# SHORE BANCSHARES INC (SHBI) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from SHORE BANCSHARES INC's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1035092/000162828024011336/shbi-20231231.htm Accession: 0001628280-24-011336 Filing date: 2024-03-15 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/SHBI/ All MD&A years: /company/SHBI/mda/ Previous year: /company/SHBI/mda/fy2022/ (FY 2022) Next year: /company/SHBI/mda/fy2024/ (FY 2024) Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion compares the Company’s financial condition at December 31, 2023 to its financial condition at December 31, 2022 and the results of operations for the years ended December 31, 2023 and 2022. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing in Item 8 of Part II of this annual report. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain 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. The most significant accounting policies that the Company follows are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses on loans, goodwill and bargain purchase gain, accounting for loans acquired in business combinations, and income taxes are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available. Allowance for Credit Losses on Loans The Company adopted ASU No. 2026-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an ACL on loans carried at amortized cost. The ACL represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date. The ACL is established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances. The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the ACL on loans, and as a result, the related provision for credit losses, can materially affect financial results. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio. The determination of the appropriate level of ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes. Changes in conditions, including unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans. While management makes every effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others. The Company’s management reviews the adequacy of the ACL on loans on at least a quarterly basis. Refer to Note 1, “Summary of Significant Accounting Policies”, of the Notes to the Consolidated Financial Statements for additional detail concerning the determination of the ACL on loans. Goodwill and Bargain Purchase Gain Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss. A bargain purchase gain represents the excess of the fair value of net assets acquired over the cost of an acquisition. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgement. Bargain purchase gain is recorded within noninterest 35 Table of Contents income in the period it was generated. An acquirer has a measurement period to finalize the accounting for a business combination which could adjust bargain purchase gain if material facts or circumstances arise. As of December 31, 2023, the Company had one reporting unit. Loans Acquired in a Business Combination The most significant assessment of fair value in our accounting for business combinations relates to the valuation of an acquired loan portfolio. Management made significant estimates and exercised significant judgement in accounting for the acquisition of loans acquired in our business combinations. At acquisition, loans are classified as either (i) purchase credit-deteriorated (“PCD”) loans or (ii) non-PCD loans and are recorded at fair value on the date of acquisition. PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination. Fair values are determined primarily through a discounted cash flow approach which considers the acquired loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, timing of principal and interest payments, current market rates, and remaining balances. Estimates of fair value also include estimates of default, loss severity, and estimated prepayments. The allowance for PCD loans is determined based upon the Company’s methodology for estimating the allowance under the current expected credit loss model (“CECL”), and is recorded as an adjustment to the acquired loan balance on the date of acquisition. The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that will be amortized or accredited into the interest income over the remaining life of the loan. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records a reserve for credit losses based on the Company’s methodology for determining the allowance under CECL. The allowance for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans were purchased or acquired. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets. The Company recognizes accrued interest and penalties as a component of tax expense. The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties. In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of its provision for income taxes. The Company remains subject to examination for tax years ending on or after December 31, 2020. RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS The Notes to the Consolidated Financial Statements discuss the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects our financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of this discussion and Notes to the Consolidated Financial Statements. 36 Table of Contents 2023 PERFORMANCE OVERVIEW The Company recorded net income of $11.2 million for 2023 and net income of $31.2 million for 2022. The basic and diluted income per share was $0.42 and $1.57 for fiscal year 2023 and 2022, respectively. Total assets were $6.0 billion at December 31, 2023, an increase of $2.5 billion or 72.9%, when compared to $3.5 billion at December 31, 2022. The aggregate increase was primarily due to the acquisition of TCFC (“the merger”), with significant increases year over year in loans held for investment of $2.1 billion, or 81.6%, and cash and cash equivalents of $316.9 million, partially offset by an increase in allowance for credit losses of $40.7 million. The ratio of the ACL to total loans increased from 0.65% at December 31, 2022, to 1.24% at December 31, 2023. The increase was due to the adoption of CECL on January 1, 2023 and the merger. Due to a lack of uniformity of historical data between the legacy banks in their respective models, beginning in the third quarter of 2023, management implemented a new post-merger model methodology. The Bank's provision for credit losses for the twelve months ended December 31, 2023 was $31.0 million and was due primarily to $20.1 million related to the acquisition of TCFC legacy loans and $7.3 million related to the change in ACL methodology on SUB legacy loans. Total borrowings were $72.3 million at December 31, 2023, a decrease of $10.8 million, or 13.0%, when compared to $83.1 million at December 31, 2022. Total borrowings at December 31, 2023 were comprised of $43.1 million of subordinated debt and $29.2 million of trust preferred debentures. The decrease in total borrowings at December 31, 2023 when compared to December 31, 2022 was primarily due to repayment of $40.0 million in FHLB short-term advances, partially offset by an increase of $29.2 million in subordinated debt and trust preferred debentures from the merger. The Company's wholesale funding increased $4.5 million, which includes brokered deposits and FHLB advances, from $40.0 million in FHLB advances at December 31, 2022 to $44.5 million in brokered deposits at December 31, 2023. The Bank redeemed callable brokered certificates of $67.0 million during the fourth quarter of 2023. Total deposits increased $2.4 billion, or 79.0% to $5.4 billion at December 31, 2023 when compared to December 31, 2022. The increase in total deposits when compared to December 31, 2022 was primarily due to the merger. Increases within deposits during the year consisted of increases in time deposits of $760.3 million, demand deposits of $471.4 million, money market and savings of $748.6 million and noninterest-bearing deposits of $396.0 million. 