S&T Bancorp Inc: Form 10-Q for the period ended Sep 30, 2023

(dollars in thousands)

(1) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

(2) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

(3) Nonaccruing loans are included in the daily average loan amounts outstanding.

(4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Credit Losses

The provision for credit losses includes a provision for losses on loans and on unfunded commitments. The provision for credit losses fluctuates based on changes in loan balances, risk ratings, net loan charge-offs/recoveries, the macro environment and our Current Expected Credit Loss, or CECL, forecast. The provision for credit losses increased $3.0 million and $11.8 million to $5.5 million and $17.0 million for the three and nine months ended September 30, 2023 compared to $2.5 million and $5.2 million for the same periods in 2022. The increase in the provision for credit losses for the three and nine months ended September 30, 2023 compared to the same periods in 2022 was primarily due to increases in net loan charge-offs and in our qualitative reserve. The increase in qualitative reserve was primarily due to deterioration in the CRE price index and our qualitative reserve capturing additional expected losses in commercial loans that are not included in the model. We also had an increase in our quantitative reserve due to downgrades in our C&I portfolio and loan growth in our consumer real estate portfolio.

For the three and nine months ended September 30, 2023, we had net loan charge-offs of $3.7 million and $9.6 million compared to $0.7 million and $1.7 million for the same periods in 2022. During the nine months ended September 30, 2023, our most significant charge-offs were three C&I relationships totaling $15.9 million, which was partially offset by a $9.3 million recovery from a customer fraud that occurred in 2020.

Refer to the "Allowance for Credit Losses" section of this MD&A for further details.

Noninterest Income

(dollars in thousands)

Noninterest income decreased $2.6 million and $3.1 million to $12.2 million and $39.6 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022. Other noninterest income decreased $1.7 million for the three months ended September 30, 2023 primarily due to a valuation adjustment for our commercial loan swaps of $0.9 million as well as a gain on the sale of OREO of $0.6 million that occurred in the three months ending September 30, 2022 compared to no OREO activity in the same period for 2023. Other noninterest income remained relatively unchanged for the nine months ended September 30, 2023 compared to the same period in 2022 despite an increase of $3.0 million related to a change in the valuation of our deferred compensation plan, which has a corresponding offset in salaries and employee benefits resulting in no impact to net income. This increase was offset by a decrease of $0.8 million related to a reduction of commercial loan swap income and a $0.9 million valuation adjustment for our commercial loan swaps as well as a decrease of $0.5 million in gain on the sale of OREO compared to the same period in 2022. Wealth management decreased $0.2 million and $0.6 million for the three months and nine months ended September 30, 2023 compared to the same periods in 2022 due to decreased trust income fees. Mortgage banking decreased $0.1 million and $1.0 million for the three and nine months ended September 30, 2023 compared to the same periods in 2022 due to a continued decline in loan sale activity caused by rising interest rates and a shift to holding originated mortgage loans on our balance sheet. Debit and credit card income decreased $0.1 million and $0.9 million for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 due to decreased debit card incentive income and timing of referral merchant revenue.

Noninterest Expense

(dollars in thousands)

Noninterest expense increased $3.2 million to $52.8 million for the three months ended September 30, 2023 and increased $8.7 million to $154.1 million for the nine months ended September 30, 2023 compared to the same periods in 2022. Salaries and employee benefits increased $0.8 million for the three months ended September 30, 2023 due to higher salary expense caused by new positions and increased restricted stock expense offset by decreases in expense for medical claims, employee pension and incentive payouts. Salaries and employee benefits increased $5.3 million for the nine months ended September 30, 2023 due to higher salary expense as well as a change in the valuation of our deferred compensation plan, which has a corresponding offset in other income within noninterest income resulting in no impact to net income, partially offset by a decrease in incentive expense. Other noninterest expense increased $0.5 million for the three months ended September 30, 2023 and increased $1.2 million for the nine months ended September 30, 2023 primarily due to higher loan related expense and increased expense in amortization related to our qualified affordable housing projects. FDIC Insurance expense increased $0.4 million for the three months ended September 30, 2023 and increased $0.7 million for the nine months ended September 30, 2023 due to an increase in the assessment rate. Marketing expense increased $0.4 million for the three months and $0.8 million for the nine months ended September 30, 2023 due to increased marketing efforts.

