FB Financial Corp: Form 10-Q for the period ended Sep 30, 2023

The following is a discussion of our financial condition as of September 30, 2023 and December 31, 2022, and our results of operations for the three and nine months ended September 30, 2023 and 2022, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2022, that was filed with the SEC on February 28, 2023, and with the accompanying unaudited notes to the condensed consolidated financial statements set forth in this Report.

Forward-looking statements

Certain statements contained in this Report that are not historical in nature may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the Company’s future plans, results, strategies, and expectations, including expectations around changing economic markets. These statements can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “project,” and other variations of such words and phrases and similar expressions. These forward-looking statements are not historical facts, and are based upon management's current expectations, estimates, and projections, many of which, by their nature, are inherently uncertain and beyond the Company’s control. The inclusion of these forward-looking statements should not be regarded as a representation by the Company or any other person that such expectations, estimates, and projections will be achieved. Accordingly, the Company cautions shareholders and investors that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties that are difficult to predict. Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements including, without limitation, (1) current and future economic conditions, including the effects of inflation, interest rate fluctuations, changes in the economy or global supply chain, supply-demand imbalances affecting local real estate prices, and high unemployment rates in the local or regional economies in which the Company operates and/or the US economy generally, (2) changes in government interest rate policies and its impact on the Company’s business, net interest margin, and mortgage operations, (3) any continuation of the recent turmoil in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by government agencies in response, (4) increased competition for deposits, (5) the Company’s ability to effectively manage problem credits, (6) any deterioration in commercial real estate market fundamentals, (7) the Company’s ability to identify potential candidates for, consummate, and achieve synergies from, potential future acquisitions, (8) the Company’s ability to successfully execute its various business strategies, (9) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including legislative developments, (10) the potential impact of the phase-out of LIBOR or other changes involving LIBOR, (11) the effectiveness of the Company’s cybersecurity controls and procedures to prevent and mitigate attempted intrusions, (12) the Company's dependence on information technology systems of third party service providers and the risk of systems failures, interruptions, or breaches of security, and (13) the impact of natural disasters, pandemics, and/or acts of war or terrorism, (14) events giving rise to international or regional political instability, including the broader impacts of such events on financial markets and/or global macroeconomic environments, and (15) general competitive, economic, political, and market conditions. Further information regarding the Company and factors which could affect the forward-looking statements contained herein can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and in any of the Company’s subsequent filings with the SEC. Many of these factors are beyond the Company’s ability to control or predict. If one or more events related to these or other risks or uncertainties materialize, or if the underlying assumptions prove to be incorrect, actual results may differ materially from the forward-looking statements. Accordingly, shareholders and investors should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date of this Report, and the Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company. The Company qualifies all forward-looking statements by these cautionary statements.

Critical accounting policies

Our financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within our financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated balance sheet dates and our results of operations for the reporting periods. We monitor the status of proposed and newly issued accounting standards to evaluate the impact on our financial condition and results of operations. Our accounting policies, including the impact of any newly issued accounting standards if applicable, are discussed in further detail in Note 1, "Basis of presentation," in the notes to our consolidated financial statements in our Annual Report.

Financial highlights The following table presents certain selected historical consolidated income statement and balance sheet data and key performance indicators and other measures as of the dates or for the periods indicated. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

(dollars in thousands, except share data)

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(1) Book value per share equals our total common shareholders’ equity divided by the number of shares of our common stock outstanding as of the date presented.

(2) Non-GAAP financial measure; See "GAAP reconciliation and management explanation of non-GAAP financial measures” and non-GAAP reconciliations herein.

(3) ROAA and ROAE is calculated by dividing annualized net income or loss for that period by our average assets or average equity for the same period.

(4) Amounts are shown on a fully consolidated basis and exclude deposits of affiliates that are eliminated in consolidation.

GAAP reconciliation and management explanation of non-GAAP financial measures

We identify certain financial measures discussed in this Report as being "non-GAAP financial measures." The non-GAAP financial measures presented in this Report are adjusted efficiency ratio (tax equivalent basis), tangible book value per common share, tangible common equity to tangible assets, and return on average tangible common equity.

In accordance with the SEC's rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in our financial highlights may differ from that of other companies reporting measures with similar names. As a result of differences in how companies report non-GAAP measures, presentations by other banking organizations may not be comparable with ours. The following reconciliation tables provide a more detailed analysis of, and reconciliations for, each of these non-GAAP financial measures.

Adjusted Efficiency ratio (tax-equivalent basis)

The adjusted efficiency ratio (tax-equivalent basis) is a non-GAAP measure that excludes certain gains (losses), mortgage restructuring expenses, and other selected items. Our management uses this measure in its analysis of our performance. Our management believes this measure provides a greater understanding of ongoing operations and enhances comparability of results with prior periods, as well as demonstrates the effects of significant gains or losses and changes. The most directly comparable financial measure calculated in accordance with GAAP is the efficiency ratio.

The following table presents a reconciliation of our adjusted efficiency ratio (tax-equivalent basis) to our efficiency ratio for the periods below:

(dollars in thousands)

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Tangible book value per common share and tangible common equity to tangible assets Tangible book value per common share and tangible common equity to tangible assets are non-GAAP measures that exclude the impact of goodwill and other intangibles used by our management to evaluate capital adequacy. Because intangible assets such as goodwill and other intangibles vary extensively from company to company, we believe that the presentation of this information allows investors to more easily compare the Company's capital position to other companies. The most directly comparable financial measure calculated in accordance with GAAP is book value per common share and our total common shareholders' equity to total assets. The following table presents, as of the dates set forth below, tangible common equity compared with total common shareholders' equity, tangible book value per common share compared with our book value per common share and common equity to tangible assets compared to total common shareholders' equity to total assets:

(dollars in thousands, except share data)

Return on average tangible common equity

Return on average tangible common equity is a non-GAAP measure that uses average shareholders' equity and excludes the impact of goodwill and other intangibles. This measurement is also used by our management to evaluate capital adequacy. The following table presents, as of the dates set forth below, reconciliations of total average tangible common equity to average shareholders' equity and return on average tangible common equity to return on average shareholders' equity:

(dollars in thousands)

55

Company overview

We are a financial holding company headquartered in Nashville, Tennessee. We operate primarily through our wholly-owned subsidiary bank, FirstBank, and the Bank's subsidiaries. FirstBank provides a comprehensive suite of commercial and consumer banking services to clients in select markets in Tennessee, Kentucky, Alabama and North Georgia. As of September 30, 2023, our footprint included 81 full-service branches serving the following Tennessee Metropolitan Statistical Areas: Nashville, Chattanooga (including North Georgia), Knoxville, Memphis, and Jackson in addition to Bowling Green, Kentucky and Birmingham, Florence and Huntsville, Alabama. Our banking services extend to 16 community markets throughout Tennessee and North Georgia. FirstBank also provides retail mortgage banking services utilizing its bank branch network and mortgage banking offices strategically located throughout the southeastern United States.

We operate through two segments, Banking and Mortgage. We generate most of our revenue in our Banking segment from interest on loans and investments, loan-related fees, trust and investment services and deposit-related fees. Our primary source of funding for our loans is customer deposits, however we have other sources of funds including unsecured credit lines, brokered CDs, and other borrowings. We generate most of our revenue in our Mortgage segment from origination fees and gains on sales in the secondary mortgage loan market, as well as from mortgage servicing revenues.

Recent developments

Recent banking events

The banking sector experienced significant volatility during the first nine months of 2023, including high-profile bank failures, continuing interest rate hikes and recessionary concerns. We have proactively positioned the balance sheet to mitigate the risks affecting the Company and the overall banking industry in order to serve our clients and communities.

As of September 30, 2023, we carried on-balance sheet liquidity of $1.35 billion. We maintain the ability to access $6.78 billion of contingent liquidity from the FHLB, Federal Reserve, brokered CDs, and unsecured lines of credit. Our available-for-sale debt securities portfolio is 10.8% of total assets and we do not maintain any held-to-maturity investment securities. Management considers our current liquidity position to be more than adequate to meet both short-term and long-term liquidity needs. Refer to the section 'Liquidity and capital resources' for additional information.

Further, our capital ratios of the Company, and its subsidiary bank are well above the standards to be considered well-capitalized under regulatory requirements. Refer to the section 'Shareholders' equity and capital management' for additional details.

Non-performing assets were 0.71% of total assets as of September 30, 2023 and net charge-offs during both the three and nine months ended September 30, 2023 were 0.02%, which we believe reflects our disciplined underwriting and conservative lending philosophy. Refer to the section 'Asset quality' for additional information.

While the high-profile bank failures and other concerns have impacted the entire banking industry and future events cannot be predicted, we remain committed to safe and sound community banking practices that have been a cornerstone of the Company's values and historical performance.

Overview of recent financial performance

Results of operations

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Our net income decreased during the three months ended September 30, 2023 to $19.2 million from $31.8 million for the three months ended September 30, 2022. Diluted earnings per common share was $0.41 and $0.68 for the three months ended September 30, 2023 and 2022, respectively. Our net income represented a return on average assets, or ROAA, of 0.61% and 1.05% for the three months ended September 30, 2023 and 2022, respectively, and a return on average shareholders’ equity, or ROAE, of 5.46% and 9.45% for the same periods. Our ratio of return on average tangible common equity, or ROATCE for the three months ended September 30, 2023 and 2022 was 6.67% and 11.7%, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of tangible common equity and return on average tangible common equity.

