National Bank Holdings Corp: Form 10-Q for the period ended Jun 30, 2024

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 six months ended June 30, 2024, 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, 2023, 2022 and 2021. 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 have 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 June 30, 2024, we had $9.9 billion in assets, $7.7 billion in loans, $8.4 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

Profitability and returns

Strategic execution

Loan portfolio

50

Credit quality

Client deposit funded balance sheet

Liquidity

Revenues

51 related to convertible preferred stock in venture capital investments classified as non-marketable securities, compared to $4.0 million of impairment in the same period during the prior year. Mortgage banking income decreased $1.0 million during the six months ended June 30, 2024, compared to the same period in the prior year.

Expenses

Strong capital position

Key Challenges

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 along with declines in commercial real estate property values are drawing increased scrutiny on financial institutions. Liquidity within the financial services sector has tightened, and we expect the intense competition for deposits throughout our markets to continue. 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.

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. In connection with our digital growth strategy and our digital solution 2UniFi, we have made and will continue to make investments in and also partner with third party fintech companies. The innovations these companies develop for utilization by 2UniFi may prove more difficult to successfully integrate into our existing operations and may require additional operational and control systems to manage fraud, operational, legal and compliance risks.

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. During the years ended December 31, 2023 and 2022, the Federal Reserve increased prevailing interest rates by a total of 100 and 425 basis points, respectively. Our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions. Management employs risk management policies to monitor and limit exposure to changes in market rates, which is discussed in more detail in the Asset/Liability Management and Interest Rate Risk section of Management’s Discussion and Analysis.

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,” “net income excluding other intangible assets amortization expense, after tax,” “non-interest expense excluding other intangible assets amortization,” “efficiency ratio excluding other intangible assets amortization FTE,” “pre-provision net revenue,” “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,” “net income excluding the impact of other intangible assets amortization expense, 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

55

Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin

Efficiency Ratio and Pre-Provision Net Revenue

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.

Future Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The update requires disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this update do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impact from ASU 2023-07, and does not expect the adoption of this pronouncement to have a material impact on its financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The update requires public business entities to disclose specific categories related to rate reconciliation. It also requires more detailed information for reconciling items, provided certain quantitative thresholds are met. The amendments in this update are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. Early adoption is permitted. The Company is evaluating the impact from ASU 2023-09, and does not expect the adoption of this pronouncement to have a material impact on its financial statements apart from the inclusion of additional disclosures.

In March 2024, the FASB issued ASU 2024-01, Compensation – Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. This update improves GAAP by adding an illustrative example that includes four fact patterns to demonstrate how an entity should apply the scope guidance in paragraph 718-10-15-3 to determine whether a profit interest award should be accounted for in accordance with Topic 718. The amendments in this update are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is evaluating the impact from ASU 2024-01, and does not expect the adoption of this pronouncement to have a material impact on its financial statements.

On March 6, 2024, the U.S. Securities and Exchange Commission (“SEC”) adopted a new set of rules that require a wide range of climate-related disclosures. The disclosures will include material climate-related risks, information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition, Scope 1 and Scope 2 Greenhouse Gas emissions and disclosure of the financial statement effects of severe weather events and other natural conditions including costs and losses. Disclosures on Greenhouse Gas emissions will be subject to adoption on a phased-in basis by certain larger registrants when those emissions are material, and an attestation report covering the same will also need to be filed. Compliance dates under the final rule are phased in by registrant category. Multiple lawsuits have been filed challenging the SEC’s new climate rules, which have been consolidated and will be heard in the U.S. Court of Appeals for the Eighth Circuit. On April 4, 2024, the SEC issued an order staying the final rules until judicial review is complete.

Financial Condition

Total assets were $9.9 billion at June 30, 2024, increasing $19.8 million, or 0.2%, from December 31, 2023. Cash and cash equivalents decreased $45.8 million from December 31, 2023, and investment securities increased $31.9 million. Loans totaled $7.7 billion at June 30, 2024 and December 31, 2023, and the allowance for credit losses decreased $1.5 million to $96.5 million at June 30, 2024. During the six months ended June 30, 2024, lower cost demand, savings, and money market deposits ("transaction deposits") increased $145.8 million, or 4.1% annualized, to $7.4 billion, compared to December 31, 2023. Total deposits increased $186.5 million, or 4.6% annualized, to $8.4 billion at June 30, 2024, compared to December 31, 2023.

