FIRST MERCHANTS CORP

Previous wording

Generally accepted accounting principles are complex and require us to apply significant judgments to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply those principles where actual measurement is not possible or practical. The judgments and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations. There have been no significant changes during the three months ended March 31, 2024 to the items disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023. For a complete discussion of our significant accounting policies, see “Notes to the Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

Generally accepted accounting principles are complex and require us to apply significant judgments to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply those principles where actual measurement is not possible or practical. The judgments and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations. There have been no significant changes during the six months ended June 30, 2024 to the items disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023. For a complete discussion of our significant accounting policies, see “Notes to the Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

HIGHLIGHTS FOR THE FIRST QUARTER OF 2024

Current wording

HIGHLIGHTS FOR THE SECOND QUARTER OF 2024

Previous wording

•Net income available to common stockholders for the three months ended March 31, 2024 was $47.5 million compared to $63.6 million for the three months ended March 31, 2023 and $42.0 million for the three months ended December 31,2023.

Current wording

•Net income available to common stockholders for the three months ended June 30, 2024 was $39.5 million compared to $60.4 million for the three months ended June 30, 2023 and $47.5 million for the three months ended March 31,2024.

Previous wording

•Strong liquidity and capital with Common Equity Tier 1 Capital Ratio of 11.25 percent.

Current wording

•Strong liquidity and capital with Common Equity Tier 1 Capital Ratio of 11.02 percent.

Previous wording

The Corporation reported first quarter 2024 net income available to common stockholders and diluted earnings per common share of $47.5 million and $0.80 per diluted share, respectively, compared to $63.6 million and $1.07 per diluted share, respectively, during the first quarter of 2023.

Current wording

The Corporation reported second quarter 2024 net income available to common stockholders and diluted earnings per common share of $39.5 million and $0.68 per diluted share, respectively, compared to $60.4 million and $1.02 per diluted share, respectively, during the second quarter of 2023.

Previous wording

Earnings per fully diluted common share for the first quarter of 2024, excluding income on PPP loans and non-core expenses, totaled $0.85, compared to $1.07 in the first quarter of 2023 and $0.87 in the fourth quarter of 2023. For reconciliations of GAAP earnings per share measures to the corresponding non-GAAP measures provided above, refer to the "NON-GAAP FINANCIAL MEASURES" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Current wording

Earnings per fully diluted common share for the second quarter of 2024, excluding income on PPP loans and non-core expenses, totaled $0.68, compared to $1.02 in the second quarter of 2023 and $0.85 in the first quarter of 2024. For reconciliations of GAAP earnings per share measures to the corresponding non-GAAP measures provided above, refer to the "NON-GAAP FINANCIAL MEASURES" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Previous wording

Cash and due from banks and interest-bearing deposits decreased $37.7 million from December 31, 2023 as cash held in ATMs and banking centers decreased and funds were used to paydown borrowings and repurchase shares of the Corporation's stock. Total investment securities decreased $27.8 million from December 31, 2023, primarily due to scheduled paydowns and maturities of investment securities of $29.4 million and an increase of $27.9 million in unrealized losses in the available for sale portfolio during the first three months of 2024. Partially offsetting these decreases were securities purchases of $32.2 million during the quarter. Additionally, while not reflected in the balance sheet, the unrealized loss in the held to maturity portfolio also increased during the three months ended March 31, 2024 by $29.0 million. Currently, the Corporation is reinvesting cashflows into the investment securities portfolio on a limited basis with a primary focus of using liquidity to paydown borrowings and fund loan growth. The investment portfolio as a percentage of total assets was 20.7 percent at March 31, 2024 and December 31, 2023 which reflects progress towards a more normalized earning asset mix. Additional details of the changes in the Corporation's investment securities portfolio are discussed within NOTE 2. INVESTMENT SECURITIES of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

