Equibles

10-Q

FIRST MERCHANTS CORP (FRME)

10-Q 2024-05-01 For: 2024-03-31
View Original
Added on April 08, 2026

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _______ to _______

FIRST MERCHANTS CORPORATION

(Exact name of registrant as specified in its charter)

Indiana
(State or other jurisdiction of incorporation)
001-41342 35-1544218
(Commission File Number) (IRS Employer Identification No.)

200 East Jackson Street, Muncie, IN                  47305-2814

(Address of principal executive offices)                   (Zip code)

(Registrant’s telephone number, including area code): (765) 747-1500

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.125 stated value per share FRME The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/100th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series A FRMEP The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934 during the preceding 12 months (or for such shorter  period that the  registrant was  required  to file such  reports),  and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐
Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

As of April 26, 2024, there were 58,585,479 outstanding common shares of the registrant.

TABLE OF CONTENTS

FIRST MERCHANTS CORPORATION

Page No.
Glossary of Defined Terms 3
Part I. Financial Information
Item 1. Financial  Statements:
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statements of Comprehensive Income (Loss) 6
Consolidated Condensed Statements of Stockholders' Equity 7
Consolidated Condensed Statements of Cash Flows 8
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk 53
Item 4. Controls and Procedures 54
Part II. Other Information
Item 1. Legal Proceedings 55
Item 1A. Risk Factors 55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55
Item 3. Defaults Upon Senior Securities 55
Item 4. Mine Safety Disclosures 55
Item 5. Other Information 55
Item 6. Exhibits 56
Signatures 57

GLOSSARY OF DEFINED TERMS

FIRST MERCHANTS CORPORATION

ACL Allowance for Credit Losses
ASC Accounting Standards Codification
ASU Accounting Standards Update
Bank First Merchants Bank, a wholly-owned subsidiary of the Corporation
BTFP Bank Term Funding Program created by the Federal Reserve in March 2023
CECL FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, adopted by the Corporation on January 1, 2021.
CET1 Common Equity Tier 1
CODM Chief operating decision maker
Corporation First Merchants Corporation
CRE Commercial Real Estate
EITF FASB's Emerging Issues Task Force
ESPP Employee Stock Purchase Plan
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve Board of Governors of the Federal Reserve System
FHLB Federal Home Loan Bank
FOMC Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System.
FTE Fully taxable equivalent
GAAP U.S. Generally Accepted Accounting Principles
IRA Inflation Reduction Act of 2022
Level One Level One Bancorp, Inc., which was acquired by the Corporation on April 1, 2022.
OREO Other real estate owned
PPP Paycheck Protection Program, which was established by the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, and implemented by the U.S. Small Business Administration to provide small business loans.
PCD Purchased credit deteriorated loans
RSA Restricted Stock Awards
SOFR Secured Overnight Financing Rate

CONSOLIDATED CONDENSED BALANCE SHEETS

December 31,<br>2023
ASSETS
Cash and due from banks 100,514 $ 112,649
Interest-bearing deposits 436,080
Investment securities available for sale 1,627,112
Investment securities held to maturity, net of allowance for credit losses of 245 and 245 (fair value of 1,820,451 and 1,870,374) 2,184,252
Loans held for sale 18,934
Loans 12,486,027
Less: Allowance for credit losses - loans (204,934)
Net loans 12,281,093
Premises and equipment 133,896
Federal Home Loan Bank stock 41,769
Interest receivable 97,664
Goodwill 712,002
Other intangibles 27,099
Cash surrender value of life insurance 306,301
Other real estate owned 4,831
Tax asset, deferred and receivable 99,883
Other assets 322,322
TOTAL ASSETS 18,317,803 $ 18,405,887
LIABILITIES
Deposits:
Noninterest-bearing 2,338,364 $ 2,500,062
Interest-bearing 12,321,391
Total Deposits 14,821,453
Borrowings:
Securities sold under repurchase agreements 157,280
Federal Home Loan Bank advances 712,852
Subordinated debentures and other borrowings 158,644
Total Borrowings 1,028,776
Interest payable 18,912
Other liabilities 289,033
Total Liabilities 16,158,174
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Cumulative Preferred Stock, 1,000 par value, 1,000 liquidation value:
Authorized - 600 cumulative shares
Issued and outstanding - 125 cumulative shares 125
Preferred Stock, Series A, no par value, 2,500 liquidation preference:
Authorized - 10,000 non-cumulative perpetual shares
Issued and outstanding - 10,000 non-cumulative perpetual shares 25,000
Common Stock, 0.125 stated value:
Authorized - 100,000,000 shares
Issued and outstanding - 58,564,819 and 59,424,122 shares 7,428
Additional paid-in capital 1,236,506
Retained earnings 1,154,624
Accumulated other comprehensive loss (175,970)
Total Stockholders' Equity 2,247,713
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 18,317,803 $ 18,405,887

All values are in US Dollars.

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended<br>March 31,
2024 2023
INTEREST INCOME
Loans receivable:
Taxable $ 198,023 $ 172,353
Tax exempt 8,190 7,709
Investment securities:
Taxable 8,748 9,087
Tax exempt 13,611 16,070
Deposits with financial institutions 6,493 637
Federal Home Loan Bank stock 835 542
Total Interest Income 235,900 206,398
INTEREST EXPENSE
Deposits 98,285 50,685
Federal funds purchased — 1,297
Securities sold under repurchase agreements 1,032 848
Federal Home Loan Bank advances 6,773 7,064
Subordinated debentures and other borrowings 2,747 2,385
Total Interest Expense 108,837 62,279
NET INTEREST INCOME 127,063 144,119
Provision for credit losses 2,000 —
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 125,063 144,119
NONINTEREST INCOME
Service charges on deposit accounts 7,907 7,359
Fiduciary and wealth management fees 8,200 7,862
Card payment fees 4,500 5,172
Net gains and fees on sales of loans 3,254 2,399
Derivative hedge fees 263 1,148
Other customer fees 427 517
Increase in cash surrender value of life insurance 1,449 1,287
Gains on life insurance benefits 143 1
Net realized losses on sales of available for sale securities (2) (1,571)
Other income 497 823
Total Noninterest Income 26,638 24,997
NONINTEREST EXPENSES
Salaries and employee benefits 58,293 57,459
Net occupancy 7,312 7,259
Equipment 6,226 6,126
Marketing 1,198 1,309
Outside data processing fees 6,889 6,113
Printing and office supplies 353 383
Intangible asset amortization 1,957 2,197
FDIC assessments 4,287 1,396
Other real estate owned and foreclosure expenses 534 (18)
Professional and other outside services 3,952 3,698
Other expenses 5,934 7,798
Total Noninterest Expenses 96,935 93,720
INCOME BEFORE INCOME TAX 54,766 75,396
Income tax expense 6,825 11,317
NET INCOME 47,941 64,079
Preferred stock dividends 469 469
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 47,472 $ 63,610
Per Share Data:
Basic Net Income Available to Common Stockholders $ 0.80 $ 1.07
Diluted Net Income Available to Common Stockholders $ 0.80 $ 1.07
Cash Dividends Paid $ 0.34 $ 0.32
Average Diluted Common Shares Outstanding (in thousands) 59,273 59,441