During the three months ended September 30, 2023, our net interest income before provisions for credit losses was $100.9 million compared with $111.4 million for the three months ended September 30, 2022. Our net interest margin, on a tax-equivalent basis, decreased to 3.42% for the three months ended September 30, 2023, compared with 3.93% for the three months ended September 30, 2022. The decrease was primarily driven by higher interest rates increasing our total cost of funds compared to the increase in the interest income on interest-earnings assets during the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

We experienced a decrease in noninterest income of $14.6 million to $8.0 million for the three months ended September 30, 2023, compared with $22.6 million for the same period in the prior year. The primary driver of the decrease in noninterest income was the result of management's election to sell $76.6 million of available-for-sale securities, which contributed toward a $14.2 million net loss on investment securities during the three months ended September 30, 2023. Refer to the section “Other earnings assets” for additional information on the sale of the available-for sale securities.

Noninterest expense increased to $83.0 million for the three months ended September 30, 2023, compared with $81.8 million for the three months ended September 30, 2022. The increase in noninterest expense is reflective of $4.8 million in early retirement and severance costs associated with our efficiency and scalability initiatives during the three months ended September 30, 2023 offset by a decrease in legal and professional fees.

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Our net income increased during the nine months ended September 30, 2023 to $90.9 million from $86.4 million for the nine months ended September 30, 2022. Diluted earnings per common share were $1.94 and $1.83 for the nine months ended September 30, 2023 and 2022, respectively. Our net income represented a ROAA of 0.95% and 0.93% for the nine months ended September 30, 2023 and 2022, respectively, and a ROAE of 8.86% and 8.45% for the same periods. Our ROATCE for the nine months ended September 30, 2023 and 2022 were 10.9% and 10.4%, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of tangible common equity and return on average tangible common equity.

During the nine months ended September 30, 2023, our net interest income before provisions for credit losses increased to $306.1 million compared with $301.7 million in the nine months ended September 30, 2022. Our net interest margin, on a tax-equivalent basis, decreased to 3.44% for the nine months ended September 30, 2023 as compared to 3.50% for the nine months ended September 30, 2022. The decrease was primarily driven by our total cost of funds increasing relative to the increase in the interest income on interest-earnings assets due to higher interest rates.

Noninterest income for the nine months ended September 30, 2023 decreased by $42.0 million to $55.2 million, down from $97.2 million for the nine months ended September 30, 2022. The decrease in noninterest income was due to a $28.2 million decrease in mortgage banking income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. These results were impacted by increasing interest rates, compressing margins, and a decrease in demand for residential mortgages during the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022. The change also reflects the restructuring of our mortgage business (referred to herein as "Mortgage restructuring"), including the exit of our direct-to-consumer internet delivery channel during the second quarter of 2022. Refer to the section "Business segment highlights" for additional information on the restructuring of our Mortgage segment. Additionally contributing to the decrease in noninterest income during the nine months ended September 30, 2023 was a $14.2 million net loss on investment securities primarily related to the sale of $76.6 million of available-for-sale securities. Refer to the section “Other earnings assets” for additional information on the sale of the available-for sale securities.

Noninterest expense decreased to $244.7 million for the nine months ended September 30, 2023, compared with $268.1 million for the nine months ended September 30, 2022. The decrease in noninterest expense is reflective of the $25.8 million decrease in salaries, commissions and employee-related costs in the Mortgage segment related to the restructuring of our Mortgage segment and reduced headcount and mortgage production. The decrease was partially offset by a $6.2 million increase in early retirement and severance costs primarily associated with our efficiency and scalability initiatives and a $2.5 million in regulatory fees and assessments. Additionally, the decrease reflects $12.5 million in mortgage restructuring expenses incurred during the nine months ended September 30, 2022.

Business segment highlights

We operate our business in two business segments: Banking and Mortgage. See Note 11, “Segment reporting” in the notes to our unaudited consolidated financial statements contained herein for a description of these business segments.

Banking

Three months ended September 30, 2023 compared to three months ended September 30, 2022

Income before taxes from the Banking segment decreased for the three months ended September 30, 2023 to $23.1 million, compared to $44.4 million for the three months ended September 30, 2022. These results included a $10.5 million decrease in net interest income to $100.9 million for the three months ended September 30, 2023 compared with $111.4 million for the three months ended September 30, 2022. The provision for credit losses on loans HFI and unfunded loan commitments decreased to $2.8 million for the three months ended September 30, 2023 compared to $11.4 million for the three months ended September 30, 2022, reflecting a decrease in unfunded loan commitments in the construction and land development category by $774.5 million from September 30, 2022. The Banking segment recorded a noninterest loss of $4.0 million for the three months ended September 30, 2023 compared to noninterest income of $10.3 million for the three months ended September 30, 2022. This includes a net loss on investment securities of $14.2 million primarily associated with the sale of $76.6 million available-for-sale securities during the three months ended September 30, 2023 compared with a net loss on investment securities of $0.1 million for the three months ended September 30, 2022. Noninterest expense increased during the three months ended September 30, 2023 to $71.0 million from $65.9 million for three months ended September 30, 2022 due primarily to increases in salaries and early retirement and severance costs offset by a decrease in legal and professional fees.

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Income before taxes from the Banking segment decreased for the nine months ended September 30, 2023 to $115.9 million, compared to $130.5 million for the nine months ended September 30, 2022. Net interest income increased by $4.4 million to $306.1 million during the nine months ended September 30, 2023 compared to $301.7 million during the nine months ended September 30, 2022. Our provisions for credit losses on loans HFI and unfunded loan commitments resulted in $2.2 million of provision expense during the nine months ended September 30, 2023 compared to $19.4 million during the nine months ended September 30, 2022. Noninterest income decreased to $18.9 million in the nine months ended September 30, 2023 as compared to $33.0 million in the nine months ended September 30, 2022. Similar to the discussion above, the decrease includes a net loss on investment securities of $14.2 million primarily associated with the sale of $76.6 million available-for-sale securities during the nine months ended September 30, 2023 compared with a net loss on investment securities of $0.4 million for the nine months ended September 30, 2022. Noninterest expense increased to $207.0 million for nine months ended September 30, 2023 compared to $184.8 million for the nine months ended September 30, 2022 due to increases in salaries, early retirement and severance costs, regulatory fees and assessments, occupancy, and marketing.

Mortgage

Three months ended September 30, 2023 compared to three months ended September 30, 2022

The Mortgage segment reported pre-tax income of $0.1 million for the three months ended September 30, 2023, compared to a pre-tax loss of $3.7 million for the three months ended September 30, 2022. Noninterest income decreased by $0.2 million to $12.1 million for the three months ended September 30, 2023, compared with $12.3 million for the three months ended September 30, 2022, which was related to a decrease in mortgage banking income. Further discussion related to the change in mortgage banking income is included under the subheading 'Noninterest income' included within this management's discussion and analysis. Noninterest expense for the three months ended September 30, 2023 and 2022 was $12.0 million and $16.0 million, respectively. This decrease is reflective of decreases in salaries, commissions, incentives and employee benefits due to a reduction in production volume.

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Activity in our Mortgage segment resulted in a pre-tax net loss of $1.5 million for the nine months ended September 30, 2023 compared to a pre-tax net loss of $19.1 million for the nine months ended September 30, 2022. Mortgage banking income decreased $28.2 million to $36.3 million during the nine months ended September 30, 2023 compared to $64.5 million for the nine months ended September 30, 2022. Further discussion on the components of mortgage banking income is included under the subheading 'Noninterest income' within this management's discussion and analysis. Noninterest expense for the nine months ended September 30, 2023 and 2022 was $37.8 million and $83.3 million, respectively, This decrease is reflective of the mortgage restructuring expense mentioned above in addition to decreases in marketing, legal and professional fees, occupancy, salaries, commissions and incentive costs associated with the decrease in production volume and headcount reduction from the Mortgage restructuring.

Results of operations

Throughout the following discussion of our operating results, we present our net interest income, net interest margin and efficiency ratio on a fully tax-equivalent basis. The fully tax-equivalent basis adjusts for the tax-favored status of net interest income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income, which enhances comparability of net interest income arising from taxable and tax-exempt sources.

The adjustment to convert certain income to a tax-equivalent basis consists of dividing tax-exempt income by one minus the combined federal and blended state statutory income tax rate of 26.06% for the three and nine months ended September 30, 2023 and 2022.

Net interest income

Net interest income is the most significant component of our earnings, generally comprising over 50% of our total revenues in a given period. Net interest income and margin are shaped by many factors, primarily the volume, term structure and mix of earning assets, funding mechanisms, and interest rate fluctuations. Other factors include accretion or amortization of discounts or premiums on purchased loans, prepayment risk on mortgage and investment–related assets, and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding, net interest income, and margin.

During the three and nine months ended September 30, 2023, the US Treasury yield curve became less inverted as long-term note and bond rates increased at a faster pace than shorter-term note rates. The curve remained inverted as of September 30, 2023, which is in contrast to the more normalized upward sloping US Treasury yield curve during the three and nine months ended September 30, 2022. The Federal Funds Target Rate range was 5.25% - 5.50% and 3.00% - 3.25% as of September 30, 2023 and September 30, 2022, respectively.