Current wording

Cash and due from banks and interest-bearing deposits decreased $274.8 million from December 31, 2023 as funds were used to fund loan growth and repurchase shares of the Corporation's stock. Total investment securities decreased $58.3 million from December 31, 2023, primarily due to scheduled pay downs and maturities of investment securities of $69.7 million and an increase of $45.6 million in unrealized losses in the available for sale portfolio during the first six months of 2024. Partially offsetting these decreases were securities purchases of $62.3 million during the first six months of 2024. Additionally, while not reflected in the balance sheet, the unrealized loss in the held to maturity portfolio also increased during the six months ended June 30, 2024 by $41.1 million. Currently, the Corporation is reinvesting cashflows into the investment securities portfolio on a limited basis with a primary focus of using liquidity to pay down borrowings and fund current and future loan growth. The investment portfolio as a percentage of total assets was 20.5 percent at June 30, 2024 and 20.7 percent at December 31, 2023 which reflects progress towards a more normalized earning asset mix. Additional details of the changes in the Corporation's investment securities portfolio are discussed within NOTE 2. INVESTMENT SECURITIES of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

Previous wording

The Corporation's total loan portfolio decreased $24.3 million, or 0.8 percent on an annualized basis, since December 31, 2023. The composition of the loan portfolio is 75.1 percent commercial oriented with the largest loan classes of commercial and industrial and commercial real estate, non-owner occupied, representing 29.8 percent and 19.0 percent of the total loan portfolio, respectively. The loan classes that experienced the largest decreases from December 31, 2023 were agricultural land, construction, commercial real estate, non-owner occupied, and commercial real estate, owner occupied. Partially offsetting those decreases was an increase in commercial and industrial and residential real estate. Additional details of the changes in the Corporation's loans are discussed within NOTE 3. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q, and the "LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Current wording

The Corporation's total loan portfolio increased $167.0 million, or 2.7 percent on an annualized basis, since December 31, 2023. The composition of the loan portfolio is 74.8 percent commercial oriented with the largest loan classes of commercial and industrial and commercial real estate, non-owner occupied, representing 31.1 percent and 18.3 percent of the total loan portfolio, respectively. The increase was primarily driven by an increase in commercial and industrial, residential real estate, home equity and commercial real estate, owner occupied. Partially offsetting those increases was a decrease in construction, commercial real estate, non-owner occupied and agricultural land. Additional details of the changes in the Corporation's loans are discussed within NOTE 3. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q, and the "LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Previous wording

The Corporation’s ACL - loans totaled $204.7 million as of March 31, 2024 and equaled 1.64 percent of total loans, compared to $204.9 million and 1.64 percent of total loans at December 31, 2023. The ACL - loans decreased $0.3 million since December 31, 2023, as net charge-offs in the first quarter of 2024 were $2.3 million and provision for credit losses - loans of $2.0 million was recorded. Nonaccrual loans at March 31, 2024 were $62.5 million and increased $8.9 million from December 31, 2023 primarily due to a $11.5 million commercial real estate, non-owner occupied loan moving to non-accrual in 2024. The increase was partially offset by a decline in non-accrual balances within commercial and industrial and construction loans of $1.9 million during the first quarter of 2024. The Corporation's reserve for unfunded commitments was $19.5 million at March 31, 2024 and December 31, 2023, and is recorded in Other Liabilities. Additional details of the Corporation's allowance methodology and asset quality are discussed within NOTE 3. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q and within the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Current wording

The Corporation’s ACL - loans totaled $189.5 million as of June 30, 2024 and equaled 1.50 percent of total loans, compared to $204.9 million and 1.64 percent of total loans at December 31, 2023. The ACL - loans decreased $15.4 million since December 31, 2023, as net charge-offs during the six months ended June 30, 2024 were $41.9 million and provision for credit losses - loans of $26.5 million was recorded. Nonaccrual loans at June 30, 2024 were $61.9 million and increased $8.3 million from December 31, 2023 primarily due to a $10.8 million and a $4.3 million increase in non-accrual balances in commercial real estate, non-owner occupied and commercial and industrial, respectively. The increases were partially offset by a decline in non-accrual balances within residential of $6.3 million.The Corporation's reserve for unfunded commitments was $19.5 million at June 30, 2024 and December 31, 2023, and is recorded in Other Liabilities. Additional details of the Corporation's allowance methodology and asset quality are discussed within NOTE 3. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q and within the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Previous wording

The Corporation's other assets increased $8.7 million from December 31, 2023. The Corporation's derivative assets (recorded in other assets) and derivative liabilities (recorded in other liabilities) increased $10.4 million and $10.4 million, respectively, from December 31, 2023. The increase in valuations are due to additional notional amounts originated in the first quarter of 2024 and an increase in rates.

