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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 168 added, 210 removed, 544 unchanged (41% of the section changed)

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of June 30, 2023, as compared to December 31, 2022, and operating results for the three and six months ended June 30, 2023 and 2022.

The following is management's discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of September 30, 2023, as compared to December 31, 2022, and operating results for the three and nine months ended September 30, 2023 and 2022.

These comments should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes appearing elsewhere herein and our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

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These statements are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including prevailing interest rates and the rate of inflation;

the continuing effects of the recent failures of Silicon Valley Bank and Signature Bank, including anticipated effects on FDIC premiums, increased deposit volatility and potential regulatory developments;

the continuing effects of the recent failures of Silicon Valley Bank and Signature Bank, including increased deposit volatility and potential regulatory developments;

changes in the financial markets;

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Significant Developments and Transactions

Each item listed below affects the comparability of our results of operations for the three and six months ended June 30, 2023 and 2022, and our financial condition as of June 30, 2023 and December 31, 2022, and may affect the comparability of financial information we report in future fiscal periods.

Each item listed below affects the comparability of our results of operations for the three and nine months ended September 30, 2023 and 2022, and our financial condition as of September 30, 2023 and December 31, 2022, and may affect the comparability of financial information we report in future fiscal periods.

Balance sheet repositioning.

In the third quarter of 2023, the Company recognized a one-time enhancement fee of $6.6 million from surrender and replacement of certain company-owned life insurance policies, which was intended to offset an increase in tax expense related to the surrender.

The tax expense associated with the surrender of the policies totaled $4.5 million.

In addition, the Company sold $65.9 million of investment securities, recognizing a loss of $4.9 million, and repaid $17.0 million of FHLB advances.

Redemption of Subordinated Notes.

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At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

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Recent Acquisitions.

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Results of Operations

The following table sets forth condensed income statement information of the Company for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

The following table sets forth condensed income statement information of the Company for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in thousands, except per share data) 2023 2022 2023 2022

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Return on average shareholders' equity 9.28 % 13.31 % 10.63 % 13.26 %

During the three months ended June 30, 2023, we generated net income of $21.6 million, or diluted earnings per common share of $0.86, compared to net income of $21.9 million, or diluted earnings per common share of $0.97, in the three months ended June 30, 2022.

Earnings for the second quarter of 2023 compared to the second quarter of 2022 decreased slightly primarily due to a $2.5 million decrease in net interest income, a $0.4 million increase in provision for credit losses and a $1.6 million increase in noninterest expense.

These results were partially offset by a $4.1 million increase in noninterest income.

During the six months ended June 30, 2023, we generated net income of $43.3 million, or diluted earnings per common share of $1.72, compared to net income of $42.6 million, or diluted earnings per common share of $1.89, in the six months ended June 30, 2022.

Earnings for the six months ended June 30, 2023 compared to six months ended June 30, 2022 increased primarily due to a $1.2 million increase in net interest income, a $0.6 million decrease in provision for credit losses, and a $4.3 million increase in noninterest income.

These results were partially offset by a $5.2 million increase in noninterest expense and a $0.2 million increase in income tax expense.

During the three months ended September 30, 2023, we generated net income of $18.0 million, or diluted earnings per common share of $0.71, compared to net income of $23.5 million, or diluted earnings per common share of $1.04, in the three months ended September 30, 2022.

Earnings for the third quarter of 2023 compared to the third quarter of 2022 decreased primarily due to a $5.4 million decrease in net interest income and a $5.7 million increase in income tax expense.

These results were partially offset by a $1.8 million decrease in provision for credit losses, a $2.4 million increase in noninterest income and a $1.5 million decrease in noninterest expense.

During the nine months ended September 30, 2023, we generated net income of $61.4 million, or diluted earnings per common share of $2.43, compared to net income of $66.2 million, or diluted earnings per common share of $2.92, in the nine months ended September 30, 2022.

Earnings for the nine months ended September 30, 2023 compared to nine months ended September 30, 2022 decreased primarily due to a $4.2 million decrease in net interest income, a $3.7 million increase in noninterest expense and a $5.9 million increase in income tax expense.

These results were partially offset by a $2.4 million decrease in provision for credit losses and a $6.7 million increase in noninterest income.

Net Interest Income and Margin.

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Net interest margin is calculated as net interest income divided by average interest-earning assets.

Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for three and six months ended June 30, 2023 and 2022.

On May 3, 2023, the Federal Reserve approved its 10th interest rate increase in just a little over a year.

The increase takes the federal funds rate to a target range of 5.00%-5.25%, the highest since August 2007.

At its June meeting, the Federal

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Reserve decided to leave interest rates unchanged.

The Federal Reserve indicated they will take another six weeks to see the impacts of policy moves as they continue to fight an inflation battle.

Net interest margin is presented on a tax-equivalent basis, which means that tax-free

interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for three and nine months ended September 30, 2023 and 2022.

On July 26, 2023, the Federal Reserve approved its 11th interest rate increase in just over a year.

The increase moved the federal funds rate to a target range of 5.25%-5.50%, the highest since August 2007.

At its September meeting, the Federal Reserve decided to leave interest rates unchanged.

