SOUTHSIDE BANCSHARES INC

Previous wording

Certain statements of other than historical fact that are contained in this report may be considered to be “forward-looking statements” within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,” “anticipate,” “appear,” “believe,” “could,” “should,” “may,” “might,” “will,” “would,” “seek,” “intend,” “probability,” “risk,” “goal,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, discussions of the effect of our expansion, benefits of the Share Repurchase Plan, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates and our expectations regarding rate increases, tax reform, inflation, the impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most significant factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the ongoing impact of higher inflation levels, prolonged elevated interest rates and general economic and recessionary concerns, all of which could impact economic growth and could cause a reduction in financial transactions and business activities, including decreased deposits and reduced loan originations, our ability to manage liquidity in a rapidly changing and unpredictable market, labor shortages and changes in interest rates by the Federal Reserve. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:

Current wording

Certain statements of other than historical fact that are contained in this report may be considered to be “forward-looking statements” within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,” “anticipate,” “appear,” “believe,” “could,” “should,” “may,” “might,” “will,” “would,” “seek,” “intend,” “probability,” “risk,” “goal,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, benefits of the Share Repurchase Plan, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates and our expectations regarding rate increases, tax reform, inflation, the impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most significant factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the ongoing impact of higher inflation levels, interest rate fluctuations and general economic and recessionary concerns, all of which could impact economic growth and could cause a reduction in financial transactions and business activities, including decreased deposits and reduced loan originations, our ability to manage liquidity in a rapidly changing and unpredictable market, labor shortages and changes in interest rates by the Federal Reserve. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:

Previous wording

•current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions to increase interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act and other regulatory responses to economic conditions;

Current wording

•current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the impact of the Dodd-Frank Act, the Federal Reserve’s actions to manage interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act and other regulatory responses to economic conditions;

Previous wording

•the impact of prolonged elevated interest rates on our financial projections, models and guidance;

Current wording

•the impact of interest rate fluctuations on our financial projections, models and guidance;

Previous wording

•acts of terrorism, war or other conflicts, including the Russia-Ukraine and Israeli-Hamas conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events that may affect general economic conditions or cause other disruptions and/or increase costs, including, but not limited to, property and casualty and other insurance costs;

Current wording

•acts of terrorism, war or other conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events that may affect general economic conditions or cause other disruptions and/or increase costs, including, but not limited to, property and casualty and other insurance costs;

Previous wording

•changes in consumer spending, borrowing and saving habits, including as a result of rising inflation, elevated interest rates and recessionary concerns;

Current wording

•changes in consumer spending, borrowing and saving habits, including as a result of inflation, elevated interest rates and recessionary concerns;

Previous wording

The economic conditions and growth prospects for our markets, even against the headwinds of slightly elevated inflation, continued higher interest rates and potential recessionary concerns, continue to reflect a solid and positive overall outlook. Ongoing inflation levels and continued higher interest rates could have a negative impact on both our consumer and commercial borrowers. Currently, the Texas markets we serve continue to remain healthy due to both job and population growth.

Current wording

The economic conditions and growth prospects for our markets, even against the headwinds of elevated inflation, interest rate fluctuations and potential recessionary concerns, continue to reflect a solid and positive overall outlook. Ongoing inflation levels and continued higher interest rates could have a negative impact on both our consumer and commercial borrowers. Currently, however, the Texas markets we serve continue to remain healthy due to both job and population growth.

Previous wording

Our deposits were $6.50 billion at June 30, 2024, a decrease of $53.7 million, or 0.8%, from December 31, 2023. At June 30, 2024, we had 179,536 total deposit accounts with an average balance of $32,000. Our estimated uninsured deposits were 36.4% of total deposits as of June 30, 2024. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 19.4% of total deposits as of June 30, 2024.

Current wording

Our deposits were $6.44 billion at September 30, 2024, a decrease of $114.0 million, or 1.7%, from December 31, 2023. At September 30, 2024, we had 179,214 total deposit accounts with an average balance of $32,000. Our estimated uninsured deposits were 35.9% of total deposits as of September 30, 2024. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 19.2% of total deposits as of September 30, 2024.

Previous wording

Our noninterest bearing deposits represent approximately 21.0% of total deposits. During the three months ended June 30, 2024, our cost of interest bearing deposits increased 98 basis points from 2.03% for the three months ended June 30, 2023 to 3.01%. Our cost of total deposits for the second quarter of 2024 increased 89 basis points from 1.50% for the three months ended June 30, 2023 to 2.39%.