Investment securities

Available-for-sale

Total investment securities available-for-sale increased 9.9% during the six months ended June 30, 2024 to $0.7 billion. Purchases of available-for-sale securities during the six months ended June 30, 2024 totaled $138.4 million. There were no purchases of available-for-sale securities during the six months ended June 30, 2023. Paydowns and maturities totaled $72.1 million and $47.6 million during the six months ended June 30, 2024 and 2023, 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 June 30, 2024 and December 31, 2023, 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 4.8 years and 5.2 years at June 30, 2024 and December 31, 2023, respectively. This estimate is based on assumptions and actual results may differ. At June 30, 2024 and December 31, 2023, the duration of the total available-for-sale investment portfolio was 3.9 years and 4.3 years, respectively.

At June 30, 2024 and December 31, 2023, adjustable rate securities comprised 11.8% and 13.0%, 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 2.29% per annum and 1.73% per annum at June 30, 2024 and December 31, 2023, respectively.

The available-for-sale investment portfolio included $103.8 million of unrealized losses and $0.2 million of unrealized gains at June 30, 2024. At December 31, 2023, the available-for-sale investment portfolio included $99.0 million of unrealized losses and $0.1 million of unrealized gains. 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 June 30, 2024, 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 totaled $554.7 million at June 30, 2024, compared to $585.1 million at December 31, 2023, a decrease of $30.4 million, or 5.2%. There were no purchases of held-to-maturity securities during the six months ended June 30, 2024. Purchases during the six months ended June 30, 2023 totaled $2.5 million. Paydowns and maturities totaled $30.7 million and $34.9 million during the six months ended June 30, 2024 and 2023, 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 $85.8 million of unrealized losses at June 30, 2024. At December 31, 2023, the held-to-maturity investment portfolio included $81.0 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 June 30, 2024 and December 31, 2023 was 5.6 years and 5.7 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 4.4 years and 4.6 years as of June 30, 2024 and December 31, 2023, respectively.

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, convertible preferred stock and equity method investments. During the six months ended June 30, 2024, purchases of non-marketable securities totaled $16.9 million, and proceeds from redemptions and sales of non-marketable securities totaled $30.8 million. Purchases consisted primarily of FHLB stock, and proceeds consisted of redemptions of FHLB stock. During the six months ended June 30, 2023, purchases of non-marketable securities totaled $77.1 million, and proceeds from redemptions and sales of non-marketable securities totaled $73.4 million. Changes in the Company’s FHLB stock holdings were directly correlated to FHLB line of credit advances and paydowns.

FRB and FHLB stock

At June 30, 2024 and December 31, 2023, the Company held FRB stock and FHLB stock for regulatory or debt facility purposes. 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.

Convertible preferred stock

Non-marketable securities include convertible preferred stock without a readily determinable fair value. During the three and six months ended June 30, 2024, the Company recorded $3.9 million of impairment on convertible preferred stock related to venture capital investments, included in other non-interest income in the Company’s consolidated statements of operations. During the three and six months ended June 30, 2023, the Company recorded $4.0 million of impairment on convertible preferred stock related to venture capital investments. During the three and six months ended June 30, 2024, the Company sold convertible preferred stock totaling $1.0 million, which generated realized gains of $0.1 million recorded in other non-interest income in the Company’s consolidated statements of operations. The Company purchased $0.0 million and $0.4 million of convertible preferred stock during the three and six months ended June 30, 2024, respectively.

Equity method investments

Non-marketable securities also include equity method investments. During the three and six months ended June 30, 2024, the Company recorded net unrealized gains on equity method investments totaling $0.3 million. During the three and six months ended June 30, 2023, the Company recorded net unrealized losses on equity method investments totaling $0.1 million and $0.4 million, respectively. These gains and losses were recorded in other non-interest income in the Company’s consolidated statements of operations.

Loans overview

At June 30, 2024, 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 $23.4 million, or 0.6% annualized, from December 31, 2023 to June 30, 2024. Loan fundings during the six months ended June 30, 2024 totaled $705.2 million, led by commercial loan fundings of $480.8 million.

