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Item 2. Management’s Discussion and Analysis

2024-10-30 compared with 2024-08-07 · 199 added, 216 removed, 403 unchanged (51% of the section changed)

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

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 .

Net income in the first nine months of 2024 was $69.3 million, which increased $5.1 million , or 8.0%, from $64.1 million for the comparable period of 2023 .

Diluted income per common share was $2.69 in the first nine months of 2024 , an increase of 8.0% from $2.49 in the comparable period of 2023 .

The increase in net income for 2024 was primarily due to an increase to noninterest income of $12.3 million, or 37.7%, and a decrease in noninterest expense of $6.8 million, or 6.7%.

Offsetting these effects was an increase in the provision for credit losses of $7.5 million, or 135.3%, and a decrease to net interest income of $3.5 million, or 2.3%.

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.

Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $95.5 million in the first nine months of 2024 , an increase of $15.7 million , or 19.7%, compared to $79.8 million for the comparable period of 2023 .

Annualized return on average total equity was 14.21% in the first nine months of 2024 versus 14.44% in the comparable period of 2023 .

Annualized return on average total assets was 1.40% in the first nine months of 2024 versus 1.33% for the comparable period of 2023 .

The Company's average equity to average assets ratio was 9.84% in the first nine months of 2024 versus 9.21% in the comparable period of 2023 .

Net income in the third quarter of 2024 was $23.3 million, down $1.9 million, or 7.6%, from $25.3 million for the comparable period of 2023.

Diluted earnings per common share was $0.91 in the third quarter of 2024, down 7.1% from $0.98 in the comparable period of 2023.

The decrease was driven primarily by an increase in provision for credit losses of $2.7 million and an increase in noninterest expense of $1.3 million, or 4.5%.

Offsetting these effects was an increase in noninterest income of $1.1 million, or 10.0%, and an increase in net interest income of $880,000, or 1.8%.

Pretax pre-provision earnings in the third quarter of 2024 were $30.8 million, an increase of $666,000, or 2.2%, compared to $30.1 million for the comparable period of 2023.

Annualized return on average total equity was 13.85% in the third quarter of 2024 versus 16.91% in the comparable period of 2023.

Annualized return on average total assets was 1.39% in the third quarter of 2024 versus 1.54% in the comparable period of 2023.

The average equity to average assets ratio was 10.07% in the third quarter of 2024 versus 9.12% in the comparable period of 2023.

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 10.47% at September 30, 2024, compared to 8.62% at September 30, 2023 and 9.91% at December 31, 2023.

Unrealized losses from available-for-sale investment securities were $154.5 million at September 30, 2024, compared to $266.4 million at September 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 12.29% at September 30, 2024, compared to 11.74% at September 30, 2023 and 11.99% at December 31, 2023.

Total assets were $6.645 billion as of September 30, 2024 versus $6.524 billion as of December 31, 2023, an increase of $121.3 million, or 1.9% .

Total loans, net of the allowance for credit losses, increased $153.8 million, or 3.2%, which was the primary driver of balance sheet expansion between December 31, 2023 and September 30, 2024.

Offsetting the increase to loans, net of the allowance of credit losses, was a decrease in available-for-sale securities of $35.1 million, or 3.3%.

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.

Total deposits increased by $116.8 million, or 2.0%, between December 31, 2023 and September 30, 2024.

Total equity increased $49.4 million, or 7.6%, from $649.8 million at December 31, 2023 to $699.2 million at September 30, 2024.

Retained earnings increased $31.8 million, or 4.6%, primarily as a result of net income of $69.3 million and reduced by dividends declared and paid of $37.0 million.

AOCI increased $17.1 million, or 11.0%, from improvement in the fair market values of available-for-sale investment securities during the nine months ended September 30, 2024.

CRITICAL ACCOUNTING POLICIES

2 unchanged sentences

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.

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.

1 unchanged sentence

RESULTS OF OPERATIONS

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,

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

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

(dollars in thousands) 2024 2023 2024 2023

37 unchanged sentences

As of and For The As of and For The

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

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

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

23 unchanged sentences

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.

Three Months Ended Nine Months Ended

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

30, 2024 Sep.

30, 2023 Sep.

30, 2024 Sep.

Noninterest Income $ 11,917 $ 10,835 $ 44,968 $ 32,650

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

Net (Gain) Loss on Visa Shares 15 0 (8,996) 0

Insurance Recoveries 0 0 (1,000) 0

17 unchanged sentences

Adjusted Core Efficiency Ratio 49.66 % 49.13 % 49.95 % 46.97 %

(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%.

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

(2) Core operational profitability was $11,000 higher than reported net income for the three months ended September 30, 2024.

Core operational profitability was $4.1 million lower than reported net income for the nine months ended September 30, 2024 and 2023, respectively.

Net income was $69.3 million in the first nine months of 2024, which increased $5.1 million , or 8.0%, from $64.1 million for the comparable period of 2023 .

Diluted income per common share was $2.69 in the first nine months of 2024 , an increase of 8.0% from $2.49 in the comparable period of 2023 .

The increase in net income for the first nine months of 2024 was primarily due to an increase to noninterest income of $12.3 million, or 37.7%, and a decrease in noninterest expense of $6.8 million, or 6.7%.

Offsetting these effects was a decrease to net interest income of $3.5 million, or 2.3%, and an increase in the provision for credit losses of $7.5 million, or 135.3%.

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%.

Net income during the third quarter of 2024 was $23.3 million, down 7.6% from $25.3 million for the comparable period of 2023.

Diluted earnings per common share was $0.91 in the third quarter of 2024, down 7.1% from $0.98 in the comparable period of 2023.

The decrease was driven primarily by an increase in the provision for credit losses of $2.7 million and an increase in noninterest expense of $1.3 million, or 4.5%, and was offset by an increase in noninterest income of $1.1 million, or 10.0% and an increase in net interest income of $880,000, or 1.8%.

N et Interest Income

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

Six Months Ended June 30,

Nine Months Ended September 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 $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.

Taxable equivalent basis adjustments were $3.6 million and $4.0 million for the nine-month periods ended September 30, 2024 and September 30, 2023, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the nine months ended September 30, 2024 and 2023 , are included as taxable loan interest income.

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

Three Months Ended June 30,

Three Months Ended September 30,

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

32 unchanged sentences

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 .

Taxable equivalent basis adjustments were $1.1 million and $1.3 million in the three-month periods ended September 30, 2024 and September 30, 2023, respectively.

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

Net interest income, on a fully tax equivalent basis, decreased $3.9 million, or 2.5%, to $148.6 million for the nine months ended September 30, 2024, compared to $152.4 million for the first nine 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 $35.4 million , or 37.1% , from $95.6 million to $131.1 million .

2 unchanged sentences

Borrowings expense declined $4.5 million, or 54.9%.

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 .

Total average earning assets were $6.281 billion for the nine months ended September 30, 2024, an increase of $177.1 million, or 2.9%, compared to $6.104 billion for the nine months ended September 30, 2023 .

Average loans outstanding drove the increase to total average earning assets, increasing $232.1 million, or 4.8%, to $5.024 billion from $4.791 billion for the nine months ended September 30, 2024 and 2023, respectively .

Offsetting this increase was a decrease to average investment securities of $75.2 million, or 6.2%, to $1.135 billion from $1.211 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.

Total average interest bearing liabilities were $4.616 billion for the nine months ended September 30, 2024, an increase of $369.5 million, or 8.7%, from $4.247 billion for the nine months ended September 30, 2023.

This increase was driven by increased interest bearing deposits of $499.4 million, or 12.4%, from $4.028 billion for the nine months ended September 30, 2023 to $4.528 billion for the nine months ended September 30, 2024.

Offsetting the increase to average interest bearing deposits was a decrease in total average borrowings of $130.0 million, or 59.5%, to $88.6 million from $218.6 million for the nine months ended September 30, 2024 and 2023 , respectively.

Noninterest bearing demand deposits decreased $259.6 million, or 17.2%, to $1.250 billion from $1.509 billion between the two periods.

The tax equivalent net interest margin was 3.16% for the nine months ended September 30, 2024, compared to 3.33% during the first nine months of 2023, representing a 17 basis point 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 2.87% for the nine months ended September 30, 2024 , up from 2.28% for the comparable period of 2023, for an increase of 59 basis points.

This increase was attributable to an increase in the rate for total interest bearing liabilities of 63 basis points from 3.27% to 3.90% 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 offset by reduced borrowing expense due to lower average borrowings.

The increase in interest expense for interest bearing deposits was a result of a combination of an increase in average interest bearing deposits of $499.4 million , or 12.4% , from $4.028 billion to $4.528 billion, and an increase in the average rate for interest bearing deposits of 70 basis points, from 3.17% to 3.87% for the nine months ended September 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 market competition and shifts from noninterest bearing deposits into interest bearing deposits.

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 6.03% for the nine months ended September 30, 2024 , up from 5.61% 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 $232.1 million , or 4.8% , to $5.024 billion from $4.791 billion , and an increase in average yield of 43 basis points from 6.34% to 6.77% 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.

The Company expects that easing of monetary policy by the Federal Reserve Bank, which commenced in late September 2024, will exert downward pressure on loan yields as variable rate commercial loans reprice lower;

however, deposits repricing lower is expected to offset the decline in loan yields.

Net interest income, on a fully tax equivalent basis, increased by $671,000, or 1.3% , for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

The increase in net interest income on a fully tax equivalent basis was driven by loan interest income, which increased by $6.3 million, or 7.9%, from $80.2 million to $86.5 million, income from short-term investments and interest bearing deposits, which increased $168,000, or 10.5%, and reduced borrowing expense, which decreased by $2.9 million, or 93.9%.

Offsetting these positive factors was an increase in deposit interest expense of $8.4 million , or 22.8% , from $37.1 million to $45.6 million and a decrease to securities interest income of $298,000 , or 3.6% .

Total average earning assets were $6.329 billion for the third quarter of 2024 , an increase of $183.4 million, or 3.0%, compared to $6.146 billion for the third quarter of 2023 .

The increase in average earning assets was driven by an increase in average loans of $214.6 million, or 4.4%, from $4.850 billion for the third quarter of 2023 to $5.064 billion for the third quarter of 2024 .

Offsetting the increase in average loans was a decrease in average investment securities, which decreased $42.7 million, or 3.6% , from $1.171 billion for the third quarter of 2023 to $1.129 billion for the third quarter of 2024.

Total average interest bearing liabilities were $4.650 billion for the third quarter of 2024 , an increase of $267.4 million, or 6.1%, from $4.382 billion for the third quarter of 2023 .

This increase was driven by growth in interest bearing deposits of $481.2 million, or 11.6%, from $4.155 billion for the third quarter of 2023 to $4.636 billion for the third quarter of 2024.

Noninterest bearing demand deposits decreased $173.5 million, or 12.2%, from $1.418 billion for the third quarter of 2023 to $1.244 billion for the third quarter of 2024 and average borrowings decreased $213.8 million, or 94.0%, from $227.6 million for the third quarter of 2023 to $13.8 million for the third quarter of 2024.

The tax equivalent net interest margin contracted by 5 basis points, or 1.6%, to 3.16% for the third quarter of 2024 , compared to 3.21% for the third 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 2.88% for the three months ended September 30, 2024 , up from 2.60% for the comparable period of 2023 , for an increase of 28 basis points.

This increase was attributable to an increase in the rate for total interest bearing liabilities of 27 basis points, or 7.5% , from 3.64% to 3.91% between the respective

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.

The increase in rate for interest bearing deposits was a result of an increase in average interest bearing deposits of $481.2 million, or 11.6%, from $4.155 billion to $4.636 billion, and an increase in the average rate for interest bearing deposits of 37 basis points, from 3.54% to 3.91% for the three months ended September 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 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 23 basis points, or 4.0%, to 6.04% for the three months ended September 30, 2024, up from 5.81% 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 $214.6 million, or 4.4%, to $5.064 billion from $4.850 billion, and an increase in average yield of 23 basis points from 6.56% 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.

The Company expects that easing of monetary policy by the Federal Reserve Bank will exert downward pressure on loan yields as variable rate commercial loans reprice lower, however the impact of the policy easing on loan yields will partly depend on the extent and timing of future rate cuts.

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.

The Company recorded provision for credit losses expense of $13.1 million for the nine months ended September 30, 2024, compared to provision expense of $5.6 million during the comparable period of 2023, an increase of $7.5 million, or 135.3%.

Net charge-offs were $1.4 million during the nine month period ended September 30, 2024, compared to $6.1 million during the comparable period of 2023, a decrease of $4.6 million, or 76.8%.

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 that occurred during the first quarter of 2023.

The Company recorded provision expense of $3.1 million during the third quarter of 2024, compared to $400,000 during the third 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.

Net charge-offs were $143,000 during the third quarter of 2024, compared to $353,000 during the third 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 and six months ended June 30, 2024 and 2023 are shown in the following tables:

Six Months Ended

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

Nine Months Ended

September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

8 unchanged sentences

Net securities gains (losses) (46) (16) (30) 187.5

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

Net gain (loss) on Visa shares 8,996 0 8,996 100.0

Other income 3,908 1,907 2,001 104.9

2 unchanged sentences

Three Months Ended

September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

4 unchanged sentences

Merchant card fee income 898 938 (40) (4.3)

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

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

Bank owned life insurance income 1,068 1,009 59 5.8

Mortgage banking income (loss) (7) (50) 43 (86.0)

Net securities gains (losses) 0 (35) 35 100.0

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

Net gain (loss) on Visa shares (15) 0 (15) (100.0)

Other income 1,027 598 429 71.7

1 unchanged sentence

Noninterest income to total revenue 19.48 % 18.29 %

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.

Noninterest income increased by $12.3 million, or 37.7%, to $45.0 million for the nine months ended September 30, 2024, compared to $32.7 million for the prior year nine-month period.

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.

Additionally, other income increased $2.0 million, or 104.9%, wealth advisory fees increased $1.0 million, or 14.8%, bank owned life insurance income increased $601,000, or 25.1%, and mortgage banking income increased $252,000.

Other income increased primarily from improved performance from limited partnership investment income and the receipt of a $1.0 million insurance recovery related to the 2023 wire fraud loss.

Improved market performance of the Company's variable bank owned life insurance policies, which are tied to the performance of the equity markets, drove the increase to bank owned life insurance income.

Mortgage banking income increased from pipeline expansion and a related positive impact to mortgage rate lock income.

Offsetting these increases was a decrease to interest rate swap fee income of $794,000, or 100.0%, due to no new swap fee activity during the period.

Adjusted core noninterest income, a non-GAAP financial measure that excludes the effects of certain non-routine events, was $35.0 million for the nine months ended September 30, 2024, an increase of $2.3 million, or 7.1%, compared to $32.7 million for the nine months ended September 30, 2023.

The Company’s noninterest income increased $1.1 million, or 10.0%, to $11.9 million for the third quarter of 2024, compared to $10.8 million for the third quarter of 2023.

Wealth advisory fees increased $420,000, or 18.3%, driven by growth in customers and favorable market performance.

Other income increased $429,000, or 71.7%, primarily from an improvement to income from the Company's limited partnership investments.

Adjusted core noninterest income was $11.9 million for the third quarter of 2024, an increase of $1.1 million, or 10.1%, compared to $10.8 million for the third 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

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

Nine Months Ended

September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

11 unchanged sentences

Three Months Ended

September 30,

(dollars in thousands) 2024 2023 Dollar Change Percent Change

6 unchanged sentences

Professional fees 2,089 2,114 (25) (1.2)

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

Other expense 2,552 2,609 (57) (2.2)

1 unchanged sentence

Efficiency ratio 49.67 % 49.13 %

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.

Noninterest expense decreased by $6.8 million, or 6.7%, for the nine months ended September 30, 2024, to $94.4 million compared to $101.3 million for the nine months ended September 30, 2023.

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

Offsetting this decrease were increases to salaries and employee benefits expense of $6.1 million, or 13.9%, other expense of $3.2 million or 41.0%, data processing fees of $1.1 million, or 10.8%, and professional fees of $391,000, or 6.2%.

The increase to salaries and benefits expense resulted primarily from increases to salaries and wages of $2.3 million, performance-based incentive compensation of $2.2 million, health insurance expense of $695,000 and variable deferred compensation related to the Company's variable bank owned life insurance of $536,000.

Other expense increased due to the recognition of a $4.5 million legal accrual during the second quarter of 2024.

The increase for 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.

Adjusted core noninterest expense, a non-GAAP financial measure that excludes the impact of certain non-routine events, was $89.9 million for the nine months ended September 30, 2024, an increase of $4.8 million, or 5.7%, from $85.1 million recorded during the comparable period of 2023.

Noninterest expense increased $1.3 million, or 4.5%, to $30.4 million for the third quarter of 2024, compared to $29.1 million during the third quarter of 2023.

Driving the third quarter 2024 increase to noninterest expense were increases to salaries and benefits expense of $499,000, or 3.1%, data processing fees and supplies expense of $389,000, or 11.5%, and corporate and business development expense of $168,000, or 14.0%, as compared to the third quarter of 2023.

Adjusted core noninterest expense was $30.4 million for the third quarter of 2024, an increase of $1.3 million, or 4.5%, compared to $29.1 million for the third quarter of 2023.

The Company's income tax expense increased $3.0 million, or 30.1%, to $13.2 million in the nine months ended September 30, 2024, compared to $10.1 million for the same period in 2023.

The effective tax rate was 16.0% in the nine months ended September 30, 2024, compared to 13.6% 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 $6.569 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.

Total assets were $6.645 billion as of September 30, 2024 versus $6.524 billion as of December 31, 2023, an increase of $121.3 million, or 1.9% .

Total loans, net of the allowance for credit losses, increased $153.8 million, or 3.2%, between December 31, 2023 and September 30, 2024.

Offsetting the increase to loans, net of the allowance for credit losses, was a decrease in available-for-sale securities of $35.1 million, or 3.3%.

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

Total deposits increased $116.8 million, or 2.0%, between December 31, 2023 and September 30, 2024.

The increase in total deposits was driven by an increase in interest bearing deposits of $185.7 million, or 4.3%, and was offset by a decrease in noninterest bearing deposits of $69.0 million, or 5.1%.

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.

Total equity increased $49.4 million, or 7.6%, from $649.8 million at December 31, 2023 to $699.2 million at September 30, 2024.

Retained earnings increased $31.8 million, or 4.6%, as a result of net income of $69.3 million but was reduced by dividends declared and paid of $37.0 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.

Accumulated other comprehensive income (loss), increased $17.1 million, or 11.0%, due primarily to an improvement in available-for-sale securities fair market values during the nine months ended September 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.

Total cash and cash equivalents increased by $8.4 million, or 5.5%, to $160.2 million at September 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%.

The fluctuation in cash and cash equivalents at September 30, 2024 was driven by an increase in cash and due from banks of $16.3 million, or 23.2%, and a decrease in interest bearing short-term investment accounts of $8.0 million, or 9.8%.

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

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

September 30, 2024 December 31, 2023

(dollars in thousands) Amortized

9 unchanged sentences

Total Investment Portfolio $ 1,302,320 $ 1,135,510 $ 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.

At September 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.

Management is aware that the directional change in the fair value of the available-for-sale investment securities portfolio is inversely related to the directional movement of the interest rate environment, with the resulting impact being reflected in the unrealized gain (loss) of the available-for-sale investment securities portfolio.

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.

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

Investment securities represented 17.3% of total assets on September 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.

Tax equivalent adjusted effective duration for the investment securities portfolio was 6.3 years at September 30, 2024 and 6.5 years at December 31, 2023.

Tax equivalent adjusted 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 $44.6 million were received in the first nine months of 2024, and the amortization of premiums, net of the accretion of discounts, was $3.6 million.

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

The Company anticipates receiving principal and interest cash flows of approximately $26.4 million throughout the remainder of 2024 from its investment securities portfolio.

The fair value of the available-for-sale investment securities portfolio as of September 30, 2024 included net unrealized losses of $154.5 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 improvement in market value seen since December 31, 2023 was driven partly by the commencement of monetary policy easing by the Federal Reserve during the third quarter of 2024, but available-for-sale securities fair values remain depressed compared to fair values prior to the policy tightening cycle 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 decreased by $759,000, or 65.5%, to $399,000 at June 30, 2024, from $1.2 million at December 31, 2023.

Real estate mortgage loans held-for-sale increased by $2.0 million, or 171.8%, to $3.1 million at September 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.

Proceeds from sales of residential mortgages totaled $12.7 million in the first nine months of 2024, compared to $6.1 million in the first nine months of 2023.

Management expects the volume of loans originated for sale in the secondary market could increase due to lower market rates for mortgage loans, however any uptick in activity may be encumbered by 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.

The unpaid principal balances of loans serviced for others were $315.5 million and $333.1 million, as of September 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,

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

(dollars in thousands) September 30,

2024 December 31,

10 unchanged sentences

Loans, net $ 4,998,363 $ 4,844,562 $ 153,801

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.

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $153.8 million, or 3.2%, to $4.998 billion at September 30, 2024 from $4.845 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,

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

(dollars in thousands) September 30,

2024 December 31,

8 unchanged sentences

Nonperforming assets to total assets 0.87 % 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

commercial relationship, an industrial company in Northern Indiana, that was moved to nonperforming status during the second quarter of 2024.

Total nonperforming assets increased by $41.9 million, or 260.4%, to $58.1 million during the nine month period ended September 30, 2024.

The ratio of nonperforming assets to total assets increased 62 basis points from 0.25% at December 31, 2023 to 0.87% at September 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 in late June during the second quarter of 2024.

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

1 unchanged sentence

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.

Total individually analyzed loans increased by $61.5 million, or 381.6%, to $77.7 million at September 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.

13 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 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.

At September 30, 2024, the allowance for credit losses was 1.65% of total loans, an increase of 19 basis points from 1.46% at December 31, 2023.

At September 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.

4 unchanged sentences

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.

Loans totaling $102.6 million for this sector represented 2.0% of total loans at September 30, 2024.

Additionally, commercial real estate loans secured by multi-family residential properties and secured by non-farm non-residential properties were approximately 210% of the Bank's risk-based capital at September 30, 2024.

As of September 30, 2024, based on management’s review of the loan portfolio, the Company had 91 credit relationships totaling $267.6 million on the classified loan list versus 68 credit relationships totaling $183.1 million as of December 31, 2023.

As of September 30, 2024, the Company had $181.2 million of assets classified as Special Mention, $42.1 million classified as Substandard, $44.3 million 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 5.27% as of September 30, 2024 from 3.72% as of December 31, 2023.

The increase to the classified loan listing during 2024 was primarily driven by downgrades to four commercial relationships individually greater than $10.0 million, net of paydowns, payoffs and upgrades to other relationships.

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.

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 allowance for credit losses increased $11.7 million, or 16.2%, from $72.0 million at December 31, 2023 to $83.6 million at September 30, 2024.

The increase was a result of provision expense of $13.1 million which was offset by net charge-offs of $1.4 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.

Provision expense recorded during the nine months ended September 30, 2024 was primarily 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.

The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes a growing 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,

As of September 30, 2024, the Company had access to $3.66 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 nine months ended September 30, 2024 and 2023 are summarized in the following table:

Nine months ended September 30,

(dollars in thousands) Balance Rate Balance Rate

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Total funding sources $ 5,865,839 3.07 % $ 5,755,940 2.41 %

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.

Average total deposits were $5.777 billion for the nine months ended September 30, 2024, an increase of $239.9 million, or 4.3%, from the comparable period in 2023.

Average total borrowings were $88.6 million for the nine months ended September 30, 2024, a decrease of $130.0 million, or 59.5%, from the comparable period in 2023.

Total average deposit costs increased 72 basis points from 2.31% for the nine months ended September 30, 2023, to 3.03% for the nine months ended September 30, 2024.

Total average borrowing costs increased 56 basis points from 5.05% for the nine months ended September 30, 2023 to 5.61% for the nine months ended September 30, 2024.

As a result, total funding costs increased by 66 basis points from 2.41% for the nine months ended September 30, 2023, to 3.07% for the nine months ended September 30, 2024.

This increase was driven by an increase in rates on interest bearing deposits and a shift 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%.

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

(dollars in thousands) June 30,

As of September 30, 2024, total deposits increased by $116.8 million, or 2.0%, from December 31, 2023.

Core deposits, which excludes brokered deposits, increased by $155.7 million, or 2.8%, to $5.741 billion as of September 30, 2024 from $5.585 billion as of December 31, 2023.

Total brokered deposits were $96.5 million at September 30, 2024, compared to $135.4 million at December 31, 2023, a decrease of $38.9 million, or 28.7%.

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

(dollars in thousands) September 30,

2024 Percentage of Total December 31,

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Total deposits $ 5,837,313 100.0 % $ 5,720,525 100.0 % $ 116,788

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

Core deposits, which excludes brokered deposits, expanded $155.7 million, or 2.8%, during the first nine 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.

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).

On September 30, 2024, commercial deposits represented 39.5% of total deposits versus 38.9% at December 31, 2023.

Retail deposits represented 29.3% at September 30, 2024 versus 31.4% at December 31, 2023.

Public Funds deposits represented 29.6% at September 30, 2024 versus 27.3% at December 31, 2023.

Brokered deposits represented 1.6% of total deposits at September 30, 2024 versus 2.4% at December 31, 2023.

Commercial deposits expanded $76.9 million, or 3.5%, from $2.23 billion at December 31, 2023 to $2.30 billion at September 30, 2024;

retail deposits contracted $85.1 million, or 4.7%, from $1.79 billion at December 31, 2023 to $1.71 billion at September 30, 2024;

and public funds deposits expanded $163.9 million, or 10.5%, from $1.56 billion at December 31, 2023 to $1.73 billion at September 30, 2024.

Deposits not covered by FDIC deposit insurance were 61% as of September 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 32% of total deposits as of September 30, 2024, versus 31% as of December 31, 2023.

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

As of September 30, 2024, total stockholders’ equity was $699.2 million, an increase of $49.4 million, or 7.6%, from $649.8 million at December 31, 2023.

The increase to total stockholders' equity was driven by net income of $69.3 million and was reduced by dividends declared and paid of $37.0 million and an increase of $17.1 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 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.

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

Capital ratios for September 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:

As of September 30, 2024:

Total Capital (to Risk Weighted Assets)

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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