Current wording

Our noninterest bearing deposits represent approximately 21.4% of total deposits. During the three months ended September 30, 2024, our cost of interest bearing deposits increased 43 basis points from 2.58% for the three months ended September 30, 2023 to 3.01%. Our cost of total deposits for the third quarter of 2024 increased 40 basis points from 1.98% for the three months ended September 30, 2023 to 2.38%.

Previous wording

Our cost of interest bearing deposits increased 107 basis points, from 1.92% for the six months ended June 30, 2023, to 2.99% for the six months ended June 30, 2024. Our cost of total deposits increased 95 basis points, from 1.42% for the six months ended June 30, 2023, to 2.37% for the six months ended June 30, 2024.

Current wording

Our cost of interest bearing deposits increased 83 basis points, from 2.16% for the nine months ended September 30, 2023, to 2.99% for the nine months ended September 30, 2024. Our cost of total deposits increased 75 basis points, from 1.62% for the nine months ended September 30, 2023, to 2.37% for the nine months ended September 30, 2024.

Previous wording

Our capital ratios and contingent liquidity sources remain solid. We utilized the Federal Reserve’s BTFP to reduce our overall funding costs and to enhance our interest rate risk position. On March 11, 2024, the Federal Reserve stopped extending new BTFP advances. As of June 30, 2024, our BTFP borrowings totaled $113.4 million at a cost of 5.40%, compared to $117.7 million at a cost of 4.37% at December 31, 2023.

Current wording

Our capital ratios and contingent liquidity sources remain solid. We utilized the Federal Reserve’s BTFP to reduce our overall funding costs and to enhance our interest rate risk position. On March 11, 2024, the Federal Reserve stopped extending new BTFP advances. As of September 30, 2024, we had no remaining BTFP borrowings, compared to $117.7 million at a cost of 4.37% at December 31, 2023.

Previous wording

Net income decreased $220,000, or 0.9%, to $24.7 million for the three months ended June 30, 2024, compared to the same period in 2023. The decrease in net income was a result of the $772,000 increase in noninterest expense, the $644,000 increase in income tax expense and the $308,000 decrease in net interest income, partially offset by the $1.1 million increase in noninterest income and the $411,000 increase in the reversal of provision for credit losses. Earnings per diluted common share was $0.81 for both of the three month periods ended June 30, 2024 and 2023.

Current wording

Net income increased $2.1 million, or 11.2%, to $20.5 million for the three months ended September 30, 2024, compared to the same period in 2023. The increase in net income was a result of the $4.6 million decrease in the provision for credit losses and the $2.2 million increase in net interest income, partially offset by the $2.7 million decrease in noninterest income, the $779,000 increase in noninterest expense, and the $1.3 million increase in income tax expense. Earnings per diluted common share was $0.68 and $0.60 for the three months ended September 30, 2024 and 2023, respectively.

Previous wording

During the six months ended June 30, 2024, our net income decreased $4.7 million, or 9.3%, to $46.2 million from $50.9 million for the same period in 2023. The decrease in net income was primarily a result of the $2.8 million increase in noninterest expense, the $1.2 million decrease in noninterest income and the $723,000 increase in income tax expense. Earnings per diluted common share decreased $0.12, or 7.3%, to $1.52 for the six months ended June 30, 2024, compared to $1.64 for the same period in 2023.

Current wording

During the nine months ended September 30, 2024, our net income decreased $2.7 million, or 3.8%, to $66.7 million from $69.4 million for the same period in 2023. The decrease in net income was primarily a result of the $3.9 million decrease in noninterest income, the $3.6 million increase in noninterest expense, and the $2.0 million increase in income tax expense, partially offset by the $4.9 million decrease in provision for credit losses and the $1.9 million increase in net interest income. Earnings per diluted common share decreased $0.04, or 1.8%, to $2.20 for the nine months ended September 30, 2024, compared to $2.24 for the same period in 2023.

Previous wording

Our total assets increased $72.8 million, or 0.9%, to $8.36 billion at June 30, 2024 from $8.28 billion at December 31, 2023. Our securities portfolio increased by $108.6 million, or 4.2%, to $2.71 billion, compared to $2.60 billion at December 31, 2023. The increase in the securities portfolio was due to purchases of MBS, partially offset by a decrease in municipal bonds during the six months ended June 30, 2024. Our FHLB stock increased $21.1 million, or 176.4%, to $33.0 million from $11.9 million at December 31, 2023, due to the increase in our FHLB borrowings during the six months ended June 30, 2024.