Three months ended September 30, 2023 compared to three months ended September 30, 2022

On a tax-equivalent basis, net interest income decreased to $101.8 million for the three months ended September 30, 2023 as compared to $112.1 million for the three months ended September 30, 2022. Interest income, on a tax-equivalent basis, was $174.7 million for the three months ended September 30, 2023, compared to $129.2 million for the three months ended September 30, 2022, an increase of $45.5 million, which was primarily driven by increases in both interest rates and volume on loans HFI and interest-bearing deposits with other financial institutions, partially offset by an increase in our deposits.

Interest income on loans HFI, on a tax-equivalent basis, increased $38.6 million to $153.0 million for the three months ended September 30, 2023 from $114.5 million for the three months ended September 30, 2022 primarily due to higher interest rates with a secondary driver of increased volume. The tax-equivalent yield on loans held for investment was 6.54% for the three months ended September 30, 2023, up 138 basis points from the three months ended September 30, 2022. Our estimated contractual loan interest yield was 6.32% for the three months ended September 30, 2023 compared with 4.79% in the three months ended September 30, 2022. Additionally, average loans HFI increased to $9.28 billion for the three months ended September 30, 2023 compared to $8.81 billion for the three months ended September 30, 2022 due to strong demand in our primary markets and funding of prior loan commitments.

The components of our loan yield for the three months ended September 30, 2023 and 2022 were as follows:

(dollars in thousands)

(1) Includes tax equivalent adjustment using combined marginal tax rate of 26.06%.

Origination and other loan fees impacted our NIM by 15 basis point and 23 basis points for the three months ended September 30, 2023 and 2022, respectively.

Interest income on interest-bearing deposits with other financial institutions increased to $9.6 million for the three months ended September 30, 2023 from $1.9 million for the three months ended September 30, 2022 due to higher interest rates and an increase in volume. The yield on interest-bearing deposits with other financial institutions increased 345 basis points to 5.48% for the three months ended September 30, 2023 compared to 2.03% for the three months ended September 30, 2022. Additionally, average interest-bearing deposits with other financial institutions increased to $696.6 million for the three months ended September 30, 2023 compared to $361.7 million for the three months ended September 30, 2022.

Interest expense was $73.0 million for the three months ended September 30, 2023, an increase of $55.9 million as compared to the three months ended September 30, 2022. The primary driver was increases in interest expense on money market, interest-bearing checking and customer time deposit products. Interest expense on money market deposits increased $30.2 million to $34.9 million for the three months ended September 30, 2023 compared to $4.7 million for the three months ended September 30, 2022. Interest expense on interest-bearing checking deposit products increased $14.7 million to $20.5 million for the three months ended September 30, 2023 compared to $5.8 million for the three months ended September 30, 2022. Interest expense on customer time deposits increased $9.4 million to $11.9 million for the three months ended September 30, 2023 compared to $2.5 million for the three months ended September 30, 2022. These increases were most significantly influenced by increasing interest rates. The average rate on money market deposits increased 305 basis points from 0.73% for the three months ended September 30, 2022 to 3.78% for the three months ended September 30, 2023. The average rate on interest-bearing checking deposits increased 223 basis points from 0.82% for the three months ended September 30, 2022 to 3.05% for the three months ended September 30, 2023. The average rate on customer time deposits increased 250 basis points from 0.87% for the three months ended September 30, 2022 to 3.37% for the three months ended September 30, 2023. Total cost of interest-bearing deposits was 3.33% for the three months ended September 30, 2023 compared to 0.74% for the three months ended September 30, 2022. As interest rates on deposits increase, we tend to experience some movement between deposit types as customers seek higher interest rates and shift from noninterest-bearing deposit accounts to interest-bearing deposit products.

The average balance on our FHLB advances decreased $315.3 million to $13.9 million for the three months ended September 30, 2023 compared to $329.1 million for the three months ended September 30, 2022. As a result, interest expense on subordinated debt decreased to $0.2 million for the three months ended September 30, 2023 compared to $2.2 million for the three months ended September 30, 2022.

Overall, our NIM, on a tax-equivalent basis, decreased to 3.42% for the three months ended September 30, 2023 from 3.93% for the three months ended September 30, 2022, driven by the increase in both interest rates and volume of loans HFI and interest-bearing deposits with other financial institutions, partially offset by an increase in cost of funds previously discussed.

Average balance and interest yield/rate analysis

The table below shows the average balances, income and expense and yield and rates of each of our interest-earning assets and interest-bearing liabilities on a tax equivalent basis, if applicable, for the periods indicated.

(dollars in thousands on tax-equivalent basis)

(1) Average balances of nonaccrual loans and overdrafts are included in average loan balances (before deduction of ACL).

(2) Interest income includes the effects of taxable-equivalent adjustments using a U.S. federal income tax rate and, where applicable, state income tax to increase tax-exempt interest income to a tax-equivalent basis. The net taxable-equivalent adjustment amounts included were $0.8 million for both the three months ended September 30, 2023 and 2022.

(3) Includes average net unrealized losses on investment securities available for sale of $232.6 million and $160.2 million for the three months ended September 30, 2023 and 2022, respectively.

(4) Includes average of optional rights to repurchase government guaranteed GNMA mortgage loans previously sold that have become past due greater than 90 days of $19.1 million and $25.9 million for the three months ended September 30, 2023 and 2022, respectively.

(5) The NIM is calculated by dividing annualized net interest income, on a tax-equivalent basis, by average total interest earning assets.

Yield/rate and volume analysis

The table below presents the components of the changes in net interest income for the three months ended September 30, 2023 and 2022. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volume and changes due to interest rates, with the changes in both volume and interest rates allocated to these two categories based on the proportionate absolute changes in each category.

(dollars in thousands on a tax-equivalent basis)

(1) Average loans are presented gross, including nonaccrual loans and overdrafts (before deduction of allowance for credit losses on loans HFI).

(2) Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis. The net taxable-equivalent adjustment amounts included was $0.8 million for both the three months ended September 30, 2023 and 2022.

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

On a tax-equivalent basis, net interest income increased $4.6 million to $308.6 million for the nine months ended September 30, 2023 as compared to $304.0 million for the nine months ended September 30, 2022. Interest income, on a tax-equivalent basis, was $506.1 million for the nine months ended September 30, 2023, compared to $336.1 million for the nine months ended September 30, 2022, an increase of $170.0 million, which was primarily driven by increases in both interest rates and volume on loans HFI, partially offset by an increase in our cost of deposits. Total interest income represents an increase in yield on interest-earning assets to 5.64% for the nine months ended September 30, 2023 compared with 3.86% for the nine months ended September 30, 2022.

Interest income on loans HFI, on a tax-equivalent basis, increased $147.3 million to $440.9 million for the nine months ended September 30, 2023 from $293.6 million for the nine months ended September 30, 2022 due primarily to increasing interest rates; however, the change was also heavily influenced by an increase in volume of average loans HFI. The average yield on loans HFI increased by 158 basis points period-over-period to 6.31% for the nine months ended September 30, 2023 from 4.73% for the nine months ended September 30, 2022. Our estimated contractual loan interest yield was 6.13% in the nine months ended September 30, 2023 compared with 4.40% in the nine months ended September 30, 2022. Additionally, average loans HFI increased to $9.34 billion for the nine months ended September 30, 2023 compared to $8.30 billion for the nine months ended September 30, 2022. The increase in average loans HFI is due to strong demand in our primary markets and additional funding during the nine months ended September 30, 2023 of commitments made in prior periods.

The components of our loan yield for the nine months ended September 30, 2023 and 2022 were as follows:

(dollars in thousands)

(1) Includes tax equivalent adjustment using combined marginal tax rate of 26.06%.

Origination and other loan fees (including syndication fee income for the nine months ended September 30, 2022) impacted our NIM by 13 basis points and 23 basis points for the nine months ended September 30, 2023 and 2022, respectively.

Interest expense was $197.4 million for the nine months ended September 30, 2023, an increase of $165.4 million as compared to $32.1 million for the nine months ended September 30, 2022. The increase was largely attributed to a rise in interest rates in interest-bearing deposit accounts, and specifically on money market, interest-bearing checking and customer time deposit products. Interest expense on money market deposits increased $81.8 million to $89.5 million for the nine months ended September 30, 2023 compared to $7.7 million for the nine months ended September 30, 2022. Interest expense on interest-bearing checking deposits increased $51.7 million to $63.3 million for the nine months ended September 30, 2023 from $11.6 million for the nine months ended September 30, 2022. Interest expense on customer time deposits increased $26.1 million to $31.8 million for the nine months ended September 30, 2023 from $5.7 million for the nine months ended September 30, 2022. The average rate on money market deposits increased 303 basis points from 0.37% for the nine months ended September 30, 2022 to 3.40% for the nine months ended September 30, 2023. The average rate on interest-bearing checking deposits increased 237 basis points from 0.47% for the nine months ended September 30, 2022 to 2.84% for the nine months ended September 30, 2023. The average rate on customer time deposits increased 230 basis points from 0.67% for the nine months ended September 30, 2022 to 2.97% for the nine months ended September 30, 2023. Total cost of interest-bearing deposits was 2.97% for the nine months ended September 30, 2023 compared to 0.44% for the nine months ended September 30, 2022.

