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Item 2. Management’s Discussion and Analysis

2024-05-01 compared with 2023-11-01 · 199 added, 300 removed, 277 unchanged (64% of the section changed)

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

Net income in the first nine months of 2023 was $64.1 million, which decreased $13.7 million , or 17.6%, from $77.8 million for the comparable period of 2022 .

Diluted income per common share was $2.49 in the first nine months of 2023 , a decrease of 17.8% from $3.03 in the comparable period of 2022 .

The decrease in net income for 2023 was primarily due to an increase in noninterest expense of $18.5 million, or 22.3%, and an increase in provision for credit losses expense of $5.1 million.

Offsetting these items was an increase to net interest income of $2.4 million, or 1.6%, and an increase to noninterest income of $1.3 million, or 4.2%.

Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $79.8 million in the first nine months of 2023 , a decrease of $14.8 million , or 15.6%, compared to $94.6 million for the comparable period of 2022 .

Annualized return on average total equity was 14.44% in the first nine months of 2023 versus 16.89% in the comparable period of 2022 .

Annualized return on average total assets was 1.33% in the first nine months of 2023 versus 1.61% for the comparable period of 2022 .

The Company's average equity to average assets ratio was 9.21% in the first nine months of 2023 versus 9.53% in the comparable period of 2022 .

Net income in the first three months of 2024 was $23.4 million, which decreased $877,000 , or 3.6%, from $24.3 million for the comparable period of 2023 .

Diluted income per common share was $0.91 in the first three months of 2024 , a decrease of 3.2% from $0.94 in the comparable period of 2023 .

The decrease in net income for 2024 was primarily due to a decrease to net interest income of $4.1 million, or 8.0%, and an increase in noninterest expense of $1.3 million, or 4.3%.

Offsetting these effects was a decrease in provision for credit losses expense of $2.8 million, or 65.1%, and an increase to noninterest income of $2.3 million, or 22.3%.

Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $29.3 million in the first three months of 2024 , a decrease of $3.1 million , or 9.5%, compared to $32.4 million for the comparable period of 2023 .

Annualized return on average total equity was 14.59% in the first three months of 2024 versus 16.81% in the comparable period of 2023 .

Annualized return on average total assets was 1.44% in the first three months of 2024 versus 1.54% for the comparable period of 2023 .

The Company's average equity to average assets ratio was 9.84% in the first three months of 2024 versus 9.13% in the comparable period of 2023 .

Equity has been negatively impacted by unrealized losses from the available-for-sale investment securities portfolio, which are reported as a component of accumulated other comprehensive income (loss).

The Company's second quarter 2023 net income was negatively impacted by the recognition of a wire fraud loss of $13.6 million, net of tax, or $0.53 per diluted earnings per share.

Core operational profitability, which is a non-GAAP financial measure that excludes the estimated effect of this one-time event, decreased by $1.5 million, or 1.9%, to $76.4 million for the first nine months of 2023 from $77.8 million for the comparable period of 2022.

Net income in the third quarter of 2023 was $25.3 million, down 11.5%, or $3.3 million, from $28.5 million for the comparable period of 2022.

Diluted earnings per common share was $0.98 in the third quarter of 2023, down 11.7% from $1.11 in the comparable period of 2022.

The decrease was driven primarily by a decrease in net interest income of $4.1 million, or 7.8%, and an increase in noninterest expense of $1.2 million, or 4.3%, and was partially offset by an increase in noninterest income of $671,000, or 6.6%.

Pretax pre-provision earnings in the third quarter of 2023 were $30.1 million, a decrease of $4.6 million, or 13.3%, compared to $34.8 million for the comparable period of 2022.

Annualized return on average total equity was 16.91% in the third quarter of 2023 versus 19.39% in the comparable period of 2022.

Annualized return on average total assets was 1.54% in the third quarter of 2023 versus 1.80% in the comparable period of 2022.

The average equity to average assets ratio was 9.12% in the third quarter of 2023 versus 9.27% the comparable period of 2022.

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 8.62% at September 30, 2023, compared to 8.20% at September 30, 2022 and 8.79% at December 31, 2022.

Unrealized losses from available-for-sale investment securities were $266.4 million at September 30, 2023, compared to $256.1 million at September 30, 2022 and $215.3 million at December 31, 2022.

When excluding the impact of accumulated other comprehensive income (loss) on tangible common equity and tangible assets, the Company's adjusted tangible common equity to adjusted tangible assets ratio, which is a non-GAAP financial measure, was 11.74% at September 30, 2023, compared to 11.32% at September 30, 2022 and 11.38% at December 31, 2022.

Total assets were $6.427 billion as of September 30, 2023 versus $6.432 billion as of December 31, 2022, a decrease of $5.5 million, or less than 1%.

Total loans, net of the allowance for credit losses, and cash and cash equivalents increased $161.1 million, or 3.5%, and $16.0 million, or 12.3%, respectively, between December 31, 2022 and September 30, 2023.

Offsetting these increases was a decrease in available-for-sale securities of $210.0 million, or 17.7%.

Total deposits increased $196.5 million, or 3.6%, between December 31, 2022 and September 30, 2023.

Deposits have shifted from noninterest bearing to interest bearing products as a result of the rising interest rate environment.

Noninterest bearing deposits decreased $359.1 million, or 20.7%, and interest bearing deposits increased $555.6 million, or 14.9%.

Total borrowings decreased $207.0 million, or 69.7%.

Total equity decreased $11.7 million, or 2.1%, from $568.9 million at December 31, 2022 to $557.2 million at September 30, 2023.

Retained earnings increased $28.8 million, or 4.5%, as a result of net income of $64.1 million, offset by dividends declared and paid of $35.3 million.

Accumulated other comprehensive income (loss), decreased $39.2 million, or 20.7%, due primarily to a decline in the fair market values of available-for-sale investment securities during the nine months ended September 30, 2023.

Net income for the first three months of 2024 benefited from the recognition of $1.0 million in additional insurance recoveries associated with the wire fraud loss that occurred during the second quarter of 2023, creating an after-tax benefit of $0.03 diluted earnings per common share for the first three months of 2024.

This recovery was in addition to insurance and loss recoveries of $6.3 million, or $0.18 diluted earnings per common share, that were recorded during the fourth quarter of 2023.

Adjusting for these recoveries, the company's core operational profitability, a non-GAAP financial measure that excludes the impact of the wire fraud loss, insurance and loss recoveries and other related effects, was $22.7 million for the first three months of 2024, a decrease of $1.6 million, or 6.7%, compared to the first three months of 2023.

Total assets were $6.567 billion as of March 31, 2024 versus $6.524 billion as of December 31, 2023, an increase of $42.8 million, or less than 1%.

Total loans, net of the allowance for credit losses, increased $79.8 million, or 1.6%, which was the primary driver behind balance sheet expansion between December 31, 2023 and March 31, 2024.

Offsetting the increase to loans, net of the allowance of credit losses, was a decrease in available-for-sale securities of $37.2 million, or 3.5%.

The Company's primary funding source for the balance sheet expansion came from an increase in total borrowings of $150.0 million, or 300.0%, between December 31, 2023 and March 31, 2024.

Total deposits decreased $102.4 million, or 1.8%, between December 31, 2023 and March 31, 2024.

Total equity decreased $2.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $647.0 million at March 31, 2024.

Retained earnings increased $10.6 million, or 1.5%, primarily as a result of net income of $23.4 million and reduced by dividends declared and paid of $12.3 million.

Accumulated other comprehensive income (loss) ("AOCI"), decreased $11.7 million, or 7.6%, from a decline in the fair market values of available-for-sale investment securities during the three months ended March 31, 2024.