Provision for Income Taxes

The provision for income taxes decreased $1.4 million to $7.8 million for the three months ended September 30, 2023 compared to $9.2 million for the same period in 2022 due an increase in tax credits and increased $1.6 million to $25.0 million for the nine months ended September 30, 2023 compared to $23.4 million for the same periods in 2022, mainly due to an increase in income before taxes. Our effective tax rate was 18.9 percent for both the three and nine months ended September 30, 2023 compared to 19.8 percent and 19.7 percent for the three and nine months ended September 30, 2022. The decrease in our effective tax rate for the three and nine month periods ended September 30, 2023 was primarily due to an increase in tax credits compared to the same periods in 2022.

Financial Condition as of September 30, 2023

Total assets increased $355.5 million to $9.5 billion at September 30, 2023 compared to $9.1 billion at December 31, 2022. Cash and due from banks increased $28.5 million to $238.5 million at September 30, 2023 compared to $210.0 million at December 31, 2022. Total portfolio loans increased $331.9 million to $7.5 billion at September 30, 2023 compared to $7.2 billion at December 31, 2022. The increase in loans primarily related to consumer loan growth of $268.4 million with an increase in consumer real estate of $277.9 million compared to December 31, 2022. The commercial loan portfolio increased $63.6 million at September 30, 2023 compared to December 31, 2022 due to an increase of $158.1 million in CRE loans offset by decreases of $83.6 million in C&I and $10.9 million in construction.

Securities decreased $47.5 million to $955.3 million at September 30, 2023 from $1.0 billion at December 31, 2022. The bond portfolio was in a net unrealized loss position of $115.4 million at September 30, 2023 compared to a net unrealized loss position of $102.3 million at December 31, 2022.

Our deposits were $7.2 billion at both September 30, 2023 and December 31, 2022. Certificates of deposit increased $553.3 million compared to December 31, 2022 mainly due to migration from other deposit categories and an increase in brokered certificates of deposit of $175.0 million. Noninterest-bearing demand deposits decreased $312.7 million, money market decreased $116.1 million and savings decreased $143.6 million compared to December 31, 2022. The decreases were primarily attributed to deposit fluctuations and competition in a higher interest rate environment.

Total borrowings increased $279.5 million to $718.7 million at September 30, 2023 compared to $439.2 million at December 31, 2022 primarily due to loan growth.

Total shareholders’ equity increased by $38.9 million to $1.2 billion at September 30, 2023 compared to December 31, 2022. The increase was primarily due to net income of $107.7 million, offset by dividends of $37.2 million, common stock repurchases of $20.0 million and other comprehensive losses of $13.5 million.

Securities Activity

(dollars in thousands)

We invest in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to an investment policy approved annually by our Board of Directors and administered through ALCO and our treasury function. Securities decreased $47.5 million to $955.3 million at September 30, 2023 compared to $1.0 billion at December 31, 2022.

At September 30, 2023, our bond portfolio was in a net unrealized loss position of $115.4 million compared to a net unrealized loss position of $102.3 million at December 31, 2022. At September 30, 2023, our bond portfolio had gross unrealized losses of $115.4 million and no gross unrealized gains, compared to December 31, 2022, when total gross unrealized losses were $102.6 million offset by gross unrealized gains of $0.3 million.

Loan Composition

(dollars in thousands)

The loan portfolio represents the most significant source of interest income for us. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower’s industry or the overall economic climate can significantly impact the borrower’s ability to pay.

Total portfolio loans increased $331.9 million, or 4.6 percent, to $7.5 billion at September 30, 2023 compared to $7.2 billion at December 31, 2022.

As of September 30, 2023, 67 percent of our total loans were variable rate loans and 33 percent were fixed rate loans compared to 72 percent variable rate and 28 percent fixed rate at December 31, 2022. Commercial loans, including CRE, C&I and commercial construction, comprised 70.7 percent of total portfolio loans at September 30, 2023 and 73.0 percent at December 31, 2022. The commercial loan portfolio increased $63.6 million at September 30, 2023 compared to December 31, 2022 due to an increase of $158.1 million in CRE primarily due to fewer loan prepayments and decreases of $83.6 million in C&I and $10.9 million in construction loans as a result of loan pay-offs and lower origination volume due to the current macro environment.