37 Table of Contents RESULTS OF OPERATIONS Summary of Financial Results The Company reported net income for the twelve months ended December 31, 2023 of $11.2 million or diluted earnings per share of $0.42 compared to net income of $31.2 million or diluted earnings per share of $1.57 for the twelve months ended December 31, 2022. The Company’s return on average assets, return on average common equity, and return on average tangible common equity were 0.24%, 2.54%, and 7.74% for the twelve months ended December 31, 2023 compared to 0.90%, 8.76%, and 11.96% for the twelve months ended December 31, 2022. For additional details, see “Reconciliation of Non-GAAP Measures (Unaudited). The decrease in net income in 2023 compared to 2022 was primarily due to merger-related expenses and increased provision for credit losses. These decreases to pretax earnings were partially offset by increased net interest income from an increased balance sheet as a result of the merger. The increase in noninterest income was principally due to the bargain purchase gain recognized in the third quarter of 2023 of $8.8 million. [[GREPCENT_TABLE]] [["","","Twelve Months Ended December 31,"],["(Dollars in thousands)","","2023","","2022","","$ Change","","% Change"],["Interest and dividend income","","$","214,079","","","$","113,845","","","$","100,234","","","88.04","%"],["Interest expenses","","78,772","","","12,543","","","66,229","","","528.02","%"],["Net interest income","","135,307","","","101,302","","","34,005","","","33.57","%"],["Provision for credit loses","","30,953","","","1,925","","","29,028","","","1,507.95","%"],["Noninterest income","","33,159","","","23,086","","","10,073","","","43.63","%"],["Noninterest expenses","","123,329","","","80,322","","","43,007","","","53.54","%"],["Income before income taxes","","14,184","","","42,141","","","(27,957)","","","(66.34)","%"],["Income tax expense","","2,956","","","10,964","","","(8,008)","","","(73.04)","%"],["Net income","","$","11,228","","","$","31,177","","","$","(19,949)","","","(63.99)","%"]] [[/GREPCENT_TABLE]] Net Interest Income As shown in the table below, tax-equivalent net interest income increased $34.1 million to $135.6 million for 2023 compared to $101.5 million for 2022. The increase in tax-equivalent net interest income was primarily due to an increase in total interest income of $100.2 million, or 88.0%, which included an increase in interest and fees on loans of $95.2 million, or 96.1%. The increase in interest and fees on loans was primarily due to the increase in the average balance of loans of $1.3 billion, or 58.7%, and an increase in net accretion income of $7.5 million due to the merger. [[GREPCENT_TABLE]] [["","","Twelve Months Ended December 31,"],["(Dollars in thousands)","","2023","","2022","","$ Change","","% Change"],["Interest and dividend income"],["Loans, including fees","","$","194,339","","","$","99,122","","","$","95,217","","","96.06","%"],["Interest and dividends on investment securities","","16,970","","","11,513","","","5,457","","","47.40","%"],["Interest on deposits with banks","","2,770","","","3,210","","","(440)","","","(13.71)","%"],["Total Interest and Dividend Income","","$","214,079","","","$","113,845","","","$","100,234","","","88.04","%"],["Interest Expenses"],["Deposits","","$","68,800","","","$","9,983","","","$","58,817","","","589.17","%"],["Short-term borrowings","","5,518","","","74","","","5,444","","","7,356.76","%"],["Long-term debt","","4,454","","","2,486","","","1,968","","","79.16","%"],["Total Interest Expenses","","$","78,772","","","$","12,543","","","$","66,229","","","528.02","%"],["Taxable-equivalent adjustment","","253","","","155","","","98","","","63.23","%"],["Tax Equivalent Net Interest Income","","$","135,560","","","$","101,457","","","$","34,103","","","33.61","%"]] [[/GREPCENT_TABLE]] ____________________________________ 38 Table of Contents Average Balances and Yields The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the twelve months ended December 31, 2023 and 2022. [[GREPCENT_TABLE]] [["","","Twelve Months Ended December 31, 2023","","Twelve Months Ended December 31, 2022"],["(Dollars in thousands)","","Average Balance","","Interest (1),(4)","","Yield/ Rate","","Average Balance","","Interest (1),(4)","","Yield/ Rate"],["Earning assets"],["Loans (2), (3)"],["Residential real estate","","$","1,076,713","","","$","54,583","","","5.07","%","","$","699,192","","","$","31,401","","","4.49","%"],["Commercial real estate","","2,039,153","","","110,058","","","5.40","","","1,182,845","","","51,821","","","4.38"],["Commercial","","184,214","","","13,607","","","7.39","","","194,785","","","7,829","","","4.02"],["Consumer","","322,033","","","15,298","","","4.75","","","195,542","","","7,560","","","3.87"],["State and political","","1,025","","","41","","","4.00","","","1,613","","","64","","","3.97"],["Credit Cards","","3,147","","","315","","","10.01","","","\u2014","","","\u2014","","","\u2014"],["Other","","12,773","","","678","","","5.31","","","19,650","","","601","","","3.06"],["Total Loans","","3,639,058","","","194,580","","","5.35","","","2,293,627","","","99,276","","","4.33"],["Investment securities:"],["Taxable","","674,203","","","16,832","","","2.50","","","589,729","","","11,507","","","1.95"],["Tax-exempt","","663","","","58","","","8.75","","","113","","","7","","","6.19"],["Federal funds sold","","1,899","","","92","","","4.84","","","\u2014","","","\u2014","","","\u2014"],["Interest-bearing deposits","","41,032","","","2,770","","","6.75","","","337,203","","","3,210","","","0.95"],["Total earning assets","","4,356,855","","","214,332","","","4.92","","","3,220,672","","","114,000","","","3.54"],["Cash and due from banks","","43,555","","","","","","","18,158"],["Other assets","","303,906","","","","","","","221,592"],["Allowance for credit losses","","(40,777)","","","","","","","(15,441)"],["Total assets","","$","4,663,539","","","","","","","$","3,444,981"],["Interest-bearing liabilities"],["Demand deposits","","$","883,976","","","$","20,134","","","2.28","%","","$","638,105","","","$","3,869","","","0.61","%"],["Money market and savings deposits","","1,275,088","","","20,039","","","1.57","","","1,043,032","","","3,609","","","0.35"],["Brokered deposits","","56,101","","","2,919","","","5.20","","","\u2014","","","\u2014","","","\u2014"],["Certificates of deposit $100,000 or more","","492,226","","","16,583","","","3.37","","","239,927","","","1,364","","","0.57"],["Other time deposits","","278,144","","","9,125","","","3.28","","","204,536","","","1,141","","","0.56"],["Interest-bearing deposits","","2,985,535","","","68,800","","","2.30","","","2,125,600","","","9,983","","","0.47"],["Securities sold under retail repurchase agreements and federal funds purchased","","\u2014","","","\u2014","","","\u2014","","","683","","","2","","","0.29"],["Advances from FHLB - short-term","","111,392","","","5,518","","","4.95","","","1,863","","","72","","","3.86"],["Advances from FHLB - long-term","","\u2014","","","\u2014","","","\u2014","","","7,701","","","35","","","0.45"],["Subordinated debt and guaranteed preferred beneficial interest in junior subordinated debentures (\"TRUPS\")","","57,708","","","4,454","","","7.72","","","42,917","","","2,451","","","5.71"],["Total interest-bearing liabilities","","3,154,635","","","78,772","","","2.50","","","2,178,764","","","12,543","","","0.58"],["Noninterest-bearing deposits","","1,043,479","","","","","","","888,509"],["Accrued expenses and other liabilities","","23,635","","","","","","","21,858"],["Stockholders\u2019 equity","","441,790","","","","","","","355,850"],["Total liabilities and stockholders\u2019 equity","","$","4,663,539","","","","","","","$","3,444,981"],["Net interest income","","","","$","135,560","","","","","","","$","101,457"]] [[/GREPCENT_TABLE]] 39 Table of Contents [[GREPCENT_TABLE]] [["","","Twelve Months Ended December 31, 2023","","Twelve Months Ended December 31, 2022"],["(Dollars in thousands)","","Average Balance","","Interest (1),(4)","","Yield/ Rate","","Average Balance","","Interest (1),(4)","","Yield/ Rate"],["Net interest spread","","","","","","2.42","%","","","","","","2.96","%"],["Net interest margin (\"NIM\")","","","","","","3.11","%","","","","","","3.15","%"],["Cost of Funds","","","","","","1.88","%","","","","","","0.41","%"],["Cost of Deposits","","","","","","1.71","%","","","","","","0.33","%"],["Cost of Debt","","","","","","5.90","%","","","","","","4.82","%"]] [[/GREPCENT_TABLE]] ____________________________________ (1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense. (2) Average loan balances include nonaccrual loans. (3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations. There were $11.8 million and $1.5 million of accretion interest on loans for the twelve months ended December 31, 2023 and 2022, respectively. (4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment. There were $(1.8) million and $0.6 million of amortization of deposits premium, and $(0.6) million and $(0.2) million of amortization of borrowing fair value adjustment for the twelve months ended December 31, 2023 and 2022, respectively. 