Our commercial and industrial loan portfolio is highly diversified across industry sectors and geography. At June 30, 2024, there were no industry sectors representing more than 15.0% of our total loan portfolio. Key segments included government/non-profit loans of $778.0 million, or 10.1% of total loans, and health care/hospital loans of $498.5 million, or 6.5% of total loans.

Non-owner occupied CRE loans were 165.0% of the Company’s risk based capital, or 24.2% 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 and office properties, comprising 3.4% of total loans. Multifamily loans totaled $356.9 million, or 4.6% of total loans, as of June 30, 2024.

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 3.8% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 0.9% 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 $1.5 billion over the past 12 months, led by commercial loan fundings of $1.0 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 $19,281, $(59,523), $16,954, ($12,877) and $13,766 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.

The Company’s policy is to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such modified loans are considered TDMs. TDMs may include principal forgiveness, interest rate reductions, other-than-insignificant-payment delays, term extensions or any combination thereof. 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 six months ended June 30, 2024 was $0.4 million and $1.0 million, respectively, and $0.7 million and $0.8 million during the three and six months ended June 30, 2023, 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 six months ended June 30, 2024, total non-performing loans decreased $2.2 million from December 31, 2023. Loans 30-89 days past due and still accruing interest were 0.35% and 0.16% of total loans at March 31, 2024 and December 31, 2023, respectively. A significant portion of the increase in the loans 30-89 days past due was a result of temporary payment delays that were administrative in nature and have been addressed subsequent to quarter end. Loans 90 days or more past due and still accruing interest were 0.05% and 0.01% at June 30, 2024 and December 31, 2023, respectively.

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.

During the three months ended June 30, 2024, the Company recorded a decrease in the allowance for credit losses of $1.2 million, due to a decrease in specific reserves related to the resolution of non-performing loans. The allowance for credit losses increased $3.9 million as of June 30, 2024, compared to June 30, 2023, driven by loan growth and higher reserve requirements.

Net charge-offs on loans during the three and six months ended June 30, 2024 totaled $4.1 million and $4.2 million, respectively, and the ratio of annualized net charge-offs to average total loans totaled 0.22% and 0.11%, respectively. Specific reserves on loans totaled $6.9 million at June 30, 2024.

Net charge-offs on loans during the three and six months ended June 30, 2023 totaled $0.3 million and $0.6 million, respectively, and the ratio of annualized net charge-offs to average total loans totaled 0.02% and 0.02%, respectively. Specific reserves on loans totaled $6.0 million at June 30, 2023.

The Company has elected to exclude AIR from the ACL calculation. As of June 30, 2024 and December 31, 2023, AIR from loans totaled $42.5 million and $42.4 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 $96.5 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at June 30, 2024. 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:

66

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 June 30, 2024 and December 31, 2023:

The following table shows uninsured time deposits by scheduled maturity as of June 30, 2024:

At June 30, 2024 and December 31, 2023, time deposits that were scheduled to mature within 12 months totaled $789.9 million and $689.0 million, respectively. Of the time deposits scheduled to mature within 12 months at June 30, 2024, $241.3 million were in denominations of $250,000 or more, and $548.6 million were in denominations less than $250,000. Approximately 79% of our total deposits were FDIC insured at June 30, 2024. Additionally, the Company participates in the IntraFi Cash Service program, which allows depositors to receive reciprocal FDIC insurance coverage. The Company had $955.8 million and $944.3 million of deposits in the program as of June 30, 2024 and December 31, 2023, 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 June 30, 2024 and December 31, 2023, net of long-term debt issuance costs totaling $0.3 million, totaled $39.7 million. Interest expense totaling $0.3 million and $0.6 million was recorded in the consolidated statements of operations during the three and six months ended June 30, 2024, respectively. During the three and six months ended June 30, 2023, interest expense totaled $0.3 million and $0.6 million, respectively.

