COMMUNITY FINANCIAL SYSTEM INC

Previous wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Bank System, Inc. (the “Company” or “CBSI”) as of and for the three months ended March 31, 2024 and 2023, although in some circumstances the fourth quarter of 2023 is also discussed in order to more fully explain recent trends. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and related notes that appear on pages 3 through 33. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2024, “last year” and equivalent terms refer to calendar year 2023, “first quarter” refers to the three months ended March 31, and earnings per share (“EPS”) figures refer to diluted EPS.

Current wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Financial System, Inc. (the “Company” or “CFSI”) as of and for the three and six months ended June 30, 2024 and 2023, although in some circumstances the first quarter of 2024 is also discussed in order to more fully explain recent trends. The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that appear on pages 3 through 40. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2024, “last year” and equivalent terms refer to calendar year 2023, “second quarter” refers to the three months ended June 30, 2024, “YTD” refers to the six months ended June 30, 2024, and earnings per share (“EPS”) figures refer to diluted EPS.

Previous wording

The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date. This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates. The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, origination vintage and payment structure. The Company utilizes three methods for calculating the ACL: cumulative loss, vintage loss and line loss. Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies. Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables. Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices and automobile prices, gross domestic product, median household income net of inflation and other relevant factors. Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts. During the first quarter of 2024, the Company updated the ACL model to add 2023 results into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures.

Current wording

The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date. This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates. The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, origination vintage and payment structure. The Company utilizes three methods for calculating the ACL: cumulative loss, vintage loss and line loss. Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies. Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables. Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices including office property-specific price forecasts, office property-specific vacancy rates, automobile prices, gross domestic product, median household income net of inflation and other relevant factors. Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts. During the first quarter of 2024, the Company updated the ACL model to add 2023 results into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures. During the second quarter of 2024, the Company updated the ACL model to incorporate office property-specific price forecasts and office property-specific vacancy forecasts to provide greater precision to the model.

Previous wording

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts. Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next. To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 30% and 30%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at March 31, 2024 were 4.5% and 1.9%, respectively, compared to 4.5% and 1.7% at December 31, 2023, respectively. The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 7.7% and an average unemployment rate of 6.4%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three months ended March 31, 2024 by approximately $4.4 million, and decrease net income by $3.3 million (net of tax). This change is reflective of the sensitivity of the various economic factors used in the ACL model. The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate at the same time that economic conditions are changing, which would affect the results of the ACL calculation. The impact that the economic factors have on the model is affected by the severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments. Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative. The third party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment. The Company’s geographic distribution of loans outside of major metropolitan areas, combined with low statistical correlation between historical losses and national economic indicators, results in changes to the allowance that are less significant as compared to national economic activity.

Current wording

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts. Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next. To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 30% and 30%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at June 30, 2024 were 4.6% and 1.8%, respectively, compared to 4.5% and 1.9% at March 31, 2024, respectively. The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 8.0% and an average unemployment rate of 6.6%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three and six months ended June 30, 2024 by approximately $4.6 million, and decrease net income by $3.5 million (net of tax). This change is reflective of the sensitivity of the various economic factors used in the ACL model. The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate concurrent with changing economic conditions, which would affect the results of the ACL calculation. The impact that the economic factors have on the model is affected by the upside or downside severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments. Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative. The third-party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment. The Company’s geographic distribution of loans primarily outside of major metropolitan areas, combined with low statistical correlation between its historical losses and national economic indicators, results in changes to the allowance that are less significant as compared to national economic activity.

Previous wording

The Company also provides supplemental reporting of its results on an “operating” or “tangible” basis. During the first quarter of 2024, the Company modified the presentation of its non-GAAP operating results to exclude amortization of intangible assets which the Company believes better reflects core performance across its segments and enhances comparability to both banking and non-banking organizations. The prior period has been recast to conform to the current period presentation. Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain on equity securities and amortization of intangible assets. Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities. In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain on equity securities and amortization of intangible assets from income before income taxes. Although operating pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the impact of CECL, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities. The Company also provides supplemental reporting of its interest income, net interest income and net interest margin on a fully tax-equivalent (“FTE”) basis, which includes an adjustment to interest income and net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent interest income, net interest income and net interest margin are non-GAAP measures, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax liabilities. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 14.

Current wording

The Company also provides supplemental reporting of its results on an “operating” or “tangible” basis. During the first quarter of 2024, the Company modified the presentation of its non-GAAP operating results to exclude amortization of intangible assets which the Company believes better reflects core performance across its segments and enhances comparability to both banking and non-banking organizations. The prior period has been recast to conform to the current period presentation. Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain (loss) on equity securities and amortization of intangible assets. Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities. In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain (loss) on equity securities and amortization of intangible assets from income before income taxes. Although operating pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the impact of CECL, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities. The Company also provides supplemental reporting of its interest income, net interest income and net interest margin on a fully tax-equivalent (“FTE”) basis, which includes an adjustment to interest income and net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent interest income, net interest income and net interest margin are non-GAAP measures, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax liabilities. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 14.

Previous wording

First quarter net income increased $35.1 million as compared to the first quarter of 2023 and earnings per share of $0.76 for the first quarter of 2024 increased $0.65 from the first quarter of 2023. The increase in net income and earnings per share for the quarter was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities realized during the prior year’s first quarter in connection with a balance sheet repositioning. In addition, increases in noninterest expenses, the provision for credit losses and income taxes and a decrease in net interest income were partially offset by an increase in noninterest revenues and a decrease in the number of fully diluted shares outstanding. First quarter operating net income, a non-GAAP measure, decreased $5.9 million, or 11.9%, as compared to the first quarter of 2023. Operating earnings per share, a non-GAAP measure, of $0.82 for the first quarter decreased $0.10 compared to the first quarter of 2023 while operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, decreased $0.04 compared to the prior year’s first quarter.