40 Table of Contents The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume. [[GREPCENT_TABLE]] [["Twelve Months Ended December 31, 2023 Compared to the Twelve Months Ended December 31, 2022"],["","","Volume","","Due to Rate","","Total"],["Interest income from earning assets:"],["Loans"],["Residential real estate","","$","19,141","","","$","4,041","","","$","23,182"],["Commercial real estate","","46,241","","","11,996","","","58,237"],["Commercial","","(781)","","","6,559","","","5,778"],["Consumer","","6,008","","","1,730","","","7,738"],["State and political","","(23)","","","\u2014","","","(23)"],["Credit Cards","","315","","","\u2014","","","315"],["Other","","(365)","","","442","","","77"],["Taxable investment securities","","2,112","","","3,213","","","5,325"],["Tax-exempt investment securities","","48","","","3","","","51"],["Fed funds sold","","92","","","\u2014","","","92"],["Interest-bearing deposits","","(19,992)","","","19,552","","","(440)"],["Total interest income","","$","52,796","","","$","47,536","","","$","100,332"],["Interest-bearing liabilities:"],["Interest-bearing demand deposits","","$","5,606","","","$","10,659","","","$","16,265"],["Money market and savings deposits","","3,643","","","12,787","","","16,430"],["Certificate of deposits","","13,834","","","12,288","","","26,122"],["Securities sold under repurchase agreements and federal funds purchased","","\u2014","","","(2)","","","(2)"],["Advances from FHLB - Short-term","","5,422","","","24","","","5,446"],["Advances from FHLB - Long-term","","\u2014","","","(35)","","","(35)"],["Subordinated debt and TRUPS","","1,142","","","861","","","2,003"],["Total interest-bearing liabilities","","$","29,647","","","$","36,582","","","$","66,229"],["Net change in net interest income","","$","23,149","","","$","10,954","","","$","34,103"]] [[/GREPCENT_TABLE]] Net interest income for 2023 was $135.3 million an increase of $34.0 million, or 33.6%, when compared to 2022. The increase in net interest income was primarily due to an increase in total interest income of $100.2 million, or 88.0%, which includes an increase in interest and fees on loans of $95.2 million, or 96.1%. The increase in interest and fees on loans was primarily due to increases in the average balance of loans of $1.3 billion, or 58.7%, largely due to the merger and the increase in loan yields. Interest on investment securities increased $5.4 million, or 46.6%, primarily due to an increase in the average balance of $85.0 million, or 14.4%. Increases to interest income were partially offset by increased interest expense of $66.2 million, or 528.0%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $859.9 million, or 40.5%, largely due to the merger. The Company’s NIM decreased to 3.11% for 2023 from 3.15% for 2022. The decrease in the NIM was primarily due to an increase in the average balance and rates paid on interest-bearing liabilities of $975.9 million and 192 basis points, partially offset by an increase in the average balance and rates earned on total earning assets of $1.1 billion and 138 basis points. In the second half of 2023, the Company mitigated margin compression by selling the acquired AFS securities from the merger and used the proceeds to pay down more costly brokered deposits and FHLB borrowings. However,margin also compressed as the Bank’s mix of average time deposit balances increased from 21% in 2022 to 26% in 2023. For the comparable periods, the cost of funds increased 147 basis points to 1.88% for December 31, 2023 compared to 0.41% for December 31, 2022. Total net accretion income for 2023 was $9.4 million, compared to $1.9 million for 2022. Noninterest Income Total noninterest income for 2023 of $33.2 million increased $10.1 million or 43.6% from $23.1 million for 2022. The increase in noninterest income was primarily due to the bargain purchase gain of $8.8 million and an increase of $1.8 million in trust and investment fee income of which $1.1 million related to the transition of customers to a new broker of record for the Bank's wealth management 41 Table of Contents division. Both the bargain purchase gain and the transition payment were the result of the merger. Additionally, interchange income increased $0.9 million due to a larger customer base and increased transaction activity. These increases to noninterest income were partially offset by a $2.2 million loss on sales of investment securities in the third quarter and a decrease of $0.8 million in title company revenue. Management sold virtually all of legacy CBTC’s AFS investment securities soon after the merger closed on July 1, 2023. The $2.2 million loss relates to the difference in the fair values of the securities at the acquisition date compared to actual sales proceeds received. Title company revenues decreased in 2023 as real estate settlement activity declined in 2023 due to the higher interest rate environment and historically low residential loans held for sale inventory. Noninterest Expense Total noninterest expense of $123.3 million for 2023 increased $43.0 million, or 53.5%, when compared to $80.3 million for 2022. Almost all noninterest expense line items increased as a result of the merger and the expanded operations of the newly combined Company. Merger-related expenses were $17.4 million for 2023, compared to $2.1 million for 2022. Excluding merger and acquisition costs and core deposit intangible amortization, of $23.5 million for 2023 and $4.1 million for 2022, noninterest expense for the comparable periods was $99.9 million and $76.2 million, respectively. Noninterest expense as a percentage of average assets increased to 2.6% for 2023 from 2.3% for 2022. Excluding merger and acquisition costs and core deposit amortization for the comparable periods, noninterest expense as a percentage of average assets decreased to 2.1% for 2023 compared to 2.2% for 2022. As the Company continues its merger integration, a key focus of management will be to further streamline processes, unlock operational efficiencies and reduce overall noninterest expense. Income Taxes The Company reported income tax expense of $3.0 million for 2023, and income tax expense of $11.0 million for 2022. The effective tax rate was 20.8% for 2023, and 26.0% for 2022. The primary drivers in the reduced effective tax rate for 2023 when compared to 2022, were due to the bargain purchase gain recorded in the third quarter and the reapportionment of assets and revenue for state income tax purposes, partially offset by nondeductible merger related costs, in connection with of the acquisition of TCFC. The estimated tax rate applied to net deferred tax assets of the Bank was 26.0% and for the Parent Company 21%. As of December 31, 2023 the Company recorded deferred tax assets relating to $31.1 million and $25.0 million of gross federal and state net operating loss carryovers. These net operating loss carryovers will offset future taxable income to the Company. 42 Table of Contents REVIEW OF FINANCIAL CONDITION Balance Sheet Summary Total assets were $6.0 billion at December 31, 2023, an increase of $2.5 billion or 72.9%, when compared to $3.5 billion at December 31, 2022. The increase was primarily due to the merger, with significant increases in loans held for investment of $2.1 billion, or 81.6%, and cash and cash equivalents of $316.9 million, partially offset by an increase in the ACL of $40.7 million The ratio of the ACL to total loans increased from 0.65% at December 31, 2022, to 1.24% at December 31, 2023. The increase was due to the adoption of CECL on January 1, 2023 and the merger. In July 2023, due to a lack of uniformity of historical data between the legacy banks in their respective models, management implemented a new post merger model methodology. The Bank's provision for credit losses for the twelve months ended December 31, 2023 was $31.0 million and was due primarily to $20.1 million related to the acquisition of TCFC legacy loans and $7.3 million due to the change in ACL methodology on CBTC legacy loans. Cash and Cash Equivalents Cash and cash equivalents totaled $372.4 million at December 31, 2023, compared to $55.5 million at December 31, 2022. Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year. Investment Securities The investment portfolio includes debt and equity securities. Debt securities are classified as either available for sale (“AFS”) or held to maturity (“HTM”). AFS investment securities are stated at estimated fair value based on market prices. They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates. Net unrealized holding gains and losses on these securities are reported net of related income taxes as AOCI (loss), a separate component of stockholders’ equity. Investment securities in the HTM category are stated at cost adjusted for amortization of premiums and accretion of discounts and the ACL. We have the intent and ability to hold such securities until maturity. At December 31, 2023, 17.72% of the portfolio of debt securities was classified as AFS and 82.3% was classified as HTM, compared to 13.0% and 87.0% respectively, at December 31, 2022. See Note 3 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio. Investment securities, including restricted stock and equity securities, totaled $647.3 million at December 31, 2023, an $8.1 million, or 1.2%, decrease compared to $655.4 million at December 31, 2022. At December 31, 2023, AFS securities, carried at fair value, totaled $110.5 million compared to $83.6 million at December 31, 2022. At December 31, 2023, AFS securities consisted of 76.0% mortgage-backed, 18.5% U.S. Government agencies and 5.5% corporate bonds, compared to 76.0%, 21.8%, and 2.3%, respectively, at year-end 2022. At December 31, 2023, AFS securities net unrealized losses were all related to changes in interest rates and were $10.3 million, or less than 1% of total assets and 2.0% of stockholder’s equity before AOCI of $518.6 million. At December 31, 2023, HTM securities, carried at amortized cost, totaled $513.2 million compared to $559.5 million at December 31, 2022. At December 31, 2023, HTM securities consisted of 69.7% mortgage-backed, 28.0% U.S. Government agencies, 2.0% other debt securities, and 0.3% states and political