Fourth Quarter Operating Results						Fourth quarter 2023 compared to third quarter 2023 Reported Results: •Net income (loss): $(3.4) million compared to $2.3 million •Earnings (loss) per fully diluted share: $(0.18) compared to $0.12 •Return on Average Equity ("ROAE"): (2.6)% compared to 1.7% •Return on Average Tangible Equity ("ROATE"): (1.3)% compared to 2.2% •Return on Average Assets ("ROAA"): (0.15)% compared to 0.10% •Net interest margin: 1.59% compared to 1.74% •Efficiency ratio: 105.9% compared to 98.3%

Financial Position						As of and for the quarter ended December 31, 2023 •Uninsured deposits were $485 million, or 7% of total deposits •Excluding brokered deposits, total deposits decreased $227 million •Loans held for investment ("LHFI"), remained stable •Nonperforming assets to total assets: 0.45% •Allowance for credit losses to LHFI: 0.55% •Book value per share: $28.62 •Tangible book value per share: $28.11

(1)Core net income, core net income (loss) per fully diluted share, return on average tangible equity, core return on average assets, and the efficiency ratio are non-GAAP financial measures. For a reconciliation of core net income, core return on average assets and return on average tangible equity to the nearest comparable GAAP financial measure and the computation of the efficiency ratio see “Non-GAAP Financial Measures” in this earnings release.

(1)Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” in this earnings release.

(2)This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA.

(3)Regulatory capital ratios at December 31, 2023 are preliminary.

 

Our net income (loss) and income (loss) before taxes were $(3.4) million and $(4.0) million, respectively, in the fourth quarter of 2023, as compared to $2.3 million and $1.4 million, respectively, in the third quarter of 2023. The $5.4 million decrease in income before taxes was due to lower net interest income, a higher provision for credit losses and an increase in noninterest expense which was partially offset by an increase in noninterest income.

The income tax benefit realized in the fourth quarter of 2023 was due to the loss in the quarter which resulted in an effective tax rate of 14.8%. The income tax benefit realized in the third quarter of 2023 was due to the recognition of return to accrual differences related to tax exempt income.

Our net interest income in the fourth quarter of 2023 was $3.9 million lower than the third quarter of 2023 due to a decrease in our net interest margin from 1.74% to 1.59%. The decrease in our net interest margin was due to a 22 basis point increase in the cost of interest-bearing liabilities which was due primarily to a 33 basis point increase in the cost of deposits caused in part by a decrease in the proportion of noninterest-bearing deposits to the total balance of interest-bearing liabilities. The increases in the rates paid on deposits were due to the significant increases in market interest rates during 2023.

A $0.4 million provision for credit losses was recognized during the fourth quarter of 2023 compared to a $1.1 million recovery of our allowance for credit losses in the third quarter of 2023. The recovery in the third quarter of 2023 was primarily due to reduced levels of higher risk land and development loans which resulted in lower expected losses.

Noninterest income in the fourth quarter of 2023 increased from the third quarter of 2023 primarily due to an increase in other income related to increased distributions from our investments in small business investment companies.

The $0.4 million increase in noninterest expenses in the fourth quarter of 2023, as compared to the third quarter of 2023 was primarily due to (i) a $1.8 million increase in medical costs relating to our self-insured medical programs due to an increase in the total number of claims and claims in excess of $100,000; (ii) $1.5 million of merger related costs; (iii) lower wages, commissions and bonuses due in part to lower levels of FTEs; and (iv) lower business taxes.

For 2023, non-core items include a $39.9 million goodwill impairment charge and $1.5 million of merger related expenses.

Our net income (loss) and income (loss) before taxes were $(27.5) million and $(32.8) million, respectively, in 2023, as compared to $66.5 million and $84.7 million, respectively, in 2022. Our core net income and core income before taxes in 2023, which excludes the impact of the goodwill impairment charge and merger related expenses, was $8.3 million and $8.6 million, as compared to $66.5 million and $84.7 million, respectively, in 2022. The $76.1 million decrease in core income before taxes was due to lower net interest income, a lower recovery of provision for credit losses and lower noninterest income, partially offset by lower noninterest expense.

Our effective tax rate of 16.0% during 2023 was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes and the benefits of tax advantaged investments which were higher than our core income before taxes. Our effective tax rate in 2022 of 21.4% was lower than the statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period.