Current wording

Second quarter 2024 net income decreased $0.4 million, or 0.8%, compared to the second quarter of 2023, while YTD net income increased $34.7 million, or 64.2% compared to the equivalent 2023 timeframe. Earnings per share of $0.91 for the second quarter of 2024 was $0.02 more than the second quarter of 2023, while 2024 YTD earnings per share of $1.67 was $0.67 higher than 2023 YTD earnings per share. Although net income decreased slightly between the quarterly periods due to increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in noninterest revenues and net interest income, earnings per share increased between the quarterly periods as the number of fully-diluted shares outstanding decreased reflective of share repurchases between the periods. The YTD increase in net income and earnings per share was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities during the first quarter of 2023 in connection with a balance sheet repositioning. In addition, increases in income taxes, noninterest expenses and the provision for credit losses and a decrease in net interest income were partially offset by an increase in noninterest revenues excluding realized investment security losses and a decrease in the number of fully-diluted shares outstanding. Second quarter and YTD operating net income, a non-GAAP measure, decreased $1.5 million, or 2.9%, as compared to the second quarter of 2023 and decreased $7.4 million, or 7.3%, compared to June YTD 2023. Second quarter and YTD operating earnings per share, a non-GAAP measure, decreased $0.01 compared to the second quarter of 2023 and decreased $0.11 compared to June YTD 2023. Second quarter and YTD operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.05 compared to the second quarter of 2023 and was consistent with June YTD 2023.

Previous wording

Net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, decreased 22 basis points between the first quarter of 2023 and the first quarter of 2024. The yield on average interest earning assets increased 61 basis points compared to the prior year first quarter as the yield on average loans and yield on average investments both improved. The yield on average loans for the first quarter increased 66 basis points compared to the first quarter of 2023, driven by market-related increases in interest rates on new loans, an increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations. The yield on average investments, including cash equivalents, increased 16 basis points compared to the prior year, which also benefitted from higher market interest rates as well as the maturities of certain lower-yielding available-for-sale investment securities between the periods. The Company’s total cost of funds increased 87 basis points from the year earlier period, as the rate paid on interest-bearing deposits increased 111 basis points and the rate paid on borrowings increased 103 basis points due in most part to market-driven increases in deposit and borrowing rates, as well as the higher proportion of funding coming from comparatively higher rate time deposits and external borrowings, including the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the first quarter of 2024.

Current wording

Net interest margin decreased 13 basis points between the second quarter of 2023 and the second quarter of 2024 and decreased 18 basis points on a YTD basis. Fully tax-equivalent net interest margin, a non-GAAP measure, decreased 14 basis points between the second quarter of 2023 and the second quarter of 2024 and decreased 18 basis points on a YTD basis. The yield on average interest-earning assets increased 53 basis points compared to the prior year second quarter and 58 basis points compared to the prior YTD period, as the yield on average loans and average investments both improved. The yield on average loans for the second quarter increased 63 basis points compared to the second quarter of 2023 and 64 basis points between comparable YTD periods. The increase in yield on average loans was driven by higher interest rates on new loans, an increase in variable and adjustable-rate loan yields reflective of higher market interest rates, including the prime rate, and a high level of new loan originations. The yield on average investments, including cash equivalents, increased six basis points compared to the prior year’s second quarter and 11 basis points on a YTD basis, reflective of the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods. The Company’s total cost of funds increased 70 basis points from last year’s second quarter and 79 basis points YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both increased largely due to market-driven increases in deposit and borrowing rates, as well as the higher proportion of funding coming from comparatively higher rate time deposits and external borrowings.

Previous wording

Loan balances increased on both an average and ending basis as compared to the prior year first quarter, reflective of continued strong organic loan growth. Deposit balances also increased on both an average and ending basis as compared to the first quarter of 2023 due primarily to growth in public fund deposit balances. Investment balances, including cash equivalents, decreased on both an average and ending basis between the first quarter of 2023 and the first quarter of 2024 primarily due to the maturities of certain lower-yielding available-for-sale investment securities between the periods, partially offset by higher interest-earning cash balances. Borrowing balances increased on both an average and ending basis compared to the prior year first quarter reflective of the Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings during 2023 to support the funding of continued loan growth.

Current wording

Loan balances increased on both an average and ending basis as compared to the prior year second quarter and YTD period, reflective of continued strong organic loan growth. Deposit balances also increased on both an average and ending basis as compared to the second quarter of 2023 and YTD due primarily to growth in municipal deposit balances. Investment balances, including cash equivalents, decreased on both an average and ending basis as compared to the prior year second quarter and YTD period, primarily due to the maturities and sales of certain available-for-sale investment securities between the periods. Borrowing balances increased on both an average and ending basis compared to the second quarter of 2023 and YTD reflective of the Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings between the periods to support the funding of continued loan growth.

Previous wording

Reflective of an increase in loans outstanding and a stable economic forecast, the Company recorded a $6.1 million provision for credit losses during the first quarter of 2024, $2.6 million higher than the first quarter of 2023, as the Company increased credit loss reserves primarily related to the business lending and consumer indirect portfolios. Asset quality remained strong and below long-term historical averages throughout the first quarter of 2024, although net charge-off, nonperforming and delinquent loan ratios increased in comparison to the first quarter of 2023 levels. Net charge-offs of $2.8 million remained relatively low at an annualized 0.12% of average loans, but were $1.3 million higher than levels for the first quarter of 2023. Nonperforming loans as a percentage of total loans increased 12 basis points to 0.50% between the first quarter of 2023 and the first quarter of 2024 primarily driven by the business loans associated with three customers being downgraded from accruing to nonaccrual status. The 30 to 89 day delinquent loan ratio increased eight basis points versus one year ago to 0.43% primarily due to increases in delinquent balances in the consumer mortgage and consumer indirect loan portfolios.

Current wording

Reflective of an increase in loans outstanding and a stable economic forecast, the Company recorded a $2.7 million provision for credit losses during the second quarter and $8.9 million for YTD 2024 resulting in a $2.0 million and $4.6 million higher provision for credit losses than comparable prior year periods, respectively, as the Company increased credit loss reserves primarily related to the business lending and consumer indirect portfolios. Asset quality remained strong and favorable relative to long-term historical averages during the second quarter and the first six months of 2024. Net charge-offs were $1.3 million, or an annualized 0.05% of average loans, for the second quarter and $4.1 million, or an annualized 0.08% of average loans, for the first six months of 2024, compared to net charge-offs of $0.7 million, or an annualized 0.03% of average loans, for the prior year’s second quarter and $2.2 million, or an annualized 0.05% of average loans, for the first six months of 2023. The nonperforming loan ratio of 0.50% at June 30, 2024 increased 14 basis points from June 30, 2023 primarily driven by the business loans associated with four customers being downgraded from accruing to nonaccrual status and remained consistent with one quarter prior. The 30 to 89 day delinquent loan ratio remained low at 0.45%, down from 0.47% at the end of the second quarter of 2023 and up slightly from 0.43% at the end of the prior quarter.

Previous wording

Noninterest expenses increased $4.0 million, or 3.5%, between the first quarter of 2023 and the first quarter of 2024, primarily due to a $1.6 million increase in salaries and employee benefits, a $1.2 million increase in data processing and communications expenses and a $1.6 million increase in other expenses. The increase in salaries and employee benefits was primarily driven by merit and market-related increases in employee wages, partially offset by the impact of the previously announced retail customer service workforce reduction plan and a decrease in employee retirement-related severance expense. The increase in data processing and communications expenses was reflective of continued investment in customer-facing and back-office technologies including investments being made in additional technology to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents. Other expenses were up due to increases in insurance expenses, including $0.4 million associated with an additional expected increase to the FDIC special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate and a decline in non-service related components of the net periodic pension benefit credit.

Current wording

Noninterest expenses increased $6.0 million, or 5.3%, between the second quarter of 2023 and the second quarter of 2024 and increased $10.0 million, or 4.4%, between June YTD 2023 and June YTD 2024. The increases were primarily driven by salaries and employee benefits that increased $5.4 million, or 8.0%, and $7.0 million, or 5.0%, for the second quarter and YTD periods of 2024, respectively, as compared to the corresponding periods of 2023, reflective of merit and market-related increases in employee wages and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense. The remaining net increase in noninterest expenses were mainly due to higher data processing and communications expenses reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure combined with an increase in other expenses driven by increases in insurance expenses and a decrease in the net periodic pension benefit credit due to lower non-service related components.

Previous wording

The Company’s deposit base and liquidity position continues to be strong, as the Company had total immediately available liquidity sources of $4.60 billion at the end of the first quarter of 2024, more than double its estimated uninsured deposits, net of collateralized and intercompany deposits. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of total deposits at the end of the first quarter. The Company’s deposit base is well diversified across customer segments, which as of March 31, 2024 is comprised of approximately 60% consumer, 25% business and 15% municipal, and broadly dispersed, illustrated by an average deposit balance per account that is under $20,000. Since the Federal Reserve began raising the federal funds rate in March 2022 in an effort to combat inflation, the cycle-to-date deposit beta (change in the Company’s cost of funds as a proportion of the change in the federal funds rate) for the Company is 20% and the cycle-to-date total funding beta is 23% of the cumulative 525 basis point increase in the federal funds rate, reflective of a comparatively high proportion of non-interest bearing deposits, representing approximately 27% of total ending deposits, and the composition and stability of the customer base. In addition, more than 65% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the first quarter. The Company did not utilize brokered or wholesale deposits.

Current wording

The Company’s deposit base and liquidity position continues to be strong, as the Company had total immediately available liquidity sources of $4.44 billion at the end of the second quarter of 2024, more than double its estimated uninsured deposits, net of collateralized and intercompany deposits. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of total deposits at the end of the second quarter. The Company’s deposit base is well diversified across customer segments, which as of June 30, 2024 was comprised of approximately 61% consumer, 26% business and 13% municipal, and broadly dispersed, illustrated by an average deposit balance per account that was under $20,000. Since the Federal Reserve began raising the federal funds rate in March 2022 in an effort to combat inflation, the cycle-to-date deposit beta (change in the Company’s cost of funds as a proportion of the change in the federal funds rate) for the Company is 22% and the cycle-to-date total funding beta is 24% of the cumulative 525 basis point increase in the federal funds rate. The lower betas are reflective of a comparatively high proportion of non-interest bearing deposits, representing approximately 28% of total ending second quarter deposits, and the composition and stability of the customer base. In addition, more than 66% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the second quarter. The Company did not utilize brokered or wholesale deposits.

Previous wording

As shown in Table 1, net income for the first quarter of $40.9 million increased $35.1 million as compared to the first quarter of 2023. Earnings per share of $0.76 for the first quarter of 2024 increased $0.65 compared to the first quarter of 2023. The increase in net income and earnings per share was primarily due to the realized loss on the sales of investment securities that was recognized in the first quarter of 2023, which negatively impacted first quarter 2023 net income by $41.2 million, or $0.75 per share. Excluding this item, earnings per share decreased $0.10, primarily driven by increases in noninterest expenses, the provision for credit losses and income taxes, and a decrease in net interest income, partially offset by an increase in noninterest revenues and a decrease in the number of fully diluted shares outstanding. Operating net income, a non-GAAP measure, of $43.8 million for the first quarter decreased $5.9 million, or 11.9%, as compared to the first quarter of 2023. Operating earnings per share, a non-GAAP measure, of $0.82 for the first quarter was down $0.10 compared to the first quarter of 2023. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

Current wording

As shown in Table 1, net income for the second quarter and June YTD of $47.9 million and $88.8 million, respectively, decreased $0.4 million, or 0.8%, as compared to the second quarter of 2023 and increased $34.7 million, or 64.2%, compared to June YTD 2023. Earnings per share of $0.91 for the second quarter was $0.02 higher than the second quarter of 2023, while earnings per share for the first six months of 2024 of $1.67 was $0.67 higher than the first six months of 2023. The decrease in net income for the quarter was the result of increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in net interest income and noninterest revenues, while the increase in earnings per share for the quarter was the result of a decrease in fully diluted shares outstanding, which more than offset the slight decline in net income. The increase in net income and earnings per share for the YTD period as compared to the prior year was the result of an increase in noninterest revenues, primarily due to the realized loss on the sales of investment securities that was recognized in the first quarter of 2023 as part of a balance sheet repositioning, as well as an increase in all other noninterest revenues and a decrease in fully diluted shares outstanding, partially offset by an increase in noninterest expenses, income taxes and the provision for credit losses, as well as a decrease in net interest income. Operating net income, a non-GAAP measure, of $50.5 million and $94.3 million for the second quarter and June YTD 2024, respectively, decreased $1.5 million, or 2.9%, as compared to the second quarter of 2023 and decreased $7.4 million, or 7.3%, compared to June YTD 2023. Operating earnings per share, a non-GAAP measure, of $0.95 for the second quarter was down $0.01 compared to the second quarter of 2023, while operating earnings per share of $1.77 for the first six months of 2024 was down $0.11 compared to the first six months of 2023. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

Previous wording

As reflected in Table 1, first quarter net interest income of $107.0 million was down $4.0 million, or 3.6%, from the comparable prior year period. The decrease was primarily the result of an increase in the cost of interest-bearing liabilities, partially offset by higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth, and the sales and maturities of certain lower-yielding available-for-sale investment securities.

Current wording

As reflected in Table 1, second quarter net interest income of $109.4 million increased $0.1 million, or 0.1%, from the comparable prior year period. The quarterly improvement resulted from an increase in the balance of and yield on interest-earning assets, partially offset by an increase in the balance of and rate paid on interest-bearing liabilities. Net interest income for the first six months of 2024 decreased $3.9 million, or 1.8%, versus the first six months of 2023. The year-over-year decrease was primarily the result of an increase in the balance and cost of interest-bearing liabilities, partially offset by a higher balance and yield on interest-earning assets due in part to a higher proportion of those assets being comprised of loan balances due to strong organic loan growth, and the sales and maturities of certain lower-yielding available-for-sale investment securities.

Previous wording

Reflective of an increase in loans outstanding and a stable economic forecast, the provision for credit losses of $6.1 million for the first quarter of 2024 increased $2.6 million as compared to the $3.5 million provision for credit losses in the first quarter of 2023. The Company increased its qualitative assessment of future uncertainty and built credit loss reserves that were primarily attributable to the business lending and consumer indirect portfolios.

Current wording

Reflective of an increase in loans outstanding and a stable economic forecast, the provision for credit losses of $2.7 million for the second quarter and $8.9 million for June YTD increased $1.9 million and $4.6 million as compared to the second quarter and first six months of 2023, respectively. During the first six months of 2024, the Company increased its qualitative assessment of future uncertainty and built credit loss reserves that were primarily attributable to the business lending and consumer indirect portfolios.

Previous wording

Noninterest expenses of $118.1 million for the first quarter reflected an increase of $4.0 million, or 3.5%, from the first quarter of 2023. The increase in noninterest expenses for the quarter was primarily due to increases in salaries and employee benefits, data processing and communications expenses, and other expenses.

Current wording

Noninterest expenses of $119.0 million and $237.1 million for the second quarter and June YTD periods, respectively, reflected an increase of $6.0 million, or 5.3%, from the second quarter of 2023 and an increase of $10.0 million, or 4.4%, from the first six months of 2023. The increase in noninterest expenses for the second quarter and June YTD periods was primarily due to increases in salaries and employee benefits, data processing and communications and other expenses. Operating noninterest expenses increased $6.7 million, or 6.2%, from the prior year second quarter, and $10.7 million, or 4.9%, from the prior June YTD.

Previous wording

Net interest income totaled $107.0 million for the first quarter of 2024 compared to $111.0 million for the first quarter of 2023. As shown in Table 2, fully tax-equivalent net interest income, a non-GAAP measure, for the first quarter was $108.0 million, a $4.1 million, or 3.7%, decrease from the same period last year. The decrease resulted from a 115 basis point increase in the rate paid on average interest-bearing liabilities and a $755.3 million increase in average interest-bearing liability balances, partially offset by a $374.0 million increase in average interest-earnings asset balances and a 61 basis point increase in the yield on average interest-earning assets in comparison to the first quarter of 2023. As reflected in Table 3, the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $29.5 million and the volume increase in average interest-bearing liability balances of $1.3 million were partially offset by the favorable impacts of the volume increase in average interest-earning asset balances of $3.4 million and the increase in the yield on average interest-earning assets of $23.3 million. The net interest margin of 2.95% and fully tax-equivalent net interest margin of 2.98%, a non-GAAP measure, for the first quarter of 2024 both decreased 22 basis points from the first quarter of 2023 driven by the increase in the rate paid on average interest-bearing liabilities, partially offset by the increase in the yield on average interest-earnings assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth and the sales and maturities of certain lower-yielding available-for-sale investment securities between the periods.

Current wording

Net interest income totaled $109.4 million for the second quarter of 2024 compared to $109.3 million for the second quarter of 2023. As shown in Table 2a, fully tax-equivalent net interest income, a non-GAAP measure, for the second quarter was $110.4 million, consistent with the same period last year. This was driven by a 53 basis point increase in the yield on average interest-earning assets and a $664.3 million increase in average interest-earning asset balances, offset by an 89 basis point increase in the rate paid on average interest-bearing liabilities and an $888.5 million increase in average interest-bearing liability balances in comparison to the second quarter of 2023. As reflected in Table 3 for the quarter, the favorable net interest income impacts of the increase in the yield on average interest-earning assets of $18.7 million and the volume increase in average interest-earning asset balances of $6.5 million were offset by the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $23.0 million and the volume increase in average interest-bearing liability balances of $2.3 million.

Previous wording

The higher yield on average interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents. The yield on average loans for the first quarter increased by 66 basis points compared to the first quarter of 2023, reflective of market-related increases in interest rates on new loans, an increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations. The first quarter of 2024 yield on average investments, including cash equivalents, increased 16 basis points compared to the prior year, as market interest rates increased and the proportion of higher-yielding cash equivalents increased. The current quarter’s yield on average investments, excluding cash equivalents, increased one basis point as the majority of the Company’s investment portfolio is comprised of fixed yield securities, while the yield on average cash equivalents increased 190 basis points compared to the first quarter of 2023.

Current wording

The 53 basis point increase in the average yield on interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents. The yield on average loans for the second quarter increased by 63 basis points compared to the second quarter of 2023. The second quarter of 2024 yield on average investments, including cash equivalents, increased six basis points compared to the prior year while the yield on average investments, excluding cash equivalents, increased four basis points for the same timeframe. The 58 basis point increase in the yield on interest-earning assets for the first six months of 2024 was the result of a 64 basis point increase in the yield on average loans and an 11 basis point increase in the yield on average investments, including cash equivalents, compared to the prior YTD period. Excluding cash equivalents, the yield on average investments increased two basis points compared to the prior YTD period. The increase in loan yields were reflective of higher interest rates on new loans, an increase in variable and adjustable-rate loan yields driven by higher market interest rates, including the prime rate, and a high level of new loan originations. As the majority of the Company’s investment portfolio, excluding cash equivalents, is comprised of fixed yield securities, the increase in investment yields were driven by the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods.

Previous wording

The average book balance of investments in the first quarter, including cash equivalents, decreased $530.5 million, or 10.0%, as compared to the corresponding prior year period due to a $733.0 million, or 13.9%, decrease in average investment balances, reflective of sales and maturities of certain available-for-sale investment securities, partially offset by a $202.5 million increase in average cash equivalents. Investment purchases outpaced sales, maturities, calls and principal payments during the first quarter of 2024 driven by $38.4 million of government agency mortgage-backed securities purchases classified as held-to-maturity. Average loan balances were $904.5 million, or 10.2%, greater than the prior year’s first quarter balances with increases in all five major loan portfolios due to high levels of organic growth.

Current wording

The second quarter and YTD average book balance of investments, including cash equivalents, decreased $232.2 million and $380.1 million, respectively, as compared to the corresponding prior year periods, primarily due to declines in the investment securities portfolio driven by scheduled maturities and the sales of certain available-for-sale investment securities combined with cashflows being redeployed into loan originations. Investment purchases outpaced sales, maturities, calls and principal payments during the second quarter and YTD periods, driven by $85.9 million of YTD government agency mortgage-backed securities purchases classified as held-to-maturity. The cash equivalents component of average interest-earning assets increased $20.4 million and $111.5 million for the second quarter and YTD periods, respectively, compared to the prior year periods. Average loan balances increased $896.5 million for the quarter and $900.0 million YTD as compared to the prior year, with increases in all five major loan portfolios between both periods due to high levels of organic growth.

Previous wording

The first quarter of 2024 rate on average interest-bearing liabilities increased 115 basis points compared to the prior year first quarter reflective of a 111 basis point increase in the rate paid on average interest-bearing deposits and a 103 basis point increase in the rate paid on average borrowings. The increase in the rate paid on average interest-bearing deposits was due to interest rates on certain interest-bearing deposits being raised in response to market conditions, including the effects of a 100 basis point increase in the Federal Funds rate during 2023 as a result of the Federal Reserve Bank’s efforts to lower elevated inflation, and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types. The increase in the rate paid on average borrowings was primarily the result of higher market interest rates between the periods and the Company securing $400.0 million of fixed rate Federal Home Loan Bank term borrowings in the third and fourth quarters of 2023 to help meet the Company’s funding needs.

Current wording

The rate paid on average interest-bearing liabilities increased by 89 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased 84 basis points and the average rate paid on external borrowings increased 111 basis points from the comparable prior period. For the first six months of 2024, the rate paid on average interest-bearing liabilities increased by 102 basis points from the comparable prior year period as the rate paid on average interest-bearing deposits increased 97 basis points and the rate paid on average external borrowings increased 105 basis points. The increase in the rate paid on average interest-bearing deposits was due to interest rates on certain interest-bearing deposits being raised in response to market conditions, including the effects of a 100 basis point increase in the Federal Funds rate during 2023 as a result of the Federal Reserve Bank’s (“Federal Reserve” or “FRB”) efforts to lower elevated inflation, and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types. The increase in the rate paid on average borrowings was primarily the result of higher market interest rates between the periods and the Company securing $400.0 million of fixed rate FHLB term borrowings in the third and fourth quarters of 2023 and $150.0 million of additional fixed rate FHLB term borrowings in the second quarter of 2024 to help meet the Company’s funding needs including the funding of the Company’s strong loan growth.

Previous wording

Table 2 below sets forth information related to average interest-earning assets and average interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 24.4% in 2024 and 24.3% in 2023. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment, late and other fees and the accretion of acquired loan marks. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

Current wording

Tables 2a and 2b below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 24.4% in 2024 and 24.3% in 2023. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment, late and other fees and the accretion of acquired loan purchase discounts and premiums. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

Previous wording

As displayed in Table 4, noninterest revenues were $70.3 million in the first quarter of 2024. This represents an increase of $56.8 million for the quarter in comparison to the same 2023 timeframe which was primarily a result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the prior year’s first quarter. Operating noninterest revenues, a non-GAAP measure that excludes loss on sales of investment securities, gain on debt extinguishment and unrealized gain on equity securities from total noninterest revenues, were $70.3 million in the first quarter, an increase of $4.7 million, or 7.1%, from the same quarter last year. The increase in operating noninterest revenues, a non-GAAP measure, was driven by increases in employee benefit services revenues, banking noninterest revenues and wealth management services revenues, partially offset by a decrease in insurance services revenues.

Current wording

As displayed in Table 4, noninterest revenues totaled $74.4 million for the second quarter of 2024 and $144.7 million for the first six months of 2024. This represents an increase of $8.4 million, or 12.7%, for the quarter and an increase of $65.2 million, or 82.0%, for the YTD period in comparison to the equivalent 2023 periods. Noninterest revenues for the second quarter and YTD periods of 2024 included a $0.9 million unrealized gain on equity securities associated with the conversion of certain Visa Class B shares to Visa Class C shares and a $0.2 million loss on sales of investment securities associated with the sales of certain available-for-sale investment securities. Noninterest revenues for the first six months of 2023 included a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the prior year’s first quarter and a $0.2 million gain on debt extinguishment. Operating noninterest revenues, a non-GAAP measure as defined in the table above, totaled $73.8 million for the second quarter of 2024, an increase of $7.7 million, or 11.7%, from the prior year’s second quarter and totaled $144.0 million for the first six months of 2024, an increase of $12.4 million, or 9.4%, from the first six months of 2023. The increases between both periods reflected growth in employee benefit services revenues, banking noninterest revenues, insurance services revenues and wealth management services revenues.

Previous wording

Employee benefit services revenues increased $2.3 million, or 7.9%, as compared to the prior year first quarter primarily related to a year-over-year increase in the total participants under administration, along with growth in asset-based fee revenues resulting from market appreciation and the acquisition of certain assets of Creative Plan Designs Limited, a provider of employee benefit plan design, administration and consulting, on February 1, 2024. Wealth management services revenues increased $1.0 million, or 11.7%, as compared to the prior year first quarter as more favorable investment market conditions drove an increase in assets under management between the periods. Insurance services revenues decreased $0.4 million, or 3.6%, for the first quarter of 2024 as compared to the first quarter of 2023, reflective of timing differences in certain commercial policy renewals and lower insurance carrier-related contingency revenues.

Current wording

Employee benefit services revenues increased $3.5 million, or 12.4%, and $5.9 million, or 10.1%, for the three and six months ended June 30, 2024, respectively, as compared to the equivalent prior year periods driven by new business and increases in the total participants under administration, along with growth in asset-based fee revenues resulting from market appreciation and the acquisition of certain assets of Creative Plan Designs Limited, a provider of employee benefit plan design, administration and consulting, on February 1, 2024.

Previous wording

The ratio of noninterest revenues to total revenues was 39.6% for the first quarter of 2024, compared to 10.8% for the prior year’s first quarter. The increase was primarily the result of the $56.8 million increase in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities recognized in the prior year’s first quarter, while net interest income decreased 3.6%, driven by funding cost pressures.

Current wording

The ratio of noninterest revenues to total revenues was 40.5% for the second quarter of 2024 and 40.1% for June YTD 2024, compared to 37.6% for the prior year’s second quarter and 26.5% for June YTD 2023. The quarterly increase was due to noninterest revenues increasing 12.7% while net interest income increased 0.1%. The YTD increase was primarily the result of the $65.2 million, or 82.0%, increase in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities recognized in the prior year’s first quarter, while net interest income decreased 1.8% driven by funding cost pressures.

Previous wording

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 39.4% for the quarter ended March 31, 2024 versus 36.9% for the equivalent period of 2023. The increase was driven by a 7.1% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, decreased 3.7%, driven by funding cost pressures.

Current wording

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 40.1% for the quarter and 39.7% for the six months ended June 30, 2024, respectively, versus 37.4% and 37.2% for the comparable periods of 2023. The increase between the quarterly periods was due to an 11.7% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, was flat. The year-to-date increase was a function of a 9.4% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, decreased 1.8%, driven by funding cost pressures.

Previous wording

Table 5 below sets forth the quarterly results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.

Current wording

Table 5 below sets forth the quarterly and YTD results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.

Previous wording

The increase in salaries and benefits expense was driven by merit and market-related increases in employee wages, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense. Other expenses were up primarily due to increases in insurance expenses and non-service related components lowering the net periodic pension benefit credit. The increase in insurance expenses included $0.4 million associated with an additional expected increase to the FDIC special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate. The increase in data processing and communications expenses is reflective of the Company’s continued investment in customer-facing and back-office technologies including investments being made in additional system resources to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents.

Current wording

The increases in salaries and benefits expense were driven by merit and market-related increases in employee wages and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense. The increases in data processing and communications expenses are reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure, including the detection and prevention of customer payment-related fraud. The increase in other expenses on a YTD basis was primarily due to increases in insurance expenses and non-service related components lowering the net periodic pension benefit credit. The increase in insurance expenses included $0.3 million associated with an additional expected increase to the Federal Deposit Insurance Corporation (“FDIC”) special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate.

Previous wording

The Company’s GAAP efficiency ratio was 66.6% for the first quarter of 2024, 25.0 percentage points favorable to the comparable quarter of 2023. This resulted from total revenues increasing 42.4%, primarily due to a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the prior year quarter, while total noninterest expenses increased 3.5% due to the factors noted above. Annualized current quarter noninterest expenses as a percentage of average assets were consistent with the first quarter of the prior year as noninterest expenses increased 3.5% due to the factors noted above and average assets increased 2.8% primarily due to the aforementioned organic loan growth.

Current wording

The Company’s GAAP efficiency ratio was 64.7% for the second quarter of 2024, 0.2 percentage points unfavorable to the comparable quarter of 2023. This resulted from total revenues increasing 4.9%, primarily due to higher noninterest revenues, while total noninterest expenses increased 5.3% due to the factors noted above. The GAAP efficiency ratio of 65.7% for June YTD 2024 was 10.1 percentage points favorable to the 75.8% GAAP efficiency ratio for June YTD 2023. The improvement in the GAAP efficiency ratio between the comparable YTD periods was the result of total revenues increasing 20.4% primarily due to the $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the first quarter of 2023, while total noninterest expenses increased 4.4% due to the factors noted above.

Previous wording

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 64.1% for the first quarter of 2024, 2.0 percentage points unfavorable to the comparable quarter of 2023. This resulted from operating noninterest expenses, a non-GAAP measure as described above, increasing 3.6%, while operating revenues (FTE), a non-GAAP measure as described above, increased by a lesser 0.3%. Current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets were consistent with the prior year first quarter. First quarter operating noninterest expenses, a non-GAAP measure as defined above, increased 3.6% year-over-year, while average assets increased 2.8% primarily due to the aforementioned organic loan growth.

Current wording

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 62.5% for the second quarter, 1.1 percentage points unfavorable to the comparable quarter of 2023. This resulted from operating noninterest expenses, a non-GAAP measure as described above, increasing 6.2%, while operating revenues (FTE), a non-GAAP measure as described above, increased 4.4%. The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, of 63.3% for the first six months of 2024 was 1.5 percentage points unfavorable compared to the first six months of 2023 due to 4.9% higher operating noninterest expenses, a non-GAAP measure as described above, while operating revenues (FTE), a non-GAAP measure as described above, increased by 2.3%.

Previous wording

The first quarter 2024 effective income tax rate was 22.9%, compared to 16.9% for the first quarter of 2023. The increase in the effective income tax rate was primarily attributable to a higher proportion of benefit derived from stock based compensation activity in relation to total income taxes during the first quarter of 2023 as total income taxes in the prior year’s first quarter were significantly lower driven by a $52.3 million realized loss on sales of investment securities. The Company recorded $0.2 million of tax expense associated with stock-based compensation in the first quarter of 2024 and a $0.3 million tax benefit associated with stock-based compensation in the first quarter of 2023, while total income tax expense was $12.2 million and $1.2 million for the same respective periods. The effective tax rates excluding the stock-based compensation tax benefits and federal tax credit amortization were 22.0% for the first quarter of 2024 and 21.4% for the first quarter of 2023, an increase of 0.6 percentage points primarily due to an increase in the full-year 2024 pre-tax income projection as compared to the prior year.

Current wording

The second quarter and YTD 2024 effective income tax rates were 22.8% and 22.9%, respectively, as compared to 21.4% and 21.0% for the comparable periods of 2023. The increase in the second quarter and YTD 2024 effective income tax rates are primarily attributable to an increase in the full-year 2024 pre-tax income projection as compared to the prior year, as the prior YTD included a $52.3 million realized loss on sales of investment securities. The Company recorded a $0.2 million income tax expense and a $0.3 million income tax benefit associated with stock-based compensation for YTD 2024 and YTD 2023, respectively. The effective tax rates adjusted to exclude stock-based compensation tax benefits and federal tax credit amortization for the second quarter and YTD 2024 were 22.3% and 22.1%, respectively, as compared to 21.4% for both of the comparable periods of 2023.

Previous wording

The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $4.15 billion at the end of the first quarter, a decrease of $13.2 million, or 0.3%, from December 31, 2023 and $478.6 million, or 10.3%, lower than March 31, 2023. The book value (excluding unrealized gains and losses) of investment securities increased $28.8 million from December 31, 2023, driven by government agency mortgage-backed securities purchases, and decreased $440.9 million from March 31, 2023 due to the maturities of certain lower-yielding available-for-sale investment securities in the prior year. During the first quarter of 2024, the Company purchased $38.4 million of government agency mortgage-backed securities with an average yield of 5.71%, which the Company classified as held-to-maturity. These additions were offset by $16.7 million from investment maturities, calls, and principal payments during the first three months of 2024. Additionally, there was $9.4 million of net accretion on investment securities during the first quarter of 2024. The effective duration of the investment securities portfolio was 6.8 years at the end of the first quarter of 2024, as compared to 7.0 years at the end of 2023 and 6.8 years at the end of the first quarter of 2023.

Current wording

The carrying value of investment securities (including unrealized gains and losses) was $4.17 billion at the end of the second quarter, an increase of $1.3 million from December 31, 2023 and a decrease of $65.3 million, or 1.5%, from June 30, 2023. The book value of investment securities (excluding unrealized gains and losses) of $4.60 billion at the end of the second quarter increased $51.4 million from December 31, 2023 and decreased $69.4 million from June 30, 2023. During the first six months of 2024, the Company purchased $85.9 million of government agency mortgage-backed securities with an average yield of 5.65%, which the Company classified as held-to-maturity. The Company also participated in a Visa Class B share exchange during the second quarter of 2024, in which half of its Visa Class B shares were converted into Visa Class C shares that are convertible (with certain timing restrictions) to NYSE-traded Visa Class A shares, resulting in a $0.9 million unrealized gain on equity securities. These additions were offset by proceeds of $31.0 million from sales of tax-exempt obligations of state and political subdivisions available-for-sale investment securities and $34.6 million of investment maturities, calls and principal payments during the first six months of 2024. A realized loss of $0.2 million was recognized on the sales of tax-exempt obligations of state and political subdivisions available-for-sale investment securities during the second quarter of 2024. Additionally, there was $18.9 million of net accretion on investment securities during the first six months of 2024. The effective duration of the investment securities portfolio was 6.6 years at the end of the second quarter of 2024, as compared to 7.0 years at the end of 2023 and 7.2 years at the end of the second quarter of 2023.

Previous wording

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At March 31, 2024, the investment portfolio (excluding held-to-maturity investment securities) had a $422.7 million net unrealized loss, a $42.0 million increase from the $380.7 million net unrealized loss at December 31, 2023 and a $37.7 million increase from the $385.0 million net unrealized loss at March 31, 2023. These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases and maturities that have occurred over the past 12 months.

Current wording

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At June 30, 2024, the investment portfolio (excluding held-to-maturity investment securities) had a $430.9 million net unrealized loss, as compared to a $380.7 million net unrealized loss at December 31, 2023 and a $435.0 million net unrealized loss at June 30, 2023. These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities sales and maturities that have occurred over the past 12 months.

Previous wording

The following table sets forth the carrying value for the Company’s investment securities portfolio:

Current wording

The following table sets forth the carrying value of the Company’s investment securities portfolio:

Previous wording

Loans ended the first quarter at $9.88 billion, $178.9 million, or 1.8%, higher than December 31, 2023 ending loans and $901.2 million, or 10.0%, higher than March 31, 2023.

Current wording

Loans ended the second quarter at $10.02 billion, $319.3 million, or 3.3%, higher than December 31, 2023 ending loans and $853.1 million, or 9.3%, higher than June 30, 2023.

Previous wording

The combined total of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $472.3 million, or 12.6%, from March 31, 2023, and $135.8 million, or 3.3%, from December 31, 2023, driven by net organic growth over both periods. Non-owner occupied commercial real estate increased $38.7 million, or 2.3%, multifamily increased $38.5 million, or 6.2%, business non-real estate loans, including commercial and industrial lending, increased $34.1 million, or 3.4%, and owner-occupied commercial real estate increased $24.5 million, or 3.3%, as compared to December 31, 2023. While certain macroeconomic concerns have emerged related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to this portfolio is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 25% of total loans and 201% of total bank-level regulatory capital. Commercial real estate lending represents 75.5% of the total business lending portfolio at March 31, 2024 while other commercial and industrial lending represents the remaining 24.5% of total business lending. The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 20.6% of total business lending, followed by office and commercial construction, at 11.7% and 11.2%, respectively. The Company’s largest owner-occupied and commercial and industrial lending concentration by industry is retail trade at 7.7% of total business lending, followed by health care and social assistance at 2.8% and real estate rental and leasing at 2.4%. These levels demonstrate the Company’s diversity in the lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 13% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas. See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

Current wording

Mortgages on commercial property combined with general-purpose business lending to commercial, industrial, non-profit and municipal customers and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $460.5 million, or 12.0%, from June 30, 2023, and $209.8 million, or 5.1%, from December 31, 2023, driven by net organic growth over both periods. Business non-real estate loans, including commercial and industrial lending, increased $92.7 million, or 9.3%, owner-occupied commercial real estate increased $63.9 million, or 8.5%, multifamily increased $43.9 million, or 7.1%, and non-owner occupied commercial real estate increased $9.3 million, or 0.5%, as compared to December 31, 2023. While certain macroeconomic concerns are persisting related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to these portfolios is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 24% of total loans and 198% of total bank-level regulatory capital. Commercial real estate lending represents 74.5% of the total business lending portfolio at June 30, 2024 while other business lending including commercial and industrial loans represents the remaining 25.5% of total business lending. The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 20.7% of total commercial real estate lending, followed by office at 11.5% and commercial construction, at 10.7%. The Company’s largest owner-occupied commercial real estate lending concentration by industry is retail trade at 8.3% of total commercial real estate lending, followed by health care and social assistance at 2.8% and real estate rental and leasing at 2.7%. These levels demonstrate the Company’s diversity in the business lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 13% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas. See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

Previous wording

The balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas. Competitive conditions for business lending continue to prevail in both the digital marketplace and geographic regions in which the Company operates. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company expects the composition of its growth in its business lending portfolio over the remaining three quarters of 2024 to be a proportionally higher balance of business non-real estate lending as compared to commercial real estate lending than that experienced by the Company over the past several years, in order to maintain the overall concentration of its CRE portfolio. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.

Current wording

The balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas, as well as the Company’s solid liquidity profile relative to competitors that creates opportunities to gain market share. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company expects the composition of its growth in its business lending portfolio over the remaining two quarters of 2024 to be a proportionally higher for business non-real estate lending than commercial real estate lending compared to what was experienced by the Company over the past several years, in order to maintain the overall concentration of its CRE portfolio. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.

Previous wording

Consumer mortgages increased $297.7 million, or 9.9%, from one year ago and increased $32.4 million, or 1.0%, from December 31, 2023, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of organic production. The Company sold $1.2 million and $6.8 million of consumer mortgage production during the first quarter of 2024 and over the last year, respectively. Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment. Reflective of the higher interest rate environment and consumer expectations of future interest rate movements, the consumer mortgage growth produced over the last quarter is comprised of a higher proportion of adjustable rate loans than experienced in recent periods. During the first quarter of 2024, approximately 32% of the net consumer mortgage growth is comprised of adjustable rate loans compared to approximately 9% over the last twelve months. The Company expects this trend to continue during the remainder of 2024. Home equity loans increased $14.0 million, or 3.2%, from one year ago and decreased $0.5 million, or 0.1%, from December 31, 2023, in part a result of lower levels of consumer mortgage refinancing-related payoffs and paydowns in the higher interest rate environment.

Current wording

Consumer mortgages increased $296.1 million, or 9.6%, from one year ago and increased $83.1 million, or 2.5%, from December 31, 2023, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of organic production. The Company sold $11.6 million and $12.8 million of consumer mortgage production during the three and six months ended 2024, respectively. Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment. Reflective of the higher interest rate environment and consumer expectations of future interest rate movements, the consumer mortgage growth produced over the last quarter is comprised of a higher proportion of adjustable rate loans than experienced in recent periods. During the first six months of 2024, approximately 30% of the net consumer mortgage growth is comprised of adjustable rate loans compared to approximately 13% over the last twelve months. The Company expects this trend to continue during the remainder of 2024. Home equity loans increased $12.8 million, or 2.9%, from one year ago and increased $5.5 million, or 1.2%, from December 31, 2023, in part a result of lower levels of payoffs and paydowns related to consumer mortgage refinancing in the higher interest rate environment.

Previous wording

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), increased $117.1 million, or 6.6%, from one year ago, and increased $11.1 million, or 0.6%, from December 31, 2023. The increase was primarily due to the Company offering competitive pricing, benefitting from reduced participation by certain competitors and capturing an increased share of the sales volumes that existed in its market area and dealer network, which, combined with higher vehicle sales prices, resulted in growth in the Company’s consumer installment portfolio. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer direct loans have historically provided attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

Current wording

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), increased $83.7 million, or 4.6%, from one year ago, and increased $20.8 million, or 1.1%, from December 31, 2023. The increases were primarily due to the Company offering competitive pricing, benefitting from reduced participation by certain competitors and capturing an increased share of the sales volumes that existed in its market area and dealer network, which resulted in growth in the Company’s consumer installment portfolio. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer direct loans have historically provided attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

Previous wording

The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the periods indicated, as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to change when the risk factors of each component part change. The allocation is not indicative of the specific amount of future net charge-offs that is expected to be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 9, total allowance for credit losses at the end of the first quarter was $70.1 million, an increase of $6.9 million, or 11.0%, from one year earlier and up $3.4 million, or 5.1%, from the end of 2023.

Current wording

The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the periods indicated, as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to change when the risk factors of each component part change. The allocation is not indicative of the specific amount of future net charge-offs that is expected to be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 9, total allowance for credit losses at the end of the first quarter was $71.4 million, an increase of $8.2 million, or 12.9%, from one year earlier and up $4.8 million, or 7.2%, from the end of 2023.

Previous wording

Allowance for credit losses, nonaccrual loans and loan net charge-off ratios are as follows:

Current wording

Allowance for credit losses and loan net charge-off ratios are as follows:

Previous wording

The net charge-offs during the first quarter of 2024 were $2.8 million, $1.3 million higher than the first quarter of 2023, with all portfolios experiencing higher net charge-off levels than the prior year. The total net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the first quarter of 2024 was 0.12%, five basis points higher than the first quarter of 2023, and two basis points above the level at the fourth quarter of 2023. Net charge-off ratios for the first quarter of 2024 for all loan portfolios were stable as compared to the Company’s average for the trailing eight quarters. Economic conditions are also relatively stable, with the unemployment rate in particular remaining low and supporting the moderate levels of net charge-offs experienced by the Company as compared to its historical trends.

Current wording

Net charge-offs during the second quarter of 2024 were $1.3 million, an increase of $0.6 million compared to the second quarter of 2023. Compared with the second quarter of 2023, the consumer installment portfolios experienced higher net charge-off levels while the business lending, consumer mortgage and home equity portfolios were below prior year levels. The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the second quarter was 0.05%, five basis points lower than the ratio for the fourth quarter of 2023 and two basis points higher than the ratio for the second quarter of 2023. Net charge-off ratios for the second quarter of 2024 for the business lending, consumer direct and home equity portfolios were above the Company’s average for the trailing eight quarters, while the net charge-off ratio for the consumer mortgage and consumer indirect portfolios were below the Company’s average for the trailing eight quarters. Economic conditions continue to be relatively stable, supporting the moderate levels of net charge-offs experienced by the Company as compared to its historical trends.

Previous wording

Other real estate owned (“OREO”) at March 31, 2024 was $1.7 million as compared to $0.5 million at March 31, 2023 and $1.2 million at December 31, 2023. At March 31, 2024, OREO consisted of 23 residential properties with a total value of $1.3 million and two commercial properties with a total value of $0.4 million. This compares to 21 residential properties with a total value of $1.1 million and one commercial property with a value of $0.1 million at December 31, 2023, and eight residential properties with a total value of $0.5 million and no commercial properties at March 31, 2023. The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.

Current wording

Other real estate owned (“OREO”) at June 30, 2024 was $1.7 million. This compares to $1.2 million at December 31, 2023 and $0.6 million at June 30, 2023. At June 30, 2024, OREO consisted of 24 residential properties with a total value of $1.4 million and one commercial property with a value of $0.3 million. This compares to 21 residential properties with a total value of $1.1 million and one commercial property with a value of $0.1 million at December 31, 2023, and 11 residential properties with a total value of $0.6 million at June 30, 2023. The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.