Independent Bank (IBCP) - 2024 Q1 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements This chapter presents the company's condensed consolidated financial statements, offering a comprehensive overview of its financial performance and condition Condensed Consolidated Statements of Financial Condition This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific reporting dates Condensed Consolidated Statements of Financial Condition (in thousands of dollars) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Assets | | | | Cash and Bank Deposits | $41,646 | $68,208 | | Interest-Bearing Deposits | $120,198 | $101,573 | | Available-for-Sale Securities | $613,620 | $679,350 | | Held-to-Maturity Securities | $349,957 | $353,988 | | Loans, Net | $3,783,652 | $3,736,243 | | Total Assets | $5,231,255 | $5,263,726 | | Liabilities and Shareholders' Equity | | | | Total Deposits | $4,582,414 | $4,622,879 | | Other Borrowings | $49,977 | $50,026 | | Total Shareholders' Equity | $415,570 | $404,449 | | Total Liabilities and Shareholders' Equity | $5,231,255 | $5,263,726 | Condensed Consolidated Statements of Operations This section outlines the company's operational performance, detailing revenues, expenses, and net income for the reported periods Condensed Consolidated Statements of Operations (for the three months ended March 31, in thousands of dollars, except per share amounts) | Metric | 2024 | 2023 | | :----------------------- | :----- | :----- | | Total Interest Income | $65,126 | $53,936 | | Total Interest Expense | $24,929 | $15,495 | | Net Interest Income | $40,197 | $38,441 | | Provision for Credit Losses | $744 | $2,160 | | Total Non-interest Income | $12,561 | $10,551 | | Total Non-interest Expense | $32,193 | $30,957 | | Income Tax Expense | $3,830 | $2,884 | | Net Income | $15,991 | $12,991 | | Basic Net Income Per Share | $0.77 | $0.62 | | Diluted Net Income Per Share | $0.76 | $0.61 | Condensed Consolidated Statements of Comprehensive Income This section presents the company's comprehensive income, including net income and other comprehensive income components Condensed Consolidated Statements of Comprehensive Income (for the three months ended March 31, in thousands of dollars) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Net Income | $15,991 | $12,991 | | Other Comprehensive Income | $513 | $11,952 | | Comprehensive Income | $16,504 | $24,943 | Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (for the three months ended March 31, in thousands of dollars) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Net Cash from Operating Activities | $20,833 | $23,385 | | Net Cash from Investing Activities | $17,691 | $4,954 | | Net Cash from Financing Activities | $(46,461) | $124,309 | | Net Increase (Decrease) in Cash and Cash Equivalents | $(7,937) | $152,648 | | Cash and Cash Equivalents at End of Period | $161,844 | $227,019 | Condensed Consolidated Statements of Shareholders' Equity This section provides a detailed breakdown of changes in the company's shareholders' equity over the reporting periods Condensed Consolidated Statements of Shareholders' Equity (for the three months ended March 31, in thousands of dollars) | Metric | March 31, 2024 | March 31, 2023 | | :----------------------------------- | :------------- | :------------- | | Beginning Balance | $404,449 | $347,596 | | Net Income | $15,991 | $12,991 | | Cash Dividends | $(4,999) | $(4,860) | | Share-based Compensation | $591 | $569 | | Other Comprehensive Income | $513 | $11,952 | | Ending Balance | $415,570 | $367,714 | Notes to Interim Condensed Consolidated Financial Statements This section provides detailed notes to the interim condensed consolidated financial statements, explaining the basis of preparation, significant accounting policies, and key financial instrument disclosures 1. Preparation of Financial Statements This section outlines the basis for preparing the condensed consolidated financial statements and highlights key accounting policies - The condensed consolidated financial statements are prepared in accordance with SEC rules and regulations and should be read in conjunction with the company's Form 10-K annual report for the year ended December 31, 2023[24] - The unaudited condensed consolidated financial statements include all necessary adjustments for a fair presentation of the consolidated financial condition as of March 31, 2024, and December 31, 2023, and results of operations for the three months ended March 31, 2024, and 2023[25] - Key accounting policies include the determination of the Allowance for Credit Losses (ACL) and the valuation of capitalized mortgage servicing rights[25] 2. New Accounting Standards This section discusses the impact of recently issued accounting standards on the company's financial statements - FASB issued ASU 2020-04 and ASU 2022-06, providing temporary optional expedients and exceptions for reference rate reform (LIBOR to SOFR transition), which the company has utilized, ceasing new LIBOR-based loans and interest rate derivatives by December 31, 2021, with guidance effective until December 31, 2024[26][27] - ASU 2023-02 (Investments—Equity Method and Joint Ventures), effective January 1, 2024, expands the proportional amortization method for tax credit structures but has no material impact on the company's condensed consolidated financial statements[28] - ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures) are expected to be effective in the future but are not anticipated to have a material impact on the company's condensed consolidated financial statements[29][31] 3. Securities This section provides details on the company's available-for-sale and held-to-maturity securities portfolios Available-for-Sale Securities (AFS) Fair Value (in thousands of dollars) | Security Type | March 31, 2024 Fair Value | December 31, 2023 Fair Value | | :----------------------- | :-------------------- | :-------------------- | | U.S. Agency | $8,925 | $9,507 | | U.S. Agency Residential Mortgage-Backed | $78,495 | $81,217 | | U.S. Agency Commercial Mortgage-Backed | $12,055 | $12,297 | | Private Mortgage-Backed | $84,770 | $86,469 | | Other Asset-Backed | $64,833 | $112,931 | | State and Political Subdivision Obligations | $293,216 | $302,737 | | Corporate | $70,383 | $73,250 | | Trust Preferred Stock | $943 | $942 | | Total | $613,620 | $679,350 | Held-to-Maturity Securities (HTM) Carrying Value (in thousands of dollars) | Security Type | March 31, 2024 Carrying Value | December 31, 2023 Carrying Value | | :----------------------- | :-------------------- | :-------------------- | | U.S. Agency | $25,672 | $25,768 | | U.S. Agency Residential Mortgage-Backed | $107,123 | $108,770 | | U.S. Agency Commercial Mortgage-Backed | $4,123 | $4,146 | | Private Mortgage-Backed | $7,313 | $7,302 | | State and Political Subdivision Obligations | $159,010 | $161,352 | | Corporate | $45,767 | $45,702 | | Trust Preferred Stock | $949 | $948 | | Total | $349,957 | $353,988 | - As of March 31, 2024, total gross unrealized losses on available-for-sale securities amounted to $63,422 thousand, primarily due to widening credit spreads and/or rising interest rates since acquisition[32][34][36][37][38][39] - Management does not intend to liquidate any securities in an unrealized loss position and is not likely to be required to sell these securities before recovery of these unrealized losses[40] - As of March 31, 2024, the allowance for credit losses on non-U.S. agency held-to-maturity securities was $155 thousand; in the first quarter of 2024, the company sold a previously charged-off corporate security, recording a $1.1 million recovery[41][44] Available-for-Sale Securities Sales (for the three months ended March 31, in thousands of dollars) | Metric | 2024 | 2023 | | :------- | :----- | :----- | | Sales Proceeds | $37,273 | $278 | | Gross Gains | $14 | $0 | | Gross Losses | $283 | $222 | | Net Gains (Losses) | $(269) | $(222) | 4. Loans This section details the company's loan portfolio, including the allowance for credit losses and nonperforming loan metrics - As of March 31, 2024, the Allowance for Credit Losses (ACL) on loans increased to $56,313 thousand, up from $54,658 thousand as of December 31, 2023[56] Allowance for Credit Losses Analysis (for the three months ended March 31, in thousands of dollars) | Category | 2024 Ending Balance | 2023 Ending Balance | | :------------------- | :------------- | :------------- | | Commercial | $18,982 | $13,533 | | Mortgage | $20,903 | $20,113 | | Installment | $3,836 | $4,054 | | Subjective Allocation | $12,592 | $12,850 | | Total | $56,313 | $50,550 | Non-accrual Loans (in thousands of dollars) | Metric | March 31, 2024 | December 31, 2023 | | :------------------- | :------------- | :------------- | | Non-accrual Loans | $3,690 | $4,800 | | Loans 90+ Days Past Due and Still Accruing | $0 | $432 | | Total Non-accrual Loans | $3,690 | $5,232 | - As of March 31, 2024, two mortgage loans (1-4 family owner-occupied—non-jumbo), one mortgage loan (1-4 family—second lien), and one installment loan (other) were modified as troubled debt restructurings, totaling $0.39 million[61] Loan Delinquency Status (as of March 31, in thousands of dollars) | Days Past Due | March 31, 2024 Total | December 31, 2023 Total | | :----------- | :---------------- | :----------------- | | 30-59 Days | $7,348 | $3,266 | | 60-89 Days | $1,563 | $1,132 | | 90+ Days | $1,319 | $3,114 | | Total | $10,230 | $7,512 | 5. Shareholders' Equity and Earnings Per Common Share This section outlines changes in shareholders' equity and provides earnings per common share information - The Board of Directors authorized a stock repurchase program on December 19, 2023, to repurchase up to 1,100,000 shares of outstanding common stock by December 31, 2024; no common stock repurchases occurred during the three months ended March 31, 2024, and 2023[86] Net Income Per Common Share (for the three months ended March 31, in thousands of dollars, except per share amounts) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Net Income | $15,991 | $12,991 | | Basic Net Income Per Share | $0.77 | $0.62 | | Diluted Net Income Per Share | $0.76 | $0.61 | 6. Derivative Financial Instruments This section provides details on the company's derivative financial instruments and their fair values Derivative Financial Instruments Fair Value (in thousands of dollars) | Category | March 31, 2024 Fair Value | December 31, 2023 Fair Value | | :----------------------------------- | :-------------------- | :-------------------- | | Derivatives Designated as Hedging Instruments (Assets) | $22,126 | $20,313 | | Derivatives Designated as Hedging Instruments (Liabilities) | $397 | $3,359 | | Derivatives Not Designated as Hedging Instruments (Assets) | $19,164 | $18,370 | | Derivatives Not Designated as Hedging Instruments (Liabilities) | $18,947 | $18,476 | | Total Derivatives (Assets) | $41,290 | $38,683 | | Total Derivatives (Liabilities) | $19,344 | $21,835 | Notional Amounts of Derivatives Designated as Fair Value Hedges (in thousands of dollars) | Derivative Type | March 31, 2024 Notional Amount | December 31, 2023 Notional Amount | | :----------------------------------- | :-------------------- | :-------------------- | | Fixed Rate Swap Agreements - Commercial | $5,937 | $6,033 | | Fixed Rate Swap Agreements - AFS Securities | $148,895 | $148,895 | | Fixed Rate Swap Agreements - Installment | $100,000 | $100,000 | | Fixed Rate Swap Agreements - Mortgage | $100,000 | $100,000 | | Floating Rate Swap Agreements - FHLB Advances | $50,000 | $0 | | Interest Rate Cap Agreements - AFS Securities | $40,970 | $40,970 | | Total | $445,802 | $395,898 | - The company uses fixed-rate swap and cap agreements to hedge the fair value of certain fixed-rate commercial, mortgage, and installment loans, and available-for-sale securities, and floating-rate swap agreements to hedge the fair value of Federal Home Loan Bank (FHLB) advances[93][94][95] - The company has entered into interest rate floor agreements to manage the variability of future expected cash flows on certain commercial loans, which are designated as cash flow hedges[96] - Derivatives not designated as hedging instruments include interest rate lock mortgage loan commitments, mandatory sale mortgage loan commitments, and offsetting interest rate swap agreements with commercial loan customers[97][98] 7. Goodwill and Other Intangibles This section provides information on the company's goodwill and other intangible assets Intangible Assets, Net (in thousands of dollars) | Category | March 31, 2024 Carrying Value | December 31, 2023 Carrying Value | | :----------------------- | :-------------------- | :-------------------- | | Amortizing Intangible Assets - Core Deposits | $1,875 | $2,004 | | Non-amortizing Intangible Assets - Goodwill | $28,300 | $28,300 | | Total | $30,175 | $30,304 | Estimated Amortization of Core Deposit Intangible Assets (in thousands of dollars) | Period | Amount | | :----------------------- | :----- | | Nine Months Ending December 31, 2024 | $387 | | 2025 | $487 | | 2026 | $460 | | 2027 | $434 | | 2028 | $107 | | Total | $1,875 | 8. Share-Based Compensation This section details the company's share-based compensation arrangements, including restricted stock and performance share units Restricted Stock and Performance Share Unit (PSU) Grants (for the three months ended March 31) | Category | 2024 | 2023 | | :----------------------- | :----- | :----- | | Restricted Stock | 80,355 | 71,346 | | PSU | 18,822 | 18,790 | - Total share-based compensation expense recognized for the three months ended March 31, 2024, and 2023, under the long-term incentive plan, was $0.5 million for both periods[109] - As of March 31, 2024, total unrecognized compensation cost related to unvested restricted stock and PSUs was $4.3 million, expected to be recognized over a weighted-average period of 2.3 years[110] 9. Income Tax This section provides information on the company's income tax expense and deferred tax assets Income Tax Expense (for the three months ended March 31, in thousands of dollars) | Metric | 2024 | 2023 | | :------- | :----- | :----- | | Income Tax Expense | $3,830 | $2,884 | - The actual federal income tax expense differs from the amount computed at the statutory rate primarily due to tax-exempt interest income and tax-exempt income from increases in life insurance cash surrender value[111] - As of March 31, 2024, the company believes that the realization of substantially all of its deferred tax assets is more likely than not[112] - As of March 31, 2024, and December 31, 2023, the company had approximately $0.2 million in total unrecognized tax benefits[113] 10. Regulatory Matters This section outlines the company's compliance with regulatory capital requirements - As of March 31, 2024, the Bank had $187.3 million in positive undistributed earnings[114] - As of March 31, 2024, and December 31, 2023, the company's Bank was categorized as a "well-capitalized" institution, exceeding the minimum ratios for a well-capitalized institution plus the capital conservation buffer[115] Actual Capital Amounts and Ratios (as of March 31, 2024, in thousands of dollars) | Capital Ratio | Actual Amount | Actual Ratio | Minimum Amount for Well-Capitalized | Minimum Ratio for Well-Capitalized | | :----------------------------------- | :------- | :------- | :------- | :------- | | Total Capital to Risk-Weighted Assets (Consolidated) | $582,411 | 13.85% | $336,359 | 8.00% | | Tier 1 Capital to Risk-Weighted Assets (Consolidated) | $489,747 | 11.65% | $252,269 | 6.00% | | Common Equity Tier 1 Capital to Risk-Weighted Assets (Consolidated) | $451,226 | 10.73% | $189,202 | 4.50% | | Tier 1 Capital to Average Assets (Consolidated) | $489,747 | 9.29% | $210,943 | 4.00% | 11. Fair Value Disclosures This section explains the company's fair value measurement methodologies and classifications for assets and liabilities - The company measures assets and liabilities at fair value according to FASB ASC Topic 820, classifying them into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[120][121][122][123] - Available-for-sale securities, loans held for sale, and derivatives are primarily classified as Level 2 fair value measurements[132] - Capitalized mortgage servicing rights and certain collateral-dependent loans are classified as Level 3 due to the use of significant unobservable inputs in their valuation[129][132] Capitalized Mortgage Servicing Rights Fair Value Measurement (as of March 31, 2024, in thousands of dollars) | Metric | Fair Value | Valuation Technique | Unobservable Inputs | Range | Weighted Average | | :----------------------- | :------- | :------- | :----------- | :----------- | :------- | | Capitalized Mortgage Servicing Rights | $43,577 | Present Value of Net Servicing Income | Discount Rate | 9.98% to 16.32% | 10.30% | | | | | Cost to Service | $69 to $317 | $78 | | | | | Ancillary Income | 20 to 30 | 20 | | | | | Float Rate | | 4.27% | | | | | Prepayment Rate | 6.55% to 27.27% | 8.46% | Collateral-Dependent Commercial Loans Fair Value Measurement (as of March 31, 2024, in thousands of dollars) | Metric | Fair Value | Valuation Technique | Unobservable Inputs | Range | Weighted Average | | :----------------------- | :------- | :------- | :----------- | :----------- | :------- | | Commercial Loans | $5,035 | Discounted Financial Statements and Machinery & Equipment Valuation | Discount Rate | 28.0% to 50.0% | 29.9% | | | | Sales Comparison Approach | Comparable Sales Differential Adjustment | (18.0)% to 43.0% | (2.2)% | 12. Fair Values of Financial Instruments This section provides a comprehensive overview of the fair values of the company's financial instruments - Most of the company's assets and liabilities are considered financial instruments, many of which lack active trading markets, and the company generally intends to hold most financial instruments to maturity[146] Book Balances and Fair Values of Financial Instruments (as of March 31, 2024, in thousands of dollars) | Category | Book Balance | Fair Value | Level 1 | Level 2 | Level 3 | | :----------------------- | :------- | :------- | :----- | :----- | :----- | | Assets | | | | | | | Cash and Bank Deposits | $41,646 | $41,646 | $41,646 | $0 | $0 | | Interest-Bearing Deposits | $120,198 | $120,198 | $120,198 | $0 | $0 | | Available-for-Sale Securities | $613,620 | $613,620 | $0 | $613,620 | $0 | | Held-to-Maturity Securities | $349,957 | $311,013 | $0 | $311,013 | $0 | | Loans, Net and Loans Held for Sale | $3,792,587 | $3,542,984 | $0 | $8,935 | $3,534,049 | | Derivative Financial Instruments | $41,290 | $41,290 | $0 | $41,290 | $0 | | Liabilities | | | | | | | Non-Maturity Deposits | $3,751,701 | $3,751,701 | $3,751,701 | $0 | $0 | | Maturity Deposits | $830,713 | $826,829 | $0 | $826,829 | $0 | | Other Borrowings | $49,977 | $49,889 | $0 | $49,889 | $0 | | Derivative Financial Instruments | $19,344 | $19,344 | $0 | $19,344 | $0 | 13. Contingencies This section addresses various macroeconomic conditions and legal matters that could impact the company's financial position - Various global and national macroeconomic conditions, including increased inflation, future interest rate uncertainty, and geopolitical tensions, continue to create significant economic uncertainty, potentially having a material adverse effect on the company's business, operating results, asset valuations, and financial condition[156][157][158] - The company is involved in various legal proceedings but does not currently believe any will have a material impact on its condensed consolidated financial condition or results of operations; the aggregate amount of losses accrued is immaterial[159] - The company holds 12,566 shares of Visa Inc. Class B-1 common stock, currently carried at zero value due to limited liquidity; Visa initiated an exchange offer for Class B-1 common stock on April 8, 2024, which, if completed, is expected to provide some liquidity to B-1 holders, potentially allowing the company to recognize approximately 50% of the estimated $5.5 million value in 2024[161][162] 14. Accumulated Other Comprehensive Income (Loss) ("AOCIL") This section details the changes in the company's accumulated other comprehensive income (loss) Changes in Accumulated Other Comprehensive Income (Loss) (for the three months ended March 31, in thousands of dollars) | Metric | 2024 Ending Balance | 2023 Ending Balance | | :----------------------------------- | :------------- | :------------- | | Beginning Balance | $(72,142) | $(92,763) | | Other Comprehensive Income (Loss) Before Reclassifications | $90 | $11,711 | | Amounts Reclassified from AOCIL | $423 | $241 | | Net Other Comprehensive Income (Loss) for the Period | $513 | $11,952 | | Ending Balance | $(71,629) | $(80,811) | Amounts Reclassified from AOCIL (for the three months ended March 31, in thousands of dollars) | AOCIL Component | 2024 Reclassification Amount | 2023 Reclassification Amount | | :----------------------------------- | :--------------- | :--------------- | | Unrealized Losses on Available-for-Sale Securities (Net of Tax) | $(213) | $(175) | | Unrealized Gains (Losses) on Derivative Financial Instruments (Net of Tax) | $210 | $66 | | Total Reclassifications for the Period (Net of Tax) | $(423) | $(241) | 15. Revenue from Contracts with Customers This section provides a breakdown of the company's revenue derived from contracts with customers - The majority of the company's revenue (approximately 89.0% in Q1 2024) falls outside the scope of ASC Topic 606, primarily including interest income and net mortgage gains[168] Revenue from Contracts with Customers Breakdown (for the three months ended March 31, in thousands of dollars) | Revenue Source | 2024 | 2023 | | :----------------------- | :----- | :----- | | Deposit Account Service Charges | $2,872 | $2,857 | | Other Deposit Related Income | $748 | $676 | | Interchange Income | $3,151 | $3,205 | | Investment and Insurance Commissions | $804 | $827 | | Total | $7,575 | $7,565 | - Revenue from service charges, interchange income, and investment/insurance commissions is recognized at the point of service delivery or over the service period[171][172][173] 16. Leases This section provides information on the company's lease arrangements, primarily operating leases - The company primarily enters into operating leases, with lease costs recognized on a straight-line basis over the lease term, and has elected to combine lease and non-lease components into a single lease component[179][180] Operating Lease Costs (for the three months ended March 31, in thousands of dollars) | Cost Category | 2024 | 2023 | | :----------------------- | :----- | :----- | | Operating Lease Cost | $346 | $362 | | Variable Lease Cost | $11 | $24 | | Short-Term Lease Cost | $24 | $22 | | Total | $381 | $408 | Operating Lease Supplemental Balance Sheet Information (in thousands of dollars) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Operating Lease Right-of-Use Assets | $6,744 | $4,911 | | Operating Lease Liabilities | $6,953 | $5,114 | | Weighted-Average Remaining Lease Term (Years) | 7.63 | 6.03 | | Weighted-Average Discount Rate | 3.6% | 2.7% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of the company's financial condition and operating performance, covering macroeconomic conditions, key financial results, and asset-liability management Introduction and Overview This section introduces the company and its primary banking services and geographic focus - This section provides additional information on the financial condition and results of operations for Independent Bank Corporation (IBCP) and its wholly-owned bank, Independent Bank ("the Bank"), and its subsidiaries[187] - The company primarily provides banking services to customers in the lower peninsula of Michigan and operates a loan production office in Fairlawn, Ohio[188] Recent Developments This section discusses recent macroeconomic conditions and their potential impact on the company's financial performance - Various global and national macroeconomic conditions, including increased inflation, future interest rate uncertainty, foreign exchange rate volatility, escalating Middle East tensions, and the ongoing Russia-Ukraine war, continue to create significant economic uncertainty[189] - Significant adverse impacts could include valuation impairments of intangible assets, available-for-sale securities, held-to-maturity securities, loans, capitalized mortgage servicing rights, or deferred tax assets[189] Results of Operations - Summary This section summarizes the company's net income and key performance ratios for the reported periods - For the three months ended March 31, 2024, and 2023, the company's net income was $16.0 million and $13.0 million, respectively[192] - The increase in first-quarter 2024 results was driven by higher net interest income and non-interest income, partially offset by increased non-interest expense and income tax expense[192] Key Performance Ratios (for the three months ended March 31) | Metric | 2024 | 2023 | | :----------------------- | :----- | :----- | | Net Income (Annualized) to Average Assets | 1.24% | 1.06% | | Net Income (Annualized) to Average Shareholders' Equity | 15.95% | 14.77% | | Basic Net Income Per Share | $0.77 | $0.62 | | Diluted Net Income Per Share | $0.76 | $0.61 | Results of Operations - Net Interest Income This section analyzes the company's net interest income and net interest margin performance - In the first quarter of 2024, the company's net interest income totaled $40.2 million, an increase of $1.8 million, or 4.6%, compared to the prior-year period[194] - The growth in net interest income primarily reflects a $213.9 million increase in average interest-earning assets, partially offset by a two basis point decrease in the net interest income as a percentage of average interest-earning assets ("net interest margin")[194] - The decline in net interest margin was mainly attributable to a 70 basis point increase in interest expense as a percentage of average interest-earning assets, partially offset by a 68 basis point increase in interest income as a percentage of average interest-earning assets[196] Net Interest Margin (FTE) (for the three months ended March 31, in thousands of dollars) | Metric | 2024 | 2023 | | :----------------------- | :----- | :----- | | Net Interest Income | $40,197 | $38,441 | | Plus: Taxable Equivalent Adjustment | $180 | $288 | | Net Interest Income - Taxable Equivalent | $40,377 | $38,729 | | Net Interest Margin (FTE) | 3.30% | 3.32% | Results of Operations - Provision for Credit Losses This section discusses the company's provision for credit losses for the reported periods - For the three months ended March 31, 2024, and 2023, the provision for credit losses was $0.7 million and $2.2 million, respectively[202] - Loan provision expense was $1.87 million, primarily due to an increase in specific reserves on a commercial credit and changes in retail loan prepayment speeds[202] - Credit provision for held-to-maturity securities was $1.13 million, reflecting a recovery on a previously charged-off corporate security in the first quarter[202] Results of Operations - Non-interest Income This section analyzes the components of the company's non-interest income - Total non-interest income for the first quarter of 2024 was $12.6 million, compared to $10.6 million in the first quarter of 2023[202] Non-interest Income Components (for the three months ended March 31, in thousands of dollars) | Category | 2024 | 2023 | | :----------------------- | :----- | :----- | | Interchange Income | $3,151 | $3,205 | | Deposit Account Service Charges | $2,872 | $2,857 | | Net Mortgage Gains | $1,364 | $1,256 | | Net Securities Gains (Losses) | $(269) | $(222) | | Net Mortgage Servicing | $2,725 | $726 | | Investment and Insurance Commissions | $804 | $827 | | Bank-Owned Life Insurance | $181 | $111 | | Other | $1,733 | $1,791 | | Total Non-interest Income | $12,561 | $10,551 | - Net mortgage servicing generated $2.7 million in income during the first quarter of 2024, compared to $0.7 million in the first quarter of 2023, primarily due to changes in the fair value of capitalized mortgage servicing rights[210] Mortgage Activity (for the three months ended March 31, in thousands of dollars) | Metric | 2024 | 2023 | | :----------------------- | :----- | :----- | | Mortgage Loan Originations | $93,994 | $113,021 | | Mortgage Loan Sales | $80,818 | $106,846 | | Net Mortgage Gains | $1,364 | $1,256 | | Loan Sales Margin | 1.69% | 1.18% | Results of Operations - Non-interest Expense This section analyzes the components of the company's non-interest expenses - For the three months ended March 31, 2024, non-interest expense increased by $1.2 million to $32.2 million, compared to $30.9 million in the prior-year period[213] Non-interest Expense Components (for the three months ended March 31, in thousands of dollars) | Category | 2024 | 2023 | | :----------------------- | :----- | :----- | | Compensation and Employee Benefits | $20,770 | $19,339 | | Data Processing | $3,255 | $2,991 | | Legal and Professional Fees | $486 | $607 | | Costs Related to Unused Loan Commitments (Recovery) | $(652) | $(475) | | Total Non-interest Expense | $32,193 | $30,957 | - Performance-based compensation increased by $1.2 million in the first quarter of 2024, primarily due to higher anticipated incentive compensation expense[215] - Data processing expenses increased by $0.3 million, partly due to annual asset growth and CPI-related cost increases from the core data processor, and new solutions implemented during the period[215] Results of Operations - Income Tax Expense This section discusses the company's income tax expense for the reported periods - Income tax expense for the first quarter of 2024 was $3.8 million, compared to $2.9 million in the first quarter of 2023, primarily due to changes in income before taxes[217] - The company assesses that the realization of substantially all of its deferred tax assets is more likely than not as of March 31, 2024[219] Financial Condition - Summary This section provides a summary of the company's financial condition, including changes in total assets, loans, and deposits - Total assets decreased by $32.5 million during the first three months of 2024[221] - As of March 31, 2024, loans (excluding held-for-sale loans) totaled $3.84 billion, compared to $3.79 billion as of December 31, 2023, with increases in both commercial and mortgage loans, and a decrease in installment loans[221] - As of March 31, 2024, total deposits were $4.58 billion, a decrease of $40.5 million from December 31, 2023, primarily due to a reduction in non-interest-bearing deposits and maturing brokered certificates of deposit[221] Financial Condition - Securities This section details the company's available-for-sale and held-to-maturity securities portfolios and their valuation Available-for-Sale Securities (AFS) Fair Value (in thousands of dollars) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Amortized Cost | $676,527 | $744,050 | | Fair Value | $613,620 | $679,350 | Held-to-Maturity Securities (HTM) Carrying Value (in thousands of dollars) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Carrying Value | $349,957 | $353,988 | - The company believes that unrealized losses on available-for-sale securities are temporary and recoverable within a reasonable period, and management has the ability to hold these securities to maturity or until unrealized losses reverse[223][227] - As of March 31, 2024, no allowance for credit losses was required for available-for-sale securities; in the first quarter of 2024, the company sold a previously charged-off corporate security, recording a $1.1 million recovery[227][228] Financial Condition - Portfolio Loans and Asset Quality This section provides an overview of the company's loan portfolio composition and asset quality metrics Loan Portfolio Summary (in thousands of dollars) | Loan Type | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Real Estate | $2,730,491 | $2,634,222 | | Consumer | $608,700 | $619,374 | | Commercial | $496,722 | $483,129 | | Agricultural | $4,052 | $4,176 | | Total Loans | $3,839,965 | $3,790,901 | Nonperforming Assets (in thousands of dollars) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Total Non-accrual Loans | $3,690 | $5,232 | | Other Real Estate and Repossessed Assets | $1,059 | $569 | | Total Nonperforming Assets | $4,749 | $5,801 | | Non-accrual Loans as a Percentage of Total Loans | 0.10% | 0.14% | | Allowance for Credit Losses as a Percentage of Non-accrual Loans | 1526.10% | 1044.69% | Allowance for Credit Losses on Loans and Unused Loan Commitments (for the three months ended March 31, in thousands of dollars) | Category | 2024 Ending Balance | 2023 Ending Balance | | :----------------------- | :------------- | :------------- | | Loans | $56,313 | $50,550 | | Securities | $155 | $160 | | Unused Commitments | $4,852 | $4,605 | - As of March 31, 2024, the Allowance for Credit Losses increased by $1.7 million to $56.3 million, representing 1.47% of the loan portfolio[239] - The Allowance for Credit Losses related to specific loans increased by $1.0 million since December 31, 2023, primarily due to a new commercial loan in the first quarter of 2024[240] Financial Condition - Deposits and Borrowings This section provides an analysis of the company's deposit and borrowing activities - As of March 31, 2024, total deposits were $4.58 billion, compared to $4.62 billion as of December 31, 2023, a decrease of $40.5 million, primarily due to reductions in non-interest-bearing deposits and brokered certificates of deposit, partially offset by growth in savings, interest-bearing checking, and reciprocal deposits[242] - Total reciprocal deposits amounted to $893.6 million as of March 31, 2024, compared to $832.0 million as of December 31, 2023[242] Deposit Portfolio Data (excluding brokered certificates of deposit, in thousands of dollars) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Uninsured Deposits | $977,374 | $961,974 | | Uninsured Deposits as a Percentage of Total Deposits | 22.0% | 22.2% | | Average Deposit Account Size | $20.91 | $20.38 | | Top 100 Depositor Balances | $973,791 | $890,289 | - As of March 31, 2024, wholesale funding sources, including reciprocal deposits, amounted to approximately $1.09 billion, representing 23.6% of total funding (deposits and all borrowings, excluding subordinated debt and debentures)[246] Liquidity and Capital Resources This section discusses the company's liquidity position and capital adequacy - As of March 31, 2024, the company had unused credit lines of approximately $1.072 billion at the FHLB and $496.0 million at the FRB[249] - As of March 31, 2024, the company held approximately $811.3 million in unpledged available-for-sale and held-to-maturity securities, estimated to provide an additional borrowing capacity of approximately $754.9 million at the FHLB and FRB[249] - As of March 31, 2024, the parent company had approximately $46.6 million in cash on hand (including time deposits), sufficient to cover operating expenses and dividend payments[254] Capitalization (in thousands of dollars) | Category | March 31, 2024 | December 31, 2023 | | :----------------------- | :------------- | :------------- | | Subordinated Debt | $39,529 | $39,510 | | Subordinated Debentures | $39,745 | $39,728 | | Total Shareholders' Equity | $415,570 | $404,449 | | Total Capitalization | $494,091 | $482,953 | - As of March 31, 2024, common shareholders' equity increased to $415.6 million, with a Tangible Common Equity (TCE) to Tangible Assets ratio of 7.41%[259] - As of March 31, 2024, the company's Bank (and holding company) continued to meet the "well-capitalized" requirements under federal regulatory standards[262] Asset/liability management This section discusses the company's strategies for managing interest rate risk and its impact on financial performance - The company monitors its interest rate risk profile through simulation analysis, with both short-term earnings simulations and long-term economic value of equity changes showing exposure to rising interest rates as of March 31, 2024[265] Portfolio Equity Market Value, Net Interest Income, and Net Interest Margin Changes (as of March 31, 2024, in thousands of dollars) | Interest Rate Change | Portfolio Equity Market Value | Percentage Change | Net Interest Income | Percentage Change | Net Interest Margin | Percentage Change | | :----------------------- | :------------- | :--------- | :--------- | :--------- | :----- | :--------- | | 200 Basis Point Increase | $480,600 | (13.92)% | $171,500 | (1.44)% | 3.42% | (1.44)% | | 100 Basis Point Increase | $520,900 | (6.70)% | $173,300 | (0.40)% | 3.46% | (0.29)% | | Baseline Scenario | $558,300 | — | $174,000 | — | 3.47% | — | | 100 Basis Point Decrease | $585,700 | 4.91% | $172,700 | (0.75)% | 3.44% | (0.86)% | | 200 Basis Point Decrease | $598,000 | 7.11% | $172,500 | (0.86)% | 3.44% | (0.86)% | - The company is closely monitoring the composition of its funding portfolio and interest-earning assets, as well as the impact of potential future interest rate changes on the market value of portfolio equity and net interest income; consequently, the company may increase certain long-term borrowings, utilize derivatives to manage interest rate risk, and potentially continue to sell some fixed-rate jumbo mortgage loans and other portfolio mortgage loans in the future[265] Litigation Matters This section addresses the company's involvement in legal proceedings and potential financial implications - The aggregate amount accrued by the company for probable losses in litigation matters is immaterial; the company believes that the outcome of any litigation matter is inherently uncertain, and thus losses in excess of the amounts accrued could occur[273] Accounting standards update This section refers to detailed information on recent accounting standard updates - For detailed information regarding recently issued accounting standards and their impact on the company's condensed consolidated financial statements, please refer to Note 2 to the Condensed Consolidated Financial Statements included in this report[275] Fair valuation of financial instruments This section describes the company's approach to fair value measurement for financial instruments - The company utilizes fair value measurements for certain financial instruments to make fair value adjustments and determine fair value disclosures; FASB ASC Topic 820 distinguishes between assets and liabilities that must be measured at fair value in each reporting period ("recurring") and those that are only required to be adjusted to fair value in specific circumstances ("non-recurring")[277] - Available-for-sale securities, loans held for sale measured at fair value, derivatives, and capitalized mortgage servicing rights are financial instruments measured at fair value on a recurring basis[277] Critical Accounting Policies This section highlights the company's critical accounting policies that involve significant estimates and management judgment - The company's critical accounting policies include the Allowance for Credit Losses (ACL) and capitalized mortgage servicing rights, which involve estimates and significant management judgment[279] - There have been no significant changes to critical accounting policies since the disclosures in the company's Form 10-K annual report for the year ended December 31, 2023[279] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to other parts of the report for quantitative and qualitative disclosures regarding market risk - For quantitative and qualitative disclosures about market risk, please refer to the relevant disclosures in the "Asset/liability management" section within "Management's Discussion and Analysis of Financial Condition and Results of Operations"[283] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports on internal control changes - As of March 31, 2024, the company's disclosure controls and procedures were effective[285] - There were no significant changes in the company's internal control over financial reporting during the quarter ended March 31, 2024[286] PART II - Other Information Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed - There have been no material changes to the risk factors disclosed in the Form 10-K annual report for the year ended December 31, 2023[288] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the issuance and repurchase of equity securities during the quarter - In the first quarter of 2024, the company issued 2,492 shares of common stock to non-employee directors under the Non-Employee Director Deferred Compensation and Stock Purchase Plan[289] - No shares were repurchased under publicly announced plans during the first quarter of 2024[290] - In the first quarter of 2024, a total of 83,236 shares of common stock were purchased at an average price of $25.06 per share to satisfy tax withholding obligations arising from the vesting of restricted stock and performance share units, and for employee stock purchase plan purchases[290] Item 5. Other Information This section confirms no adoption or termination of Rule 10b5-1 trading arrangements by directors or officers - During the period covered by this quarterly report, no directors or officers of the company adopted or terminated any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement"[291] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL files - Exhibits include CEO and CFO certifications filed pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[293][294] - Exhibits also include Inline XBRL instance documents and related taxonomy extension files (Schema, Calculation, Definition, Label, Presentation Linkbase Document)[294]