Minutes from that meeting indicated that the Federal Reserve officials believed that rates would need to stay elevated until they are convinced inflation is heading back to 2%.

The benchmark federal funds rate remains at a target range between 5.25%-5.50%, compared to a target rate of 0.00%-0.25% at the beginning of 2022.

During the three months ended June 30, 2023, net interest income, on a tax-equivalent basis, decreased to $59.0 million compared to $61.7 million for the three months ended June 30, 2022.

The tax-equivalent net interest margin decreased to 3.23% for the second quarter of 2023 compared to 3.65% in the second quarter of 2022.

During the six months ended June 30, 2023 , net interest income, on a tax-equivalent basis, increased to $119.8 million with a tax-equivalent net interest margin of 3.31% compared to net interest income, on a tax-equivalent basis, of $118.9 million and a tax-equivalent net interest margin of 3.58% for the six months ended June 30, 2022 .

During the three months ended September 30, 2023, net interest income, on a tax-equivalent basis, decreased to $58.8 million compared to $64.3 million for the three months ended September 30, 2022.

The tax-equivalent net interest margin decreased to 3.20% for the third quarter of 2023 compared to 3.63% in the third quarter of 2022.

During the nine months ended September 30, 2023 , net interest income, on a tax-equivalent basis, decreased to $178.6 million with a tax-equivalent net interest margin of 3.27% compared to net interest income, on a tax-equivalent basis, of $183.2 million and a tax-equivalent net interest margin of 3.60% for the nine months ended September 30, 2022 .

Average Balance Sheet, Interest and Yield/Rate Analysis.

The following tables present the average balance sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the three and six months ended June 30, 2023 and 2022.

The following tables present the average balance sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the three and nine months ended September 30, 2023 and 2022.

The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

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Three Months Ended June 30,

Three Months Ended September 30,

(tax-equivalent basis, dollars in thousands) Average

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(1) Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.

Tax-equivalent adjustments totaled $0.2 million and $0.3 million for the three months ended June 30, 2023 and 2022, respectively.

Tax-equivalent adjustments totaled $0.2 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively.

(2) Average loan balances include nonaccrual loans.

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(i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

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Six Months Ended June 30,

Nine Months Ended September 30,

(tax-equivalent basis, dollars in thousands) Average

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(1) Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.

Tax-equivalent adjustments totaled $0.4 million and $0.7 million for the six months ended June 30, 2023 and 2022, respectively.

Tax-equivalent adjustments totaled $0.6 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.

(2) Average loan balances include nonaccrual loans.

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(i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

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Interest Rates and Operating Interest Differential.

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Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.

Three Months Ended June 30, 2023 compared with Three Months Ended June 30, 2022 Six Months Ended June 30, 2023 compared with Six Months Ended June 30, 2022

Three Months Ended September 30, 2023 compared with Three Months Ended September 30, 2022 Nine Months Ended September 30, 2023 compared with Nine Months Ended September 30, 2022

Change due to:

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Interest Income.

Interest income, on a tax-equivalent basis, increased $31.1 million to $100.7 million in the three months ended June 30, 2023 as compared to the same quarter in 2022, primarily due to improved yields on earning assets.

Interest income, on a tax-equivalent basis, increased $23.9 million to $103.8 million in the three months ended September 30, 2023 as compared to the same quarter in 2022, primarily due to improved yields on earning assets.

The yield on earning assets increased 114 basis points to 5.65% from 4.51% primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.33 billion in the second quarter of 2023 from $6.77 billion in the same quarter in 2022.

Average earning assets increased to $7.28 billion in the third quarter of 2023 from $7.03 billion in the same quarter in 2022.

Increases in average loans and investment securities of $257.2 million and $114.0 million, respectively, were partially offset by a decrease in federal funds sold and cash investments of $117.3 million.

Average loans increased $678.2 million in the second quarter of 2023 compared to the same quarter of 2022.

Average loans increased $257.2 million in the third quarter of 2023 compared to the same quarter of 2022 across all loan categories, except for commercial FHA warehouse lines and consumer loans.

Average commercial loans increased $38.5 million.

Included in this category are commercial FHA warehouse lines.

Average commercial FHA warehouse lines decreased $93.2 million to $13.4 million in the second quarter of 2023.

Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $208.7 million in the second quarter of 2023 compared to the same period one year prior.

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Average commercial real estate loans increased this quarter by $229.7 million, compared to the prior year's second quarter.

Average balances in our construction loans, consumer loans and lease portfolios also increased this quarter by $154.0 million, $68.0 million and $70.6 million, respectively, compared to the prior year second quarter.

For the six months ended June 30, 2023, interest income, on a tax-equivalent basis, increased $63.8 million to $196.5 million as compared to the same period in 2022, primarily due to improved yields on earning assets.

Average commercial FHA warehouse lines decreased $37.2 million to $20.4 million in the third quarter of 2023.

Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $75.7 million in the third quarter of 2023 compared to the same period one year prior.

Average construction loans increased this quarter by $164.7 million, compared to the prior year's third quarter, primarily due to funding draws on existing multifamily project lines.

