LAKELAND FINANCIAL CORP

Previous wording

Net income in the first three months of 2024 was $23.4 million, which decreased $877,000, or 3.6%, from $24.3 million for the comparable period of 2023. Diluted income per common share was $0.91 in the first three months of 2024, a decrease of 3.2% from $0.94 in the comparable period of 2023. The decrease in net income for 2024 wasprimarily due to a decrease to net interest income of $4.1 million, or 8.0%, and an increase in noninterest expense of $1.3 million, or 4.3%. Offsetting these effects was a decrease in provision for credit losses expense of $2.8 million, or 65.1%, and an increase to noninterest income of $2.3 million, or 22.3%. Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $29.3 million in the first three months of 2024, a decrease of $3.1 million, or 9.5%, compared to $32.4 million for the comparable period of 2023.

Current wording

Net income in the first six months of 2024 was $46.0 million, which increased $7.1 million, or 18.2%, from $38.9 million for the comparable period of 2023. Diluted income per common share was $1.78 in the first six months of 2024, an increase of 17.9% from $1.51 in the comparable period of 2023. The increase in net income for 2024 wasprimarily due to an increase to noninterest income of $11.2 million, or 51.5%, and a decrease in noninterest expense of $8.1 million, or 11.3%. Offsetting these effects was an increase in the provision for credit losses of $4.9 million, or 94.2%, and a decrease to net interest income of $4.3 million, or 4.3%. Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $64.7 million in the first six months of 2024, an increase of $15.0 million, or 30.3%, compared to $49.7 million for the comparable period of 2023.

Previous wording

Annualized return on average total equity was 14.59% in the first three months of 2024 versus 16.81% in the comparable period of 2023. Annualized return on average total assets was 1.44% in the first three months of 2024 versus 1.54% for the comparable period of 2023. The Company's average equity to average assets ratio was 9.84% in the first three months of 2024 versus 9.13% in the comparable period of 2023. Equity has been negatively impacted by unrealized losses from the available-for-sale investment securities portfolio, which are reported as a component of accumulated other comprehensive income (loss).

Current wording

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.

Previous wording

Total assets were $6.567 billion as of March 31, 2024 versus $6.524 billion as of December 31, 2023, an increase of $42.8 million, or less than 1%. Total loans, net of the allowance for credit losses, increased $79.8 million, or 1.6%, which was the primary driver behind balance sheet expansion between December 31, 2023 and March 31, 2024. Offsetting the increase to loans, net of the allowance of credit losses, was a decrease in available-for-sale securities of $37.2 million, or 3.5%. The Company's primary funding source for the balance sheet expansion came from an increase in total borrowings of $150.0 million, or 300.0%, between December 31, 2023 and March 31, 2024. Total deposits decreased $102.4 million, or 1.8%, between December 31, 2023 and March 31, 2024. Total equity decreased $2.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $647.0 million at March 31, 2024. Retained earnings increased $10.6 million, or 1.5%, primarily as a result of net income of $23.4 million and reduced by dividends declared and paid of $12.3 million. Accumulated other comprehensive income (loss) ("AOCI"), decreased $11.7 million, or 7.6%, from a decline in the fair market values of available-for-sale investment securities during the three months ended March 31, 2024.

Current wording

Total assets were $6.569 billion as of June 30, 2024 versus $6.524 billion as of December 31, 2023, an increase of $44.8 million, or less than 1%. Total loans, net of the allowance for credit losses, increased $127.1 million, or 2.6%, which was the primary driver behind balance sheet expansion between December 31, 2023 and June 30, 2024. Offsetting the increase to loans, net of the allowance of credit losses, was a decrease in available-for-sale securities of $58.7 million, or 5.6%. Total deposits increased by $43.0 million, or less than 1%, between December 31, 2023 and June 30, 2024. Total equity increased $4.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $654.6 million at June 30, 2024. Retained earnings increased $20.8 million, or 3.0%, primarily as a result of net income of $46.0 million and reduced by dividends declared and 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.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

(3)Non-GAAP financial measure. Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio included in accumulated other comprehensive income (loss) ("AOCI") from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to periods preceding the recent significant rise in prevailing interest rates. See reconciliation on the following pages.

Current wording

(3)Non-GAAP financial measure. Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio included in accumulated other comprehensive income (loss) ("AOCI") from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to periods preceding the recent significant rise in prevailing interest rates and demonstrates long-term trends capital strength. See reconciliation on the following pages.

Previous wording

The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the Company's financial performance. Reconciliations of these non-GAAP financial measures is provided below.

Current wording

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

Previous wording

The impact of the wire fraud loss, insurance and loss recoveries and adjustments to salaries and benefits is presented below. Management considers these measures of core financial performance to be meaningful to understanding the Company's business performance for these periods.

Current wording

Adjusted core noninterest income, adjusted core noninterest expense, adjusted earnings before income taxes, core operational profitability, core operational diluted earnings per common share and adjusted core efficiency ratio are non-GAAP financial measures calculated based on GAAP amounts. These adjusted amounts are calculated by excluding the impact of the net gain on Visa shares, legal accrual, and wire fraud loss and associated insurance and loss recoveries and adjustments to salaries and employee benefits expense for the periods presented below. Management considers these measures of financial performance to be meaningful to understanding the company’s core business performance for these periods.

Previous wording

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

Current wording

(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.

Previous wording

Net income was $23.4 million in the first three months of 2024, which decreased $877,000, or 3.6%, from $24.3 million for the comparable period of 2023. The decrease in net income for the first three months of 2024 wasprimarily due to a decrease to net interest income of $4.1 million, or 8.0%, and an increase in noninterest expense of $1.3 million, or 4.3%. Offsetting these effects was a decrease in the provision for credit losses of $2.8 million, or 65.1%, and an increase to noninterest income of $2.3 million, or 22.3%.

Current wording

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 wasprimarily due to an increase to noninterest income of $11.2 million, or 51.5%, and a decrease in noninterest expense of $8.1 million, or 11.3%. Offsetting these effects was a decrease to net interest income of $4.3 million, or 4.3%, and an increase in the provision for credit losses of $4.9 million, or 94.2%.

Previous wording

(1)Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.3 million and $1.4 million for the three-month periods ended March 31, 2024 and March 31, 2023, respectively.

Current wording

(1)Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.2 million and $1.3 million in the three-month periods ended June 30, 2024 and June 30, 2023, respectively.

Previous wording

Net interest income, on a fully tax equivalent basis, decreased $4.2 million, or 7.9%, to $48.7 million for the three months ended March 31, 2024, compared to $52.9 million for the first three months of 2023. The decline in net interest income on a fully tax equivalent basis was driven byan increase in deposit interest expense of$16.2 million, or 65.2%, from$24.9 million to$41.2 million between the two periods. Securities interest income contributed further to the decline in fully tax equivalent net interest income, declining $779,000, or 7.9%. Loan interest income positively impacted fully tax equivalent net interest income, increasing $12.5 million, or 17.7%, from $70.7 million to $83.2 million between the two periods. Borrowings expense declined $329,000, or 11.8%.

Current wording

Net interest income, on a fully tax equivalent basis, decreased $4.6 million, or 4.4%, to $98.2 million for the six months ended June 30, 2024, compared to $102.7 million for the first six months of 2023. The decline in net interest income on a fully tax equivalent basis was driven byan increase in deposit interest expense of$27.0 million, or 46.1%, from$58.5 million to$85.5 million. Securities interest income contributed further to the decline in fully tax equivalent net interest income, declining $1.4 million, or 7.8%. Loan interest income positively impacted fully tax equivalent net interest income, increasing $21.3 million, or 14.5%, from $146.9 million to $168.2 million between the two periods. Borrowings expense declined $1.6 million, or 31.2%.

Previous wording

Total average earning assets were $6.217 billion for the three months ended March 31, 2024, an increase of $149.4 million, or 2.5%, compared to $6.068 billion for the three months ended March 31, 2023. Average loans outstanding drove the increase to total average earning assets, increasing $245.6 million, or 5.2%, to $4.971 billion from $4.725 billion for the three months ended March 31, 2024 and 2023, respectively. Offsetting this increase was a decrease to average investment securities of $91.7 million, or 7.3%, to $1.159 billion from $1.250 billion between the respective periods. Total average interest bearing liabilities were $4.532 billion for the three months ended March 31, 2024, an increase of $465.2 million, or 11.4%, from $4.067 billion for the three months ended March 31, 2023. This increase was driven by increased interest bearing deposits of $531.3 million, or 13.9%, from $3.825 billion for the three months ended March 31, 2023 to $4.356 billion for the three months ended March 31, 2024. Offsetting the increase to average interest bearing deposits was a decrease in total average borrowings of $66.1 million, or 27.3%, to $175.8 million from $241.9 million for the three months ended March 31, 2024 and 2023, respectively. Noninterest bearing demand deposits decreased $388.4 million, or 23.4%, to $1.274 billion from $1.663 billion between the respective periods.

Current wording

Total average earning assets were $6.256 billion for the six months ended June 30, 2024, an increase of $174.1 million, or 2.9%, compared to $6.082 billion for the six months ended June 30, 2023. Average loans outstanding drove the increase to total average earning assets, increasing $241.2 million, or 5.1%, to $5.003 billion from $4.762 billion for the six months ended June 30, 2024 and 2023, respectively. Offsetting this increase was a decrease to average investment securities of $91.8 million, or 7.5%, to$1.139 billion from$1.230 billion between the respective periods. Total average interest bearing liabilities were $4.599 billion for the six months ended June 30, 2024, an increase of $421.5 million, or 10.1%, from $4.178 billion for the six months ended June 30, 2023. This increase was driven by increased interest bearing deposits of $509.0 million, or 12.8%, from $3.964 billion for the six months ended June 30, 2023 to $4.473 billion for the six months ended June 30, 2024. Offsetting the increase to average interest bearing deposits was a decrease in total average borrowings of $87.5 million, or 40.9%, to $126.4 million from $214.0 million for the six months ended June 30, 2024 and 2023, respectively. Noninterest bearing demand deposits decreased $303.4 million, or 19.5%, to$1.253 billion from$1.556 billion between the respective periods.

Previous wording

The tax equivalent net interest margin was 3.15% for the three months ended March 31, 2024, compared to 3.54% during the first three months of 2023, representing a 39 basis point, or 11.0%, contraction between the two periods. The net interest margin contraction was primarily driven by an increase to interest expense as a percentage of average earning assets, which increased to 2.82% for thethree months ended March 31, 2024, up from 1.85% for the comparable period of 2023, for an increase of 97 basis points, or 52.4%. This increase was attributable to an increase in the rate for total interest bearing liabilities of 111 basis points, or 40.2%, to 3.87% from 2.76% between the respective periods. This increase was driven by increased costs associated with the Company's interest bearing deposits, as depositors sought higher rates on interest bearing deposit products and competition for deposits remains high throughout the industry, and by higher FHLB advances. The increase in rate for interest bearing deposits was a result of a combination of anincrease in average interest bearing deposits of$531.3 million, or 13.9%, from$3.825 billion to$4.356 billion, and an increase in the average rate for interest bearing deposits of 116 basis points, from 2.64% to 3.80% for the three months ended March 31, 2023 as compared to the three months ended March 31, 2024. The Company anticipates the costs of funds may continue to remain elevated as a result of increased market competition, shifts from noninterest bearing deposits into interest bearing deposits, and elevated wholesale funding costs. Offsetting the increase to interest expense as a percentage of average earning assets was an increase to interest income as a percentage of average earning assets of 58 basis points, or 10.8%, to 5.97% for thethree months ended March 31, 2024, up from 5.39% for the comparable period of 2023. This increase was attributable to an increase in loan yields, which was driven by the combination of an increase in average loans of $245.6 million, or 5.2%, to $4.971 billion from $4.725 billion, and an increase in average yield of 66 basis points to 6.73% from 6.07% between the respective periods. Loan yields benefited from an increase in the target Federal Funds rate of 50 basis points between the two periods, increasing to a range of 5.25%-5.50% during the three months ended March 31, 2024. The Company expects the elevated interest rate environment will further benefit tax equivalent net interest margin as more commercial fixed rate loans mature and are renewed at higher interest rates.

Current wording

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 thesix months ended June 30, 2024, up from 2.11% for the comparable period of 2023, for an increase of 75 basis points, or 35.5%. This increase was attributable to an increase in the rate for total interest bearing liabilities of 82 basis points, or 26.7%, from 3.07% to 3.89% between the respective periods. This increase was driven by increased costs associated with the Company's interest bearing deposits, as depositors sought higher rates on interest bearing deposit products while competition for deposits remained high throughout the industry. This increase was offset by reduced borrowings expense due to lower average borrowings. The increase in rate for interest bearing deposits was a result of a combination of anincrease 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 thesix 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 thesix months ended June 30, 2024, up from 5.52% for the comparable period of 2023. This increase was attributable to an increase in loan yields, which was driven by the combination of an increase in average loans of$241.2 million, or 5.1%, to$5.003 billion from$4.762 billion, and an increase in average yield of 54 basis points from 6.22% to 6.76% between the respective periods. Loan yields benefited from an increase in the target Federal Funds rate of 25 basis points between the two periods, increasing to a range of 5.25%-5.50%. The Company expects loan yields to improve as commercial fixed rate loans continue to mature and reprice at current interest rates.

Previous wording

The Company recorded provision for credit losses expense of $1.5 million for the three months ended March 31, 2024, compared to provision expense of $4.4 million during the comparable period of 2023, a decrease of $2.8 million, or 65.1%. Net charge-offs were $312,000 during the three month period ended March 31, 2024, compared to $5.7 million during the comparable period of 2023, a decrease of $5.4 million, or 94.6%. The decrease in charge-offs between the respective periods was the result of a charge-off of $5.5 million attributable to a single commercial borrower during the first quarter of 2023.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

Noninterest income increased by $2.3 million, or 22.3%, to $12.6 million for the three months ended March 31, 2024, compared to $10.3 million for the prior year three month period. Theincrease in noninterest income was driven primarily byan increase in other income of$1.6 million, or 253.3%, due to the recognition of an insurance recovery of $1.0 million during the first three months of 2024. Contributing further to the increase in other income was the recognition of a death benefit from the Company's bank owned life insurance program, increased FHLB dividend income and increased limited partnership investment income. Additionally, bank owned life insurance income increased $345,000, or 49.9%, wealth advisory fees increased $255,000, or 11.6%, and mortgage banking income increased$151,000. The increase to bank owned life insurance was driven by an improvement in market valuation for the Company's variable owned life insurance policies, which are tied to the performance of the equity markets. Wealth advisory fees benefited from new volume growth in addition to favorable market performance. The increase to mortgage banking income was attributable to growth in the Company's mortgage pipeline, which favorably impacted secondary market loan sale gains and mortgage rate lock income.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

The Company's income tax expense increased $631,000, or 16.7%, to $4.4 million in the three months ended March 31, 2024, compared to $3.8 million for the same period in 2023. The effective tax rate was 15.8% in the three months ended March 31, 2024, compared to 13.4% for the comparable period of 2023. The year-to-date effective tax rate was increased due to adoption of ASU 2023-02, to account for the Company's investment in low-income housing tax credit structures, as well as a reduction in the tax benefit recognized from stock-based compensation vesting of shares for plan participants.

Current wording

The Company's income tax expense increased $3.1 million, or 55.3%, to $8.8 million in the six months ended June 30, 2024, compared to $5.7 million for the same period in 2023. The effective tax rate was 16.0% in the six months ended June 30, 2024, compared to 12.7% for the comparable period of 2023. The year-to-date effective tax rate was increased due to adoption of ASU 2023-02, to account for the Company's investment in low-income housing tax credit structures, as well as a reduction in the tax benefit recognized from stock-based compensation vesting of shares for plan participants.

Previous wording

Total assets were $6.567 billion as of March 31, 2024 versus $6.524 billion as of December 31, 2023, an increase of $42.8 million, or less than 1%. Total loans, net of the allowance for credit losses, increased $79.8 million, or 1.6%, between December 31, 2023 and March 31, 2024. Offsetting the increase to loans, net of the allowance for credit losses, was a decrease in available-for-sale securities of $37.2 million, or 3.5%. Total deposits decreased $102.4 million, or 1.8%, between December 31, 2023 and March 31, 2024. The decrease in total deposits was driven the change in noninterest bearing deposits which decreased $99.3 million, or 7.3%. An increase in total borrowings of $150.0 million, or 300.0%, offset the decrease in total deposits to fund the balance sheet growth between December 31, 2023 and March 31, 2024. Total equity decreased $2.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $647.0 million at March 31, 2024. Retained earnings increased $10.6 million, or 1.5%, as a result of net income of $23.4 million but was reduced by dividends declared and paid of $12.3 million. Accumulated other comprehensive income (loss), decreased $11.7 million, or 7.6%, due primarily to a decline in available-for-sale securities fair market values during the three months ended March 31, 2024.

Current wording

Total assets were $6.569 billion as of June 30, 2024 versus $6.524 billion as of December 31, 2023, an increase of $44.8 million, or less than 1%. Total loans, net of the allowance for credit losses, increased $127.1 million, or 2.6%, between December 31, 2023 and June 30, 2024. Offsetting the increase to loans, net of the allowance for credit losses, was a decrease in available-for-sale securities of $58.7 million, or 5.6%. Total deposits increased $43.0 million, or less than 1%, between December 31, 2023 and June 30, 2024. The increase in total deposits was driven by an increase in interest bearing deposits of $183.5 million, or 4.2%, and was offset by a decrease in noninterest bearing deposits of $140.5 million, or 10.4%. Total equity increased $4.8 million, or less than 1%, from $649.8 million at December 31, 2023 to $654.6 million at June 30, 2024. Retained earnings increased $20.8 million, or 3.0%, as a result of net income of $46.0 million but was reduced by dividends declared and paid of $24.6 million. Accumulated other comprehensive income (loss), decreased $15.3 million, or 9.8%, due primarily to a decline in available-for-sale securities fair market values during the six months ended June 30, 2024.

Previous wording

Total cash and cash equivalents decreased by $4.1 million, or 2.7%, to $147.7 million at March 31, 2024, from $151.8 million at December 31, 2023. Cash and cash equivalents include short-term investments. The fluctuation in cash and cash equivalents at March 31, 2024 was driven by a decrease in cash and due from banks of $14.9 million, or 21.2% and offset by an increase in interest bearing short-term investment accounts of $10.8 million, or 13.2%.

Current wording

Total cash and cash equivalents decreased by $30.6 million, or 20.2%, to $121.2 million at June 30, 2024, from $151.8 million at December 31, 2023. Cash and cash equivalents include short-term investments. The fluctuation in cash and cash equivalents at June 30, 2024 was driven by a decrease in cash and due from banks of $9.6 million, or 13.6%, and a decrease in interest bearing short-term investment accounts of $21.1 million, or 25.9%.

Previous wording

There were no purchases of available-for-sale securities in the first three months of 2024. Investment securities represented 17.4% of total assets on March 31, 2024, compared to 18.1% of total assets on December 31, 2023. Effective duration for the investment portfolio was 6.6 years at March 31, 2024, compared to 4.0 years at December 31, 2019 prior to the pandemic, and 6.5 years at December 31, 2023. Effective duration of the portfolio expanded following the deployment of excess liquidity to the portfolio and the rise in interest rates during the recent Federal Reserve tightening cycle. The ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 12%-14% during 2014 to 2020. The Company expects the investment securities portfolio as a percentage of assets to decrease over time as the proceeds from pay downs, sales and maturities of these investment securities are used to fund loan portfolio growth and for other general liquidity purposes. Paydowns from prepayments and scheduled payments of $13.5 million were received in the first three months of 2024, and the amortization of premiums, net of the accretion of discounts, was $1.3 million. There were no maturities or calls of securities during the first three months of 2024. Sales of available-for-sale investment securities totaled $7.1 million in the first three months of 2024 and resulted in net losses of $46,000. No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of March 31, 2024 and December 31, 2023.

Current wording

There were no purchases of available-for-sale securities in the first six months of 2024. Investment securities represented 17.1% of total assets on June 30, 2024, compared to 18.1% of total assets on December 31, 2023. The ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 12% to 14%. The Company expects the investment securities portfolio as a percentage of assets to continue to decrease over time as the proceeds from pay downs, sales and maturities are used to fund loan portfolio growth and for general liquidity purposes. Tax equivalent adjusted effective duration for the investment securities portfolio was 6.5 years at June 30, 2024 and 6.5 years at December 31, 2023. Effective duration of the portfolio remains elevated as compared to 4.0 at December 31, 2019, prior to the deployment of excess liquidity to the investment portfolio and the rise in interest rates from the recent tightening cycle by the Federal Reserve. Paydowns from prepayments and scheduled payments of $28.9 million were received in the first six months of 2024, and the amortization of premiums, net of the accretion of discounts, was $2.4 million. Sales of available-for-sale investment securities totaled $7.1 million in the first six months of 2024 and resulted in net losses of $46,000. No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of June 30, 2024 and December 31, 2023. The Company anticipates receiving principal and interst cash flows of approximately $52.4 million throughout the remainder of 2024 from its investment securities portfolio.

Previous wording

The fair value of the available-for-sale investment securities portfolio as of March 31, 2024 included net unrealized losses of $189.9 million, compared to net unrealized losses of $174.6 million as of December 31, 2023. Unrealized losses in the available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities. These declines were driven by the rising interest rate environment as a result of the Federal Reserve's recent monetary tightening policy.

Current wording

The fair value of the available-for-sale investment securities portfolio as of June 30, 2024 included net unrealized losses of $194.9 million, compared to net unrealized losses of $174.6 million as of December 31, 2023. Unrealized losses in the available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities. These declines were driven by the rising interest rate environment as a result of the Federal Reserve's recent cycle of monetary policy tightening during 2022 and 2023.

Previous wording

Real estate mortgage loans held-for-sale increased by $501,000, or 43.3%, to $1.7 million at March 31, 2024, from $1.2 million at December 31, 2023. The balance of this asset category is subject to a high degree of variability depending on, among other factors, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $4.1 million in the first three months of 2024, compared to $672,000 in the first three months of 2023. Management expects the volume of loans originated for sale in the secondary market to remain at reduced levels due to elevated mortgage rates, limited inventory, and existing homeowners being locked in at historically low rates. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $328.8 million and $333.1 million, as of March 31, 2024 and December 31, 2023, respectively.

Current wording

Real estate mortgage loans held-for-sale decreased by $759,000, or 65.5%, to $399,000 at June 30, 2024, from $1.2 million at December 31, 2023. The balance of this asset category is subject to a high degree of variability depending on, among other factors, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $9.1 million in the first six months of 2024, compared to $3.4 million in the first six months of 2023. Management expects the volume of loans originated for sale in the secondary market to remain at reduced levels due to elevated mortgage rates, limited inventory, and existing homeowners being locked in at historically low rates. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $322.9 million and $333.1 million, as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $80.8 million, or 1.6%, to $5.001 billion at March 31, 2024 from $4.920 billion at December 31, 2023. The increase was primarily driven by originations of loans concentrated in the commercial and industrial and commercial real estate and multi-family residential loans categories and was offset by paydowns in the agri-business and agricultural loans segment which traditionally experiences seasonal fluctuations in activity.

Current wording

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $135.2 million, or 2.7%, to $5.055 billion at June 30, 2024 from $4.920 billion at December 31, 2023. The increase was primarily driven by originations of loans concentrated in the commercial and industrial and commercial real estate and multi-family residential loans categories and was offset by paydowns in the agri-business and agricultural loans segment which traditionally experiences seasonal fluctuations in activity.

Previous wording

Total nonperforming assets decreased by $875,000, or 5.4%, to $15.2 million during the three month period ended March 31, 2024. The ratio of nonperforming assets to total assets decreased 2 basis point from 0.25% at December 31, 2023 to 0.23% at March 31, 2024.

Current wording

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.

Previous wording

A loan is individually analyzed when full payment under the original loan terms is not expected. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral. Total individually analyzed loans decreased by $943,000, or 5.8%, to $15.2 million at March 31, 2024 from $16.1 million at December 31, 2023, due primarily to loan paydowns.

Current wording

A loan is individually analyzed when full payment under the original loan terms is not expected. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral. Total individually analyzed loans increased by $62.4 million, or 387.1%, to $78.5 million at June 30, 2024 from $16.1 million at December 31, 2023. The increase to individually analyzed loans was primarily related to the downgrade of two commercial relationships.

Previous wording

At March 31, 2024, the allowance for credit losses was 1.46% of total loans, which was unchanged from December 31, 2023. At March 31, 2024, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses. The process of identifying credit losses is a subjective process.

Current wording

At June 30, 2024, the allowance for credit losses was 1.60% of total loans, an increase of 14 basis points from 1.46% at December 31, 2023. At June 30, 2024, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses. The process of identifying credit losses is a subjective process.

Previous wording

The Company has a relatively high percentage of commercial and commercial real estate loans, which are extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area. The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $73.6 million for this sector represented 1.5% of total loans at March 31, 2024. Additionally, commercial real estate loans secured by multi-family residential properties and secured by non-farm non-residential properties were approximately 205% of the Bank's risk-based capital at March 31, 2024.

Current wording

The Company has a relatively high percentage of commercial and commercial real estate loans, which are extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area. The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $101.2 million for this sector represented 2.0% of total loans at June 30, 2024. Additionally, commercial real estate loans secured by multi-family residential properties and secured by non-farm non-residential properties were approximately 205% of the Bank's risk-based capital at June 30, 2024.

Previous wording

As of March 31, 2024, based on management’s review of the loan portfolio, the Company had 70 credit relationships totaling $183.3 million on the classified loan list versus 68 credit relationships totaling $183.1 million as of December 31, 2023. As of March 31, 2024, the Company had $147.9 million of assets classified as Special Mention, $35.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $143.6 million, $39.4 million, $0 and $0, respectively, at December 31, 2023. Watch list loans as a percentage of total loans decreased to 3.67% as of March 31, 2024 from 3.72% as of December 31, 2023.

Current wording

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.

Previous wording

The allowance for credit losses increased $1.2 million, or 1.7%, from $72.0 million at December 31, 2023 to $73.2 million at March 31, 2024. The increase was a result of provision expense of $1.5 million which was offset by net charge-offs of $312,000. Provision expense recorded during the three months ended March 31, 2024 was attributable to loan growth. As the bulk of the Company’s lending activity is concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits, management has historically considered growth and portfolio composition when determining credit loss allocations.

Current wording

The allowance for credit losses increased $8.7 million, or 12.1%, from $72.0 million at December 31, 2023 to $80.7 million at June 30, 2024. The increase was a result of provision expense of $10.0 million which was offset by net charge-offs of $1.3 million. Provision expense recorded during the six months ended June 30, 2024 was attributable to an increase in the specific reserve allocation from the downgrade of a single $43.3 million commercial relationship, an industrial company in Northern Indiana, that was placed on nonperforming status during the second quarter of 2024. As the bulk of the Company’s lending activity is concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits, management has historically considered growth and portfolio composition when determining credit loss allocations.

Previous wording

The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes a stable mix of commercial, retail and public funds deposit accounts. While the traditional base of core deposits represents the primary source of funding for the Company, the Company has access to a robust array of other liquidity sources, including secured borrowings available from the Federal Home Loan Bank and the Federal Reserve Bank Discount Window. In addition, the Company has access to unsecured borrowing capacity through long established relationships within the brokered deposit markets, Federal Funds lines from correspondent bank partners and Insured Cash Sweep (ICS) one-way buy funds available from the Intrafi network. As of March 31, 2024, the Company had access to $3.13 billion in unused liquidity available from these aggregate sources as compared to $3.41 billion at December 31, 2023.

Current wording

The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes a stable mix of commercial, retail and public funds deposit accounts. While the traditional base of core deposits represents the primary source of funding for the Company, the Company has access to a robust array of other liquidity sources, including secured borrowings available from the Federal Home Loan Bank and the Federal Reserve Bank Discount Window. In addition, the Company has access to unsecured borrowing capacity through long established relationships within the brokered deposit markets, Federal Funds lines from correspondent bank partners and Insured Cash Sweep (ICS) one-way buy funds available from the Intrafi network. As of June 30, 2024, the Company had access to $3.31 billion in unused liquidity available from these aggregate sources as compared to $3.41 billion at December 31, 2023.

Previous wording

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

Current wording

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:

Previous wording

Average total deposits were $5.630 billion for the three months ended March 31, 2024, an increase of $142.8 million, or 2.6%, from the comparable period in 2023. Average total borrowings were $175.8 million for the three months ended March 31, 2024, a decrease of $66.1 million, or 27.3%, from the comparable period in 2023. Total average deposit costs increased 110 basis points from 1.84% for the three months ended March 31, 2023, to 2.94% for the three months ended March 31, 2024. Total average borrowing costs increased 94 basis points from 4.67% for the three months ended March 31, 2023 to 5.61% for the three months ended March 31, 2024. As a result, total funding costs increased by 106 basis points from 1.96% for the three months ended March 31, 2023, to 3.02% for the three months ended March 31, 2024. This increase was driven by an increase in rates on interest bearing deposits and deposit migration from noninterest bearing deposits to interest bearing deposits.

Current wording

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.

Previous wording

As of March 31, 2024, total deposits decreased by $102.4 million, or 1.8%, from December 31, 2023. Core deposits, which excludes brokered deposits, decreased by $152.8 million, or 2.7%, to $5.432 billion as of March 31, 2024 from $5.585 billion as of December 31, 2023. Total brokered deposits were $185.8 million at March 31, 2024, compared to $135.4 million at December 31, 2023, an increase of $50.4 million.

Current wording

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%.

Previous wording

Core deposits declined $152.8 million, or 2.7%, during the first three months of 2024. Utilization of brokered deposits as a wholesale funding alternative has returned to pre-pandemic levels. On March 31, 2024 commercial deposits represented 37.7% of total deposits versus 38.9% at December 31, 2023. Retail deposits represented 31.5% at March 31, 2024 versus 31.4% at December 31, 2023. Public Funds deposits represented 27.5% at March 31, 2024 versus 27.3% at December 31, 2023. Brokered deposits represented 3.3% of total deposits at March 31, 2024 versus 2.4% at December 31, 2023. Commercial deposits contracted $109.6 million, or 4.9%, from $2.23 billion at December 31, 2023 to $2.12 billion at March 31, 2024; retail deposits contracted $25.0 million, or 1.4%, from $1.79 billion at December 31, 2023 to $1.77 billion at March 31, 2024; and public funds deposits contracted $18.2 million, or 1.2%, from $1.56 billion at December 31, 2023 to $1.54 billion at March 31, 2024.

Current wording

Core deposits, which excludes brokered deposits, expanded $17.4 million, or less than 1%, during the first six months of 2024. Utilization of brokered deposits as a wholesale funding alternative has returned to pre-pandemic levels. On June 30, 2024, commercial deposits represented 37.3% of total deposits versus 38.9% at December 31, 2023. Retail deposits represented 29.9% at June 30, 2024 versus 31.4% at December 31, 2023. Public Funds deposits represented 30.0% at June 30, 2024 versus 27.3% at December 31, 2023. Brokered deposits represented 2.8% of total deposits at June 30, 2024 versus 2.4% at December 31, 2023. Commercial deposits contracted $77.0 million, or 3.5%, from $2.23 billion at December 31, 2023 to $2.15 billion at June 30, 2024; retail deposits contracted $70.2 million, or 3.9%, from $1.79 billion at December 31, 2023 to $1.72 billion at June 30, 2024; and public funds deposits expanded $164.6 million, or 10.5%, from $1.56 billion at December 31, 2023 to $1.73 billion at June 30, 2024.

Previous wording

Deposits not covered by FDIC deposit insurance were 54% as of March 31, 2024, versus 57% at December 31, 2023. Deposits not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (which insures public fund deposits in Indiana), were 27% of total deposits as of March 31, 2024, versus 31% as of December 31, 2023. As of March 31, 2024 and December 31, 2023, 98% of deposit accounts had deposit balances less than $250,000.

Current wording

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.

Previous wording

As of March 31, 2024, total stockholders’ equity was $647.0 million, a decrease of $2.8 million, or less than 1%, from $649.8 million at December 31, 2023. The decrease to total stockholders' equity was driven by net income of $23.4 million and was reduced by a decrease of $11.7 million in accumulated other comprehensive income (loss) and dividends declared and paid of $12.3 million.

Current wording

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).

Previous wording

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

Current wording

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