Current wording

Our total assets increased $77.3 million, or 0.9%, to $8.36 billion at September 30, 2024 from $8.28 billion at December 31, 2023. Our securities portfolio increased by $93.5 million, or 3.6%, to $2.70 billion, compared to $2.60 billion at December 31, 2023. The increase in the securities portfolio was due to purchases of MBS, partially offset by a decrease in municipal bonds during the nine months ended September 30, 2024. Our FHLB stock increased $28.4 million, or 237.6%, to $40.3 million from $11.9 million at December 31, 2023, due to the increase in our FHLB borrowings during the nine months ended September 30, 2024.

Previous wording

Loans at June 30, 2024 were $4.59 billion, an increase of $64.9 million, or 1.4%, compared to December 31, 2023, due to increases of $304.3 million in commercial real estate loans and $41.3 million in 1-4 family residential loans. The increases were partially offset by decreases of $243.7 million in construction loans, $24.2 million in municipal loans, $7.1 million in commercial loans, and $5.8 million in loans to individuals. Loans held for sale decreased $9.5 million, or 87.6%, to $1.4 million at June 30, 2024 from $10.9 million at December 31, 2023 due to the sale of a $7.9 million commercial real estate loan relationship during the first quarter of 2024.

Current wording

Loans at September 30, 2024 were $4.58 billion, an increase of $53.5 million, or 1.2%, compared to December 31, 2023, due to increases of $254.2 million in commercial real estate loans and $58.7 million in 1-4 family residential loans. The increases were partially offset by decreases of $203.9 million in construction loans, $39.1 million in municipal loans, $8.2 million in loans to individuals and $8.0 million in commercial loans. Loans held for sale decreased $10.1 million, or 93.0%, to $768,000 at September 30, 2024 from $10.9 million at December 31, 2023 due to the sale of a $7.9 million commercial real estate loan relationship during the first quarter of 2024.

Previous wording

Our nonperforming assets at June 30, 2024 increased $2.9 million, or 72.9%, to $6.9 million and represented 0.08% of total assets, compared to $4.0 million, or 0.05% of total assets, at December 31, 2023. Nonaccruing loans increased $2.2 million, or 57.1%, to $6.1 million, and the ratio of nonaccruing loans to total loans was 0.13% and 0.09% for June 30, 2024 and December 31, 2023, respectively. The increase in nonaccrual loans was primarily due to one commercial real estate loan and one commercial loan relationship that were put on nonaccrual during the first quarter of 2024. Restructured loans were $145,000 as of June 30, 2024, compared to $13,000 at December 31, 2023. Repossessed assets were $15,000 at June 30, 2024. There were no repossessed assets at December 31, 2023. There was $648,000 and $99,000 of OREO at June 30, 2024 and December 31, 2023, respectively.

Current wording

Our nonperforming assets at September 30, 2024 increased $3.7 million, or 91.4%, to $7.7 million and represented 0.09% of total assets, compared to $4.0 million, or 0.05% of total assets, at December 31, 2023. Nonaccruing loans increased $3.4 million, or 86.5%, to $7.3 million, and the ratio of nonaccruing loans to total loans was 0.16% and 0.09% for September 30, 2024 and December 31, 2023, respectively. The increase in nonaccrual loans was primarily due to one commercial real estate loan added during the third quarter of 2024. There were no restructured loans as of September 30, 2024, compared to $13,000 at December 31, 2023. Repossessed assets were $14,000 at September 30, 2024. There were no repossessed assets at December 31, 2023. There was $388,000 and $99,000 of OREO at September 30, 2024 and December 31, 2023, respectively.

Previous wording

Our deposits decreased $53.7 million, or 0.8%, with a balance of $6.50 billion at June 30, 2024 from $6.55 billion at December 31, 2023, which consisted of decreases of $30.3 million in interest bearing deposits and $23.5 million in noninterest bearing deposits.

Current wording

Our deposits decreased $114.0 million, or 1.7%, with a balance of $6.44 billion at September 30, 2024 from $6.55 billion at December 31, 2023, which consisted of decreases of $100.6 million in interest bearing deposits and $13.4 million in noninterest bearing deposits.