Overall, our NIM, on a tax-equivalent basis, decreased to 3.44% for the nine months ended September 30, 2023 from 3.50% for the nine months ended September 30, 2022, driven by the increase in interest rates and volume of loans HFI, partially offset by an increase in cost of funds previously discussed. Additionally, there was a shift in our balance sheet composition, including a decline in excess liquidity, which we define as interest-bearing deposits with other financial institutions in excess of 5% of average tangible assets. Excess liquidity is estimated to have negatively impacted our NIM by approximately 2 basis point for the nine months ended September 30, 2023 compared to approximately 13 basis points for the nine months ended September 30, 2022.

Average balance and interest yield/rate analysis

The table below shows the average balances, income and expense and yield and rates of each of our interest-earning assets and interest-bearing liabilities on a tax equivalent basis, if applicable, for the periods indicated.

(dollars in thousands on a tax-equivalent basis)

(1) Average balances of nonaccrual loans and overdrafts (before deduction of ACL) are included in average loan balances.

(2) Interest income includes the effects of taxable-equivalent adjustments using a U.S. federal income tax rate and, where applicable, state income tax to increase tax-exempt interest income to a tax-equivalent basis. The net tax-equivalent adjustment amounts included in income were $2.5 million and $2.3 million for nine months ended September 30, 2023 and 2022, respectively.

(3) Includes average net unrealized losses on investment securities available for sale of $222.5 million and $107.1 million for the nine months ended September 30, 2023 and 2022, respectively.

(4) Includes average of optional rights to repurchase government guaranteed GNMA mortgage loans previously sold that have become past due greater than 90 days of $21.1 million and $8.7 million for the nine months ended September 30, 2023 and 2022, respectively.

(5) The NIM is calculated by dividing annualized net interest income, on a tax-equivalent basis, by average total earning assets.

Yield/rate and volume analysis

The table below presents the components of the changes in net interest income for the nine months ended September 30, 2023 and 2022. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volume and changes due to interest rates, with the changes in both volume and interest rates allocated to these two categories based on the proportionate absolute changes in each category.

(dollars in thousands on a tax-equivalent basis)

(1) Average loans are presented gross, including nonaccrual loans and overdrafts (before deduction of allowance for credit losses on loans HFI).

(2) Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis. The net taxable-equivalent adjustment amounts included was $2.5 million and $2.3 million for the nine months ended September 30, 2023 and 2022, respectively.

Provision for credit losses

The provision for credit losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance for credit losses is complex and involves a high degree of judgment and subjectivity. Refer to Note 1, "Basis of presentation" in the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022 for a detailed discussion regarding ACL methodology.

Our allowance for credit losses calculation as of September 30, 2023 resulted from management’s best estimate of losses over the life of loans and unfunded commitments in our portfolio in accordance with the CECL approach. Our calculation considered impacts of projected slower GDP growth over the next two years, expected elevated unemployment levels, and potentially more interest rate increases from the Federal Reserve. We also considered the current global economic environment, including continued pressures on supply chains (and more specifically, oil and energy) and increased uncertainty due primarily to inflation surrounding the potential impact and hardship on the U.S. economy. The evaluations above include considered projections that the economy may be nearing a recession. These factors may continue to lead to increased volatility in forecasted macroeconomic variables, a key input to our calculated level of allowance for credit losses.

Three months ended September 30, 2023 compared to three months ended September 30, 2022

We recognized a provision for credit losses on loans HFI of $6.0 million and $8.2 million for the three months ended September 30, 2023 and 2022, respectively. The decrease in our provision for credit losses on loans HFI during the three months ended September 30, 2023 was a result of decreased loan growth and the factors discussed above compared to the strong loan growth used for the three months ended September 30, 2022. The decrease was partially offset by an increase in our provision for credit losses on loans HFI due to a single commercial and industrial relationship moving to nonaccrual status during the three months ended September 30, 2023.

We also estimate expected credit losses on off-balance sheet loan commitments that are not accounted for as derivatives. When applying the CECL methodology to estimate expected credit loss, we consider the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions. We recorded a reversal of provision for credit losses on unfunded commitments of $3.2 million and a provision expense of $3.2 million for the three months ended September 30, 2023 and 2022, respectively. The credit is due to a $59.5 million decrease in our unfunded commitments during the three months ended September 30, 2023, including a $220.8 million decrease in our construction category.

During the three months ended September 30, 2023 and 2022, it was determined that all available-for-sale debt securities that experienced a decline in fair value below amortized were due to noncredit-related factors. Therefore, there was no provision for credit losses recognized on available-for-sale debt securities during the three months ended September 30, 2023 or 2022.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

We recognized a provision for credit losses on loans HFI for the nine months ended September 30, 2023 of $13.6 million. This compares to a provision for credit losses on loans HFI of $10.2 million recorded for the nine months ended September 30, 2022. The current period provision on loans HFI resulted from management’s best estimate of losses over the life of loans in our portfolio in accordance with the CECL approach driven by a single commercial and industrial relationship moving to nonaccrual status and the deteriorating economic forecasts as discussed in further detail above. For the nine months ended September 30, 2022, the modest increase in the provision for credit losses on loans HFI was driven by an increase in loans HFI outstanding period-over-period.

For the nine months ended September 30, 2023, we recorded a reversal of provision for credit losses on unfunded commitments of $11.4 million compared to provision expense of $9.2 million during the nine months ended September 30, 2022. The decrease in the provision for credit losses on unfunded commitments is primarily due to our intentional decrease in unfunded loan commitments from December 31, 2022, including a $716.8 million decrease in our construction category and $51.3 million decrease in the non-owner occupied commercial real estate category.

During the nine months ended September 30, 2023 and 2022, it was determined that all available-for-sale debt securities that experienced a decline in fair value below amortized were due to noncredit-related factors. Therefore, there was no provision for credit losses recognized on available-for-sale debt securities during the nine months ended September 30, 2023 or 2022.

Noninterest income

The following table sets forth the components of noninterest income for the periods indicated:

(dollars in thousands)

Three months ended September 30, 2023 compared to three months ended September 30, 2022

Noninterest income amounted to $8.0 million for the three months ended September 30, 2023, a decrease of $14.6 million, or 64.4%, as compared to $22.6 million for the three months ended September 30, 2022. Changes in selected components of noninterest income in the above table are discussed below.

Mortgage banking income primarily includes origination fees and realized gains and losses on the sale of mortgage loans, unrealized change in fair value of mortgage loans and derivatives, and mortgage servicing fees, which includes net change in fair value of MSRs and related derivatives. Mortgage banking income is initially driven by the recognition of interest rate lock commitments at fair value at inception of the IRLCs. This is subsequently adjusted for changes in the overall interest rate environment offset by derivative contracts entered into to mitigate the interest rate exposure. Upon sale of the loan, the net fair value gain is reclassified as a realized gain on sale.

Mortgage banking income was $12.0 million and $12.4 million for the three months ended September 30, 2023 and 2022, respectively. The decrease includes a decrease from gains on sale and related fair value changes of $0.3 million to $8.4 million during the three months ended September 30, 2023 compared to $8.6 million for the three months ended September 30, 2022. This was impacted by the reduction in interest rate lock volume of $35.8 million, or 8.76%, during the three months ended September 30, 2023 over the same period in the previous year. In addition to being impacted by the interest rate environment and depressed consumer demand.

The components of mortgage banking income for three months ended September 30, 2023 and 2022 were as follows:

(dollars in thousands)

Net loss from investment securities was $14.2 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. The net loss from investment securities during the three months ended September 30, 2023 is primarily the result of management's election to sell $76.6 million of available-for-sale securities to reinvest the proceeds of the sale into higher yielding available-for-sale securities. Refer to the section “Other earnings assets” for additional information on the sale of the available-for sale securities.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Noninterest income amounted to $55.2 million for the nine months ended September 30, 2023, a decrease of $42.0 million, or 43.2%, as compared to $97.2 million for the nine months ended September 30, 2022. Changes in selected components of noninterest income in the above table are discussed below.

Mortgage banking income was $36.3 million and $64.5 million for the nine months ended September 30, 2023 and 2022, respectively, representing a $28.2 million decrease, or 43.7% year-over-year. The total decrease includes a reduction in income from gains on sale and related fair value changes, which decreased to $25.0 million during the nine months ended September 30, 2023 compared to $46.2 million for the nine months ended September 30, 2022. This change was caused by a decrease in interest rate lock volume of $1.27 billion, or 52.4%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. In addition to being impacted by the interest rate environment, affordability constraints and a decline in consumer demand, this decrease also reflects the impact of the Mortgage restructuring and discontinuance of our direct-to-consumer internet delivery channel during the second quarter of 2022. For the nine months ended September 30, 2022, direct-to-consumer comprised 27.4% our total interest rate lock volume and 37.6% of our sales volume, respectively.

The components of mortgage banking income for the nine months ended September 30, 2023 and 2022 were as follows:

(dollars in thousands)

ATM and interchange fees decreased $5.4 million to $7.7 million during the nine months ended September 30, 2023 as compared to $13.1 million for the nine months ended September 30, 2022. The decrease was primarily attributable to the expiration of our temporary exemption from the Durbin amendment during the second half of 2022. The Durbin amendment limits the amount of interchange transaction fees that banks with asset sizes greater than $10 billion are permitted to charge retailers for debit card processing. Interchange fee income varies with size and volume of transactions, which can fluctuate with seasonality, consumer spending habits and economic conditions. While our volume of interchange transactions increased approximately 7.00% during the nine months ended September 30, 2023 from the previous year, interchange fee income declined by 43.1%, the majority of which related to the application of the fee cap imposed by the Durbin amendment impacting the current period.

