National Bank Holdings Corp: Form 10-Q for the period ended Sep 30, 2023

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and nine months ended September 30, 2023, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2022, 2021 and 2020. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” located elsewhere in this quarterly report and in Item 1A“Risk Factors” in the annual report on Form 10-K, referenced above, and should be read herewith.

All amounts are in thousands, except share and per share data, or as otherwise noted.

Overview

Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We executed on strategic acquisition opportunities to expand our presence in attractive markets and to diversify our revenue streams. Additionally, we are innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for our clients. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to digital payment tools, under the safety of a regulated bank. We believe that our established presence in our core markets of Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho, as well as our ongoing investment in digital solutions and strategic acquisitions position us well for growth opportunities. As of September 30, 2023, we had $9.9 billion in assets, $7.5 billion in loans, $8.1 billion in deposits, $1.2 billion in equity and $0.9 billion in assets under management in our trust and wealth management business.

Operating Highlights and Key Challenges

Recent industry concerns

Profitability and returns

Strategic execution

Loan portfolio

Credit quality

Client deposit funded balance sheet

Revenues

53

Expenses

Strong capital position

Key Challenges

There are a number of significant challenges confronting us and our industry. Liquidity within the financial services sector has tightened, and we expect the intense competition for deposits throughout our markets to continue. Additionally, we face continual challenges implementing our business strategy. These include growing our assets, particularly loans, and deposits amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive and inflationary environment.

Macroeconomic pressures have resulted in volatility and uncertainty in the banking industry. Increases in interest rates, declines in the fair value of securities, lack of available funding, uninsured deposits and risk from concentrations in loan and deposit segments are drawing focus to financial institutions in the wake of recent bank failures. While these are widespread challenges for the banking industry, the Company has not experienced a material impact to our financial condition, operations, customer base, liquidity, capital position or risk profile.

Management employs risk management policies to monitor and limit exposure to changes in market rates. The Asset Liability Committee, a cross-functional committee comprised of executive management and senior leaders, meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and interest rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company. The Company's principal objective regarding asset and liability management is to evaluate interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while preserving adequate levels of liquidity and capital.

Regarding the fair value of investment securities, our accumulated other comprehensive loss is manageable. Additionally, the investment security portfolio is largely backed by either U.S. government agencies or U.S. government sponsored entities, giving us confidence we will not realize material losses. With respect to liquidity, management believes that the Company's excess cash, borrowing capacity and access to various sources of capital and liquidity are sufficient to meet its short-term and long-term needs. We have no significant concentrations in our loan portfolio and deposit base, and we remain well within self-imposed concentration limits, limiting exposure to risk in any particular segment. Our exposure to interest rate risk, unrealized losses in investments, liquidity, loan portfolio, deposit base and uninsured deposits are discussed in more detail below.

We are focused on growing our loan portfolio while adhering to our established underwriting standards and self-imposed concentration limits. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio. In addition, we may see increased rates of repurchase or indemnification demands or indemnification as a result of self-reporting of identified errors in our mortgage loan portfolio. For instance, as part of our normal review process, we have discovered irregularities in mortgage loan applications in one of our offices that has prompted an investigation. The investigation is not yet complete, however, we do not expect the outcome to materially or adversely affect our business or financial condition or results.

Future growth in our interest income will ultimately be dependent on our ability to originate high-quality loans and other high-quality earning assets such as investment securities as well as our ability to access liquidity and manage our cost of funds. Liquidity is monitored and managed to ensure that sufficient funds are available to meet our business needs. Management believes that the Company's excess cash, borrowing capacity and access to sufficient sources of capital are adequate to meet our short-term and long-term liquidity needs in the foreseeable future. We anticipate having access to other third party funding sources, including the ability to raise funds through FHLB advances, issuance of debt, federal funds purchased and the issuance of shares of our common stock or other equity or equity-related securities.

Cash balances total $291.3 million as of September 30, 2023 and have increased $95.8 million from December 31, 2022. Investment securities totaled $1.2 billion as of September 30, 2023 and decreased $136.9 million, or 10.1%, compared to December 31, 2022. As of September 30, 2023, our loans outstanding totaled $7.5 billion, increasing $258.0 million, or 3.6%, compared to December 31, 2022. During 2023, our weighted average rate on new loans funded at the time of origination was 8.6%, which was higher compared to the weighted average yield from our outstanding originated loans of 4.8% during the same period last year. During the nine months ended September 30, 2023, the Federal Reserve increased prevailing interest rates by a total of 100 basis points. Our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions.

We maintain a granular and well diversified deposit base with no exposure to venture capital or crypto deposits. Approximately 70% of our deposits were FDIC insured as of September 30, 2023, and our FHLB advances were $316.8 million, decreasing $68.2 million compared to December 31, 2022. Average total deposits were $8.1 billion during the third quarter of 2023, increasing $0.1 billion compared to the fourth quarter of 2022. The mix of transaction deposits to total deposits was 87.8% at September 30, 2023. Cost of deposits totaled 1.18% at September 30, 2023, and our total cost of funds was 1.40%.

Continued regulation, new liquidity and capital constraints, increased FDIC insurance costs, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including fintechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges and expand our offerings in digital technology, including by partnering with and investing in fintechs where appropriate. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.