Average balances in our consumer loan portfolio decreased this quarter by $42.2 million compared to the prior year third quarter due a decrease in loans originated through the program with GreenSky.

For the nine months ended September 30, 2023, interest income, on a tax-equivalent basis, increased $87.7 million to $300.3 million as compared to the same period in 2022, primarily due to improved yields on earning assets.

The yield on earning assets increased 133 points to 5.50% from 4.17%, primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.30 billion in the first six months of 2023 from $6.70 billion in the same period in 2022.

Average earning assets increased to $7.29 billion in the first nine months of 2023 from $6.81 billion in the same period in 2022.

An increase in average loans of $657.7 million was partially offset by a $191.2 million decrease in federal funds sold and cash investments.

Average commercial loans increased $129.9 million for the six months ended June 30, 2023 compared to the same period of 2022.

Commercial FHA warehouse lines decreased $63.4 million to $13.4 million in the first half of 2023.

Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $193.3 million for the six months ended June 30, 2023 compared to the same period one year prior.

Average balances in our commercial real estate loan portfolio increased by $369.7 million for the six months ended June 30, 2023 compared to the same period of 2022.

Average construction loans, consumer loans and lease portfolios also increased $141.8 million, $108.8 million and $73.3 million, respectively, for the six months ended June 30, 2023 compared to the same period of 2022.

Average commercial loans increased $99.1 million for the nine months ended September 30, 2023 compared to the same period of 2022.

Commercial FHA warehouse lines decreased $54.6 million to $15.7 million during this period.

Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $153.7 million for the nine months ended September 30, 2023 compared to the same period one year prior.

Average balances in all of our other loan classifications increased for the nine months ended September 30, 2023 compared to the same period of 2022.

Average commercial real estate loans, construction loans, and lease portfolios also increased $253.2 million, $149.5 million and $64.6 million, respectively, for the nine months ended September 30, 2023 compared to the same period of 2022.

Interest Expense.

Interest expense increased $33.7 million to $41.7 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The cost of interest-bearing liabilities increased to 2.83% for the second quarter of 2023 compared to 0.60% for the second quarter of 2022 due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

Interest expense on deposits increased $29.8 million to $33.6 million for the three months ended June 30, 2023 from the comparable period in 2022 .

Interest expense increased $29.5 million to $45.0 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The cost of interest-bearing liabilities increased to 3.01% for the third quarter of 2023 compared to 1.12% for the third quarter of 2022 due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

Interest expense on deposits increased $27.5 million to $37.8 million for the three months ended September 30, 2023 from the comparable period in 2022 .

The increase was primarily due to an increase in rates paid on deposits.

Average balances of interest-bearing deposit accounts increased $540.4 million, or 11.45%, to $5.26 billion for the three months ended June 30, 2023 compared to the same period one year earlier.

The increase in volume was attributable to increases of retail deposits, servicing deposits and brokered deposits of $148.5 million, $41.3 million, and $58.4 million, respectively.

Average balances of interest-bearing deposit accounts increased $432.0 million, or 8.78%, to $5.35 billion for the three months ended September 30, 2023 compared to the same period one year earlier.

The increase in volume was attributable to increases of retail deposits and brokered deposits of $60.2 million and $127.6 million, respectively.

In addition, our Insured Cash Sweep product average balances increased $538.0 million.

For the six month period ended June 30, 2023, interest expense increased $62.9 million to $76.7 million compared to the six months ended June 30, 2022.

The cost of interest-bearing liabilities increased to 2.65% for the first six months of 2023 compared to 0.54% for the same period of 2022.

For the nine month period ended September 30, 2023, interest expense increased $92.3 million to $121.7 million compared to the nine months ended September 30, 2022.

The cost of interest-bearing liabilities increased to 2.77% for the first nine months of 2023 compared to 0.74% for the same period of 2022.

I nterest expense on deposits increased to $97.8 million from $16.2 million for the comparable period in 2022 , primarily due to increases in interest rates on deposits.

Interest expense on FHLB advances and other borrowings increased $4.0 million and $8.8 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022.

Average balances increased $164.4 million and $196.5 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022.

Interest expense on subordinated debt decreased $0.7 million and $1.3 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022.

Interest expense on FHLB advances and other borrowings increased $2.1 million and $10.9 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022, due to increases in both average balances and the cost of funds.

Average balances increased $62.3 million and $151.3 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022.

Average costs of funds increased 166 basis points and 241 basis points, respectively, for the three and nine months ended September 30, 2023, from the comparable periods in 2022.

Interest expense on subordinated debt decreased $0.7 million and $2.0 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022.

The Company redeemed $6.6 million of subordinated debt in the second quarter of 2023 and $40.0 million of subordinated debt on October 15, 2022.

Interest expense on trust preferred debentures increased $0.7 million and $1.4 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022, due to interest rate increases, as these debt instruments reprice quarterly.

Interest expense on trust preferred debentures increased $0.5 million and $1.9 million for the three and nine months ended September 30, 2023, respectively, from the comparable periods in 2022, due to interest rate increases, as these debt instruments reprice quarterly.

Provision for Credit Losses.

The Company's provision for credit losses totaled $5.9 million for the three months ended June 30, 2023, all of which was attributable to loans.