Net loss from investment securities was $14.2 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively. The net loss from investment securities during the nine months ended September 30, 2023 is primarily the result of management's election to sell $76.6 million of available-for-sale securities to reinvest the proceeds of the sale into higher yielding available-for-sale securities. Refer to the section “Other earnings assets” for additional information on the sale of the available-for sale securities.

Other income increased $3.1 million to $7.5 million during the nine months ended September 30, 2023 as compared to $4.4 million during the nine months ended September 30, 2022. This increase is primarily related to a $0.9 million gain associated with the change in fair value of the commercial loans held for sale portfolio during the nine months ended September 30, 2023 compared to a $2.6 million loss for the nine months ended September 30, 2022. Additional information on our commercial loans held for sale portfolio is included under the subheading 'Loans held for sale' within this management's discussion and analysis.

Noninterest expense

The following table sets forth the components of noninterest expense for the periods indicated:

(dollars in thousands)

Three months ended September 30, 2023 compared to three months ended September 30, 2022

Noninterest expense increased by $1.2 million during the three months ended September 30, 2023 to $83.0 million as compared to $81.8 million in the three months ended September 30, 2022. Changes in selected components of noninterest expense in the above table are discussed below.

Salaries, commissions and employee benefits expense was the largest component of noninterest expense representing 65.7% and 62.3% of total noninterest expense for the three months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2023, salaries and employee benefits expense increased $3.5 million, or 6.79%, to $54.5 million as compared to $51.0 million for the three months ended September 30, 2022. This increase was mainly driven by $4.8 million in early retirement and severance costs incurred during the three months ended September 30, 2023, which includes the acceleration in vesting of certain equity grants. The increase is partially offset by decreases in incentive and commission-based compensation during the three months ended September 30, 2023, which was driven by the decrease in mortgage production volume and decline in profitability during the period.

Legal and professional expense includes expenses related to legal, consulting, external audit and tax advisory services, compliance, and other professional licenses and fees. Legal and professional expense decreased by $2.7 million during the three months ended September 30, 2023 to $1.8 million as compared to $4.4 million during the three months ended September 30, 2022. The decrease in legal and professional expenses was due to decreases in consulting, legal, and other fees as these were temporarily increased during the three months ended September 30, 2022 due to the acceleration of some of our internal projects.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Noninterest expense decreased by $23.4 million during the nine months ended September 30, 2023 to $244.7 million as compared to $268.1 million in the nine months ended September 30, 2022. Changes in selected components of noninterest expense in the above table are discussed below.

Salaries, commissions and employee benefits expense was the largest component of noninterest expense representing 63.5% and 61.8% of total noninterest expense for the nine months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023, salaries and employee benefits expense decreased $10.4 million, or 6.25%, to $155.3 million as compared to $165.7 million for the nine months ended September 30, 2022. The decrease was attributable to a $10.0 million decrease in salaries in the Mortgage segment due to the Mortgage restructuring. Additionally, the decrease was attributable to a $10.7 million decrease in incentive and commission-based compensation during the nine months ended September 30, 2023, which was driven by the decrease in mortgage production volume and decline in profitability during the period. The decrease was partially offset by a $6.2 million increase in early retirement and severance costs primarily associated with our efficiency and scalability initiatives.

Legal and professional expense decreased by $3.1 million during the nine months ended September 30, 2023 to $7.1 million as compared to $10.2 million during the nine months ended September 30, 2022. As discussed above, the decrease in legal and professional expenses was due to decreases in consulting, legal, and other fees as these were temporarily increased during the nine months ended September 30, 2022 due to the acceleration of some of our internal projects.

Advertising expense includes expenses related to sponsorships, advertising, marketing, customer relations and business development and public relations. During the nine months ended September 30, 2023, advertising expense decreased $1.9 million to $6.3 million compared to $8.1 million during the nine months ended September 30, 2022. This decrease is primarily attributable to realigning our expenses after the Mortgage restructuring to reflect the decrease in production.

Mortgage restructuring expense of $12.5 million was reported during the nine months ended September 30, 2022 related to the exit from our direct-to-consumer internet delivery channel. These expenses primarily include $10.0 million related to salaries, commissions and employee benefits expense, including the acceleration of vesting on restricted stock units. Other components of this expense includes $1.1 million related to software license and maintenance fees, $0.4 million impairment of our operating lease right-of-use assets, and $0.9 million loss on disposal of fixed assets.

Other noninterest expense primarily includes mortgage servicing expenses, regulatory fees and deposit insurance assessments, software license and maintenance fees and various other miscellaneous expenses. Other noninterest expense increased $4.2 million during the nine months ended September 30, 2023 to $47.9 million compared to $43.7 million during the nine months ended September 30, 2022. This increase includes a $2.5 million increase in regulatory fees and assessments.

Efficiency ratio

The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income. For an adjusted efficiency ratio, we exclude certain gains, losses and expenses we do not consider core to our business.

Our efficiency ratio was 76.2% and 67.7% for the three and nine months ended September 30, 2023, respectively, and 61.1% and 67.2% for the three and nine months ended September 30, 2022, respectively. Our adjusted efficiency ratio, on a tax-equivalent basis, was 63.1% and 63.3% for the three and nine months ended September 30, 2023, respectively, and 60.7% and 63.3% for the three and nine months ended September 30, 2022, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of the adjusted efficiency ratio.

Income taxes

Income tax expense was $4.0 million and $8.9 million for the three months ended September 30, 2023 and 2022, respectively, and $23.5 million and $25.0 million for the nine months ended September 30, 2023 and 2022, respectively. This represents effective tax rates of 17.2% and 21.9% for the three months ended September 30, 2023 and 2022, respectively, and 20.6% and 22.4% for the nine months ended September 30, 2023 and 2022, respectively. The primary differences from the enacted rates are applicable state income taxes and certain expenses that are not deductible reduced for non-taxable income and additional deductions for equity-based compensation upon vesting of restricted stock units. State taxes, net of federal benefits, decreased our effective tax rate by 2.00% and increased our effective tax rate by 2.50% for the three months ended September 30, 2023 and 2022 and increased our effective tax rate by 0.40% and 3.19% for the nine months ended September 30, 2023 and 2022, respectively.

Financial condition

The following discussion of our financial condition compares balances as of September 30, 2023 and December 31, 2022.

Loan portfolio

The following table sets forth the balance and associated percentage of each class of financing receivable in our loan portfolio as of the dates indicated:

(dollars in thousands)

Our loans HFI portfolio is our most significant earning asset, comprising 74.4% and 72.4% of our total assets at September 30, 2023 and December 31, 2022, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. Our overall lending approach is primarily focused on providing credit to our customers directly in the markets we serve, but we are also party to loan syndications and participations from other banks (collectively, “participated loans”). As of September 30, 2023 and December 31, 2022, loans held for investment included approximately $285.0 million and $280.5 million, respectively, related to participated loans. We also sell loan participations to unaffiliated third parties as part of our credit risk management and balance sheet management strategy. During the three months ended September 30, 2023 and 2022, we sold $14.5 million and $29.4 million loan participations, respectively. During the nine months ended September 30, 2023 and 2022, we sold $30.8 million and $37.0 million loan participations, respectively. All loans, whether or not we act as a participant, are underwritten to the same standards as all other loans we originate. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Our lending activity is heavily concentrated in the geographic market areas we serve, with highest concentration in Tennessee. This geographic concentration subjects our loan portfolio to the general economic conditions within the state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses on loans HFI. As of September 30, 2023 and December 31, 2022, there were no concentrations of loans exceeding 10% of total loans other than our exposure to Tennessee and the categories of loans disclosed in the table above. We believe our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories.

Banking regulators have established guidelines of less than 100% of tier 1 capital plus allowance for credit losses in construction lending and less than 300% of tier 1 capital plus allowance for credit losses in commercial real estate lending that management monitors as part of the risk management process. The construction concentration ratio is a percentage of the outstanding construction and land development loans to total tier 1 capital plus allowance for credit losses. The commercial real estate concentration ratio is a percentage of the outstanding balance of non-owner occupied commercial real estate, multifamily, and construction and land development loans to tier 1 capital plus allowance for credit losses. Management strives to operate within the thresholds set forth above.

When our ratios are in excess of one or both of these guidelines, banking regulators generally require an increased level of monitoring in these lending areas by management. The table below shows concentration ratios for the Bank and Company as of September 30, 2023 and December 31, 2022.

73

74

As part of our lending policy and risk management activities, the Company tracks lending exposure of commercial and industrial and owner-occupied commercial real estate by industry classification (as defined by the North American Industry Classification System) and type to determine potential risks associated with industry concentrations, and if any risk issues could lead to additional credit loss exposure. The table below provides a summary of our commercial and industrial and owner-occupied commercial real estate portfolios by industry classification.