The Company devotes considerable resources to protect the confidentiality, integrity, and availability of its subsidiary Banks’ systems and data, including associate and client information. Through coordinated efforts across our information technology, risk management, and third parties, we continuously enhance our suite of cyber-defense and information security capabilities. Further, the Audit & Risk Committee of our Board of Directors is updated quarterly on information security and cybersecurity trends and current efforts, and receives an annual report on the Company’s information security risk assessment efforts.

Performance Overview

In evaluating our consolidated statements of financial condition and results of operations financial statement line items, we evaluate and manage our performance based on key earnings indicators, balance sheet ratios, asset quality metrics and regulatory capital ratios, among others. The table below presents some of the primary performance indicators that we use to analyze our business on a regular basis for the periods indicated:

Key Metrics(1)

About Non-GAAP Financial Measures

Certain of the financial measures and ratios we present, including “tangible assets,” “average tangible assets,” “return on average tangible assets,” “tangible common equity,” “tangible common equity to tangible assets,” “return on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible common equity to tangible assets,” “tangible common book value, excluding accumulated other comprehensive loss, net of tax,” “tangible common book value per share, excluding accumulated other comprehensive loss, net of tax,” “adjusted non-interest expense,” “non-interest expense to average assets, adjusted,” “adjusted net income,” “adjusted net income excluding core deposit intangible amortization expense, after tax,” “adjusted earnings per share - diluted,” “adjusted return on average tangible assets,” “adjusted return on average tangible common equity,” “non-interest expense adjusted for intangible assets amortization and acquisition-related expenses,” “non-interest expense adjusted for acquisition-related expenses,” “efficiency ratio adjusted for other intangible assets amortization and acquisition-related expenses,” “pre-provision net revenue,” “pre-provision net revenue adjusted for acquisition-related expenses,” “tangible common book value, excluding accumulated other comprehensive loss (income), net of tax,” “tangible common book value per share, excluding accumulated other comprehensive loss (income), net of tax,” “adjusted net income excluding other intangible assets amortization expense, after tax,” “net income adjusted for the impact of other intangible assets amortization expense and acquisition-related expenses, after tax,” “net income excluding the impact of other intangible assets amortization expense, after tax,” and “fully taxable equivalent” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on an FTE basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.

These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.

A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows:

Tangible Common Book Value Ratios

Return on Average Tangible Assets and Return on Average Tangible Equity

Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin

Efficiency Ratio and Pre-Provision Net Revenue

Adjusted Net Income and Earnings Per Share

Application of Critical Accounting Policies and Significant Estimates

We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the determination of the ACL.

Allowance for credit losses

The determination of the ACL, which represents management’s estimate of lifetime credit losses inherent in our loan portfolio at the balance sheet date, involves a high degree of judgment and complexity. The Company estimates the collective ACL by first disaggregating the loan portfolio into segments based upon broad characteristics such as primary use and underlying collateral. Within these segments, the portfolio is further disaggregated into classes of loans with similar attributes and risk characteristics. The collective ACL is determined at the class level, analyzing loss history based upon specific loss drivers and risk factors affecting each loan class. The Company utilizes a discounted cash flow (“DCF”) model that incorporates forecasts of certain national macroeconomic factors (reasonable and supportable forecasts) which drive the losses predicted in establishing the Company’s collective ACL. Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing and weighting alternate forecast scenarios. For periods beyond the reasonable and supportable forecast period, the Company reverts to historical long-term average loss rates on a straight-line basis. Additionally, the collective ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition.

Financial Condition

Total assets were $9.9 billion at September 30, 2023, compared to $9.6 billion at December 31, 2022, an increase of $293.0 million, or 3.1%. Cash and cash equivalents increased $95.8 million, or 49.0%, from December 31, 2022, and investment securities decreased $136.9 million, or 10.1%. Total loans increased $258.0 million, or 4.8% annualized, and the allowance for credit losses increased $3.9 million to $93.4 million at September 30, 2023. At September 30, 2023, lower cost demand, savings, and money market deposits ("transaction deposits") totaled $7.2 billion, compared to $7.0 billion at December 31, 2022. Total deposits increased $0.3 billion to $8.1 billion at September 30, 2023, compared to December 31, 2022. FHLB advances totaled $316.8 million at September 30, 2023 and $385.0 million at December 31, 2022.

Investment securities

Available-for-sale

Total investment securities available-for-sale decreased 12.2% during the nine months ended September 30, 2023 to $0.6 billion. Purchases of available-for-sale securities during the nine months ended September 30, 2023 and 2022 totaled zero and $260.2 million, respectively. Paydowns and maturities totaled $71.3 million and $116.0 million during the nine months ended September 30, 2023 and 2022, respectively.

Our available-for-sale investment securities portfolio is summarized in the following table as of the dates indicated. The weighted average yield was calculated based on amortized cost. Yields on tax exempt securities have not been adjusted for tax exempt status.

As of September 30, 2023 and December 31, 2022, nearly all the available-for-sale investment portfolio was backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate FHLMC, FNMA and GNMA securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities.

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 5.5 years and 5.4 years at September 30, 2023 and December 31, 2022, respectively. This estimate is based on assumptions and actual results may differ. At September 30, 2023 and December 31, 2022, the duration of the total available-for-sale investment portfolio was 4.4 years for both periods.