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended<br>March 31,
2024 2023
Net income $ 47,941 $ 64,079
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period (27,925) 49,415
Reclassification adjustment for losses (gains) included in net income 2 1,571
Tax effect 5,864 (10,707)
Net of tax (22,059) 40,279
Unrealized gain (loss) on cash flow hedges:
Unrealized holding gain (loss) arising during the period — (51)
Reclassification adjustment for losses (gains) included in net income — (1)
Tax effect — 10
Net of tax — (42)
Total other comprehensive income (loss), net of tax (22,059) 40,237
Comprehensive income $ 25,882 $ 104,316

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Three Months Ended March 31, 2024
Cumulative Preferred Stock Non-Cumulative Preferred Stock Common Stock Additional Accumulated<br>Other
Shares Amount Shares Amount Shares Amount Paid in<br>Capital Retained<br>Earnings Comprehensive<br> Loss Total
Balances, December 31, 2023 125 $ 125 10,000 $ 25,000 59,424,122 $ 7,428 $ 1,236,506 $ 1,154,624 $ (175,970) $ 2,247,713
Comprehensive income:
Net income — — — — — — — 47,941 — 47,941
Other comprehensive loss, net of tax — — — — — — — — (22,059) (22,059)
Cash dividends on preferred stock ($46.88 per share) — — — — — — — (469) — (469)
Cash dividends on common stock ($0.34 per share) — — — — — — — (20,157) — (20,157)
Repurchases of common stock — — — — (888,442) (111) (29,863) — — (29,974)
Excise tax on stock repurchase — — — — — — (297) — — (297)
Share-based compensation — — — — 7,413 1 1,401 — — 1,402
Stock issued under employee benefit plans — — — — 6,259 1 185 — — 186
Stock issued under dividend reinvestment and<br>stock purchase plan — — — — 16,215 2 540 — — 542
Restricted shares withheld for taxes — — — — (748) — (25) — — (25)
Balances, March 31, 2024 125 $ 125 10,000 $ 25,000 58,564,819 $ 7,321 $ 1,208,447 $ 1,181,939 $ (198,029) $ 2,224,803
Three Months Ended March 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Cumulative Preferred Stock Non-Cumulative Preferred Stock Common Stock Additional Accumulated<br>Other
Shares Amount Shares Amount Shares Amount Paid in<br>Capital Retained<br>Earnings Comprehensive<br>Loss Total
Balances, December 31, 2022 125 $ 125 10,000 $ 25,000 59,170,583 $ 7,396 $ 1,228,626 $ 1,012,774 $ (239,151) 2,034,770
Comprehensive loss:
Net income — — — — — — — 64,079 — 64,079
Other comprehensive loss, net of tax — — — — — — — — 40,237 40,237
Cash dividends on preferred stock ($46.88 per share) — — — — — — — (469) — (469)
Cash dividends on common stock ($0.32 per share) — — — — — — — (19,086) — (19,086)
Share-based compensation — — — — 7,573 1 1,196 — — 1,197
Stock issued under employee benefit plans — — — — 5,900 1 198 — — 199
Stock issued under dividend reinvestment and<br>stock purchase plan — — — — 14,464 2 512 — — 514
Stock options exercised — — — — 58,620 7 1,003 — — 1,010
Restricted shares withheld for taxes — — — — (89) — (3) — — (3)
Balances, March 31, 2023 125 $ 125 10,000 $ 25,000 59,257,051 $ 7,407 $ 1,231,532 $ 1,057,298 $ (198,914) $ 2,122,448

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended March 31,
2024 2023
Cash Flow From Operating Activities:
Net income $ 47,941 $ 64,079
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 2,000 —
Depreciation and amortization 3,194 2,964
Change in deferred taxes (2,260) (3,395)
Share-based compensation 1,402 1,197
Loans originated for sale (182,793) (74,212)
Proceeds from sales of loans held for sale 188,347 74,746
Gains on sales of loans held for sale (1,738) (848)
Net losses on sales and redemptions of securities available for sale 2 1,571
Increase in cash surrender value of life insurance (1,449) (1,287)
Gains on life insurance benefits (143) (1)
Change in interest receivable 5,114 (445)
Change in interest payable 350 4,449
Other adjustments (1,119) 18,791
Net cash provided by operating activities 58,848 87,609
Cash Flows from Investing Activities:
Net change in interest-bearing deposits 25,583 (226,634)
Purchases of:
Securities available for sale (32,231) (1,400)
Proceeds from sales of securities available for sale — 213,232
Proceeds from maturities and redemptions of:
Securities available for sale 9,415 17,814
Securities held to maturity 20,006 22,987
Change in Federal Home Loan Bank stock 11 (3,353)
Payment of capital calls to qualified affordable housing investments (7,975) (4,171)
Net change in loans 56,511 (238,872)
Proceeds from the sale of other real estate owned 78 46
Proceeds from life insurance benefits 1,865 509
Proceeds from commercial portfolio loan sale 3,273 —
Other adjustments 6,344 (7,284)
Net cash provided (used) in investing activities 82,880 (227,126)
Cash Flows from Financing Activities:
Net change in :
Demand and savings deposits (30,726) (184,063)
Certificates of deposit and other time deposits 93,857 504,605
Borrowings 60 486,714
Repayment of borrowings (167,182) (646,683)
Cash dividends on preferred stock (469) (469)
Cash dividends on common stock (20,157) (19,086)
Stock issued under employee benefit plans 186 199
Stock issued under dividend reinvestment and stock purchase plans 542 514
Stock options exercised — 1,010
Repurchase of common stock (29,974) —
Net cash provided (used) by financing activities (153,863) 142,741
Net Change in Cash and Cash Equivalents (12,135) 3,224
Cash and Cash Equivalents, January 1 112,649 122,594
Cash and Cash Equivalents, March 31 $ 100,514 $ 125,818
Additional cash flow information:
Interest paid $ 108,487 $ 57,830
Income tax paid (refunded) (1) (1,118)
Loans transferred to other real estate owned 127 1,080
Non-cash investing activities using trade date accounting 41,719 —
ROU assets obtained in exchange for new operating lease liabilities 3,343 646
Qualified affordable housing investments obtained in exchange for funding commitments — 4,700

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

NOTE 1

GENERAL

Financial Statement Preparation

The Consolidated Condensed Balance Sheet of the Corporation as of December 31, 2023, has been derived from the audited consolidated balance sheet of the Corporation as of that date. Certain information and note disclosures normally included in the Corporation’s annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2024, are not necessarily indicative of the results to be expected for the year. Reclassifications have been made to prior financial statements to conform to the current financial statement presentation. These reclassifications had no effect on net income. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and fair value of financial instruments.

Significant Accounting Policies

The significant accounting policies followed by the Corporation and its wholly-owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments, which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying Consolidated Condensed Financial Statements.

Recent Accounting Changes Adopted in 2024

FASB Accounting Standards Updates - No. 2023-02 - Investments - Equity Method and Joint Ventures (Topic 323) - Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method

Summary - The FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which is intended to improve the accounting and disclosures for investments in tax credit structures. The ASU is a consensus of the FASB’s Emerging Issues Task Force (“EITF”).

The ASU allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU responds to stakeholder feedback that the proportional amortization method provides investors and other allocators of capital with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits.

Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures. In recent years, stakeholders asked the FASB to extend the application of the proportional amortization method to qualifying tax equity investments that generate tax credits through other programs, which resulted in the EITF addressing this issue.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Corporation adopted this guidance in the first quarter of 2024 and adoption did not have a significant impact on the Corporation’s financial statements or disclosures.