(dollars in thousands)

75

Additionally, the Company tracks lending exposure of non-owner occupied commercial real estate and construction by collateral property type to determine potential risks associated with collateral types, and if any risk issues could lead to additional credit loss exposure. The following table provides a summary of our non-owner occupied commercial real estate and construction loan portfolios by collateral property type:

(dollars in thousands)

76

Loan maturity and sensitivities

The following table presents the contractual maturities of our loan portfolio as of September 30, 2023. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due in 1 year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment assumptions or scheduled repayments.

For loans due after one year or more, the following table presents the interest rate composition for loans outstanding as of September 30, 2023.

The following table presents the contractual maturities of our loan portfolio segregated into fixed and floating interest rate loans as of September 30, 2023. As of September 30, 2023 and December 31, 2022, we had $17.7 million and $17.4 million, respectively, in fixed-rate loans in which we have entered into variable rate swap contracts.

(dollars in thousands)

77

Of the loans shown above with floating interest rates as of September 30, 2023, many have interest rate floors as follows:

Asset quality

In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions, including extensions or interest rate modifications, to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. Furthermore, we are committed to collecting on all of our loans. This practice leads to higher recoveries in the long-term.

Nonperforming assets

Our nonperforming assets consist of nonperforming loans, other real estate owned and other repossessed non-earning assets. As of September 30, 2023 and December 31, 2022, we had $88.7 million and $87.5 million, respectively, in nonperforming assets. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. In our loan review process, we seek to identify and proactively address nonperforming loans. Accrued interest receivable written off as an adjustment to interest income amounted to $0.3 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $0.7 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively. Additionally, we had net interest recoveries on nonperforming assets previously charged off of $0.6 million and $0.5 million for the three months ended September 30, 2023 and 2022, respectively, and $1.0 million and $2.1 million for the nine months ended September 30, 2023 and 2022, respectively.

Nonperforming loans HFI increased $8.7 million to $54.5 million as of September 30, 2023 compared to $45.8 million as of December 31, 2022. The increase is primarily attributable to a single commercial and industrial relationship moving to nonaccrual status.

In addition to loans HFI, we also include loans HFS that have stopped accruing interest or become 90 days or more past due. Our nonperforming commercial loans HFS represent a pool of acquired commercial loans. These loans amounted to $9.3 million as of both September 30, 2023 and December 31, 2022.

As of September 30, 2023 and December 31, 2022, we had $22.1 million and $26.2 million, respectively, of delinquent GNMA loans previously sold included on our consolidated balance sheets in loans held for sale. These are considered nonperforming assets as we do not earn any interest on the unexercised option to repurchase these loans.

As of September 30, 2023 and December 31, 2022, other real estate owned included $0.1 million and $2.1 million, respectively, of excess land and facilities held for sale resulting from our prior acquisitions. Other nonperforming assets also included other repossessed non-real estate amounting to $1.3 million and $0.4 million as of September 30, 2023 and December 31, 2022, respectively.

The following table provides details of our nonperforming assets, the ratio of such loans and other nonperforming assets to total assets, and certain other related information as of the dates presented:

(dollars in thousands)

We have evaluated our loans HFI classified as nonperforming and believe all nonperforming loans have been adequately reserved for in the allowance for credit losses on loans HFI as of September 30, 2023 and December 31, 2022. Management also continually monitors past due loans for potential credit quality deterioration. Loans not considered nonperforming include loans 30-89 days past due that continue to accrue interest amounting to $40.8 million at September 30, 2023 as compared to $31.3 million at December 31, 2022.

Allowance for credit losses

We calculate our expected credit loss using a lifetime loss rate methodology. We utilize probability-weighted forecasts, which consider multiple macroeconomic variables from Moody's that are applicable to the type of loan. Each of our loss rate models incorporate forward-looking macroeconomic projections throughout the reasonable and supportable forecast period and the subsequent historical reversion at the macroeconomic variable input level. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated prepayments based on market information and our prepayment history.

The allowance for credit losses represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as we promptly charge off accrued interest receivable determined to be uncollectible. We determine the appropriateness of the allowance through periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. See "Critical Accounting Estimates- Allowance for credit losses" within management's discussion and analysis in our Form 10-K and Note 3 “Loans and allowance for credit losses on loans HFI“ in the notes to the consolidated financial statements in this report for additional information regarding our methodology.

The following table presents the allocation of the allowance for credit losses on loans HFI by loan category as well as the ratio of loans by loan category compared to the total loan portfolio as of the dates indicated:

(dollars in thousands)

80

The following table summarizes activity in our allowance for credit losses on loans HFI during the periods indicated:

(dollars in thousands)

81

The following tables details our provision for credit losses on loans HFI and net (charge-offs) recoveries to average loans HFI outstanding by loan category during the periods indicated:

(dollars in thousands)

82

(dollars in thousands)

The allowance for credit losses on loans HFI was $146.1 million and $134.2 million and represented 1.57% and 1.44% of loans held for investment as of September 30, 2023 and December 31, 2022, respectively. For the three months ended September 30, 2023, we experienced net charge-offs of $0.6 million, or 0.02% of average loans HFI, compared to net recoveries of $15 thousand, or 0.00% for the three months ended September 30, 2022. For the nine months ended September 30, 2023, we experienced net charge-offs of $1.7 million, or 0.02% of average loans HFI, compared to net charge-offs of $1.3 million, or 0.02% for the nine months ended September 30, 2022. Our ratio of total nonperforming loans HFI as a percentage of total loans HFI increased by 10 basis points to 0.59% as of September 30, 2023 compared to December 31, 2022 primarily due to a single commercial and industrial relationship moving to nonaccrual status.

The primary reason for the increase in the allowance for credit losses on loans HFI is due to a worsening economic outlook that was incorporated into our macroeconomic forecast as of September 30, 2023 compared to December 31, 2022. Specifically, we performed evaluations within our established qualitative framework, assessing the impact continued actions taken by the Federal Reserve with regard to monetary policy, interest rates and the potential impact of those actions, potential impact of persistent high inflation on economic growth, failures of several U.S. banks in the first half of 2023, potential negative economic forecasts, and other considerations. In addition, approximately 26% of the dollar increase in allowance for credit losses on loans HFI during the period was due to a single commercial and industrial relationship moving to nonaccrual status. As a ratio of ACL to loans HFI by loan type, our commercial and industrial, HELOC and consumer and other portfolios incurred the largest increases period-over-period. These portfolios are heavily reliant on the strength of the economy; and therefore, they are adversely affected by inflation and high interest rates.

We also maintain an allowance for credit losses on unfunded commitments, which decreased to $11.6 million as of September 30, 2023 from $23.0 million as of December 31, 2022 due to a 12.4% or $440.0 million decrease in unfunded loan commitments during the period. Notably, there was a $716.8 million decrease in unfunded loan commitments in our construction loan category pipeline which resulted in an $11.4 million decrease in required ACL related to unfunded commitments. Our unfunded commitments in our construction loan category decreased as a result of management's concentrated effort over the last few quarters to reduce commitments in specific categories judged to be inherently higher risk considering the current and projected economic conditions. Partially offsetting the decrease in unfunded loan commitments in our construction portfolio was a $283.3 million increase in unfunded loan commitments for commercial and industrial loans compared to December 31, 2022.

Loans held for sale

Commercial loans held for sale

Our loans held for sale includes a previously acquired portfolio of commercial loans. The loans had a fair value of $9.3 million as of September 30, 2023 compared to $30.5 million as of December 31, 2022. The change is primarily attributable to loans within the portfolio being paid off through external refinancing and pay-downs.

This decrease also includes gains recognized on the change in fair value of the portfolio which is included in 'other noninterest income' on the consolidated statement of income of $0.9 million for the nine months ended September 30, 2023 compared to losses of $0.4 million and $2.6 million for the three and nine months ended September 30, 2022, respectively. The loss recognized on the change in fair value of the portfolio for the three months ended September 30, 2023 was not meaningful.

Mortgage loans held for sale

Mortgage loans held for sale consisted of $72.5 million of residential real estate mortgage loans in the process of being sold to third party private investors or government sponsored agencies and $22.1 million of GNMA optional repurchase loans. This compares to $82.8 million of residential real estate mortgage loans in the process of being sold to third parties and $26.2 million of GNMA optional repurchase loans as of December 31, 2022.

Generally, mortgage volume decreases in rising interest rate environments and slower housing markets and increases in lower interest rate environments and robust housing markets. Interest rate lock volume for the three months ended September 30, 2023 and 2022 totaled $373.1 million and $408.9 million, respectively, and $1.15 billion and $2.42 billion for the nine months ended September 30, 2023 and 2022, respectively. The decrease in interest rate lock volume during the three and nine months ended September 30, 2023 reflects the slow down experienced across the industry compared with the three and nine months ended September 30, 2022, which benefited from lower interest rates relative to the rising rates experienced during the three and nine months ended September 30, 2023. The decrease noted for the year-over-year nine months ended periods also reflects the exit from our direct-to-consumer internet delivery channel completed during 2022. Interest rate lock volume within our direct-to-consumer internet delivery channel for the nine months ended September 30, 2022 totaled $663.8 million. Interest rate lock commitments in the pipeline were $112.8 million as of September 30, 2023 compared with $118.3 million as of December 31, 2022.