CRITICAL ACCOUNTING POLICIES

6 unchanged sentences

RESULTS OF OPERATIONS

Selected income statement information for the three and nine months ended September 30, 2023 and 2022 is presented in the following table:

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

Selected income statement information for the three months ended March 31, 2024 and 2023 is presented in the following table:

Three Months Ended March 31,

(dollars in thousands) 2024 2023

Income Statement Summary:

Net interest income $ 48,393 52,492 $ 148,436 $ 146,050

Net interest income (a) $ 47,416 $ 51,519

Provision for credit losses 1,520 4,350

Noninterest income 10,835 10,164 32,650 31,343

Noninterest expense 29,097 27,894 101,265 82,776

Noninterest income (b) 12,612 10,314

Noninterest expense (c) 30,705 29,434

Efficiency ratio (1) 51.15 % 47.60 %

4 unchanged sentences

Net charge-offs to average loans 0.03 0.49

Net interest margin Net interest margin 3.21 3.57 3.33 3.25

Net interest margin 3.15 3.54

Noninterest income to total revenue 21.01 16.68

Pretax pre-provision earnings (4) $ 29,323 $ 32,399

(1) Noninterest expense/net interest income plus noninterest income.

(1) Noninterest expense (c)/(Net interest income (a) plus Noninterest income (b).

(2) Non-GAAP financial measure.

The Company believes that disclosing non-GAAP financial measures provides investors with information useful to understanding the Company’s financial performance.

Additionally, these non-GAAP measures are used by management for planning and forecasting purposes, including measures based on “tangible common equity,” which is “total equity” excluding intangible assets, net of deferred tax, and “tangible assets,” which is “total assets” excluding intangible assets, net of deferred tax.

The tangible capital ratio is calculated by excluding the balance of goodwill, net of deferred taxes.

See reconciliation on the next page.

Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity.

Management believes this is an important measure because it is useful for planning and forecasting purposes.

See reconciliation on the following pages.

(3) Non-GAAP financial measure.

Calculated by removing the fair market value adjustment impact of the investment securities portfolio from tangible equity and tangible assets.

Management believes this is an important measure because it provides better comparability to prior periods.

See reconciliation on the next page.

Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio included in accumulated other comprehensive income (loss) ("AOCI") from tangible equity and tangible assets.

Management believes this is an important measure because it provides better comparability to periods preceding the recent significant rise in prevailing interest rates.

See reconciliation on the following pages.

(4) Non-GAAP financial measure.

1 unchanged sentence

Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period.

See reconciliation on the next page.

Reconciliations of non-GAAP measures are provided below (in thousands, except for per share data).

As of and For The As of and For The

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

(dollars in thousands) 2023 2022 2023 2022

See reconciliation on the following pages.

The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the Company's financial performance.

Reconciliations of these non-GAAP financial measures is provided below.

As of and For The

Three Months Ended March 31,

(dollars in thousands, except per share data) 2024 2023

Total Equity $ 647,009 $ 602,006

18 unchanged sentences

Pretax Pre-Provision Earnings $ 29,323 $ 32,399

Nine Months Ended

30, 2023 Sep.

The impact of the wire fraud loss, insurance and loss recoveries and adjustments to salaries and benefits is presented below.

Management considers these measures of core financial performance to be meaningful to understanding the Company's business performance for these periods.

Three Months Ended

(dollars in thousands, except per share data) Mar.

31, 2024 Mar.

Noninterest Income $ 12,612 $ 10,314

Recoveries (1,000) 0

Adjusted Core Noninterest Income $ 11,612 $ 10,314

Noninterest Expense $ 30,705 $ 29,434

3 unchanged sentences

Earnings Before Income Taxes $ 27,803 $ 28,049

Adjusted Core Noninterest Expense Impact 16,208 0

Adjusted Core Impact:

Noninterest Income (1,000) 0

Noninterest Expense 0 0

Total Adjusted Core Impact (1,000) 0

Adjusted Earnings Before Income Taxes 26,803 28,049

1 unchanged sentence

Core Operational Profitability (1) 22,650 24,278

Diluted Earnings Per Common Share $ 0.91 $ 0.94

Impact of Wire Fraud Loss, Net of Recoveries (0.03) 0.00

Core Operational Diluted Earnings Per Common Share $ 0.88 $ 0.94

Adjusted Core Efficiency Ratio 52.02 % 47.60 %

(1) Long-term, incentive-based compensation accruals were reduced as a result of the wire fraud loss.

Adjusted core noninterest expense, adjusted earnings before income taxes, core operational profitability, core operational diluted earnings per common share and adjusted core efficiency ratio are non‐GAAP financial measures calculated using GAAP amounts.

These adjusted amounts are calculated by excluding the impact of the wire fraud loss and corresponding reduction to salaries and employee benefits for the nine month periods ended September 30, 2023 and 2022.

There was no impact to the three month periods ended September 30, 2023 and 2022.

Management considers these measures of financial performance to be meaningful to understanding the company’s core business performance for these periods.

Net income was $64.1 million in the first nine months of 2023, which decreased $13.7 million , or 17.6%, from $77.8 million for the comparable period of 2022 .

The decrease in net income for the first nine months of 2023 was primarily due to an increase in noninterest expense of $18.5 million, or 22.3%, and an increase in the provision for credit losses of $5.1 million.

Offsetting these items was an increase to net interest income of $2.4 million, or 1.6%, and an increase to noninterest income of $1.3 million, or 4.2%.

The Company's second quarter 2023 net income was negatively impacted by the recognition of a wire fraud loss of $13.6 million, net of tax, or $0.53 per diluted earnings per share.

Core operational profitability, which is a non-GAAP financial measure that excludes the estimated effect of this one-time event, decreased by $1.5 million, or 1.9%, to $76.4 million for the first nine of 2023 from $77.8 million for the comparable period of 2022.

Net income in third quarter of 2023 was $25.3 million, down 11.5% from $28.5 million for the comparable period of 2022.

Diluted earnings per common share was $0.98 in the third quarter of 2023, down 11.7% from $1.11 in the comparable period of 2022.

(1) Core operational profitability was $751,000 lower than reported net income for the three months ended March 31, 2024.

Net income was $23.4 million in the first three months of 2024, which decreased $877,000 , or 3.6%, from $24.3 million for the comparable period of 2023 .

The decrease in net income for the first three months of 2024 was primarily due to a decrease to net interest income of $4.1 million, or 8.0%, and an increase in noninterest expense of $1.3 million, or 4.3%.

Offsetting these effects was a decrease in the provision for credit losses of $2.8 million, or 65.1%, and an increase to noninterest income of $2.3 million, or 22.3%.

This recovery was in addition to insurance and loss recoveries of $6.3 million, or $0.18 diluted earnings per common share, that were recorded during the fourth quarter of 2023.

N et Interest Income

The following tables set forth consolidated information regarding average balances and rates:

Nine Months Ended September 30,

(fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/

Rate Average Balance Interest Yield (1)/

Earning Assets

Taxable (2)(3) $ 4,733,421 $ 223,499 6.31 % $ 4,351,009 $ 136,580 4.20 %

Tax exempt (1) 58,010 3,577 8.24 30,275 1,149 5.07

Securities (1) 1,210,540 25,645 2.83 1,472,807 29,105 2.64

Short-term investments 2,362 77 4.36 2,251 12 0.71

Interest bearing deposits 99,205 3,527 4.75 322,445 1,489 0.62

Total earning assets $ 6,103,538 $ 256,325 5.61 % $ 6,178,787 $ 168,335 3.64 %

Allowance for credit losses (72,242) (67,684)

Nonearning Assets

Cash and due from banks 71,406 72,240

Premises and equipment 58,699 59,026

Other nonearning assets 286,915 226,732

Total assets $ 6,448,316 $ 6,469,101

Interest Bearing Liabilities

Savings deposits $ 360,535 $ 194 0.07 % $ 421,363 $ 241 0.08 %

Interest bearing checking accounts 2,854,161 76,518 3.58 2,658,739 14,456 0.73

Time deposits:

In denominations under $100,000 196,914 3,296 2.24 189,459 951 0.67

In denominations over $100,000 616,477 15,629 3.39 607,352 2,389 0.53

Miscellaneous short-term borrowings 218,561 8,252 5.05 9 0 0.00

Long-term borrowings and subordinated debentures 0 0 0.00 42,857 127 0.40

Total interest bearing liabilities $ 4,246,648 $ 103,889 3.27 % $ 3,919,779 $ 18,164 0.62 %

Noninterest Bearing Liabilities

Demand deposits 1,509,292 1,868,858

Other liabilities 98,313 64,262

Stockholders' Equity 594,063 616,202

Total liabilities and stockholders' equity $ 6,448,316 $ 6,469,101

Interest Margin Recap

Interest income/average earning assets 256,325 5.61 % 168,335 3.64 %

Interest expense/average earning assets 103,889 2.28 18,164 0.39

Net interest income and margin $ 152,436 3.33 % $ 150,171 3.25 %

(1) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate.