New Accounting Pronouncements Not Yet Adopted

The Corporation continually monitors potential accounting pronouncements and the following pronouncements have been deemed to have the most applicability to the Corporation's financial statements:

FASB Accounting Standards Updates - No. 2023-07 - Segment Reporting (Topic 280) — Improvements to Reportable Segment Disclosure

Summary - The FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosure, which is intended to improve disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses.

The key amendments:

•Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss.

•Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.

•Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by FASB ASC Topic 280, Segment Reporting, in interim periods.

•Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit or loss. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements.

•Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.

•Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280.

ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, applies to all public entities that are required to report segment information in accordance with Topic 280. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. This ASU is not expected to have a material impact on the Corporation’s financial statements and disclosures as the Corporation has one operating segment.

FASB Accounting Standards Update - No. 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures

Summary - The FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures in the fourth quarter of 2023. This ASU is intended to enhance income tax disclosures to address investor requests for more information about the tax risks and opportunities present in an entity’s worldwide operations.

The two primary enhancements disaggregate existing income tax disclosures related to the effective tax rate reconciliation and income taxes paid. These amendments require that public business entities on an annual basis disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The amendments also require that all entities disclose on an annual basis the amount of income taxes paid (net of refunds received) disaggregated by federal, state and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid (net of refunds received).

For public business entities, the amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issue. The amendments should be applied on a prospective basis. The Corporation is assessing the terms of this guidance, but adoption of the standard is not expected to have a significant impact on the Corporation’s financial statements or disclosures.

NOTE 2

INVESTMENT SECURITIES

The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale as of March 31, 2024 and December 31, 2023.

Amortized<br>Cost Gross Unrealized <br>Gains Gross Unrealized <br>Losses Fair<br>Value
Available for sale at March 31, 2024
U.S. Government-sponsored agency securities $ 110,457 $ — $ 17,325 $ 93,132
State and municipal 1,179,288 27 136,252 1,043,063
U.S. Government-sponsored mortgage-backed securities 565,177 336 93,469 472,044
Corporate obligations 12,950 — 976 11,974
Total available for sale $ 1,867,872 $ 363 $ 248,022 $ 1,620,213
Amortized<br>Cost Gross Unrealized <br>Gains Gross Unrealized <br>Losses Fair<br>Value
--- --- --- --- --- --- --- --- ---
Available for sale at December 31, 2023
U.S. Government-sponsored agency securities $ 111,521 $ — $ 16,214 $ 95,307
State and municipal 1,181,029 364 116,222 1,065,171
U.S. Government-sponsored mortgage-backed securities 541,343 462 86,990 454,815
Corporate obligations 12,947 — 1,128 11,819
Total available for sale $ 1,846,840 $ 826 $ 220,554 $ 1,627,112

The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity as of March 31, 2024 and December 31, 2023.

Amortized<br>Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized <br>Gains Gross Unrealized <br>Losses Fair<br>Value
Held to maturity at March 31, 2024
U.S. Government-sponsored agency securities $ 370,310 $ — $ 370,310 $ — $ 66,154 $ 304,156
State and municipal 1,097,848 245 1,097,603 691 171,353 927,186
U.S. Government-sponsored mortgage-backed securities 693,948 — 693,948 — 106,317 587,631
Foreign investment 1,500 — 1,500 — 22 1,478
Total held to maturity $ 2,163,606 $ 245 $ 2,163,361 $ 691 $ 343,846 $ 1,820,451
Amortized<br>Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized <br>Gains Gross Unrealized <br>Losses Fair<br>Value
--- --- --- --- --- --- --- --- --- --- --- --- ---
Held to maturity at December 31, 2023
U.S. Government-sponsored agency securities $ 374,002 $ — $ 374,002 $ — $ 64,159 $ 309,843
State and municipal 1,099,201 245 1,098,956 1,625 152,113 948,713
U.S. Government-sponsored mortgage-backed securities 709,794 — 709,794 — 99,448 610,346
Foreign investment 1,500 — 1,500 — 28 1,472
Total held to maturity $ 2,184,497 $ 245 $ 2,184,252 $ 1,625 $ 315,748 $ 1,870,374

Accrued interest on investment securities available for sale and held to maturity at March 31, 2024 and December 31, 2023 of $22.6 million and $25.2 million, respectively, are included in the Interest Receivable line on the Corporation's Consolidated Condensed Balance Sheets. The total amount of accrued interest is excluded from the amortized cost of available for sale and held to maturity securities presented above.

In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality.

The allowance for credit losses on investment securities held to maturity is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. Government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have been insignificant. Furthermore, as of March 31, 2024, there were no past due principal and interest payments associated with these securities. At current expected credit loss ("CECL") adoption, an allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. The balance of the allowance for credit losses remained unchanged at $245,000 as of March 31, 2024.

On a quarterly basis, the Corporation monitors the credit quality of investment securities held to maturity through the use of credit ratings. The following table summarizes the amortized cost of investment securities held to maturity at March 31, 2024, aggregated by credit quality indicator.

Held to Maturity
State and municipal Other Total
Credit Rating:
Aaa $ 114,449 $ 70,587 $ 185,036
Aa1 159,923 — 159,923
Aa2 169,157 — 169,157
Aa3 133,379 — 133,379
A1 131,318 — 131,318
A2 16,837 — 16,837
A3 3,468 — 3,468
Non-rated 369,317 995,171 1,364,488
Total $ 1,097,848 $ 1,065,758 $ 2,163,606

The following tables summarize, as of March 31, 2024 and December 31, 2023, investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and length of time in a continuous unrealized loss position.

Less than 12 Months 12 Months or Longer Total
Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses
Investment securities available for sale at March 31, 2024
U.S. Government-sponsored agency securities $ — $ — $ 93,132 $ 17,325 $ 93,132 $ 17,325
State and municipal 54,062 1,643 980,756 134,609 1,034,818 136,252
U.S. Government-sponsored mortgage-backed securities 43,251 499 408,518 92,970 451,769 93,469
Corporate obligations — — 11,944 976 11,944 976
Total investment securities available for sale $ 97,313 $ 2,142 $ 1,494,350 $ 245,880 $ 1,591,663 $ 248,022
Less than 12 Months 12 Months or Longer Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses
Investment securities available for sale at December 31, 2023
U.S. Government-sponsored agency securities $ — $ — $ 95,307 $ 16,214 $ 95,307 $ 16,214
State and municipal 55,514 1,076 963,584 115,146 1,019,098 116,222
U.S. Government-sponsored mortgage-backed securities 11,493 25 422,868 86,965 434,361 86,990
Corporate obligations — — 11,788 1,128 11,788 1,128
Total investment securities available for sale $ 67,007 $ 1,101 $ 1,493,547 $ 219,453 $ 1,560,554 $ 220,554

The following table summarizes investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and the number of securities in the portfolio as of the dates indicated.