At September 30, 2023 and December 31, 2022, adjustable rate securities comprised 13.1% and 11.5%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 1.74% per annum and 1.75% per annum at September 30, 2023 and December 31, 2022, respectively.

The available-for-sale investment portfolio included $128.0 million of unrealized losses and $14 thousand of unrealized gains at September 30, 2023. At December 31, 2022, the available-for-sale investment portfolio included $113.5 million of unrealized losses. We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities and U.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

Our investment security portfolio consists of high-quality securities, which are largely backed by either U.S. government agencies or U.S. government sponsored entities. We regularly model liquidity stress scenarios to assess potential liquidity issues. The results of our stress testing on our debt security portfolio at September 30, 2023, illustrated that we would continue to meet all capital adequacy requirements, even in an up to 200 basis point rate shock scenario.

Held-to-maturity

Held-to-maturity investment securities decreased 7.8% during the nine months ended September 30, 2023 to $0.6 billion. Purchases during the nine months ended September 30, 2023 and 2022 totaled $2.5 million and $91.6 million, respectively. Paydowns and maturities totaled $53.9 million and $93.2 million during the nine months ended September 30, 2023 and 2022, respectively.

Held-to-maturity investment securities are summarized as follows as of the dates indicated:

The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities.

The fair value of the held-to-maturity investment portfolio included $106.3 million of unrealized losses at September 30, 2023. At December 31, 2022, the held-to-maturity investment portfolio included $91.8 million of unrealized losses and $0.2 million of unrealized gains.

The Company does not measure expected credit losses on a financial asset, or groups of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell the securities and believes it will not be required to sell the securities before the recovery of their amortized cost.

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of September 30, 2023 and December 31, 2022 was 6.1 years and 6.0 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 4.8 years as of September 30, 2023 and December 31, 2022.

Non-marketable securities

The carrying balance of non-marketable securities are summarized as follows as of the dates indicated:

Non-marketable securities included FRB stock, FHLB stock and other non-marketable securities. During the nine months ended September 30, 2023, purchases of non-marketable securities, consisting primarily of FHLB stock, totaled $93.9 million and proceeds of non-marketable securities, consisting of redemptions of FHLB stock, totaled $90.3 million. The changes in the Company’s FHLB stock holdings are directly correlated to FHLB line of credit advances and paydowns. During the nine months ended September 30, 2022, purchases totaling $11.5 million were comprised of other non-marketable securities, and proceeds from other non-marketable securities totaled $0.1 million.

FRB and FHLB stock

At September 30, 2023 and December 31, 2022, the Company held FRB stock and FHLB stock for regulatory or debt facility purpose. These are restricted securities which, lacking a market, are carried at cost. There have been no identified events or changes in circumstances that may have an adverse effect on the FRB and FHLB stock carried at cost.

Other non-marketable securities

Other non-marketable securities consist of equity method investments and convertible preferred stock without a readily determinable fair value. During the three and nine months ended September 30, 2023, the Company recorded zero and $4.0 million, respectively, in impairments on convertible preferred stock related to venture capital investments, included in other non-interest income in the Company’s consolidated statements of operations. No impairments were recorded during 2022. During the three and nine months ended September 30, 2023, the Company recorded net unrealized losses on equity method investments totaling zero and $0.4 million, respectively. During the three and nine months ended September 30, 2022, the Company recorded net unrealized losses on equity method investments totaling $1.3 million and $1.4 million, respectively. These losses were recorded in other non-interest income in the Company’s consolidated statements of operations. The Company continues to invest with fintech solution providers to support our digital ecosystem buildout, support our core bank products and offerings, and to leverage efficiencies and technological solutions in our shared services areas.

Loans overview

At September 30, 2023, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our acquisitions.

The table below shows the loan portfolio composition at the respective dates:

The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. The loan portfolio increased $258.0 million, or 4.8% annualized, from December 31, 2022 to September 30, 2023. Loan fundings during the nine months ended September 30, 2023 totaled $1.1 billion, led by commercial loan fundings of $568.1 million.

Our commercial and industrial loan portfolio is highly diversified across industry sectors and geography. At September 30, 2023, there were no industry sectors representing more than 10.0% of our total loan portfolio. Key segments included government/non-profit loans of $728.9 million, or 9.7% of total loans, and health care/hospital loans of $400.7 million, or 5.4% of total loans.

Non-owner occupied CRE loans were 171.0% of the Company’s risk based capital, or 24.3% of total loans, and no specific property type comprised more than 10.0% of total loans. The Company maintains little exposure to non-owner occupied CRE retail properties, comprising 1.9% of total loans. Multi-family loans totaled $329.7 million, or 4.4% of total loans, and office loans totaled $98.6 million, or 1.3% of total loans as of September 30, 2023.

The agriculture industry continues to be impacted by elevated and volatile commodity prices and intermittent disruptions in supply chains. Our food and agribusiness portfolio is only 4.3% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 1.1% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.

New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan fundings totaled $1.6 billion over the past 12 months, led by commercial loan fundings of $0.8 billion. Fundings are defined as closed-end funded loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of fundings to better approximate the impact of fundings on loans outstanding and ultimately net interest income.

The following table represents new loan fundings for the periods presented:

Included in fundings are net fundings (paydowns) under revolving lines of credit totaling ($12,877), $13,766, ($7,096), $96,903 and $124,834 for the dates noted in the table above, respectively.