Consumer loans represent 29.3 percent of our total portfolio loans at September 30, 2023 and 27.0 percent at December 31, 2022. The consumer loan portfolio increased $268.4 million at September 30, 2023 due to growth in our consumer real estate portfolio of $277.9 million compared to December 31, 2022. Consistent with 2022, we continue to retain consumer real estate loans on our balance sheet as portfolio loans versus selling these loans due to the loan pricing in the secondary market.

Allowance for Credit Losses

We maintain an ACL at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers our historical loss experience, current conditions and forecasts of future economic conditions as of the balance sheet date. We develop and document a systematic ACL methodology based on the following portfolio segments: 1) Commercial Real Estate, or CRE, 2) Commercial and Industrial, or C&I, 3) Commercial Construction, 4) Business Banking, 5) Consumer Real Estate and 6) Other Consumer. Refer to Part 1. Financial Information, Note 5 Loans and Allowance for Credit Losses for details on our portfolio segments.

The following table presents activity in the ACL for the periods presented:

(dollars in thousands)

The following table presents key ACL ratios for the periods presented:

(1) Year-to-date net charge-offs annualized

Net loan charge-offs were $9.6 million, or 0.18 percent of average loans, for the nine months ended September 30, 2023. Refer to the "Provision for Credit Losses" section of this MD&A for further details.

The ACL was $108.2 million, or 1.44 percent of total portfolio loans, at September 30, 2023 compared to $101.3 million, or 1.41 percent of total portfolio loans, at December 31, 2022. The increase in the ACL of $6.9 million was primarily due to a $4.9 million increase in our qualitative reserve due to deterioration in the CRE price index and our qualitative reserve capturing additional expected losses in commercial loans that are not included in the model. We also had a $2.0 million increase in our quantitative reserve primarily due to downgrades in our C&I portfolio and loan growth in our consumer real estate portfolio.

Substandard loans increased $14.3 million to $177.4 million at September 30, 2023 compared to $163.1 million at December 31, 2022. The increase in substandard loans was primarily due to risk rating downgrades from special mention to substandard in our C&I and CRE portfolios which occurred during the nine months ended September 30, 2023. Special mention loans decreased $26.8 million to $194.3 million at September 30, 2023 compared to $221.1 million at December 31, 2022. The decrease in special mention loans was primarily due to the risk rating downgrades from special mention to substandard and loan payoffs.

Our allowance for credit losses on unfunded commercial loan commitments and letters of credit provide for the risk of expected loss in these arrangements. The allowance is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The provision for credit losses on unfunded loan commitments is included in the provision for credit losses on our Condensed Consolidated Statements of Comprehensive Income (Loss). The allowance for unfunded loan commitments increased $1.1 million to $9.3 million at September 30, 2023 compared to $8.2 million at December 31, 2022. The increase was due to increased loss rates and an increase in unused C&I commitments. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.

Nonperforming assets, or NPA's, consist of nonaccrual loans and OREO. The following represents NPA's as of the dates presented:

(dollars in thousands)

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past the contractual due date. Nonaccrual loans decreased $6.4 million, or 33.5 percent, to $12.7 million at September 30, 2023 compared to $19.1 million at December 31, 2022. The decrease in nonaccrual loans primarily related to the payoff of a $5.4 million CRE loan during the nine months ended September 30, 2023.

Deposits

Deposits are our primary source of funds. We have a well-diversified deposit base with a balance mix of 57.4 percent personal, 35.2 percent business, 5.0 percent public funds and 2.4 percent brokered at September 30, 2023.

(dollars in thousands)

The following table presents the composition of deposits for the periods presented:

(dollars in thousands)

Our total deposits were $7.2 billion at both September 30, 2023 and December 31, 2022. Certificates of deposit increased $553.3 million compared to December 31, 2022 due to migration from other deposit categories as customers continue to seek higher interest rates, new deposit inflows and the issuance of $175.0 million of brokered certificates of deposit in 2023. We had no brokered deposits at December 31, 2022. As a member of the IntraFi network, we are able to offer our customers insurance coverage on interest-bearing demand, money market and certificate of deposit balances in excess of the FDIC insurance limits. IntraFi balances increased $154.5 million to $221.8 million at September 30, 2023 compared to $67.3 million at December 31, 2022. We have total uninsured deposits of $2.2 billion, or 31 percent of our total deposit base, compared to $2.5 billion, or 34 percent, at December 31, 2022.