Mortgage loans in the process of being sold are sold either on a “best efforts” basis or under a mandatory delivery sales agreement. Under a “best efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and we are obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within fifteen to twenty-five days after the loan is funded, depending on the economic environment and competition in the market. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market.

Other earning assets

Securities purchased under agreements to resell ("reverse repurchase agreements")

We enter into agreements with certain customers to purchase investment securities under agreements to resell at specific dates in the future. This investment deploys some of our liquidity position into an instrument that improves the return on those funds. Securities purchased under agreements to resell totaled $47.1 million and $75.4 million at September 30, 2023 and December 31, 2022, respectively.

Federal Funds Sold

Federal funds may fluctuate from period to period depending upon our liquidity position at the time and our strategy for deploying liquidity. Federal funds sold totaled $82.8 million and $135.1 million at September 30, 2023 and December 31, 2022, respectively.

Available-for-sale debt securities portfolio

Our investment portfolio objectives include maximizing total return after other primary objectives are achieved such as, but not limited to, providing liquidity, capital preservation, and pledging collateral for various lines of credit and other borrowings. The investment objectives guide the portfolio allocation among security types, maturities, and other attributes.

The fair value of our available-for-sale debt securities portfolio was $1.35 billion and $1.47 billion as of September 30, 2023 and December 31, 2022, respectively. Included in the fair value of available-for-sale debt securities were net unrealized losses of $265.0 million and $234.4 million as of September 30, 2023 and December 31, 2022, respectively. Current net unrealized losses are due to interest rate increases.

During the three and nine months ended September 30, 2023, we sold $76.6 million of available-for-sale debt securities with a weighted average yield of 1.36%. The sales contributed to a pre-tax loss on securities of $14.2 million. We primarily sold collateralized mortgage obligation and U.S. government agency securities. During the three and nine months ended September 30, 2023, we purchased $92.9 million and $93.8 million of available-for-sale debt securities, respectively. We reinvested the proceeds from the sales primarily into U.S. government agency available-for-sale debt securities with a weighted average yield of 6.43%. During the three and nine months ended September 30, 2023, maturities and calls of securities totaled $33.0 million and $91.4 million, respectively.

During the nine months ended September 30, 2022, we sold $1.2 million of available-for-sale debt securities. There were no available-for-sale debt securities sold during the three months ended September 30, 2022. During the three and nine months ended September 30, 2022, we purchased $0.9 million and $242.6 million of available-for-sale debt securities, respectively. During the three and nine months ended September 30, 2022, maturities and calls of securities totaled $44.4 million and $170.7 million, respectively.

The following table sets forth the fair value, scheduled maturities and weighted average yields for our available-for-sale debt securities portfolio as of the dates indicated below:

(dollars in thousands)

(1) Yields on a tax-equivalent basis.

Equity Securities

We had $2.9 million and $3.0 million in marketable equity securities recorded at fair value that primarily consisted of mutual funds as of September 30, 2023 and December 31, 2022, respectively. During the three months ended September 30, 2023 and 2022, the change in the fair value of equity securities resulted in a net loss of $97 thousand and $141 thousand, respectively. During the nine months ended September 30, 2023 and 2022, the change in the fair value of equity securities resulted in net losses of $56 thousand and $405 thousand, respectively.

Deposits

Deposits represent the Bank’s primary source of funding. We continue to focus on growing core customer deposits through our relationship driven banking philosophy, community-focused marketing programs, and initiatives such as the development of our treasury management services.

Total deposits were $10.64 billion and $10.86 billion as of September 30, 2023 and December 31, 2022, respectively. Noninterest-bearing deposits at September 30, 2023 and December 31, 2022 were $2.36 billion and $2.68 billion, respectively, while interest-bearing deposits were $8.28 billion and $8.18 billion at September 30, 2023 and December 31, 2022, respectively.

The decrease in noninterest-bearing deposits of $318.2 million from December 31, 2022 to September 30, 2023 is attributable to migration to interest-yielding products such as money market and savings deposits, which increased by $422.1 million from December 31, 2022. Also included in noninterest-bearing deposits are certain mortgage escrow deposits from our third-party mortgage servicing provider, which amounted to $122.6 million and $75.6 million as of September 30, 2023 and December 31, 2022, respectively.

Interest-bearing checking deposits decreased by $505.3 million from December 31, 2022 due largely to decreases in our deposits from municipal and governmental entities, also known as public funds, which decreased by $454.7 million during the period. The decline in public funds was primarily seasonal.

Additionally, brokered and internet time deposits increased by $173.7 million to $175.5 million as of September 30, 2023 compared to December 31, 2022, which was a result of our balance sheet and liquidity management strategy, which included purchasing brokered time deposits in order to increase the liquidity of our balance sheet and lower our cost of funding.

As a result of the rising interest rate environment and the shift in our deposit composition, we have experienced an increase in our cost of interest-bearing deposits and total cost of deposits. Average deposit balances by type, together with the average rates per period are reflected in the average balance sheet amounts, interest paid, and rate analysis tables included in this management's discussion and analysis under the subheading "Results of operations" discussion.

We utilize designated fair value hedges to mitigate interest rate exposure associated with certain fixed-rate money market deposits. The aggregate fair value of these hedges included in the carrying amount of total money market deposits as of September 30, 2023 and December 31, 2022 was $6.8 million and $9.8 million, respectively.

Our deposit base also includes certain commercial and high net worth individuals that periodically place deposits with the Bank for short periods of time and can cause fluctuations from period to period in the overall level of customer deposits outstanding. These fluctuations may include certain deposits from related parties as disclosed within Note 14, "Related party transactions" in the notes to our consolidated financial statements included in this Report.

The following table sets forth the distribution by type of our deposit accounts as of the dates indicated:

(dollars in thousands)

(1) Average rates are presented for the nine months ended September 30, 2023 and the year-ended December 31, 2022, respectively.

(2) Rates are presented as of period-end.

Further details related to our deposit customer base is presented below as of the dates indicated:

(dollars in thousands)

(1) Segments are determined based on the customer account level.

The below sets forth maturity information on time deposits below and in excess of the FDIC insurance limit as of September 30, 2023:

(dollars in thousands)

Uninsured deposits are defined as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit and amounts in any other uninsured investment or deposit account that are classified as deposits and are not subject to any federal or state deposit insurance regimes. Collateralized deposits are included within our total uninsured deposits.

Further details related to our estimated insured or collateralized deposits and uninsured and uncollateralized deposits is presented below as of the dates indicated:

(1) Amounts are shown on an unconsolidated basis consistent with regulatory reporting requirements.

(2) Amounts are shown on a fully consolidated basis and exclude deposits of affiliates that are eliminated in consolidation.

Borrowed funds

Deposits and investment securities available-for-sale are the primary source of funds for our lending activities and general business purposes. However, we may also obtain advances from the FHLB, purchase federal funds and engage in overnight borrowing from the Federal Reserve, correspondent banks, or enter into client repurchase agreements. We also use these sources of funds as part of our asset liability management process to control our long-term interest rate risk exposure, even if it may increase our short-term cost of funds.

Our level of short-term borrowing can fluctuate on a daily basis depending on funding needs and the source of funds to satisfy those needs, in addition to the overall interest rate environment and cost of public funds.

Securities sold under agreements to repurchase and federal funds purchased

We enter into agreements with certain customers to sell certain securities under agreements to repurchase the security the following day. These agreements are made to provide customers with comprehensive treasury management programs as a short-term return for their excess funds. Securities sold under agreements to repurchase totaled $19.7 million and $21.9 million at September 30, 2023 and December 31, 2022, respectively.

We also maintain lines with certain correspondent banks that provide borrowing capacity in the form of federal funds purchased. Federal funds purchased are short-term borrowings that typically mature within one to ninety days. Borrowings against these lines (i.e., federal funds purchased) totaled $55.0 million and $65.0 million as of September 30, 2023 and December 31, 2022, respectively.

FHLB short-term borrowings

As a member of the FHLB system, we may utilize advances from the FHLB in order to provide additional liquidity and funding. Under these short-term agreements, we maintain a line of credit that as of September 30, 2023 and December 31, 2022 had total borrowing capacity of $1.59 billion and $1.27 billion, respectively. As of September 30, 2023 and December 31, 2022, we had qualifying loans pledged as collateral securing these lines amounting to $2.73 billion and $2.67 billion, respectively. Overnight cash advances against this line totaled $175.0 million as of December 31, 2022. There were no such advances outstanding as of September 30, 2023.

Subordinated debt

During the year-ended December 31, 2003, we formed two separate trusts which issued $9.0 million (“Trust I”) and $21.0 million (“Trust II”) of floating rate trust preferred securities as part of a pooled offering of such securities. We issued junior subordinated debentures of $9.3 million, which included proceeds of common securities which we purchased for $0.3 million, and junior subordinated debentures of $21.7 million which included proceeds of common securities of $0.7 million. The Trusts were created for the sole purpose of issuing 30-year capital trust preferred securities to fund the purchase of junior subordinated debentures issued by us. Both issuances were to the trusts in exchange for the proceeds of the securities offerings, which represent the sole asset of the trusts.

Additionally, during the year ended December 31, 2020, we placed $100.0 million of ten year fixed-to-floating rate subordinated notes, maturing September 1, 2030. We mitigate our interest rate exposure associated with these notes through the use of fair value hedging instruments. See Note 9, "Derivatives" in the notes to the consolidated financial statements for additional details related to these instruments.