The tables below show the contractual maturities of our total loans for the dates indicated:

The stated interest rate (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of total loans with maturities over one year is as follows at the dates indicated:

Asset quality

Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.

Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution for the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below.

In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered TDMs. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ACL and any subsequent declines in carrying value charged to impairments on OREO.

Non-performing assets and past due loans

Non-performing assets consist of non-accrual loans and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and nine months ended September 30, 2023 was $0.8 million and $1.6 million, respectively, and $0.2 million and $0.4 million during the three and nine months ended September 30, 2022, respectively.

Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of collection.

The following table sets forth the non-performing assets and past due loans as of the dates presented:

During the nine months ended September 30, 2023, total non-performing loans totaled $33.2 million, increasing $16.7 million from December 31, 2022. Total non-performing assets to total loans and OREO totaled 0.49% at September 30, 2023, compared to 0.28% at December 31, 2022.

Loans 30-89 days past due and still accruing interest were 0.11% and 0.04% of total loans at September 30, 2023 and December 31, 2022, respectively. Loans 90 days or more past due and still accruing interest were zero percent of total loans for both September 30, 2023 and December 31, 2022.

Allowance for credit losses

The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing delays. The model incorporates forecasts of certain national macro-economic factors, including unemployment rates, home price index (“HPI”), retail sales and gross domestic product (“GDP”), which drive correlated loss rates. The determination and application of the ACL accounting policy involves judgments, estimates and uncertainties that are subject to change. For periods beyond the reasonable and supportable forecast period, we revert to historical long-term average loss rates on a straight-line basis.

We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary loan segments within the ACL model that are further stratified into 11 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following are the loan classes within each of the four primary loan segments:

Loans on non-accrual, in bankruptcy and TDMs with a balance greater than $250,000 are excluded from the pooled analysis and are evaluated individually. If management determines that foreclosure is probable, expected credit losses are evaluated based on the criteria listed below, adjusted for selling costs as appropriate. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:

The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.

Net charge-offs on loans during the three and nine months ended September 30, 2023 totaled $0.3 million and $0.8 million, respectively, and the ratio of annualized net charge-offs to average total loans totaled 0.01% and 0.02%, respectively. During the three and nine months ended September 30, 2023, the Company recorded an increase in the allowance for credit losses of $1.1 million and $4.7 million, respectively, driven by loan growth and an increase in required reserves. Specific reserves on loans totaled $6.1 million at September 30, 2023.

Net charge-offs on loans during the three and nine months ended September 30, 2022 were $0.2 million and $1.1 million, respectively. The Company recorded an increase in the allowance for credit losses of $15.0 million during the three months ended September 30, 2022. During the nine months ended September 30, 2022, the Company recorded an increase in the allowance for credit losses of $17.0 million, driven by loan growth, higher reserve requirements from changes in the CECL model’s underlying macro-economic forecast and Day 1 reserve requirements for the acquired RCB portfolio. Specific reserves on loans totaled $2.9 million at September 30, 2022.

The Company has elected to exclude AIR from the ACL calculation. As of September 30, 2023 and December 31, 2022, AIR from loans totaled $41.7 million and $31.8 million, respectively. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income.

Total ACL

After considering the above mentioned factors, we believe that the ACL of $93.4 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at September 30, 2023. However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively affect the Company's results of operations, liquidity or financial condition.

The following schedules present, by class stratification, the changes in the ACL during the periods listed:

The following tables present the allocation of the ACL and the percentage of the total amount of loans in each loan category listed as of the dates presented:

Deposits

Deposits from banking clients serve as a primary funding source for our banking operations, and our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a lower-cost funding source for our loans, but also provide a foundation for the client relationships that are critical to future loan growth. We maintain a granular and well diversified deposit base with no exposure to venture capital or crypto deposits. The following table presents information regarding our deposit composition at September 30, 2023 and December 31, 2022:

The following table shows uninsured time deposits by scheduled maturity as of September 30, 2023:

At September 30, 2023 and December 31, 2022, time deposits that were scheduled to mature within 12 months totaled $666.3 million and $469.8 million, respectively. Of the time deposits scheduled to mature within 12 months at September 30, 2023, $203.4 million were in denominations of $250,000 or more, and $462.9 million were in denominations less than $250,000. Approximately 70% of our total deposits were FDIC insured at September 30, 2023 and December 31, 2022. Additionally, the Company participates in the IntraFi Cash Service program, which allows depositors to receive reciprocal FDIC insurance coverage. The Company had $852.4 million and $268.8 million of deposits in the program as of September 30, 2023 and December 31, 2022, respectively.

Long-term debt

The Company holds a subordinated note purchase agreement to issue and sell a fixed-to-floating rate note totaling $40.0 million. The balance on the note at September 30, 2023, net of long-term debt issuance costs totaling $0.3 million, totaled $39.7 million. Interest expense totaling $0.3 million and $0.9 million was recorded in the consolidated statements of operations during the three and nine months ended September 30, 2023, respectively, consistent with the same periods in 2022.

