involves estimates based on third-party valuations, such as appraisals or internal valuations based on discounted cash flow analysis or other valuation techniques. These methodologies are inherently subjective and involve significant assumptions, adjustments, and judgement around the selection of assumptions including, among others, discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change. The determination of the useful lives over which an intangible asset will be amortized is also subjective. While the selected fair values represented our best estimate of fair value as of the acquisition date, these estimates are inherently uncertain. In addition, the acquisition method of accounting allows for a measurement period to adjust acquisition accounting for up to one year after the acquisition date, for new information that existed at the acquisition date but may not have been known or available at that time.

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We evaluate acquired loans at the acquisition date and classify them as either (1) loans that have experienced a more-than insignificant amount of credit deterioration since origination (“PCD” loans) or (2) loans that have not experienced a more-than an insignificant amount of credit deterioration since origination (“non-PCD” loans). The fair value for acquired loans is estimated using a discounted cash flow analysis that considers factors including loan type, interest rate type, prepayment speeds, duration, and current discount rates. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. The fair value adjustment is recorded as a premium or discount to the unpaid principal balance of each acquired loan. PCD loans are recorded at the amount paid. An ALLL on PCD loans is determined using the same methodology as other LHFI, however, there is no initial impact to net income to record the allowance at acquisition. The sum of the PCD loan’s purchase price and ALLL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the PCD loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. If the PCD loan has revolving privileges, the discount/premium is amortized/accreted using the straight-line method; otherwise, the effective interest method is used. Subsequent changes to the ALLL on PCD loans are recorded through provision expense. The allowance for credit losses for non-PCD loans is recognized as provision expense upon acquisition using the Company’s existing ACL methodology. For further information, refer to Note 2 “Acquisitions” 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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RECENT ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT FULLY ADOPTED)

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. ASU No. 2023-09 is not expected to have an impact on the Company’s financial condition or results of operations but could change certain disclosures in the Company’s SEC filings.

In November 2024, the FASB issued ASU No. 2024-03 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures. This guidance requires enhanced disclosure of income statement expenses. The amendments are effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. We are evaluating the impact of ASU No. 2024-03 on our consolidated financial statements.

RESULTS OF OPERATIONS

Economic Environment and Industry Events

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We are continually monitoring the impact of various global and national events on our results of operations and financial condition, including inflationary pressures, changes in market interest rates, geopolitical conflicts, deposit competition and liquidity strains, and changes in political leadership. The timing and impact of such events on our results of operation and financial condition will depend on future developments, which are highly uncertain and difficult to predict. In late 2024, the Federal Reserve’s interest rate policy shifted as inflationary pressure began to ease and economic growth moderated. Following a period of aggressive rate hikes aimed at curbing inflation in 2022 and 2023, the Federal Reserve lowered rates three times between September and December in 2024 by a total of 100 bps, compared to 2023, resulting in the Federal Funds target rate range of 4.25% to 4.50%. The FOMC, at its January 2025 meeting, decided not to further lower the Federal Funds target range, but instead decided to maintain the target range at 4.25% to 4.50%. While inflation eased substantially in 2024, it was estimated at 2.9% as of December 2024, over the FOMC’s 2.0% target, and such estimate increased to 3.0% as of January 2025. The FOMC has noted that it will continue to carefully assess incoming data, the evolving outlook, and the balance of risks in considering additional adjustments to the target range for the Federal Funds rate and that its assessments 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 noted that it would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the FOMC’s goals. The FOMC also confirmed the continued reduction to the Federal Reserve’s holdings of U.S. Treasury securities and agency debt and agency MBS. We will continue to deploy various asset liability management strategies to seek to manage our risk related to interest rate fluctuations and monitor balance sheet trends, deposit flows, and liquidity needs to seek to ensure that we are able to meet the needs of our customers and maintain financial flexibility. 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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Financial institutions continue to deal with macroeconomic headwinds. In 2024, the higher-for-longer interest rate environment and heightened competition for deposits has led to a continued shift within deposit composition toward higher cost products, although the pace of movement has slowed in recent months. The interest rate environment has also affected the affordability of credit to consumers and businesses, moderating loan demand. At December 31, 2024, our LHFI and total deposits increased from December 31, 2023 by $2.8 billion and $3.6 billion, respectively, primarily due to our acquisition of American National, and our short-term borrowings decreased by $804.6 million from December 31, 2023, due to paydowns on FHLB borrowings. At December 31, 2024, non-interest-bearing deposits comprised 21.0% of total deposits, compared to 23.6% at December 31, 2023. As of December 31, 2024, we estimate that approximately 70.6% of our deposits were insured or collateralized, and that we maintained available liquidity sources to cover approximately 139.8% of uninsured and uncollateralized deposits. In addition, to further bolster our funding position, we augmented customer deposit growth by also increasing brokered deposits to $1.2 billion at December 31, 2024, an increase of $669.5 million from December 31, 2023.

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The recent change in U.S. presidential administration may lead to potentially significant changes to the existence, priorities, scope, practices and/or staffing levels of various regulatory agencies, which may have significant effects on our business and economic and market conditions generally. We cannot predict these changes or their ultimate scope. See “Item 1A – Risk Factors” of this Form 10-K.

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.

Strategic Initiatives

Acquisition of American National Bankshares Inc.