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 June 30, 2024, net of a fair value adjustment related to the acquisition totaling $0.4 million, totaled $14.6 million. At December 31, 2023, the balance on the notes, net of the fair value adjustment from the acquisition totaling $0.5 million, totaled $14.5 million. Interest expense related to the notes totaling $0.1 million and $0.3 million was recorded in the consolidated statements of operations during the three and six months ended June 30, 2024, respectively. During the three and six months ended June 30, 2023, interest expense related to the notes totaled $0.1 million and $0.3 million, 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 June 30, 2024 and December 31, 2023, the Company sold securities under agreements to repurchase totaling $19.5 million and $19.6 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 $1.8 billion at June 30, 2024. The Company may utilize the FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At June 30, 2024 and December 31, 2023, the Banks had $35.0 million and $340.0 million, respectively, of outstanding borrowings with the FHLB. The Company may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at June 30, 2024 or December 31, 2023. Loans pledged were $2.6 billion at June 30, 2024 and December 31, 2023, respectively. The Company incurred $0.1 million and $3.3 million of interest expense related to FHLB advances or other short-term borrowings for the three and six months ended June 30, 2024, respectively. During the three and six months ended June 30, 2023, interest expense related to FHLB advances or other short-term borrowings totaled $5.6 million and $12.7 million, respectively.

Regulatory Capital

Our subsidiary banks and the holding company are subject to the regulatory capital adequacy requirements of the Federal Reserve Board and the FDIC, as applicable. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly further discretionary actions by regulators that could have a material adverse effect on us. At June 30, 2024 and December 31, 2023, our subsidiary banks and the consolidated holding company exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as further detailed in note 10 of our consolidated financial statements.

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

Net income totaled $26.1 million and $57.5 million, or $0.68 and $1.50 per diluted share, during the three and six months ended June 30, 2024, respectively. During the three and six months ended June 30, 2023, net income totaled $32.6 million and $72.8 million, or $0.85 and $1.91 per diluted share, respectively. The decrease in net income was largely driven by lower net interest income due to an increase in cost of funds outpacing the increase in interest income. The return on average tangible assets was 1.17% and 1.28% during the three and six months ended June 30, 2024, respectively, and the return on average tangible common equity was 12.44% and 13.77%, respectively.

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 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 timeframes prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale and loans.

The table below presents the components of net interest income on an FTE basis for the three months ended June 30, 2024 and 2023.

Net interest income totaled $83.6 million and $89.8 million during the three months ended June 30, 2024 and 2023, respectively. Net interest income on an FTE basis totaled $85.3 million and $91.2 million during the three months ended June 30, 2024 and 2023, respectively. During the three months ended June 30, 2024, the FTE net interest margin narrowed 31 basis points to 3.76%, compared to the three months ended June 30, 2023. The yield on earning assets increased 46 basis points, driven by an increase in new loan origination yields. During the three months ended June 30, 2024, the cost of funds increased 84 basis points to 2.32%, compared to the three months ended June 30, 2023.

Average loans comprised $7.6 billion, or 83.5%, of total average interest earning assets during the three months ended June 30, 2024, compared to $7.4 billion, or 81.8%, during the three months ended June 30, 2023. The increase in average loan balances was driven by loan originations during the period.

Average investment securities comprised 15.0% and 15.7% of total interest earning assets during the three months ended June 30, 2024 and 2023, respectively. Average interest bearing cash balances totaled $92.4 million during the three months ended June 30, 2024, compared to $144.4 million for the same period in the prior year.

Average interest bearing liabilities increased $0.4 billion during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, driven by organic balance sheet and strategic acquisition growth. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $827.0 million and time deposits totaling $34.2 million. The increase was partially offset by a decrease in FHLB advances totaling $426.2 million and securities sold under agreements to repurchase of $2.8 million.

The table below presents the components of net interest income on an FTE basis for the six months ended June 30, 2024 and 2023:

Net interest income totaled $167.6 million and $184.7 million during the six months ended June 30, 2024 and 2023, respectively. Net interest income on an FTE basis totaled $171.0 million and $187.5 million during the six months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024, the FTE net interest margin narrowed 45 basis points to 3.77%, compared to the six months ended June 30, 2023. The yield on earning assets increased 55 basis points, driven by an increase in earning assets and increases in the Federal Reserve Bank’s interest rates. The cost of funds increased 109 basis points to 2.29% during the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Average loans comprised $7.6 billion, or 83.7%, of total average interest earning assets during the six months ended June 30, 2024, compared to $7.3 billion, or 81.8%, during the six months ended June 30, 2023. The increase in average loan balances was driven by loan originations during the period.