The note is subordinated, unsecured and matures on November 15, 2031. Payments consist of interest only. Interest expense on the note is payable semi-annually in arrears and will bear interest at 3.00% per annum until November 15, 2026 (or any earlier redemption date). From November 15, 2026 until November 15, 2031 (or any earlier redemption date) payments will be made quarterly in arrears, and the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month term SOFR plus 203 basis points. The Company deployed the net proceeds from the sale of the note for general corporate purposes. Prior to November 5, 2026, the Company may redeem the note only under certain limited circumstances. Beginning on November 5, 2026 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the note being redeemed, together with any accrued and unpaid interest on the note being redeemed up to but excluding the date of redemption. The note is not subject to redemption at the option of the holder.

As part of the acquisition of BOJH on October 1, 2022, the Company assumed three subordinated note purchase agreements to issue and sell fixed-to-floating rates totaling $15.0 million. The balance on the notes at September 30, 2023, net of a fair value adjustment related to the acquisition totaling $0.5 million, totaled $14.5 million. Interest expense related to the notes totaling $0.1 million and $0.4 million was recorded in the consolidated statements of operations during the three and nine months ended September 30, 2023, respectively.

The three notes, containing similar terms, are subordinated, unsecured and mature on June 15, 2031. Payments consist of interest only. Interest expense on the notes is payable semi-annually in arrears and will bear interest at 3.75% per annum until June 15, 2026 (or any earlier redemption date). From June 15, 2026 until June 15, 2031 (or any earlier redemption date) payments will be made quarterly in arrears, and the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month term SOFR plus 306 basis points. Prior to June 15, 2026, the Company may redeem the notes only under certain limited circumstances. Beginning on June 15, 2026 through maturity, the notes may be redeemed, at the Company’s option, on any scheduled interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the notes being redeemed, together with any accrued and unpaid interest on the notes being redeemed up to but excluding the date of redemption. The notes are not subject to redemption at the option of the holder.

Other borrowings

As of September 30, 2023 and December 31, 2022, the Company sold securities under agreements to repurchase totaling $20.3 million and $20.2 million, respectively. In addition, as a member of the FHLB, the Company has access to a line of credit and term financing from the FHLB with total available credit of $1.7 billion at September 30, 2023. The Company may utilize the FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At both September 30, 2023 and December 31, 2022, the Company had $316.8 million and $385.0 million of outstanding borrowings with the FHLB, respectively. The Company may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at September 30, 2023 or December 31, 2022. Loans pledged were $2.5 billion and $2.0 billion at September 30, 2023 and December 31, 2022, respectively. The Company incurred $4.4 million and $17.1 million of interest expense related to FHLB advances or other short-term borrowings for the three and nine months ended September 30, 2023, respectively. The Company incurred no interest expense related to FHLB advances or other short-term borrowings for the three and nine months ended September 30, 2022.

Results of Operations

Our net income depends largely on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for credit losses and non-interest income, such as service charges, bank card income, swap fee income, and gain on sale of mortgages. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, occupancy costs, telecommunications data processing expense, FDIC deposit insurance and intangible assets amortization. Any expenses related to the resolution of problem assets are also included in non-interest expense.

Overview of results of operations

During the three months ended September 30, 2023, net income increased $20.2 million, or 127.8%, to $36.1 million, compared to the three months ended September 30, 2022. During the nine months ended September 30, 2023, net income increased $54.4 million, or 99.7%, to $108.9 million, compared to the nine months ended September 30 2022. Earnings per diluted share for the three and nine months ended September 30, 2023 were $0.94 and $2.85, respectively. The increases over the same periods in the prior year were driven by organic balance sheet growth, strategic acquisition growth and increases in the Federal Reserve Bank’s interest rates. The return on average tangible assets was 1.58% and 1.61% during the three and nine months ended September 30, 2023, respectively, and 0.87% and 1.03% during the three and nine months ended September 30, 2022. The return on average tangible common equity was 18.38% and 18.81% during the three and nine months ended September 30, 2023, respectively, and 8.66% and 10.17% during the three and nine months ended September 30, 2022.

The three months ended September 30, 2022 included $9.5 million of non-recurring acquisition-related expenses, after tax, related to our 2022 acquisitions. Adjusting for these expenses in the prior period, net income for the third quarter of 2023 increased $10.7 million, or 42.4%, and fully taxable equivalent pre-provision net revenue increased $7.2 million, or 17.6%. The adjusted return on average tangible assets was 1.39%, and the adjusted return on average tangible common equity was 13.76% for the three months ended September 30, 2022.

The nine months ended September 30, 2022 included $10.5 million of non-recurring acquisition-related expenses, after tax, related to our 2022 acquisitions. Adjusting for these expenses in the prior period, net income for the first nine months of 2023 increased $43.9 million or 67.5%, and fully taxable equivalent pre-provision net revenue increased $51.2 million, or 54.6%. The adjusted return on average tangible assets was 1.23%, and the adjusted return on average tangible common equity was 12.10% for the nine months ended September 30, 2022.

Net interest income

We regularly review net interest income metrics to provide us with indicators of how the various components of net interest income are performing. We regularly review: (i) our loan mix and the yield on loans; (ii) the investment portfolio and the related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast periods.

The table below presents the components of net interest income on a FTE basis for the three months ended September 30, 2023 and 2022. The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale and loans.