Previous wording

Total FHLB borrowings increased $349.6 million, or 164.4%, to $562.3 million at June 30, 2024 from $212.6 million at December 31, 2023.

Current wording

Total FHLB borrowings increased $547.4 million, or 257.4%, to $760.0 million at September 30, 2024 from $212.6 million at December 31, 2023.

Previous wording

Other borrowings decreased $308.4 million, or 60.5%, to $201.4 million at June 30, 2024, from $509.8 million at December 31, 2023, which was primarily due to a $300.0 million decrease in borrowings from the FRDW.

Current wording

Other borrowings decreased $404.0 million, or 79.2%, to $105.8 million at September 30, 2024, from $509.8 million at December 31, 2023, which was primarily due to a $275.0 million decrease in borrowings from the FRDW and a $117.7 million decrease in borrowings from the BTFP.

Previous wording

Our total shareholders’ equity at June 30, 2024 increased 3.6%, or $27.7 million, to $801.0 million, or 9.6% of total assets, compared to $773.3 million, or 9.3% of total assets, at December 31, 2023. The increase in shareholders’ equity was the result of net income of $46.2 million, other comprehensive income of $2.5 million, stock compensation expense of $1.5 million, common stock issued under our dividend reinvestment plan of $596,000 and net issuance of common stock under employee stock plans of $184,000, partially offset by cash dividends paid of $21.8 million and repurchases of $1.5 million of our common stock.

Current wording

Our total shareholders’ equity at September 30, 2024 increased 4.1%, or $32.0 million, to $805.3 million, or 9.6% of total assets, compared to $773.3 million, or 9.3% of total assets, at December 31, 2023. The increase in shareholders’ equity was the result of net income of $66.7 million, stock compensation expense of $2.5 million, net issuance of common stock under employee stock plans of $1.1 million and common stock issued under our dividend reinvestment plan of $886,000, partially offset by cash dividends paid of $32.7 million, other comprehensive loss of $5.0 million and repurchases of $1.5 million of our common stock.

Previous wording

We ended the second quarter of 2024 with approximately $377.4 million in available liquidity from the FRDW, in addition to the approximately $1.78 billion credit line available from FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At June 30, 2024, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 19.4%, or $1.26 billion.

Current wording

We ended the third quarter of 2024 with approximately $352.6 million in available liquidity from the FRDW, in addition to the approximately $1.80 billion credit line available from FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At September 30, 2024, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 19.2%, or $1.24 billion.

Previous wording

During the six months ended June 30, 2024, we entered into an additional $50 million cash flow hedge swap while $120 million of cash flow hedge swaps matured. At June 30, 2024, FHLB advances of $310 million and brokered deposits of $630 million were hedged with our $940 million of cash flow swaps. As of June 30, 2024, a pre-tax unrealized gain of $23.1 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges. We continue to evaluate the lowest cost wholesale funding sources and will utilize either brokered deposits, FHLB advances or FRDW borrowings, or a combination of the three funding sources in addition to utilizing cash flow hedges to mitigate the impacts of interest rate movements. At June 30, 2024, the majority of the securities portfolio was funded by non-maturity deposits, some of which are included in wholesale funding that accounts for approximately 49% of the funding source, of which approximately 69% is swapped at a fixed rate, providing protection from rising interest rates.

Current wording

During the nine months ended September 30, 2024, we entered into an additional $50 million cash flow hedge interest rate swap contract while $150 million cash flow hedge interest rate swap contracts were terminated and $120 million matured. At September 30, 2024, FHLB advances of $310 million and brokered deposits of $480 million were hedged with our $790 million of cash flow swaps. As of September 30, 2024, a pre-tax unrealized gain of $6.8 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges. We continue to evaluate the lowest cost wholesale funding sources and will utilize either brokered deposits, FHLB advances or FRDW borrowings, or a combination of the three funding sources in addition to utilizing cash flow hedges to mitigate the impacts of interest rate movements. At September 30, 2024, the majority of the securities portfolio was funded by non-maturity deposits, some of which are included in wholesale funding that accounts for approximately 57% of the funding source, of which approximately 51% is swapped at a fixed rate, providing protection from rising interest rates.

Previous wording

We utilize wholesale funding and securities to enhance overall profitability to determine the appropriate leverage of our capital, determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy currently consists of borrowing funds from the brokered market, FHLB and the Federal Reserve through the FRDW and BTFP. These funds are invested primarily in U.S. agency MBS and long-term municipal securities and to a lesser extent, U.S. Treasury Bills and corporate securities. Although the securities purchased often carry lower yields than loans we make, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, and the guarantees of the municipalities, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations.