Borrowings

(dollars in thousands)

Borrowings are an additional source of funding for us. Total borrowings increased $279.5 million to $718.7 million compared to $439.2 million at December 31, 2022 primarily due to loan growth.

Information pertaining to short-term borrowings is summarized in the table below for the nine months ended September 30, 2023 and for the twelve months ended December 31, 2022.

(dollars in thousands)

Information pertaining to long-term borrowings and junior subordinated debt securities is summarized in the tables below for the nine months ended September 30, 2023 and for the twelve months ended December 31, 2022.

(dollars in thousands)

We redeemed $5.0 million of junior subordinated debt securities, along with $0.2 million in common equity issued by the Trust and held by us, on July 25, 2023.

Liquidity and Capital Resources

Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. Our primary future cash needs are centered on the ability to (i) satisfy the financial needs of depositors who may want to withdraw funds or of borrowers needing to access funds to meet their credit needs and (ii) to meet our future cash commitments under contractual obligations with third parties. In order to manage liquidity risk, our Board of Directors has delegated authority to ALCO for the formulation, implementation and oversight of liquidity risk management for S&T. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.

Our primary funding and liquidity source is a stable customer deposit base. We believe S&T has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile funding sources. Refer to the "Financial Condition as of September 30, 2023 - Deposits" section of this MD&A, for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various other funding sources that can be used as part of our normal funding program. Additional funding sources accessible to S&T include borrowing availability at the Federal Home Loan Bank, or FHLB, of Pittsburgh, federal funds lines with other financial institutions and the brokered deposit market. Additionally, S&T has borrowing availability through the Federal Reserve Discount Window and the Federal Reserve Bank Term Funding Program, or BTFP.

In response to recent bank failures, the Federal Reserve authorized additional funding availability to eligible depository institutions through the BTFP. The program is intended to help assure depositors that their institutions have an additional source of liquidity to meet their needs. Under the program, any collateral eligible for purchase by the Federal Reserve Banks in open market operations can be pledged including U.S. Treasury securities, U.S. Agencies and U.S. Agency mortgage-backed securities. Collateral advances will be equal to 100 percent of the par value of the collateral pledged with a term of up to one year. Interest is charged at a fixed rate equal to the one-year overnight index swap rate plus 10 basis points with no prepayment penalty. As of September 30, 2023, we have $675.8 million of collateral available to pledge under the program and no outstanding balance.

Available borrowing capacity exceeds uninsured deposits of $2.2 billion. The following table summarizes funding sources available as of the dates presented:

(dollars in thousands)

We have contractual obligations representing required future payments on certificates of deposit, junior subordinated debt securities, short-term borrowings, long-term borrowings, operating and capital leases and purchase obligations. See the Liquidity and Capital Resources portion of our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K for more information on these future cash outflows. Certificates of deposit increased $553.3 million to $1.5 billion at September 30, 2023 compared to December 31, 2022 and short-term borrowings increased $260.0 million to $630.0 million at September 30, 2023 compared to December 31, 2022. Other than these changes, there have been no material changes to the contractual obligations previously disclosed in our 2022 Form 10-K.

An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At September 30, 2023, S&T Bank had $885.6 million in highly liquid assets which consisted primarily of $162.6 million in interest-bearing deposits with banks and $722.7 million in unpledged securities. This resulted in a highly liquid assets to total assets ratio of 9.4 percent at September 30, 2023.

We continue to maintain a strong capital position with our leverage ratio at 11.12 percent at September 30, 2023 compared to 11.06 percent at December 31, 2022, both in excess of the well-capitalized regulatory guideline of 5.00 percent. We continue to be well-capitalized with a risk-based Common Equity Tier 1 ratio of 13.11 percent at September 30, 2023 compared to 12.81 percent at December 31, 2022, both in excess of the well-capitalized regulatory guideline of 6.50 percent.