Net interest income totaled $87.8 million and $69.1 million during the three months ended September 30, 2023 and 2022, respectively. Net interest income on an FTE basis totaled $89.4 million and $70.5 million during the three months ended September 30, 2023 and 2022, respectively. During the three months ended September 30, 2023, the FTE net interest margin narrowed 9 basis points to 3.92%, compared to the three months ended September 30, 2022. The yield on earning assets increased 141 basis points, driven by an increase in earning assets and increases in the Federal Reserve Bank’s interest rates. The cost of funds increased 160 basis points to 1.80% during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

Average loans comprised $7.5 billion, or 82.7%, of total average interest earning assets during the three months ended September 30, 2023. Average loans increased $2.3 billion, or 45.7%, compared to the three months ended September 30, 2022. During the three months ended September 30, 2022, average loans comprised $5.1 billion, or 73.5%, of total average interest earning assets. The increase in average loan balances was driven by a $1.4 billion increase in average acquired loans from the 2022 acquisitions and a $1.0 billion increase in average originated loans.

Average investment securities comprised 15.2% and 21.1% of total interest earning assets during the three months ended September 30, 2023 and 2022, respectively. Average interest bearing cash balances totaled $130.2 million during the three months ended September 30, 2023, compared to $326.3 million for the same period in the prior year as the excess cash liquidity has been deployed into higher-yielding earning assets.

Average balances of interest bearing liabilities increased $2.0 billion during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, driven by organic balance sheet and strategic acquisition growth. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $1.5 billion, FHLB advances totaling $316.7 million, time deposits totaling $193.0 million and long term debt totaling $14.5 million. The increase was partially offset by a decrease in securities sold under agreements to repurchase of $2.9 million.

The table below presents the components of net interest income on a FTE basis for the nine months ended September 30, 2023 and 2022:

Net interest income totaled $272.5 million and $171.8 million during the nine months ended September 30, 2023 and 2022, respectively. Net interest income on a FTE basis totaled $276.9 million and $175.8 million during the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023, the FTE net interest margin widened 68 basis points to 4.12%, compared to the nine months ended September 30, 2022. The yield on earning assets increased 182 basis points, primarily driven by increases in the earning assets and increases in the Federal Reserve Bank’s interest rates. The cost of funds increased 121 basis points to 1.40% during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Average loans comprised $7.4 billion, or 82.1%, of total average interest earning assets during the nine months ended September 30, 2023, compared to $4.8 billion, or 70.1%, of total average interest earning assets during the nine months ended September 30, 2022. The increase in average loan balances was driven by a $1.5 billion increase in average acquired loans from the 2022 acquisitions and a $1.1 billion increase in average originated loans. Year-to-date loan fundings through September 30, 2023 totaled $1.1 billion.

Average investment securities comprised 15.8% and 20.9% of total interest earning assets during the nine months ended September 30, 2023 and 2022, respectively, driven by changes in our earning assets mix.

Average balances of interest bearing liabilities increased $1.8 billion during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, driven by organic balance sheet and strategic acquisition growth. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $1.2 billion, FHLB advances totaling $449.1 million, time deposits totaling $161.6 million and long-term debt totaling $14.5 million. The increase was partially offset by a decrease in securities sold under agreements to repurchase of $2.4 million. The cost of deposits increased 101 basis points to 1.18% during the nine months ended September 30, 2023, compared to 0.17% during the nine months ended September 30, 2022.

The following table summarizes the changes in net interest income on an FTE basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022:

Below is a breakdown of average deposits and the average rates paid during the periods indicated:

Provision for credit losses

The provision for credit losses represents the amount of expense that is necessary to bring the ACL to a level that we deem appropriate to absorb estimated lifetime losses inherent in the loan portfolio and estimated losses inherent in unfunded loans as of the balance sheet date. The determination of the ACL, and the resultant provision for credit losses, is subjective and involves significant estimates and assumptions. Provision for credit losses of $1.1 million and $3.7 million was recorded during the three and nine months ended September 30, 2023, respectively. Included in the provision for credit losses was zero and $1.0 million of provision release for unfunded loan commitments during the three and nine months ended September 30, 2023, respectively. The three and nine months ended September 30, 2023 provision was driven by loan growth and higher reserve requirements. Net charge-offs on loans during the three and nine months ended September 30, 2023 were $0.3 million and $0.8 million, respectively, and the allowance for credit losses totaled 1.25% of total loans at September 30, 2023.

Provision for credit losses of $12.7 million and $14.9 million was recorded during the three and nine months ended September 30, 2022, respectively. Included in the provision for credit losses was $0.2 million and $0.4 million of provision expense for unfunded loan commitments during the three and nine months ended September 30, 2022, respectively. The three and nine months ended September 30, 2022 provision was driven by record loan growth, higher reserve requirements from changes in the CECL model’s underlying macro-economic forecast and $5.4 million of Day 1 reserve requirements for the acquired RCB portfolio. Net charge-offs on loans during the three and nine months ended September 30, 2022 were $0.2 million and $1.1 million, respectively, and the allowance for credit losses totaled 1.15% of total loans at September 30, 2022.

Non-interest income

The table below details the components of non-interest income for the periods presented:

Non-interest income increased to $19.4 million for the three months ended September 30, 2023, compared to $17.4 million for the three months ended September 30, 2022. Service charges and bank card fees increased $0.8 million, driven by growth in our depositor base. Other non-interest income increased $0.6 million during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily driven by $0.6 million from a gain on sale of SBA loans, $0.5 million of trust income, as well as Cambr fee income. Mortgage banking income increased $0.2 million during the three months ended September 30, 2023 and included a $1.1 million gain from the sale of mortgage servicing rights, partially offset by lower mortgage banking income due to lower refinance and purchase activity and competition driving tighter gain on sale margins. During the three months ended September 30, 2022, other non-interest income included higher gains on fixed asset sales and income from non-marketable securities, compared to the three months ended September 30, 2023.