Current wording

We utilize wholesale funding and securities to enhance overall profitability to determine the appropriate leverage of our capital, determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy currently consists of borrowing funds from the brokered market, FHLB and the FRDW. These funds are invested primarily in U.S. agency MBS and long-term municipal securities and to a lesser extent, U.S. Treasury Bills and corporate securities. Although the securities purchased often carry lower yields than loans, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, and the guarantees of the municipalities, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations.

Previous wording

Our securities portfolio increased from $2.60 billion at December 31, 2023 to $2.71 billion at June 30, 2024. The increase in the securities portfolio was due to securities purchased during the six months ended June 30, 2024, which more than offset sales of securities and principal payments.

Current wording

Our securities portfolio increased from $2.60 billion at December 31, 2023 to $2.70 billion at September 30, 2024. The increase in the securities portfolio was due to securities purchased during the nine months ended September 30, 2024, which more than offset sales of securities and principal payments.

Previous wording

During the six months ended June 30, 2024, we continued to adjust the composition of the securities portfolio as U.S. Treasury Bills and MBS increased while the remaining categories in the portfolio decreased. The increase in MBS was attributable to purchases of U.S. Agency MBS, partially offset by MBS principal payments. During the six months ended June 30, 2024, we purchased $408.9 million in short-term U.S. Treasury Bills to collateralize public fund deposits and $249.5 million in low premium, primarily 6.0% and 6.5% coupon MBS and to a lesser extent, discounted 5.5% coupon MBS. Sales during the six months ended June 30, 2024 included $100.8 million in municipal securities and in some instances the unwinding of the related hedged items to align the investment portfolio with the current balance sheet strategy. Sales of AFS securities for the three and six months ended June 30, 2024 resulted in a net realized loss of $563,000 and $581,000, respectively.

Current wording

During the nine months ended September 30, 2024, we continued to adjust the composition of the securities portfolio as U.S. Treasury Bills and MBS increased while the remaining categories in the portfolio decreased. The increase in MBS was attributable to purchases of U.S. Agency MBS, partially offset by MBS principal payments. During the nine months ended September 30, 2024, we purchased $482.9 million in short-term U.S. Treasury Bills to collateralize public fund deposits and $289.0 million in low premium, primarily 5.0% to 6.5% coupon MBS and to a lesser extent, discounted 4.0% to 5.5% coupon MBS. Sales during the nine months ended September 30, 2024 included $128.8 million in municipal securities and in most instances the unwinding of the related fair value hedges to align the investment portfolio with the current balance sheet strategy. Sales of AFS securities and the related fair value hedge unwinds for the three and nine months ended September 30, 2024 resulted in a net realized loss of $1.9 million and $2.5 million, respectively. In addition, during the three months ended September 30, 2024, we recorded an impairment loss of $868,000 on the sale of approximately $10.0 million in AFS municipal securities and the unwind of the related fair value hedges, sold on October 1, 2024.

Previous wording

At June 30, 2024, securities as a percentage of assets totaled 32.4%, compared to 31.4% at December 31, 2023, due to a $108.6 million, or 4.2%, increase in securities, while cash and cash equivalents decreased to 5.41% of total assets at June 30, 2024, compared to 6.77% at December 31, 2023. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant.

Current wording

At September 30, 2024, securities as a percentage of assets totaled 32.3%, compared to 31.4% at December 31, 2023, due to a $93.5 million, or 3.6%, increase in securities, while cash and cash equivalents decreased to 5.8% of total assets at

Previous wording

During 2022, we entered into partial term fair value hedges for certain of our fixed rate callable AFS municipal securities. During 2024, we entered into partial term fair value hedges of fixed rate AFS MBS and fixed rate loans using the portfolio layer method. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to partially offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. As of June 30, 2024, hedged municipal securities with a carrying amount of $358.0 million are included in our AFS securities portfolio in our consolidated balance sheets representing approximately 25% and 78% of the AFS securities portfolio and the AFS municipal portfolio, respectively. As of June 30, 2024, $201.0 million in hedging instruments were used to hedge a layer of the closed portfolio of AFS MBS, and $155.0 million in hedging instruments were used to hedge a layer of the closed portfolio of municipal loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