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On April 1, 2024, we completed our acquisition of American National, the holding company for American National Bank and Trust Company. American National’s results of operations are included in our consolidated results since the date of acquisition, and therefore, our fourth quarter and full year 2024 results reflect increased levels of average balances, net interest income, and expense compared to our results for the corresponding period in 2023. For more information, reference Note 2 “Acquisitions” in “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

Pending Merger with Sandy Spring Bancorp, Inc.

On October 21, 2024, we entered into a merger agreement with Sandy Spring. Under the merger agreement, Sandy Spring will merge with and into the Company, with the Company continuing as the surviving entity. Immediately following the merger, Sandy Spring’s wholly owned banking subsidiary, Sandy Spring Bank, will merge with and into the Bank, with the Bank continuing as the surviving bank.

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Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of Sandy Spring common stock, other than shares of restricted Sandy Spring common stock and certain shares held by the Company or Sandy Spring, will be converted into the right to receive 0.900 shares of our common stock plus cash in lieu of fractional shares.

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All necessary regulatory and shareholder or stockholder approvals for the merger have been received by the Company and Sandy Spring, as applicable, and the merger is expected to close on April 1, 2025, subject to the satisfaction or waiver of customary closing conditions.

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As of December 31, 2024, Sandy Spring had total assets of approximately $14.1 billion, total loans of approximately $11.5 billion, and total deposits of approximately $11.7 billion.

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Forward Sale Agreements

On October 21, 2024, in connection with the execution of the merger agreement with respect to Sandy Spring, we entered into an initial forward sale agreement with Morgan Stanley & Co. LLC (the “Forward Purchaser”), relating to an aggregate of 9,859,155 shares of our common stock. On October 21, 2024, we priced the public offering of shares of our common stock in connection with such forward sale agreement and entered into an underwriting agreement with Morgan Stanley & Co. LLC, as representative for the underwriters named therein, the Forward Purchaser and Morgan Stanley & Co. LLC as forward seller (the “Forward Seller”), relating to the registered public offering and sale of 9,859,155 shares of our common stock at a public offering price of $35.50 per share (before underwriting discounts and commissions). The underwriters were granted a 30-day option to purchase up to an additional 1,478,873 shares of our common stock. On October 21, 2024, the underwriters exercised in full their option to purchase the additional 1,478,873 shares of our common stock pursuant to the underwriting agreement and, in connection therewith, we entered into an additional forward sale agreement with the Forward Purchaser relating to 1,478,873 shares of our common stock, on terms substantially similar to those contained in the initial forward sale agreement (such additional forward sale agreement together with the initial forward sale agreement, the “Forward Sale Agreements”).

We did not initially receive any proceeds from the sale of our common stock sold by the Forward Seller to the underwriters named in the underwriting agreement. We expect to physically settle the Forward Sale Agreements (by the delivery of shares of our common stock) and receive proceeds from the sale of those shares of our common stock upon one or more forward settlement dates within approximately 18 months from the date of the Forward Sale Agreements at the then applicable forward sale price. The forward sale price was initially $34.08 per share, which is equal to the public offering price per share, less the underwriting discount per share, and would result in net proceeds (before offering expenses) of approximately $386.4 million to the Company under the Forward Sale Agreements. No physical settlement has occurred through the date on which our consolidated financial statements for the year ended December 31, 2024.

In the fourth quarter of 2024, average diluted common shares outstanding increased, driven by the dilutive accounting impact of the Forward Sale Agreements under the treasury stock method of accounting, which required us to reflect the potential shares of our common stock to be issued under the Forward Sale Agreements, even though no shares of our common stock have been issued to date. Accordingly, at December 31, 2024, 1,759,194 shares of our common stock under the Forward Sale Agreements were included in the calculation of diluted earnings per share.

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SUMMARY OF 2024 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, 2024 and 2023

Net income available to common shareholders was $197.3 million for 2024, an increase of $7.3 million or 3.8% and represented basic and diluted EPS of $2.29 and $2.24, respectively, compared to net income of $190.0 million and basic and diluted EPS of $2.53 for 2023. The increase in net income was primarily related to the American National acquisition. Adjusted operating earnings available to common shareholders(+) totaled $241.3 million for 2024, compared to $221.2 million for 2023, and adjusted diluted operating EPS(+) was $2.74 for 2024, compared to $2.95 for 2023.

Net interest income for 2024 totaled $698.5 million, an increase of $87.5 million or 14.3% from 2023. The increase in net interest income was primarily the result of an increase in interest-earning assets, higher yield on interest-earning assets, and higher net accretion income, partially offset by the impact of higher interest-bearing liabilities and higher cost of funds. The increase in interest-earning assets and interest-bearing deposits was primarily related to the acquisition of American National. The increased asset yield and cost of funds reflect the impact of the FOMC rate increases throughout 2022 and 2023 prior to the Federal Reserve lowering the Federal Funds target rate 100 bps between September and December in 2024. For additional details on net interest income, refer to the section “Net Interest Income” included within this Item 7 of this Form 10-K.

Noninterest income increased $28.0 million or 30.8% to $118.9 million for 2024, compared to $90.9 million for 2023, primarily driven by a decrease in loss on the sale of AFS securities, as well as the impact of the American National acquisition, partially offset by a decrease in other operating income primarily driven by a gain recognized in 2023 related to our sale-leaseback transactions. 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 $77.1 million or 17.9% to $507.5 million for 2024, compared to $430.4 million for 2023, primarily driven by an increase in merger-related costs due to the American National acquisition and our pending merger with Sandy Spring, as well as an increase in salaries and benefits and other increases in various categories of noninterest expense, most of which were due to the impact of the American National acquisition. These increases were partially offset by a decrease in other expenses, due primarily to higher expenses in the prior year associated with strategic cost saving initiatives and a legal reserve related to our previously disclosed settlement with the CFPB. 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, 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. 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, which included gains related to the sale lease-back transactions, service charges on deposit accounts, and other service charges, commissions, and fees.

