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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-01 · 311 added, 168 removed, 308 unchanged (61% of the section changed)

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

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).

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.

Net income in the first six months of 2024 was $46.0 million, which increased $7.1 million , or 18.2%, from $38.9 million for the comparable period of 2023 .

Diluted income per common share was $1.78 in the first six months of 2024 , an increase of 17.9% from $1.51 in the comparable period of 2023 .

The increase in net income for 2024 was primarily due to an increase to noninterest income of $11.2 million, or 51.5%, and a decrease in noninterest expense of $8.1 million, or 11.3%.

Offsetting these effects was an increase in the provision for credit losses of $4.9 million, or 94.2%, and a decrease to net interest income of $4.3 million, or 4.3%.

Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $64.7 million in the first six months of 2024 , an increase of $15.0 million , or 30.3%, compared to $49.7 million for the comparable period of 2023 .

Annualized return on average total equity was 14.39% in the first six months of 2024 versus 13.18% in the comparable period of 2023 .

Annualized return on average total assets was 1.40% in the first six months of 2024 versus 1.22% for the comparable period of 2023 .

The Company's average equity to average assets ratio was 9.73% in the first six months of 2024 versus 9.26% in the comparable period of 2023 .

Net income in the second quarter of 2024 was $22.5 million, up $7.9 million, or 54.3%, from $14.6 million for the comparable period of 2023.

Diluted earnings per common share was $0.87 in the second quarter of 2024, up 52.6% from $0.57 in the comparable period of 2023.

The increase was driven primarily by an increase in noninterest income of $8.9 million, or 77.7%, and a decrease in noninterest expense of $9.4 million, or 22.0%.

Offsetting these effects was an increase in provision for credit losses of $7.7 million and a decrease in net interest income of $228,000, or less than 1%.

Pretax pre-provision earnings in the second quarter of 2024 were $35.4 million, an increase of $18.1 million, or 104.7%, compared to $17.3 million for the comparable period of 2023.

Annualized return on average total equity was 14.19% in the second quarter of 2024 versus 9.70% in the comparable period of 2023.

Annualized return on average total assets was 1.37% in the second quarter of 2024 versus 0.91% in the comparable period of 2023.

The average equity to average assets ratio was 9.62% in the second quarter of 2024 versus 9.39% the comparable period of 2023.

The Company’s performance in the second quarter was impacted by two non-routine events.

During the quarter, the Bank recognized $9.0 million in net gains on Visa shares previously carried at cost basis of $0 since 2008.

On April 8, 2024, Visa Inc.

announced the commencement of an exchange offer for Visa Class B-1 common stock and the Bank subsequently tendered its Visa Class B-1 common stock in exchange for a combination of Visa Class C common stock and Visa Class B-2 common stock.

After entering the exchange, the Bank redeemed two-thirds of its Visa Class C common stock and sold its remaining Visa B-2 common stock in the secondary market.

As of June 30, 2024, the Bank held 1,574 shares of Visa Class C common stock valued at $1.7 million and intends to redeem these remaining shares during the third quarter of 2024 pursuant to the Visa redemption provisions.

In addition, the Company incurred a one-time accrual of $4.5 million related to the resolution of a legal matter during the second quarter.

The lawsuit against the Company related to this resolution was dismissed by the court.

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 9.91% at June 30, 2024, compared to 9.04% at June 30, 2023 and 9.91% at December 31, 2023.

Unrealized losses from available-for-sale investment securities were $194.9 million at June 30, 2024, compared to $202.0 million at June 30, 2023 and $174.6 million at December 31, 2023.

When excluding the impact of accumulated other comprehensive income (loss) ("AOCI") 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 12.18% at June 30, 2024, compared to 11.45% at June 30, 2023 and 11.99% at December 31, 2023.

Total assets were $6.569 billion as of June 30, 2024 versus $6.524 billion as of December 31, 2023, an increase of $44.8 million, or less than 1%.

Total loans, net of the allowance for credit losses, increased $127.1 million, or 2.6%, which was the primary driver behind balance sheet expansion between December 31, 2023 and June 30, 2024.

Offsetting the increase to loans, net of the allowance of credit losses, was a decrease in available-for-sale securities of $58.7 million, or 5.6%.

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.

Total deposits increased by $43.0 million, or less than 1%, between December 31, 2023 and June 30, 2024.

Total equity increased $4.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $654.6 million at June 30, 2024.

Retained earnings increased $20.8 million, or 3.0%, primarily as a result of net income of $46.0 million and reduced by dividends declared and

paid of $24.6 million.

AOCI decreased $15.3 million, or 9.8%, from a decline in the fair market values of available-for-sale investment securities during the six months ended June 30, 2024.