Current wording

During 2022, we entered into partial term fair value hedges for certain of our fixed rate callable AFS municipal securities. During 2024, we entered into partial term fair value hedges of fixed rate AFS MBS and fixed rate municipal loans using the portfolio layer method. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to partially offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. As of September 30, 2024, hedged municipal securities with a carrying amount of $336.9 million are included in our AFS securities portfolio in our consolidated balance sheets representing approximately 77% of the AFS municipal portfolio. As of September 30, 2024, $201.0 million in hedging instruments were used to hedge a layer of the closed portfolio of AFS MBS with a carrying value of $632.1 million, or 81% of the AFS MBS portfolio, and $155.0 million in hedging instruments were used to hedge a layer of the closed portfolio of municipal loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

Previous wording

With respect to funding sources, we primarily utilize deposits and to a lesser extent wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. Our primary wholesale funding sources are brokered deposits, FHLB and borrowings from the Federal Reserve through the FRDW and BTFP. Our FHLB borrowings increased 164.4%, or $349.6 million, to $562.3 million at June 30, 2024 from $212.6 million at December 31, 2023.

Current wording

With respect to funding sources, we primarily utilize deposits and to a lesser extent wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. Our primary wholesale funding sources are FHLB, brokered deposits and borrowings from the FRDW. Our FHLB borrowings increased 257.4%, or $547.4 million, to $760.0 million at September 30, 2024 from $212.6 million at December 31, 2023.

Previous wording

As of June 30, 2024, our total wholesale funding as a percentage of deposits, not including brokered deposits, decreased to 23.3% from 25.5% at December 31, 2023 and 25.2% at June 30, 2023.

Current wording

As of September 30, 2024, our total wholesale funding as a percentage of deposits, not including brokered deposits, increased to 27.1% from 25.5% at December 31, 2023 and 23.3% at September 30, 2023.

Previous wording

Our brokered deposits may consist of CDs and non-maturity deposits. We had $23.5 million in brokered CDs at June 30, 2024. We had no brokered CDs at December 31, 2023. At June 30, 2024, our brokered CDs had a weighted average cost of 532 basis points and remaining maturities of approximately less than 10 months. Our brokered non-maturity deposits decreased to $658.2 million at June 30, 2024, of which $630.0 million are related to our cash flow hedges, from $828.0 million at December 31, 2023, with a weighted average cost of 321 and 323 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total deposits. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

Current wording

Our brokered deposits may consist of CDs and non-maturity deposits. We had $126.4 million in brokered CDs at September 30, 2024. We had no brokered CDs at December 31, 2023. At September 30, 2024, our brokered CDs had a weighted average cost of 517 basis points and remaining maturities of approximately less than 11 months. Our brokered non-maturity deposits decreased to $627.2 million at September 30, 2024, of which $480.0 million are related to our cash flow hedges, from $828.0 million at December 31, 2023, with a weighted average cost of 345 and 323 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total assets. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

Previous wording

In connection with $940.0 million of our wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements with an interest rate tied to overnight SOFR. In connection with $940.0 million and $1.01 billion of the agreements outstanding at June 30, 2024 and December 31, 2023, respectively, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows at 3.08% with a remaining average weighted maturity of 2.1 years at June 30, 2024. Refer to “Note 11 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.

Current wording

In connection with $790.0 million of our wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements with an interest rate tied to SOFR. In connection with $790.0 million and $1.01 billion of the agreements outstanding at September 30, 2024 and December 31, 2023, respectively, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows at 2.70% with a remaining average weighted maturity of 1.8 years at September 30, 2024. Refer to “Note 11 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.

Previous wording

Net interest income is one of the principal sources of a financial institution’s earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the year ended December 31, 2023, the Federal Reserve increased the target federal funds rate by 100 basis points to 5.25% to 5.50%. During the six months ended June 30, 2024, the Federal Reserve held the rate steady but has indicated it may cut interest rates in 2024. The increase in the federal funds rate has resulted in a slight decrease in our net interest income. If the federal funds rate remains elevated or increases further and the yield curve remains inverted, it may continue to negatively impact our net interest income.

Current wording

Net interest income is one of the principal sources of a financial institution’s earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the year ended December 31, 2023, the Federal Reserve increased the target federal funds rate by 100 basis points to 5.25% to 5.50%. During the third quarter of 2024, the Federal Reserve reduced target federal funds rate by 50 basis points to 4.75% to 5.00%. If the federal funds rate remains elevated or increases further, it may negatively impact our net interest income.