Provision for credit losses for the three months ended June 30, 2022 was $5.4 million, with $4.7 million expense attributable to loans and $0.7 million expense related to unfunded loan commitments.

For the six months ended June 30, 2023 and 2022 , the Company recorded provision expense of $9.0 million and $9.6 million, respectively.

The provision for credit losses on loans recognized during the three and six months ended June 30, 2023 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

A detailed evaluation of the adequacy

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of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

The Company's provision for credit losses on loans totaled $5.2 million for the three months ended September 30, 2023, compared to $7.0 million for the three months ended September 30, 2022.

For the nine months ended September 30, 2023 and 2022 , the Company recorded provision expense of $14.2 million and $16.6 million, respectively.

The provision for credit losses on loans recognized during the three and nine months ended September 30, 2023 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.

Noninterest Income.

Noninterest income increased 28.33% for the three months ended June 30, 2023, compared to the same period one year prior, and increased 14.25% for the six months ended June 30, 2023, compared to the same period one year prior.

The following table sets forth the major components of our noninterest income for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Increase

(decrease) Six Months Ended June 30, Increase

Noninterest income increased 14.91% for the three months ended September 30, 2023, compared to the same period one year prior, and increased 14.47% for the nine months ended September 30, 2023, compared to the same period one year prior.

The following table sets forth the major components of our noninterest income for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, Increase

(decrease) Nine Months Ended September 30, Increase

(dollars in thousands) 2023 2022 2023 2022

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Total noninterest income $ 18,185 $ 15,826 $ 2,359 $ 52,717 $ 46,052 $ 6,665

Wealth management revenue .

Wealth management revenue decreased $0.6 million for the six months ended June 30, 2023, as compared to the same period in 2022.

Assets under administration increased to $3.59 billion at June 30, 2023 from $3.50 billion at June 30, 2022, primarily due to an increase in market performance in 2023.

Loss on sale of investment securities .

The Company took advantage of certain market conditions during the three and six months ended June 30, 2023 to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations.

These transactions resulted in losses of $0.9 million and $1.5 million in the three and six months ended June 30, 2023, with expected paybacks to occur within a one year period.

The Company took advantage of certain market conditions during the three and nine months ended September 30, 2023 to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations.

These transactions resulted in losses of $5.0 million and $6.5 million in the three and nine months ended September 30, 2023, with expected paybacks to occur within a one year period.

Company-owned life insurance income.

Company-owned life insurance income increased $6.6 million for each the three and nine months ended September 30, 2023, as compared to the same periods in 2022.

As previously discussed, the Company recognized a one-time enhancement fee of $6.6 million from the surrender and replacement of certain life insurance policies.

Other noninterest income.

Other income increased $3.2 million and $4.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022.

Other income increased $3.9 million for the nine months ended September 30, 2023, as compared to the same period in 2022.

As mentioned previously, the Company recognized a gain of $0.7 million on the redemption of subordinated debt in the second quarter of 2023.

Also in the second quarter of 2023, we recognized a gain of $0.8 million on the sale of OREO.

Net unrealized gains on our equity securities increased $0.6 million and $1.3 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

As a result of designating our commercial FHA loan servicing rights as held for sale, we did not amortize the servicing asset nor record impairment in 2023.

In the three and six months ended June 30, 2022, amortization expense totaled $0.6 million and $1.3 million, respectively.

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Net unrealized gains on our equity securities increased $1.4 million for the nine months ended September 30, 2023, compared to the same period in 2022.

As a result of designating our commercial FHA loan servicing rights as held for sale, we did not amortize the servicing asset nor record impairment during the first half of 2023.

In the nine months ended September 30, 2023 and 2022, amortization expense totaled $0.6 million and $1.9 million, respectively.

Noninterest Expense.

The following table sets forth the major components of noninterest expense for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Increase

(decrease) Six Months Ended June 30, Increase

The following table sets forth the major components of noninterest expense for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, Increase

(decrease) Nine Months Ended September 30, Increase

(dollars in thousands) 2023 2022 2023 2022

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Salaries and employee benefits.

For the six months ended June 30, 2023, salaries and employee benefits expense increased $2.6 million as compared to the same period in 2022, primarily due to annual salary increases and increased medical insurance expense.

The Company employed 915 employees at June 30, 2023 compared to 932 employees at June 30, 2022.

For the nine months ended September 30, 2023, salaries and employee benefits expense increased $2.0 million as compared to the same period in 2022, primarily due to annual salary increases and increased medical insurance expense.

The Company employed 911 employees at September 30, 2023 compared to 930 employees at September 30, 2022.

Occupancy and Equipment Expense.

For the six months ended June 30, 2023, occupancy and equipment expense increased $1.1 million as compared to the same period in 2022 primarily as a result of the non-controllable seasonal expenses in the first quarter of 2023, including snow removal.

For the nine months ended September 30, 2023, occupancy and equipment expense increased $1.0 million as compared to the same period in 2022 primarily as a result of the non-controllable seasonal expenses in the first quarter of 2023, including snow removal.

In addition, the Company transitioned to an outsourced facilities management program and incurred increased repair expenses as a result of deferred maintenance.