Current wording

The Corporation's other assets increased $45.5 million from December 31, 2023. The Corporation's continued investment in qualified affordable housing projects resulted in an increase of $36.7 million in CRA investments (recorded in other assets) and an increase of $24.2 million in unfunded commitments associated with these CRA investments (recorded in other liabilities) from December 31, 2023. Additionally, the Corporation's derivative assets (recorded in other assets) and derivative liabilities (recorded in other liabilities) increased $8.4 million and $8.2 million, respectively, from December 31, 2023. The increase in valuations are due to additional notional amounts originated in the second quarter of 2024 and an increase in rates.

Previous wording

As of March 31, 2024, total deposits equaled $14.9 billion, an increase of $63.1 million from December 31, 2023, or 1.7 percent on an annualized basis. Total deposits less time deposits greater than $100,000, or core deposits, represented 90.1 percent of the deposit portfolio at March 31, 2024. Noninterest bearing deposits represents 15.7 percent of the deposit portfolio at March 31, 2024, compared to 16.9 percent at December 31, 2023. The decline is the result of a mix shift occurring across the industry as clients move into higher yielding deposit products. The Corporation experienced increases from December 31, 2023 in money market of $141.2 million, certificates and other time deposits of $100,000 or more of $40.2 million, other certificates and time deposits of $51.6 million and savings accounts of $11.6 million. Demand accounts decreased from December 31, 2023 by $161.7 million.

Current wording

As of June 30, 2024, total deposits equaled $14.6 billion, a decrease of $252.4 million from December 31, 2023, or 3.4 percent on an annualized basis. Total deposits less time deposits greater than $100,000, or core deposits, represented 89.5 percent of the deposit portfolio at June 30, 2024. Noninterest bearing deposits represents 15.8 percent of the deposit portfolio at June 30, 2024, compared to 16.9 percent at December 31, 2023. The decline is the result of a mix shift occurring across the industry as clients move into higher yielding deposit products. The Corporation experienced decreases from December 31, 2023 in demand deposits of $196.7 million, savings accounts of $107.9 million and money market of $69.4 million. Offsetting these decreases was an increase in brokered certificates of deposit of $86.9 million from December 31, 2023.

Previous wording

The average account within the deposit portfolio totals only $34,000. Insured deposits totaled 70.6 percent of total deposits, with the State of Indiana's Public Deposit Insurance Fund, which insures certain public deposits, providing insurance to 14.2 percent of deposits and the Federal Deposit Insurance Corporation ("FDIC") providing insurance to the remaining 56.4 percent. Only 29.4 percent of deposits are uninsured and our available liquidity is ample to cover those when considering both on balance sheet sources of liquidity and unused capacity from the Federal Reserve Discount Window, FHLB and unsecured borrowing sources.

Current wording

The average account within the deposit portfolio totals only $33,000. Insured deposits totaled 70.2 percent of total deposits, with the State of Indiana's Public Deposit Insurance Fund, which insures certain public deposits, providing insurance to 14.7 percent of deposits and the Federal Deposit Insurance Corporation ("FDIC") providing insurance to the remaining 55.5 percent. Only 29.8 percent of deposits are uninsured and our available liquidity is ample to cover those when considering both on balance sheet sources of liquidity and unused capacity from the Federal Reserve Discount Window, FHLB and unsecured borrowing sources.

Previous wording

Net interest income is the most significant component of our earnings, comprising 82.7 percent of revenues for the three months ended March 31, 2024. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations. Other factors include the level of accretion income on purchased loans, prepayment risk on loan and investment-related assets, and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from customer deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve Board monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and the net interest income and margin.

Current wording

Net interest income is the most significant component of our earnings, comprising 81.5 percent of revenues for the six months ended June 30, 2024. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations. Other factors include the level of accretion income on purchased loans, prepayment risk on loan and investment-related assets, and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from customer deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve Board monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and the net interest income and margin.

Previous wording

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented on a fully taxable equivalent ("FTE") basis in the table that follows to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. The federal statutory rate of 21 percent was used for 2024 and 2023. The FTE analysis portrays the income tax benefits associated with tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons.