Non-interest income totaled $47.9 million for the nine months ended September 30, 2023, compared to $53.2 million for the nine months ended September 30, 2022. Mortgage banking income decreased $9.5 million, driven by lower purchase and refinance activity and competition driving tighter gain on sale margins, and was partially offset by a $1.1 million gain from the sale of mortgage servicing rights. Service charges and bank card fees increased $2.8 million due to growth in our depositor base. Other non-interest income increased $0.5 million during the nine months ended September 30, 2023, compared to the same period in the prior year. During the nine months ended September 30, 2023, other non-interest income included $1.5 million of trust income and a $1.3 million gain from the sale of SBA loans, as well as Cambr fee income. Trust income, SBA loan sales and Cambr fee income, are new and diversified sources of fee revenue. Increases in other non-interest income during the nine months ended September 30, 2023 were partially offset by $4.4 million in impairments related to venture capital investments classified as non-marketable securities.

Non-interest expense

The table below details the components of non-interest expense for the periods presented:

During the three months ended September 30, 2023, non-interest expense increased $6.7 million, or 12.4%, compared to the three months ended September 30, 2022, primarily due to an increase in core operating expenses driven by acquisitions. During the three months ended September 30, 2023, FDIC deposit insurance expense increased $1.2 million, compared to the three months ended September 30, 2022, as a result of recent acquisitions and an increase in the FDIC assessment rate effective January 2023. Included in the third quarter of 2022 were non-recurring acquisition-related expenses of $7.0 million.

During the nine months ended September 30, 2023, non-interest expense increased $36.3 million, or 25.3%, compared to the nine months ended September 30, 2022, primarily due to an increase in core operating expenses driven by our recent acquisitions. During the nine months ended September 30, 2023, FDIC deposit insurance expense increased $4.0 million, compared to the nine months ended September 30, 2022, as a result of recent acquisitions and an increase in the FDIC assessment rate effective January 2023. Included in the first nine months of 2023 and 2022 were non-recurring acquisition-related expenses of $1.0 million and $8.3 million, respectively.

Income taxes

Income tax expense totaled $9.3 million and $27.8 million for the three and nine months ended September 30, 2023, respectively. Income tax expense for the three and nine months ended September 30, 2022 was $4.0 million and $12.0 million, respectively. The increases over the prior periods were driven by higher pre-tax income. The effective tax rate for the three and nine months ended September 30, 2023 was 20.5% and 20.3%, respectively, compared to 20.1% and 18.0% for the same periods in the prior year.

Additional information regarding income taxes can be found in note 20 of our audited consolidated financial statements in our 2022 Annual Report on Form 10-K.

Liquidity and Capital Resources

Liquidity

Liquidity risk management is an important element in our asset/liability management. Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay our obligations to depositors and other creditors, while providing ample available funds for opportunistic and strategic investments. The Company’s corporate treasury team measures liquidity needs through daily cash monitoring, weekly cash projections and monthly liquidity measures reviewed in conjunction with Board-approved liquidity policy limits. We also regularly conduct Board-approved contingency funding plan stress tests to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provide the basis for the identification of our liquidity needs and are monitored monthly by our Asset and Liability

Committee. As of September 30, 2023, the Banks had sufficient liquidity to cover all expected and unexpected uses of cash as modeled by various short-term and long-term liquidity stress scenarios.

Our primary sources of funds include but are not limited to cash on hand, the investment securities portfolio, federal funds purchased, deposits, funds provided from operations, prepayments and maturities of loans.

On-balance sheet liquidity is represented by our cash and cash equivalents, and unencumbered investment securities, and is detailed in the table below as of September 30, 2023 and December 31, 2022:

Total on-balance sheet liquidity increased $33.9 million at September 30, 2023, compared to December 31, 2022. The increase was due to higher cash and due from banks of $95.8 million, partially offset by $61.9 million lower unencumbered available-for-sale and held-to-maturity securities balances. As of September 30, 2023, approximately, $805.8 million of investment securities were pledged to secure client deposits and repurchase agreements.

We have access to various off-balance sheet third party funding sources including the ability to access immediate funding through FHLB advances, the Federal Reserve discount window, Cambr deposits and the brokered deposit marketplace, whereby deposits could be purchased in a wholesale market as an alternate source of funding. We anticipate having access to capital markets including the ability to issue debt or issue shares of our common stock or other equity or equity-related securities.

The Company had pledged $2.5 billion of loans as collateral to the FHLB at September 30, 2023 and $2.0 billion at December 31, 2022, respectively. FHLB borrowing availability, lines of credit and other short-term borrowing availability totaled $1.7 billion at September 30, 2023. At September 30, 2023, the Company had $316.8 million of outstanding borrowings with the FHLB.

Additionally, we have access to the Federal Reserve’s Bank Term Funding Program (“BTFP”). The BTFP is a recently established facility in response to recent liquidity concerns within the banking industry to help assure that banks have the ability to meet the needs of depositors. Under the program, eligible depository institutions can obtain loans of up to one year in length by pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.