subdivisions, compared to 71.3%, 26.5%, 2.0%, and 0.3%, respectively, at year-end 2022.At December 31, 2023, HTM securities unrealized losses were all related to changes in interest rates, except for a general CECL reserve of $94,000, and were $55.4 million or less than 1% of total assets and 10.7% of stockholder’s equity before AOCI of $518.6 million At December 31, 2023 and December 31, 2022, 97.1% and 97.8%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S. Government agencies or government-sponsored agencies. The following tables set forth the weighted average yields by maturity category of the bond investment portfolio as of December 31, 2023. [[GREPCENT_TABLE]] [["","","Under 1 Year","","1 - 5 Years","","5 - 10 Years","","Over 10 Years","","Total Investment Securities"],["(Dollars in thousands)","","Amortized Cost","","Average Yield","","Amortized Cost","","Average Yield","","Amortized Cost","","Average Yield","","Amortized Cost","","Average Yield","","Amortized Cost","","Fair Value"],["December 31, 2023"],["Available for sale"],["U.S. Treasury and government agencies","","$","2,447","","","5.36","%","","$","5,532","","","1.50","%","","$","14,877","","","1.27","%","","$","616","","","5.39","%","","$","23,472","","","$","20,475"],["Mortgage-backed securities","","\u2014","","","\u2014","%","","10,959","","","2.39","%","","8,300","","","2.60","%","","72,021","","","3.12","%","","91,280","","","84,027"],["Other debt securities","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","6,080","","","5.85","%","","\u2014","","","\u2014","%","","6,080","","","6,019"],["Total","","$","2,447","","","5.36","%","","$","16,491","","","2.09","%","","$","29,257","","","2.60","%","","$","72,637","","","3.14","%","","$","120,832","","","$","110,521"]] [[/GREPCENT_TABLE]] 43 Table of Contents [[GREPCENT_TABLE]] [["","","Under 1 Year","","1 - 5 Years","","5 - 10 Years","","Over 10 Years","","Total Investment Securities"],["(Dollars in thousands)","","Amortized Cost","","Average Yield","","Amortized Cost","","Average Yield","","Amortized Cost","","Average Yield","","Amortized Cost","","Average Yield","","Amortized Cost","","Fair Value"],["December 31, 2023"],["Held to Maturity"],["U.S. Treasury and government agencies","","$","7,000","","","3.50","%","","$","110,163","","","2.44","%","","$","15,418","","","1.48","%","","$","10,861","","","3.02","%","","$","143,442","","","$","133,065"],["Mortgage-backed securities","","\u2014","","","\u2014","%","","6,295","","","4.64","%","","27,620","","","3.73","%","","323,955","","","2.20","%","","357,870","","","314,006"],["Obligations of states and political subdivisions (1)","","\u2014","","","\u2014","%","","310","","","4.52","%","","\u2014","","","\u2014","%","","1,160","","","4.53","%","","1,470","","","1,508"],["Other debt securities","","\u2014","","","\u2014","%","","3,000","","","10.35","%","","7,500","","","4.63","%","","\u2014","","","\u2014","%","","10,500","","","9,251"],["Total","","$","7,000","","","3.50","%","","$","119,768","","","2.76","%","","$","50,538","","","3.18","%","","$","335,976","","","2.24","%","","$","513,282","","","$","457,830"]] [[/GREPCENT_TABLE]] _____________________________________________ (1)Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%. Loans Held for Sale We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At December 31, 2023, the fair value of loans held for sale amounted to $8.8 million compared to $4.2 million at December 31, 2022. When we sell mortgage loans we make certain representations to the purchaser related to loan ownership, loan compliance and legality, and accurate documentation, among other things. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, we may be required to repurchase the loan or indemnify the purchaser. The Company was not required to repurchase any loans during 2023 or 2022. Loans Held for Investment The following table summarizes the Company’s loan portfolio at December 31, 2023 and December 31, 2022. [[GREPCENT_TABLE]] [["(Dollars in thousands)","","December 31, 2023","","%","","December 31, 2022","","%","","$ Change","","% Change"],["Construction","","$","299,000","","","6.40","%","","$","246,319","","","9.60","%","","$","52,681","","","21.40","%"],["Residential real estate","","1,490,438","","","32.10","%","","810,497","","","31.70","%","","679,941","","","83.90","%"],["Commercial real estate","","2,286,154","","","49.30","%","","1,065,409","","","41.70","%","","1,220,745","","","114.60","%"],["Commercial","","229,939","","","5.00","%","","147,856","","","5.80","%","","82,083","","","55.50","%"],["Consumer","","328,896","","","7.10","%","","286,026","","","11.20","%","","42,870","","","15.00","%"],["Credit Cards","","6,583","","","0.10","%","","\u2014","","","\u2014","%","","6,583","","","\u2014","%"],["Total loans","","$","4,641,010","","","100.00","%","","$","2,556,107","","","100.00","%","","$","2,084,903","","","81.60","%"],["Allowance for credit losses on loans","","(57,351)","","","","","(16,643)","","","","","(40,708)","","","244.60","%"],["Total loans, net","","$","4,583,659","","","","","$","2,539,464","","","","","$","2,044,195","","","80.50","%"]] [[/GREPCENT_TABLE]] Credit Cards In relation to the merger with TCFC, the Bank added a consumer credit card portfolio noted in the table above. The Bank has prior experience with consumer credit card lending and continued to maintain the operations and adopted the internal controls of legacy CBTC to properly manage this activity during 2023. CRE Loan Portfolio Our loan portfolio has a CRE loan concentration, which is generally defined as a combination of certain construction and CRE loans. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in CRE lending. Pursuant to the supervisory criteria contained in the guidance for identifying instructions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk. Institutions which are deemed to have concentrations in CRE 44 Table of Contents lending are expected to employ heightened levels of risk management with respect to their CRE portfolios, and may be required to hold higher levels of capital. The Bank has a concentration in CRE loans, and experienced significant growth in its CRE portfolio with its acquisition of TCFC and its wholly-owned subsidiary CBTC. Non-owner occupied CRE as a percentage of the Bank’s Tier 1 Capital + ACL at December 31, 2023 and December 31, 2022 was $2.0 billion or 382.6% and $1.0 billion or 289.4%, respectively. Construction loans as a percentage of the Bank’s Tier 1 Capital + ACL at December 31, 2023 and December 31, 2022 was $299.0 million or 56.7% and $246.3 million or 69.9%, respectively. The CRE portfolio has increased significantly in the past two years. Management has extensive experience in CRE lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio. Monitoring practices are part of the Bank’s credit and risk departments annual test plans and are adjusted as needed on a quarterly basis if external or internal conditions merit changes. The Bank’s CRE monitoring plans include stress testing analysis to evaluate changes in collateral values and changes in cash flow debt service coverage ratios as a result of increasing interest rates or declines in customer net operating revenues. We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect shareholder returns. 45 Table of Contents CRE Non Owner-Occupied Real Estate Loans [[GREPCENT_TABLE]] [["","","December 31, 2023"],["Non-owner occupied real estate loans (dollars in thousands)","","Amount","","Average Loan Size","","% of Non-Owner Occupied CRE Loans","","% of Total Portfolio Loans, Gross"],["Loan Type:"],["Retail","","$","469,226","","","$","2,133","","","23.2","%","","10.1","%"],["Office/Office Condo","","404,227","","","1,497","","","20.0","%","","8.7","%"],["Multi-Family (5+ Units)","","262,475","","","2,169","","","13.0","%","","5.6","%"],["Motel/Hotel","","213,414","","","3,335","","","10.6","%","","4.6","%"],["Other(1)","","668,910","","","592","","","33.1","%","","14.4","%"],["Total non-owner occupied CRE loans (2)","","$","2,018,252","","","$","1,945","","","100.0","%","","43.4","%"],["Total Portfolio loans, gross (3)","","$","4,649,792"]] [[/GREPCENT_TABLE]] (1) Other non owner-occupied CRE loans include industrial loans of $209.4 million, mini-storage loans of $74.0 million, restaurant loans of $48.9 million, and other loans of $336.6 million. (2) The balances for our non-owner occupied commercial real estate portfolio as of December 31, 2023, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines. Within the non-owner occupied balances presented in this table, the Company has included certain loans secured by multifamily residential properties and other investor owned 1-4 family residential properties that are reported in the residential real estate caption in other areas of this report. As such, the total balance of loans presented in this table when added to the balance of the table presented below detailing owner occupied commercial real estate may not reconcile to the commercial real estate caption included in other tables and footnotes. (3) Includes Loans held for sale of $8.8 million. CRE