Previous wording

Net interest income for the three months ended June 30, 2024, declined slightly when compared to the same period in 2023. The decrease in net interest income for the three months ended June 30, 2024, was largely due to increases in the average rate paid on our interest bearing liabilities and average balance of our interest bearing liabilities, partially offset by the increase in the average balance of interest earning assets and average yield of interest earning assets. Total interest income increased $17.3 million, or 19.9%, to $104.2 million for the three months ended June 30, 2024, compared to $86.9 million during the same period in 2023. Total interest expense increased $17.6 million, or 53.5%, to $50.6 million for the three months ended June 30, 2024, compared to $33.0 million for the same period in 2023. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.74% and 2.87%, respectively, for the three months ended June 30, 2024, compared to 2.99% and 3.17%, respectively, for the same period in 2023, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.00% and 2.13%, respectively, compared to 2.37% and 2.55%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.

Current wording

Net interest income for the three months ended September 30, 2024, increased $2.2 million, or 4.1%, compared to the same period in 2023. The increase in net interest income for the three months ended September 30, 2024, was due to the increases in the average balance and the average yield of interest earning assets, partially offset by increases in the average rate paid on our interest bearing liabilities and the average balance of our interest bearing liabilities. Total interest income increased $12.6 million, or 13.6%, to $105.7 million for the three months ended September 30, 2024, compared to $93.1 million during the same period in 2023. Total interest expense increased $10.4 million, or 26.2%, to $50.2 million for the three months ended September 30, 2024, compared to $39.8 million for the same period in 2023. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.82% and 2.95%, respectively, for the three months ended September 30, 2024, compared to 2.85% and 3.02%, respectively, for the same period in 2023, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.10% and 2.23%, respectively, compared to 2.14% and 2.31%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.

Previous wording

Net interest income was $107.0 million for the six months ended June 30, 2024, compared to $107.3 million for the same period in 2023, a decrease of $0.3 million, or 0.3%. The decrease in net interest income for the six months ended June 30, 2024 was due to increases in the average rate paid on our interest bearing liabilities and average balance of our interest bearing liabilities, partially offset by the increase in the average balance of interest earning assets and average yield of interest earning assets. Total interest income increased $39.2 million, or 23.4%, to $206.9 million for the six months ended June 30, 2024, compared to $167.7 million for the same period in 2023. Total interest expense increased $39.5 million, or 65.4%, to $100.0 million for the six months ended June 30, 2024, compared to $60.5 million for the same period in 2023. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.73% and 2.87%, respectively, for the six months ended June 30, 2024, compared to 3.01% and 3.19%, respectively, for the same period in 2023, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.01% and 2.15%, respectively, compared to 2.40% and 2.58%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

Current wording

Net interest income was $162.4 million for the nine months ended September 30, 2024, compared to $160.5 million for the same period in 2023, an increase of $1.9 million, or 1.2%. The increase in net interest income for the nine months ended September 30, 2024 was due to increases in the average balance and the average yield of interest earning assets, partially offset by increases in the average rate paid on our interest bearing liabilities and average balance of our interest bearing liabilities. Total interest income increased $51.8 million, or 19.9%, to $312.6 million for the nine months ended September 30, 2024, compared to $260.8 million for the same period in 2023. Total interest expense increased $50.0 million, or 49.8%, to $150.2 million for the nine months ended September 30, 2024, compared to $100.3 million for the same period in 2023. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.76% and 2.90%, respectively, for the nine months ended September 30, 2024, compared to 2.95% and 3.13%, respectively, for the same period in 2023, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.04% and 2.18%, respectively, compared to 2.31% and 2.48%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

Previous wording

The increase in total interest income for the three months ended June 30, 2024, was attributable to a $656.8 million, or 9.1%, increase in the average balance of interest earning assets for the three months ended June 30, 2024, compared to the same period in 2023, as well as an increase in the average yield on interest earning assets to 5.45% from 5.00% for the same period in 2023. The increase in total interest expense for the three months ended June 30, 2024, was primarily attributable to the increase in interest rates on our interest bearing liabilities to 3.32% from 2.45% for the same period in 2023, and an increase in the average balance of our interest bearing liabilities of $741.1 million, or 13.8%, for the three months ended June 30, 2024, compared to the same period in 2023. The increase in average earning assets was primarily the result of the increase in loans, MBS and interest earning deposits, partially offset by the decrease in tax-exempt and taxable investment securities.