The Company’s acquisition of Cambr Solutions, LLC in April 2023 also adds a funding source by providing on-demand access to bring deposits onto our balance sheet. We anticipate that the sources of liquidity discussed above will provide adequate funding and liquidity for at least a 12-month period, and we may utilize any combination of these funding sources for long-term liquidity needs if deemed prudent.

Our primary uses of funds are loan fundings, investment security purchases, withdrawals of deposits, capital expenditures, operating expenses, and share repurchases.

At present, financing activities primarily consist of changes in deposits and repurchase agreements, and advances from the FHLB, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As of September 30, 2023, $666.3 million of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment and market conditions, our consumer banking strategy is to focus on attracting and maintaining both lower cost transaction accounts and time deposits.

During 2021, the Company entered into a subordinated note purchase agreement to issue and sell a fixed-to-floating note. The Company deployed the net proceeds from the sale of the note for general corporate purposes. At September 30, 2023, the balance on the note, net of long-term debt issuance costs totaling $0.3 million, totaled $39.7 million. The note is not subject to redemption at the option of the holder. Additionally, as part of the acquisition of BOJH on October 1, 2022, the Company assumed three subordinated note purchase agreements to issue and sell fixed-to-floating rate notes. The balance on the notes at September 30, 2023, net of the fair value adjustment from the acquisition totaling $0.5 million, totaled $14.5 million.

Exclusive from the investing activities related to acquisitions, our primary investing activities are loan fundings and pay-offs and paydowns of loans and purchases and sales of investment securities. At September 30, 2023, pledgeable investment securities represented a significant source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled $1.2 billion at September 30, 2023, inclusive of pre-tax net unrealized losses of $128.0 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $106.3 million of pre-tax net unrealized losses at September 30, 2023. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of September 30, 2023, our investment securities portfolio consisted primarily of MBS, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base.

For additional information regarding our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying consolidated financial statements.

Capital

Under the Basel III requirements, at September 30, 2023, the Company, NBH Bank and Bank of Jackson Hole Trust met all capital adequacy requirements, and the Banks had regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on regulatory capital, see note 10 in our consolidated financial statements.

Our shareholders' equity is impacted by earnings, changes in unrealized gains and losses on securities, net of tax, stock-based compensation activity, share repurchases, shares issued in connection with acquisitions and the payment of dividends.

The Board of Directors has from time to time authorized multiple programs to repurchase shares of the Company’s common stock either in open market or in privately negotiated transactions in accordance with applicable regulations of the SEC. On May 9, 2023, the Company’s Board of Directors authorized a new program to repurchase up to $50.0 million of the Company’s stock. The remaining authorization under the 2023 program as of September 30, 2023 was $50.0 million.

On November 7, 2023, our Board of Directors declared a quarterly dividend of $0.27 per common share, payable on December 15, 2023 to shareholders of record at the close of business on November 24, 2023.

Asset/Liability Management and Interest Rate Risk

The Board of Directors meets as often as necessary, but no less than quarterly, to review financial statements, public filings, significant accounting policy changes and any risk management issues. The Board also oversees the performance of our internal audit function as well as serves as an independent and objective body to monitor and assess our compliance with legal and regulatory requirements as well as internal control systems. Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows.

Interest rate risk results from following:

The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee with direction from the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.

Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and utilize various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.

We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

Our interest rate risk model indicated that the Company was in a fairly neutral position in terms of interest rate sensitivity at September 30, 2023. At September 30, 2023, our asset sensitivity position decreased from December 31, 2022, primarily driven by balance sheet mix change, mainly due to shifting of non-interest bearing deposits into interest bearing accounts. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 and 200 basis point decrease in interest rates on net interest income based on the interest rate risk model at the respective dates:

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.

As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has executed interest rate derivatives primarily using floors and collars. For further discussion of the Company’s derivative contracts refer to note 15. The strategy with respect to liabilities has been to continue to emphasize transaction deposit growth, particularly non-interest or low interest bearing non-maturing deposit accounts while building long-term client relationships. Non-maturing deposit accounts totaled 87.8% of total deposits at September 30, 2023, compared to 88.9% at December 31, 2022. We currently have no brokered time deposits.

Impact of Inflation and Changing Prices

The primary impact of inflation on our operations is reflected in increasing operating costs and non-interest expense. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than do changes in the general rate of inflation and changes in prices. Interest rate changes do not necessarily move in the same direction, nor have the same magnitude, as changes in the prices of goods and services. Although not as critical to the banking industry as many other industries, inflationary factors may have some impact on our ability to grow, total assets, earnings and capital levels. While we plan to continue our disciplined approach to expense management, an inflationary environment may cause wage pressures and general increases in our cost of doing business, which may increase our non-interest expense.

Off-Balance Sheet Activities

In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As of September 30, 2023 and December 31, 2022, we had loan commitments totaling $1.8 billion and $2.0 billion, respectively, and standby letters of credit that totaled $9.9 million and $13.9 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.

The information called for by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.

Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of September 30, 2023. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

During the most recently completed fiscal quarter, there were no changes made in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There have been no material changes in the Risk Factors described in the Corporation’s 2022 Annual Report on Form 10-K other than as set out in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, in Item 1A of Part II.