Average investment securities comprised 14.8% and 16.1% of total interest earning assets during the six months ended June 30, 2024 and 2023, respectively. Average interest bearing cash balances totaled $92.0 million during the six months ended June 30, 2024, compared to $115.8 million for the same period in the prior year.

Average balances of interest bearing liabilities increased $0.7 billion during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, driven by organic balance sheet and strategic acquisition growth. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $1.0 billion and time deposits totaling $50.7 million. The increase was partially offset by a decrease in FHLB advances totaling $397.5 million and securities sold under agreements to repurchase of $2.0 million. The cost of funds increased 109 basis points to 2.29% during the six months ended June 30, 2024, compared to 1.20% during the six months ended June 30, 2023.

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 six months ended June 30, 2024, compared to the three and six months ended June 30, 2023:

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 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.

The Company recorded provision for credit loss expense totaling $2.8 million for the three and six months ended June 30, 2024, driven by loan growth and higher reserve requirements from changes in the CECL model’s underlying economic forecast. During the three and six months ended June 30, 2023, the Company recorded provision expense for credit losses of $1.7 million and $2.6 million, respectively. Included in the provision for credit losses was $0.2 million of provision expense and $0.1 million of provision release for unfunded loan commitments during the three and six months ended June 30, 2024, respectively. The allowance for credit losses totaled 1.25% of total loans for June 30, 2024 and 2023.

Non-interest income

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

Non-interest income increased to $14.0 million for the three months ended June 30, 2024, compared to $13.8 million for the three months ended June 30, 2023. Other non-interest income increased $1.3 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, driven by diversified sources of fee revenue including increases in SBA loan income and trust income. Service charges and bank card fees decreased $0.4 million, and mortgage banking income decreased $0.4 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Non-interest income totaled $31.7 million for the six months ended June 30, 2024, compared to $28.5 million for the six months ended June 30, 2023. The increase was driven by diversified sources of fee revenue including increases in SBA loan income, Cambr fee income and trust income. Mortgage banking income decreased $1.0 million, as the sustained high-interest rate environment has lowered mortgage volume. Included in the three and six months ended June 30, 2024 was $3.9 million of impairment related to venture capital investments classified as non-marketable securities, compared to $4.0 million of impairment in the same period during the prior year.

Non-interest expense

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

During the three months ended June 30, 2024, non-interest expense increased $2.1 million, or 3.4%, compared to the three months ended June 30, 2023, largely due to ongoing investments in technology. During the three months ended June 30, 2024, professional fees decreased $1.4 million, compared to the same period during the prior year.

During the six months ended June 30, 2024, non-interest expense totaled $125.9 million, an increase of 5.6%, compared to $119.3 million for the same period during the prior year, largely due to ongoing investments in technology and an increase in core operating expenses driven by our Cambr acquisition in April 2023. Other intangible assets amortization increased $0.6 million due to intangible assets acquired through our Cambr acquisition. These increases were partially offset by a decrease of $2.4 million in professional fees.

Income taxes

Income tax expense totaled $5.6 million and $13.1 million for the three and six months ended June 30, 2024, respectively. Income tax expense for the three and six months ended June 30, 2023 totaled $8.4 million and $18.4 million, respectively. The decreases over the prior periods were driven by lower pre-tax income. The effective tax rate for the three and six months ended June 30, 2024 was 17.7% and 18.6%, respectively, compared to 20.5% and 20.2% for the same periods in the prior year.

Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our 2023 Annual Report on Form 10-K.

Liquidity and Capital Resources

Liquidity

Liquidity risk management is an important element in our asset/liability management. The Company maintains a robust liquidity profile at its holding company and the Banks collectively as well as separately. The Company is prudently managing liquidity in the current environment and maintains a liquidity profile focused on core deposit and stable long-term funding sources. Liquidity is supplemented with a variety of secured and unsecured wholesale funding sources across the maturity spectrum, which allows for the effective management of concentration and rollover risk. 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. The Company also regularly conducts stress tests to its Board-approved contingency funding plan to assess potential liquidity outflows or funding concerns 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 the contingency funding plan, which provides the basis for the identification of our liquidity needs and are monitored monthly by our Asset and Liability Committee.