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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.

NET INTEREST INCOME

Net interest income, which represents our principal source of revenue, is the amount by which interest income exceeds interest expense. Our interest margin represents net interest income expressed as a percentage of average earning assets. Changes in the volume and mix of 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. In addition, our interest income includes the accretion of discounts on our acquired loans, which will also affect our net interest income and net interest margin.

We seek to fund increased loan volumes by growing our core deposits, but, subject to internal policy limits on the amount of wholesale funding we may maintain, we may use wholesale funding sources to fund shortfalls, if any, or provide additional liquidity. To the extent that our dependence on wholesale funding sources increased, as was the case during 2024 and 2023, our net interest margin would likely be negatively impacted as it was in 2024 and 2023, as we may not be able to reduce the rates we pay on these funding sources as quickly as we can on core deposits should rates begin to decline.

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 2024, our net interest income was $698.5 million, an increase of $87.5 million from 2023. Net interest income (FTE)(+) for 2024 was $713.8 million, an increase of $87.8 million from 2023. The increases in both net interest income and net interest income (FTE)(+) were primarily the result of a $3.0 billion increase in average interest-earning assets, higher yields on interest-earning assets, and higher net accretion income, partially offset by a $2.8 billion increase in average interest-bearing liabilities and higher cost of funds. The increase in average interest-earning assets and interest-bearing liabilities were primarily related to the acquisition of American National. In 2024, our net interest margin decreased 6 bps to 3.27% from 3.33% in 2023, and our net interest margin (FTE)(+) decreased 7 bps to 3.34% in 2024 from 3.41% in 2023. The decreases in net interest margin and net interest margin (FTE)(+) were primarily driven by the increase in the cost of funds, reflecting higher deposit rates and changes in deposit mix as depositors moved to higher yielding deposit products, partially offset by an increase in yield on interest-earning assets, primarily due to the increase in loan balances and accretion income, primarily due to the acquisition of American National, as well as the impact of higher market interest rates.

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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.

Our net interest margin and net interest margin (FTE)(+) includes the impact of acquisition accounting fair value adjustments. Net accretion income related to acquisition accounting was approximately $40.3 million for 2024 compared to approximately $3.5 million for 2023, an increase of $36.8 million due to the American National acquisition. The impact of accretion and amortization 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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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 annualized and calculated from actual, not rounded amounts in thousands, which appear above.

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

(4) Interest income on loans includes $44.1 million, $4.4 million, and $7.9 million for the years ended December 31, 2024, 2023, and 2022, respectively, in accretion of the fair value adjustments related to acquisitions.

(5) Interest expense on time deposits includes $2.7 million, $31,000, and $44,000 for the years ended December 31, 2024, 2023, and 2022, respectively, in accretion of the fair value adjustments related to acquisitions.

(6) Interest expense on borrowings includes $1.1 million, $852,000, and $828,000 for the years ended December 31, 2024, 2023, and 2022, respectively, in amortization of the fair value adjustments related to acquisitions.

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The Volume Rate Analysis table below presents changes in our net 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 includes the impact of higher accretion of the acquisition-related fair value adjustments of $39.7 million, $3.5 million, and $9.1 million for the years ended December 31, 2024, 2023, and 2022, respectively.

(2) The rate-related changes in interest expense on deposits includes the impact of higher accretion of the acquisition-related fair value adjustments of $2.7 million, $13,000, and $57,000 for the years ended December 31, 2024, 2023, and 2022, respectively.

(3) The rate-related changes in interest expense on other borrowings include the impact of higher amortization of the acquisition-related fair value adjustments of $226,000, $24,000, and $22,000 for the years ended December 31, 2024, 2023, and 2022, respectively.

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NONINTEREST INCOME

Years Ended December 31, 2024 and 2023

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For 2024, our noninterest income increased $28.0 million or 30.8% to $118.9 million compared to $90.9 million for 2023, primarily driven by a $34.5 million decrease in loss on the sale of securities, which included $41.0 million of losses resulting from our balance sheet repositioning strategy executed in 2023, compared to $6.5 million of losses in 2024 due to our restructuring of the American National securities portfolio, as well as increases in various other categories of noninterest income, due primarily to the impact of the American National acquisition discussed below. These increases were partially offset by a $25.2 million decrease in other operating income primarily driven by a $29.6 million gain recognized in 2023 related to our sale-leaseback transactions.

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Our adjusted operating noninterest income(+) for 2024, which excludes losses on sale of securities ($6.5 million in 2024 and $41.0 million in 2023) and the gain on sale-leaseback transactions ($29.6 million in 2023), increased $23.1 million or 22.6%, to $125.4 million, compared to $102.3 million for 2023. The increase in adjusted operating noninterest income(+) was primarily due to the impact of the American National acquisition, which drove the majority of the $7.8 million increase in fiduciary and asset management fees, the $4.0 million increase in service charges on deposit accounts, and the $2.5 million increase in interchange fees. Outside of the American National acquisition, other operating income increased $4.4 million primarily due to an increase in equity method investment income. BOLI income increased $3.9 million primarily due to death benefits received in 2024, and mortgage banking income increased $1.5 million due to an increase in mortgage loan origination volumes and gain on sale margins. These increases were partially offset by a $602,000 decrease in loan-related interest rate swap fees due to lower transaction volumes.