The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.

Taxable equivalent basis adjustments were $4.0 million and $4.1 million for the nine-month periods ended September 30, 2023 and September 30, 2022, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the nine-months ended September 30, 2023 and 2022 , are included as taxable loan interest income .

(3) Nonaccrual loans are included in the average balance of taxable loans.

Three Months Ended September 30,

Three Months Ended March 31,

(fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/

20 unchanged sentences

Miscellaneous short-term borrowings 175,809 2,454 5.61 241,870 2,783 4.67

Long-term borrowings and subordinated debentures 0 0 0.00 0 0 0.00

Total interest bearing liabilities $ 4,532,137 $ 43,618 3.87 % $ 4,066,932 $ 27,701 2.76 %

10 unchanged sentences

Taxable equivalent basis adjustments were $1.3 million and $1.5 million in the three-month periods ended September 30, 2023 and September 30, 2022, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended September 30, 2023 and 2022, are included as taxable loan interest income .

Taxable equivalent basis adjustments were $1.3 million and $1.4 million for the three-month periods ended March 31, 2024 and March 31, 2023, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended March 31, 2024 and 2023 , are included as taxable loan interest income.

(3) Nonaccrual loans are included in the average balance of taxable loans.

Net interest income, on a fully tax equivalent basis, increased $2.3 million, or 1.5%, to $152.4 million for the nine months ended September 30, 2023, compared to $150.2 million for the first nine months of 2022 .

Growth in average loans and an improvement in earning assets yields were the primary drivers behind the $88.0 million, or 52.3%, increase in tax equivalent interest income between the two periods.

Offsetting these increases was a decrease in the average balance of investment securities.

Interest expense, which mostly offset the positive impact of the increase to tax equivalent interest income, increased by $85.7 million, or 472.0%.

and was driven by increased funding costs from increased average interest bearing liabilities and a decrease in average noninterest bearing liabilities.

Total average earning assets were $6.104 billion for the nine months ended September 30, 2023, a decrease of $75.2 million, or 1.2%, compared to $6.179 billion for the nine months ended September 30, 2022 .

A decrease to average investment securities of $262.3 million, or 17.8%, from $1.473 billion for the nine months ended September 30, 2022 to $1.211 billion for the nine months ended September 30, 2023, and a decrease to the Company's cash held in interest bearing deposits of $223.2 million, or 69.2%, from $322.4 million for the nine months ended September 30, 2022 to $99.2 million for the nine months ended September 30, 2023, drove the contraction in average earning assets between the two periods.

Offsetting these decreases was an increase in average loans outstanding, which increased $410.1 million, or 9.4%, to $4.791 billion during the nine months ended September 30, 2023, compared to $4.381 billion during the same period of 2022 .

Total average interest bearing liabilities were $4.247 billion for the nine months ended September 30, 2023, an increase of $326.9 million, or 8.3%, from $3.920 billion for the nine months ended September 30, 2022.

This increase was driven by increased interest bearing deposits of $151.2 million, or 3.9%, from $3.877 billion for the nine months ended September 30, 2022 to $4.028 billion for the nine months ended September 30, 2023, and an increase in total average borrowings of $175.7 million, or 409.9%, from $42.9 million for the nine months ended September 30, 2022 to $218.6 million for the nine month ended September 30, 2023.

Noninterest bearing demand deposits decreased $359.6 million, or 19.2%, from $1.869 billion for the nine months ended September 30, 2022 to $1.509 billion for the nine months ended September 30, 2023.

The tax equivalent net interest margin was 3.33% for the nine months ended September 30, 2023, compared to 3.25% during the first nine months of 2022, representing an 8 basis point, or 2.5%, expansion between the two periods.

The net interest margin expansion was driven by a 525 basis point increase to the target Federal Funds rate implemented by the Federal Reserve through a series of rate increases beginning in March of 2022, increasing the target Federal Funds Rate range from a zero-bound range of 0.00%-0.25% in March 2022 to a range of 5.25%-5.50% at September 30, 2023.

The impact of the higher interest rate environment has increased earning asset yields by 197 basis points, or 54.1%, to 5.61% for the nine months ended September 30, 2023 , up from 3.64% for the comparable period of 2022.

The increase in earning asset yields was offset by an increase in the Company's funding costs, as depositors sought higher interest bearing deposit products and competition for deposits increased throughout the industry.

Interest expense as a percentage of average earning assets increased to 2.28% for the nine months ended September 30, 2023 , up from 0.39% for the comparable period of 2022, an increase of 189 basis points, or 484.6%.

The Company anticipates the c ost of funds may continue to rise throughout the remainder of 2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and elevated wholesale funding costs.

Net interest income, on a fully tax equivalent basis, decreased by $4.2 million, or 7.8%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Tax equivalent net interest income benefited from increased average loan balances and yields between the two periods.

Offsetting this benefit were increased interest bearing liabilities and an increased funding costs.

Total average earning assets were $6.146 billion for the third quarter of 2023 , an increase of $154.3 million, or 2.6%, compared to $5.992 billion for the third quarter of 2022 .

The increase in average earning assets was driven by an increase in average loans of $433.8 million, or 9.8%, from $4.416 billion for the third quarter of 2022 to $4.850 billion for the third quarter of 2023 .

Offsetting the increase in average loans was a decrease in average investment securities, which decreased $257.8 million, or 18.0%, from $1.429 billion for the third quarter of 2022 to $1.171 billion for the third quarter of 2023.

Total average interest bearing liabilities were $4.382 billion for the third quarter of 2023 , an increase of $560.7 million, or 14.7%, from $3.822 billion for the third quarter of 2022 .

This increase was driven by increased interest bearing deposits of $333.1 million, or 8.7%, from $3.822 billion for the third quarter of 2022 to $4.155 billion for the third quarter of 2023 and increased average borrowings of $227.6 million for the third quarter of 2023 compared to no average borrowings for the third quarter of 2022.

Noninterest bearing demand deposits decreased $399.1 million, or 22.0%, from $1.817 billion for the third quarter of 2022 to $1.418 billion for the third quarter of 2023 .

The tax equivalent net interest margin contracted by 36 basis points, or 10.1%, to 3.21% for the third quarter of 2023 , compared to 3.57% for the third quarter of 2022 .

Earning asset yields expanded 157 basis points, or 37.0%, from 4.24% for the third quarter of 2022 to 5.81% for the third quarter of 2023 .

This increase was offset by an increase in the Company's funding costs as interest expense as a percentage of average earning assets increased 193 basis points, or 288.1%, from 0.67% for the third quarter of 2022 to 2.60% for the third quarter of 2023 .

Increases to the Company's earning asset yields and interest expense as a percentage of average earning assets between the two periods were driven by the Federal Reserve's action to increase the target Federal Funds rate to 5.50% from 0.25%.

The target Federal Funds rate was increased 225 basis points between September 30, 2022 and September 30, 2023, increasing the target Federal Funds rate range from 3.00%-3.25% to 5.25%-5.50%.