Current wording

The increase in total interest income for the three months ended September 30, 2024, was attributable to a $404.9 million, or 5.5%, increase in the average balance of interest earning assets for the three months ended September 30, 2024, compared to the same period in 2023, as well as an increase in the average yield on interest earning assets to 5.51% from 5.15% for the same period in 2023. The increase in total interest expense for the three months ended September 30, 2024, was primarily attributable to the increase in interest rates on our interest bearing liabilities to 3.28% from 2.84% for the same period in 2023, and an increase in the average balance of our interest bearing liabilities of $519.9 million, or 9.3%, for the three months ended September 30, 2024, compared to the same period in 2023. The increase in average earning assets was primarily the result of the increase in MBS, interest earning deposits and loans, partially offset by the decrease in tax-exempt and taxable investment securities.

Previous wording

Note: As of June 30, 2024 and 2023, loans totaling $6.1 million and $3.0 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Current wording

Note: As of September 30, 2024 and 2023, loans totaling $7.3 million and $4.3 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Previous wording

The increase in total interest income was attributable to the increase in average earning assets of $688.5 million, or 9.6%, for the six months ended June 30, 2024, compared to the same period in 2023, as well as the increase in the average yield on earning assets to 5.42% from 4.88% for the same period in 2023. The increase in total interest expense for the six months ended June 30, 2024 was primarily attributable to the increase in interest rates on our interest bearing liabilities to 3.27% from 2.30% for the same period in 2023 and an increase in the average balance of our interest bearing liabilities of $854.9 million, or 16.1%, when compared to the same period in 2023. The increase in average earning assets was primarily the result of the increase in loans, MBS and interest earning deposits, partially offset by the decrease in tax-exempt investment securities.

Current wording

The increase in total interest income was attributable to the increase in average earning assets of $592.9 million, or 8.2%, for the nine months ended September 30, 2024, compared to the same period in 2023, as well as the increase in the average yield on earning assets to 5.45% from 4.97% for the same period in 2023. The increase in total interest expense for the nine months ended September 30, 2024 was primarily attributable to the increase in interest rates on our interest bearing liabilities to 3.27% from 2.49% for the same period in 2023 and an increase in the average balance of our interest bearing liabilities of $742.1 million, or 13.8%, when compared to the same period in 2023. The increase in average earning assets was primarily the result of the increase in loans, MBS and interest earning deposits, partially offset by the decrease in tax-exempt investment securities.

Previous wording

The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the six months ended June 30, 2024 and 2023. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” for more information, and for a reconciliation to GAAP.

Current wording

The “Average Balances with Average Yields and Rates” table that follows shows average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the nine months ended September 30, 2024 and 2023. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” for more information, and for a reconciliation to GAAP.

Previous wording

Note: As of June 30, 2024 and 2023, loans totaling $6.1 million and $3.0 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Current wording

Note: As of September 30, 2024 and 2023, loans totaling $7.3 million and $4.3 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

Previous wording

The 10.4% increase in noninterest income for the three months ended June 30, 2024, when compared to the same period in 2023, was primarily due to a decrease in net loss on sale of securities AFS and an increase in BOLI income, partially offset by a $2.6 million net gain on sale of equity securities during the three months ended June 30, 2023. The decrease in noninterest income for the six months ended June 30, 2024, when compared to the same period in 2023, was due to decreases in the net gain on sale of equity securities, deposit services income, other noninterest income and loss on sale of loans. These decreases were partially offset by a decrease in net loss on sale of securities AFS and an increase in brokerage services income.

Current wording

The 24.6% decrease in noninterest income for the three months ended September 30, 2024, when compared to the same period in 2023, was due to a net loss on sale of securities AFS and decreases in other noninterest income and deposit services income, partially offset by an increase in brokerage services income. The 11.6% decrease in noninterest income for the nine months ended September 30, 2024, when compared to the same period in 2023, was due to decreases in the net gain on sale of equity securities, other noninterest income and deposit services income and a loss on sale of loans. These decreases were partially offset by a decrease in net loss on sale of securities AFS and an increase in brokerage services income.

Previous wording

During the three and six months ended June 30, 2024, we sold municipal securities that resulted in a net loss on sale of AFS securities of $563,000 and $581,000, respectively.

Current wording

During the three and nine months ended September 30, 2024, we sold municipal securities that resulted in a net loss on sale of AFS securities of $1.9 million and $2.5 million, respectively.