CRITICAL ACCOUNTING POLICIES

6 unchanged sentences

RESULTS OF OPERATIONS

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,

Selected income statement information for the three and six months ended June 30, 2024 and 2023 is presented in the following table:

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

(dollars in thousands) 2024 2023 2024 2023

13 unchanged sentences

Pretax pre-provision earnings (4) $ 35,402 $ 17,291 $ 64,725 $ 49,690

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

(1) Noninterest expense (c) / (Net interest income (a) + Noninterest income (b)) = Efficiency Ratio

(2) Non-GAAP financial measure.

4 unchanged sentences

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.

Management believes this is an important measure because it provides better comparability to periods preceding the recent significant rise in prevailing interest rates and demonstrates long-term trends capital strength.

See reconciliation on the following pages.

4 unchanged sentences

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,

Tangible common equity, adjusted tangible common equity, tangible assets, adjusted tangible assets, tangible book value per common share, tangible common equity to tangible assets, adjusted tangible common equity to adjusted tangible assets, and pretax pre-provision earnings are non-GAAP financial measures calculated based on GAAP amounts.

Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets from the calculation of equity, net of deferred tax.

Tangible assets are calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets, net of deferred tax.

Adjusted tangible assets and adjusted tangible common equity remove the fair market value adjustment impact of the available-for-sale investment securities portfolio in accumulated other comprehensive income (loss) ("AOCI").

Tangible book value per common share is calculated by dividing tangible common equity by the number of shares outstanding less true treasury stock.

Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense.

Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.

However, management considers these measures of the company’s value meaningful to understanding of the company’s financial information and performance.

A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data).

As of and For The As of and For The

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

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

19 unchanged sentences

Pretax Pre-Provision Earnings $ 35,402 $ 17,291 $ 64,725 $ 49,690

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.

Adjusted core noninterest income, 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 based on GAAP amounts.

These adjusted amounts are calculated by excluding the impact of the net gain on Visa shares, legal accrual, and wire fraud loss and associated insurance and loss recoveries and adjustments to salaries and employee benefits expense for the periods presented below.

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

A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data).

Three Months Ended Six Months Ended

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

30, 2024 Jun.

30, 2023 Jun.

30, 2024 Jun.

Noninterest Income $ 20,439 $ 11,501 $ 33,051 $ 21,815

Recoveries (1,000) 0

Net Gain on Visa Shares (9,011) 0 (9,011) 0

Insurance Recoveries 0 0 (1,000) 0

Adjusted Core Noninterest Income $ 11,428 $ 11,501 $ 23,040 $ 21,815

Noninterest Expense $ 33,333 $ 42,734 $ 64,038 $ 72,168

Legal Accrual (4,537) 0 (4,537) 0

Wire Fraud Loss 0 (18,058) 0 (18,058)

10 unchanged sentences

Diluted Earnings Per Common Share $ 0.87 $ 0.57 $ 1.78 $ 1.51

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

Impact of Adjusted Core Items (0.13) 0.48 (0.16) 0.48

Core Operational Diluted Earnings Per Common Share $ 0.74 $ 1.05 $ 1.62 $ 1.99

Adjusted Core Efficiency Ratio 48.22 % 44.19 % 50.11 % 45.92 %

(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.

(1) In 2023, long-term, incentive-based compensation accruals were reduced as a result of the wire fraud loss and subsequent insurance and loss recoveries.

(2) Core operational profitability was $3.4 million lower and $12.2 million higher than reported net income for the three months ended June 30, 2024 and June 30, 2023, respectively.

Core operational profitability was $4.1 million lower and $12.2 million higher than reported net income for the six months ended June 30, 2024 and 2023, respectively.

Net income was $46.0 million in the first six months of 2024, which increased $7.1 million , or 18.2%, from $38.9 million for the comparable period of 2023 .

Diluted income per common share was $1.78 in the first six months of 2024 , an increase of 17.9% from $1.51 in the comparable period of 2023 .

The increase in net income for the first six months of 2024 was primarily due to an increase to noninterest income of $11.2 million, or 51.5%, and a decrease in noninterest expense of $8.1 million, or 11.3%.

Offsetting these effects was a decrease to net interest income of $4.3 million, or 4.3%, and an increase in the provision for credit losses of $4.9 million, or 94.2%.

Net income during the second quarter of 2024 was $22.5 million, up 54.3% from $14.6 million for the comparable period of 2023.

Diluted earnings per common share was $0.87 in the second quarter of 2024, up 52.6% from $0.57 in the comparable period of 2023.