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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.

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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NONINTEREST EXPENSE

Years Ended December 31, 2024 and 2023

NM = Not Meaningful

For 2024, our noninterest expense increased $77.1 million or 17.9% to $507.5 million, compared to $430.4 million for 2023, primarily driven by a $37.0 million increase in merger-related costs due to the American National acquisition and our pending merger with Sandy Spring, as well as the increase in salaries and benefits and increases in various other categories of noninterest expense, most of which were due to the impact of the American National acquisition discussed below. These increases were partially offset by a $19.0 million decrease in other expenses primarily due to expenses in 2023 associated with strategic cost saving initiatives and a legal reserve related to our previously disclosed settlement with the CFPB.

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Our adjusted operating noninterest expense(+) for 2024, which excludes merger-related costs ($40.0 million in 2024 and $3.0 million in 2023), amortization of intangible assets ($19.3 million in 2024 and $8.8 million in 2023), expenses associated with strategic cost saving initiatives principally composed of severance charges related to headcount reductions and charges for exiting leases ($12.6 million in 2023), a legal reserve related to our previously disclosed settlement with the CFPB ($8.3 million in 2023), and FDIC special assessments ($840,000 in 2024 and $3.4 million in 2023), increased $53.1 million or 13.5% to $447.4 million, compared to $394.3 million for 2023. The increase in adjusted operating noninterest expense(+) was primarily due to the impact of the American National acquisition, which drove the majority of the $37.3 million increase in salaries and benefits, the $5.1 million increase in occupancy expenses, the $5.0 million increase in technology and data processing, and the $2.9 million increase in FDIC assessment premiums and other insurance. Outside of the American National acquisition, marketing and advertising expense increased $1.7 million and professional services increased $1.3 million related to projects that occurred in 2024. These increases were partially offset by a $903,000 decrease in other expenses primarily due to a decrease in non-credit related losses on customer transactions.

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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.

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 to a decrease 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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SEGMENT RESULTS

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As discussed in Note 18 “Segment Reporting and Revenue” within Item 8 “Financial Statements and Supplementary Data” of this Form 10-K, 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 revised our prior segment operating results for the year ended December 31, 2022, resulting in a reallocation of noninterest income ($12.5 million) and noninterest expense ($16.0 million) from the Consumer Banking segment to the Wholesale Banking segment. Based on that reorganizational change, we also reallocated $9.6 million of goodwill from the Consumer Banking segment to the Wholesale Banking segment and revised our prior segment information for the year ended December 31, 2022. Goodwill was evaluated for impairment prior to and immediately following the organizational change. Refer to Note 6 “Goodwill and Intangible Assets” within Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

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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 and capital market services to wholesale customers primarily throughout Virginia, Maryland, North Carolina, and South Carolina. These customers include CRE and commercial and industrial customers. This segment also includes our equipment finance subsidiary, which has nationwide exposure. The wealth management business also resides 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 above.

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Years Ended December 31, 2024 and 2023

Wholesale Banking income before income taxes increased $78.4 million to $187.7 million for 2024, compared to $109.3 million for 2023. The increase was primarily due to an increase in net interest income primarily driven by the impact of the American National acquisition and favorable spreads on both the loan and deposit portfolios, partially offset by an increase in the provision for credit losses, which includes initial provision expense on non-PCD loans and unfunded commitments acquired from American National, as well as a specific reserve on an impaired loan in the commercial and industrial portfolio recorded in the fourth quarter. Wholesale Banking’s noninterest income also increased in 2024 compared to 2023, primarily due to the impact of the American National acquisition, which drove the majority of the increases in fiduciary and asset management fees and service charges on deposit accounts. The increases discussed above were partially offset by an increase in noninterest expense primarily due to the impact of the American National acquisition, which drove the majority of the increase in salaries and benefits.

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Years Ended December 31, 2023 and 2022

Wholesale Banking income before income taxes decreased $59.1 million to $109.3 million for 2023, compared to $168.4 million for 2022. The decrease was primarily due to a decrease in 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, 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.

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

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LHFI, net of deferred fees and costs, for the Wholesale Banking segment increased $2.8 billion or 22.3% to $15.5 billion at December 31, 2024 compared to December 31, 2023 primarily driven by the American National acquisition and organic loan growth.

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Wholesale Banking deposits increased $790.0 million or 12.3% to $7.2 billion at December 31, 2024 compared to December 31, 2023 primarily due to an increase in interest checking accounts, primarily driven by the American National acquisition.

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Consumer Banking

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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.

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

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(1) Operating results include a reallocation to the Wholesale Banking segment, due to the January 1, 2023 organizational change discussed above.

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Years Ended December 31, 2024 and 2023

Consumer Banking income before income taxes increased $20.8 million to $100.2 million for 2024 compared to $79.4 million for 2023. The increase was primarily driven by an increase in net interest income primarily driven by the impact of the American National acquisition and favorable funding credits on deposits, partially offset by an increase in the provision for credit losses, which includes initial provision expense on non-PCD loans and unfunded commitments acquired from American National. Consumer Banking’s noninterest income also increased in 2024 compared to 2023, primarily due to the impact of the American National acquisition, which drove the majority of the increases in interchange fee income, fiduciary and asset management fees, and service charges on deposit accounts. The increases discussed above were partially offset by an increase in noninterest expense primarily due to the impact of the American National acquisition, which drove the majority of the increase in salaries and benefits and occupancy expense.