Gross<br>Unrealized<br>Losses Number of Securities
Investment securities available for sale at March 31, 2024
U.S. Government-sponsored agency securities $ 17,325 14
State and municipal 136,252 721
U.S. Government-sponsored mortgage-backed securities 93,469 156
Corporate obligations 976 10
Total investment securities available for sale $ 248,022 901 Gross<br>Unrealized<br>Losses Number of Securities
--- --- --- ---
Investment securities available for sale at December 31, 2023
U.S. Government-sponsored agency securities $ 16,214 14
State and municipal 116,222 691
U.S. Government-sponsored mortgage-backed securities 86,990 150
Corporate obligations 1,128 10
Total investment securities available for sale $ 220,554 865

The unrealized losses in the Corporation’s investment portfolio were the result of changes in interest rates and not credit quality. As a result, the Corporation expects to recover the amortized cost basis over the term of the securities. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

Certain investment securities available for sale are reported in the financial statements at an amount less than their historical cost as indicated in the table below.

March 31, 2024 December 31, 2023
Investments available for sale reported at less than historical cost:
Historical cost $ 1,839,685 $ 1,781,108
Fair value 1,591,663 1,560,554
Gross unrealized losses $ 248,022 $ 220,554
Percent of the Corporation's investments available for sale 98.2 % 95.9 %

In determining the fair value of the investment securities portfolio, the Corporation utilizes a third party for portfolio accounting services, including market value input, for those securities classified as Level 1 and Level 2 in the fair value hierarchy.  The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor classified these securities based upon these inputs.  From these discussions, the Corporation’s management is comfortable that the classifications are proper.  The Corporation has gained trust in the data for two reasons:  (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis; and (b) actual gains or losses resulting from the sale of certain securities has proven the data to be accurate over time.   Fair value of securities classified as Level 3 in the valuation hierarchy was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

The amortized cost and fair value of investment securities available for sale and held to maturity at March 31, 2024 and December 31, 2023, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.

Available for Sale Held to Maturity
Amortized Cost Fair Value Amortized Cost Fair Value
Maturity Distribution at March 31, 2024
Due in one year or less $ 1,865 $ 1,855 $ 12,971 $ 12,831
Due after one through five years 24,392 22,654 112,676 105,283
Due after five through ten years 141,962 131,832 137,043 125,783
Due after ten years 1,134,476 991,828 1,206,968 988,923
1,302,695 1,148,169 1,469,658 1,232,820
U.S. Government-sponsored mortgage-backed securities 565,177 472,044 693,948 587,631
Total investment securities $ 1,867,872 $ 1,620,213 $ 2,163,606 $ 1,820,451
Available for Sale Held to Maturity
--- --- --- --- --- --- --- --- ---
Amortized Cost Fair Value Amortized Cost Fair Value
Maturity Distribution at December 31, 2023
Due in one year or less $ 1,390 $ 1,382 $ 3,041 $ 3,043
Due after one through five years 24,899 23,372 118,592 111,723
Due after five through ten years 127,948 120,385 135,805 126,461
Due after ten years 1,151,260 1,027,158 1,217,265 1,018,801
1,305,497 1,172,297 1,474,703 1,260,028
U.S. Government-sponsored mortgage-backed securities 541,343 454,815 709,794 610,346
Total investment securities $ 1,846,840 $ 1,627,112 $ 2,184,497 $ 1,870,374

Securities with a carrying value of approximately $1.7 billion and $1.8 billion were pledged at March 31, 2024 and December 31, 2023, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law.

The book value of securities pledged and available under agreements to repurchase amounted to $152.0 million at March 31, 2024 and $181.4 million at December 31, 2023.

Gross gains and losses on the sales and redemptions of investment securities available for sale for the three months ended March 31, 2024 and 2023 are shown below.

Three Months Ended March 31,
2024 2023
Sales and redemptions of investment securities available for sale:
Gross gains $ — $ 12
Gross losses (2) (1,583)
Net gains (losses) on sales and redemptions of investment securities available for sale $ (2) $ (1,571)

NOTE 3

LOANS AND ALLOWANCE

Loan Portfolio and Credit Quality

The Corporation's primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. The following tables show the composition of the loan portfolio and credit quality characteristics by collateral classification, excluding loans held for sale.  Loans held for sale at March 31, 2024 and December 31, 2023, were $15.1 million and $18.9 million, respectively.

The following table illustrates the composition of the Corporation’s loan portfolio by loan class as of the dates indicated:

March 31, 2024 December 31, 2023
Commercial and industrial loans $ 3,722,365 $ 3,670,948
Agricultural land, production and other loans to farmers 234,431 263,414
Real estate loans:
Construction 941,726 957,545
Commercial real estate, non-owner occupied 2,368,360 2,400,839
Commercial real estate, owner occupied 1,137,894 1,162,083
Residential 2,316,490 2,288,921
Home equity 618,258 617,571
Individuals' loans for household and other personal expenditures 161,459 168,388
Public finance and other commercial loans 964,599 956,318
Loans $ 12,465,582 $ 12,486,027

Credit Quality

As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to: (i) the level of criticized commercial loans, (ii) net charge-offs, (iii) nonperforming loans, (iv) covenant failures and (v) the general national and local economic conditions.

The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows:

•Pass - Loans that are considered to be of acceptable credit quality.

•Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation's credit position at some future date. Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification.

•Substandard - Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

•Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable.

•Loss – Loans that are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted. Loans will be classified as Loss when it is neither practical or desirable to defer charging-off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following tables summarize the risk grading of the Corporation’s loan portfolio and gross charge-offs by loan class and by year of origination for the periods indicated. Consumer loans are not risk graded. For the purposes of this disclosure, the consumer loans are classified in the following manner: loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard.  The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

