Hancock Whitney Corp: Form 10-Q for the period ended Jun 30, 2024

FORWARD-LOOKING STATEMENTS

The objective of this discussion and analysis is to provide material information relevant to the assessment of the financial condition and results of operations of Hancock Whitney Corporation and its subsidiaries during the six months ended June 30, 2024 and selected comparable prior periods, including an evaluation of the amounts and certainty of cash flows from operations and outside sources. This discussion and analysis is intended to highlight and supplement financial and operating data and information presented elsewhere in this report, including the consolidated financial statements and related notes. The discussion contains forward-looking statements within the meaning and protections of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q and in other reports or documents that we file from time to time with the SEC include, but are not limited to, the following:

• general economic and business conditions in our local markets, including conditions affecting employment levels, interest rates, inflation, the threat of recession, volatile equity capital markets, property and casualty insurance costs, collateral values, customer income, creditworthiness and confidence, spending and savings that may affect customer bankruptcies, defaults, charge-offs and deposit activity; and the impact of the foregoing on customer behavior (including the velocity and levels of deposit withdrawals and loan repayment);
• adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity and regulatory responses to these developments (including increases in the cost of our deposit insurance assessments), the Company's ability to effectively manage its liquidity risk and any growth plans, and the availability of capital and funding;
• balance sheet and revenue growth expectations may differ from actual results;
• the risk that our provision for credit losses may be inadequate or may be negatively affected by credit risk exposure;
• loan growth expectations;
• management’s predictions about charge-offs;
• fluctuations in commercial and residential real estate values, especially as they relate to the value of collateral supporting the Company's loans;
• the risk that our enterprise risk management framework may not identify or address risks adequately, which may result in unexpected losses;
• the impact of future business combinations upon our performance and financial condition including our ability to successfully integrate the businesses;
• deposit trends, including growth, pricing and betas;
• credit quality trends;
• changes in interest rates, including actions taken by the Federal Reserve Board and the impact of prolonged elevated interest rates on our financial projections, models and guidance;
• net interest margin trends, including the impact of ongoing elevated interest rates;
• changes in the cost and availability of funding due to changes in the deposit and credit markets;
• success of revenue-generating and cost reducing initiatives;
• future expense levels;
• changes in expense to revenue (efficiency ratio), including the risk that we may not realize and/or sustain benefits from efficiency and growth initiatives or that we may not be able to realize cost savings or revenue benefits in the time period expected, which could negatively affect our future profitability;
• the effectiveness of derivative financial instruments and hedging activities to manage risks;
• risks related to our reliance on third parties to provide key components of our business infrastructure, including the risks related to disruptions in services or financial difficulties of a third-party vendor;
• risks related to potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings or enforcement actions;
• risks related to the ability of our operational framework to manage risks associated with our business such as credit risk and operation risk, including third-party vendors and other service providers, which could among other things, result in a breach of operating or security systems as a result of a cyber-attack or similar acts;
• the extensive use, reliability, disruption, and accuracy of the models and data upon which we rely;
• risks related to our implementation of new lines of business, new products and services, new technologies, and expansion of our existing business opportunities;
• projected tax rates;
• future profitability;
• purchase accounting impacts, such as accretion levels;
• our ability to identify and address potential cybersecurity risks, which may be exacerbated by recent developments in generative artificial intelligence, on our systems and/or third party vendors and service providers on which we rely, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage to our systems, increased costs, losses, or adverse effects to our reputation;
• our ability to receive dividends from Hancock Whitney Bank could affect our liquidity, including our ability to pay dividends or take other capital actions;
• the risk that we may be required to make substantial expenditures to keep pace with regulatory initiatives and the rapid technology changes in the financial services market;
• the impact on our financial results, reputation, and business if we are unable to comply with all applicable federal and state regulations or other supervisory actions or directives and any necessary capital initiatives;
• our ability to effectively compete with other traditional and non-traditional financial services companies, some of whom possess greater financial resources than we do or are subject to different regulatory standards;
• our ability to maintain adequate internal controls over financial reporting;
• the financial impact of future tax legislation;
• the effects of war or other conflicts, acts of terrorism, climate change, natural disasters such as hurricanes, freezes, flooding, man-made disasters, such as oil spills in the Gulf of Mexico, health emergencies, epidemics or pandemics, or other catastrophic events that may affect general economic conditions, and/or increase costs, including, but not limited to, property and casualty and other insurance costs;
• risks related to environmental, social and governance ("ESG") legislation, rulemaking, activism and litigation, the scope and pace of which could alter our reputation and shareholder, associate, customer and third-party affiliations;
• changes in laws and regulations affecting our businesses, including governmental monetary and fiscal policies, legislation and regulations relating to bank products and services, increased regulatory scrutiny resulting from bank failures, as well as changes in the enforcement and interpretation of such laws and regulations by applicable governmental and self-regulatory agencies, which could require us to change certain business practices, increase compliance risk, reduce our revenue, impose additional costs on us, or otherwise negatively affect our businesses; and
• the risk that the regulatory environment may not be conducive to or may prohibit the consummation of future mergers and/or business combinations, may increase the length of time and amount of resources required to consummate such transactions, and the potential to reduce anticipated benefits from such mergers or combinations.

Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “forecast,” “goals,” “targets,” “initiatives,” “focus,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.

Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward looking statements. Additional factors that could cause actual results to differ materially can be found in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, or in other periodic reports that we file with the SEC.

You are cautioned not to place undue reliance on these forward-looking statements. We do not intend, and undertake no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.

OVERVIEW

Non-GAAP Financial Measures

Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe our performance. These non-GAAP financial measures have inherent limitations as analytical tools and should not be considered on a standalone basis or as a substitute for analyses of financial condition and results as reported under GAAP. Non-GAAP financial measures are not standardized and therefore, it may not be possible to compare these measures with other companies that present measures having the same or similar names. These disclosures should not be considered an alternative to GAAP.

A reconciliation of those measures to GAAP measures are provided in the Consolidated Financial Results table later in this item. The following is a summary of these non-GAAP measures and an explanation as to why they are deemed useful.

Consistent with the provisions of subpart 229.1400 of the Securities and Exchange Commission’s Regulation S-K, “Disclosures by Bank and Savings and Loan Registrants,” we present net interest income, net interest margin and efficiency ratios on a fully taxable equivalent ("te") basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using a statutory federal tax rate of 21% to increase tax-exempt interest income to a taxable equivalent basis. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources.

We present certain additional non-GAAP financial measures to assist the reader with a better understanding of the Company’s performance period over period, and to provide investors with assistance in understanding the success management has experienced in executing its strategic initiatives. The Company highlights certain items that are outside of our principal business and/or are not indicative of forward-looking trends in supplemental disclosure items below our GAAP financial data and presents certain "Adjusted" ratios that exclude these disclosed items. These adjusted ratios provide management and the reader with a measure that may be more indicative of forward-looking trends in our business, as well as demonstrates the effects of significant gains or losses and changes.

We define Adjusted Pre-Provision Net Revenue as net income excluding provision expense and income tax expense, plus the taxable equivalent adjustment (as defined above), less supplemental disclosure items (as defined above). Management believes that adjusted pre-provision net revenue is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle. We define Adjusted Revenue as net interest income (te) and noninterest income less supplemental disclosure items. We define Adjusted Noninterest Expense as noninterest expense less supplemental disclosure items. We define our Efficiency Ratio as noninterest expense to total net interest income (te) and noninterest income, excluding amortization of purchased intangibles and supplemental disclosure items, if applicable. Management believes adjusted revenue, adjusted noninterest expense and the efficiency ratio are useful measures as they provide a greater understanding of ongoing operations and enhance comparability with prior periods.

Current Economic Environment

Persistent inflation and the Federal Reserve's response to such remain in the forefront of the economic landscape. Thus far, the Federal Reserve has been successful in tempering inflation without precipitating a recession. Headline and core (excluding food and energy) inflation have receded considerably below the 40-year highs experienced in 2022, although at 3% and 3.3%, respectively, in June 2024, both remain above the Federal Reserve's target rate of 2%. Second quarter 2024 gross domestic product (GDP) was 2.8% on an annual basis. The labor market remains strong, but has softened, with the unemployment rate at 4.1% in June 2024, up from 3.8% in March 2024 and 3.6% a year earlier. Amid continued strong economic indicators and sustained disparity between the core inflation rate and the Federal Reserve's target rate, the Federal Reserve's benchmark interest rates has remained elevated for longer than originally anticipated. The Federal Reserve signaled in its July 2024 meeting that they will be attentive to both sides of their dual mandate of maximum employment and stable prices, leaving the door open for rate cuts as early as September 2024, depending on continued progress with economic indicators. While the continued strong pace of consumer spending and the strength of the labor market may help prevent or reduce the severity of a potential recession, the prolonged period of elevated interest rates and uncertainty surrounding the Federal Reserve's future actions with respect to monetary policy may adversely affect capital markets and could result in below-trend economic growth. Economic trends may be further influenced by factors outside of inflation, such continued pressure on the commercial real estate sector, uncertainty surrounding the upcoming U.S. presidential election, and ongoing geopolitical conflict.