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Years Ended December 31, 2023 and 2022

Consumer Banking income before income taxes increased $26.8 million to $79.4 million for 2023 compared to $52.6 million for 2022. The increase was primarily driven by an increase in net interest income after provision for credit losses 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 after provision for credit losses was a decrease in the provision for credit losses primarily driven by runoff in the third-party lending and auto portfolios related to the decision to exit this business. The increase in net interest income after provision for credit losses was partially offset by a decrease in noninterest income, 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. In addition, noninterest expense increased in 2023 from 2022, 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.

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

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LHFI, net of deferred fees and costs, for the Consumer Banking segment increased $126.4 million or 4.3% to $3.1 billion at December 31, 2024 compared to December 31, 2023 primarily due to increases in the residential 1-4 family consumer and residential 1-4 family revolving portfolios, primarily driven by the American National acquisition, partially offset by runoff in the third-party lending and auto portfolios related to the decision to exit this business.

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Consumer Banking deposits increased $2.1 billion or 21.2% to $11.9 billion at December 31, 2024 compared to December 31, 2023 with increases across all deposit categories, primarily driven by the American National acquisition.

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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.

As of each reporting date, we consider existing evidence, both positive and negative, that could impact our view regarding our future realization of deferred tax assets. Our bank subsidiary, Atlantic Union Bank, is subject to a bank franchise tax but not a state income tax in Virginia, its primary place of business. We, our subsidiaries, and Atlantic Union Bank’s non-bank subsidiaries are subject to Virginia income taxes and may be able to utilize existing state deferred tax assets, depending on a number of factors including those entities’ financial results. During 2024, we reviewed our business plan considering the American National acquisition and other business changes and noted shifts within our state income tax footprint and other factors that impacted projected future realization of state deferred tax items, including those attributable to operations in Virginia. As a result, we concluded it is more likely than not that the benefit for certain state net operating loss carryforwards will not be realized, and we recorded a valuation allowance via a non-cash charge to income tax expense. The valuation allowance totaled $4.4 million at December 31, 2024. We had no valuation allowance in 2023.

Our effective tax rate for the years ended December 31, 2024, 2023, and 2022 was 19.5%, 15.9%, and 16.2%, respectively. The increase in the effective rate for 2024 compared to 2023 is primarily due to the valuation allowance established in 2024, which resulted in a 170 bps increase in the effective tax rate, and the proportionality of tax-exempt income to pre-tax income.

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BALANCE SHEET

At December 31, 2024, our consolidated balance sheet includes the impact of the American National acquisition, which closed April 1, 2024, and includes preliminary goodwill of $288.8 million at December 31, 2024 associated with the American National acquisition.

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Assets

At December 31, 2024, we had total assets of $24.6 billion, an increase of $3.4 billion or 16.2% from December 31, 2023. The increase in total assets was primarily due the American National acquisition, as well as organic growth in LHFI.

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LHFI were $18.5 billion at December 31, 2024, an increase of $2.8 billion or 18.1% from December 31, 2023. For additional information on our loan activity, please refer to the section “Loan Portfolio” included within this Item 7 and Note 4 “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, 2024 were $3.3 billion, an increase of $164.9 million or 5.2% from December 31, 2023. AFS securities totaled $2.4 billion at December 31, 2024, an increase of $210.9 million or 9.5% from December 31, 2023. At December 31, 2024, total net unrealized losses on the AFS securities portfolio were $402.6 million, compared to $384.3 million at December 31, 2023. HTM securities totaled $803.9 million at December 31, 2024, a $33.5 million decrease from December 31, 2023. Total net unrealized losses on the HTM securities portfolio were $44.5 million at December 31, 2024, compared to $29.3 million at December 31, 2023.

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Liabilities and Stockholders’ Equity

At December 31, 2024, we had total liabilities of $21.4 billion, an increase of $2.8 billion or 15.2% from December 31, 2023, which was primarily driven by an increase in deposits of $3.6 billion, primarily due to the American National assumed deposits, as well as increased usage of brokered deposits, partially offset by a decrease in total borrowings of $777.3 million due to paydowns during 2024.

Total deposits at December 31, 2024 were $20.4 billion, an increase of $3.6 billion or 21.3% from December 31, 2023. Average deposits at December 31, 2024 increased $3.6 billion or 21.3% from December 31, 2023. Total deposits increased from December 31, 2023 due to a $2.6 billion increase in interest-bearing customer deposits and $313.9 million increase in demand deposits, primarily due to the American National acquisition, as well as an increase of $669.5 million in brokered deposits. For additional information on deposits, refer to the section “Deposits” included within this Item 7 of this Form 10-K.

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Total borrowings at December 31, 2024 were $534.6 million, a decrease of $777.3 million or 59.3% compared to $1.3 billion at December 31, 2023. The decrease in borrowings was primarily due to repayment of short-term FHLB advances using funds from customer deposit growth. For additional information on our borrowing activity, please refer to Note 9 “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, 2024, our stockholders’ equity was $3.1 billion, an increase of $586.6 million or 22.9% from December 31, 2023. The net increase was primarily attributable to the issuance of common stock as merger consideration in the American National acquisition.