While the rate increases have positively affected the Company's yields on earning assets, the Company has experienced a corresponding increase to funding costs, as depositors sought higher interest bearing deposit products and competition for deposits increased throughout the industry .

The Company anticipates the c ost of funds may continue to rise

throughout the remainder of 2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and elevated wholesale funding costs.

Net interest income, on a fully tax equivalent basis, decreased $4.2 million, or 7.9%, to $48.7 million for the three months ended March 31, 2024, compared to $52.9 million for the first three months of 2023 .

The decline in net interest income on a fully tax equivalent basis was driven by an increase in deposit interest expense of $16.2 million , or 65.2% , from $24.9 million to $41.2 million between the two periods.

Securities interest income contributed further to the decline in fully tax equivalent net interest income, declining $779,000, or 7.9%.

Loan interest income positively impacted fully tax equivalent net interest income, increasing $12.5 million, or 17.7%, from $70.7 million to $83.2 million between the two periods.

Borrowings expense declined $329,000, or 11.8%.

Total average earning assets were $6.217 billion for the three months ended March 31, 2024, an increase of $149.4 million, or 2.5%, compared to $6.068 billion for the three months ended March 31, 2023 .

Average loans outstanding drove the increase to total average earning assets, increasing $245.6 million, or 5.2%, to $4.971 billion from $4.725 billion for the three months ended March 31, 2024 and 2023, respectively .

Offsetting this increase was a decrease to average investment securities of $91.7 million, or 7.3%, to $1.159 billion from $1.250 billion between the respective periods .

Total average interest bearing liabilities were $4.532 billion for the three months ended March 31, 2024, an increase of $465.2 million, or 11.4%, from $4.067 billion for the three months ended March 31, 2023.

This increase was driven by increased interest bearing deposits of $531.3 million, or 13.9%, from $3.825 billion for the three months ended March 31, 2023 to $4.356 billion for the three months ended March 31, 2024.

Offsetting the increase to average interest bearing deposits was a decrease in total average borrowings of $66.1 million, or 27.3%, to $175.8 million from $241.9 million for the three months ended March 31, 2024 and 2023, respectively.

Noninterest bearing demand deposits decreased $388.4 million, or 23.4%, to $1.274 billion from $1.663 billion between the respective periods.

The tax equivalent net interest margin was 3.15% for the three months ended March 31, 2024, compared to 3.54% during the first three months of 2023, representing a 39 basis point, or 11.0%, contraction between the two periods.

The net interest margin contraction was primarily driven by an increase to interest expense as a percentage of average earning assets, which increased to 2.82% for the three months ended March 31, 2024 , up from 1.85% for the comparable period of 2023, for an increase of 97 basis points, or 52.4%.

This increase was attributable to an increase in the rate for total interest bearing liabilities of 111 basis points, or 40.2%, to 3.87% from 2.76% between the respective periods.

This increase was driven by increased costs associated with the Company's interest bearing deposits, as depositors sought higher rates on interest bearing deposit products and competition for deposits remains high throughout the industry, and by higher FHLB advances.

The increase in rate for interest bearing deposits was a result of a combination of an increase in average interest bearing deposits of $531.3 million , or 13.9% , from $3.825 billion to $4.356 billion , and an increase in the average rate for interest bearing deposits of 116 basis points, from 2.64% to 3.80% for the three months ended March 31, 2023 as compared to the three months ended March 31, 2024.

The Company anticipates the costs of funds may continue to remain elevated as a result of increased market competition, shifts from noninterest bearing deposits into interest bearing deposits, and elevated wholesale funding costs.

Offsetting the increase to interest expense as a percentage of average earning assets was an increase to interest income as a percentage of average earning assets of 58 basis points, or 10.8%, to 5.97% for the three months ended March 31, 2024 , up from 5.39% for the comparable period of 2023.

This increase was attributable to an increase in loan yields, which was driven by the combination of an increase in average loans of $245.6 million, or 5.2%, to $4.971 billion from $4.725 billion, and an increase in average yield of 66 basis points to 6.73% from 6.07% between the respective periods.

Loan yields benefited from an increase in the target Federal Funds rate of 50 basis points between the two periods, increasing to a range of 5.25%-5.50% during the three months ended March 31, 2024.

The Company expects the elevated interest rate environment will further benefit tax equivalent net interest margin as more commercial fixed rate loans mature and are renewed at higher interest rates.

Provision for Credit Losses

The Company recorded provision for credit losses expense of $5.6 million for the nine months ended September 30, 2023, compared to provision expense of $417,000 during the comparable period of 2022, an increase of $5.1 million, or 1,230.9%.

The increase in provision during the nine months ended September 30, 2023, compared to the comparable period in 2022, was primarily attributable to loan growth and increased qualitative risk factors for current market conditions impacting certain segments of the loan portfolio.

Net charge-offs were $6.1 million during the nine month period ended September 30, 2023, compared to net charge-offs of $951,000 during the comparable period of 2022, an increase of $5.1 million, or 536.3%.

The increase in charge-offs during the nine months ended September 30, 2023, compared to the comparable period in 2022 was the result of a charge-off of $5.5 million attributable to a single commercial borrower during the first quarter of 2023.

The Company recorded provision expense of $400,000 during the third quarter of 2023, compared to no provision expense recorded during the third quarter of 2022.

Provision expense during the quarter was primarily driven by growth in the loan portfolio.

Net charge-offs were $353,000 during the third quarter of 2023, compared to $284,000 during the third quarter of 2022.

The Company recorded provision for credit losses expense of $1.5 million for the three months ended March 31, 2024, compared to provision expense of $4.4 million during the comparable period of 2023, a decrease of $2.8 million, or 65.1%.

Net charge-offs were $312,000 during the three month period ended March 31, 2024, compared to $5.7 million during the comparable period of 2023, a decrease of $5.4 million, or 94.6%.

The decrease in charge-offs between the respective periods was the result of a charge-off of $5.5 million attributable to a single commercial borrower during the first quarter of 2023.

Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower.

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Noninterest Income

Noninterest income categories for the nine month and three month period ended September 30, 2023 and 2022 are shown in the following tables:

Nine Months Ended

September 30,

(dollars in thousands) 2023 2022 Dollar Change Percent Change

Wealth advisory fees $ 6,769 $ 6,550 $ 219 3.3 %

Investment brokerage fees 1,370 1,711 (341) (19.9)

Service charges on deposit accounts 8,091 8,681 (590) (6.8)

Loan and service fees 8,782 9,131 (349) (3.8)

Merchant card fee income 2,744 2,660 84 3.2

Bank owned life insurance income (loss) 2,393 (212) 2,605 (1,228.8)

Interest rate swap fee income 794 492 302 61.4

Mortgage banking income (loss) (184) 771 (955) (123.9)

Net securities gains (losses) (16) 0 (16) N/A

Other income 1,907 1,559 348 22.3

Total noninterest income $ 32,650 $ 31,343 $ 1,307 4.2 %

Noninterest income to total revenue 18.03 % 17.67 %

Noninterest income categories for the three months ended March 31, 2024 and 2023 are shown in the following tables:

Three Months Ended

September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

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Loan and service fees 2,852 2,846 6 0.2

Merchant card fee income 938 941 (3) (0.3)

Bank owned life insurance income (loss) 1,009 54 955 1,768.5

Interest rate swap fee income 0 88 (88) (100.0)

Merchant and interchange fee income 863 877 (14) (1.6)

Bank owned life insurance income 1,036 691 345 49.9

Mortgage banking income (loss) 52 (99) 151 (152.5)

Net securities gains (losses) (35) 0 (35) N/A

Net securities gains (losses) (46) 16 (62) (387.5)

Other income 2,187 619 1,568 253.3

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Noninterest income to total revenue 21.01 % 16.68 %

Noninterest income increased by $1.3 million, or 4.2%, to $32.7 million for the nine months ended September 30, 2023, compared to $31.3 million for the prior year nine-month period.

The increase was driven by increases to bank owned life insurance income of $2.6 million, other income of $348,000, or 22.3%, interest rate swap fee income of $302,000, or 61.4%, and wealth advisory fees of $219,000, or 3.3%.

These increases were offset by decreases to mortgage banking income of $955,000, or 123.9%, service charges on deposit accounts of $590,000, or 6.8%, loan and service fees of $349,000, or 3.8%, and investment brokerage fees of $341,000, or 19.9%.

The company’s noninterest income increased $671,000, or 6.6%, to $10.8 million for the third quarter of 2023, compared to $10.2 million for the third quarter of 2022.

The increase in noninterest income was primarily driven by an increase in bank owned life insurance income of $955,000, an increase in wealth advisory fees of $239,000, or 11.6%, and an increase in other income of $175,000, or 41.4%.

Bank owned life insurance income benefited from improved market performance of the company's variable life insurance policies which track to the overall performance of the equity markets, and from the purchase of general life insurance policies during the fourth quarter of 2022.

The increase in wealth advisory fees was driven by an increase in trust assets which benefited from new customer inflows.

The increase to other income was driven by increased limited partnership income and higher dividend from the company's FHLB stock holding.

Offsetting these increases to noninterest income was a decrease to service charges on deposit accounts of of $255,000, or 8.5%, primarily the result of increased earning credit rating for commercial depositors related to commercial treasury management fees and other changes to the deposit fee schedule for retail accounts, a decrease to investment brokerage fees of $243,000, or 37.3%, due to fluctuations in fee generating sales volume and mix, and a decrease to loan and service fees of $113,000, or 3.7%, due to a decline in fee-based volume.

Noninterest income increased by $2.3 million, or 22.3%, to $12.6 million for the three months ended March 31, 2024, compared to $10.3 million for the prior year three month period.

The increase in noninterest income was driven primarily by an increase in other income of $1.6 million , or 253.3% , due to the recognition of an insurance recovery of $1.0 million during the first three months of 2024.

Contributing further to the increase in other income was the recognition of a death benefit from the Company's bank owned life insurance program, increased FHLB dividend income and increased limited partnership investment income.

Additionally, bank owned life insurance income increased $345,000 , or 49.9% , wealth advisory fees increased $255,000 , or 11.6% , and mortgage banking income increased $151,000 .

The increase to bank owned life insurance was driven by an improvement in market valuation for the Company's variable owned life insurance policies, which are tied to the performance of the equity markets.

Wealth advisory fees benefited from new volume growth in addition to favorable market performance.

The increase to mortgage banking income was attributable to growth in the Company's mortgage pipeline, which favorably impacted secondary market loan sale gains and mortgage rate lock income.

Adjusted core noninterest income, a non-GAAP financial measure that excludes the impact of the $1.0 million insurance recovery, was $11.6 million for the first three months of 2024, an increase of $1.3 million, or 12.6%, compared to the first three months of 2023.

Noninterest Expense

Noninterest expense categories for the nine month and three month period ended September 30, 2023 and 2022 are shown in the following tables:

Nine Months Ended

September 30,

(dollars in thousands) 2023 2022 Dollar Change Percent Change

Salaries and employee benefits $ 43,414 $ 43,840 $ (426) (1.0) %

Net occupancy expense 4,874 4,793 81 1.7

Equipment costs 4,189 4,250 (61) (1.4)

Data processing fees and supplies 10,305 9,510 795 8.4

Corporate and business development 3,930 4,078 (148) (3.6)

FDIC insurance and other regulatory fees 2,469 1,516 953 62.9

Professional fees 6,284 4,527 1,757 38.8

Wire fraud loss 18,058 0 18,058 N/A

Other expense 7,742 10,262 (2,520) (24.6)

Total noninterest expense $ 101,265 $ 82,776 $ 18,489 22.3 %

Efficiency ratio 55.92 % 46.66 %

Noninterest expense categories for the three months ended March 31, 2024 and 2023 are shown in the following tables:

Three Months Ended

September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

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Professional fees 2,463 2,121 342 16.1

Wire fraud loss 0 0 0 N/A

Other expense 2,248 2,562 (314) (12.3)

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Efficiency ratio 51.15 % 47.60 %

Noninterest expense increased by $18.5 million, or 22.3%, for the nine months ended September 30, 2023, from $82.8 million to $101.3 million.

The increase to noninterest expense during the year was driven by an $18.1 million wire fraud loss recorded as a component of noninterest expense during the second quarter of 2023.

Other drivers contributing to the increase in noninterest expense include an increase to professional fees of $1.8 million, or 38.8%, an increase to FDIC insurance and other regulatory fees of $953,000, or 62.9%, and an increase to data processing fees and supplies of $795,000, or 8.4%.

Adjusted core noninterest expense, which excludes the estimated impact of the wire fraud loss, increased by $2.3 million, or 2.8%, from $82.8 million for the nine months ended September 30, 2022, to $85.1 million for the nine months ended September 30, 2023.

Noninterest expense increased $1.2 million, or 4.3%, to $29.1 million for the third quarter of 2023, compared to $27.9 million during the third quarter of 2022.

The increase in noninterest expense during the quarter was attributable to an increase in salaries and employee benefits of $1.3 million, or 9.1%, an increase in professional fees of $560,000, or 36.0%, and an increase in FDIC insurance and other regulatory fees of $413,000, or 90.2%.

Salaries and employee benefits increased due to increases in salaries and employee insurance expense and an increase in deferred compensation expense which is tied to the market performance of the company's variable bank owned life insurance policies.

Professional fees increased as a result of increased interest charges associated with the bank's cash swap collateral positions and increased legal expense related to the wire fraud loss and ongoing matters.

The increase to FDIC insurance and other regulatory fees was caused by a blanket increase to the assessment rate used by the FDIC to calculate insurance premiums.

Offsetting these increases was a decrease to other expense of $1.1 million, or 29.9%, driven by a decrease in accruals pertaining to ongoing legal matters.

The Company's income tax expense decreased $6.2 million, or 38.1%, to $10.1 million in the nine months ended September 30, 2023, compared to $16.4 million for the same period in 2022 .

The effective tax rate was 13.6% in the nine months ended September 30, 2023, compared to 17.4% for the comparable period of 2022 .

The year-to-date effective tax rate is reduced by the wire fraud loss, income from tax-advantaged sources such as f ederally tax exempt municipal bond interest income as w ell as a tax benefit from stock-based compensation vesting of shares for plan participants.

Noninterest expense increased by $1.3 million, or 4.3%, for the three months ended March 31, 2024, from $29.4 million to $30.7 million.

The increase in noninterest expense during the three months ended March 31, 2024 was driven by an increase of salaries and employee benefits of $770,000 , or 4.8% .

The increase to salaries and employees and benefits expense was driven by increases to expenses for employee salaries, incentive pay and health insurance as well as deferred compensation expense linked to the increase in market valuation of the Company's variable owned life insurance.

Data processing fees and supplies expense increased $387,000 , or 11.2% , from increased software as well as digital and core data processing expenses.

Professional fees increased $342,000 , or 16.1% , from continued investment in customer-facing and operational technology solutions.

Other expense decreased $314,000 , or 12.3% , due to a reduction in expenses related to credit card recourse reserve expense, telephone expense and semi-annual director share grant expense.

The Company's income tax expense increased $631,000, or 16.7%, to $4.4 million in the three months ended March 31, 2024, compared to $3.8 million for the same period in 2023.

The effective tax rate was 15.8% in the three months ended March 31, 2024, compared to 13.4% for the comparable period of 2023.

The year-to-date effective tax rate was increased due to adoption of ASU 2023-02, to account for the Company's investment in low-income housing tax credit structures, as well as a reduction in the tax benefit recognized from stock-based compensation vesting of shares for plan participants.

FINANCIAL CONDITION

Total assets were $6.427 billion as of September 30, 2023 versus $6.432 billion as of December 31, 2022, a decrease of $5.5 million, or less than 1%.

Offsetting these increases was a decrease in available-for-sale securities of $210.0 million, or 17.7%.

Total deposits increased $196.5 million, or 3.6%, between December 31, 2022 and September 30, 2023.

Noninterest bearing deposits decreased $359.1 million, or 20.7%, and interest bearing deposits increased $555.6 million, or 14.9%.

Total borrowings decreased $207.0 million, or 69.7%.

Total equity decreased $11.7 million, or 2.1%, from $568.9 million at December 31, 2022 to $557.2 million at September 30, 2023.

Retained earnings increased $28.8 million, or 4.5%, as a result of net income of $64.1 million, offset by dividends declared and paid of $35.3 million.

Accumulated other comprehensive income (loss), decreased $39.2 million, or 20.7%, due primarily to a decline in available-for-sale securities fair market values during the nine months ended September 30, 2023.

Total assets were $6.567 billion as of March 31, 2024 versus $6.524 billion as of December 31, 2023, an increase of $42.8 million, or less than 1%.

Total loans, net of the allowance for credit losses, increased $79.8 million, or 1.6%, between December 31, 2023 and March 31, 2024.

Offsetting the increase to loans, net of the allowance for credit losses, was a decrease in available-for-sale securities of $37.2 million, or 3.5%.

Total deposits decreased $102.4 million, or 1.8%, between December 31, 2023 and March 31, 2024.

The decrease in total deposits was driven the change in noninterest bearing deposits which decreased $99.3 million, or 7.3%.

An increase in total borrowings of $150.0 million, or 300.0%, offset the decrease in total deposits to fund the balance sheet growth between December 31, 2023 and March 31, 2024.

Total equity decreased $2.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $647.0 million at March 31, 2024.

Retained earnings increased $10.6 million, or 1.5%, as a result of net income of $23.4 million but was reduced by dividends declared and paid of $12.3 million.

Accumulated other comprehensive income (loss), decreased $11.7 million, or 7.6%, due primarily to a decline in available-for-sale securities fair market values during the three months ended March 31, 2024.

Uses of Funds

Total Cash and Cash Equivalents

Total cash and cash equivalents increased by $16.0 million, or 12.3%, to $146.3 million at September 30, 2023, from $130.3 million at December 31, 2022.

Total cash and cash equivalents decreased by $4.1 million, or 2.7%, to $147.7 million at March 31, 2024, from $151.8 million at December 31, 2023.

Cash and cash equivalents include short-term investments.

The increase in cash and cash equivalents at September 30, 2023 was driven by an increase in interest bearing short-term investment accounts of $29.5 million, or 59.8%, offset by a decrease in cash and due from banks of $13.5 million, or 16.6%.

The fluctuation in cash and cash equivalents at March 31, 2024 was driven by a decrease in cash and due from banks of $14.9 million, or 21.2% and offset by an increase in interest bearing short-term investment accounts of $10.8 million, or 13.2%.

Investment Portfolio

The amortized cost and the fair value of securities as of September 30, 2023 and December 31, 2022 were as follows:

September 30, 2023 December 31, 2022

The amortized cost and the fair value of securities as of March 31, 2024 and December 31, 2023 were as follows:

March 31, 2024 December 31, 2023

(dollars in thousands) Amortized

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Available-for-Sale

U.S Treasury securities $ 2,873 $ 2,861 $ 3,057 $ 3,034

U.S government sponsored agencies $ 144,693 $ 116,452 $ 146,692 $ 119,479

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Total Investment Portfolio $ 1,334,750 $ 1,129,948 $ 1,356,237 $ 1,170,943

At September 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S.

At March 31, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S.

government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity.

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This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses.

Purchases of securities available-for-sale totaled $4.3 million in the first nine months of 2023.

The purchases consisted of U.S.

Treasury securities and mortgage-backed securities issued by government sponsored entities for CRA purposes.

Investment securities represented 17.2% of total assets on September 30, 2023, compared to 20.4% of total assets on December 31, 2022.

Effective duration for the investment portfolio was 6.7 years at September 30, 2023, compared to 4.0 years at December 31, 2019, before the pandemic, and 6.5 years at December 31, 2022.

Duration of the portfolio extended following the deployment of excess liquidity to the portfolio and the dramatic rise in interest rates during 2022 and into 2023.

There were no purchases of available-for-sale securities in the first three months of 2024.

Investment securities represented 17.4% of total assets on March 31, 2024, compared to 18.1% of total assets on December 31, 2023.

Effective duration for the investment portfolio was 6.6 years at March 31, 2024, compared to 4.0 years at December 31, 2019 prior to the pandemic, and 6.5 years at December 31, 2023.

Effective duration of the portfolio expanded following the deployment of excess liquidity to the portfolio and the rise in interest rates during the recent Federal Reserve tightening cycle.

The ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 12%-14% during 2014 to 2020.

The Company expects the investment securities portfolio as a percentage of assets to decrease over time as the proceeds from pay downs, sales and maturities of these investment securities are used to fund loan portfolio growth and for other general liquidity purposes.

Paydowns from prepayments and scheduled payments of $44.5 million were received in the first nine months of 2023, and the amortization of premiums, net of the accretion of discounts, was $3.7 million.

Maturities and calls of securities totaled $12.1 million in the first nine months of 2023.

Sales of available-for-sale investment securities totaled $102.8 million in the first nine months of 2023 and resulted in net losses of $16,000.

No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of September 30, 2023 and December 31, 2022.

The fair value of the available-for-sale investment securities portfolio as of September 30, 2023 included net unrealized losses of $266.4 million, compared to net unrealized losses of $215.3 million as of December 31, 2022.

Paydowns from prepayments and scheduled payments of $13.5 million were received in the first three months of 2024, and the amortization of premiums, net of the accretion of discounts, was $1.3 million.

There were no maturities or calls of securities during the first three months of 2024.

Sales of available-for-sale investment securities totaled $7.1 million in the first three months of 2024 and resulted in net losses of $46,000.

No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of March 31, 2024 and December 31, 2023.

The fair value of the available-for-sale investment securities portfolio as of March 31, 2024 included net unrealized losses of $189.9 million, compared to net unrealized losses of $174.6 million as of December 31, 2023.

Unrealized losses in the available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities.

These declines were driven by the rising interest rate environment as a result of the Federal Reserve's monetary tightening policy to combat elevated levels of inflation affecting the U.S.

These declines were driven by the rising interest rate environment as a result of the Federal Reserve's recent monetary tightening policy.

The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio.

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Real Estate Mortgage Loans Held-for-Sale

Real estate mortgage loans held-for-sale increased by $215,000, or 60.2%, to $572,000 at September 30, 2023, from $357,000 at December 31, 2022.

Real estate mortgage loans held-for-sale increased by $501,000, or 43.3%, to $1.7 million at March 31, 2024, from $1.2 million at December 31, 2023.

The balance of this asset category is subject to a high degree of variability depending on, among other factors, recent mortgage loan rates and the timing of loan sales into the secondary market.

The Company generally sells conforming qualifying mortgage loans it originates on the secondary market.

Proceeds from sales of residential mortgages totaled $6.1 million in the first nine months of 2023, compared to $34.3 million in the first nine months of 2022.

Proceeds from sales of residential mortgages totaled $4.1 million in the first three months of 2024, compared to $672,000 in the first three months of 2023.

Management expects the volume of loans originated for sale in the secondary market to remain at reduced levels due to elevated mortgage rates, limited inventory, and existing homeowners being locked in at historically low rates.

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.

The unpaid principal balances of loans serviced for others were $340.1 million and $364.3 million, as of September 30, 2023 and December 31, 2022, respectively.

The unpaid principal balances of loans serviced for others were $328.8 million and $333.1 million, as of March 31, 2024 and December 31, 2023, respectively.

Loan Portfolio

The loan portfolio by portfolio segment as of September 30, 2023 and December 31, 2022 is summarized as follows:

(dollars in thousands) September 30,

The loan portfolio by portfolio segment as of March 31, 2024 and December 31, 2023 is summarized as follows:

(dollars in thousands) March 31,

2024 December 31,

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Loans, net $ 4,924,379 $ 4,844,562 $ 79,817

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $161.1 million, or 3.5%, to $4.874 billion at September 30, 2023 from $4.713 billion at December 31, 2022.

The increase was primarily driven by originations of loans concentrated in the commercial real estate and multi-famly residential, other commercial, and consumer 1-4 family mortgage loans categories and was offset by paydowns in commercial and industrial loans and the agri-business and agricultural loans segments, the latter of which traditionally experiences seasonal fluctuations in activity.

The following table summarizes the Company’s non-performing assets as of September 30, 2023 and December 31, 2022:

(dollars in thousands) September 30,

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $80.8 million, or 1.6%, to $5.001 billion at March 31, 2024 from $4.920 billion at December 31, 2023.

The increase was primarily driven by originations of loans concentrated in the commercial and industrial and commercial real estate and multi-family residential loans categories and was offset by paydowns in the agri-business and agricultural loans segment which traditionally experiences seasonal fluctuations in activity.

The following table summarizes the Company’s non-performing assets as of March 31, 2024 and December 31, 2023:

(dollars in thousands) March 31,

2024 December 31,

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Nonperforming assets to total assets 0.23 % 0.25 %

Total nonperforming assets decreased by $486,000, or 2.8%, to $16.7 million during the nine month period ended September 30, 2023.

The ratio of nonperforming assets to total assets decreased 1 basis point from 0.27% at December 31, 2022 to 0.26% at September 30, 2023.

Total nonperforming assets decreased by $875,000, or 5.4%, to $15.2 million during the three month period ended March 31, 2024.

The ratio of nonperforming assets to total assets decreased 2 basis point from 0.25% at December 31, 2023 to 0.23% at March 31, 2024.

A loan is individually analyzed when full payment under the original loan terms is not expected.

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If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral.

Total individually analyzed loans decreased by $14.6 million, or 46.6%, to $16.7 million at September 30, 2023 from $31.3 million at December 31, 2022, due primarily to a charge off of a single commercial credit during the first quarter of 2023 and nonaccrual loan paydowns.

Total individually analyzed loans decreased by $943,000, or 5.8%, to $15.2 million at March 31, 2024 from $16.1 million at December 31, 2023, due primarily to loan paydowns.

Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible.

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The allowance is an amount that management believes will be adequate to absorb current expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other current expected losses in the loan portfolio.

The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay.

The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current

economic conditions that may affect the borrower’s ability to repay.

Management also considers trends in adversely classified loans based upon a monthly review of those credits.

8 unchanged sentences

If an asset or portion, thereof is classified as a loss, the Company’s policy is to either establish specified allowances for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.

At September 30, 2023, the allowance for credit losses was 1.48% of total loans outstanding, versus 1.54% of total loans outstanding at December 31, 2022.

At September 30, 2023, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio.

However, if economic conditions deteriorate, certain

borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses.

At March 31, 2024, the allowance for credit losses was 1.46% of total loans, which was unchanged from December 31, 2023.

At March 31, 2024, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio.

However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses.

The process of identifying credit losses is a subjective process.

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The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets.

Loans totaling $71.9 million for this sector represented only 1.5% of total loans at September 30, 2023.

As of September 30, 2023, based on management’s review of the loan portfolio, the Company had 66 credit relationships totaling $186.4 million on the classified loan list versus 58 credit relationships totaling $161.0 million as of December 31, 2022.

The increase in classified loans for the first nine months of 2023 resulted primarily from borrower risk rating downgrades of pass rated loans to the non-individually analyzed portion of the watch list.

As of September 30, 2023, the Company had $166.1 million of assets classified as Special Mention, $20.2 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $115.7 million, $45.3 million, $0 and $0, respectively, at December 31, 2022.

Watch list loans as a percentage of total loans increased to 3.83% as of September 30, 2023, up from a historical low at 3.42% as of December 31, 2022.

Loans totaling $73.6 million for this sector represented 1.5% of total loans at March 31, 2024.

Additionally, commercial real estate loans secured by multi-family residential properties and secured by non-farm non-residential properties were approximately 205% of the Bank's risk-based capital at March 31, 2024.

As of March 31, 2024, based on management’s review of the loan portfolio, the Company had 70 credit relationships totaling $183.3 million on the classified loan list versus 68 credit relationships totaling $183.1 million as of December 31, 2023.

As of March 31, 2024, the Company had $147.9 million of assets classified as Special Mention, $35.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $143.6 million, $39.4 million, $0 and $0, respectively, at December 31, 2023.

Watch list loans as a percentage of total loans decreased to 3.67% as of March 31, 2024 from 3.72% as of December 31, 2023.

Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions and a reasonably supportable forecast period.

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For a more thorough discussion of the allowance for credit losses methodology see the ("Critical Accounting Policies") section of this Item 2.

The allowance for credit losses decreased $501,000, or less than 1%, from $72.6 million at December 31, 2022 to $72.1 million at September 30, 2023.

The decrease was a result of net charge-offs recorded during the period of $6.1 million, offset by provision expense of $5.6 million.

Of the $6.1 million in net charge-offs, $5.5 million was attributable to a single deteriorated commercial relationship.

The increased provision expense recorded during the nine months ended September 30, 2023 was primarily attributable to loan growth.

The allowance for credit losses increased $1.2 million, or 1.7%, from $72.0 million at December 31, 2023 to $73.2 million at March 31, 2024.

The increase was a result of provision expense of $1.5 million which was offset by net charge-offs of $312,000.

Provision expense recorded during the three months ended March 31, 2024 was attributable to loan growth.

As the bulk of the Company’s lending activity is concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits, management has historically considered growth and portfolio composition when determining credit loss allocations.

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The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes a stable mix of commercial, retail and public funds deposit accounts.

While the traditional base of core deposits represents the primary source of funding for the Company, the Company has access to a robust array of other liquidity sources, including secured borrowings available from the Federal Home Loan Bank, the Federal Reserve Bank Discount Window and the Federal Reserve Bank Term Funding Program.

In addition, the Company has access to unsecured borrowing capacity through long established relationships within the brokered deposit markets, Federal Funds lines from correspondent bank partners and Insured Cash Sweep (ICS) one-way buy funds available from the Intrafi network.

As of September 30, 2023, the Company had access to $3.27 billion in unused liquidity available from these aggregate sources, up from $2.99 billion at December 31, 2022.

The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the nine months ended September 30, 2023 and 2022 are summarized in the following table:

Nine months ended September 30,

available from the Intrafi network.

As of March 31, 2024, the Company had access to $3.13 billion in unused liquidity available from these aggregate sources as compared to $3.41 billion at December 31, 2023.

The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the three months ended March 31, 2024 and 2023 are summarized in the following table:

Three months ended March 31,

(dollars in thousands) Balance Rate Balance Rate

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Total funding sources $ 5,806,240 3.02 % $ 5,729,462 1.96 %

Average total deposits were $5.537 billion for the nine months ended September 30, 2023, a decrease of $208.4 million, or 3.6%, from the comparable period in 2022.

Average total borrowings were $218.6 million for the nine months ended September 30, 2023, an increase of $175.7 million, or 409.9%, from the comparable period in 2022.

Total average deposit costs increased 189 basis points from 0.42% for the nine months ended September 30, 2022, compared to 2.31% for the nine months ended September 30, 2023.

Total average borrowing costs increased 465 basis points from 0.40% for the nine months ended September 30, 2022 to 5.05% for the nine months ended September 30, 2023.

As a result, total funding costs increased by 199 basis points from 0.42% for the nine months ended September 30, 2022, to 2.41% for the nine months ended September 30, 2023.

Average total deposits were $5.630 billion for the three months ended March 31, 2024, an increase of $142.8 million, or 2.6%, from the comparable period in 2023.

Average total borrowings were $175.8 million for the three months ended March 31, 2024, a decrease of $66.1 million, or 27.3%, from the comparable period in 2023.

Total average deposit costs increased 110 basis points from 1.84% for the three months ended March 31, 2023, to 2.94% for the three months ended March 31, 2024.

Total average borrowing costs increased 94 basis points from 4.67% for the three months ended March 31, 2023 to 5.61% for the three months ended March 31, 2024.

As a result, total funding costs increased by 106 basis points from 1.96% for the three months ended March 31, 2023, to 3.02% for the three months ended March 31, 2024.

This increase was driven by an increase in rates on interest bearing deposits and deposit migration from noninterest bearing deposits to interest bearing deposits.

Deposits and Borrowings

As of September 30, 2023, total deposits increased by $196.5 million, or 3.6%, from December 31, 2022.

Core deposits, which excludes brokered deposits, increased by $29.1 million, or less than 1%, to $5.480 billion as of September 30, 2023 from $5.451 billion as of December 31, 2022.

Total brokered deposits were $177.4 million at September 30, 2023, compared to $10.0 million at December 31, 2022, an increase of $167.4 million.

The following table summarizes deposit composition at September 30, 2023 and December 31, 2022:

(dollars in thousands) September 30,

As of March 31, 2024, total deposits decreased by $102.4 million, or 1.8%, from December 31, 2023.

Core deposits, which excludes brokered deposits, decreased by $152.8 million, or 2.7%, to $5.432 billion as of March 31, 2024 from $5.585 billion as of December 31, 2023.

Total brokered deposits were $185.8 million at March 31, 2024, compared to $135.4 million at December 31, 2023, an increase of $50.4 million.

The following table summarizes deposit composition at March 31, 2024 and December 31, 2023:

(dollars in thousands) March 31,

2024 Percentage of Total December 31,

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Total deposits $ 5,618,085 100.0 % $ 5,720,525 100.0 % $ (102,440)

Core deposits have been stable during 2023.

Core deposits declined $152.8 million, or 2.7%, during the first three months of 2024.

Utilization of brokered deposits as a wholesale funding alternative has returned to pre-pandemic levels.

On September 30, 2023 commercial deposits represented 38.1% of total deposits versus 38.2% at December 31, 2022.

Retail deposits represented 31.1% at September 30, 2023 versus 35.4% at December 31, 2022.

Public Funds deposits represented 27.7% at September 30, 2023 versus 26.2% at December 31, 2022.

Brokered deposits represented 3.1% of total deposits at September 30, 2023 versus less than 1% at December 31, 2022.

Commercial deposits expanded $68.9 million, or 3.3%, from $2.09 billion at December 31, 2022 to $2.15 billion at September 30, 2023;

retail deposits contracted $173.6 million, or 9.0%, from $1.93 billion at December 31, 2022 to $1.76 billion at September 30, 2023;

and public funds deposits expanded $133.7 million, or 9.3%, from $1.43 billion at December 31, 2022 to $1.56 billion at September 30, 2023.

Uninsured deposits not covered by FDIC deposit insurance were 54% as of September 30, 2023, versus 56% at December 31, 2022.

Uninsured deposits not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (which insures public fund deposits in Indiana), were 28% of total deposits as of September 30, 2023, versus 30% as of December 31, 2022.

As of September 30, 2023 and December 31, 2022, 98% of deposit accounts had deposit balances less than $250,000.

As of September 30, 2023, total stockholders’ equity was $557.2 million, a decrease of $11.7 million, or 2.1%, from $568.9 million at December 31, 2022.

Net income of $64.1 million was offset by a decrease of $39.2 million in accumulated other comprehensive income (loss) and dividends declared and paid of $35.3 million.

On March 31, 2024 commercial deposits represented 37.7% of total deposits versus 38.9% at December 31, 2023.

Retail deposits represented 31.5% at March 31, 2024 versus 31.4% at December 31, 2023.

Public Funds deposits represented 27.5% at March 31, 2024 versus 27.3% at December 31, 2023.

Brokered deposits represented 3.3% of total deposits at March 31, 2024 versus 2.4% at December 31, 2023.

Commercial deposits contracted $109.6 million, or 4.9%, from $2.23 billion at December 31, 2023 to $2.12 billion at March 31, 2024;

deposits contracted $25.0 million, or 1.4%, from $1.79 billion at December 31, 2023 to $1.77 billion at March 31, 2024;

and public funds deposits contracted $18.2 million, or 1.2%, from $1.56 billion at December 31, 2023 to $1.54 billion at March 31, 2024.

Deposits not covered by FDIC deposit insurance were 54% as of March 31, 2024, versus 57% at December 31, 2023.

Deposits not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (which insures public fund deposits in Indiana), were 27% of total deposits as of March 31, 2024, versus 31% as of December 31, 2023.

As of March 31, 2024 and December 31, 2023, 98% of deposit accounts had deposit balances less than $250,000.

As of March 31, 2024, total stockholders’ equity was $647.0 million, a decrease of $2.8 million, or less than 1%, from $649.8 million at December 31, 2023.

The decrease to total stockholders' equity was driven by net income of $23.4 million and was reduced by a decrease of $11.7 million in accumulated other comprehensive income (loss) and dividends declared and paid of $12.3 million.

The impact on equity for other comprehensive income (loss) is not included in regulatory capital.

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banking organizations.

As of September 30, 2023, the Company's capital levels remained characterized as “well-capitalized”.

The actual capital amounts and ratios of the Company and the Bank as of September 30, 2023 and December 31, 2022, are presented in the table below.

Capital ratios for September 30, 2023 are preliminary until the Call Report and FR Y-9C are filed.

As of March 31, 2024, the Company's capital levels remained characterized as “well-capitalized”.

The actual capital amounts and ratios of the Company and the Bank as of March 31, 2024 and December 31, 2023, are presented in the table below.

Capital ratios for March 31, 2024 are preliminary until the Call Report and FR Y-9C are filed.

Actual Minimum Required For Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2023:

As of March 31, 2024:

Total Capital (to Risk Weighted Assets)

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• the effects of future economic, business and market conditions and changes, particularly in our Indiana market area, including prevailing interest rates and the rate of inflation;

• governmental monetary and fiscal policies and the impact the current economic environment will have on these;

• governmental monetary and fiscal policies;

• the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;

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• the effects of disruption and volatility in capital markets on the value of our investment portfolio;

• the performance of our commercial real estate loan portfolio, including the effects of the elevated interest rate environment, the strength of the commercial real estate market in our Indiana markets, and recent changes in retail and office usage patterns;

• risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company;

• the outcome of pending litigation and other claims we may be subject to from time to time;

• the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

• the risks related to the recent failures of First Republic Bank, Silicon Valley Bank and Signature Bank, including the effects already recognized and increased deposit volatility;

• the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets;

• the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;

• changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages;

• changes in the prices, values and sales volumes of residential and commercial real estate;

• the risk of labor availability, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector;

• the outcome of pending litigation and other claims we may be subject to from time to time;

• changes in the prices, values and sales volumes of residential real estate;

• the risks related to the recent failures of First Republic Bank, Silicon Valley Bank and Signature Bank, including the effects already recognized and increased deposit volatility;

• the risk of labor shortages, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector;

• the effects of fraud by or affecting employees, customers or third parties;

• changes in the availability and cost of credit and capital in the financial markets;

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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