The increase was driven primarily by an increase in noninterest income of $8.9 million, or 77.7% and a decrease in noninterest expense of $9.4 million, or 22.0%, and was offset by an increase in the provision for credit losses of $7.7 million and a decrease in net interest income of $228,000, or less than 1%.

N et Interest Income

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

Three Months Ended March 31,

Six Months Ended June 30,

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

32 unchanged sentences

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 $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.

Taxable equivalent basis adjustments were $2.5 million and $2.7 million for the six-month periods ended June 30, 2024 and June 30, 2023, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the six months ended June 30, 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, 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%.

Three Months Ended June 30,

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

Rate Average Balance Interest Yield (1)/

Earning Assets

Taxable (2)(3) $ 4,993,270 $ 84,226 6.78 % $ 4,739,885 $ 75,047 6.35 %

Tax exempt (1) 41,581 783 7.57 57,857 1,198 8.31

Securities (1) 1,118,776 8,082 2.91 1,210,870 8,520 2.82

Short-term investments 2,836 35 4.96 2,308 26 4.52

Interest bearing deposits 138,818 1,807 5.24 85,364 1,009 4.74

Total earning assets $ 6,295,281 $ 94,933 6.07 % $ 6,096,284 $ 85,800 5.65 %

Allowance for credit losses (74,166) (71,477)

Nonearning Assets

Cash and due from banks 64,518 69,057

Premises and equipment 58,702 58,992

Other nonearning assets 298,619 280,073

Total assets $ 6,642,954 $ 6,432,929

Interest Bearing Liabilities

Savings deposits $ 289,107 $ 48 0.07 % $ 360,173 $ 65 0.07 %

Interest bearing checking accounts 3,275,502 33,323 4.09 2,930,285 27,226 3.73

Time deposits:

In denominations under $100,000 217,146 1,871 3.47 198,864 1,147 2.31

In denominations over $100,000 807,304 9,121 4.54 611,427 5,173 3.39

Miscellaneous short-term borrowings 77,077 1,077 5.62 186,418 2,347 5.05

Total interest bearing liabilities $ 4,666,136 $ 45,440 3.92 % $ 4,287,167 $ 35,958 3.36 %

Noninterest Bearing Liabilities

Demand deposits 1,230,903 1,450,396

Other liabilities 106,916 91,367

Stockholders' Equity 638,999 603,999

Total liabilities and stockholders' equity $ 6,642,954 $ 6,432,929

Interest Margin Recap

Interest income/average earning assets 94,933 6.07 % 85,800 5.65 %

Interest expense/average earning assets 45,440 2.90 35,958 2.37

Net interest income and margin $ 49,493 3.17 % $ 49,842 3.28 %

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

Taxable equivalent basis adjustments were $1.2 million and $1.3 million in the three-month periods ended June 30, 2024 and June 30, 2023, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended June 30, 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, decreased $4.6 million, or 4.4%, to $98.2 million for the six months ended June 30, 2024, compared to $102.7 million for the first six 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 $27.0 million , or 46.1% , from $58.5 million to $85.5 million .

Securities interest income contributed further to the decline in fully tax equivalent net interest income, declining $1.4 million, or 7.8%.

Loan interest income positively impacted fully tax equivalent net interest income, increasing $21.3 million, or 14.5%, from $146.9 million to $168.2 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 .

Borrowings expense declined $1.6 million, or 31.2%.

Total average earning assets were $6.256 billion for the six months ended June 30, 2024, an increase of $174.1 million, or 2.9%, compared to $6.082 billion for the six months ended June 30, 2023 .

Average loans outstanding drove the increase to total average earning assets, increasing $241.2 million, or 5.1%, to $5.003 billion from $4.762 billion for the six months ended June 30, 2024 and 2023, respectively .

Offsetting this increase was a decrease to average investment securities of $91.8 million, or 7.5%, to $1.139 billion from $1.230 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.

Total average interest bearing liabilities were $4.599 billion for the six months ended June 30, 2024, an increase of $421.5 million, or 10.1%, from $4.178 billion for the six months ended June 30, 2023.

This increase was driven by increased interest bearing deposits of $509.0 million, or 12.8%, from $3.964 billion for the six months ended June 30, 2023 to $4.473 billion for the six months ended June 30, 2024.

Offsetting the increase to average interest bearing deposits was a decrease in total average borrowings of $87.5 million, or 40.9%, to $126.4 million from $214.0 million for the six months ended June 30, 2024 and 2023 , respectively.

Noninterest bearing demand deposits decreased $303.4 million, or 19.5%, to $1.253 billion from $1.556 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.

The tax equivalent net interest margin was 3.16% for the six months ended June 30, 2024, compared to 3.41% during the first six months of 2023, representing a 25 basis point, or 7.3%, 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 2.86% for the six months ended June 30, 2024 , up from 2.11% for the comparable period of 2023, for an increase of 75 basis points, or 35.5%.

This increase was attributable to an increase in the rate for total interest bearing liabilities of 82 basis points, or 26.7%, from 3.07% to 3.89% 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 while competition for deposits remained high throughout the industry.

This increase was offset by reduced borrowings expense due to lower average borrowings.

The increase in rate for interest bearing deposits was a result of a combination of an increase in average interest bearing deposits of $509.0 million , or 12.8% , from $3.964 billion to $4.473 billion, and an increase in the average rate for interest bearing deposits of 87 basis points, from 2.98% to 3.85% for the six months ended June 30, 2024 as compared to the comparable period in the prior year.

The Company anticipates the cost 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 50 basis points, or 9.1%, to 6.02% for the six months ended June 30, 2024 , up from 5.52% 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 $241.2 million , or 5.1% , to $5.003 billion from $4.762 billion , and an increase in average yield of 54 basis points from 6.22% to 6.76% between the respective periods.

Loan yields benefited from an increase in the target Federal Funds rate of 25 basis points between the two periods, increasing to a range of 5.25%-5.50%.

The Company expects loan yields to improve as commercial fixed rate loans continue to mature and reprice at current interest rates.

Net interest income, on a fully tax equivalent basis, decreased by $349,000, or less than 1%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.

The decline in net interest income on a fully tax equivalent basis was driven by an increase in deposit interest expense of $10.8 million, or 32.0%, from $33.6 million to $44.4 million.

Securities interest income contributed further to the decline, decreasing $438,000, or 5.1%.

Loan interest income positively impacted fully tax equivalent net interest income, increasing $8.8 million, or 11.5%, from $76.2 million to $85.0 million.

Additionally, income from short-term investments and interest bearing deposits increased $807,000.

Borrowings expense decreased $1.3 million, or 54.1%.

Total average earning assets were $6.295 billion for the second quarter of 2024 , an increase of $199.0 million, or 3.3%, compared to $6.096 billion for the second quarter of 2023 .

The increase in average earning assets was driven by an increase in average loans of $237.1 million, or 4.9%, from $4.798 billion for the second quarter of 2023 to $5.035 billion for the second quarter of 2024 .

Offsetting the increase in average loans was a decrease in average investment securities, which decreased $92.1 million, or 7.6% , from $1.211 billion for the second quarter of 2023 to $1.119 billion for the second quarter of 2024.

Total average interest bearing liabilities were $4.666 billion for the second quarter of 2024 , an increase of $379.0 million, or 8.8%, from $4.287 billion for the second quarter of 2023 .

This increase was driven by increased interest bearing deposits of $488.3 million, or 11.9%, from $4.101 billion for the second quarter of 2023 to $4.589 billion for the second quarter of 2024.

Noninterest bearing demand deposits decreased $219.5 million, or 15.1%, from $1.450 billion for the second quarter of 2023 to $1.231 billion for the second quarter of 2024 and average borrowings decreased $109.3 million, or 58.7%, from $186.4 million for the second quarter of 2023 to $77.1 million for the second quarter of 2024.

The tax equivalent net interest margin contracted by 11 basis points, or 3.4%, to 3.17% for the second quarter of 2024 , compared to 3.28% for the second quarter of 2023 .

The net interest margin contraction was primarily driven by an increase in interest expense as a percentage of average earning assets, which increased to 2.90% for the three months ended June 30, 2024, up from 2.37% for the comparable period of 2023, for an increase of 53 basis points, or 22.4%.

This increase was attributable to an increase in the rate for total interest bearing liabilities of 56 basis points, or 16.7%, from 3.36% to 3.92% between the

respective periods.

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

This increase was offset by reduced borrowings expense due to lower average borrowings.

The increase in rate for interest bearing deposits was a result of an increase in average interest bearing deposits of $488.3 million, or 11.9%, from $4.101 billion to $4.589 billion, and an increase in the average rate for interest bearing deposits of 60 basis points, from 3.29% to 3.89% for the three months ended June 30, 2024, as compared to the comparable period in the prior year.

The Company anticipates the cost of funds may continue to remain elevated as a result of increased market competition, shifts from noninterest bearing deposits to 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 42 basis points, or 7.4%, to 6.07% for the three months ended June 30, 2024, up from 5.65% for the comparable period of 2023.

This increase was attributable to an increase in loan yields, which was driven by an increase in average loans of $237.1 million, or 4.9%, to $5.035 billion from $4.798 billion, and an increase in average yield of 42 basis points from 6.37% to 6.79% between the respective periods.

Loan yields benefited from an increase in the target Federal Funds rate of 25 basis points between the two periods, increasing to a range of 5.25%-5.50%.

The Company expects loan yields to improve as commercial fixed rate loans continue to mature and reprice at current interest rates.

Provision for Credit Losses

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 Company recorded provision for credit losses expense of $10.0 million for the six months ended June 30, 2024, compared to provision expense of $5.2 million during the comparable period of 2023, an increase of $4.9 million, or 94.2%.

Net charge-offs were $1.3 million during the six month period ended June 30, 2024, compared to $5.7 million during the comparable period of 2023, a decrease of $4.4 million, or 77.9%.

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.

The Company recorded provision expense of $8.5 million during the second quarter of 2024, compared to $800,000 during the second quarter of 2023.

Provision expense during the quarter was primarily driven by an increase in the specific reserve allocation from the downgrade of a single $43.3 million commercial relationship, an industrial company in Northern Indiana, that was placed on nonperforming status during the second quarter of 2024.

Net charge-offs were $949,000 during the second quarter of 2024, compared to net recoveries of $43,000 during the second 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 three months ended March 31, 2024 and 2023 are shown in the following tables:

Three Months Ended

Noninterest income categories for the three and six months ended June 30, 2024 and 2023 are shown in the following tables:

Six Months Ended

(dollars in thousands) 2024 2023 Dollar Change Percent Change

5 unchanged sentences

Bank owned life insurance income 1,926 1,384 542 39.2

Interest rate swap fee income 0 794 (794) (100.0)

Mortgage banking income (loss) 75 (134) 209 (156.0)

Net securities gains (losses) (46) 19 (65) (342.1)

Net gain on Visa shares 9,011 0 9,011 100.0

Other income 2,881 1,309 1,572 120.1

1 unchanged sentence

Noninterest income to total revenue 25.67 % 17.90 %

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.

Three Months Ended

(dollars in thousands) 2024 2023 Dollar Change Percent Change

Wealth advisory fees $ 2,597 $ 2,271 $ 326 14.4 %

Investment brokerage fees 478 428 50 11.7

Service charges on deposit accounts 2,806 2,726 80 2.9

Loan and service fees 3,048 3,002 46 1.5

Merchant card fee income 892 929 (37) (4.0)

Bank owned life insurance income (loss) 890 693 197 28.4

Interest rate swap fee income 0 794 (794) (100.0)

Mortgage banking income (loss) 23 (35) 58 (165.7)

Net securities gains (losses) 0 3 (3) (100.0)

Net gain on Visa shares 9,011 0 9,011 100.0

Other income 694 690 4 0.6

Total noninterest income $ 20,439 $ 11,501 $ 8,938 77.7 %

Noninterest income to total revenue 29.74 % 19.16 %

Noninterest income increased by $11.2 million, or 51.5%, to $33.1 million for the six months ended June 30, 2024, compared to $21.8 million for the prior year six-month period.

The increase in noninterest income was driven primarily by net gain on Visa shares of $9.0 million.

Additionally, other income increased $1.6 million, or 120.1%, wealth advisory fees increased $581,000, or 13.0%, bank owned life insurance income increased $542,000, or 39.2%, and mortgage banking income increased $209,000.

Other income increased from the insurance recovery and bank owned life insurance benefit received during the first quarter of 2024.

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

Bank owned life insurance income increased through an improvement in market valuation for the Company's variable bank owned life insurance policies, which are tied to the performance of the equity markets.

Adjusted core noninterest income for the six months ended June 30, 2024, was $23.0 million, an increase of $1.2 million, or 5.6%, compared to $21.8 million for the six months ended June 30, 2023.

The Company’s noninterest income increased $8.9 million, or 77.7%, to $20.4 million for the second quarter of 2024, compared to $11.5 million for the second quarter of 2023.

The increase in noninterest income was driven primarily by the net gain on Visa shares of $9.0 million.

Wealth advisory fees increased $326,000, or 14.4%, because of new volume growth in addition to favorable market performance.

Bank owned life insurance income increased $197,000, or 28.4%, primarily from improved market performance of the Company's variable bank owned life insurance policies.

Offsetting these increases was a decrease in interest rate swap fee income of $794,000 due to no new swap fee activity during the quarter.

Adjusted core noninterest income was $11.4 million for the second quarter of 2024, a decrease of $73,000, or 0.6%, compared to $11.5 million for the second quarter of 2023.

Noninterest Expense

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

Noninterest expense categories for the three and six months ended June 30, 2024 and 2023 are shown in the following tables:

Six Months Ended

(dollars in thousands) 2024 2023 Dollar Change Percent Change

Salaries and employee benefits $ 32,991 $ 27,437 $ 5,554 20.2 %

Net occupancy expense 3,438 3,253 185 5.7

Equipment costs 2,755 2,864 (109) (3.8)

Data processing fees and supplies 7,651 6,926 725 10.5

Corporate and business development 2,646 2,729 (83) (3.0)

FDIC insurance and other regulatory fees 1,605 1,598 7 0.4

Professional fees 4,586 4,170 416 10.0

Wire fraud loss 0 18,058 (18,058) (100.0)

Other expense 8,366 5,133 3,233 63.0

Total noninterest expense $ 64,038 $ 72,168 $ (8,130) (11.3) %

Efficiency ratio 49.73 % 59.22 %

Three Months Ended

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Professional fees 2,123 2,049 74 3.6

Wire fraud loss 0 18,058 (18,058) (100.0)

Other expense 6,118 2,571 3,547 138.0

1 unchanged sentence

Efficiency ratio 48.49 % 71.19 %

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.

Noninterest expense decreased by $8.1 million, or 11.3%, for the six months ended June 30, 2024 to $64.0 million compared to $72.2 million for the six months ended June 30, 2023.

The primary driver behind the decrease was the $18.1 million wire fraud loss recorded during the second quarter of 2023.

Offsetting this decrease were increases to salaries and employee benefits expense of $5.6 million, or 20.2%, other expense of $3.2 million or 63.0%, data processing fees and supplies expense of $725,000, or 10.5%, and professional fees of $416,000, or 10.0%.

The increase to data processing fees resulted from continued investment in customer-facing and operational technology solutions.

Professional fees increased due to higher costs to implement technology solutions as well as higher legal and accounting costs.

Adjusted core noninterest expense was $59.5 million for the six months ended June 30, 2024, an increase of $3.5 million, or 6.3%, from $56.0 million recorded during the comparable period of 2023.

Noninterest expense decreased $9.4 million, or 22.0%, to $33.3 million for the second quarter of 2024, compared to $42.7 million during the second quarter of 2023.

Noninterest expense for the second quarter of 2023 included an $18.1 million wire fraud loss.

During the second quarter 2024 salaries and benefits expense increased $4.8 million, or 42.1%, other expense increased $3.5 million, or 138.0%, and data processing fees and supplies expense increased $338,000, or 9.7%, compared to the second quarter of 2023.

Salaries and employee benefits expense increased due to higher performance-based incentive compensation of $2.9 million, salaries and wages increases of $1.5 million and increased health insurance expense of $500,000.

During the second quarter of 2023 performance-based incentive accruals were reversed by $1.9 million due to the wire fraud loss.

Other expense increased primarily due to a $4.5 million litigation accrual.

Data processing fees increased due to investments in software, digital banking, and core data processing technologies.

Adjusted core noninterest expense was $28.8 million for the three months ended June 30, 2024, an increase of $2.3 million, or 8.6%, from $26.5 million for the three months ended June 30, 2023.

The Company's income tax expense increased $3.1 million, or 55.3%, to $8.8 million in the six months ended June 30, 2024, compared to $5.7 million for the same period in 2023.

The effective tax rate was 16.0% in the six months ended June 30, 2024, compared to 12.7% 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 $6.567 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.

Total assets were $6.569 billion as of June 30, 2024 versus $6.524 billion as of December 31, 2023, an increase of $44.8 million, or less than 1%.

Total loans, net of the allowance for credit losses, increased $127.1 million, or 2.6%, between December 31, 2023 and June 30, 2024.

Offsetting the increase to loans, net of the allowance for credit losses, was a decrease in available-for-sale securities of $58.7 million, or 5.6%.

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.

Total deposits increased $43.0 million, or less than 1%, between December 31, 2023 and June 30, 2024.

The increase in total deposits was driven by an increase in interest bearing deposits of $183.5 million, or 4.2%, and was offset by a decrease in noninterest bearing deposits of $140.5 million, or 10.4%.

Total equity increased $4.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $654.6 million at June 30, 2024.

Retained earnings increased $20.8 million, or 3.0%, as a result of net income of $46.0 million but was reduced by dividends declared and paid of $24.6 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.

Accumulated other comprehensive income (loss), decreased $15.3 million, or 9.8%, due primarily to a decline in available-for-sale securities fair market values during the six months ended June 30, 2024.

Uses of Funds

Total Cash and Cash Equivalents

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.

Total cash and cash equivalents decreased by $30.6 million, or 20.2%, to $121.2 million at June 30, 2024, from $151.8 million at December 31, 2023.

Cash and cash equivalents include short-term investments.

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%.

The fluctuation in cash and cash equivalents at June 30, 2024 was driven by a decrease in cash and due from banks of $9.6 million, or 13.6%, and a decrease in interest bearing short-term investment accounts of $21.1 million, or 25.9%.

Investment Portfolio

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

The amortized cost and the fair value of securities as of June 30, 2024 and December 31, 2023 were as follows:

June 30, 2024 December 31, 2023

(dollars in thousands) Amortized

9 unchanged sentences

Total Investment Portfolio $ 1,318,728 $ 1,107,054 $ 1,356,237 $ 1,170,943

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

At June 30, 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.

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 $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.

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

Investment securities represented 17.1% of total assets on June 30, 2024, compared to 18.1% of total assets on December 31, 2023.

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

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

Tax equivalent adjusted effective duration for the investment securities portfolio was 6.5 years at June 30, 2024 and 6.5 years at December 31, 2023.

Effective duration of the portfolio remains elevated as compared to 4.0 at December 31, 2019, prior to the deployment of excess liquidity to the investment portfolio and the rise in interest rates from the recent tightening cycle by the Federal Reserve.

Paydowns from prepayments and scheduled payments of $28.9 million were received in the first six months of 2024, and the amortization of premiums, net of the accretion of discounts, was $2.4 million.

Sales of available-for-sale investment securities totaled $7.1 million in the first six 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 June 30, 2024 and December 31, 2023.

The Company anticipates receiving principal and interst cash flows of approximately $52.4 million throughout the remainder of 2024 from its investment securities portfolio.

The fair value of the available-for-sale investment securities portfolio as of June 30, 2024 included net unrealized losses of $194.9 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 recent monetary tightening policy.

These declines were driven by the rising interest rate environment as a result of the Federal Reserve's recent cycle of monetary policy tightening during 2022 and 2023.

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 $501,000, or 43.3%, to $1.7 million at March 31, 2024, from $1.2 million at December 31, 2023.

Real estate mortgage loans held-for-sale decreased by $759,000, or 65.5%, to $399,000 at June 30, 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 $4.1 million in the first three months of 2024, compared to $672,000 in the first three months of 2023.

Proceeds from sales of residential mortgages totaled $9.1 million in the first six months of 2024, compared to $3.4 million in the first six 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 $328.8 million and $333.1 million, as of March 31, 2024 and December 31, 2023, respectively.

The unpaid principal balances of loans serviced for others were $322.9 million and $333.1 million, as of June 30, 2024 and December 31, 2023, respectively.

Loan Portfolio

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

(dollars in thousands) March 31,

The loan portfolio by portfolio segment as of June 30, 2024 and December 31, 2023 is summarized as follows:

(dollars in thousands) June 30,

2024 December 31,

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Loans, net $ 4,971,630 $ 4,844,562 $ 127,068

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.

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $135.2 million, or 2.7%, to $5.055 billion at June 30, 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,

The following table summarizes the Company’s non-performing assets as of June 30, 2024 and December 31, 2023:

(dollars in thousands) June 30,

2024 December 31,

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Nonperforming assets to total assets 0.88 % 0.25 %

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.

Total nonperforming assets increased by $41.5 million, or 257.8%, to $57.6 million during the six month period ended June 30, 2024.

The ratio of nonperforming assets to total assets increased 63 basis point from 0.25% at December 31, 2023 to 0.88% at June 30, 2024.

The increase in nonperforming assets was primarily driven by the downgrade of a single $43.3 million

commercial relationship, an industrial company in Northern Indiana, that was moved to nonperforming status during the second quarter of 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 $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.

Total individually analyzed loans increased by $62.4 million, or 387.1%, to $78.5 million at June 30, 2024 from $16.1 million at December 31, 2023.

The increase to individually analyzed loans was primarily related to the downgrade of two commercial relationships.

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 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.

At June 30, 2024, the allowance for credit losses was 1.60% of total loans, an increase of 14 basis points from 1.46% at December 31, 2023.

At June 30, 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.

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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 $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.

Loans totaling $101.2 million for this sector represented 2.0% of total loans at June 30, 2024.

As of June 30, 2024, based on management’s review of the loan portfolio, the Company had 85 credit relationships totaling $268.3 million on the classified loan list versus 68 credit relationships totaling $183.1 million as of December 31, 2023.

As of June 30, 2024, the Company had $182.6 million of assets classified as Special Mention, $85.7 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 increased to 5.31% as of June 30, 2024 from 3.72% as of December 31, 2023.

The increase to the classified loan listing was primarily a result of downgraded credits added to the watch list during the first six months of 2024, offset by upgrades of loans.

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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Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio based upon loan segment.

In accordance with applicable accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

that affect the collectability of the reported amounts.

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 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.

The allowance for credit losses increased $8.7 million, or 12.1%, from $72.0 million at December 31, 2023 to $80.7 million at June 30, 2024.

The increase was a result of provision expense of $10.0 million which was offset by net charge-offs of $1.3 million.

Provision expense recorded during the six months ended June 30, 2024 was attributable to an increase in the specific reserve allocation from the downgrade of a single $43.3 million commercial relationship, an industrial company in Northern Indiana, that was placed on nonperforming status during the second quarter of 2024.

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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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 and the Federal Reserve Bank Discount Window.

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 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,

As of June 30, 2024, the Company had access to $3.31 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 six months ended June 30, 2024 and 2023 are summarized in the following table:

Six months ended June 30,

(dollars in thousands) Balance Rate Balance Rate

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Total funding sources $ 5,851,639 3.06 % $ 5,733,535 2.24 %

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.

Average total deposits were $5.725 billion for the six months ended June 30, 2024, an increase of $205.7 million, or 3.7%, from the comparable period in 2023.

Average total borrowings were $126.4 million for the six months ended June 30, 2024, a decrease of $87.5 million, or 40.9%, from the comparable period in 2023.

Total average deposit costs increased 86 basis points from 2.14% for the six months ended June 30, 2023, to 3.00% for the six months ended June 30, 2024.

Total average borrowing costs increased 79 basis points from 4.83% for the six months ended June 30, 2023 to 5.62% for the six months ended June 30, 2024.

As a result, total funding costs increased by 82 basis points from 2.24% for the six months ended June 30, 2023, to 3.06% for the six months ended June 30, 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 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,

As of June 30, 2024, total deposits increased by $43.0 million, or less than 1%, from December 31, 2023.

Core deposits, which excludes brokered deposits, increased by $17.4 million, or less than 1%, to $5.602 billion as of June 30, 2024 from $5.585 billion as of December 31, 2023.

Total brokered deposits were $161.0 million at June 30, 2024, compared to $135.4 million at December 31, 2023, an increase of $25.6 million, or 18.9%.

The following table summarizes deposit composition at June 30, 2024 and December 31, 2023:

(dollars in thousands) June 30,

2024 Percentage of Total December 31,

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Total deposits $ 5,763,537 100.0 % $ 5,720,525 100.0 % $ 43,012

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

Core deposits, which excludes brokered deposits, expanded $17.4 million, or less than 1%, during the first six months of 2024.

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

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.

On June 30, 2024, commercial deposits represented 37.3% of total deposits versus 38.9% at December 31, 2023.

Retail deposits represented 29.9% at June 30, 2024 versus 31.4% at December 31, 2023.

Public Funds deposits represented 30.0% at June 30, 2024 versus 27.3% at December 31, 2023.

Brokered deposits represented 2.8% of total deposits at June 30, 2024 versus 2.4% at December 31, 2023.

Commercial deposits contracted $77.0 million, or 3.5%, from $2.23 billion at December 31, 2023 to $2.15 billion at June 30, 2024;

retail deposits contracted $70.2 million, or 3.9%, from $1.79 billion at December 31, 2023 to $1.72 billion at June 30, 2024;

and public funds deposits expanded $164.6 million, or 10.5%, from $1.56 billion at December 31, 2023 to $1.73 billion at June 30, 2024.

Deposits not covered by FDIC deposit insurance were 58% as of June 30, 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 29% of total deposits as of June 30, 2024, versus 31% as of December 31, 2023.

As of June 30, 2024 and December 31, 2023, 98% of deposit accounts had deposit balances less than $250,000.

As of June 30, 2024, total stockholders’ equity was $654.6 million, an increase of $4.8 million, or less than 1%, from $649.8 million at December 31, 2023.

The increase to total stockholders' equity was driven by net income of $46.0 million and was reduced by dividends declared and paid of $24.6 million and a decrease of $15.3 million in accumulated other comprehensive income (loss).

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

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banking organizations.

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.

As of June 30, 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 June 30, 2024 and December 31, 2023, are presented in the table below.

Capital ratios for June 30, 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 March 31, 2024:

As of June 30, 2024:

Total Capital (to Risk Weighted Assets)

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• the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates;

• 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;

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

• 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 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;

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

• 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;

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

• 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 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 impact of labor shortages, and changes in trade policy and tariffs;

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

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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