The Company’s primary sources of funds include revenue from interest income and noninterest income as well as cash flows from loan repayments, payments from securities related to maturities and amortization, the sale of loans, and funds generated by core deposits, in addition to the use of private debt offerings.

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 June 30, 2024 and December 31, 2023:

Total on-balance sheet liquidity increased $78.2 million at June 30, 2024 compared to December 31, 2023, due to higher unencumbered investment securities of $124.0 million, partially offset by lower cash and due from banks of $45.8 million.

The Company’s investment portfolio remains positioned in liquid and readily marketable instruments and is a significant source of on-balance sheet secured borrowing capacity. Our investment securities portfolio is evaluated under established Asset and Liability Committee objectives and is structured as a liquidity portfolio, and only security fair values are used for the liquidity assessment. The fair value of total investment securities was $1.2 billion at June 30, 2024, compared to $1.1 billion at December 31, 2023. As of June 30, 2024, the fair value was inclusive of pre-tax net unrealized losses of $103.6 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $85.8 million of pre-tax net unrealized losses. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of June 30, 2024, 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. At June 30, 2024, the duration of the investment securities portfolio was 4.2 years and the weighted average life was 5.2 years.

As part of its liquidity management activities, the Company pledges collateral at its secured funding providers to ensure immediate availability of funding, which includes maintaining borrowing capacity at both the FHLB and the Federal Reserve. The Company does not consider borrowing capacity at the Federal Reserve a primary source of funding; however, it could be used as a potential source of funds in a stressed environment or during a market disruption. The amount of available contingent secured borrowing capacity may fluctuate based on the level of borrowings outstanding and level of assets pledged. The table below details those amounts as of the dates shown:

The Company had pledged $2.6 billion of loans as collateral to the FHLB at June 30, 2024 and December 31, 2023. FHLB borrowing capacity totaled $1.8 billion at June 30, 2024, including outstanding borrowings and the remaining FHLB funds available shown in the table above. At June 30, 2024, the Company had $35.0 million outstanding borrowings with the FHLB, compared to $340.0 million at December 31, 2023. At June 30, 2024, the Company’s available secured and committed borrowing capacity at the FHLB and Federal Reserve totaled $2.6 billion, compared to $1.5 billion at December 31, 2023.

In addition to core deposit and secured funding, the Company also accesses a variety of other short-term and long-term unsecured funding sources, which includes access to Cambr platform deposits, multiple brokered deposit platform options and lines of credit. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs, as well as within prudently defined concentration and policy limits. The Company executes periodic test trades to assess the level of access and operational processes associated with its secured and unsecured funding sources.

We anticipate that the sources of funds discussed above will provide adequate funding and liquidity for at least a 12-month period and the foreseeable future, 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 June 30, 2024, $789.9 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. 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 all subordinated notes totaled $54.3 million at June 30, 2024. At December 31, 2023, the balance on the notes, totaled $54.2 million.

Capital

Under the Basel III requirements, at June 30, 2024, 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 program as of June 30, 2024 was $50.0 million.

On July 30, 2024, our Board of Directors declared a quarterly dividend of $0.28 per common share, payable on September 13, 2024 to shareholders of record at the close of business on August 30, 2024.

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 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.

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 net 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 relatively neutral position in terms of interest rate sensitivity at June 30, 2024. At June 30, 2024, our liability sensitivity position increased slightly from December 31, 2023, primarily driven by balance sheet mix change, mainly due to shifting of non-interest bearing deposits into interest bearing deposits. 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 June 30, 2024 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 June 30, 2024, compared to 88.0% at December 31, 2023.

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. Inflationary factors may have some impact on our total assets, earnings, capital levels, our ability to grow, and, particularly, our clients. 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 June 30, 2024 and December 31, 2023, we had loan commitments totaling $1.5 billion and $1.6 billion, respectively, and standby letters of credit totaling $10.3 million and $13.0 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 June 30, 2024 Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2024.

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 to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023.