Data processing fees.

The $0.5 million and $0.9 million increases in data processing fees for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 were primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes.

The $0.4 million and $1.3 million increases in data processing fees for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022, were primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes.

FDIC Insurance Expense.

For the three and six months ended June 30, 2023, FDIC insurance expense increased $0.4 million and $0.9 million, respectively, as compared to the same periods in 2022, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

For the nine months ended September 30, 2023, FDIC insurance expense increased $1.0 million, as compared to the same period in 2022, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

Income Tax Expense.

Income tax expense was $7.2 million for the three months ended June 30, 2023, as compared to $7.3 million for the three months ended June 30, 2022.

The resulting effective tax rates were 25.1% and 25.0% for the three months ended June 30, 2023 and 2022, respectively.

Income tax expense was $14.1 million for the six months ended June 30, 2023, as compared to $13.9 million for the six months ended June 30, 2022.

The resulting effective tax rates were 24.6% for each of the six months ended June 30, 2023 and 2022.

The Company's effective tax rate was 39.0% and 19.9% for the three months ended September 30, 2023 and 2022, respectively.

For the nine months ended September 30, 2023 and 2022, the Company's effective tax rate was 29.5% and 23.0%, respectively.

The increase in the effective tax rate from the three and nine months ended September 30, 2022 is due primarily to tax expense of $4.5 million associated with a surrender of company-owned life insurance policies, as previously discussed, and a $1.4 million return to provision adjustment recognized in the third quarter of 2023.

Financial Condition

Total assets increased to $8.03 billion at June 30, 2023, as compared to $7.86 billion at December 31, 2022.

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Total assets increased to $7.98 billion at September 30, 2023, as compared to $7.86 billion at December 31, 2022.

The loan portfolio is the largest category of our assets.

At June 30, 2023, total loans were $6.37 billion as compared to $6.31 billion at December 31, 2022.

The following table shows loans by category as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

(dollars in thousands) Book Value % Book Value %

At September 30, 2023, total loans were $6.28 billion as compared to $6.31 billion at December 31, 2022.

The following table shows loans by category as of September 30, 2023 and December 31, 2022:

September 30, 2023 December 31, 2022

(dollars in thousands) Balance Percent Balance Percent

Equipment finance loans $ 578,931 9.2 % $ 616,751 9.8 %

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Total loans, net $ 6,214,214 $ 6,245,416

Total loans increased $60.9 million to $6.37 billion at June 30, 2023, as compared to December 31, 2022.

The loan growth was primarily reflected in our commercial loans and leases, and construction and land development portfolios, which increased $102.1 million and $45.7 million, respectively.

Commercial loans and leases, which includes commercial FHA warehouse lines, increased $102.1 million to $2.11 billion at June 30, 2023, as compared to December 31, 2022.

Advances on commercial FHA warehouse lines increased $5.5 million to $30.5 million at June 30, 2023.

Excluding the increase in commercial FHA warehouse lines, commercial loans and leases increased $96.6 million.

Consumer loans decreased $103.2 million at June 30, 2023 primarily due to a decrease in loans originated through the program with GreenSky.

Total loans decreased $25.6 million to $6.28 billion at September 30, 2023, as compared to December 31, 2022, as the Company continued to originate loans in a more selective and deliberate approach to balance liquidity and funding costs.

The increase in our construction and land development portfolio of $95.9 million was primarily driven by draws on existing lines.

In addition, our commercial loans and leases increased $50.4 million.

Consumer loans decreased $160.0 million at September 30, 2023 primarily due to a decrease in loans originated through the program with GreenSky, as expected.

On January 24, 2023, the Company notified GreenSky that, effective October 21, 2023, the Company would terminate its participation in GreenSky’s loan origination program.

15 unchanged sentences

Interest reserves are generally established on real estate construction loans.

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Residential real estate loans.

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The financing is secured by a first priority interest in the financed asset and generally requires monthly payments.

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at June 30, 2023:

June 30, 2023

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at September 30, 2023:

September 30, 2023

Within One Year One Year to Five Years Five Years to 15 Years After 15 Years

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Analysis of the Allowance for Credit Losses on Loans.

The allowance for credit losses on loans was $65.0 million, or 1.02% of total loans, at June 30, 2023 compared to $61.1 million, or 0.97% of total loans, at December 31, 2022.

The allowance for credit losses on loans was $66.7 million, or 1.06% of total loans, at September 30, 2023 compared to $61.1 million, or 0.97% of total loans, at December 31, 2022.

The following table allocates the allowance for credit losses on loans by loan category:

June 30, 2023 December 31, 2022

(dollars in thousands) Allowance % (1)

Allowance % (1)

September 30, 2023 December 31, 2022

(dollars in thousands) Allowance Percent (1)

Allowance Percent (1)

Commercial $ 19,410 1.24 % $ 14,639 0.97 %

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Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

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The allowance allocated to commercial loans totaled $15.3 million, or 0.95% of total commercial loans, at June 30, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022.

Modeled expected credit losses increased $0.2 million and qualitative factor ("Q-Factor") adjustments related to commercial loans increased $0.5 million.