March 31, 2024
Term Loans (amortized cost basis by origination year) Revolving loans amortized Revolving loans converted
2024 2023 2022 2021 2020 Prior cost basis to term Total
Commercial and industrial loans
Pass $ 370,101 $ 996,601 $ 367,993 $ 231,487 $ 75,654 $ 79,364 $ 1,341,496 $ — $ 3,462,696
Special Mention 482 46,079 13,757 1,215 4,807 2,895 59,223 — 128,458
Substandard 2,834 46,434 23,731 15,038 1,157 1,915 35,069 — 126,178
Doubtful — 805 — — — — 4,228 — 5,033
Total Commercial and industrial loans 373,417 1,089,919 405,481 247,740 81,618 84,174 1,440,016 — 3,722,365
Current period gross charge-offs 740 554 45 71 345 76 — — 1,831
Agricultural land, production and other loans to farmers
Pass 10,864 28,681 37,013 30,569 30,261 37,157 58,787 — 233,332
Special Mention — — 266 — — 146 — — 412
Substandard — 56 143 — 454 34 — — 687
Total Agricultural land, production and other loans to farmers 10,864 28,737 37,422 30,569 30,715 37,337 58,787 — 234,431
Real estate loans:
Construction
Pass 100,743 321,996 267,749 158,342 8,135 9,639 12,414 — 879,018
Special Mention 729 25,332 2,064 652 20,846 — — — 49,623
Substandard — 2,867 4,896 5,322 — — — — 13,085
Total Construction 101,472 350,195 274,709 164,316 28,981 9,639 12,414 — 941,726
Commercial real estate, non-owner occupied
Pass 113,217 345,073 449,978 497,967 409,018 329,186 15,892 — 2,160,331
Special Mention 28,438 45,237 15,281 11,039 2,757 46,235 — — 148,987
Substandard — 14,773 9,670 216 20,068 2,059 85 — 46,871
Doubtful — 11,472 699 — — — — — 12,171
Total Commercial real estate, non-owner occupied 141,655 416,555 475,628 509,222 431,843 377,480 15,977 — 2,368,360
Current period gross charge-offs — 339 3 — — — — — 342
Commercial real estate, owner occupied
Pass 32,088 176,955 193,895 241,834 235,547 168,792 27,158 — 1,076,269
Special Mention 140 6,681 10,555 6,949 2,618 2,098 — — 29,041
Substandard 1,113 16,524 3,268 4,947 3,302 3,144 286 — 32,584
Total Commercial real estate, owner occupied 33,341 200,160 207,718 253,730 241,467 174,034 27,444 — 1,137,894
Current period gross charge-offs — — — — 9 — — — 9
Residential
Pass 33,315 413,735 701,242 435,538 357,126 343,918 5,108 15 2,289,997
Special Mention 58 2,354 4,340 2,468 623 4,213 200 — 14,256
Substandard 180 801 3,555 2,690 1,017 3,994 — — 12,237
Total Residential 33,553 416,890 709,137 440,696 358,766 352,125 5,308 15 2,316,490
Current period gross charge-offs — 39 266 28 21 24 — — 378
Home equity
Pass 5,302 9,261 27,980 59,097 11,158 5,046 489,371 2,102 609,317
Special Mention — — 711 99 1,075 84 4,245 155 6,369
Substandard 63 — — 725 — 248 1,536 — 2,572
Total Home Equity 5,365 9,261 28,691 59,921 12,233 5,378 495,152 2,257 618,258
Current period gross charge-offs — 12 2 17 1 125 — — 157
Individuals' loans for household and other personal expenditures
Pass 8,190 32,152 44,959 25,956 5,351 6,787 37,110 25 160,530
Special Mention 10 137 291 135 48 20 84 194 919
Substandard — 10 — — — — — — 10
Total Individuals' loans for household and other personal expenditures 8,200 32,299 45,250 26,091 5,399 6,807 37,194 219 161,459
Current period gross charge-offs 20 190 131 62 21 12 — — 436
Public finance and other commercial loans
Pass 33,294 54,992 206,812 202,288 153,742 313,389 82 — 964,599
Total Public finance and other commercial loans 33,294 54,992 206,812 202,288 153,742 313,389 82 — 964,599
Loans $ 741,161 $ 2,599,008 $ 2,390,848 $ 1,934,573 $ 1,344,764 $ 1,360,363 $ 2,092,374 $ 2,491 $ 12,465,582
Total current period gross charge-offs $ 760 $ 1,134 $ 447 $ 178 $ 397 $ 237 $ — $ — $ 3,153
December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Term Loans (amortized cost basis by origination year) Revolving loans amortized Revolving loans converted
2023 2022 2021 2020 2019 Prior cost basis to term Total
Commercial and industrial loans
Pass $ 1,175,967 $ 474,601 $ 253,148 $ 86,226 $ 47,910 $ 45,020 $ 1,393,756 $ 60 $ 3,476,688
Special Mention 34,356 3,911 1,546 5,149 2,986 241 45,994 — 94,183
Substandard 12,311 20,245 17,733 2,479 1,507 1,512 40,449 144 96,380
Doubtful 857 — — — — — 2,840 — 3,697
Total Commercial and industrial loans 1,223,491 498,757 272,427 93,854 52,403 46,773 1,483,039 204 3,670,948
Current period gross charge-offs 13,973 2,711 576 5,665 78 261 — — 23,264
Agricultural land, production and other loans to farmers
Pass 35,633 38,145 31,511 31,048 12,995 25,462 87,534 — 262,328
Special Mention — 266 — — — 122 — — 388
Substandard 58 150 — 454 — 36 — — 698
Total Agricultural land, production and other loans to farmers 35,691 38,561 31,511 31,502 12,995 25,620 87,534 — 263,414
Real estate loans:
Construction
Pass 403,578 267,587 198,350 8,372 7,723 2,357 11,735 — 899,702
Special Mention 25,894 — — 20,846 — — — — 46,740
Substandard 1,451 4,330 5,322 — — — — — 11,103
Total Construction 430,923 271,917 203,672 29,218 7,723 2,357 11,735 — 957,545
Commercial real estate, non-owner occupied
Pass 373,378 504,280 535,327 418,553 141,320 200,821 16,744 — 2,190,423
Special Mention 76,382 21,145 7,005 4,531 19,479 27,941 37 — 156,520
Substandard 20,358 10,537 219 20,236 — 2,299 247 — 53,896
Total Commercial real estate, non-owner occupied 470,118 535,962 542,551 443,320 160,799 231,061 17,028 — 2,400,839
Current period gross charge-offs — 66 — — — — — — 66
Commercial real estate, owner occupied
Pass 176,750 199,821 256,346 263,522 99,180 77,485 27,369 — 1,100,473
Special Mention 6,712 5,034 9,319 2,460 919 2,902 514 — 27,860
Substandard 18,092 3,712 4,183 4,545 289 2,929 — — 33,750
Total Commercial real estate, owner occupied 201,554 208,567 269,848 270,527 100,388 83,316 27,883 — 1,162,083
Current period gross charge-offs 48 — — — 2 — — — 50
Residential
Pass 395,363 695,056 442,495 365,297 98,654 254,718 4,988 83 2,256,654
Special Mention 2,167 5,591 3,202 1,924 1,065 4,837 200 81 19,067
Substandard 804 3,708 2,529 1,199 866 4,063 31 — 13,200
Total Residential 398,334 704,355 448,226 368,420 100,585 263,618 5,219 164 2,288,921
Current period gross charge-offs 101 252 208 3 3 94 — — 661
Home equity
Pass 9,375 29,784 61,591 11,084 1,092 3,875 484,330 5,837 606,968
Special Mention — 715 — 1,092 15 2 5,031 149 7,004
Substandard 63 — 727 — — 123 2,589 97 3,599
Total Home Equity 9,438 30,499 62,318 12,176 1,107 4,000 491,950 6,083 617,571
Current period gross charge-offs 69 213 224 149 193 1,596 — — 2,444
Individuals' loans for household and other personal expenditures
Pass 35,781 49,295 28,387 6,726 2,070 5,904 38,619 772 167,554
Special Mention 184 246 138 69 — 14 176 — 827
Substandard — 6 — — 1 — — — 7
Total Individuals' loans for household and other personal expenditures 35,965 49,547 28,525 6,795 2,071 5,918 38,795 772 168,388
Current period gross charge-offs 147 770 342 77 62 156 — — 1,554
Public finance and other commercial loans
Pass 65,357 208,347 204,863 155,132 91,619 229,355 1,645 — 956,318
Total Public finance and other commercial loans 65,357 208,347 204,863 155,132 91,619 229,355 1,645 — 956,318
Loans $ 2,870,871 $ 2,546,512 $ 2,063,941 $ 1,410,944 $ 529,690 $ 892,018 $ 2,164,828 $ 7,223 $ 12,486,027
Total current period gross charge-offs $ 14,338 $ 4,012 $ 1,350 $ 5,894 $ 338 $ 2,107 $ — $ — $ 28,039