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During 2024, 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 2024, we also declared and paid cash dividends of $1.30 per common share, an increase of $0.08 per share or 6.6% over 2023.

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SECURITIES

At December 31, 2024, we had total investments of $3.3 billion or 13.6% of total assets, compared to $3.2 billion or 15.0% of total assets at December 31, 2023. This increase was primarily due to the American National acquisition. We seek to diversify our investment portfolio to minimize risk, and 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 tax-equivalent 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 11 “Derivatives” in “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

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

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The following table summarizes the weighted average yields(1) for AFS securities by contractual maturity date of the underlying securities as of December 31, 2024:

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(1) Yields on tax-exempt securities have been computed on an estimated 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, 2024:

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

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

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As of December 31, 2024, we maintained a diversified municipal bond portfolio with approximately 66% 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 $18.5 billion and $15.6 billion at December 31, 2024 and 2023, respectively, with the growth primarily driven by the increase in LHFI from the acquisition of American National, as well as organic loan growth. Total CRE and commercial and industrial loans represented our largest loan categories at both December 31, 2024 and 2023. We remain committed to originating soundly underwritten loans to qualifying borrowers within our markets.

The following table presents the 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, 2024 (dollars in thousands):

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Our highest concentration of credit by loan type is in CRE. CRE loans consist of term loans secured by a mortgage lien on the real property and include both non-owner occupied and owner occupied CRE loans, as well as construction and land development, multifamily real estate, and residential 1-4 family-commercial loans. CRE loans are generally viewed as having more risk of default than residential real estate loans and depend on cash flows from the owner’s business or the property’s tenants to service the debt. The borrower’s cash flows may be affected significantly by general economic conditions, a downturn in the local economy, or in occupancy rates in the market where the property is located, any of which could increase the likelihood of default.

We seek to mitigate risks attributable to our most highly concentrated portfolios and our portfolios that pose unique risks to our balance sheet through our credit underwriting and monitoring processes, including oversight by a centralized credit administration function, approval process, 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. All construction lending risk is controlled by a centralized construction loan servicing department that independently reviews and approves each draw request, including assessing on-going budget adequacy, and monitors project completion milestones. When underwriting CRE loans, we require collateral values in excess of the loan amounts, cash flows in excess of expected debt service requirements, and equity investment in the project. As part of the CRE loan origination process, we also stress test loan interest rates and occupancy rates to determine the impact of different economic conditions on the borrower’s ability to maintain adequate debt service.

We also manage our CRE exposure through product type limits, individual loan-size limits for CRE product types, client relationship limits, and transactional risk acceptance criteria, as well as other techniques, including but not limited to, loan syndications/participations, collateral, guarantees, structure, covenants, and other risk reduction techniques. Our CRE loan policies are specific to individual product types and underwriting parameters vary depending on the risk profile of each asset class. We evaluate risk concentrations regularly in our CRE portfolio on both an aggregate portfolio level and on an individual client basis, and regularly review and adjust as appropriate our lending strategies and CRE product-specific approach to underwriting in light of market conditions and our overall corporate strategy and initiatives.

The average loan size of our CRE portfolio was approximately $1.1 million and $1.2 million, as of December 31, 2024 and 2023, respectively, and the median loan size in our CRE portfolio was approximately $242,000 as of December 31, 2024 and approximately $273,000 as of December 31, 2023.

The following table presents the composition of our CRE loan categories, including the industry classification for CRE non-owner occupied loans, and CRE loans as a percentage of total loans for the years ended December 31, (dollars in thousands):

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Because payments on loans secured by commercial and multifamily properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. In particular, the repayment of loans secured by non-owner occupied commercial properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the

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borrower’s ability to repay the loan may be impaired.  Due to these risks, we proactively monitor our non-owner occupied CRE and multifamily real estate exposures and evaluate these portfolios against our established lending policies, and we believe this monitoring and evaluation helps ensure that these portfolios are geographically diverse and granular. We do not currently monitor owner-occupied CRE loans based on geographical markets as the primary source of repayment for these loans is predicated on the cash flow from the underlying operating entity, which is generally less dependent on conditions in the relevant CRE market. These loans are generally located within our geographical footprint and are generally distributed across industries.

The following table presents the distribution of our CRE non-owner occupied, multifamily real estate, and office portfolio loans by market location based on the underlying loan collateral for the years ended December 31, (dollars in thousands):

(1) The office portfolio is a subset of our CRE non-owner occupied loans included in the column to the left.

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The shift to work-from-home and hybrid work environments have caused a decrease in the use of office space. As such, we have additional monitoring for our exposure to office space, within our non-owner occupied CRE portfolio, including periodic credit risk assessment of expiring office leases for most of the office portfolio. We do not currently finance large, high-rise, or major metropolitan central business district office buildings, and the office portfolio is generally in suburban markets with strong occupancy levels. The average loan size in our office portfolio was approximately $1.7 million and approximately $1.9 million as of December 31, 2024 and 2023, respectively, and the median loan size in our office portfolio was approximately $571,000 and approximately $647,000 as of December 31, 2024 and 2023, respectively. The average loan size in our multifamily portfolio was approximately $2.5 million and approximately $3.2 million as of December 31, 2024 and 2023, respectively, and the median loan size in our multifamily portfolio was approximately $646,000 and approximately $793,000 as of December 31, 2024 and 2023, respectively.