Current wording

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented on an FTE basis in the table that follows to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. The federal statutory rate of 21 percent was used for 2024 and 2023. The FTE analysis portrays the income tax benefits associated with tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons. For reconciliations of GAAP net interest margin to the corresponding non-GAAP measures provided below, refer to the "NON-GAAP FINANCIAL MEASURES" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Previous wording

Net interest margin, on an FTE basis, decreased 48 basis points to 3.10 percent for the three months ended March 31, 2024 compared to 3.58 percent for the same period in 2023.

Current wording

Net interest margin, on an FTE basis, decreased 23 basis points to 3.16 percent for the three months ended June 30, 2024 compared to 3.39 percent for the same period in 2023.

Previous wording

Average earning assets for the three months ended March 31, 2024 increased $299.4 million compared to the same period in 2023. The increase for the three months ended March 31, 2024 was driven by an increase in interest-bearing deposits of $402.9 million as deposit growth and proceeds from investment securities principal and interest cashflows were held in cash for liquidity purposes. Organic loan growth within the residential real estate and commercial portfolios of $216.3 million and $114.2 million, respectively, also contributed to the increase in average earning assets.

Current wording

Average earning assets for the three months ended June 30, 2024 increased $45.5 million compared to the same period in 2023. The increase for the three months ended June 30, 2024 was primarily driven by organic loan growth within the real estate mortgage and commercial portfolios of $119.5 million and $86.4 million, respectively. The organic loan growth was offset by a decrease in the average investment securities portfolio of $184.6 million, as the Corporation utilized cash flows from investment securities to fund current and future loan growth.

Previous wording

Offsetting the increases in interest-bearing deposits and loans was a decrease in the average investment securities portfolio, which was $447.1 million for the three months ended March 31, 2024, when compared to the same period in 2023. The Corporation is reinvesting cashflows into the investment securities portfolio on a limited basis with a primary focus of using liquidity to paydown borrowings and fund loan growth. Additionally, there was an increase of $27.9 million in unrealized losses in the available for sale portfolio during the first three months of 2024. The investment portfolio as a percentage of total assets was 20.7 percent at March 31, 2024, which is down from the peak at December 31, 2021 of 29.3 percent, and 22.2 percent at March 31, 2023. This decline reflects progress towards a more normalized earning asset mix.

Current wording

Average earning assets for the six months ended June 30, 2024 increased $172.1 million compared to the same period in 2023. The increase for the six months ended June 30, 2024 was driven by an increase in interest bearing deposits of $190.7 million as well as organic loan growth within the real estate mortgage and commercial portfolios of $168.1 million and $100.0 million, respectively. Offsetting the increases in interest-bearing deposits and loans was a decrease in the average investment securities portfolio of $315.1 million for the six months ended June 30, 2024 when compared to the same period in 2023. The Corporation is reinvesting cashflows into the investment securities portfolio on a limited basis with a primary focus of using liquidity to fund current and future loan growth. The investment portfolio as a percentage of total assets was 20.5 percent at June 30, 2024, which is down from the peak at December 31, 2021 of 29.3 percent, and reflects progress towards a more normalized earning asset mix.

Previous wording

Total average deposits for the three months ended March 31, 2024 increased $457.8 million when compared to the same period in 2023. Average interest-bearing deposits for the three months ended March 31, 2024 increased $1.2 billion compared to the same period in 2023, with the largest increases in the certificates and other time deposit portfolio, money market and interest-bearing demand deposits. Noninterest bearing deposits act to mitigate deposit yield increases as interest rates rise and represented 16.3 percent of the deposit portfolio, which is a decline from the peak in the second quarter of 2022 of 23.6 percent, and 21.6 percent for the three months ended March 31, 2023. Noninterest bearing deposits declined $693.1 million in the three months ended March 31, 2024 when compared to the same period in 2023. The decline is the result of a mix shift occurring across the industry as clients move into higher yielding deposit products.

Current wording

Total average deposits for the three months ended June 30, 2024 increased $176.0 million, when compared to the same period in 2023. Average interest-bearing deposits for the three months ended June 30, 2024 increased $624.7 million compared to the same period in 2023, with the largest increases in the certificates and other time deposits, money market and interest-bearing demand deposits. Noninterest bearing deposits act to mitigate deposit yield increases as interest rates rise. Average noninterest bearing deposits declined $448.8 million in the three months ended June 30, 2024 when compared to the same period in 2023. The decline is the result of a mix shift occurring across the industry as clients move into higher yielding deposit products. Average noninterest bearing deposits represented 15.8 percent of the deposit portfolio for the three months ended June 30, 2024, and 19.0 percent of the deposit portfolio for the three months ended June 30, 2023, which is a decline from the peak in the second quarter of 2022 of 23.6 percent.

Previous wording

In the first quarter of 2024, FTE asset yields increased 59 basis points compared to the same period in 2023. The increase in interest income, on an FTE basis, of $29.0 million during the three months ended March 31, 2024 compared to the same period in 2023 was primarily due to an increase in average earning assets. Additionally, the Corporation's loan portfolio is 66.4 percent variable and repricing occurred when the Federal Open Market Committee's ("FOMC") increased interest rates a total of 100 basis points in 2023. The FOMC interest rate increases in 2023 and 2022 also resulted in increased yields on new and renewed loans, which were 8.15 percent for the three months ended March 31, 2024 compared to 7.08 percent for the same period in 2023. The Corporation also recognized fair value accretion income on purchased loans, which is included in interest income, of $1.4 million, which accounted for 3 basis points of net interest margin in the three months ended March 31, 2024. Comparatively, the Corporation recognized $2.4 million of accretion income for the three months ended March 31, 2023, or 6 basis points of net interest margin.

Current wording

In the second quarter of 2024, FTE asset yields increased 33 basis points compared to the same period in 2023 and was primarily due to Federal Open Market Committee ("FOMC") increasing interest rates a total of 100 basis points in 2023, which resulted in an increase in interest income, on an FTE basis, of $15.0 million during the three months ended June 30, 2024 compared to the same period in 2023. Additionally, the Corporation's loan portfolio is 67.1 percent variable and repricing occurred when the Federal Open Market Committee's ("FOMC") increased interest rates a total of 100 basis points in 2023. The FOMC interest rate increases in 2023 and 2022 also resulted in increased yields on new and renewed loans, which were 8.13 percent for the three months ended June 30, 2024 compared to 7.30 percent for the same period in 2023. The Corporation also recognized fair value accretion income on purchased loans, which is included in interest income, of $1.5 million, which accounted for 3 basis points of net interest margin in the three months ended June 30, 2024. Comparatively, the Corporation recognized $2.0 million of accretion income for the three months ended June 30, 2023, or 5 basis points of net interest margin.

Previous wording

As customers have migrated to higher yielding interest-bearing deposit products, interest expense increased 47.6 million for the three months ended March 31, 2024, or 137 basis points when compared to the same period in 2023. Offsetting some of the increase in deposit costs, borrowing costs declined 58 basis points. Total cost of funds was 3.23 percent for the three months ended March 31, 2024 compared to 1.98 percent during the same period in 2023.

Current wording

As customers have migrated to higher yielding interest-bearing deposit products, interest expense on deposits increased 26.0 million for the three months ended June 30, 2024, or 70 basis points when compared to the same period in 2023. Total cost of funds was 3.21 percent for the three months ended June 30, 2024 compared to 2.56 percent during the same period in 2023. Interest costs increased 65 basis points, which mitigated the 33 basis point increase in asset yields and resulted in a 32 basis point FTE decrease in net interest spread when compared to the same period in 2023.

Previous wording

The following table presents the Corporation’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets/liabilities for the three months ended March 31, 2024 and 2023.

Current wording

The following tables present the Corporation’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets/liabilities for the three and six months ended June 30, 2024 and 2023.

Previous wording

Income tax expense for the three months ended March 31, 2024 was $6.8 million on pre-tax net income of $54.8 million. For the same period in 2023, income tax expense was $11.3 million on pre-tax income of $75.4 million. The effective income tax rates for the first quarters of 2024 and 2023 were 12.5 percent and 15.0 percent, respectively.

Current wording

Income tax expense for the three months ended June 30, 2024 was $4.1 million on pre-tax net income of $44.0 million. For the same period in 2023, income tax expense was $10.7 million on pre-tax income of $71.6 million. The effective income tax rates for the second quarter of 2024 and 2023 were 9.2 percent and 15.0 percent, respectively.

Previous wording

The lower effective income tax rate for the three months ended March 31, 2024 when compared to the same period in 2023 was primarily a result of tax-exempt interest income being a larger portion of pre-tax income in 2024.

Current wording

The lower effective income tax rate for the three and six months ended June 30, 2024 when compared to the same periods in 2023 was primarily a result of tax-exempt interest income being a larger portion of pre-tax income in 2024.

Previous wording

As part of the Level One acquisition, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $2,500 per share, in exchange for the outstanding Level One Series B preferred stock, and as part of that exchange, each outstanding Level One depository share representing a 1/100th interest in a share of the Level One preferred stock was converted into a depository share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock. The Corporation had $25.0 million of outstanding preferred stock at March 31, 2024 and December 31, 2023. During the three months ended March 31, 2024 and 2023, the Corporation declared and paid dividends of $46.88 per share (equivalent to $0.4688 per depository share) equal to $469,000. The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations.

Current wording

As part of the Level One acquisition, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $2,500 per share, in exchange for the outstanding Level One Series B preferred stock, and as part of that exchange, each outstanding Level One depository share representing a 1/100th interest in a share of the Level One preferred stock was converted into a depository share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock. The Corporation had $25.0 million of outstanding preferred stock at June 30, 2024 and December 31, 2023. During the three and six months ended June 30, 2024 and 2023, the Corporation declared and paid dividends of $46.88 per share (equivalent to $0.4688 per depository share) and $93.76 per share, respectively, equal to $469,000 and $938,000, respectively. The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations.

Previous wording

On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100,000,000. On a share basis, the amount of common stock subject to the repurchase program represented approximately 6 percent of the Corporation's outstanding shares at the time the program became effective. The Corporation repurchased 0.9 million shares of its common stock pursuant to the repurchase program during the three months ended March 31, 2024. As of March 31, 2024, the Corporation had approximately 1.8 million shares at an aggregate value of $44.6 million available to repurchase under the program.

Current wording

On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100,000,000. On a share basis, the amount of common stock subject to the repurchase program represented approximately 6 percent of the Corporation's outstanding shares at the time the program became effective. The Corporation repurchased 0.6 million and 1.5 million shares of its common stock pursuant to the repurchase program during the three and six months ended June 30, 2024, respectively. As of June 30, 2024, the Corporation had approximately 1.2 million shares at an aggregate value of $24.6 million available to repurchase under the program.

Previous wording

In August 2022, the Inflation Reduction Act of 2022 (the "IRA") was enacted. Among other things, the IRA imposes a new 1 percent excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations (like the Corporation). With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. For thethree months ended March 31, 2024, the Corporation recorded excise tax of $297,000 related to its share repurchases during the first quarter of 2024, which is reflected in the Statement of Stockholders' Equity as a component of additional paid-in capital.

Current wording

In August 2022, the Inflation Reduction Act of 2022 (the "IRA") was enacted. Among other things, the IRA imposes a new 1 percent excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations (like the Corporation). With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. For the three andsix months ended June 30, 2024, the Corporation recorded excise tax of $185,000 and $482,000, respectively, related to its share repurchases during the first half of 2024, which is reflected in the Statement of Stockholders' Equity as a component of additional paid-in capital.

Previous wording

On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $70 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5 million and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due October 30, 2028 in the aggregate principal amount of $65 million. As of December 31, 2023 the Corporation began the five year phase-out (at a rate of 20 percent per year) as defined in the Basel III capital rules, which resulted in a reduction of $13 million in tier 2 capital. Additionally, subordinated debt decreased due to the paydown of $40 million in principal on the scheduled interest payment date during the first quarter of 2024, which resulted in an additional reduction of $32 million in tier 2 capital. As of March 31, 2024, $25 million remains outstanding under these instruments, and $20 million is included in tier 2 capital after the 20 percent phase-out.

Current wording

On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $70.0 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5 million and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due October 30, 2028 in the aggregate principal amount of $65.0 million. As of December 31, 2023 the Corporation began the five year phase-out (at a rate of 20 percent per year) as defined in the Basel III capital rules, which resulted in a reduction of $13.0 million in tier 2 capital. Subordinated debt decreased due to the pay down of $40.0 million in principal on the scheduled interest payment date during the first quarter of 2024, which resulted in an additional reduction of $32.0 million in tier 2 capital. Additionally, the remaining $25.0 million of subordinated debt was paid in full during the second quarter of 2024. As of June 30, 2024, the Corporation's remaining subordinated debt of $31.0 million was classified as tier 2 capital and was not subject to the five year phase-out.

Previous wording

The Corporation's tangible common equity measures are capital adequacy metrics that are meaningful to the Corporation, as well as analysts and investors, in assessing the Corporation's use of equity and in facilitating period-to-period and company-to-company comparisons. Tangible common equity to tangible assets ratio was 8.32 percent at March 31, 2024, and 8.44 percent at December 31, 2023. At March 31, 2024 and December 31, 2023, the Corporation had net unrealized losses associated with its investment securities available for sale of $247.7 million and $219.7 million, respectively. This decrease in value is due to interest rate changes and not due to credit quality.

Current wording

The Corporation's tangible common equity measures are capital adequacy metrics that are meaningful to the Corporation, as well as analysts and investors, in assessing the Corporation's use of equity and in facilitating period-to-period and company-to-company comparisons. Tangible common equity to tangible assets ratio was 8.27 percent at June 30, 2024, and 8.40 percent at December 31, 2023. At June 30, 2024 and December 31, 2023, the Corporation had net unrealized losses associated with its investment securities available for sale of $265.3 million and $219.7 million, respectively. This decrease in value is due to interest rate changes and not due to credit quality.

Previous wording

At March 31, 2024, non-accrual loans totaled $62.5 million, an increase of $8.9 million from December 31, 2023, primarily due to an $11.5 million commercial real estate, non-owner occupied loan that moved to non-accrual in the first quarter of 2024. The increase was partially offset by a decline in non-accrual balances within commercial and industrial and construction of $1.9 million during the first quarter of 2024.

Current wording

At June 30, 2024, non-accrual loans totaled $61.9 million, an increase of $8.3 million from December 31, 2023, primarily due to a $10.8 million and a $4.3 million increase in non-accrual balances in commercial real estate, non-owner occupied and commercial and industrial, respectively. The increase was partially offset by a decline in non-accrual balances within residential of $6.3 million.

Previous wording

Other real estate owned and repossessions, totaling $4.9 million at March 31, 2024, increased $55,000 from December 31, 2023. For other real estate owned, current appraisals are obtained to determine fair value as management continues to aggressively market these real estate assets.

Current wording

Other real estate owned and repossessions, totaling $4.8 million at June 30, 2024, remained consistent from December 31, 2023. For other real estate owned, current appraisals are obtained to determine fair value as management continues to aggressively market these real estate assets.

Previous wording

The Corporation’s loan balances, excluding loans held for sale, decreased $20.4 million from December 31, 2023 to $12.5 billion at March 31, 2024. At March 31, 2024, the allowance for credit losses totaled $204.7 million, which represents a decrease of $253,000 from December 31, 2023. As a percentage of loans, the allowance for credit losses was 1.64 percent at March 31, 2024 and December 31, 2023.

Current wording

The Corporation’s loan balances, excluding loans held for sale, increased $153.6 million from December 31, 2023 to $12.6 billion at June 30, 2024. At June 30, 2024, the allowance for credit losses totaled $189.5 million, which represents a decrease of $15.4 million from December 31, 2023. As a percentage of loans, the allowance for credit losses was 1.50 percent at June 30, 2024 and December 31, 2023.

Previous wording

Net charge-offs totaling $2.3 million were recognized for the three months ended March 31, 2024, and provision for credit losses of $2.0 million was recorded for the same period in 2024. Net charge-offs totaling $225,000 were recognized for the three months ended March 31, 2023, with no provision for credit losses recorded in the same period in 2023.

Current wording

Net charge-offs totaling $39.6 million and $41.9 million were recognized for the three and six months ended June 30, 2024, respectively, and provision for credit losses of $24.5 million and $26.5 million, respectively, were recorded for the same periods in 2024. Net charge-offs totaling $1.9 million and $2.1 million were recognized for the three and six months ended June 30, 2023, respectively, with no provision for credit losses recorded in the same periods in 2023. The increase in net charge-offs is primarily related to two commercial and industrial relationships that accounted for $36.1 million of charge-offs during the three and six months ended June 30, 2024. One borrower experienced a sudden change in revenue from the cancellation and inability to renegotiate their contracts with the U.S. Government. This negatively impacted the value of the borrower's business and resulted in their inability to repay principal and interest. The second borrower provided notification of its plans to cease operations. These charge-offs are not indicative of the portfolio as a whole.

Previous wording

For the three months ended March 31, 2024 and 2023, there were no individual charge-offs or recoveries greater than $500,000. The distribution of the net charge-offs (recoveries) for the three months ended March 31, 2024 and 2023 are reflected in the following table.

Current wording

The distribution of the net charge-offs (recoveries) for the three and six months ended June 30, 2024 and 2023 are reflected in the following table.

Previous wording

Management continually evaluates the commercial loan portfolio by including consideration of specific borrower cash flow analysis and estimated collateral values, types and amounts on nonperforming loans, past and anticipated credit loss experience, changes in the composition of the loan portfolio, and the current condition and amount of loans outstanding. The determination of the provision for credit losses in any period is based on management’s continuing review and evaluation of the loan portfolio, and its judgment as to the impact of current economic conditions on the portfolio. The allowance for credit losses remains robust, along with $21.8 million of fair value accretion remaining on the acquired portfolio. The Corporation continues to monitor economic forecast changes, loan growth and credit quality to determine provision needs in the future.

Current wording

Management continually evaluates the commercial loan portfolio by including consideration of specific borrower cash flow analysis and estimated collateral values, types and amounts on nonperforming loans, past and anticipated credit loss experience, changes in the composition of the loan portfolio, and the current condition and amount of loans outstanding. The determination of the provision for credit losses in any period is based on management’s continuing review and evaluation of the loan portfolio, and its judgment as to the impact of current economic conditions on the portfolio. The allowance for credit losses remains adequate, along with $20.3 million of fair value accretion remaining on the acquired portfolio. The Corporation continues to monitor economic forecast changes, loan growth and credit quality to determine provision needs in the future.

Previous wording

The principal source of asset-funded liquidity is investment securities classified as available for sale, the market values of which totaled $1.6 billion at March 31, 2024, a decrease of $6.9 million, or 0.4 percent, from December 31, 2023. Securities classified as held to maturity that are maturing within a short period of time can also be a source of liquidity. Securities classified as held to maturity and that are maturing in one year or less totaled $13.0 million at March 31, 2024. In addition, other types of assets such as cash and interest-bearing deposits with other banks, federal funds sold and loans maturing within one year are sources of liquidity.

Current wording

The principal source of asset-funded liquidity is investment securities classified as available for sale, the market values of which totaled $1.6 billion at June 30, 2024, a decrease of $8.2 million, or 0.5 percent, from December 31, 2023. Securities classified as held to maturity that are maturing within a short period of time can also be a source of liquidity. Securities classified as held to maturity and that are maturing in one year or less totaled $13.4 million at June 30, 2024. In addition, other types of assets such as cash and interest-bearing deposits with other banks, federal funds sold and loans maturing within one year are sources of liquidity.

Previous wording

The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. Federal funds purchased and securities sold under agreements to repurchase are also considered a source of liquidity. In addition, FHLB advances and Federal Reserve Discount Window borrowings utilized as a funding source. At March 31, 2024, total borrowings from the FHLB were $612.8 million and there were no outstanding borrowings from the Federal Reserve Discount Window. The Bank has pledged certain mortgage loans and investments to the FHLB and Federal Reserve. The total available remaining borrowing capacity from the FHLB and Federal Reserve at March 31, 2024 was $721.2 million and $1.1 billion, respectively.

Current wording

The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. Federal funds purchased and securities sold under agreements to repurchase are also considered a source of liquidity. In addition, FHLB advances and Federal Reserve Discount Window borrowings utilized as a funding source. At June 30, 2024, total borrowings from the FHLB were $832.7 million and there were no outstanding borrowings from the Federal Reserve Discount Window. The Bank has pledged certain mortgage loans and investments to the FHLB and Federal Reserve. The total available remaining borrowing capacity from the FHLB and Federal Reserve at June 30, 2024 was $780.7 million and $1.1 billion, respectively.