Total past due loans equaled $68.9 million as of March 31, 2024 representing a $10.3 million decrease from $79.2 million at December 31, 2023. The 30-59 days past due loans decreased $16.7 million from December 31, 2023 as commercial and industrial, commercial real estate, non-owner occupied and residential loan classes decreased $1.7 million, $12.2 million and $3.1 million, respectively. The 60-89 days past due loans decreased $1.7 million from December 31, 2023. The 90 days or more past due loans increased $8.0 million from December 31, 2023 as commercial real estate, non-owner occupied increased $11.3 million, which was partially offset by a decrease in residential of $2.3 million. The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, as of the dates indicated:

March 31, 2024
Current 30-59 Days<br>Past Due 60-89 Days<br>Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due<br>And Accruing
Commercial and industrial loans $ 3,712,412 $ 3,279 $ 267 $ 6,407 $ 3,722,365 $ 1,585
Agricultural land, production and other loans to farmers 234,177 254 — — 234,431 —
Real estate loans:
Construction 941,726 — — — 941,726 —
Commercial real estate, non-owner occupied 2,341,845 746 2,988 22,781 2,368,360 —
Commercial real estate, owner occupied 1,136,405 939 6 544 1,137,894 —
Residential 2,293,704 8,741 4,197 9,848 2,316,490 1,185
Home equity 611,309 2,918 1,643 2,388 618,258 68
Individuals' loans for household and other personal expenditures 160,530 529 390 10 161,459 —
Public finance and other commercial loans 964,599 — — — 964,599 —
Loans $ 12,396,707 $ 17,406 $ 9,491 $ 41,978 $ 12,465,582 $ 2,838
December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- ---
Current 30-59 Days<br>Past Due 60-89 Days<br>Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due<br>And Accruing
Commercial and industrial loans $ 3,657,447 $ 5,021 $ 1,622 $ 6,858 $ 3,670,948 $ 86
Agricultural land, production and other loans to farmers 263,414 — — — 263,414 —
Real estate loans:
Construction 955,588 — 1,957 — 957,545 —
Commercial real estate, non-owner occupied 2,376,184 12,995 195 11,465 2,400,839 —
Commercial real estate, owner occupied 1,161,869 — 104 110 1,162,083 —
Residential 2,259,496 11,810 5,472 12,143 2,288,921 —
Home equity 608,948 3,614 1,647 3,362 617,571 52
Individuals' loans for household and other personal expenditures 167,553 635 192 8 168,388 —
Public finance and other commercial loans 956,284 — — 34 956,318 34
Loans $ 12,406,783 $ 34,075 $ 11,189 $ 33,980 $ 12,486,027 $ 172

Loans are reclassified to a nonaccruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in prior years, if any, is charged to the allowance for credit losses. Payments subsequently received on nonaccrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance.

The following table summarizes the Corporation’s nonaccrual loans by loan class as of the dates indicated:

March 31, 2024 December 31, 2023
Nonaccrual Loans Nonaccrual Loans with no Allowance for Credit Losses Nonaccrual Loans Nonaccrual Loans with no Allowance for Credit Losses
Commercial and industrial loans $ 7,140 $ 305 $ 9,050 $ 1,015
Agricultural land, production and other loans to farmers 56 — 58 —
Real estate loans:
Construction — — 520 —
Commercial real estate, non-owner occupied 23,213 10,650 11,932 11,095
Commercial real estate, owner occupied 2,687 1,936 3,041 2,257
Residential 25,900 — 25,140 —
Home equity 3,449 — 3,820 —
Individuals' loans for household and other personal expenditures 33 — 19 —
Loans $ 62,478 $ 12,891 $ 53,580 $ 14,367

Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. There was no interest income recognized on nonaccrual loans for the three months ended March 31, 2024 or 2023.

Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

The tables below present the amortized cost basis of collateral dependent loans by loan class and their respective collateral type, which are individually evaluated to determine expected credit losses. The total collateral dependent loan balance increased $17.4 million, primarily related to increases of $8.3 million and $8.6 million in commercial and industrial and commercial real estate, non-owner occupied, respectively, for the three months ended March 31, 2024. The total related allowance balance increased $9.5 million, primarily related to increases of $6.9 million and $2.6 million in commercial and industrial and commercial real estate, non-owner occupied, respectively, for the three months ended March 31, 2024.

March 31, 2024
Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans
Commercial and industrial loans $ — $ — $ 40,331 $ 40,331 $ 18,324
Real estate loans:
Construction — 6 — 6 —
Commercial real estate, non-owner occupied 26,097 — — 26,097 2,672
Commercial real estate, owner occupied 10,100 — — 10,100 —
Residential — 1,333 — 1,333 213
Home equity — 218 — 218 29
Loans $ 36,197 $ 1,557 $ 40,331 $ 78,085 $ 21,238
December 31, 2023
--- --- --- --- --- --- --- --- --- --- ---
Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans
Commercial and industrial loans $ — $ — $ 32,029 $ 32,029 $ 11,474
Real estate loans:
Construction — 7 — 7 —
Commercial real estate, non-owner occupied 17,516 — — 17,516 35
Commercial real estate, owner occupied 9,452 — — 9,452 —
Residential — 1,439 — 1,439 230
Home equity — 223 — 223 30
Loans $ 26,968 $ 1,669 $ 32,029 $ 60,666 $ 11,769

In certain situations, the Corporation may modify the terms of a loan to a debtor experiencing financial difficulty. The modifications may include principal forgiveness, interest rate reductions, payment delays, term extensions or combinations of these modifications. The following tables present the amortized cost basis of loans at March 31, 2024 and March 31, 2023 that were both experiencing financial difficulty and modified during the three months ended March 31, 2024 and 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.

Three Months Ended March 31, 2024
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
Payment Delay Term Extension Interest Rate Reduction Combination Payment Delay & Term Extension % of Total Class of Financing Receivable
Commercial and industrial loans $ 1,542 $ 2,798 $ 250 $ 14 0.12 %
Real estate loans:
Commercial real estate, owner occupied — 190 — — 0.02 %
Residential 1,617 — — — 0.07 %
Home equity 90 266 — — 0.06 %
Total $ 3,249 $ 3,254 $ 250 $ 14
Three Months Ended March 31, 2023
--- --- --- --- --- --- --- ---
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
Term Extension Combination Interest Rate Reduction & Term Extension % of Total Class of Financing Receivable
Commercial and industrial loans $ 9,224 $ — 0.26 %
Agricultural land, production and other loans to farmers 37 — 0.02 %
Real estate loans:
Construction 17 — — %
Commercial real estate, non-owner occupied 97 5,966 0.26 %
Commercial real estate, owner occupied 10,822 82 0.88 %
Total $ 20,197 $ 6,048

The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three months ended March 31, 2024 and 2023.

Three Months Ended March 31, 2024
Financial Effect of Loan Modifications
Payment Delay Interest Rate Reduction Combination Payment Delay & Term Extension
Commercial and industrial loans Provided payment deferrals with weighted average delayed amounts of 50,000. Reduced the weighted average contractual interest rate from 9.00% to 8.00%. Provided payment deferrals with weighted average delayed amounts of $5,000. Extended loans by a weighted average of 3 months.
Real estate loans:
Commercial real estate, owner occupied
Residential Provided payment deferrals with weighted average delayed amounts of 31,000.
Home equity Provided payment deferrals with weighted average delayed amounts of 4,000.

All values are in US Dollars.

Three Months Ended March 31, 2023
Financial Effect of Loan Modifications
Term Extension Combination Interest Rate Reduction & Term Extension
Commercial and industrial loans Added a weighted average life of 4 months to the life of the loans, which reduced monthly payment amounts for the borrowers.
Agricultural land, production and other loans to farmers Added a weighted average life of 60 months to the life of the loans, which reduced monthly payment amounts for the borrowers.
Real estate loans:
Construction Added a weighted average life of 24 months to the life of the loans, which reduced monthly payment amounts for the borrowers.
Commercial real estate, non-owner occupied Added a weighted average life of 12 months to the life of the loans, which reduced monthly payment amounts for the borrowers. Reduced the weighted average contractual interest rate from 7.81% to 7.40%. Added a weighted average 41 months to the life of loans, which reduced monthly payment amounts for the borrowers.
Commercial real estate, owner occupied Added a weighted average life of 9 months to the life of the loans, which reduced monthly payment amounts for the borrowers. Reduced the weighted average contractual interest rate from 10.25% to 6.61%. Added a weighted average 114 months to the life of loans, which reduced monthly payment amounts for the borrowers.

The following tables present the amortized cost basis and payment status of loans modified within the previous twelve months to borrowers experiencing financial difficulty, and that subsequently defaulted during the three months ended March 31, 2024 and 2023 and remained in default at period end.

Three Months Ended March 31, 2024
Payment Status
Current 30-89 Days Past Due 90+ Days Past Due
Commercial and industrial loans $ 4,605 $ — $ 98
Real estate loans:
Commercial real estate, owner occupied 189 7 —
Residential — 122 1,617
Home equity 356 — —
Total $ 5,150 $ 129 $ 1,715
Three Months Ended March 31, 2023
--- --- ---
Payment Status
Current
Commercial and industrial loans $ 9,224
Agricultural land, production and other loans to farmers 37
Real estate loans:
Construction 17
Commercial real estate, non-owner occupied 6,063
Commercial real estate, owner occupied 10,904
Total $ 26,245

Upon the Corporation's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is charged-off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

Allowance for Credit Losses on Loans

The Allowance for Credit Losses on Loans ("ACL - Loans") is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over the contractual term. The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge-offs for loans, net of recoveries. Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Loans are charged-off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance represents the Corporation’s best estimate of current expected credit losses on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The CECL calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the allowance for credit losses is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

In calculating the allowance for credit losses, the loan portfolio was pooled into ten loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Corporation analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

The expected credit losses are measured over the life of each loan segment utilizing the Probability of Default / Loss Given Default methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates.

The Corporation sub-segmented certain commercial portfolios by risk level and certain consumer portfolios by delinquency status where appropriate. The Corporation utilized a four-quarter reasonable and supportable economic forecast period followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the loans. Econometric modeling was performed using historical default rates and a selection of economic forecast scenarios published by Moody’s to develop a range of estimated credit losses for which to determine the best credit loss estimate within. Macroeconomic factors utilized in the modeling process include the national unemployment rate, BBB US corporate index, Commercial Real Estate ("CRE") price index and the home price index.

The Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, charge-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending, investment, collection and other relevant management staff, (vi) changes in the volume and severity of past due financial assets, the volume of the nonaccrual assets, and the volume and severity of adversely classified or graded assets, (vii) the value of underlying collateral for loans that are not collateral dependent, and (viii) other environmental factors such as regulatory, legal and technological considerations, as well as competition and changes in the economic and business conditions that affect the collectibility of financial assets. At CECL adoption, the Corporation established certain qualitative factors that were expected to correlate to losses within the loan portfolio. During a scheduled review of qualitative factors in 2023, the Corporation determined there had not been significant evidence of correlation to losses for the qualitative factors that included i) changes in experience, ability and depth of lending management and staff; ii) changes in lending policies and procedures; iii) changes in the quality of the credit review function; iv) portfolio mix and growth; and v) industry concentration. The Corporation decided to refine these qualitative factors in order to improve our ability to assess related risk and enhance our ability to correlate to losses. The Corporation’s evaluation of the qualitative approach resulted in an insignificant change to the ACL – Loans estimate.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis.

The risk characteristics of the Corporation’s portfolio segments are as follows:

Commercial

Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Corporation monitors commercial real estate loans based on collateral and risk grade criteria, as well as the levels of owner-occupied versus non-owner occupied loans.

Construction

Construction loans are underwritten utilizing a combination of tools and techniques including feasibility and market studies, independent appraisals and appraisal reviews, absorption and interest rate sensitivity analysis as well as the financial analysis of the developer and all guarantors. Construction loans are monitored by either in house or third party inspectors limiting advances to a percentage of costs or stabilized project value. These loans frequently involve the disbursement of significant funds with the repayment dependent upon the successful completion and, where necessary, the future stabilization of the project. The predominant inherent risk of this portfolio is associated with the borrower's ability to successfully complete a project on time, within budget and stabilize the projected as originally projected.

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences, which are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans, such as small installment loans and certain lines of credit, are unsecured. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers and can also be impacted by changes in property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The allowance for credit losses decreased $253,000 during the three months ended March 31, 2024. Net charge-offs totaled $2.3 million and provision expense of $2.0 million was recorded during the three months ended March 31, 2024. The allowance for credit losses decreased $225,000 due to net charge-offs for the three months ended March 31, 2023. The following tables summarize changes in the allowance for credit losses by loan segment for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31, 2024
Commercial Commercial Real Estate Construction Consumer & Residential Total
Allowance for credit losses
Balances, December 31, 2023 $ 97,348 $ 44,048 $ 24,823 $ 38,715 $ 204,934
Provision for credit losses 3,145 1,528 (4,454) 1,781 2,000
Recoveries on loans 551 53 — 296 900
Loans charged off (1,831) (351) — (971) (3,153)
Balances, March 31, 2024 $ 99,213 $ 45,278 $ 20,369 $ 39,821 $ 204,681 Three Months Ended March 31, 2023
--- --- --- --- --- --- ---
Commercial Commercial Real Estate Construction Consumer & Residential Total
Allowance for credit losses
Balances, December 31, 2022 $ 102,216 $ 46,839 $ 28,955 $ 45,267 $ 223,277
Provision for credit losses (1,199) (583) (384) 2,166 —
Recoveries on loans 530 56 — 258 844
Loans charged off (243) (4) — (822) (1,069)
Balances, March 31, 2023 $ 101,304 $ 46,308 $ 28,571 $ 46,869 $ 223,052

Off-Balance Sheet Arrangements, Commitments And Contingencies

In the normal course of business, the Corporation has entered into off-balance sheet financial instruments which include commitments to extend credit and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial customers that use lines of credit to supplement their treasury management functions, and thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing for their cash flows. Other typical lines of credit are related to home equity loans granted to customers. Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require a fee.

Standby letters of credit are generally issued on behalf of an applicant (the Corporation’s customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. The standby letter of credit would permit the beneficiary to obtain payment from the Corporation under certain prescribed circumstances. Subsequently, the Corporation would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Corporation typically follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is typically evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property. The contractual amounts of these commitments are not reflected in the consolidated financial statements and only amounts drawn upon would be reflected in the future. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should the Corporation’s customers default on their resulting obligation to the Corporation, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments.