The allowance allocated to residential real estate loans totaled $5.6 million, or 1.49% of total residential real estate loans at June 30, 2023, compared to $4.3 million, or 1.17%, at December 31, 2022.

Modeled expected credit losses increased $0.9 million and Q-Factor adjustments increased $0.3 million.

The allowance allocated to consumer loans totaled $4.0 million, or 0.37% of total consumer loans at June 30, 2023, compared to $3.6 million, or 0.30%, at December 31, 2022.

The allowance allocated to the GreenSky portfolio increased to 30 basis points as of June 30, 2023 compared to 25 basis points as of December 31, 2022, due to residual risk as the portfolio starts paying down and credit enhancements shrink.

In addition, specific allocations for consumer loans that were evaluated for expected credit losses on an individual basis increased $0.2 million.

The allowance allocated to the lease portfolio totaled $7.5 million, or 1.51% of total commercial leases, at June 30, 2023, increasing $0.7 million from $6.8 million, or 1.38% of total commercial leases at December 31, 2022.

Modeled expected credit losses increased $0.5 million and specific allocations for leases that were evaluated for expected credit losses on an individual basis increased $0.2 million.

In estimating expected credit losses as of June 30, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models.

The forecasted projections included, among other things, (i) expectations of a recession to occur in second half of 2023 because of past rate hikes by the Fed and the lagged effect of recent tightening in lending standards;

The allowance allocated to commercial loans totaled $19.4 million, or 1.24% of total commercial loans, at September 30, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022.

Modeled expected credit losses increased

$2.5 million and qualitative factor adjustments related to commercial loans increased $0.9 million.

Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased $1.3 million.

There were no specific allocation reserves for commercial loans in prior period.

The allowance allocated to commercial real estate loans totaled $24.6 million, or 1.02% to total commercial real estate loans, at September 30, 2023, decreasing $4.7 million, from $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022.

Modeled expected credit losses decreased $2.6 million and qualitative factor adjustments related to commercial real estate loans decreased $0.6 million.

Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.5 million at December 31, 2022 to $0.0 million at September 30, 2023.

The allowance allocated to the lease portfolio totaled $9.4 million, or 1.94% of total commercial leases, at September 30, 2023, increasing $2.6 million from $6.8 million, or 1.38% of total commercial leases at December 31, 2022.

Modeled expected credit losses increased $2.1 million and qualitative factor adjustments increased $0.6 million.

There were no specific allocation reserves for commercial leases in either period.

In estimating expected credit losses as of September 30, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models.

The forecasted projections included, among other things, (i) U.S.

gross domestic product growth of 1.5% for 2023 and 0.3% for 2024;

(ii) Federal Reserve holding the policy rate through year end with a gradual decrease in 2024;

and (iii) unemployment rate averaging 3.9% for 2023, increasing to an average of 5.2% for 2024.

While these economic metrics indicate an improvement from the prior quarter, they still point to a slowing economy.

and (iii) unemployment rate averaging 5.6% through the second quarter of 2024.

We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools.

Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures;

These "Q-Factor" adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures;

economic and business conditions;

loan portfolio attributes and credit concentrations;

and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes.

and external factors, among other things, that are not already fully captured within the modeling inputs, assumptions and other processes.

Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment.

As a result of this assessment as of June 30, 2023, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 52 basis points of total loans, increasing from 50 basis points at December 31, 2022.

The Q-Factor adjustment at June 30, 2023 was based primarily on declining economic conditions, including rising inflation fears.

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The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

As a result of this assessment as of September 30, 2023, modeled expected credit losses were adjusted upwards with a qualitative factor adjustment of approximately 54 basis points of total loans, increasing from 50 basis points at December 31, 2022.

The Q-Factor adjustment at September 30, 2023 was based primarily on declining credit quality conditions within the equipment financing segment, economic conditions, including persistent inflation fears, an increasing risk of recession and the impact of rising fuel prices on businesses and consumers.

The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in thousands) 2023 2022 2023 2022

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Recoveries on loans previously charged off are added to the allowance.

Net charge-offs for the three months ended June 30, 2023 totaled $3.0 million, compared to $2.8 million for the same period one year ago.

For the six months ended June 30, 2023, net charge-offs totaled $5.1 million, compared to $5.0 million for the same period one year ago.

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Charge-offs for the three months ended September 30, 2023 included $2.2 million on a commercial loan and $2.3 million on equipment financing loans and leases.

In addition, a commercial real estate loan of $2.3 million was also charged-off in the third quarter.

The Company specially reserved for this loss in the second quarter of 2023.

The Company recognized a $3.4 million recovery on a commercial real estate loan, which was charged-off in 2017.

Net charge-offs for the three months ended September 30, 2023 totaled $3.4 million, compared to $3.2 million for the same period one year ago.

For the nine months ended September 30, 2023, net charge-offs totaled $8.6 million, compared to $8.2 million for the same period one year ago.

Nonperforming Loans .

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The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.

(dollars in thousands) June 30, 2023 December 31, 2022

(dollars in thousands) September 30, 2023 December 31, 2022

Nonperforming loans:

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Allowance for credit losses to nonperforming loans 119.09 % 123.53 %

We did not recognize interest income on nonaccrual loans during the three months ended June 30, 2023 or 2022 while the loans were in nonaccrual status.

Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $0.8 million and $1.6 million for the three and six months ended June 30, 2023, respectively, and $0.5 million and $1.3 million for the three and six months ended June 30, 2022, respectively.

We utilize an asset risk classification system in compliance with guidelines established by the Federal Reserve as part of our efforts to improve asset quality.

In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them.

There are three classifications for problem assets:

“substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.

Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.

An asset classified as loss is not considered collectable and is of such little value that continuance of booking the asset is not warranted.

We use a ten grade risk rating system to categorize and determine the credit risk of our loans.

Potential problem loans include loans with a risk grade of 7, which are "special mention," and loans with a risk grade of 8, which are "substandard" loans that are not considered to be nonperforming.

These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance.

Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management team.

The following table presents the recorded investment of potential problem commercial loans by loan category at the dates indicated:

Commercial Commercial

real estate Construction &

land development

Risk category Risk category Risk category

(dollars in thousands) 7 8 (1)

June 30, 2023 $ 10,545 $ 29,183 $ 28,440 $ 95,203 $ 60 $ 6,000 $ 169,431

December 31, 2022 12,693 9,579 42,770 82,949 210 8,415 156,616

(1) Includes only those 8-rated loans that are not included in nonperforming loans.

Commercial loans with a risk rating of 7 or 8 increased $17.5 million to $39.7 million as of June 30, 2023, compared to $22.3 million as of December 31, 2022.

The increase was due to a single commercial loan that was down graded in the second quarter of 2023.

Commercial real estate loans with a risk rating of 7 or 8 decreased $2.1 million to $123.6 million as of June 30, 2023, compared to $125.7 million as of December 31, 2022, primarily due to risk rating upgrades within the portfolio.

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We did not recognize interest income on nonaccrual loans during the three months ended September 30, 2023 or 2022 while the loans were in nonaccrual status.

Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $0.8 million and $2.5 million for the three and nine months ended September 30, 2023, respectively, and $0.8 million and $1.9 million for the three and nine months ended September 30, 2022, respectively.

The following table presents the change in our non-performing loans for the nine months ended September 30, 2023:

(dollars in thousands) Nine Months Ended September 30, 2023

Balance, beginning of period $ 49,424

New nonperforming loans 35,071

Return to performing status (1,097)

Payments received (20,795)

Transfer to OREO and other repossessed assets (332)

Charge-offs (6,290)

Balance, end of period $ 55,981

Investment Securities.

1 unchanged sentence

The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.

The following table sets forth the book value and percentage of each category of investment securities at June 30, 2023 and December 31, 2022.

The following table sets forth the book value and percentage of each category of investment securities at September 30, 2023 and December 31, 2022.

The book value for investment securities classified as available for sale is equal to fair market value.

June 30, 2023 December 31, 2022

(dollars in thousands) Book

September 30, 2023 December 31, 2022

(dollars in thousands) Balance Percent Balance Percent

Investment securities available for sale:

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Total investment securities, available for sale, at fair value $ 835,009 100.0 % $ 768,234 100.0 %

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at June 30, 2023.

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at September 30, 2023.

The book value for investment securities classified as available for sale is equal to fair market value.

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(dollars in thousands) Book value % of total Weighted average yield

(dollars in thousands) Balance Percent Weighted average yield

Investment securities available for sale:

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(1) Weighted average yield for tax-exempt securities are presented on a tax-equivalent basis assuming a federal income tax rate of 21%.

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The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at June 30, 2023.

Amortized Estimated Average credit rating

(dollars in thousands) cost fair value AAA AA+/- A+/- BBB+/- <BBB- Not Rated

The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at September 30, 2023.

Amortized Fair Average credit rating

(dollars in thousands) cost Value AAA AA+/- A+/- BBB+/- <BBB- Not Rated

Investment securities available for sale:

8 unchanged sentences

Total investment securities, available for sale $ 963,281 $ 835,009 $ 99,520 $ 697,598 $ 16,584 $ 14,826 $ 6,481 $ —

At June 30, 2023, liabilities totaled $7.26 billion compared to $7.10 billion at December 31, 2022.

At September 30, 2023, liabilities totaled $7.21 billion compared to $7.10 billion at December 31, 2022.

We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources.

Our deposits consist of noninterest-bearing and interest-bearing demand, savings and time deposit accounts.

Total deposits increased $61.9 million to $6.43 billion at June 30, 2023, as compared to December 31, 2022.

Interest rate promotions offered in 2023 on money market and time deposit products resulted in increases in balances of $42.4 million and $251.1 million, respectively, at June 30, 2023, compared to December 31, 2022.

Total deposits increased $40.4 million to $6.41 billion at September 30, 2023, as compared to December 31, 2022.

Brokered time deposits increased to $119.1 million at September 30, 2023 from $12.8 million at December 31, 2022.

In addition, interest rate promotions offered in 2023 on time deposit products resulted in an increases in balances of non-brokered time deposits of $236.3 million over the same period.

These increases were partially offset by a decrease in noninterest-bearing demand account balances of $207.6 million, as a result of increasing deposit rates in response to the rate increases announced by the Federal Reserve.