Within the financial services industry, institutions continue to grapple with both macroeconomic and industry-specific headwinds. The elevated interest rate environment and heightened competition for deposits has fostered a continued shift within deposit composition toward higher cost products, although the pace of movement has continued to slow, allowing deposit costs to stabilize. The interest rate environment has also steadily affected the affordability of credit to consumers and businesses, moderating loan demand. At the same time, economic uncertainty and industry turmoil have prompted financial institutions to tighten credit standards. Many financial institutions, including ours, have also experienced some degree of deterioration in credit quality metrics from the mostly-benign credit environment experienced during the last three years.

Within our markets, loan growth remains tempered in response to heightened interest rates and increased insurance costs. Further, we continue to focus on full-service relationships. However, interest rates on new, renewed and repricing variable rate loans continue to result in higher yields on earning assets and, coupled with stabilization in funding costs, has contributed to net interest margin expansion.

Economic Outlook

We utilize economic forecasts produced by Moody’s that provide various scenarios to assist in the development of our economic outlook. This outlook discussion utilizes the June 2024 Moody’s forecasts, the most current available at the time of our computation of the June 30, 2024 allowance for credit losses. The forecasts are anchored on a baseline forecast scenario, which Moody’s defines as the “most likely outcome” of where the economy is headed based on current conditions. Several upside and downside scenarios are produced that are derived from the baseline scenario that display varying depictions of economic performance as compared to the baseline.

Management applied a weighting of 40% to the baseline and 60% to the mild recessionary S-2 scenario in the computation of the allowance for credit losses at June 30, 2024, consistent with the scenarios and respective weighting used at March 31, 2024. Our overall credit loss outlook has not changed significantly, and we continue to believe a mild recession is reasonably possible due to uncertainty in current economic conditions.

The baseline scenario continues to incorporate the belief that the Federal Reserve will accomplish its goal of bringing inflation to or below its target without precipitating a recession. Key assumptions within the June 2024 baseline forecast include the following: (1) the Federal Funds rate has reached its terminal value in the rate hiking cycle, with rate cuts of 25 basis points in September and December 2024, with subsequent rate cuts occurring until the benchmark rate reaches 3% in 2027; (2) while there has been softening in the labor market, the economy is at full-employment, and the unemployment rate will remain near its current level of 4% in the coming years; (3) GDP will display modest annual growth of 2.4% in 2024, 1.8% in 2025, and 1.9% in 2026; and (4) the 10-year U.S. Treasury yield will average 4.5% in the second quarter of 2024, and will approach its equilibrium level of 4% in 2025 and remain near this level through the end of the decade.

The S-2 scenario presents a downside alternative to the baseline. Compared to baseline, the S-2 scenario assumes that elevated interest rates weaken credit-sensitive spending more than anticipated, geopolitical conflict will create longer and farther-reaching disturbance, and continued disruption in the financial services industry will lead to additional tightening of credit standards. Further, the scenario assumes the unemployment rate will increase considerably to 4.6% in 2024 and 6.4% in 2025 before improving to 4.4% in 2026 and 4.0% in 2027. As the economy weakens, the Federal Reserve commences rate cuts in the third quarter of 2024, deeper than those assumed in the baseline. As a result of these pressures, the U.S. falls into a mild recession beginning in the third quarter of 2024 that lasts for three quarters, with the stock market contracting 22% and a peak-to-trough decline in GDP of 1%.

The credit loss outlook for our portfolio as a whole has not changed materially since March 31, 2024. We continue to closely monitor our portfolio for customers that are sensitive to prolonged inflation, the elevated interest rate environment and/or other economic circumstances that may impact credit quality. We expect end-of-period loan balances at December 31, 2024 to be flat or slightly down from the previous year end, reflecting our disciplined loan pricing, the potential for economic slowdown and a focus on lending to resilient borrowers with whom we have a full service relationship.

There are a number of uncertainties in the current economic outlook, including the Federal Reserve's actions with respect to monetary policy. The full extent of the impact of these factors, among others, is uncertain and may have a negative impact on the U.S. economy, including the possibility of an economic recession in the near or mid-term.

Highlights of the Second Quarter 2024

We reported net income for the second quarter of 2024 of $114.6 million, or $1.31 per diluted common share, compared to $108.6 million, or $1.24 per diluted common share, in the first quarter of 2024 and $117.8 million, or $1.35 per diluted common share, in the second quarter of 2023. The first quarter of 2024 includes a charge of $3.8 million, or $0.04 per diluted share after-tax, supplemental disclosure item attributable to a revision of the FDIC special assessment recorded in the prior quarter. There were no supplemental disclosure items in the second quarters of 2024 or 2023.

Second quarter 2024 results compared to first quarter 2024:

• Net income of $114.6 million, or $1.31 per diluted share, up $6.0 million, or $0.07 per diluted share
• Adjusted pre-provision net revenue, a non-GAAP measure, totaled $156.4 million, up $3.5 million, or 2%
• Period-end loans totaled $23.9 billion, down $59.3 million, or less than 1%
• Criticized commercial loans and nonaccrual loans continued to normalize from historically low levels; annualized net charge-offs declined to 0.12% compared to 0.15%
• Period-end deposits totaled $29.2 billion, down $575 million, or 2%
• Net interest margin of 3.37%, up 5 basis points (bps) from 3.32%
• Common equity tier 1 ratio of 13.25%, up 60 bps, and tangible common equity ratio of 8.77%, up 16 bps
• Efficiency ratio, a non-GAAP measure, of 56.18%, compared to 56.44%

Our results for the second quarter of 2024 represent solid performance. Net interest margin expansion, fee income growth and expense control efforts contributed to improved profitability. Our capital ratios remained strong as we enhanced shareholder value with the deployment of capital through an increased common share dividend and share repurchases during the quarter. Our allowance for credit losses is solid at 1.43% and our credit metrics remain at or below peer averages. As with many other institutions, credit metrics continue to normalize compared to the recent benign environment, but we have not seen signs of significant weakening in any portfolio or geographic segment. We remain mindful of potential headwinds, but we believe we are well positioned to navigate the current operating environment and as we celebrate our 125th anniversary of serving our customers.

Consolidated Financial Results

The following table contains the consolidated financial results for the periods indicated.

(in thousands, except per share data)

43

($ in thousands)

(a) For analytical purposes, management adjusts interest income and net interest income for tax-exempt items to a taxable equivalent basis using a federal income tax rate of 21%.

(b) The tangible common equity ratio is common stockholders’ equity less intangible assets divided by total assets less intangible assets.

(c) The efficiency ratio is noninterest expense to total net interest (te) and noninterest income, excluding amortization of purchased intangibles and supplemental disclosure items.

(d) Refer to the non-GAAP financial measures section of this analysis for a discussion of these measures.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income (te) for the second quarter of 2024 was $273.3 million, up $4.3 million, or 2%, compared to the first quarter of 2024, and was $542.3 million for the first six months of 2024, down $22.1 million, or 4%, from the comparable period in 2023.

The $4.3 million increase in net interest income (te) compared to the first quarter of 2024 is largely attributable to both higher loan yields and volumes, partially offset by higher levels of short-term borrowings. Interest income (te) was up $5.9 million, largely due to an 8 bp increase in the loan yield, which drove an overall 7 bp increase in the yield on average earning assets. Interest expense was up $1.6 million, largely due to a $354.9 million increase in average short-term borrowings which was partially offset by lower deposit costs. The net interest margin for the second quarter of 2024 was 3.37%, up 5 bps from 3.32% in the first quarter of 2024. The increase in the net interest margin from the prior quarter was largely driven by higher loan yields, higher securities yields, and lower deposit costs, partially offset by an increase in borrowing costs.

The $22.1 million decrease in net interest income (te) for the six months ended June 30, 2024 compared to the same period in 2023 reflects the growth in and prevailing rates on interest-bearing liabilities outpacing those of earning assets. The decline in net interest income (te) includes a $93.7 million increase in interest expense, partially offset by a $71.6 million increase in interest income (te). The increase in interest expense is largely due to a shift in the mix of deposits from noninterest-bearing and low interest-bearing transaction and savings deposits into higher cost products at competitive interest rates, partially offset by a decrease in the cost of borrowings, largely the result of the decrease in average FHLB advances. The increase in interest income (te) was largely driven by the increase in loan yields and loan growth. The net interest margin was down 8 bps from the first six months of 2023, driven largely by the cost of deposits. The rate on interest-bearing liabilities was up 84 bps compared to the first half of 2023, with the rate on interest-bearing deposits up 110 bps. The yield on average earning assets was up 52 bps, primarily driven by a 52 bp improvement in the loan yield.