Net interest income in 2023 decreased $66.6 million as compared to 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets. The increase in the average balance of our interest-earning assets was due to loan originations and purchases of investment securities during 2022. Our net interest margin decreased from 2.99% in 2022 to 1.88% in 2023 due to a 198 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 57 basis point increase in the yield on interest earning assets. Yields on interest-earning assets increased as the yields on loan originations during the last two years were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based. The higher yields on our investment securities were primarily due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during the past year being higher than the yields on our existing portfolio. The increase in the rates paid on our interest-bearing liabilities was due to an increase in the proportion of higher cost borrowings and a decrease in the proportion of noninterest-bearing deposits to the total balance of interest-bearing liabilities, higher deposit costs and higher borrowing costs. The increases in the rates paid on deposits were due to the significant increase in market interest rates over the prior year and the decrease in the proportion of noninterest-bearing deposits to total deposits. Our average borrowings increased by $728 million to fund the growth of our loan portfolio and investment securities. Our cost of borrowings increased from 281 basis points during 2022 to 468 basis points during 2023 due to the significant increase in market interest rates during the last two years.

A $0.4 million recovery of our allowance for credit losses was recognized during 2023 compared to a $5.2 million recovery of our allowance for credit losses in 2022. The recovery of our allowance for credit losses in 2022 was the result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.

The decrease in noninterest income in 2023 as compared to 2022 was due to a decrease in gain on loan origination and sale activities and other income, which was partially offset by higher deposit fees. The $8.4 million decrease in gain on loan origination and sale activities was due to a $4.6 million decrease in single family gain on loan origination and sale activities and a $3.8 million decrease in commercial real estate and commercial and industrial gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume as a result of the effects of increasing mortgage interest rates. The decrease in commercial real estate and commercial and industrial gain

on loan origination and sale activities was primarily due to an 82% decrease in loans sold as a result of increasing interest rates. The $2.8 million decrease in other income was primarily due to a $4.3 million gain on sale of branches realized in 2022. The $1.3 million increase in deposit fee income was primarily due to higher early withdrawals fees.

The $36.5 million increase in noninterest expenses in 2023 as compared to 2022 was due to a $39.9 million goodwill impairment charge and higher general, administrative and other costs which were partially offset by lower compensation and benefit costs and occupancy costs. The $4.5 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower staffing levels and lower bonus expense, which were partially offset by wage increases given in 2023, higher medical costs related to our self-insured medical program and a reduction in deferred costs due to lower levels of loan production. FTEs decreased from 970 at the beginning of 2022 to 913 at the end of 2022 to 875 at the end of 2023. The increase in general, administrative and other costs was primarily due to higher FDIC insurance fees, resulting primarily from our larger asset base, and $1.5 million of merger related costs which were partially offset by lower business taxes.

During 2023, our total assets increased $20 million due primarily to a $143 million increase in cash, partially offset by a decrease in investment securities. During 2023 total liabilities increased $44 million due to an increase in borrowings, partially offset by a decrease in deposits. The $689 million decrease in deposits was due to a $229 million decrease in brokered certificates of deposit and a $1.3 billion decrease in non-certificates of deposit balances which were partially offset by a $491 million increase in certificates of deposit balances related to our promotional products. The decrease in deposits was offset by $373 million in deposits that we acquired as part of the branch acquisitions completed in the first quarter of 2023. The $729 million of additional borrowings were used to replace maturing brokered deposits and increase our on-balance sheet cash balances.

Loans Held for Investment ("LHFI")

(1)Includes $1.3 million, $1.2 million, $1.3 million, $5.2 million and $5.9 million of single family loans that are carried at fair value at December 31, 2023, September 30, 2023, June 30, 2023, March 31, 2023, and December 31, 2022, respectively.

(1)    Includes $17.1 million and $3.4 million, respectively, of consumer loans and commercial and industrial loans purchased in our first quarter 2023 branch acquisition.

During the fourth quarter, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans increased but remained at low levels. As of December 31, 2023, our ratio of nonperforming assets to total assets was 0.45%, while our ratio of total loans delinquent over 30 days, including nonaccrual loans, to total loans was 0.72%.

(1) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.

(2) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $12.4 million and $10.2 million at December 31, 2023 and September 30, 2023, respectively.

(1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA

(1) May include loans originated as held for investment.

(1)Represents changes due to collection/realization of expected cash flows and curtailments.

(2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.