ASSET QUALITY

Overview

At December 31, 2024, NPAs as a percentage of total LHFI were 0.32%, an increase of 8 bps from the prior year and included nonaccrual loans of $58.0 million. Our net charge-offs remain low at 0.05% of total loans for 2024, consistent with the prior year. Our ACL at December 31, 2024 increased by $45.2 million from the prior year primarily due to a $13.1 million specific reserve on an impaired loan in the commercial and industrial portfolio, the American National acquisition, organic loan growth during 2024, and the impact of continued uncertainty in the economic outlook on certain portfolios.

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In connection with the American National acquisition, we recorded an initial ACL of $18.5 million that consisted of an ALLL of $17.1 million, which included a $3.9 million reserve on acquired PCD loans. We also recorded a $13.2 million reserve on non-PCD loans established through provision expense, which represents the CECL “double count” of the non-PCD credit mark, and a $1.4 million RUC through the provision for credit losses.

We continue to experience historically low levels of NPAs, despite the 8 bps increase in the current year primarily due to the $27.7 million commercial and industrial loan added to NPAs during the fourth quarter of 2024, for which a specific reserve was established as noted above. However, the economic environment could be impacted by a number of factors, such as elevated inflation, even as inflation rates began to improve in 2024, the potential impact of monetary policy as the Federal Reserve continues to evaluate changes in interest rates, and slower economic growth or recession, all of which could increase NPAs in future periods. We continue to refrain from originating or purchasing loans from foreign

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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.

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Nonperforming Assets

At December 31, 2024, our NPAs totaled $58.4 million, an increase of $21.5 million or 58.2% from December 31, 2023. NPAs as a percentage of total LHFI at December 31, 2024 were 0.32%, an increase of 8 bps from 0.24% at December 31, 2023. The increase in NPAs is primarily due to one nonaccrual loan within the commercial and industrial portfolio of $27.7 million that has a specific reserve of $13.1 million.

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):

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NPAs include non-accrual loans, which totaled $58.0 million and $36.9 million at December 31, 2024 and 2023, respectively. The following table shows the activity in nonaccrual loans for the years ended December 31, (dollars in thousands):

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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):

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Past Due Loans

At December 31, 2024, past due loans still accruing interest totaled $57.7 million or 0.31% of total LHFI, compared to $48.4 million or 0.31% of total LHFI at December 31, 2023. Of the total past due loans still accruing interest, $14.1 million or 0.08% of total LHFI were loans past due 90 days or more at December 31, 2024, compared to $13.9 million or 0.09% of total LHFI at December 31, 2023.

Troubled Loan Modifications

As of December 31, 2024 and 2023, we had TLMs with an amortized cost basis of $35.2 million and $51.2 million with an estimated $454,000 and $289,000 in allowance for those loans, respectively. As of December 31, 2024 and 2023, unfunded commitments on loans modified and designated as TLMs were $198,000 and $1.6 million, respectively.

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Net Charge-offs

For the year ended December 31, 2024, our net charge-offs were $8.8 million or 0.05% of total average loans, compared to $7.6 million or 0.05%, respectively, for the year ended December 31, 2023. The majority of our net charge-offs in 2024 are related to one relationship within the commercial real estate – non-owner occupied portfolio which was previously reserved for in the 2023 ACL, one relationship within the construction and land development portfolio, and overdrawn deposit accounts.

Provision for Credit Losses

We recorded a provision for credit losses of $50.1 million for the year ended December 31, 2024, an increase of $18.5 million or 58.4% from the prior year. The provision for credit losses for the year ended December 31, 2024 reflected $51.3 million in provision for loan losses offset by a $1.2 million release for unfunded commitments. The increased provision for credit losses is primarily due to organic loan growth during 2024, the impact of continued uncertainty in the economic outlook on certain portfolios, and a specific reserve on an impaired loan in the commercial and industrial portfolio recorded in the fourth quarter. Included in the provision for credit losses is $13.2 million of initial provision expense on non-PCD loans and $1.4 million on unfunded commitments, each relating to loans acquired from American National, which were recorded in the second quarter of 2024.

Allowance for Credit Losses

At December 31, 2024, the ACL was $193.7 million, comprised of an ALLL of $178.6 million and a reserve for unfunded commitments of $15.0 million. The ACL at December 31, 2024 increased by $45.2 million from December 31, 2023, primarily due to a new $13.1 million specific reserve on an impaired loan in the commercial and industrial portfolio and the initial $18.5 million ACL recorded in the American National acquisition, as well as organic loan growth in 2024 and the impact of continued uncertainty in the economic outlook on certain portfolios.

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

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

(1) Net charge-off rates are calculated by dividing net charge-offs by average LHFI for the period for each loan category.

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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.

(2) The percentage represents ALLL divided by the total LHFI for each category.

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The increase in the ALLL for the Commercial segment is primarily due to a specific reserve on an impaired loan, the American National acquisition, loan growth during 2024, and the impact of continued uncertainty in the economic outlook on certain portfolios. The increase in the ALLL from the prior year for the Consumer segment primarily reflects the impact from the American National acquisition.

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DEPOSITS

As of December 31, 2024, our total deposits were $20.4 billion, an increase of $3.6 billion or 21.3.% compared to December 31, 2023. Total interest-bearing deposits consisted of interest checking accounts, money market accounts, savings accounts, time deposits, and brokered deposits. Our time deposits balances with customers totaled $4.1 billion and accounted for 27.5% of total interest-bearing customer deposits at December 31, 2024, compared to $2.8 billion and 23.1% at December 31, 2023. We use purchased brokered deposits as part of our overall liquidity management strategy on an as needed basis; brokered deposits were purchased in 2024 and 2023 through nationally recognized networks. At December 31, 2024, our brokered deposits totaled $1.2 billion, a $669.5 million increase from December 31, 2023.