Further information related to our subordinated debt as of September 30, 2023 is detailed below:

(dollars in thousands)

Other borrowings

Other borrowings on our consolidated balance sheets includes our finance lease liability totaling $1.3 million and $1.4 million as of September 30, 2023 and December 31, 2022, respectively. In addition, other borrowings on our consolidated balance sheets include guaranteed rebooked GNMA loans previously sold that have become past due over 90 days and are eligible for repurchase totaling $22.1 million and $26.2 million as of September 30, 2023 and December 31, 2022, respectively. See Note 5, "Leases" and Note 10, "Fair value of financial instruments" within the Notes to our unaudited consolidated financial statements herein for additional information regarding our finance lease and guaranteed GNMA loans eligible for repurchase, respectively.

Liquidity and capital resources

We are expected to maintain adequate liquidity at the Bank to meet the cash flow requirements of clients who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our Liquidity Policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs and otherwise sustain our operations. We accomplish this through management of the maturities of our interest-earning assets and interest-bearing liabilities. We believe that our present position is adequate to meet our current and future liquidity needs.

We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of clients, while maintaining an appropriate balance between assets and liabilities to optimize our net interest margin. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.

As part of our liquidity management strategy, we focus on minimizing our costs of liquidity and attempt to decrease these costs by growing our noninterest-bearing and other low-cost deposits, while replacing higher cost funding sources. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer. Increasing interest rates generally attracts customers to higher cost interest-bearing deposit products as they seek to maximize their yield.

Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Available-for-sale debt securities within our investment portfolio are used to secure government, public, trust and other deposits and as collateral for short-term borrowings, letters of credit and derivative instruments. As of September 30, 2023 and December 31, 2022, we had pledged securities related to these items with carrying values of $853.6 million and $1.19 billion, respectively.

Additional sources of liquidity include federal funds purchased, repurchase agreements, FHLB borrowings, and lines of credit. Interest is charged at the prevailing market rate on federal funds purchased, reverse repurchase agreements and FHLB advances. Overnight advances obtained from the FHLB are used primarily to meet day to day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. As of December 31, 2022, we had outstanding overnight cash advances from the FHLB totaling $175.0 million. As of September 30, 2023, there were no outstanding overnight cash advances from the FHLB. As of September 30, 2023, there was $1.59 billion available to borrow against with a remaining capacity of $1.01 billion. As of December 31, 2022, there was $1.27 billion available to borrow against with a remaining capacity of $830.0 million.

We also maintained unsecured lines of credit with other commercial banks totaling $350.0 million as of both September 30, 2023 and December 31, 2022. These are unsecured, uncommitted lines of credit typically maturing at various times within the next twelve months. Borrowings against these lines (i.e., federal funds purchased) totaled $55.0 million and $65.0 million as of September 30, 2023 and December 31, 2022, respectively. As of both September 30, 2023 and December 31, 2022, we also had $50.0 million available through the IntraFi network, which allows us to offer banking customers access to FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits.

Our current on-balance sheet liquidity and available sources of liquidity are summarized in the table below:

(dollars in thousands)

(1) Includes capacity available per internal policy in the form of brokered deposits and unsecured lines of credit.

(2) Amounts are shown on a fully consolidated basis and exclude deposits of affiliates that are eliminated in consolidation.

The Company also maintains the ability to access capital markets to meet its liquidity needs. The Company has an active shelf registration statement filed with the SEC which allows it to raise capital in various forms, including through the sale of common stock, preferred stock, depository shares, debt securities, rights, warrants and units. Specific terms and prices would be determined at the time of any such offering. In the past, the Company has utilized capital markets to generate liquidity in the form of common stock and subordinated debt primarily for the purpose of funding acquisitions.

The Company is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid by the Bank to the Company. Statutory and regulatory limitations exist that affect the ability of the Bank to pay dividends to the Company. Management believes that these limitations will not impact the Company’s ability to meet its ongoing short-term cash obligations. For additional information regarding dividend restrictions, see the “Item 1. Business - Supervision and regulation”, "Item 1A. Risk Factors - Risks related to our business" and "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividend Policy", each of which is set forth in our Annual Report.

Due to state banking laws, the Bank may not declare dividends in any calendar year in an amount exceeding the total of its net income for that year combined with its retained net income of the preceding two years, without the prior approval of the Tennessee Department of Financial Institutions. Based upon this regulation, as of September 30, 2023 and December 31, 2022, $196.9 million and $161.3 million of the Bank’s retained earnings were available for the payment of dividends without such prior approval. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. During the three and nine months ended September 30, 2023, there were $8.5 million and $40.5 million in cash dividends approved by the board for payment from the Bank to the holding company. During the three and nine months ended September 30, 2022, there were $7.3 million and $41.8 million in cash dividends approved by the board for payment from the Bank to the holding company. None of these required approval from the TDFI. Subsequent to September 30, 2023, the board approved a dividend from the Bank to the holding company to be paid in the third quarter for $8.5 million that also did not require approval from the TDFI.

During the three and nine months ended September 30, 2023, the Company declared shareholder dividends of $0.15 per share, or $7.1 million and $0.45 per share, or $21.3 million, respectively. During the three and nine months ended September 30, 2022, the Company declared shareholder dividends of $0.13 per share, or $6.1 million and $0.39 per share, or $18.5 million, respectively. Subsequent to September 30, 2023, the Company declared a quarterly dividend in the amount of $0.15 per share, payable on November 21, 2023, to stockholders of record as of November 7, 2023.

Shareholders’ equity and capital management

Our total shareholders’ equity was $1.37 billion as of September 30, 2023 and $1.33 billion as of December 31, 2022. Book value per common share was $29.31 as of September 30, 2023 and $28.36 as of December 31, 2022. The increase in shareholders’ equity was primarily attributable to an increase in retained net income, net of dividend declarations. The increase in shareholders’ equity as of September 30, 2023 was partially off-set by a decrease in accumulated other comprehensive income of $23.0 million related to unrealized losses on our available-for-sale securities portfolio and by dividends declared of $21.3 million.

Our capital management consists of providing adequate equity to support our current and future operations. We are subject to various regulatory capital requirements administered by state and federal banking agencies, including the TDFI, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. The Federal Reserve and the FDIC have issued guidelines governing the levels of capital that banks must maintain. As of September 30, 2023 and December 31, 2022, we met all capital adequacy requirements for which we were subject. See additional discussion regarding our capital adequacy and ratios at within Note 12, "Minimum capital requirements" in the notes to our consolidated financial statements contained herein.

(1) Applicable to Bank level capital.

Capital ratios are well above regulatory requirements for well-capitalized institutions. Management’s use of risk-based capital ratios in its analysis of the measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company.

Interest rate sensitivity

Our market risk arises primarily from interest rate risk inherent in the normal course of lending and deposit-taking activities. Management believes that our ability to successfully respond to changes in interest rates will have a significant impact on our financial results. To that end, management actively monitors and manages our interest rate risk exposure.

The Asset Liability Management Committee, which is authorized by our board of directors, monitors our interest rate sensitivity and makes decisions relating to that process. The ALCO’s goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital in either a rising or declining interest rate environment. Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.

We monitor the impact of changes in interest rates on our net interest income and economic value of equity using rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates of interest in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. Economic Value of Equity ("EVE") measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in affect over the life of the current balance sheet. For purposes of calculating EVE, a zero percent floor is assumed on discount factors.

The following analysis depicts the estimated impact on net interest income and EVE of immediate changes in interest rates at the specified levels for the periods presented:

(1) The percentage change represents the projected net interest income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected net interest income in the various rate scenarios.

(2) The percentage change in this column represents our EVE in a stable interest rate environment versus EVE in the various rate scenarios.

The results for the net interest income simulations as of September 30, 2023 and December 31, 2022 resulted in an asset sensitive position. The primary influence of our asset sensitivity is the floating rate structure in many of our loans held for investment as well as the composition of our liabilities which is primarily customer deposits. Our variable rate loan portfolio is indexed to market rates and timing of repricing of loans and deposits varies in proportion to market rate fluctuations. We actively monitor and perform stress tests on our deposit beta's as part of our overall management of interest rate risk. This requires the use of various assumptions based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive pricing in the market, we anticipate that our future results will likely be different from the scenario results presented above and such differences could be material.

The preceding measures assume no change in the size or asset/liability compositions of the balance sheet. Thus, the measures do not reflect the actions the ALCO may undertake in response to such changes in interest rates. The scenarios assume instantaneous movements in interest rates in increments of 100, 200, 300 and 400 basis points. As interest rates are adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results may differ from simulated results.

We may utilize derivative financial instruments as part of an ongoing effort to mitigate interest rate risk exposure to interest rate fluctuations and facilitate the needs of our customers. For more information about our derivative financial instruments, see Note 9, “Derivatives” in the notes to our consolidated financial statements.

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Report was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

The following risk factor supplements and should be read in conjunction with the risk factors set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2022 and our Quarterly Report on Form 10-Q for the period ended March 31, 2023.

Failure to address the federal debt ceiling in a timely manner, downgrade of the U.S. credit rating, and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may adversely affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.

As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and liquidity risks. Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities, and could result in our counterparties requiring additional collateral for our borrowings. Further, unless and until U.S. political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs.