FB Financial Corp: Form 10-Q for the period ended Sep 30, 2024

The following is a discussion of our financial condition as of September 30, 2024 and December 31, 2023, and our results of operations for the three and nine months ended September 30, 2024 and 2023, 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, 2023, that was filed with the SEC on February 27, 2024, 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,” 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 effectiveness of the Company’s cybersecurity controls and procedures to prevent and mitigate attempted intrusions, (11) 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 (12) the impact of natural disasters, pandemics, and/or acts of war or terrorism, (13) 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 (14) 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, 2023, 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)

50

(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 by average assets or average equity.

(4) Includes $30,537, $22,074 and $21,229 of optional rights to repurchase delinquent GNMA loans as of September 30, 2024, September 30, 2023 and December 31, 2023, respectively.

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 consolidated 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 selected historical consolidated financial data may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in our selected historical consolidated financial data when comparing such non-GAAP financial measures. The following reconciliation tables provide a more detailed analysis of these, and reconciliation for, each of non-GAAP financial measures.

Core efficiency ratio (tax-equivalent basis)

The core efficiency ratio (tax-equivalent basis) is a non-GAAP measure that excludes certain gains, losses 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 and charges. The most directly comparable financial measure calculated in accordance with GAAP is the efficiency ratio.

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

(dollars in thousands)

52

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 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 our 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 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 used by management to provide a depiction of our profitability without being impacted by intangible assets, as intangible assets are not directly managed to generate earnings. The most directly comparable financial measure calculated in accordance with GAAP is return on average common shareholders' equity.

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)

53

Company overview

We are a financial holding company headquartered in Nashville, Tennessee. We operate primarily through our wholly-owned subsidiary bank, FirstBank, and its 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, 2024, our footprint included 77 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 17 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.

Overview of recent financial performance

Results of operations

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Our net income decreased during the three months ended September 30, 2024 to $10.2 million from $19.2 million for the three months ended September 30, 2023. Diluted earnings per common share were $0.22 and $0.41 for the three months ended September 30, 2024 and 2023, respectively. Our net income represented a ROAA of 0.32% and 0.61% for the three months ended September 30, 2024 and 2023, respectively, and a ROAE of 2.67% and 5.46% for the same periods. Our ROATCE for the three months ended September 30, 2024 and 2023 were 3.19% and 6.67%, 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, 2024, our net interest income increased to $106.0 million compared with $100.9 million in the three months ended September 30, 2023. Our net interest margin, on a tax-equivalent basis, increased to 3.55% for the three months ended September 30, 2024 as compared to 3.42% for the three months ended September 30, 2023. The increase in net interest margin was primarily driven by higher rates for loans HFI and taxable AFS debt securities offset by a smaller increase in the volume of interest-earnings assets compared to interest-bearing liabilities.

Noninterest income for the three months ended September 30, 2024 decreased by $24.5 million to a loss of $16.5 million, compared to $8.0 million for the three months ended September 30, 2023. The decrease was primarily the result of management’s election to sell $318.6 million of AFS debt securities, which resulted in a $40.2 million net loss on investment securities during the three months ended September 30, 2024 compared to a $14.2 million net loss on investment securities primarily related to the sale of $76.6 million of AFS debt securities during the three months ended September 30, 2023. Refer to the section “Other earnings assets” for additional information on the sale of the AFS debt securities.

Noninterest expense decreased to $76.2 million for the three months ended September 30, 2024, compared with $83.0 million for the three months ended September 30, 2023. The decrease in noninterest expense is due to decreases in salaries, commissions and employee benefits of $7.0 million primarily related to the Company’s efficiency and scalability initiatives and updated methodology of deferrals for loan fees and loan origination expenses.

Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023

Our net income decreased during the nine months ended September 30, 2024 to $78.2 million from $90.9 million for the nine months ended September 30, 2023. Diluted earnings per common share were $1.67 and $1.94 for the nine months ended September 30, 2024 and 2023, respectively. Our net income represented a ROAA of 0.83% and 0.95% for the nine months ended September 30, 2024 and 2023, respectively, and a ROAE of 7.02% and 8.86% for the same periods. Our ROATCE for the nine months ended September 30, 2024 and 2023 were 8.45% and 10.9%, 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, 2024, our net interest income increased to $308.1 million from $306.1 million for the nine months ended September 30, 2023. Our net interest margin, on a tax-equivalent basis, increased to 3.51% for the nine months ended September 30, 2024 as compared to 3.44% for the nine months ended September 30, 2023. The increase in net interest margin was primarily driven by higher interest rates mostly offset by our volume of interest-earnings assets decreasing compared to an increase in our interest-bearing liabilities.

Noninterest income for the nine months ended September 30, 2024 decreased by $38.1 million to $17.1 million, down from $55.2 million for the nine months ended September 30, 2023. The decrease in noninterest income was primarily due to a $56.4 million net loss on investment securities related to the sale of $526.4 million of AFS debt securities during the nine months ended September 30, 2024 compared to a $14.2 million net loss on investment securities primarily related to the sale of $76.6 million of AFS debt securities during the nine months ended September 30, 2023. Refer to the section “Other earnings assets” for additional information on the sale of the AFS debt securities. The decrease was partially offset by a $2.1 million increase in investment services and trust income and a $2.1 million cash life insurance benefit during the nine months ended September 30, 2024.

Noninterest expense decreased to $223.7 million for the nine months ended September 30, 2024, compared with $244.7 million for the nine months ended September 30, 2023. The decrease in noninterest expense is due to decreases in salaries, commissions and employee benefits of $16.9 million primarily related to the Company’s efficiency and scalability initiatives and updated methodology of deferrals for loan fees and loan origination expenses. Additionally, the decrease is reflective of decreases in advertising, legal and professional expenses and franchise tax expense.

Business segment highlights

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

Banking

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Income before taxes from the Banking segment decreased for the three months ended September 30, 2024 to $10.8 million, compared to $23.4 million for the three months ended September 30, 2023. Net interest income increased by $5.0 million to $104.3 million during the three months ended September 30, 2024 compared to $99.4 million during the three months ended September 30, 2023. Provisions for credit losses on loans HFI and unfunded loan commitments resulted in $1.9 million of provision expense during the three months ended September 30, 2024 compared to $3.3 million during the three months ended September 30, 2023. The Banking segment recorded a noninterest loss of $28.4 million in the three months ended September 30, 2024 compared to a $4.0 million loss in the three months ended September 30, 2023. This decrease includes a net loss on investment securities of $40.2 million associated with the sale of $318.6 million AFS debt securities during the three months ended September 30, 2024 compared to a $14.2 million net loss on investment securities primarily related to the sale of $76.6 million of AFS debt securities during the three months ended September 30, 2023. Noninterest expense decreased to $63.3 million for three months ended September 30, 2024 compared to $68.7 million for the three months ended September 30, 2023 due primarily to a decrease in salaries associated with our efficiency and scalability initiatives and updated methodology of deferrals for loan fees and loan origination expenses.

Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023

Income before taxes from the Banking segment decreased for the nine months ended September 30, 2024 to $93.2 million, compared to $116.4 million for the nine months ended September 30, 2023. Net interest income increased by $2.6 million to $304.0 million during the nine months ended September 30, 2024 compared to $301.4 million during the nine months ended September 30, 2023. Provisions for credit losses on loans HFI and unfunded loan commitments resulted in $5.1 million of provision expense during the nine months ended September 30, 2024 compared to $2.3 million during the nine months ended September 30, 2023. The Banking segment recorded a noninterest loss of $19.7 million in the nine months ended September 30, 2024 as compared to income of $18.9 million in the nine months ended September 30, 2023. This decrease includes a net loss on investment securities of $56.4 million associated with the sale of $526.4 million AFS debt securities during the nine months ended September 30, 2024 compared with a net loss on investment securities of $14.2 million as noted above for the nine months ended September 30, 2023. Noninterest expense decreased to

$186.0 million for nine months ended September 30, 2024 compared to $201.7 million for the nine months ended September 30, 2023 due to decreases in salaries, advertising, legal and professional fees and franchise tax expense.

Mortgage

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Activity in our Mortgage segment resulted in a pre-tax net contribution of $0.6 million for the three months ended September 30, 2024 compared to a $0.2 million pre-tax net loss for the three months ended September 30, 2023. Net interest income was $1.7 million for the three months ended September 30, 2024 and $1.6 million for the three months ended September 30, 2023. Provisions for credit losses on loans HFI and unfunded loan commitments resulted in provision expense of $0.1 million during the three months ended September 30, 2024 compared to a reversal of $0.4 million of provision expense during the three months ended September 30, 2023. Mortgage banking income decreased $0.4 million to $11.6 million during the three months ended September 30, 2024 compared to $12.0 million for the three months ended September 30, 2023. As noted below, mortgage banking income includes origination fees and realized gains and losses on the sale of mortgage loans, change in fair value of mortgage loans and derivatives, and mortgage loan servicing fees, which includes the 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. 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.

The components of mortgage banking income for the three months ended September 30, 2024 and 2023 were as follows:

(dollars in thousands)

Noninterest expense for the three months ended September 30, 2024 and 2023 was $12.9 million and $14.3 million, respectively. This decrease is reflective of a decrease in salaries and employee benefits associated with our efficiency and scalability initiatives.

Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023

Activity in our Mortgage segment resulted in a pre-tax net contribution of $3.3 million for the nine months ended September 30, 2024 compared to a $2.0 million pre-tax net loss for the nine months ended September 30, 2023. Net interest income was $4.1 million for the nine months ended September 30, 2024 compared to $4.7 million for the nine months ended September 30, 2023. Provisions for credit losses on loans HFI and unfunded loan commitments resulted in a reversal of $0.2 million of provision expense during the nine months ended September 30, 2024 compared to a reversal of $0.1 million of provision expense during the nine months ended September 30, 2023. Mortgage banking income decreased $0.3 million to $36.0 million during the nine months ended September 30, 2024 compared to $36.3 million for the nine months ended September 30, 2023.

The components of mortgage banking income for the nine months ended September 30, 2024 and 2023 were as follows:

(dollars in thousands)

Noninterest expense for the nine months ended September 30, 2024 and 2023 was $37.8 million and $43.1 million, respectively. This decrease is reflective of a decrease in salaries and employee benefits associated with our efficiency and scalability initiatives.

Results of operations

Throughout the following discussion of our operating results, we present our net interest income, net interest margin and core 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.

Our tax-exempt income is converted to a tax-equivalent basis by adjusting for the combined federal and blended state statutory income tax rate of 26.06% for the three and nine months ended September 30, 2024 and 2023.

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, 2024, the U.S. Treasury yield curve continued its path towards normalization and became less inverted as long-term note and bond rates decreased at a slower pace than shorter-term note rates. The curve remained inverted as of September 30, 2024, which is in contrast to the more normalized upward sloping U.S. Treasury yield curve exhibited during the three and nine months ended September 30, 2023. The Federal Funds Target Rate range was 4.75% - 5.00% and 5.25% - 5.50% as of September 30, 2024 and December 31, 2023, respectively. During the Federal Open Market Committee’s September 18, 2024 meeting, the federal funds rate was lowered 50 basis points, which was the first rate change since July 2023.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Net interest income increased to $106.6 million for the three months ended September 30, 2024 as compared to $101.8 million for the three months ended September 30, 2023. The change in net interest income was driven by a $11.5 million increase in interest income partially offset by an increase in interest expense of $6.6 million. Further discussion of the changes to interest income and expense are discussed below.

Interest income was $186.2 million for the three months ended September 30, 2024, compared to $174.7 million for the three months ended September 30, 2023, an increase of $11.5 million, which was primarily driven by an increase in yields and somewhat by an increase in volume of loans HFI and taxable investment securities.

Interest income on loans HFI increased $4.7 million to $157.8 million for the three months ended September 30, 2024 from $153.0 million for the three months ended September 30, 2023 primarily due to higher yields with a secondary driver of increased volume. The yield on loans HFI was 6.70% for the three months ended September 30, 2024, up 16 basis points from the three months ended September 30, 2023.

The components of our loan yield for the three months ended September 30, 2024 and 2023 were as follows:

(dollars in thousands)

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

Interest income on taxable investment securities increased $7.5 million to $13.9 million for the three months ended September 30, 2024 from $6.4 million for the three months ended September 30, 2023 due to the reinvestment of proceeds from the sale of AFS debt securities that were sold during the second half of 2023 and first nine months of 2024 to higher yielding U.S. government agency and mortgage-backed securities. The yield on taxable investment securities increased 184 basis points to 3.73% for the three months ended September 30, 2024 compared to 1.89% for the three months ended September 30, 2023.

Interest expense was $79.6 million for the three months ended September 30, 2024, an increase of $6.6 million as compared to the three months ended September 30, 2023. The increase in interest expense was driven equally by an increase in the average balance of interest-bearing liabilities which increased interest expense $3.6 million and an increase in the rate paid on interest-bearing liabilities which increased interest expense $3.0 million over the comparative time period. Increases in average balances of interest-bearing liabilities were led by brokered and internet time deposits of $140.0 million for the three months ended September 30, 2024 due to the issuance of brokered deposits as we took advantage of favorable relative terms available during the quarter. Notable contributors to the increase in interest expense are attributable to the rate paid on interest-bearing liabilities, including money market and customer time deposits, which increased $2.7 million and $1.6 million, respectively, from the three months ended September 30, 2023. These increases were most significantly influenced by increases in rates paid on these balances. The average rate on money market deposits increased 15 basis points to 3.93% for the three months ended September 30, 2024 from 3.78% for the three months ended September 30, 2023. The average rate on customer time deposits increased 60 basis points to 3.97% for the three months ended September 30, 2024 from 3.37% for the three months ended September 30, 2023.

More broadly, total cost of interest-bearing deposits was 3.58% for the three months ended September 30, 2024 compared to 3.33% for the three months ended September 30, 2023. 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.

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)

59

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, 2024 and 2023. 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)

Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023

Net interest income was relatively flat for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, increasing $1.4 million to $310.1 million from $308.6 million. Increases in interest income of $35.1 million were largely offset by increases in interest expense of $33.6 million for the nine months ended September 30, 2024 compared to the prior period. The increase in interest income for the current year period was driven by an increase in yields on average earning assets incrementally offset by decreases in the average volume of interest-bearing deposits with other financial institutions. The increase in interest expense was primarily driven increases in the rate paid on interest-bearing liabilities.

Interest income on loans HFI increased $26.0 million to $466.9 million for the nine months ended September 30, 2024 from $440.9 million for the nine months ended September 30, 2023 due primarily to increasing yields. The average yield on loans HFI increased by 37 basis points period-over-period to 6.68% for the nine months ended September 30, 2024 from 6.31% for the nine months ended September 30, 2023.

The components of our loan yield for the nine months ended September 30, 2024 and 2023 were as follows:

(dollars in thousands)

Interest income on taxable investment securities increased $15.6 million to $35.0 million for the nine months ended September 30, 2024 from $19.4 million for the nine months ended September 30, 2023 due to the reinvestment of proceeds from the sale of AFS debt securities that were sold during the second half of 2023 and first and third quarters of 2024 to higher yielding U.S. government agency securities and mortgage-backed securities. The yield on taxable investment securities increased 133 basis points to 3.22% for the nine months ended September 30, 2024 compared to 1.89% for the nine months ended September 30, 2023.

Interest income on interest-bearing deposits with other financial institutions decreased to $23.2 million for the nine months ended September 30, 2024 from $28.5 million for the nine months ended September 30, 2023 due to a decrease in volume of interest-bearing deposits with other financial institutions partially offset by higher yields. The average balance of interest-bearing deposits with other financial institutions decreased $187.0 million to $573.9 million for the nine months ended September 30, 2024 from $760.9 million for the nine months ended September 30, 2023. The yield on interest-bearing deposits with other financial institutions increased 41 basis points to 5.41% for the nine months ended September 30, 2024 compared to 5.00% for the nine months ended September 30, 2023.

Interest expense was $231.0 million for the nine months ended September 30, 2024, an increase of $33.6 million as compared to $197.4 million for the nine months ended September 30, 2023. The increase was largely attributed to a rise in the rate paid on interest-bearing deposit accounts, most notably, on money market and customer time deposit products. Interest expense on money market deposits increased $22.6 million to $112.0 million for the nine months ended September 30, 2024 compared to $89.5 million for the nine months ended September 30, 2023. Interest expense on customer time deposits increased $9.6 million to $41.4 million for the nine months ended September 30, 2024 from $31.8 million for the nine months ended September 30, 2023. The average rate on money market deposits increased 53 basis points to 3.93% for the nine months ended September 30, 2024 from 3.40% for the nine months ended September 30, 2023. The average rate on customer time deposits increased 99 basis points to 3.96% for the nine months ended September 30, 2024 from 2.97% for the nine months ended September 30, 2023. Total cost of interest-bearing deposits was 3.53% for the nine months ended September 30, 2024 compared to 2.97% for the nine months ended September 30, 2023.

The average balance of other borrowings increased $127.9 million to $129.4 million for the nine months ended September 30, 2024 compared to $1.5 million for the nine months ended September 30, 2023. As a result, interest expense on other borrowings increased to $4.7 million for the nine months ended September 30, 2024 compared to $23 thousand for the nine months ended September 30, 2023. The yield on other borrowings increased 275 basis points to 4.83% for the nine months ended September 30, 2024 compared to 2.08% for the nine months ended September 30, 2023. The increase is due primarily of borrowings from the Bank Term Funding Program, which was paid-off at the end of this quarter. Refer to the section “Borrowings” for additional information on the BTFP.

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)

(1) Average balances of nonaccrual loans and overdrafts 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 $2.0 million and $2.5 million for nine months ended September 30, 2024 and 2023, respectively.

(3) Includes average net unrealized losses on investment securities available for sale of $181.9 million and $222.5 million for the nine months ended September 30, 2024 and 2023, 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 $22.3 million and $21.1 million for the nine months ended September 30, 2024 and 2023, 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 tables below present the components of the changes in net interest income for the nine months ended September 30, 2024 and 2023. 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)

(1) Average loans are presented gross, including nonaccrual loans and overdrafts.

(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 $2.0 million and $2.5 million for the nine months ended September 30, 2024 and 2023, 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 is complex and involves a high degree of judgment and subjectivity. Refer to Note 1, “Basis of presentation” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for a detailed discussion regarding ACL methodology.

Our allowance for credit losses calculation as of September 30, 2024 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 included forecasts for projected slower GDP growth over the next two to three years and expected elevated unemployment levels. We also considered the current global economic environment, including continued pressures on supply chains (and more specifically, oil and energy) and increased uncertainty due to geopolitical turmoil and its impact on the U.S. economy. 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, 2024 compared to three months ended September 30, 2023

We recognized a provision for credit losses on loans HFI of $1.9 million and $6.0 million for the three months ended September 30, 2024 and 2023, respectively. The decrease in our provision for credit losses on loans HFI during the three months ended September 30, 2024 was primarily due to reductions in balances outstanding for construction loans offset by growth in other classes of financing receivable in our loan portfolio. For the three months ended September 30, 2023, the decrease in the provision for credit losses on loans HFI was driven by decreased loan growth in our loans HFI combined with the economic variables signaling a possible recession in our forward-looking model partially offset by an increase in the 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 provision expense for credit losses on unfunded commitments of $0.1 million and a reversal of provision expense of $3.2 million for the three months ended September 30, 2024 and 2023, respectively. The reversal is due to a $9.3 million decrease in our unfunded commitments during the three months ended September 30, 2024, including a $6.7 million decrease in our construction portfolio. Commitments increased in commercial and industrial and residential real estate line of credit portfolios offset by reductions in construction and commercial real estate.

During the three months ended September 30, 2024 and 2023 it was determined that all AFS debt securities that experienced a decline in fair value below amortized cost basis were due to noncredit-related factors. Therefore, there was no provision for credit losses recognized on AFS debt securities during the three months ended September 30, 2024 or 2023.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

We recognized a provision for credit losses on loans HFI for the nine months ended September 30, 2024 and 2023 of $7.6 million and $13.6 million, respectively. The current period provision on loans HFI is due to growth in loan balances for most loan categories offset by significant decreases in construction lending. For the nine months ended September 30, 2023, the increase in the provision for credit losses on loans HFI was driven by a single commercial and industrial relationship moving to nonaccrual status during the period and the deteriorating economic forecasts.

We recorded a reversal of provision for credit losses on unfunded commitments of $2.7 million and $11.4 million for the nine months ended September 30, 2024 and 2023, respectively. The reversal of provision for credit losses on unfunded commitments for the nine months ended September 30, 2024 and 2023 is primarily due to management's concentrated effort to reduce unfunded loan commitments during the periods indicated including a $215.7 million and a $716.8 million decrease in our construction category as these projects primarily moved to permanent financing for the nine months ended nine months ended September 30, 2024 and 2023, respectively. Decreases in commitment balances for construction and commercial real estate were offset by increases in commercial and industrial and residential segments. This resulted in a $2.7 million and $11.4 million decrease in required ACL related to the unfunded commitments for the nine months ended September 30, 2024 and 2023, respectively.

During the nine months ended September 30, 2024 and 2023, it was determined that all AFS debt securities that experienced a decline in fair value below amortized cost basis were due to noncredit-related factors. Therefore, there was no provision for credit losses recognized on AFS debt securities during the nine months ended September 30, 2024 and 2023.

Noninterest income

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

(dollars in thousands)

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Noninterest income amounted to a $16.5 million loss for the three months ended September 30, 2024, a decrease of $24.5 million, or 305%, as compared to income of $8.0 million for the three months ended September 30, 2023. The decrease in noninterest income was driven by the net loss from investment securities.

Net loss from investment securities was $40.2 million and $14.2 million for the three months ended September 30, 2024 and 2023, respectively. The net loss from investment securities during the three months ended September 30, 2024 is the result of management’s election to sell $318.6 million of AFS debt securities to reinvest the proceeds of the sale into higher yielding AFS debt securities compared to a $14.2 million net loss on investment securities primarily related to the sale of $76.6 million of AFS debt securities during the three months ended September 30, 2023. Refer to the section “Other earnings assets” for additional information on the sale of the AFS debt securities.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Noninterest income amounted to $17.1 million for the nine months ended September 30, 2024, a decrease of $38.1 million, or 69%, as compared to $55.2 million for the nine months ended September 30, 2023. The decrease in noninterest income was driven by the net loss from investment securities, offset by increases in investment services and trust income and BOLI income recognized in other noninterest income.

Investment services and trust income increased $2.1 million during the nine months ended September 30, 2024 to $10.3 million as compared to $8.2 million during the nine months ended September 30, 2023. The increase is primarily attributable to fees earned from higher assets under management stemming from market value improvement and existing account growth, as well as customer acquisition efforts through a mix of financial advisors joining the Company bringing new business and the addition of new accounts by the financial advisors already at the Company.

Net loss from investment securities was $56.4 million for the nine months ended September 30, 2024 compared to a net loss of $14.2 million for the nine months ended September 30, 2023. The net loss from investment securities during the nine months ended September 30, 2024 is the result of management’s election to sell $526.4 million of AFS debt securities to reinvest the proceeds into higher yielding AFS securities compared to a $14.2 million net loss on investment securities primarily related to the sale of $76.6 million of AFS debt securities during the nine months ended September 30, 2023. Refer to the section “Other earning assets” for additional information on the sale of the AFS debt securities.

Other income increased $1.3 million to $8.8 million during the nine months ended September 30, 2024 as compared to $7.5 million during the nine months ended September 30, 2023. This increase was primarily related to a $2.1 million increase in BOLI income resulting from a cash life insurance benefit during the nine months ended September 30, 2024 offset by a $0.9 million gain during the nine months ended September 30, 2023 associated with the change in fair value of the commercial loans held for sale portfolio that was exited during the year ended December 31, 2023.

Noninterest expense

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

(dollars in thousands)

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Noninterest expense decreased by $6.8 million, or 8%, during the three months ended September 30, 2024 to $76.2 million as compared to $83.0 million in the three months ended September 30, 2023. The decrease in noninterest expense was attributable to a decrease in salaries, commissions and employee benefits.

Salaries, commissions and employee benefits expense is the largest component of noninterest expense and is comprised of salaries and wages in addition to other employee benefit costs. During the three months ended September 30, 2024, salaries and employee benefits expense decreased $7.0 million, or 13%, to $47.5 million as compared to $54.5 million for the three months ended September 30, 2023. This change was attributable to the impact of the Company’s efficiency and scalability initiatives, as well as a $2.9 million decrease from the Company applying an updated deferral methodology for loan fees and loan origination expenses.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Noninterest expense decreased by $21.0 million, or 9%, during the nine months ended September 30, 2024 to $223.7 million as compared to $244.7 million in the nine months ended September 30, 2023. The decrease in noninterest expense was attributable to a decrease in salaries, commissions and employee benefits, legal and professional fees, advertising expense, and franchise tax expense recognized in other noninterest expense offset slightly by a FDIC special assessment expense.

Salaries, commissions and employee benefits expense is the largest component of noninterest expense. For the nine months ended September 30, 2024, salaries, commissions and employee benefits expense decreased $16.9 million, or 11%, to $138.4 million as compared to $155.3 million for the nine months ended September 30, 2023. This change was attributable to the impact of the Company’s efficiency and scalability initiatives, as well as a $7.8 million decrease from the Company applying an updated deferral methodology for loan fees and loan origination expenses.

Advertising expense includes expenses related to sponsorships, advertising, marketing, customer relations and business development, and public relations. During the nine months ended September 30, 2024, advertising expense decreased $1.3 million to $5.0 million compared to $6.3 million during the nine months ended September 30, 2023. This decrease was primarily attributable to marketing rebate activity with partners earned through higher transaction volumes during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Legal and professional fees decreased by $1.3 million during the nine months ended September 30, 2024 to $5.8 million as compared to $7.1 million during the nine months ended September 30, 2023. The decrease was primarily driven by the completion of internal projects in the prior year.

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 decreased $2.3 million during the nine months ended September 30, 2024 to $45.5 million compared to $47.9 million during the nine months ended September 30, 2023. The decrease was primarily related to a $3.1 million decrease in franchise tax expense which was partially offset by $0.5 million expense related to the FDIC special assessment.

Efficiency ratio

The efficiency ratio is one measure of productivity in the banking industry. This ratio is a measure of 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. This ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income. For a core efficiency ratio, we exclude certain gains, losses and expenses we do not consider core to our business.

Our efficiency ratio was 85.1% and 68.8% for the three and nine months ended September 30, 2024, respectively, and 76.2% and 67.7% for the three and nine months ended September 30, 2023, respectively. Our core efficiency ratio, on a tax-equivalent basis, was 58.4% and 58.2% for the three and nine months ended September 30, 2024, respectively, and 63.1% and 63.3% the three and nine months ended September 30, 2023, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of the core efficiency ratio.

Income taxes

Income tax expense was $1.2 million and $4.0 million for the three months ended September 30, 2024 and 2023, respectively, and $18.4 million and $23.5 million for the nine months ended September 30, 2024 and 2023, respectively. This represents effective tax rates of 10.3% and 17.2% for the three months ended September 30, 2024 and 2023, respectively, and 19.1% and 20.6% for the nine months ended September 30, 2024 and 2023, 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. Refer to Note 7 “Income taxes” in the notes to the consolidated financial statements for additional information regarding the Company’s income tax expense and effective tax rates.

Financial condition

The following discussion of our financial condition compares balances as of September 30, 2024 and December 31, 2023.

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 73.4% and 74.6% of our total assets at September 30, 2024 and December 31, 2023, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer type 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. However, we are also party to loan syndications and participations from other banks (collectively, “participated loans”). As of September 30, 2024 and December 31, 2023, loans HFI included approximately $224.9 million and $254.6 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, 2024 and 2023, we sold $7.5 million and $14.5 million in loan participations, respectively. During the nine months ended September 30, 2024 and 2023, we sold $24.5 million and $30.8 million in 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 the 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, 2024 and December 31, 2023, there were no concentrations of loans exceeding 10% of total loans other than our geographic exposure to Tennessee and Alabama, as well as 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. For additional details related to the concentrations within our loan portfolio, refer to the industry classification and collateral property type concentration tables detailed later in this section.

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, 2024 and December 31, 2023.

68

69

As part of our lending policy and risk management activities, we track 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)

70

Additionally, we track our 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 table below provides a summary of our non-owner occupied commercial real estate and construction loan portfolios by collateral property type.

(dollars in thousands)

71

Loan maturity and sensitivities

The following table presents the contractual maturities of our loan portfolio as of September 30, 2024. 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, 2024.

The following table presents the contractual maturities of our loan portfolio segregated into fixed and floating interest rate loans as of September 30, 2024.

72

Of the loans shown above with floating interest rates as of September 30, 2024, 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 interest rate reduction, a term extension, principal forgiveness, payment deferral, or a combination thereof, 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, 2024 and December 31, 2023, we had $127.3 million and $86.5 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. Accrued interest receivable written off as an adjustment to interest income amounted to $0.1 million and $0.3 million for the three months ended September 30, 2024 and 2023, respectively. Accrued interest receivable written off as an adjustment to interest income amounted to $0.5 million and $0.7 million for the nine months ended September 30, 2024 and 2023, respectively. Additionally, we had net interest recoveries on nonperforming assets previously charged off of $0.1 million and $0.6 million for the three months ended September 30, 2024 and 2023, respectively, and $1.1 million and $1.0 million for the nine months ended September 30, 2024 and 2023, respectively.

Nonperforming loans HFI increased by $29.9 million to $90.8 million as of September 30, 2024 compared to $60.9 million as of December 31, 2023. The increase in nonperforming loans primarily occurred in our 1-4 family mortgage residential real estate and construction portfolios.

As of September 30, 2024 and December 31, 2023, we had $30.5 million and $21.2 million, respectively, of delinquent GNMA optional repurchase 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 both September 30, 2024 and December 31, 2023, other real estate owned included $0.1 million of excess land and facilities held for sale resulting from our prior acquisitions. Other repossessed assets also included other repossessed non-real estate amounting to $2.2 million and $1.1 million as of September 30, 2024 and December 31, 2023, 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, 2024 and December 31, 2023. 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 $40.5 million at September 30, 2024 as compared to $47.0 million at December 31, 2023. The decrease from December 31, 2023 to September 30, 2024 primarily occurred within our construction and commercial real estate non-owner occupied portfolios.

Allowance for credit losses

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. 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 uncollectible accrued interest receivable.

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 each type of loan. See Note 1, “Basis of presentation,” in the notes to our consolidated financial statements in our Annual Report that was filed with the SEC on February 27, 2024 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)

75

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

(dollars in thousands)

76

The following tables details our provision for (reversal of) 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)

77

(dollars in thousands)

The ACL on loans HFI was $156.3 million and $150.3 million and represented 1.65% and 1.60% of loans HFI as of September 30, 2024 and December 31, 2023, respectively. For further information related to the change in the ACL refer to “Provision for credit losses” section herein and Note 3, “Loans and allowance for credit losses on loans HFI” in the notes to our consolidated financial statements.

For the three months ended September 30, 2024, we experienced net charge-offs of $0.7 million, or 0.03% of average loans HFI, compared to net charge-offs of $0.6 million, or 0.02% for the three months ended September 30, 2023. For both the nine months ended September 30, 2024 and 2023, we experienced net charge-offs of $1.7 million, or 0.02% of average loans HFI. Our ratio of total nonperforming loans HFI as a percentage of total loans HFI increased by 31 basis points to 0.96% as of September 30, 2024 compared to December 31, 2023.

Management has made an effort to reduce exposure to construction lending during three and nine months ended September 30, 2024. The reduction in construction balances and related allowance offset some of the additional allowance needed related to growth in other loan segments.

We also maintain an allowance for credit losses on unfunded commitments, which decreased to $6.0 million as of September 30, 2024 from $8.8 million as of December 31, 2023 due to a 6.26% or $181.3 million decrease in unfunded loan commitments during the period. Notably, there was a $215.7 million decrease in unfunded loan commitments in our construction segment, which resulted in a $2.7 million decrease in required ACL related to unfunded construction commitments. Our unfunded commitments in our construction loan category decreased as a result of management's concentrated effort to reduce commitments in specific categories judged to be inherently higher risk considering the current and projected economic conditions. The decrease in ACL related to unfunded construction commitment was primarily offset by increases in our ACL related to unfunded commercial and industrial and residential line of credit commitments.

Loans held for sale

Mortgage loans held for sale consisted of $72.6 million of residential real estate mortgage loans in the process of being sold to third-party private investors or government sponsored agencies and $30.5 million of GNMA optional repurchase loans. This compares to $46.6 million of residential real estate mortgage loans in the process of being sold to third-party private investors or government sponsored agencies and $21.2 million of GNMA optional repurchase loans as of December 31, 2023.

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 our treasury management services.

Total deposits were $10.98 billion and $10.55 billion as of September 30, 2024 and December 31, 2023, respectively. Noninterest-bearing deposits at September 30, 2024 and December 31, 2023 were $2.23 billion and $2.22 billion, respectively, while interest-bearing deposits were $8.75 billion and $8.33 billion at September 30, 2024 and December 31, 2023, respectively.

Our noninterest-bearing deposits include mortgage escrow deposits which increased to $126.9 million as of September 30, 2024 from $63.6 million as of December 31, 2023. This increase was slightly offset by a migration to interest-yielding products such as interest-bearing checking deposits, which increased by $249.8 million from December 31, 2023.

In addition to customers seeking higher rates on noninterest-bearing deposit balances, customers also migrated from money market account balances to interest-bearing checking accounts. Money market and savings deposits decreased by $106.4 million from December 31, 2023.

Our deposits from municipal and governmental entities, also known as public funds, decreased by $184.6 million during the period within the interest-bearing checking category. The decrease in public funds was due to management’s decision to not renew certain maturing public deposits due to rising costs of these deposits.

Additionally, customer time deposits decreased by $91.7 million from December 31, 2023 which was largely driven by three large depositor relationship customers shifting deposits away from the bank for higher yields; however, each of the customers still maintain a relationship with us.

Brokered and internet time deposits increased by $368.4 million to $519.2 million as of September 30, 2024 compared to December 31, 2023. The increase was driven by an issuance of brokered deposits of $369.1 million at an average coupon of 4.15% as we took advantage of favorable relative terms available during the quarter.

Our deposit base 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.

As a result of the changing interest rate environment and the shift in our deposit composition, we have experienced an increase in our cost of interest-bearing deposits and a decrease in our total 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.

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, 2024 and the year ended December 31, 2023, 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 tables below set forth maturity information on time deposits and amounts in excess of the FDIC insurance limit as of September 30, 2024:

(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 a fully consolidated basis and exclude deposits of affiliates that are eliminated in consolidation.

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

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 $60.2 million and $47.8 million at September 30, 2024 and December 31, 2023, 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 $37.1 million and $35.5 million at September 30, 2024 and December 31, 2023, respectively.

AFS 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 certain deposit types, 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 AFS debt securities portfolio was $1.57 billion and $1.47 billion as of September 30, 2024 and December 31, 2023, respectively. Included in the fair value of AFS debt securities were net unrealized losses of $105.2 million and $186.8 million as of September 30, 2024 and December 31, 2023, respectively. Current net unrealized losses are due to interest rate increases.

During the three months ended September 30, 2024, we sold $318.5 million of AFS debt securities with a weighted average yield of 2.25% and reinvested the proceeds of the sales into AFS securities with a weighted average yield of 5.25%. The sales resulted in a loss on securities of $40.2 million. We primarily sold low yielding mortgage-backed securities and municipal securities. Including the reinvestment of these proceeds into higher yielding U.S. government agency and mortgage-backed securities, we purchased $457.4 million of AFS debt securities during the three months ended September 30, 2024. Maturities, prepayments and calls of AFS debt securities totaled $89.9 million for the three months ended September 30, 2024.

During the nine months ended September 30, 2024, we sold $526.4 million of AFS debt securities, resulting in a loss on securities of $56.4 million. We primarily sold fixed rate, deeply discounted mortgage bonds and low yielding municipal bonds and reinvested the proceeds into U.S. government agency AFS debt securities and a blend of fixed and floating rate securities to achieve the best accretion profile for the Bank. Including the reinvestment of these proceeds, we purchased $824.0 million of AFS debt securities during the nine months ended September 30, 2024. Maturities, prepayments and calls of AFS debt securities totaled $224.1 million for the nine months ended September 30, 2024.

During the three and nine months ended September 30, 2023, we sold $76.6 million of AFS debt securities, contributing to a net loss on securities of $14.2 million. During the three and nine months ended September 30, 2023, we purchased $92.9 million and $93.8 million of AFS debt securities, respectively. During the three and nine months ended September 30, 2023, maturities, prepayments and calls of AFS debt securities totaled $33.0 million and $91.4 million, respectively.

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

(dollars in thousands)

(1) Yields on a tax-equivalent basis.

Borrowed funds

Deposits are the primary source of funds for our lending activities and general business purposes. However, we may also obtain advances from the FHLB, borrow from the Federal Reserve’s Discount Window, one-off borrowing programs from the Federal Reserve, purchase federal funds and engage in overnight borrowing with 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 sources 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 products as a short-term return for their excess funds. Securities sold under agreements to repurchase totaled $19.7 million and $19.3 million at September 30, 2024 and December 31, 2023, 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 $89.4 million as of December 31, 2023. There were no such borrowings as of September 30, 2024.

FHLB short-term advances

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, 2024 and December 31, 2023 had total borrowing capacity of $1.36 billion and $1.76 billion, respectively. As of September 30, 2024 and December 31, 2023, we had qualifying loans pledged as collateral securing these lines amounting to $2.53 billion and $3.01 billion, respectively. There were no FHLB advances outstanding as of September 30, 2024 or December 31, 2023.

Bank Term Funding Program

In March 2023, the Federal Reserve established the Bank Term Funding Program to make available funding to eligible depository institutions in order to help assure they have the ability to meet the needs of their depositors following the March 2023 high-profile bank failures. The program allows for advances for up to one year secured by eligible high-quality securities at par value extended at the one-year overnight index swap rate, plus 10 basis points, as of the day the advance is made. The interest rate is fixed for the term of the advance and there are no prepayment penalties. The BTFP ceased extending new borrowings on March 11, 2024. As of December 31, 2023, we had outstanding borrowings of $130.0 million under the BTFP at a borrowing rate of 4.85% with a maturity date of December 26, 2024. During the three months ended September 30, 2024, we repaid the $130.0 million borrowings in full.

Subordinated debt

During the year ended December 31, 2003, we formed two separate trusts which issued $9.0 million and $21.0 million 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.

Further information related to our subordinated debt as of September 30, 2024 is detailed below:

(dollars in thousands)

Other borrowings

Other borrowings on our consolidated balance sheets includes our finance lease liability totaling $1.3 million as of both September 30, 2024 and December 31, 2023. 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 $30.5 million and $21.2 million as of September 30, 2024 and December 31, 2023, respectively. See Note 5, “Leases” and Note 10, “Fair value of financial instruments” within the notes to our 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. AFS 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, 2024 and December 31, 2023, we had pledged securities related to these items with carrying values of $1.06 billion and $0.93 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. There were no FHLB advances outstanding as of September 30, 2024 or December 31, 2023. As of September 30, 2024, we had the ability to borrow $1.36 billion through these channels with remaining capacity of $1.36 billion. As of December 31, 2023, there was $1.76 billion available to borrow against with a remaining capacity of $1.30 billion.

We also maintained unsecured lines of credit with other commercial banks totaling $370.0 million as of both September 30, 2024 and December 31, 2023. 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 $89.4 million as of December 31, 2023. There were no such borrowings against these lines as of September 30, 2024. As of both September 30, 2024 and December 31, 2023, 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 may utilize various methods to raise capital, including through the sale of common stock, preferred stock, debt securities, warrants, rights, or other securities. 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 - Dividends,” 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 TDFI. Based upon this regulation, as of September 30, 2024 and December 31, 2023, $191.2 million and $218.4 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, 2024, there were $9.0 million and $37.5 million in cash dividends approved by the board for payment from the Bank to the holding company. Additionally, an asset dividend of an equity security amounting to $1.7 million was paid from the Bank to the holding company during the nine months ended September 30, 2024. 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. None of these required approval from the TDFI. Subsequent to September 30, 2024, the Board approved a dividend from the Bank to the holding company to be paid in the fourth quarter for $24.0 million that also did not require approval from the TDFI.

During the three and nine months ended September 30, 2024, the Company declared shareholder dividends of $0.17 per share, or $8.0 million and $0.51 per share, or $24.1 million, respectively. 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. Subsequent to September 30, 2024, the Company declared a quarterly dividend in the amount of $0.17 per share, payable on November 19, 2024, to stockholders of record as of November 5, 2024.

Shareholders’ equity and capital management

Our total shareholders’ equity was $1.56 billion as of September 30, 2024 and $1.45 billion as of December 31, 2023. The increase in shareholders’ equity was primarily attributable to an increase in retained net income, net of dividends declared and unrealized loss reclassification adjustment for loss on sale of securities included in net income of $41.7 million (net of tax benefit) from December 31, 2023. The increase in shareholders’ equity as of September 30, 2024 was partially off-set by dividends declared of $24.1 million and stock repurchases of $12.7 million. Book value per common share was $33.48 as of September 30, 2024 and $31.05 as of December 31, 2023.

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, 2024 and December 31, 2023, we met all capital adequacy requirements for which we were subject. See additional discussion regarding our capital adequacy and ratios 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 uses 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 ALCO, 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. 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 effect 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, 2024 and December 31, 2023 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 floating-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 betas 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, 2024, 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.

There have been no material changes to the risk factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2023.