We expect modest expansion in the net interest margin during 2024. This guidance assumes no Federal Reserve interest rate cuts, continued deposit remix, but at a slower pace, lower deposit costs, and continued repricing of securities and fixed rate loans.

The following tables detail the components of our net interest income (te) and net interest margin.

($ in millions)

(a) Taxable equivalent (te) amounts were calculated using a federal income tax rate of 21%.

(b) Includes nonaccrual loans.

(c) Average securities do not include unrealized holding gains/losses on available for sale securities.

(d) Included in interest income is net purchase accounting accretion of $0.8 million, $0.3 million, and $0.7 million for the three months ended June 30, 2024, March 31, 2024, and June 30, 2023, respectively.

($ in millions)

(a) Taxable equivalent (te) amounts were calculated using a federal income tax rate of 21%.

(b) Includes nonaccrual loans.

(c) Average securities do not include unrealized holding gains/losses on available for sale securities.

(d) Included in interest income is net purchase accounting accretion of $1.1 million, and $1.4 million for the six months ended June 30, 2024 and 2023, respectively.

Provision for Credit Losses

During the second quarter of 2024, we recorded a provision for credit losses expense of $8.7 million, compared to $13.0 million in the first quarter of 2024. The provision in the second quarter of 2024 included net charge-offs of $7.3 million and a reserve build of $1.4 million, compared to net charge-offs of $9.0 million and a reserve build of $4.0 million in the first quarter of 2024. Lower levels of charge-offs, loan balances and unfunded exposures are the primary drivers of the improvement in provision expense linked quarter. Annualized net charge-offs as a percentage of average loans in the second quarter of 2024 was 0.12%, down from 0.15%, in the first quarter of 2024. The second quarter of 2024 net charge-offs included $4.1 million in the commercial portfolio and $3.3 million in the consumer portfolio, partially offset by net recoveries of $0.1 million in the residential mortgage portfolio. The first quarter of 2024 net charge-offs included $5.3 million in the commercial portfolio and $3.9 million in the consumer portfolio, partially offset by net recoveries of $0.2 million in the residential mortgage portfolio. Net charge-offs in the commercial portfolio for the first quarter of 2024 includes an $8.8 million charge-off on a single commercial real estate - income producing credit and an $11.8 million recovery from a single legacy energy credit.

We recorded a provision for credit losses expense of $21.7 million for the six months ended June 30, 2024, compared to $13.7 million for the same period in 2023. The provision for credit losses in the first six months of 2024 included net charge-offs of $16.3 million and a reserve build of $5.4 million, compared to net charge-offs of $9.1 million and a reserve build of $4.6 million in the same period in 2023. The $8.0 million increase in provision for credit losses compared to the prior year is primarily attributable to normalization in the level of net charge-offs compared to a relatively benign credit environment. Net charge-offs in the first six months of 2024 of $16.3 million, or 0.14% of average loans, is comprised of net charge-offs of $9.4 million in the commercial portfolio and $7.1 million in the consumer portfolio, partially offset by net recoveries of $0.2 million in the residential mortgage portfolio. Net charge-offs in the first six months of 2023 of $9.1 million, or 0.08% of average loans, is comprised of net charge-offs of $4.6 million in the commercial portfolio and $5.0 million in the consumer portfolio, partially offset by net recoveries of $0.5 million in the residential mortgage portfolio.

We expect to see modest charge-offs and provision for credit losses in the remainder of 2024. However, loan growth, portfolio mix, asset quality metrics and future assumptions in economic forecasts will drive the level of credit loss reserves.

The discussion labeled "Allowance for Credit Losses and Asset Quality" that appears later in this Item provides additional information on these changes and on general credit quality.

Noninterest Income

Noninterest income totaled $89.2 million for the second quarter of 2024, up $1.3 million, or 2%, from the first quarter of 2024. The increase in noninterest income from the first quarter of 2024 is primarily attributable to increases in derivative income, trust fees and bank card and ATM fees, partially offset by a decline in investment and annuity fees and gains on sales of assets. For the six months ended June 30, 2024, noninterest income totaled $177.0 million, up $13.5 million, or 8%, from the same period in 2023. The increase is largely attributable to investment and annuity fees, other miscellaneous fees, gains on sales of assets, service charges on deposits, secondary mortgage market operations, and income from bank-owned life insurance, partially offset by a decline in derivative income. A more detailed discussion of these and other noninterest income variances follows.

The components of noninterest income are presented in the following table for the indicated periods.

($ in thousands)

Service charges on deposit accounts are composed of overdraft fees, and nonsufficient funds fees on business accounts, business and corporate account analysis fees, overdraft protection fees and other customer transaction-related charges. Service charges on deposits totaled $22.3 million for the second quarter of 2024, virtually flat compared to the first quarter of 2024, as analysis fees on business accounts resulting from account activity and sales performance were largely offset by decreases in consumer overdraft and service fees as a result of fewer instances of overdraft and the elimination of paper statement fees. For the six months ended June 30, 2024, services charges on deposits totaled $44.5 million, up $2.4 million, or 6%, from the same period in 2023. The year over year increase was driven primarily by analysis fees on business accounts, as a result of activity levels, balance outflows and sales performance, and consumer overdraft fees, partially offset by a decline in consumer service charges as a result of the elimination of paper statement fees.

Trust fee income represents revenue generated from a full range of trust services, including asset management and custody services provided to individuals, businesses and institutions. Trust fees totaled $18.5 million for the second quarter of 2024, up $1.4 million, or 8%, from the first quarter of 2024, largely attributable to increases in personal trust revenue as a result of seasonal tax preparation fees and institutional trust fees driven by market value and sales volume. For the six months ended June 30, 2024, trust fees totaled $35.6 million, an increase of $1.4 million, or 4%, from the same period in 2023. The year over year increase was primarily attributable to corporate and institutional trust revenue, driven by market value and sales volumes.

Bank card and ATM fees include interchange and other income from credit and debit card transactions, fees earned from processing card transactions for merchants, and fees earned from ATM transactions. Bank card and ATM fees totaled $21.8 million for the second quarter of 2024, up $1.2 million, or 6%, from the first quarter of 2024. The linked quarter increase reflects a return from the typical seasonal declines in debit and consumer credit card activity of the first quarter of the year, and increases in purchasing card and merchant revenue. Bank card and ATM fees for the six months ended June 30, 2024 totaled $42.4 million, up $0.7 million, or 2%, from the same period in 2023. The year over year change was driven primarily by increases in purchasing card activity and merchant fees.

Investment and annuity fees and insurance commissions, which include both fees earned from sales of annuity and insurance products, as well as managed account fees, totaled $9.8 million, down $2.1 million, or 17%, from the first quarter of 2024. The linked-quarter change was largely driven by a $1.1 million decline in annuity sales following record-high sales performance in the previous quarter, and a $0.5 million decline in investment fees. Investment and annuity fees and insurance commissions for the six months ended June 30, 2024 totaled $21.6 million, up $4.5 million, or 26%, from the same period in 2023. The year over year increase includes a $3.2 million increase in investment fees, and a $1.5 million increase in annuity fees, reflective of continued strong annuity sales performance and fixed-income trading commissions amid the elevated interest rate environment and favorable market conditions.

Income from secondary mortgage market operations is comprised of income produced from the origination and sales of residential mortgage loans in the secondary market. We offer a full range of mortgage products to our customers and typically sell longer-term fixed-rate loans while retaining the majority of adjustable-rate loans, as well as loans generated through programs to support customer relationships. Secondary mortgage market operations income will vary based on mortgage application volume, pull through rates, the percentage of loans ultimately sold in the secondary market and the timing of such sales. Income from secondary mortgage market operations was $3.5 million in the second quarter of 2024, up $0.7 million, or 23%, from the first quarter of 2024. For the six months ended June 30, 2024, income from secondary mortgage market operations totaled $6.4 million, up $2.0 million, or 44%, from the same period in 2023. The linked-quarter and year over year increases were largely driven by an upward trend in the percentage of mortgage loans sold in the secondary market as opposed to those held in our portfolio.

Income from bank-owned life insurance (BOLI) is typically generated through insurance benefit proceeds as well as the growth of the cash surrender value of insurance contracts held. Income from BOLI was $3.8 million for the second quarter of 2024, down $0.5 million, or 11%, from the first quarter of 2024, largely attributable to a decline in mortality gains. Income from BOLI for the six months ended June 30, 2024 totaled $8.0 million, up $1.3 million, or 20% from the same period in 2023 and is reflective of increases in both income from cash surrender value and mortality gains.

Credit-related fees include fees assessed on letters of credit and unused portions of loan commitments. Credit-related fees were $3.1 million for the second quarter of 2024, virtually flat compared to the first quarter of 2024. Credit-related fees for the six months ended June 30, 2024 totaled $6.3 million, up $0.3 million, or 4%, from the same period in 2023. Income from these products will vary based on letters of credit issued, credit line utilization and prevailing assessment rates.

Income or loss from customer and other derivatives is largely from our customer interest rate derivative program and totaled a loss of $1.1 million for the second quarter of 2024, compared to a loss of $2.8 million in the prior quarter. Derivative income can be volatile and is dependent upon the composition of the portfolio, volume and mix of sales and termination activity, and market value adjustments due to market interest rate movement. The linked-quarter improvement is largely reflective of a loss of $1.5 million recorded in the first quarter of 2024 related to assumption changes for certain valuation inputs on customer derivatives. For the six months ended June 30, 2024, loss from customer and other derivatives totaled $3.9 million, compared to income of $1.2 million for the same period in 2023. The current period includes the $1.5 million loss resulting from assumption changes associated with customer derivatives described above and $1.4 million increase in losses resulting from assumption changes to the Visa B derivative liability. The remainder of the decline is largely tied to the change in the interest rate environment present in each of the comparative periods, which affects demand for variable rate loans and related derivative products, valuation adjustments, and related collateral income/expense for the program as a whole.

Net gains on sales of premises, equipment and other assets consists primarily of net revenue earned from sales of excess-bank owned facilities and equipment no longer in use, gains on sales of Small Business Administration and other non-residential mortgage loans, and leases and other assets associated with the equipment finance line of business. Net gains on sales of premises, equipment and other assets totaled $1.0 million for the second quarter of 2024, compared to $2.8 million for the first quarter of 2024. The linked-quarter decline was largely driven by a gain on sale of bank premises and equipment and other miscellaneous activity recorded in the first quarter of 2024. Net gains on sales of premises, equipment and other assets for the six months ended June 30, 2024 totaled $3.8 million, compared to $1.0 million in the same period in 2023. The level of net gains or losses in a given reporting period will vary based on a variety of circumstances.

Other miscellaneous income is comprised of various items, including income from small business investment companies (SBIC), Federal Home Loan Bank (FHLB) stock dividends, and fees from loan syndication and other specialty lines of business. Other miscellaneous income totaled $6.4 million, up $0.6 million, or 9%. The linked-quarter increase was largely driven by a $0.5 million increase in SBIC income, which can vary from period to period. For the six months ended June 30, 2024, other miscellaneous income totaled $12.2 million, up $3.0 million, or 33%, from the same period in 2023. The year over year increase was largely driven by a $2.1 million increase in dividends on FHLB stock and other various smaller items.

We expect noninterest income to be up four to five percent for the full year of 2024 from the 2023 adjusted noninterest income of $337.7 million.

Noninterest Expense

Noninterest expense for the second quarter of 2024 was $206.0 million, down $1.7 million, or less than 1%, from the first quarter of 2024. Included in noninterest expense in the first quarter of 2024 was a supplemental disclosure item of $3.8 million attributable to a revision of the FDIC's special assessment related to certain bank failures of 2023. Excluding the impact of the supplemental disclosure item, noninterest expense for the second quarter of 2024 was up $2.1 million, or 1%, from the first quarter of 2024, with increases in data processing, other miscellaneous expenses, travel, professional services, advertising and net other retirement expense partially offset by decreases in personnel expenses, other real estate and foreclosed assets expense, and entertainment and contributions. For the six months ended June 30, 2024, noninterest expense totaled $413.7 million, up $10.7 million, or 3%, from the same period in 2023. Excluding the impact of the supplemental disclosure item, noninterest expense for the six months ended June 30, 2024 was up $6.9 million, or 2%, from the same period in 2023. The year over year increase was largely driven by personnel expense and data processing expense, partially offset by a decrease in net other retirement expense. A more detailed discussion of these and other noninterest expense variances follows.

The components of noninterest expense are presented in the following table for the indicated periods.

($ in thousands)

Personnel expense consists of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and insurance for medical, life and disability. Personnel expense totaled $118.7 million for the second quarter of 2024, down $2.4 million, or 2%. The linked quarter variance reflects seasonal declines in payroll tax and benefit expenses and a decline in incentive-based pay, which were partially offset by an increase in salaries attributable to annual merit increases. For the six months ended June 30, 2024, personnel expense totaled $239.9 million, up $9.7 million, or 4%, from the same period in 2023. The year over year change reflects annual increases across most salary and benefit categories that were partially offset by savings attributable to a decrease in headcount.

Occupancy and equipment expenses are primarily composed of lease expenses, depreciation, maintenance and repairs, rent, taxes, and other equipment expenses. Occupancy and equipment expenses totaled $17.5 million for the second quarter of 2024, down $0.2 million, or 1%, from the prior quarter, largely due to a modest reduction in building rent expense. For the six months ended June 30,

2024, occupancy and equipment expenses totaled $35.1 million, up $0.4 million, or 1%, driven largely by higher leased building costs, lower rental income and increases in insurance expense, partially offset by lower maintenance costs on fixed assets.

Data processing expense includes expenses related to third party technology processing and servicing costs, technology project costs and fees associated with bank card and ATM transactions, and may vary with transaction volume and timing of technology enhancement initiatives. Data processing expense was $31.4 million for the second quarter of 2024, up $2.6 million, or 9%, from the first quarter of 2024. The linked-quarter increase was driven in part by debit card processing expense and other activity-based processing fees and expenses associated with ongoing technology enhancements. For the six months ended June 30, 2024, data processing expense totaled $60.1 million, up $2.4 million, or 4%, from the same period in 2023, driven in part by certain activity-based processing fees and expenses associated with ongoing technology enhancements, increases in card rewards expense, and ATM servicing arrangement costs, as the current period reflects a full six months of expense associated with an arrangement entered into in 2023.

Professional services expense for the second quarter of 2024 totaled $9.5 million, up $0.4 million, or 5%, from the first quarter of 2024. For the six months ended June 30, 2024, professional services expense totaled $18.5 million, up $0.4 million, or 2%, from the same period in 2023. The linked-quarter and year over year increases were largely driven by expenses incurred for certain outsourcing initiatives.

Deposit insurance and regulatory fees for the second quarter of 2024 totaled $6.0 million, down $2.9 million, or 33%, from the first quarter of 2024. For the six months ended June 30, 2024, deposit insurance and regulatory fees totaled $14.9 million, up $2.6 million, or 21%, from the same period in 2023. Included in the first quarter of 2024 was a $3.8 million adjustment to the special assessment by the FDIC to cover losses incurred under the systemic risk exception following the failure of two large regional banks. Excluding the $3.8 million of expense associated with the special assessment, the linked-quarter and year over year changes in deposit insurance and regulatory fees were primarily attributable to modest changes in our risk-based assessment calculation.

The FDIC special assessment expense recorded to date is management's estimate of our portion of the cost attributable to the systemic risk exception based on the information available from the FDIC. However, the loss estimates resulting from the failures of Silicon Valley Bank and Signature Bank may be subject to further change pending the projected and actual outcome of loss share agreements, joint ventures, and outstanding litigation. The exact amount of losses incurred will not be determined until the FDIC terminates the receiverships; therefore, the exact exposure to the Company remains unknown.

Net gains on sales of other real estate and foreclosed assets outpaced expense by $1.1 million in the second quarter of 2024, compared to $0.2 million in the first quarter of 2024. For the six months ended June 30, 2024, net gains on sales of other real estate and foreclosed assets exceeded expense by $1.3 million compared to $0.1 million for the same period in 2023. The level of net expense or income associated with maintaining the other real estate owned portfolio can vary depending on sales activity and/or valuation adjustments. Gains or losses on the sale of other real estate and foreclosed assets may occur periodically and are dependent on the number and type of assets for sale and current market conditions.

Corporate value, franchise and other non-income tax expense for the second quarter of 2024 totaled $5.1 million, virtually flat compared to the prior quarter. For the six months ended June 30, 2024, corporate value, franchise and other non-income tax expense totaled $10.2 million, down $0.3 million, or 3%, from the same period in 2023, largely attributable to bank share tax. The calculation of bank share tax is based on multiple variables, including average quarterly assets, earnings and stockholders’ equity to determine the taxable assessment value.

Business development-related expenses (including advertising, travel, entertainment and contributions) totaled $7.6 million for the second quarter of 2024, up $0.4 million, or 5%, from the first quarter of 2024 driven largely by an increase in travel and advertising expense, partially offset by a decline in entertainment and contributions. For the six months ended June 30, 2024, business development-related expenses totaled $14.7 million, up $0.1 million, or 1%, from the same period in 2023. The timing and level of business development expense can vary based on business needs and promotional campaigns.

All other expenses, excluding amortization of intangibles, is comprised of a variety of other operational expenses and losses, tax credit investment amortization, and net other retirement expense. All other expenses totaled $9.1 million for the second quarter of 2024, up $1.4 million, or 18%, from the first quarter of 2024, largely in other miscellaneous expense. For the six months ended June 30, 2024, all other expenses totaled $16.7 million, down $2.2 million, or 12%, from the same period in 2023, driven in large part by a $2.4 million decrease in net other retirement expense.

We expect noninterest expense to be up two to three percent for the full year of 2024 from the 2023 adjusted noninterest expense of $810.7 million.

Income Taxes

The effective income tax rate for the second quarter of 2024 was 20.9% compared to 18.5% in the first quarter of 2024. The effective income tax rate for the six months ended June 30, 2024 was 19.8% compared to 20.1% for the same period in 2023.

Many factors impact the effective income tax rate including, but not limited to, the level of pre-tax income and relative impact of net tax benefits related to tax credit investments, tax-exempt interest income, bank-owned life insurance, and nondeductible expenses. Additionally, discrete tax items recognized in any given period affect the comparability of the effective income tax rate between periods. Such items include share-based compensation, valuation allowance changes, uncertain tax position changes and tax law changes. Based on the current forecast, management expects the effective income tax rate for 2024 will be in the 20% to 21% range, absent any changes in tax law.

Our effective tax rate has historically varied from the federal statutory rate primarily because of tax-exempt income and tax credits. Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the bank-owned life insurance program are the major components of tax-exempt income. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. These investments are made primarily in the markets we serve and are directed at tax credits issued under the Federal and State New Market Tax Credit (“NMTC”) programs, Low-Income Housing Tax Credit (“LIHTC”) programs, as well as pre-2018 Qualified Zone Academy Bonds (“QZAB”) and Qualified School Construction Bonds (“QSCB”). These investments generate tax credits, which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes.

We have invested in NMTC projects through investments in our own Community Development Entities (“CDE”), as well as other unrelated CDEs. Federal tax credits from NMTC investments are recognized over a seven-year period, while recognition of the benefits from state tax credits varies from three to five years. We have also invested in affordable housing projects that generate federal LIHTC tax credits that are recognized over a ten-year period, beginning in the year the rental activity begins. The amortization of the LIHTC investment cost is recognized as a component of income tax expense in proportion to the tax credits recognized over the ten-year credit period.

Based on tax credit investments that have been made to date in 2024, we expect to realize benefits from federal and state tax credits over the next three years totaling $9.8 million, $8.2 million, and $8.0 million in 2025, 2026, and 2027, respectively. We intend to continue making investments in tax credit projects. However, our ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity management ensures that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the Bank and other subsidiaries. As part of the overall asset and liability management process, liquidity management strategies and measurements have been developed to manage and monitor liquidity risk. The following table summarizes available liquidity at June 30, 2024:

($ in thousands)

(a) Amount used includes letters of credit.

Liquidity levels for financial institutions continue to have heightened focus since the failure of several major regional U.S. banks that experienced large-scale deposit runs in the first half of 2023. Dampened depositor confidence over a financial institution's ability to protect deposit balances in excess of the federally insured limit is thought to pose a higher likelihood of a deposit run, and, in turn, the risk that the institution may have insufficient liquidity to meet customer demand. At June 30, 2024, our available on and off-balance sheet liquidity of $19.4 billion is well in excess of our estimated uninsured, noncollateralized deposits of approximately $10.5 billion.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities and repayments of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements. Free securities represent unpledged securities that can be sold or used as collateral for borrowings, and include unpledged securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window. Total pledged securities were $3.6 billion at June 30, 2024, compared to $4.2 billion at March 31, 2024 and $4.7 billion at December 31, 2023. Management has established an internal target for the ratio of free securities to total securities of 20% or greater. As shown in the table below, our ratio of free securities to total securities was 53.24% at June 30, 2024, compared to 44.86% at March 31, 2024 and 38.80% December 31, 2023. The decline in pledged securities and related increase in free securities compared to the prior periods are the result of pledging of approximately $1.0 billion of FHLB letters of credit in lieu of securities in the second quarter of 2024. Both securities and FHLB letters of credit are pledged as collateral related to public funds and repurchase agreements.

The liability portion of the balance sheet provides liquidity mainly through the ability to use cash sourced from customers’ interest-bearing and noninterest-bearing deposit accounts. At June 30, 2024, deposits totaled $29.2 billion, down $0.6 million compared to March 31, 2024 and $0.5 million compared to December 31, 2023.

Brokered time deposits at June 30, 2024 totaled $200.1 million, down $194.7 million from March 31, 2024 and down $389.7 million from December 31, 2023. The brokered deposits held at June 30, 2024 bear interest at a weighted average rate of 5.52% with maturities between August 2024 and February 2025. The decrease from both comparative periods is attributable to net maturities of instruments that were not replaced. The use of brokered deposits as a funding source is subject to certain policies regarding the amount, term and interest rate.

Core deposits consist of total deposits excluding certificates of deposit of $250,000 or more and brokered deposits. Core deposits totaled $27.2 billion at June 30, 2024, down $402.1 million, or 1%, from March 31, 2024 and down $292.5 million, or 1%, from December 31, 2023. The decrease in core deposits from March 31, 2024 is primarily attributable to seasonal deposit outflows in noninterest-bearing and interest-bearing transaction and savings accounts and public funds. The ratio of core deposits to total deposits was 93.06% at June 30, 2024, compared to 92.61% at March 31, 2024 and 92.51% at December 31, 2023.

Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings from customers provide additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. At June 30, 2024, the Bank had $650 million in borrowings and approximately $5.3 billion available under this line. The unused borrowing capacity at the Federal Reserve’s discount window is approximately $3.4 billion. There were no outstanding borrowings with the Federal Reserve at any date during any period covered by this report.

Wholesale funds, which are comprised of short-term borrowings, long-term debt and brokered deposits were 6.63% of core deposits at June 30, 2024, compared to 4.71% at March 31, 2024 and 7.21% at December 31, 2023. At June 30, 2024, wholesale funds totaled $1.8 billion, an increase of $501.5 million, or 39%, from March 31, 2024 and a decrease of $180.5 million, or 9%, from December 31, 2023. The linked-quarter increase was primarily driven by a change in the funding mix as a result of the $650 million increase in FHLB borrowings. The Company has established an internal target for wholesale funds to be less than 25% of core deposits.

Other key measures used to monitor liquidity include the liquid asset ratio and the loan-to-deposit ratio. The liquid asset ratio (liquid assets, consisting of cash, short-term investments and free securities, divided by total liabilities) measures our ability to meet short-term obligations. Our liquid asset ratio was 16.30% at June 30, 2024, compared to 13.19% at March 31, 2024 and 12.69% at December 31, 2023. Management has established a minimum liquid asset ratio of 7.5% and an internal target of 12% or greater. The loan to deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding) measures the amount of funds the Company lends for each dollar of deposits on hand. Our average loan-to-deposit ratio for the second quarter of 2024 was 82.28%, compared to 80.55% for the first quarter of 2024 and 79.39% for the fourth quarter of 2023. Management has an established target range for the loan-to-deposit ratio of 87% to 89%, but will operate outside that range under certain circumstances.

Cash generated from operations is another important source of funds to meet liquidity needs. The Consolidated Statements of Cash Flows included in Part I, Item 1 of this document present operating cash flows and summarize all significant sources and uses of funds during the six months ended June 30, 2024 and 2023.

Dividends received from the Bank have been the primary source of funds available to the Parent for the payment of dividends to our stockholders and for servicing its debt. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Parent. The Parent targets cash and other liquid assets to provide liquidity in an amount sufficient to fund approximately six quarters of ongoing cash or liquid asset needs, consisting primarily of common stockholder dividends, debt service requirements, and any expected share repurchase or early extinguishment of debt. The Parent may operate below the target level on a temporary basis if a return to the target can be achieved in the near-term, generally not to exceed four quarters. The Parent had cash and liquid assets of $246.1 million at June 30, 2024, exceeding our internal target.

Capital Resources

Stockholders’ equity totaled $3.9 billion at June 30, 2024, up $67.3 million, or 2%, from March 31, 2024 and $117.1 million, or 3% from December 31, 2023. The increase from March 31, 2024 is primarily attributable to net income of $114.6 million and $7.0 million of long-term incentive plan and dividend reinvestment activity. These factors were partially offset by dividends of $35.3 million and share repurchases of $14.6 million, and other comprehensive loss of $4.4 million. The increase from December 31, 2023 is attributable to net income of $223.2 million and $7.1 million of long-term incentive plan and dividend reinvestment activity, partially offset by $61.8 million of dividends, $36.8 million of other comprehensive loss, and $14.6 million of share repurchases.

The tangible common equity (TCE) ratio was 8.77% at June 30, 2024, up 16 bps from 8.61% at March 31, 2024, driven primarily by tangible net earnings (+34 bps), stock compensation activity (+2bps), partially offset by dividends (-10 bps), an increase in tangible assets (-5 bps) and common share repurchases (-4 bps), and other comprehensive loss (-1bp).

The regulatory capital ratios of the Company and the Bank at June 30, 2024 remained well in excess of current regulatory minimum requirements, including capital conservation buffers, by at least $984 million. The Company and the Bank have been categorized as “well-capitalized” in the most recent notices received from our regulators. Refer to the Supervision and Regulation section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion of our capital requirements.

The following table shows the regulatory capital ratios for the Company and the Bank as calculated under current rules for the indicated periods. The capital ratios reflect the election to use the CECL five-year transition rule that allowed for the option to delay for two years the estimated impact of CECL on regulatory capital (0% in 2020 and 2021), followed by a three-year transition (25% in 2022, 50% in 2023, 75% in 2024, and 100% thereafter). The two-year delay included the full impact of January 1, 2020 cumulative effect impact plus an estimated impact of CECL calculated quarterly as 25% of the current ACL over the January 1, 2020 balance (modified transition amount). The modified transition amount was recalculated each quarter in 2020 and 2021, with the December 31, 2021 impact of $24.9 million plus day one impact of $44.1 million (net of tax) carrying through the remaining three years of the transition, as adjusted by the applicable transition percentage, equating to $17.2 million at June 30, 2024.

Approximately half of the improvement in the tier 1 and total risk-based capital ratios from March 31, 2024 is the result of a risk weighted asset optimization analysis associated with certain off-balance sheet commitments for home equity lines of credit.

We regularly perform stress analysis on our capital levels. One such scenario includes the hypothetical impact of including accumulated other comprehensive losses on market valuations of available for sale securities and cash flow hedges in regulatory capital and a further stress scenario that includes both those losses plus losses on the held to maturity investment portfolio in regulatory capital. We estimate that our regulatory capital ratios would remain in excess of the well-capitalized minimums under both of these stress scenarios at June 30, 2024.

On April 25, 2024, our board of directors approved a $0.10, or 33%, increase in the regular quarterly common stock cash dividend to $0.40 per share payable on June 14, 2024 to shareholders of record on June 5, 2024. The Company has paid uninterrupted dividends to its shareholders since 1967.

On January 26, 2023, our board of directors authorized the repurchase of up to 4,297,000 shares of the Company’s common stock (approximately 5% of the shares of common stock outstanding as of December 31, 2022). The authorization is set to expire on December 31, 2024. The shares may be repurchased in the open market, by block purchase, through accelerated share repurchase plans, in privately negotiated transactions or otherwise, in one or more transactions, from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the Securities and Exchange Commission. The Company is not obligated to purchase any shares under this program and the repurchase authorization may be terminated or amended by the Board at any time prior to the expiration date. During the second quarter of 2024, 312,993 shares were repurchased under this program at an average price of $46.72 per share, inclusive of commissions, representing the total number of shares repurchased under this plan.

BALANCE SHEET ANALYSIS

Short-Term Investments

Short-term assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors. Short-term investments, including interest-bearing bank deposits and federal funds sold, were $581.6 million at June 30, 2024, up $142.6 million from March 31, 2024 and down $45.5 million from December 31, 2023. Average short-term investments of $382.9 million for the second quarter of 2024 were down $151.0 million from the first quarter of 2024. Year-to-date average short term investments for the six months ended June 30, 2024 totaled $458.3 million, down $262.4 million compared to the same period in 2023. Typically, the balance of short-term investments will change on a daily basis depending upon movement in customer loan and deposit accounts. Comparative balances in 2023 were also impacted by excess liquidity held in response to the disruption in the financial industry caused by bank failures.

Securities

The purpose of the securities portfolio is to increase profitability, mitigate interest rate risk, provide liquidity and comply with regulatory pledging requirements. Our securities portfolio includes securities categorized as available for sale and held to maturity. Available for sale securities are carried at fair value and may be sold prior to maturity. Unrealized gains or losses on available for sale securities, net of deferred taxes, are recorded as accumulated other comprehensive income or loss in stockholders' equity.

Investment in securities totaled $7.5 billion at June 30, 2024, down $23.3 million, or less than 1%, from March 31, 2024 and $64.1 million, or 1%, from December 31, 2023. The decrease from December 31, 2023 is primarily due to an increase in unfavorable fair market valuation adjustment of $59.1 million on the available for sale portfolio.

At June 30, 2024, securities available for sale totaled $5.0 billion and securities held to maturity totaled $2.6 billion.

Our securities portfolio consists mainly of residential and commercial mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies. We invest only in high quality investment grade securities with a targeted portfolio effective duration generally between two and five and a half years. At June 30, 2024, the average expected maturity of the portfolio was 5.88 years with an effective duration of 4.38 years and a nominal weighted-average yield of 2.56%. Under an immediate, parallel rate shock using increases of 100 bps and 200 bps, the effective durations would be 4.38 and 4.35 years, respectively. At December 31, 2023, the average expected maturity of the portfolio was 6.22 years with an effective duration of 4.60 years and a nominal weighted-average yield of 2.48%. The changes in expected maturity, effective duration, and nominal weighted-average yield were largely the result of maturities and paydowns and reinvestment in the portfolio during the quarter. At June 30, 2024, approximately $514 million of our available for sale securities are hedged with $478 million in fair value hedges in order to provide protection and flexibility to reposition and/or reprice the portfolio in a rising interest rate environment, effectively reducing the duration (market price risk) on the hedged securities.

At the end of each reporting period, we evaluate the securities portfolio for credit loss. Based on our assessments, expected credit loss was not material for any period presented, and therefore no allowance for credit loss was recorded.

Loans

Total loans at June 30, 2024 were $23.9 billion, down $59.3 million, or less than 1%, from March 31, 2024 and down $10.3 million, or less than 1%, from December 31, 2023. The decrease from March 31, 2024 is largely attributable to the commercial non-real estate loan portfolio.

The following table shows the composition of our loan portfolio at each date indicated.

($ in thousands)

Commercial and industrial (“C&I”) loans includes both non-real estate and owner occupied real estate secured loans. The Bank lends mainly to middle market and smaller commercial entities, although it participates in larger shared credit loan facilities. C&I totaled $12.9 billion at June 30, 2024, down $64.5 million, or 1%, from March 31, 2024 and down $109 million, or 1%, from December 31, 2023. Loan growth in this portfolio segment has tempered, as demand has been affected by the interest rate environment, and as we refine our credit appetite and focus on full-relationship lending.

Shared national credits outstanding at June 30, 2024 totaled approximately $2.53 billion, or 10.6% of total loans, down $221.1 million from March 31, 2024 and down $100.6 million from December 31, 2023. The decline from both comparative periods was driven by a strategic reduction of exposure to credit-only relationships. At June 30, 2024, our larger concentrations in shared national credits include approximately $414 million to healthcare-related credits, $370 million to finance and insurance credits, $346 million to manufacturing credits, and $339 million to real estate rental and leasing credits, with the remainder of the balance in other diverse industries.

Our loan portfolio is well diversified by product, client, and geography throughout our footprint. Nevertheless, we may be exposed to certain concentrations of credit risk which exist in relation to different borrowers or groups of borrowers, specific types of collateral, industries, loan products, or regions. The following table provides detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes for all industries, with the exception of energy, which is based on the borrower’s source of revenue (i.e. a manufacturer whose income is derived from energy-related business is reported as energy).

( $ in thousands )

Commercial real estate - income producing loans totaled approximately $4.1 billion at June 30, 2024, up $11.0 million, or less than 1%, from March 31, 2024 and up $66.9 million, or 2%, from December 31, 2023. Construction and land development loans totaled approximately $1.5 billion at June 30, 2024, down $13.4 million, or 1%, from March 31, 2024, and down $22.7 million, or 1%, from December 31, 2023. The modest increase in commercial real estate - income producing loans was in part the result of completed construction projects moving to permanent financing. In addition, we continue to see slowing of prepayments in our commercial real estate - income producing portfolio driven by the current interest rate environment. We are continuing to limit our growth in income producing real estate with a focus on resilient projects given the current economic environment. The following table details the end-of-period aggregated commercial real estate - income producing and construction loan balances by property type. Loans reflected in 1-4 family residential construction include both loans to construction builders as well as single family borrowers.

( $ in thousands )

The residential mortgage loan portfolio totaled $4.0 billion at June 30, 2024, up $16.9 million, or less than 1%, from March 31, 2024 and up $114.1 million, or 3%, from December 31, 2023. Growth in residential mortgage includes a combination of completed construction loans converting to permanent financing, as well as new loan originations.

The consumer loan portfolio totaled $1.4 billion at June 30, 2024, down $9.3 million, or 1%, from March 31, 2024 and down $59.6 million, or 4%, from December 31, 2023. Changes in the consumer loan portfolio reflect both slowing demand and the impact of our exit from the indirect automobile lending market, where the existing portfolio is in run-off. The indirect loan portfolio totaled $32.2 million at June 30, 2024, down $9.3 million from March 31, 2024 and down $20.3 million from December 31, 2023.

Average loans for the second quarter of 2024 of $23.9 billion were up $107.2 million, or less than 1%, compared to the first quarter of 2024.

Management expects December 31, 2024 period-end loans to be flat or down slightly compared to the December 31, 2023 balance of $23.9 billion.

Allowance for Credit Losses and Asset Quality

Our allowance for credit losses was $342.2 million at June 30, 2024, up $1.4 million from March 31, 2024 and up $5.4 million from December 31, 2023. The increase in the allowance for credit losses from March 31, 2024 is attributable to a $8.7 million provision for credit losses, partially offset by $7.3 million of net charge-offs. Our overall credit loss outlook is not significantly different from that at March 31, 2024. However, uncertainty related to inflationary pressure and the outcome of the Federal Reserve’s actions with respect to monetary policy, and stress in the commercial real estate sector continues to result in an elevated reserve relative to pre-pandemic levels. The allowance for loan loss increased $2.4 million and the reserve for unfunded lending commitments decreased $1.0 million from March 31, 2024. The modest increase in the allowance for loan losses at June 30, 2024 compared to March 31, 2024 reflects a relatively consistent credit loss outlook and continued focus on risks that impact certain segments within the Company’s loan portfolio. The decline in the reserve for unfunded commitments compared to March 31, 2024 was largely volume driven.

We utilized the June 2024 Moody's economic scenarios to inform our allowance for credit losses at June 30, 2024. After considering the variables underlying each of the Moody's economic scenarios, management probability-weighed the baseline scenario at 40% and the downside S-2 mild recessionary scenario at 60% in the computation of the allowance for credit losses at June 30, 2024, consistent with the weighting used in the prior quarter. Each of the scenarios considered have varying degrees of severity and duration of inflationary pressure, including volatility in commodities prices and impacts to the labor market, the consequences of the Federal Reserve's actions with regard to monetary policy, the effects of disruption in the financial services industry, and impacts from geopolitical unrest. Refer to the Economic Outlook section of this discussion and analysis for further information on the Moody’s scenarios and our weighting assumptions.

Our allowance for credit losses coverage to total loans was 1.43% at June 30, 2024, up from 1.42% at March 31, 2024 and 1.41% at December 31, 2023. The allowance for credit losses on the commercial portfolio totaled $273.8 million, or 1.48% of that portfolio, at June 30, 2024, up from $272.7 million, or 1.47%, at March 31, 2024. The allowance for credit losses on the residential mortgage portfolio totaled $41.7 million, or 1.04% of that portfolio, at June 30, 2024, up from $41.2 million, or 1.03%, at March 31, 2024. The allowance for credit losses on the consumer portfolio totaled $26.7 million, or 1.93% of that portfolio, at June 30, 2024, down slightly from $26.9 million, or 1.92%, at March 31, 2024.

Criticized commercial loans totaled $379.8 million at June 30, 2024, up $39.9 million, or 12% from $339.9 million at March 31, 2024 and $106.1 million, or 39%, from $273.7 million at December 31, 2023. Criticized loans are defined as those having potential weaknesses that deserve management’s close attention (risk-rated as special mention, substandard and doubtful), including both accruing and nonaccruing loans. The Company routinely assesses the ratings of loans in its portfolio through an established and comprehensive portfolio management process. In addition, the Company often reviews portfolios of loans to determine if there are areas of risk not specifically identified in its loan by loan approach. Criticized commercial loans comprised 2.05% of that portfolio at June 30, 2024, up from 1.83% at March 31, 2024 and 1.47% at December 31, 2023. While criticized commercial loans increased, we are not seeing significant weakening in any specific portfolio sector or geography. Management believes the increase is mostly reflective of expected normalization of credit metrics following the mostly benign credit environment in recent years and our credit metrics remain in the top quartile of our peers. Our criticized commercial loans at June 30, 2024 are diversified across many industries, with the largest concentrations being wholesale trade, totaling $66.7 million; construction, totaling $64.4 million; transportation and warehousing, totaling $48.5 million; manufacturing, totaling $43.3 million; real estate and rental and leasing, totaling $35.5 million; finance and insurance, totaling $29.4 million; retail trade, totaling $20.3 million; and accommodation, food services and entertainment, totaling $18.6 million. Commercial loans risk rated pass-watch totaled $450.5 million at June 30, 2024, down $20.5 million, or 4%, from $471.0 million at March 31, 2024 and up $16.9 million, or 4%, from December 31, 2023. The pass-watch risk rating includes credits with negative performance trends that reflect sufficient risk to cause concern, but have not risen to the level of criticized.

Net charge-offs were $7.3 million, or 0.12% of average total loans on an annualized basis in the second quarter of 2024, compared to $9.0 million, or 0.15% in the first quarter of 2024. The second quarter of 2024 net charge-offs included $4.1 million in the commercial portfolio and $3.3 million in the consumer portfolio, partially offset by net recoveries of $0.1 million in the residential mortgage portfolio. The first quarter of 2024 net charge-offs included $5.3 million in the commercial portfolio and $3.9 million in the consumer portfolio, partially offset by net recoveries of $0.2 million in the residential mortgage portfolio. Net charge-offs in the commercial portfolio for the first quarter of 2024 includes an $8.8 million charge-off on a single commercial real estate - income producing credit and an $11.8 million recovery from a single legacy energy credit. The following table sets forth activity in the allowance for credit losses for the periods indicated.

($ in thousands)

58

The following table sets forth for the periods indicated nonaccrual loans and loans modified or restructured, by type, and foreclosed and surplus ORE and other foreclosed assets. The table also includes loans past due 90 days or more and still accruing.

($ in thousands)

Nonaccrual loans plus ORE and foreclosed assets totaled $88.4 million at June 30, 2024, up $3.5 million from March 31, 2024 and $25.7 million from December 31, 2023. Nonaccrual loans of $86.3 million increased $4.2 million from March 31, 2024 and $27.2 million from December 31, 2023. While the level of nonaccrual loans continued to increase, the ratio remains relatively low at 0.36% of the total portfolio and we believe is largely representative of a continued normalization of credit metrics following a mostly benign credit environment in recent years. ORE and foreclosed assets were $2.1 million at June 30, 2024, down $0.7 million from March 31, 2024. Nonaccrual loans plus ORE and other foreclosed assets as a percentage of total loans, ORE and other foreclosed assets was 0.37% at June 30, 2024, up 2 bps from March 31, 2024 and 12 bps from December 31, 2023.

We expect to continue to see modest charge-offs and provision for credit losses for the remainder of 2024. Loan growth, portfolio mix, asset quality metrics and future assumptions in economic forecasts will drive the level of credit loss reserves.

Deposits

Deposits provide the most significant source of funding for our interest earning assets. Generally, our ability to compete for market share depends on our deposit pricing and our wide range of products and services that are focused on customer needs, among other factors. We offer high-quality banking services with convenient delivery channels, including online and mobile banking. We provide specialized services to our commercial customers to promote commercial deposit growth. These services include treasury management, industry expertise and lockbox services.

The failures of several large U.S. banks in the first half of 2023 created disruption in the financial services industry. While many factors played a role in the ultimate failures, these institutions had significant industry/demographic concentration within their deposit bases and a high ratio of uninsured deposits. Lack of diversity in concentration within a deposit base may increase the risk of events or trends that could prompt a larger-scale demand for deposits outflow. Concerns over a financial institution's ability to protect deposit balances in excess of the federally insured limit may increase the risk of a deposit run. We consider our deposit base to be seasoned, stable and well-diversified. We also offer our customers an insured cash sweep product (ICS) that allows customers to secure deposits above FDIC insured limits. We continue to see an increase in demand for the ICS product, with the balance totaling $403.9 million at June 30, 2024, compared to $372.5 million at March 31, 2024 and $303.8 million at December 31, 2023. At June 30, 2024, we have calculated our average deposit account size by dividing period-end deposits by the population of accounts with balances to be approximately $37,000 which includes $194,000 in our commercial and small business lines (excluding public funds), $125,400 in our wealth management business line, and $18,500 in our consumer business line.

Further, at June 30, 2024, our sources of liquidity exceed uninsured deposits. We have estimated the Bank’s amount of uninsured deposits using the methodologies and assumptions required for FDIC regulatory reporting to be approximately $13.8 billion at June 30, 2024, compared to $14.0 billion at March 31, 2024 and $13.8 billion at December 31, 2023. Our uninsured deposit total at June 30, 2024 includes approximately $3.3 billion of public funds that have pledged securities as collateral, leaving approximately $10.5 billion of noncollateralized, uninsured deposits compared to total liquidity of $19.4 billion. Our ratio of noncollateralized, uninsured deposits to total deposits was approximately 35.9% at June 30, 2024, compared to 35.4% at March 31, 2024 and 34.4% at December 31, 2023.

Total deposits were $29.2 billion at June 30, 2024, down $575.2 million, or 2%, from March 31, 2024 and down $489.3 million, or 2%, from December 31, 2023. Average deposits for the second quarter of 2024 were $29.1 billion, down $491.9 million, or 2%, from the first quarter of 2024.

The following table shows the composition of our deposits at each date indicated.

($ in thousands)

Noninterest-bearing demand deposits totaled $10.6 billion at June 30, 2024, down $159.9 million, or 1%, from March 31, 2024 and $388.3 million, or 4%, from December 31, 2023. Noninterest-bearing demand deposits comprised 36% of total deposits at June 30, 2024, unchanged compared to March 31, 2024 and down from 37% at December 31, 2023. Noninterest-bearing deposit levels have trended downward in recent quarters as customers shift to interest-bearing products amid the elevated interest rate environment and as spending increases in an inflationary environment. The current level of noninterest-bearing deposits to total deposits of 36% represents what we consider to be a more typical, pre-pandemic mix of noninterest-bearing and interest-bearing deposits.

Interest-bearing transaction and savings accounts totaled $10.8 billion at June 30, 2024, down $145.6 million, or 1%, from March 31, 2024 and up $143.4 million, or 1%, from December 31, 2023. The linked-quarter decrease is in part attributable to seasonality. Interest-bearing public fund deposits totaled $2.9 billion at June 30, 2024, down $144.5 million, or 5%, from March 31, 2024 and down $221.3 million, or 7%, from December 31, 2023. The decrease in public funds deposits is mostly reflective of typical seasonal outflows. Retail time deposits totaled $4.6 billion at June 30, 2024, up $69.5 million, or 2%, from March 31, 2024 and $366.5 million, or 9%, from December 31, 2023. Despite maturity concentrations and promotional rate reductions during the period, retail time deposits increased linked-quarter as rate offerings remain attractive. Brokered time deposits totaled $200.1 million at June 30, 2024, down $194.7 million from March 31, 2024 and $389.7 million from December 31, 2023 as a result of net maturities of instruments that were not replaced. Our brokered deposits bear interest at a weighted average rate of 5.52% with maturities between August 2024 and February 2025.

The rate paid on interest-bearing deposits for the second quarter of 2024 was virtually flat compared to the first quarter of 2024, with decreases in rates paid on time deposits and public funds deposits offsetting increases in rates paid on interest-bearing transaction and savings deposits. Rates paid on deposits will vary based on prevailing interest rates and promotional rate offerings on the various product types. The following table sets forth average balances and weighted-average rates paid on deposits for the second and first quarters of 2024 and the second quarter of 2023.

($ in millions)

The following sets forth the maturities of time certificates of deposit greater than $250,000 at June 30, 2024.

($ in thousands)

Management expects December 31, 2024 period-end deposits to be flat to down slightly from the December 31, 2023 balance of $29.7 billion.

Short-Term Borrowings

At June 30, 2024, short-term borrowings totaled $1.4 billion, up $696.2 million from March 31, 2024 and $209.1 million from December 31, 2023. The linked-quarter change is primarily attributable to a change in the funding mix that included an increase in FHLB borrowings of $650 million. Average short-term borrowings of $1.1 billion in the second quarter of 2024 were up $354.9 million, or 45%, from the first quarter of 2024.

Short-term borrowings are a core portion of the Company’s funding strategy and can fluctuate depending on our funding needs and the sources utilized. Customer repurchase agreements and FHLB borrowings are the major sources of short-term borrowings. Customer repurchase agreements are offered mainly to commercial customers to assist them with their cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Bank, amounts available will vary. FHLB borrowings are funds from the Federal Home Loan Bank that are collateralized by certain residential mortgage and commercial real estate loans included in the Bank’s loan portfolio, subject to specific criteria.

Long-Term Debt

Long-term debt totaled $236.4 million at June 30, 2024, virtually unchanged from March 31, 2024 and December 31, 2023.

Long-term debt at June 30, 2024 includes subordinated notes payable with an aggregate principal amount of $172.5 million, a stated maturity of June 15, 2060, and a fixed rate of 6.25% per annum that qualify as Tier 2 capital of certain regulatory capital ratios. Subject to prior approval by the Federal Reserve, the Company may redeem these notes in whole or in part on any of its quarterly interest payment dates after June 15, 2025.

OFF-BALANCE SHEET ARRANGEMENTS

Loan Commitments and Letters of Credit

In the normal course of business, the Bank enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Bank to varying degrees of credit risk and interest rate risk in much the same way as funded loans. Under regulatory capital guidelines, the Company and Bank must include unfunded commitments meeting certain criteria in risk-weighted capital calculations.

Commitments to extend credit include revolving commercial credit lines, non-revolving loan commitments issued mainly to finance the acquisition and development or construction of real property or equipment, and credit card and personal credit lines. The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates. A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent our future cash requirements.

A substantial majority of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services.

The contractual amounts of these instruments reflect our exposure to credit risk. The Bank undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support. At June 30, 2024, the Company had a reserve for credit losses on unfunded lending commitments totaling $26.1 million.

The following table shows the commitments to extend credit and letters of credit at June 30, 2024 according to expiration date.

($ in thousands)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There were no material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with those generally practiced within the banking industry which require management to make estimates and assumptions about future events. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, and the resulting estimates form the basis for making judgments about the carrying values of certain assets and liabilities not readily apparent from other sources. Actual results could differ significantly from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 15 to our consolidated financial statements included elsewhere in this report.

Our primary market risk is interest rate risk that stems from uncertainty with respect to the absolute and relative levels of future market interest rates that affect our financial products and services. In an attempt to manage our exposure to interest rate risk, management measures the sensitivity of our net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to promote a relatively stable net interest margin under varying rate environments.

Net Interest Income at Risk

The following table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in rates at June 30, 2024. Shifts are measured in 100 basis point increments in a range from -500 to +500 basis points from base case, with -300 through +300 basis points presented in the table below. Our interest rate sensitivity modeling incorporates a number of assumptions including loan and deposit repricing characteristics, the rate of loan prepayments and other factors. The base scenario assumes that the current interest rate environment is held constant over a 24-month forecast period and is the scenario to which all others are compared in order to measure the change in net interest income. Policy limits on the change in net interest income under a variety of interest rate scenarios are approved by the Board of Directors. All policy scenarios assume a static volume forecast where the balance sheet is held constant, although other scenarios are modeled.

The results indicate a general asset sensitivity across most scenarios driven primarily by repricing in variable rate loans and a funding mix which includes a large percentage of noninterest-bearing and lower rate sensitive deposits. As rates increased in the first half of 2023 and remain elevated, the funding mix has continued to shift to more rate sensitive deposits and wholesale funding which has resulted in a lower net interest income at risk measurements compared to recent years. When deemed prudent, management has taken actions to mitigate exposure to interest rate risk with on- or off-balance sheet financial instruments and intends to do so in the future. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and adding to, modifying or terminating existing interest rate swap agreements or other financial instruments used for interest rate risk management purposes.

Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to net interest income than indicated above. Strategic management of our balance sheet and earnings is fluid and would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets such as adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Also, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. All of these factors are considered in monitoring exposure to interest rate risk.

Economic Value of Equity (EVE)

EVE simulation involves calculating the present value of all future cash flows from assets and subtracting the present value of all future cash outflows from liabilities including the impact of off-balance sheet items such as interest rate hedges. This analysis results in a theoretical market value of the bank's equity or EVE. Management’s focus on EVE analysis is not on the resulting calculation of EVE itself, but instead on the sensitivity of EVE to changes in market rates. Policy limits on the change in EVE under a variety of interest rate scenarios are approved by the Board of Directors. The following table presents an analysis of the change in the Bank’s EVE resulting from instantaneous and parallel shifts in rates as of June 30, 2024. Shifts are measured in 100 basis point increments ranging from -500 to +500 basis points from base case, with -300 through +300 basis points presented in table below.

The net changes in EVE presented in the preceding table are within the parameters approved by the Boards of Directors. Because EVE measures the present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not consider factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, possible hedging activities, or changing product spreads, each of which could mitigate the adverse impact of changes in interest rates.

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, the Company’s disclosure controls and procedures were effective.

Our management, including the Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended June 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

In addition to the other information set forth in this Report, in evaluating an investment in the Company’s securities, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our 2023 Form 10-K. which could materially affect the Company's business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.

There are no material changes during the period covered by this Report to the risk factors previously disclosed in our 2023 Form 10-K.