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

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(1) Includes uninsured deposits of $7.1 billion and $5.8 billion as of December 31, 2024 and December 31, 2023, respectively, and collateralized deposits of $1.1 billion and $861.6 million as of December 31, 2024 and December 31, 2023, 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 reviews our capital adequacy on an ongoing basis with reference to size, composition, and quality of our 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 31, 2025, 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 3, 2025 to preferred shareholders of record as of February 14, 2025. Our Board of Directors also declared a quarterly dividend of $0.34 per share of common stock, which is payable on February 28, 2025 to common shareholders of record as of February 14, 2025.

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 was phased into the regulatory capital over a three-year period that began in 2022 and ended in 2024.

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

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(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.

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

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 asset liability management committee 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 our asset liability management committee.

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.

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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 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 asset liability management committee 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):

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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.

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From a net interest income perspective, we were more asset sensitive as of December 31, 2024 compared to 2023. 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.

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):

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As of December 31, 2024, our economic value of equity is generally less liability sensitive in a rising interest rate environment compared to its position as of December 31, 2023, primarily due to the composition of our Consolidated Balance Sheets and also due to the pricing characteristics and assumptions of certain deposits and loans.

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, 2024 were $20.4 billion, an increase of $3.6 billion or 21.3% from December 31, 2023. Average deposits at December 31, 2024 were $19.5 billion, an increase of $2.9 billion or 17.3% from December 31, 2023. Total deposits increased from the prior year primarily due to a $2.6 billion increase in interest-bearing customer deposits and a $313.9 million increase in demand deposits, primarily due to the American National acquisition, as well as an increase of $669.5 million in brokered deposits. Refer to “Deposits” within this Item 7 for additional information on this topic.

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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 sources to fund our liquidity needs. We also closely track the potential impacts on our liquidity from declines in the fair value of our securities portfolio due to changing 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.

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We consider our liquid assets to 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. As of December 31, 2024, our liquid assets totaled $8.8 billion or 35.6% of total assets, and liquid earning assets totaled $8.6 billion or 39.0% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As of December 31, 2024, loan payments of approximately $8.0 billion or 43.5% of total LHFI are expected within one year based on contractual terms and expected prepayments, and approximately $355.1 million or 10.6% of total investments as of December 31, 2024 are scheduled to be paid down within one year based on contractual terms and expected prepayments.

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, a corporate line of credit with a large correspondent bank, and debt and capital issuances. Management believes our overall liquidity to be sufficient to satisfy our depositors’ requirements and to meet our customers’ credit needs.

During 2024, the Company improved its borrowing capacity at the FHLB and FRB since secured borrowing facilities provide the most reliable sources of funding, especially during times of market turbulence and financial distress. In 2024, the Company added Commercial and Industrial, Construction, lot/land, and other consumer loans to the population of loans pledged to the FRB. At the FHLB, the Company expanded the population of loans pledged, primarily CRE loans and securities.

For additional information and the available balances on various lines of credit, please refer to Note 9 “Borrowings” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. In addition to lines of credit, we may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. For additional information on cash requirements for known contractual and other obligations, please refer to “Capital Resources” within this Item 7.

Cash Requirements

Our cash requirements outside of lending transactions consist primarily of borrowings, leases, debt, and capital instruments which are used as part of our overall liquidity and capital management strategy. We expect that 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, 2024 (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, 2024. 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 7 “Leases” and Note 9 “Borrowings” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

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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 10 “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.

We are also a lessor in sales-type and direct financing leases for equipment, as noted in Note 7 “Leases” in the “Notes to 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 $621.3 million and $472.7 million, respectively, at December 31, 2024 and December 31, 2023.

During the third quarter of 2024, we entered into Forward Sale Agreements in connection with our proposed merger with Sandy Spring. For more information, refer to Note 12 “Stockholders’ Equity” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

Impact of Inflation and Changing Prices

Our financial statements included in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K 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.

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NON-GAAP FINANCIAL MEASURES

In this Form 10-K, we have provided supplemental performance measures determined by methods other than in accordance with GAAP. 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 our analysis of our performance. Management believes that these non-GAAP financial measures provide additional understanding of 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.

We believe interest and dividend income (FTE), which is used in computing yield on interest-earning assets (FTE), provides valuable additional insight into the yield on interest-earning assets (FTE) by adjusting for differences in the tax treatment of interest income sources. 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 merger-related costs, deferred tax asset write-down, FDIC special assessments, strategic cost saving initiatives (principally composed of severance charges related to headcount reductions and charges for exiting certain leases), legal reserves associated with our previously disclosed settlement with the CFPB, 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), loss on sale of securities, gain on sale-leaseback transaction, and gain on sale of DHFB. We believe these non-GAAP adjusted measures provide investors with important information about the continuing economic results of our 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, merger-related costs, FDIC special assessments, strategic cost saving initiatives (principally composed of severance charges related to headcount reductions and charges for exiting certain leases), legal reserves associated with our previously disclosed settlement with the CFPB, and 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). Adjusted operating noninterest income excludes loss on sale of securities, gain on sale-leaseback transaction and gain on sale of DHFB. 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 these adjusted measures provide 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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