The following table summarizes capital amounts and ratios for S&T and S&T Bank for the dates presented:

(dollars in thousands)

On March 27, 2020, the regulators issued interim final rule, or IFR, “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity due to the COVID-19 pandemic. The IFR provides financial institutions that adopted CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided by the initial two-year delay (“five-year transition”). We adopted CECL effective January 1, 2020 and elected to implement the five-year transition.

We have filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, with the SEC, which allows for the issuance of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to subsidiaries, possible acquisitions and stock repurchases. As of September 30, 2023, we had not issued any securities pursuant to this shelf registration statement.

Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can adversely affect a financial institution’s earnings or capital. For most financial institutions, including S&T, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes also affect capital by changing the net present value of a bank’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancing shareholder value. However, excessive interest rate risk can threaten a bank’s earnings, capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by the ALCO. The ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analyses and by performing stress tests and simulations to mitigate earnings and market value fluctuations due to changes in interest rates.

Rate shock analyses results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 and 24 months of pretax net interest income. The base case and rate shock analyses are performed on a static balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of loans and securities with optionality. S&T policy guidelines limit the change in pretax net interest income over 12 and 24 month horizons using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in pretax net interest income by graduated risk tolerance levels of minimal, moderate and high.

In order to monitor interest rate risk beyond the 24 month time horizon of rate shocks on pretax net interest income, we also perform EVE analyses. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analyses on pretax net interest income, EVE analyses incorporate management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit products. S&T policy guidelines limit the change in EVE using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in EVE by graduated risk tolerance levels of minimal, moderate and high.

The table below reflects the rate shock analyses results for the 1-12 and 13-24 month periods of pretax net interest income and EVE.

49

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of S&T’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of September 30, 2023. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to S&T’s management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material respects, as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2023, there were no changes made to S&T’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, S&T’s internal control over financial reporting.

PART II

OTHER INFORMATION

There have been no material changes to the risk factors that we have previously disclosed in Part I, Item 1A – “Risk Factors” in our 2022 Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 24, 2023 other than the risks described below.

Difficult market conditions, including rapidly rising interest rates and several bank receiverships may adversely affect our business, results of operations, liquidity and stock price. Further adverse developments affecting the financial services industry and the soundness of financial institutions and further disruption to the economy and U.S. banking system may adversely affect our business, results of operations, liquidity and stock price.

The rapid rise in interest rates during 2022, the resulting industry-wide reduction in the fair value of securities portfolios, and the related bank runs resulting in the takeover by the FDIC of two banks placed in receivership in March 2023, have caused a current state of volatility in the financial services industry and uncertainty with respect to liquidity and the health of the U.S. banking system. Although we were not directly affected by these bank receiverships, this news caused fear among depositors, which caused them to withdraw or attempt to withdraw their funds from these and other financial institutions. Uncertainty may be compounded by the reach and depth of media attention, including social media, and its ability to disseminate concerns or rumors about any events of these kinds or other similar risks, and have in the past and may in the future lead to market-wide liquidity problems. Additionally, the stock prices of many financial institutions dropped and became volatile. While the FDIC resolution of these two banks was done in a manner that fully protects depositors, it is uncertain whether the steps taken by the government will be sufficient to calm the financial markets, alleviate concerns with respect to the U.S. banking system, reduce the risk of significant depositor withdrawals at other financial institutions and thereby reduce the risk of additional banks becoming insolvent, particularly in light of an additional bank being placed in receivership in the second quarter of 2023. Furthermore, financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships, which may expose us to credit risk and losses in the event of a default by a counterparty or client. As a result of these recent events, we face the potential for reputational risk, deposit outflows and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations and liquidity.

Furthermore, if such levels of financial market and economic disruption and volatility continue, if actual events or concerns or rumors involving limited liquidity, defaults, or other adverse developments, or if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened due to market-wide liquidity problems. While we maintain liquidity primarily through customer deposits and through access to other short-term funding sources, including advances from the Federal Home Loan Bank (FHLB), our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated increase or reductions in our liquidity, particularly in light of the impact of increased interest rates on the market value of investment securities. This situation could have a material adverse impact on our results of operations and financial condition.

Additionally, regulatory pressures and potential additional regulation of the financial institutions as a result of the industry developments could have material adverse effects on our business, results of operations, financial condition and growth prospects.