Owner-Occupied Real Estate Loans [[GREPCENT_TABLE]] [["","","December 31, 2023"],["Owner-occupied CRE Loans (dollars in thousands)","","Amount","","Average Loan Size","","% of Owner- Occupied CRE Loans","","% of Total Portfolio Loans, Gross"],["Loan Type:"],["Office/Office Condo","","$","137,334","","","$","505","","","18.0","%","","3.0","%"],["Industrial Warehouse","","106,216","","","610","","","13.9","%","","2.3","%"],["Church","","72,560","","","942","","","9.5","%","","1.6","%"],["Marine/Boat Slip","","66,112","","","2,449","","","8.7","%","","1.4","%"],["Other(1)","","381,575","","","784","","","50.0","%","","8.2","%"],["Total owner-occupied CRE loans","","$","763,797","","","$","1,058","","","100.0","%","","16.4","%"],["Total Portfolio loans, gross (2)","","$","4,649,792"]] [[/GREPCENT_TABLE]] (1) Other owner-occupied CRE loan include restaurant loans of $59.7 million, retail loans of $56.5 million, fire/CMS building loans of $42.0 million and other loans of $223.4 million. (2) Includes Loans held for sale of $8.8 million. Office CRE Portfolio The Bank’s office CRE portfolio, which included owner-occupied and non-owner occupied CRE loans, was $541.6 million or 10.6% of total loans of $4.6 billion at December 31, 2023. The Bank had only 24 office CRE loans totaling $189.8 million that were greater than $5.0 million at December 31, 2023. There were 507 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.4 million at December 31, 2023. Loan to value estimates are less than 70% for $385.9 million or 74.0% of the office CRE portfolio 46 Table of Contents and the average loan debt-service coverage ratio was 2.4x and average loan to value was 47.7% at December 31, 2023. Collateral values are based on the most recent appraisal, which varies from the initial loan boarding to interim credit reviews. The office CRE portfolio is 74% geographically located in rural or suburban areas with limited exposure to metropolitan cities. This portfolio included $142.9 million or 26.4% with medical tenants and $75.2 million or 14.4% with government or government contractor tenants. Only 6% of the total value of the office CRE loans consists of buildings that are 5 stories or more. The maturity and repricing schedule in 2024 for the office CRE portfolio is $29.8 million and $5.8 million, respectively. Only $2.8 million of office CRE loans are special mention or substandard. Maturity of Loan Portfolio The following table below sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2023. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. [[GREPCENT_TABLE]] [["(Dollars in thousands)","","Maturing within one year","","Maturing after one but within five years","","Maturing after five but within fifteen years","","Maturing after fifteen years","","Total"],["Construction","","$","188,934","","","$","70,495","","","$","35,664","","","$","3,907","","","$","299,000"],["Residential real estate","","44,337","","","263,398","","","187,161","","","995,542","","","1,490,438"],["Commercial real estate","","104,494","","","571,996","","","805,362","","","804,302","","","2,286,154"],["Commercial","","8,388","","","100,827","","","61,855","","","58,869","","","229,939"],["Consumer","","1,311","","","68,479","","","118,440","","","140,666","","","328,896"],["Credit Cards","","6,583","","","\u2014","","","\u2014","","","\u2014","","","6,583"],["Totals","","$","354,047","","","$","1,075,195","","","$","1,208,482","","","$","2,003,286","","","$","4,641,010"],["Rate Terms:"],["Fixed-interest rate loans","","$","316,009","","","$","969,513","","","$","841,484","","","$","471,631","","","$","2,598,637"],["Adjustable-interest rate loans","","38,038","","","105,682","","","366,997","","","1,531,656","","","2,042,373"],["Total","","$","354,047","","","$","1,075,195","","","$","1,208,481","","","$","2,003,287","","","$","4,641,010"]] [[/GREPCENT_TABLE]] 47 Table of Contents Asset Quality The following table summarizes asset quality information and ratios at December 31, 2023 and December 31, 2022. [[GREPCENT_TABLE]] [["(dollars in thousands)","","December 31, 2023","","December 31, 2022"],["ASSET QUALITY"],["Total portfolio loans","","$","4,641,010","","","$","2,556,107"],["Classified assets","","14,851","","","2,663"],["Allowance for credit losses on loans","","(57,351)","","","(16,643)"],["Past due loans - 31 to 89 days","","$","10,853","","","$","13,081"],["Past due loans = 90 days","","738","","","1,841"],["Total past due (delinquency) loans","","$","11,591","","","$","14,922"],["Non-accrual loans","","$","12,784","","","$","1,908"],["Accruing borrowers experiencing financial difficulty (\"BEFD\") modifications","","153","","","4,405"],["Other real estate owned (\"OREO\")","","179","","","197"],["Non-accrual loans, OREO and BEFD modifications","","$","13,116","","","$","6,510"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(dollars in thousands)","","December 31, 2023","","December 31, 2022"],["ASSET QUALITY RATIOS"],["Classified assets to total assets","","0.25","%","","0.08","%"],["Classified assets to risk-based capital","","2.75","%","","0.73","%"],["Allowance for credit losses on loans to total portfolio loans","","1.24","%","","0.65","%"],["Allowance for credit losses on loans to non-accrual loans","","448.62","%","","872.27","%"],["Past due loans - 31 to 89 days to total portfolio loans","","0.23","%","","0.51","%"],["Past due loans =90 days and non-accrual to total loans","","0.29","%","","0.15","%"],["Total past due and non-accrual loans to total portfolio loans","","0.53","%","","0.66","%"],["Non-accrual loans to total portfolio loans","","0.28","%","","0.07","%"],["Non-accrual loans and BEFD modifications to total loans","","0.28","%","","0.25","%"],["Non-accrual loans and OREO to total assets","","0.22","%","","0.06","%"],["Non-accrual loans and OREO to total portfolio loans and OREO","","0.28","%","","0.08","%"],["Non-accrual loans, OREO and BEFD modifications to total assets","","0.22","%","","0.19","%"]] [[/GREPCENT_TABLE]] ____________________________________ (1)Classified assets consist of substandard loans and OREO. Classified assets do not include special mention loans. (2)On January 1, 2023, the Company adopted ASU 2022-02–Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the trouble debt restructuring recognition and measurement guidance. As such, loans designated as TDRs prior to January 1, 2023 and are currently performing are no longer reported as a BEFD loan beginning in the quarter ended March 31, 2023, while prior period amounts continue to be reported in accordance with previously applicable GAAP. (3)BEFD modification loans include both non-accrual and accruing performing loans. All BEFD modification loans are included in the calculation of asset quality financial ratios. Non-accrual BEFD modification loans are included in the non-accrual balance and accruing BEFD modification loans are included in the accruing BEFD modification balance. 48 Table of Contents ACL and Provision for Credit Losses The following is a breakdown of the Company’s general and specific allowances as a percentage of total portfolio loans at December 31, 2023 and December 31, 2022: Breakdown of general and specific allowance as a percentage of total portfolio loans [[GREPCENT_TABLE]] [["","","December 31, 2023","","December 31, 2022"],["General allowance","","$","56,428","","","$","16,516"],["Specific allowance","","923","","","127"],["","","$","57,351","","","$","16,643"],["General allowance","","1.22","%","","0.65","%"],["Specific allowance","","0.02","%","","\u2014","%"],["Allowance to total gross loans","","1.24","%","","0.65","%"],["Total gross loans","","$","4,641,010","","","$","2,556,107"]] [[/GREPCENT_TABLE]] On January 1, 2023, the Company adopted ASU 2016-13 and implemented CECL. The ACL is a valuation allowance that is deducted from loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries may not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Bank uses data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of the loans. Historical loss experience serves as the foundation for our estimated credit losses. Adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as the impact of changing unemployment rates, changes in U.S. Treasury yields, portfolio concentrations, the volume of classified loans, and other prevailing economic conditions and factors that may affect the borrower’s ability to repay, or reduce the estimated value of any underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The Company adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon the adoption of ASC 326, the Company recorded a $10.8 million increase to the ACL. ACL balances increased to 1.24% of portfolio loans at December 31, 2023 compared to 0.65% at December 31, 2022. At December 31, 2023, the Company's ACL increased $40.7 million or 244.60% to $57.4 million from $16.6 million at December 31, 2022. The increase in the general allowance was primarily due to the merger with TCFC and the impact of the adoption of ASC 326. The Company recorded a provision for credit losses on loans of $30.4 million for the year ended December 31, 2023 compared to $1.9 million for the year ended December 31, 2022. Net recoveries amounted to $774 thousand, or 0.03% of average loans for the year ended December 31, 2022 compared to net charge-offs of $2.0 million or 0.06% of average loans for the year ended December 31, 2023. Included in the net charge-offs for 2023 were $1.2 million in charge-offs related to the strategic sale of $10.7 million in loans that reduced classified assets and CRE concentrations. Management believes that the ACL was adequate at December 31, 2023. The ACL as a percent of total loans may increase or decrease in future periods based on economic conditions. Management’s determination of the adequacy of the ACL is based on a periodic evaluation of the loan portfolio. For additional information regarding the ACL, refer to Notes 1 and 4 of the Consolidated Financial Statements and the Critical Accounting Policy section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations. 49 Table of Contents The following table allocates the ACL by portfolio loan category at the dates indicated. The allocation of the ACL to each category is not necessarily indicative of future losses and does not restrict the use of the ACL to absorb losses in any category. [[GREPCENT_TABLE]] [["","","December 31, 2023","","December 31, 2022"],["(dollars in thousands)","","Amount","","%(1)","","Amount","","%(1)"],["Construction","","$","3,935","","","6.40","%","","$","2,973","","","9.60","%"],["Residential real estate","","21,949","","","32.10","%","","2,622","","","31.70","%"],["Commercial real estate","","20,975","","","49.30","%","","4,899","","","41.70","%"],["Commercial","","2,671","","","5.00","%","","1,652","","","5.80","%"],["Consumer","","7,601","","","7.10","%","","4,497","","","11.20","%"],["Credit Cards","","220","","","0.10","%","","\u2014","","","\u2014","%"],["Total allowance for credit losses","","$","57,351","","","100.00","%","","$","16,643","","","100.00","%"]] [[/GREPCENT_TABLE]] ____________________________________ (1) Percent of loans in each category to total portfolio loans. The following table indicates net charge-offs or recoveries by average portfolio loan category for the years ended as indicated: [[GREPCENT_TABLE]] [["","","December 31, 2023","","December 31, 2022"],["(dollars in thousands)","","Net (Charge-offs) Recoveries","","Average Balance (1)","","%","","Net (Charge-offs) Recoveries","","Average Balance (1)","","%"],["Construction","","$","15","","","$","311,360","","","\u2014","%","","$","13","","","$","243,045","","","0.01","%"],["Residential real estate","","(75)","","","1,151,181","","","0.01","%","","137","","","707,965","","","0.02","%"],["Commercial real estate","","(1,326)","","","1,713,825","","","0.08","%","","945","","","965,108","","","0.59","%"],["Commercial","","(232)","","","127,441","","","0.18","%","","(319)","","","159,288","","","0.16","%"],["Consumer","","(290)","","","322,904","","","0.09","%","","(2)","","","202,979","","","\u2014","%"],["Credit Cards","","(111)","","","2,811","","","3.95","%","","\u2014","","","\u2014","","","\u2014","%"],["","","(2,019)","","","3,629,522","","","0.06","%","","774","","","2,278,385","","","0.03","%"],["Allowance for credit losses","","\u2014","","","(40,777)","","","\u2014","%","","\u2014","","","(15,441)","","","\u2014","%"],["Total net charge-off and average loans","","$","(2,019)","","","$","3,588,745","","","0.06","%","","$","774","","","$","2,262,944","","","0.03","%"]] [[/GREPCENT_TABLE]] ____________________________________ (1) Excludes Loans Held for Sale Off Balance Sheet Credit Exposure Reserve The Company's reserve for off balance sheet credit exposures was $1.1 million at December 31, 2023 and increased compared to December 31, 2022 due to impact of the adoption of ASC 326, the merger, and growth in unfunded commitments for residential real estate loans. The Company is monitoring line of credit usage and has not seen substantive increases in usage or expected usage. The Company will continue to monitor activity for potential increases in the off-balance sheet reserve in future quarters as customers use available liquidity. 50 Table of Contents Classified Assets and Special Mention Assets Classified assets increased $12.2 million from $2.7 million at December 31, 2022 to $14.9 million at December 31, 2023. Management considers classified assets to be an important measure of asset quality. Increases in classified and special mention loan categories were due to loans related to our marine lending portfolio of $7.2 million and residential mortgages of $3.2 million all of which are diverse in origination date and not indicative of recurring trends. The Company’s risk rating process for classified loans is an important input into the Company’s allowance methodology. Risk ratings are an important input into the Company’s ACL qualitative framework. The following is a breakdown of the Company’s classified and special mention assets at December 31, 2023 and December 31, 2022, respectively: [[GREPCENT_TABLE]] [["(dollars in thousands)","","December 31, 2023","","December 31, 2022"],["Classified loans"],["Substandard","","$","14,672","","","$","2,466"],["Doubtful","","\u2014","","","\u2014"],["Loss","","\u2014","","","\u2014"],["Total classified loans","","14,672","","","2,466"],["Special mention loans","","28,263","","","3,539"],["Total classified loans and special mention loans","","$","42,935","","","$","6,005"],["Classified loans","","$","14,672","","","$","2,466"],["Classified securities","","\u2014","","","\u2014"],["OREO","","179","","","197"],["Total classified assets","","$","14,851","","","$","2,663"],["Total classified assets and special mention loans","","$","43,114","","","$","6,202"],["Total classified assets as a percentage of total assets","","0.25","%","","0.08","%"],["Total classified assets as a percentage of risk based capital","","2.75","%","","0.73","%"]] [[/GREPCENT_TABLE]] Nonperforming Assets At December 31, 2023, nonperforming assets were $13.7 million, an increase of $9.8 million, or 247.21%, when compared to December 31, 2022. The increase in nonperforming assets was primarily due to the increase in nonaccrual loans acquired in the merger, partially offset by a decrease in loans 90 days past due and still accruing. At December 31, 2023, the ratio of nonaccrual loans to total assets was 0.21%, an increase from 0.05% at December 31, 2022. The ratio of nonperforming assets to total assets at December 31, 2023 was 0.23% compared to 0.11% at December 31, 2022. The Company continues to focus on the resolution of its nonperforming and problem loans. The efforts to accomplish this goal include frequently contacting borrowers until the delinquency is cured or until an acceptable payment plan has been agreed upon; obtaining updated appraisals; provisioning for credit losses; charging off loans; transferring loans to OREO; aggressively marketing OREO; and selling loans. The reduction of nonperforming and problem loans is and will continue to be a high priority for the Company. 51 Table of Contents The following table summarizes our nonperforming assets for the years ended December 31, 2023 and December 31, 2022. [[GREPCENT_TABLE]] [["(Dollars in thousands)","","December 31, 2023","","December 31, 2022"],["Nonperforming assets"],["Nonaccrual loans","","$","12,784","","","$","1,908"],["Total loans 90 days or more past due and still accruing","","738","","","1,841"],["OREO","","179","","","197"],["Total nonperforming assets","","$","13,701","","","$","3,946"],["As a percent of total loans:"],["Nonaccrual loans","","0.28","%","","0.07","%"],["As a percent of total loans and OREO:"],["Nonperforming assets","","0.30","%","","0.15","%"],["As a percent of total assets:"],["Nonaccrual loans","","0.21","%","","0.05","%"],["Nonperforming assets","","0.23","%","","0.11","%"]] [[/GREPCENT_TABLE]] Deposits The following is a breakdown of the Company’s deposit portfolio at December 31, 2023 and December 31, 2022: [[GREPCENT_TABLE]] [["","","December 31, 2023","","December 31, 2022"],["(dollars in thousands)","","Balance","","%","","Balance","","%","","$ Change","","% Change"],["Noninterest-bearing demand","","$","1,258,037","","","23.36","%","","$","862,015","","","28.64","%","","$","396,022","","","45.9","%"],["Interest-bearing:"],["Demand","","1,165,546","","","21.64","%","","694,101","","","23.06","%","","471,445","","","67.9","%"],["Money market deposits","","1,430,603","","","26.56","%","","709,132","","","23.56","%","","721,471","","","101.7","%"],["Savings","","347,324","","","6.45","%","","320,188","","","10.64","%","","27,136","","","8.5","%"],["Certificates of deposit","","1,184,610","","","21.99","%","","424,348","","","14.10","%","","760,262","","","179.2","%"],["Total interest-bearing","","4,128,083","","","76.64","%","","2,147,769","","","71.36","%","","1,980,314","","","92.2","%"],["Total Deposits","","$","5,386,120","","","100.0","%","","$","3,009,784","","","100.0","%","","$","2,376,336","","","79.0","%"]] [[/GREPCENT_TABLE]] Total deposits increased $2.4 billion, or 79.0%, to $5.4 billion at December 31, 2023 when compared to December 31, 2022. The increase in total deposits was primarily due to the merger, which resulted in an increase in time deposits of $760.3 million, demand deposits of $471.4 million, money market and savings of $748.6 million, and noninterest-bearing deposits of $396.0 million. Total estimated uninsured deposits were $1.05 billion, or 19.5% of total deposits, at December 31, 2023. At December 31, 2023, there were $156.1 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank’s uninsured deposits, excluding deposits secured by the market value of pledged collateral, at December 31, 2023 was $893.5 million, or 16.6% of total deposits. For FDIC call reporting purposes, reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank’s liabilities or $5.0 billion. Reciprocal deposits increased $816.0 million to $1.3 billion at December 31, 2023 compared to $475.6 million at December 31, 2022. Reciprocal deposits as a percentage of the Bank’s liabilities at December 31, 2023 and December 31, 2022 were 24.0% and 15.8%, respectively. For call reporting purposes, $204.8 million of reciprocal deposits were considered brokered at December 31, 2023 compared to none at December 31, 2022. The Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance. This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously. Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits. At December 31, 2023, the Bank had four local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $598.5 million or 11.11% of total deposits of $5.4 billion. At December 31, 2022, 52 Table of Contents there were two customer deposit relationships that exceeded 2% of total deposits, totaling $217.8 million or 7.24% of total deposits of $3.0 billion. The Bank uses deposits primarily to fund loans and to purchase investment securities. Average total deposits increased from $3.0 billion at December 31, 2022 to $4.0 billion at December 31, 2023, an increase of $1.0 billion, or 33.67%. The following table sets forth the average balances of deposits and percentage of each major category to total average deposits for the year ended December 31, 2023 and December 31, 2022. [[GREPCENT_TABLE]] [["","","December 31, 2023","","December 31, 2022"],["(Dollars in thousands)","","Average Balance","","%","","Average Balance","","%"],["Noninterest-bearing demand","","$","1,043,479","","","25.9","%","","$","888,509","","","29.5","%"],["Interest-bearing deposits"],["Demand","","883,976","","","21.9","%","","638,105","","","21.2","%"],["Money market and savings","","1,275,088","","","31.6","%","","1,043,032","","","34.6","%"],["Certificates of deposit of $100,000 or more","","492,226","","","12.2","%","","239,927","","","8.0","%"],["Other time deposits","","334,245","","","8.3","%","","204,536","","","6.8","%"],["Total interest-bearing","","$","2,985,535","","","74.1","%","","$","2,125,600","","","70.5","%"],["Total Deposits","","$","4,029,014","","","100.0","%","","$","3,014,109","","","100.0","%"]] [[/GREPCENT_TABLE]] Average interest-bearing deposits increased $859.9 million, or 40.5%, in 2023, compared to an increase of $684.5 million, or 47.5%, in 2022. Average noninterest-bearing deposits increased $155 million, or 17.44% in 2023, compared to an increase of $314.0 million, or 54.6%, in 2022. Deposits provided funding for approximately 92.5% and 93.6% of average earning assets for 2023 and 2022, respectively. The following table sets forth the aggregate amount and maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2023, as well as the portion that is uninsured. [[GREPCENT_TABLE]] [["(Dollars in thousands)","","Total","","Uninsured"],["Three months or less","","$","90,670","","","$","39,593"],["Over three through 6 months","","122,077","","","51,078"],["Over 6 through 12 months","","122,331","","","44,832"],["Over 12 months","","19,500","","","7,249"],["Total","","$","354,578","","","$","142,752"]] [[/GREPCENT_TABLE]] Note 8 to the Consolidated Financial Statements includes the scheduled contractual maturities of total certificates of deposits of $1.2 billion at December 31, 2023. Securities Sold Under Retail Repurchase Agreements Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors. There were no securities sold under retail purchase agreements at the end of 2023 and 2022. Wholesale Funding - Short-Term Borrowings and Brokered Deposits The Company borrows from the FHLB on a short-term basis to meet short term liquidity needs. At December 31, 2023, there were no short-term borrowings outstanding, compared to short-term advances with the FHLB of $40.0 million at December 31, 2022. The Company’s wholesale funding increased $4.5 million, which includes FHLB advances and brokered deposits, from $40.0 million in FHLB advances at December 31, 2022 to $44.5 million in brokered deposits at December 31, 2023. Brokered deposits for the Company’s measurement of wholesale funding exclude reciprocal deposit balances that exceeded 2% of total deposits. The Bank decreased wholesale funding by $380.0 million during the third quarter of 2023 and $62.0 million in the fourth quarter of 2023. Cash proceeds from the sale of TCFC’s AFS securities acquired in the merger and increases in on-balance sheet cash were utilized to curtail FHLB advances and brokered deposits. Contractual Obligations 53 Table of Contents The Company has various contractual obligations that affect its cash flows and liquidity. Our operating leases are primarily related to branch premises and equipment. Purchase obligations arise from agreements to purchase goods and services that are enforceable and legally binding. Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations. For information regarding material contractual obligations please see Note 6 Leases in the Notes to the Consolidated Financial Statements and Note 23 Revenue Recognition. Long-Term Debt The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. There were no long-term borrowings from the FHLB outstanding at December 31, 2023 and December 31, 2022. On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain accredited purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030. As a result of the acquisition of Severn Bancorp, Inc. (“Severn”), effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million. The debt balance of $18.6 million at December 31, 2023 and $18.4 million at December 31, 2022 was presented net of fair value adjustments of $2.0 million and $2.2 million, respectively. Additionally, as a result of the TCFC merger, the Company acquired Junior Subordinated Debt Securities which had an outstanding principal balance of $12.0 million. The debt balance of $10.6 million at December 31, 2023 was presented net of a fair value adjustment of $1.4 million. In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a principal balance of $19.5 million at December 31, 2023. The debt balance of $18.3 million at December 31, 2023 was presented net of fair value adjustment of $1.2 million. For additional information regarding the long-term debt, refer to Note 9 to the Consolidated Financial Statements. Stockholders’ Equity Total stockholders’ equity was $511.1 million at December 31, 2023, compared to $364.3 million at December 31, 2022. The increase in stockholders’ equity in 2023 was primarily due to the $153.1 million increase in paid in capital due to the merger and net income of $11.2 million, partially offset by a $7.8 million CECL adjustment, net of tax in the first quarter of 2023 and dividends paid of $12.7 million. The ratio of period-end equity to total assets was 8.50% for 2023, as compared to 10.48% for 2022. [[GREPCENT_TABLE]] [["(Dollars in thousands)","","December 31, 2023","","December 31, 2022","","$ Change","","% Change"],["Common Stock at par value of $0.01","","$","332","","","$","199","","","$","133","","","66.83","%"],["Additional paid in capital","","356,007","","","201,494","","","154,513","","","76.68","%"],["Retained earnings","","162,290","","","171,613","","","(9,323)","","","(5.43)","%"],["Accumulated other comprehensive loss","","(7,494)","","","(9,021)","","","1,527","","","(16.93)","%"],["Total Stockholders' Equity","","$","511,135","","","$","364,285","","","$","146,850","","","40.31","%"]] [[/GREPCENT_TABLE]] We record unrealized holding gains (losses), net of tax, on investment securities available for sale as AOCI (loss), a separate component of stockholders’ equity. At December 31, 2023, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding loss, net of tax, of $7.5 million compared to a net unrealized holding loss, net of tax, of $9.1 million at December 31, 2022. 54 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Liquidity is our ability to fund operations and meet present and future financial obligations through the sale or repayment of existing assets or by obtaining additional funding through liability management. Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities. We believe our level of liquid assets is sufficient to meet current anticipated funding needs. Liquidity is provided by access to funding sources, which include core deposits and brokered deposits. Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB of Atlanta. The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes. We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net increase in cash and cash equivalents was $316.9 million for the year ended December 31, 2023 compared to a decrease of $528.1 million for the year ended December 31, 2022. The increase in cash and cash equivalents in 2023 was mainly due to proceeds from the sale of acquired investment securities of $434.2 million after the merger as well as increases in the Bank’s deposits subsequent to the merger. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funding markets. The Bank has arrangements with other correspondent banks whereby it has $45.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. At December 31, 2023, the Bank had approximately $1.3 billion of available liquidity including: $372.4 million in cash and cash equivalents, $344.8 million in unpledged securities, $659.0 million in secured borrowing capacity at the FHLB, and the other correspondent banks of $45.0 million. The Bank is a member of the FHLB, which provides another source of liquidity. The Bank has pledged, under a blanket lien, all qualifying residential and CRE loans under borrowing agreements with the FHLB. Comparison of Cash Flows for the Years Ending December 31, 2023 and 2022 During the year ended December 31, 2023, all financing activities provided $121.9 million in cash compared to $0.8 million in cash provided for the same period in 2022. The Company was provided $121.1 million more cash from financing activities compared to the prior year, primarily due to increased deposits of $243.2 million from management’s efforts to expand deposit relationships. The Company used less cash in 2023 compared to 2022 for net long-term debt activity. Short-term borrowings activity used $144.9 million more cash in 2023 compared to 2022 as the Bank paid down wholesale funding. The Company used $3.2 million more in cash for stock related activities in 2023 compared to 2022. The increase was primarily due to a $3.2 million increase in common stock dividend payments. The Bank’s principal use of cash has been in investing activities including its investments in loans, investment securities and other assets. In 2023, the level of net cash provided from investing activities increased $753.9 million to $172.3 million from net cash used of $581.6 million in 2022. The increase in cash provided was primarily the result of proceeds from sale of investment securities of $434.2 million acquired from the merger partially offset by cash used for loan activities. Cash used for loan activities decreased $109.7 million to $317.3 million, for the year ended December 31, 2023 from $427.0 million for the year ended December 31, 2022 as organic loan growth slowed in 2023 as management focused on merger integration as well as safe and sound moderate loan growth in the current economic environment.The use of funds to purchase investment securities decreased $148.1 million to $68.7 million for the year ended December 31, 2023 from $216.7 million for the year ended December 31, 2022. Cash provided increased $471.5 million as total proceeds from sales of acquired investment securities, redemption of restricted securities and principal payments of securities for year ended December 31, 2023 increased compared to the year ended December 31, 2022. Operating activities provided less cash of $29.7 million as cash provided decreased $22.7 million for the year ended December 31, 2023 compared to $52.6 million of cash provided for the same period of 2022. The Company has no business other than holding the stock of the Bank and does not currently have any material funding requirements, except for the payment of dividends on common stock, and the payment of interest on subordinated debentures and subordinated notes, and noninterest expense. 55 Table of Contents Capital Requirements The Company evaluates capital resources by the ability to maintain adequate regulatory capital ratios. The Company and the Bank annually update its strategic plan that includes a three-year capital plan. In developing its plan, the Company considers the impact to capital of asset growth, loan concentrations, income accretion, dividends, holding company liquidity, investment in markets and people and stress testing. The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of CET 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions of the Dodd-Frank Act. The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion. As of December 31, 2023, the Bank and Company were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. The following tables present the applicable capital ratios for the Company and the Bank as of December 31, 2023 and December 31, 2022. [[GREPCENT_TABLE]] [["December 31, 2023","","Tier 1 Leverage Ratio","","Common Equity Tier 1 Ratio","","Tier 1 Risk-Based Capital Ratio","","Total Risk-Based Capital Ratio"],["The Company","","7.74","%","","8.69","%","","9.31","%","","11.48","%"],["The Bank","","8.33","%","","10.02","%","","10.02","%","","11.27","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["December 31, 2022","","Tier 1 Leverage Ratio","","Common Equity Tier 1 Ratio","","Tier 1 Risk-Based Capital Ratio","","Total Risk-Based Capital Ratio"],["The Company","","9.52","%","","11.62","%","","12.33","%","","13.91","%"],["The Bank","","9.92","%","","12.82","%","","12.82","%","","13.47","%"]] [[/GREPCENT_TABLE]] See Note 16 to the Consolidated Financial Statements for further information about the regulatory capital positions of the Bank and Company. 56 Table of Contents USE OF NON-GAAP FINANCIAL MEASURES Statements included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See Non-GAAP reconciliation schedules that immediately follow: Reconciliation of Non-GAAP Measures Reconciliation of U.S. GAAP total assets, common equity, common equity to assets and book value to Non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value. This Annual Report on Form 10-K, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company. [[GREPCENT_TABLE]] [["(dollars in thousands, except per share amounts)","","December 31, 2023","","December 31, 2022"],["Total assets","","$","6,010,918","","","$","3,477,276"],["Less: intangible assets"],["Goodwill","","63,266","","","63,266"],["Core deposit intangibles","","48,090","","","5,547"],["Total intangible assets","","111,356","","","68,813"],["Tangible assets","","$","5,899,562","","","$","3,408,463"],["Total common equity","","$","511,135","","","$","364,285"],["Less: intangible assets","","111,356","","","68,813"],["Tangible common equity","","$","399,779","","","$","295,472"],["Common shares outstanding at end of period","","33,161,532","","","19,864,956"],["Common equity to assets","","8.50","%","","10.48","%"],["Tangible common equity to tangible assets","","6.78","%","","8.67","%"],["Common book value per share","","$","15.41","","","$","18.34"],["Tangible common book value per share","","$","12.06","","","$","14.87"]] [[/GREPCENT_TABLE]] 57 Table of Contents Return on Average Common Equity Return on average common equity is a financial ratio that measures the profitability of a company in relation to the average stockholders’ equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average shareholders' equity for a specific period of time. [[GREPCENT_TABLE]] [["","","","","For the Year Ended"],["(dollars in thousands, except per share amounts)","","","","","","December 31, 2023","","December 31, 2022"],["Net income (as reported)","","","","","","$","11,228","","","$","31,177"],["Return on Average Common Equity","","","","","","2.54","%","","8.76","%"],["Average stockholders\u2019 equity","","","","","","$","441,790","","","$","355,850"]] [[/GREPCENT_TABLE]] Return on Average Tangible Common Equity Return on average tangible common equity is computed by dividing net earnings applicable to common shareholders by average tangible common stockholders’ equity. Management believes that return on average tangible common equity is meaningful because it measures the performance of a business consistently, whether acquired or internally developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. [[GREPCENT_TABLE]] [["","","","","For the Year Ended"],["(dollars in thousands, except per share amounts)","","","","","","December 31, 2023","","December 31, 2022"],["Net income (as reported)","","","","","","$","11,228","","","$","31,177"],["Core deposit intangible amortization (net of tax)","","","","","","4,254","","","1,471"],["Merger and acquisition costs (net of tax)","","","","","","11,637","","","1,553"],["Net earnings applicable to common shareholders","","","","","","$","27,119","","","$","34,201"],["Return of Average Tangible Common Equity","","","","","","7.74","%","","11.96","%"],["Average stockholders' equity","","","","","","$","441,790","","","$","355,850"],["Average goodwill and core deposit intangible","","","","","","(91,471)","","","(69,845)"],["Average tangible stockholders' common equity","","","","","","$","350,319","","","$","286,005"]] [[/GREPCENT_TABLE]] 58 Table of Contents