(dollars in thousands) June 30, 2023 December 31, 2022

Book Value % of Total Book Value % of Total

Our noninterest-bearing deposits decreased to 18.0% of total deposits at September 30, 2023 compared to 21.4% at December 31, 2022.

(dollars in thousands) September 30, 2023 December 31, 2022

Balance Percent Balance Percent

Noninterest-bearing demand $ 1,154,515 18.0 % $ 1,362,158 21.4 %

5 unchanged sentences

Total deposits $ 6,405,002 100.0 % $ 6,364,652 100.0 %

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The following table summarizes our average deposit balances and weighted average rates for the three months ended June 30, 2023 and 2022:

Three months ended

June 30, 2023 Three months ended

June 30, 2022

(dollars in thousands) Average

Balance Weighted Average Rate Average

Balance Weighted Average Rate

Noninterest-bearing demand $ 1,187,584 — $ 1,401,268 —

Interest-bearing:

Checking 2,529,185 2.92 % 2,336,630 0.36 %

Money market 1,242,638 2.94 1,030,144 0.32

Savings 626,818 0.25 719,204 0.05

Time, insured 651,203 2.42 476,233 0.47

Time, uninsured 153,377 3.14 139,381 0.59

Time, brokered 55,967 4.21 17,167 1.16

Total interest-bearing 5,259,188 2.56 4,718,759 0.32

Total deposits $ 6,446,772 2.09 % $ 6,120,027 0.25 %

The Company estimates that uninsured deposits (1) totaled $1.21 billion, or 19% of total deposits, at June 30, 2023 compared to $1.55 billion, or 24%, at December 31, 2022.

The following table sets forth the maturity of uninsured time deposits as of June 30, 2023:

The Company estimates that uninsured deposits (1) totaled $1.28 billion, or 20% of total deposits, at September 30, 2023 compared to $1.55 billion, or 24%, at December 31, 2022.

The following table sets forth the maturity of uninsured time deposits as of September 30, 2023:

(dollars in thousands) Amount

8 unchanged sentences

Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available-for-sale investment securities and cash flow hedges.

Shareholders’ equity increased $18.2 million to $776.8 million at June 30, 2023 as compared to December 31, 2022.

Shareholders’ equity increased $5.7 million to $764.3 million at September 30, 2023 as compared to December 31, 2022.

The Company generated net income of $61.4 million during 2023.

2 unchanged sentences

This program terminates December 31, 2023.

As of June 30, 2023, $8.9 million, or 432,809 shares of the Company’s common stock, had been repurchased under the program, with approximately $16.1 million of remaining repurchase authority.

As of September 30, 2023, $14.9 million, or 703,868 shares of the Company’s common stock, had been repurchased under the program, with approximately $10.1 million of remaining repurchase authority.

Liquidity Management.

2 unchanged sentences

We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

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Integral to our liquidity management is the administration of short-term borrowings.

3 unchanged sentences

The Bank may be required to provide additional collateral based on the fair value of the underlying securities.

Investment securities with a carrying amount of $28.8 million and $46.1 million at June 30, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.

The table below presents our sources of liquidity as of June 30, 2023 and December 31, 2022:

(dollars in thousands) June 30, 2023 December 31, 2022

Investment securities with a carrying amount of $27.8 million and $46.1 million at September 30, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.

The table below presents our sources of liquidity as of September 30, 2023 and December 31, 2022:

(dollars in thousands) September 30, 2023 December 31, 2022

Cash and cash equivalents $ 132,132 $ 160,631

9 unchanged sentences

There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company.

Management believed at June 30, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Management believed at September 30, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

7 unchanged sentences

The Company is adopting the capital transition relief over the permissible five-year period.

At June 30, 2023, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

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The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at June 30, 2023:

At September 30, 2023, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at September 30, 2023:

Ratio Actual Minimum

28 unchanged sentences

We seek to achieve consistent growth in net interest income while managing volatility arising from shifts in market interest rates.

Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate risk, as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income.

Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate risk,

as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income.

The Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

5 unchanged sentences

The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

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We use Net Interest Income at Risk (“NII at Risk”) to model interest rate risk utilizing various assumptions for assets, liabilities, and derivatives.

9 unchanged sentences

(dollars in thousands) -200 -100 +100 +200

June 30, 2023:

September 30, 2023:

Dollar change $ 13,564 $ 4,761 $ (7,540) $ (15,513)

6 unchanged sentences

It models -200, −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months.

We were within board policy limits for the -100, +100 and +200 basis point scenarios at June 30, 2023.

We added a -200 basis point scenario as the Federal Reserve has indicated the rate increases may have run their course.

We were within board policy limits for the -200, -100, +100 and +200 basis point scenarios at September 30, 2023.

Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet.

NII at Risk reported at June 30, 2023 projects that our earnings exhibit increasing sensitivity to changes in interest rates for both rising rate scenarios compared to December 31, 2022.

NII at Risk reported at September 30, 2023 projects that our earnings exhibit increasing profitability in a declining rate environment, compared to December 31, 2022.

Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting.

2 unchanged sentences

The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk”.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis