LAKELAND FINANCIAL CORP 10-Q

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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%. 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 37 Table of Contents 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 The Company’s accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for credit losses. See “Note 4 – Allowance for Credit Losses and Credit Quality” for more information on this critical accounting policy. RESULTS OF OPERATIONS Overview 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 Income Statement Summary: Net interest income (a) $ 48,296 48,524 $ 95,712 $ 100,043 Provision for credit losses 8,480 800 10,000 5,150 Noninterest income (b) 20,439 11,501 33,051 21,815 Noninterest expense (c) 33,333 42,734 64,038 72,168 Other Data: Efficiency ratio (1) 48.49 % 71.19 % 49.73 % 59.22 % Diluted EPS $ 0.87 $ 0.57 $ 1.78 $ 1.51 Average Equity/Average Assets 9.62 % 9.39 % 9.73 % 9.26 % Tangible capital ratio (2) 9.91 9.04 9.91 9.04 Adjusted tangible capital ratio (3) 12.18 11.45 12.18 11.45 Net charge-offs to average loans 0.08 0.00 0.05 0.24 Net interest margin 3.17 3.28 3.16 3.41 Noninterest income to total revenue 29.74 19.16 25.67 17.90 Pretax pre-provision earnings (4) $ 35,402 $ 17,291 $ 64,725 $ 49,690 (1) Noninterest expense (c) / (Net interest income (a) + Noninterest income (b)) = Efficiency Ratio (2) Non-GAAP financial measure. 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 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 and demonstrates long-term trends capital strength. See reconciliation on the following pages. (4) Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. 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 following pages. 38 Table of Contents The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the Company's financial performance. 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 Total Equity $ 654,590 $ 591,995 $ 654,590 $ 591,995 Less: Goodwill (4,970) (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 1,167 1,167 Tangible Common Equity (A) 650,787 588,192 650,787 588,192 Market Value Adjustment in AOCI 169,747 176,898 169,747 176,898 Adjusted Tangible Common Equity (C) 820,534 765,090 820,534 765,090 Total Assets $ 6,568,807 $ 6,509,546 $ 6,568,807 $ 6,509,546 Less: Goodwill (4,970) (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 1,167 1,167 Tangible Assets (B) 6,565,004 6,505,743 6,565,004 6,505,743 Market Value Adjustment in AOCI 169,747 176,898 169,747 176,898 Adjusted Tangible Assets (D) 6,734,751 6,682,641 6,734,751 6,682,641 Ending Common Shares Issued (E) 25,679,066 25,607,663 25,679,066 25,607,663 Tangible Book Value per Common Share (A/E) $ 25.34 $ 22.97 $ 25.34 $ 22.97 Tangible Capital Ratio (A/B) 9.91 % 9.04 % 9.91 % 9.04 % Adjusted Tangible Capital Ratio (C/D) 12.18 % 11.45 % 12.18 % 11.45 % Net Interest Income $ 48,296 $ 48,524 $ 95,712 $ 100,043 Plus: Noninterest Income 20,439 11,501 33,051 21,815 Minus: Noninterest Expense (33,333) (42,734) (64,038) (72,168) Pretax Pre-Provision Earnings $ 35,402 $ 17,291 $ 64,725 $ 49,690 39 Table of Contents 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. 30, 2023 Noninterest Income $ 20,439 $ 11,501 $ 33,051 $ 21,815 Less: Net Gain on Visa Shares (9,011) 0 (9,011) 0 Less: 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 Less: Legal Accrual (4,537) 0 (4,537) 0 Less: Wire Fraud Loss 0 (18,058) 0 (18,058) Plus: Salaries and Employee Benefits (1) 0 1,850 0 1,850 Adjusted Core Noninterest Expense $ 28,796 $ 26,526 $ 59,501 $ 55,960 Earnings Before Income Taxes $ 26,922 $ 16,491 $ 54,725 $ 44,540 Adjusted Core Impact: Noninterest Income (9,011) 0 (10,011) 0 Noninterest Expense 4,537 16,208 4,537 16,208 Total Adjusted Core Impact (4,474) 16,208 (5,474) 16,208 Adjusted Earnings Before Income Taxes 22,448 32,699 49,251 60,748 Tax Effect (3,261) (5,873) (7,414) (9,644) Core Operational Profitability (2) $ 19,187 $ 26,826 $ 41,837 $ 51,104 Diluted Earnings Per Common Share $ 0.87 $ 0.57 $ 1.78 $ 1.51 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) 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 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%. 40 Table of Contents 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: Six Months Ended June 30, 2024 2023 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/ Rate Average Balance Interest Yield (1)/ Rate Earning Assets Loans: Taxable (2)(3) $ 4,955,106 $ 166,268 6.75 % $ 4,704,075 $ 144,589 6.20 % Tax exempt (1) 47,829 1,901 7.99 57,709 2,322 8.11 Investments: Securities (1) 1,138,639 16,117 2.85 1,230,421 17,476 2.86 Short-term investments 2,773 68 4.93 2,275 48 4.25 Interest bearing deposits 111,758 2,880 5.18 87,529 1,951 4.49 Total earning assets $ 6,256,105 $ 187,234 6.02 % $ 6,082,009 $ 166,386 5.52 % Less: Allowance for credit losses (73,299) (72,366) Nonearning Assets Cash and due from banks 66,551 72,797 Premises and equipment 58,292 58,657 Other nonearning assets 291,062 281,465 Total assets $ 6,598,711 $ 6,422,562 Interest Bearing Liabilities Savings deposits $ 292,378 $ 97 0.07 % $ 376,281 $ 137 0.07 % Interest bearing checking accounts 3,161,230 63,688 4.05 2,844,181 48,627 3.45 Time deposits: In denominations under $100,000 220,643 3,788 3.45 189,734 1,789 1.90 In denominations over $100,000 798,442 17,954 4.52 553,472 7,976 2.91 Miscellaneous short-term borrowings 126,443 3,531 5.62 213,990 5,130 4.83 Total interest bearing liabilities $ 4,599,136 $ 89,058 3.89 % $ 4,177,658 $ 63,659 3.07 % Noninterest Bearing Liabilities Demand deposits 1,252,503 1,555,877 Other liabilities 105,069 94,175 Stockholders' Equity 642,003 594,852 Total liabilities and stockholders' equity $ 6,598,711 $ 6,422,562 Interest Margin Recap Interest income/average earning assets 187,234 6.02 % 166,386 5.52 % Interest expense/average earning assets 89,058 2.86 63,659 2.11 Net interest income and margin $ 98,176 3.16 % $ 102,727 3.41 % (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 $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. 41 Table of Contents Three Months Ended June 30, 2024 2023 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/ Rate Average Balance Interest Yield (1)/ Rate Earning Assets Loans: 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 Investments: 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 % Less: 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. 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 $1.2 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 $1.6 million, or 31.2%. 42 Table of Contents 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 $4.599 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 3.16% 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 43 Table of Contents 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 $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. Management’s overall view on current credit quality was also a factor in the determination of the provision for credit losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans. 44 Table of Contents Noninterest Income Noninterest income categories for the three and six months ended June 30, 2024 and 2023 are shown in the following tables: Six Months Ended June 30, (dollars in thousands) 2024 2023 Dollar Change Percent Change Wealth advisory fees $ 5,052 $ 4,471 $ 581 13.0 % Investment brokerage fees 1,000 962 38 4.0 Service charges on deposit accounts 5,497 5,356 141 2.6 Loan and service fees 5,900 5,848 52 0.9 Merchant and interchange fee income 1,755 1,806 (51) (2.8) 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 Total noninterest income $ 33,051 $ 21,815 $ 11,236 51.5 % Noninterest income to total revenue 25.67 % 17.90 % Three Months Ended June 30, (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. 45 Table of Contents 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 and six months ended June 30, 2024 and 2023 are shown in the following tables: Six Months Ended June 30, (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 June 30, (dollars in thousands) 2024 2023 Dollar Change Percent Change Salaries and employee benefits $ 16,158 $ 11,374 $ 4,784 42.1 % Net occupancy expense 1,698 1,681 17 1.0 Equipment costs 1,343 1,426 (83) (5.8) Data processing fees and supplies 3,812 3,474 338 9.7 Corporate and business development 1,265 1,298 (33) (2.5) FDIC insurance and other regulatory fees 816 803 13 1.6 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 Total noninterest expense $ 33,333 $ 42,734 $ (9,401) (22.0) % Efficiency ratio 48.49 % 71.19 % 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. 46 Table of Contents 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 Overview 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 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 $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 $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 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%. 47 Table of Contents Investment Portfolio 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 Cost Fair Value Amortized Cost Fair Value Available-for-Sale U.S government sponsored agencies $ 142,183 $ 113,697 $ 146,692 $ 119,479 Mortgage-backed securities: residential 498,259 419,230 522,275 447,842 State and municipal securities 547,540 460,130 557,352 484,407 Total available-for-sale $ 1,187,982 $ 993,057 $ 1,226,319 $ 1,051,728 Held-to-Maturity State and municipal securities $ 130,746 $ 113,997 $ 129,918 $ 119,215 Total Investment Portfolio $ 1,318,728 $ 1,107,054 $ 1,356,237 $ 1,170,943 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. Management is aware that, as interest rates rise, any unrealized loss in the available-for-sale investment securities portfolio will increase, and as interest rates fall the unrealized gain in the investment portfolio will rise. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. 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 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 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. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 48 Table of Contents Real Estate Mortgage Loans Held-for-Sale 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 $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 $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 June 30, 2024 and December 31, 2023 is summarized as follows: (dollars in thousands) June 30, 2024 December 31, 2023 Current Period Change Commercial and industrial loans $ 1,526,277 30.2 % $ 1,420,764 28.9 % $ 105,513 Commercial real estate and multi-family residential loans 2,503,380 49.5 2,437,534 49.5 65,846 Agri-business and agricultural loans 361,064 7.2 388,764 7.9 (27,700) Other commercial loans 96,703 1.9 120,726 2.5 (24,023) Consumer 1-4 family mortgage loans 469,907 9.3 456,187 9.3 13,720 Other consumer loans 97,895 1.9 96,022 1.9 1,873 Subtotal, gross loans 5,055,226 100.0 % 4,919,997 100.0 % 135,229 Less: Allowance for credit losses (80,711) (71,972) (8,739) Net deferred loan fees (2,885) (3,463) 578 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 $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 June 30, 2024 and December 31, 2023: (dollars in thousands) June 30, 2024 December 31, 2023 Nonaccrual loans $ 57,124 $ 15,687 Loans past due over 90 days and still accruing 26 27 Total nonperforming loans 57,150 15,714 Other real estate owned 384 384 Repossessions 90 8 Total nonperforming assets $ 57,624 $ 16,106 Individually analyzed loans $ 78,533 $ 16,124 Nonperforming loans to total loans 1.13 % 0.32 % Nonperforming assets to total assets 0.88 % 0.25 % 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 49 Table of Contents 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. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. 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 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. Subsequent recoveries, if any, are credited to the allowance. 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. Management also considers trends in adversely classified loans based upon a monthly review of those credits. General allowance is determined after considering the following factors: application of loss percentages using a probability of default/loss given default approach subject to a floor, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention applies to loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for credit losses for any assets where management has identified conditions or circumstances that indicate an asset is nonperforming. 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 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. The process of identifying credit losses is a subjective process. The Company has a relatively high percentage of commercial and commercial real estate loans, which are extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area. The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $101.2 million for this sector represented 2.0% of total loans at June 30, 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 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. The Company has annual discussions regarding this methodology with regulatory authorities. 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 50 Table of Contents 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 $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. Sources of Funds 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 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 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, 2024 2023 (dollars in thousands) Balance Rate Balance Rate Noninterest bearing demand deposits $ 1,252,503 0.00 % $ 1,555,877 0.00 % Savings and transaction accounts: Savings deposits 292,378 0.07 376,281 0.07 Interest bearing demand deposits 3,161,230 4.05 2,844,181 3.45 Time deposits: Deposits of $100,000 or more 798,442 4.52 553,472 2.91 Other time deposits 220,643 3.45 189,734 1.90 Total deposits $ 5,725,196 3.00 % $ 5,519,545 2.14 % FHLB advances and other borrowings 126,443 5.62 213,990 4.83 Total funding sources $ 5,851,639 3.06 % $ 5,733,535 2.24 % 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 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%. 51 Table of Contents 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, 2023 Percentage of Total Current Period Change Retail $ 1,724,777 29.9 % $ 1,794,958 31.4 % $ (70,181) Commercial 2,150,127 37.3 2,227,147 38.9 (77,020) Public funds 1,727,593 30.0 1,563,015 27.3 164,578 Core deposits $ 5,602,497 97.2 % $ 5,585,120 97.6 % $ 17,377 Brokered deposits 161,040 2.8 135,405 2.4 25,635 Total deposits $ 5,763,537 100.0 % $ 5,720,525 100.0 % $ 43,012 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 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. Capital 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. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of June 30, 2024, the Company's capital levels remained characterized as “well-capitalized”. 52 Table of Contents 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 June 30, 2024: Total Capital (to Risk Weighted Assets) Consolidated $ 891,912 15.53 % $ 459,531 8.00 % $ 603,135 N/A N/A N/A Bank $ 887,497 15.46 % $ 459,279 8.00 % $ 602,803 10.50 % $ 574,099 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 819,990 14.28 % $ 344,649 6.00 % $ 488,252 N/A N/A N/A Bank $ 815,536 14.21 % $ 344,459 6.00 % $ 487,984 8.50 % $ 459,279 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 819,990 14.28 % $ 258,486 4.50 % $ 402,090 N/A N/A N/A Bank $ 815,536 14.21 % $ 258,344 4.50 % $ 401,869 7.00 % $ 373,164 6.50 % Tier I Capital (to Average Assets) Consolidated $ 819,990 11.98 % $ 273,877 4.00 % $ 273,877 N/A N/A N/A Bank $ 815,536 11.92 % $ 273,686 4.00 % $ 273,686 4.00 % $ 342,108 5.00 % As of December 31, 2023: Total Capital (to Risk Weighted Assets) Consolidated $ 870,390 15.47 % $ 450,211 8.00 % $ 590,901 N/A N/A N/A Bank $ 852,405 15.16 % $ 449,894 8.00 % $ 590,486 10.50 % $ 562,367 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 799,929 14.21 % $ 337,658 6.00 % $ 478,349 N/A N/A N/A Bank $ 781,999 13.91 % $ 337,420 6.00 % $ 478,012 8.50 % $ 449,894 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 799,929 14.21 % $ 253,243 4.50 % $ 393,934 N/A N/A N/A Bank $ 781,999 13.91 % $ 253,065 4.50 % $ 393,657 7.00 % $ 365,539 6.50 % Tier I Capital (to Average Assets) Consolidated $ 799,929 11.82 % $ 270,636 4.00 % $ 270,636 N/A N/A N/A Bank $ 781,999 11.58 % $ 270,041 4.00 % $ 270,041 4.00 % $ 337,551 5.00 % 53 Table of Contents FORWARD-LOOKING STATEMENTS This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation: • 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; • 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; • changes in borrowers’ credit risks and payment behaviors; • 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 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 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 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 impact of labor shortages, and changes in trade policy and tariffs; • 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; • changes in technology or products that may be more difficult or costly, or less effective than anticipated; • the risks related to mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; • changes in accounting policies, rules and practices; and 54 Table of Contents • the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2023, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.