Financial instruments with off-balance sheet risk were as follows:

March 31, 2024 December 31, 2023
Amounts of commitments:
Loan commitments to extend credit $ 4,993,077 $ 5,025,790
Standby letters of credit $ 72,956 $ 65,580

The Corporation maintains an accrual for credit losses on off-balance sheet commitments using the CECL methodology. Reserves for unfunded commitments declined by $3.8 million during the year ended December 31, 2023, due to reserve release, which decreased the reserve to $19.5 million at December 31, 2023 and March 31, 2024. This reserve level remains appropriate and is reported in Other Liabilities as of March 31, 2024 in the Consolidated Condensed Balance Sheets.

The table below reflects the total allowance for credit losses for the off-balance sheet commitment for the three months ended March 31, 2024 and 2023:

Three Months Ended
March 31, 2024 March 31, 2023
Balance at beginning of the period $ 19,500 $ 23,300
Provision for credit losses - unfunded commitments — —
Ending balance $ 19,500 $ 23,300

NOTE 4

DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Corporation is exposed to certain risks arising from both its business operations and economic conditions.  The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments.  Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash payments principally related to certain variable-rate liabilities.  The Corporation also has derivatives that are a result of a service the Corporation provides to certain qualifying customers, and, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities.  The Corporation manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net risk exposure resulting from such transactions.

Derivatives Designated as Hedges

The Corporation’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of fixed amounts to a counterparty in exchange for the Corporation receiving variable payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of March 31, 2024 and December 31, 2023 the Corporation had no interest rate swaps.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss). The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2024 and 2023, the Corporation did not recognize any ineffectiveness.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Corporation's variable-rate liabilities. During the next twelve months, the Corporation doesn't expect to reclassify income (loss) from accumulated other comprehensive income (loss) to interest income.

The amount of gain (loss) recognized in other comprehensive income (loss) is included in the table below for the periods indicated.

Derivatives in Cash Flow Hedging Relationships Amount of Loss Recognized in Other Comprehensive Income (Loss) on Derivatives<br> (Effective Portion)
Three Months Ended
March 31, 2024 March 31, 2023
Interest Rate Products $ — $ (51)

The amount of gain (loss) reclassified from other comprehensive income (loss) into income related to cash flow hedging relationships is included in the table below for the periods indicated.

Derivatives Designated as<br>Hedging Instruments Location of Gain (Loss)<br>Recognized Income on<br>Derivative Amount of Gain Reclassed from Other Comprehensive Income (Loss) into Income (Effective Portion)
Three Months Ended <br>March 31, 2024 Three Months Ended <br>March 31, 2023
Interest rate contracts Interest Expense $ — $ 1

Non-designated Hedges

The Corporation does not use derivatives for trading or speculative purposes.  Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers. The Corporation executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Corporation executes with a third party, such that the Corporation minimizes its net risk exposure resulting from such transactions.  As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Corporation's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair value of these mortgage banking derivatives are included in net gains and fees on sales of loans.

The table below presents the fair value of the Corporation’s non-designated hedges, as well as their classification on the Consolidated Condensed Balance Sheet, as of March 31, 2024, and December 31, 2023.

March 31, 2024 December 31, 2023
Notional Amount Fair Value Notional Amount Fair Value
Included in other assets:
Interest rate swaps $ 1,348,270 $ 89,209 $ 1,355,947 $ 78,743
Forward contracts related to mortgage loans to be delivered for sale 25,689 357 15,160 469
Interest rate lock commitments 30,146 177 22,706 167
Included in other assets $ 1,404,105 $ 89,743 $ 1,393,813 $ 79,379
Included in other liabilities:
Interest rate swaps $ 1,348,270 $ 89,265 $ 1,355,947 $ 78,811
Forward contracts related to mortgage loans to be delivered for sale 32,935 143 25,290 191
Interest rate lock commitments 15,026 29 1,025 6
Included in other liabilities $ 1,396,231 $ 89,437 $ 1,382,262 $ 79,008

In the normal course of business, the Corporation may decide to settle a forward contract rather than fulfill the contract. Cash received or paid in this settlement manner is included in "Net gains and fees on sales of loans" in the Consolidated Condensed Statements of Income and is considered a cost of executing a forward contract. The amount of gain (loss) recognized into income related to non-designated hedging instruments is included in the table below for the periods indicated.

Derivatives Not Designated as<br>Hedging Instruments Location of Gain (Loss)<br>Recognized Income on<br>Derivative Amount of Gain (Loss)<br>Recognized into Income on<br>Derivatives
Three Months Ended <br>March 31, 2024 Three Months Ended <br>March 31, 2023
Forward contracts related to mortgage loans to be delivered for sale Net gains and fees on sales of loans $ (1) $ (46)
Interest rate lock commitments Net gains and fees on sales of loans (13) 227
Total net gain (loss) recognized in income $ (14) $ 181

The Corporation’s exposure to credit risk occurs because of nonperformance by its counterparties.  The counterparties approved by the Corporation are usually financial institutions, which are well capitalized and have credit ratings through Moody’s and/or Standard & Poor’s at or above investment grade.  The Corporation’s control of such risk is through quarterly financial reviews, comparing mark-to-market values with policy limitations, credit ratings and collateral pledging.

Credit-risk-related Contingent Features

The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well or adequately capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts. Additionally, the Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. As of March 31, 2024, the termination value of derivatives in a net liability position related to these agreements was $4.0 million, which resulted in no collateral pledged to counterparties as of March 31, 2024. While the Corporation did not breach any of these provisions as of March 31, 2024, if it had, the Corporation could have been required to settle its obligations under the agreements at their termination value.

NOTE 5

FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC 820 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances.

As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs for which there is little or no market activity (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10 percent or more of the total fair value of a particular asset or liability.

RECURRING MEASUREMENTS

Assets and liabilities are considered to be measured at fair value on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment and recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the

accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government-sponsored agency and mortgage-backed securities, state and municipal securities and corporate obligations securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. Government-sponsored mortgage-backed securities and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

Derivative Financial Agreements

See information regarding the Corporation’s derivative financial agreements in NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2024, and December 31, 2023.

Fair Value Measurements Using:
March 31, 2024 Fair Value Quoted Prices in Active Markets for Identical Assets<br>(Level 1) Significant Other<br>Observable Inputs<br>(Level 2) Significant<br>Unobservable<br>Inputs<br>(Level 3)
Available for sale securities:
U.S. Government-sponsored agency securities $ 93,132 $ — $ 93,132 $ —
State and municipal 1,043,063 — 1,039,851 3,212
U.S. Government-sponsored mortgage-backed securities 472,044 — 472,040 4
Corporate obligations 11,974 — 11,943 31
Derivative assets 89,743 — 89,743 —
Derivative liabilities 89,437 — 89,437 —
Fair Value Measurements Using:
--- --- --- --- --- --- --- --- ---
December 31, 2023 Fair Value Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) Significant Other Observable Inputs<br>(Level 2) Significant<br>Unobservable<br>Inputs<br>(Level 3)
Available for sale securities:
U.S. Government-sponsored agency securities $ 95,307 $ — $ 95,307 $ —
State and municipal 1,065,171 — 1,061,896 3,275
U.S. Government-sponsored mortgage-backed securities 454,815 — 454,811 4
Corporate obligations 11,819 — 11,788 31
Derivative assets 79,379 — 79,379 —
Derivative liabilities 79,008 — 79,008 —

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying

balance sheets using significant unobservable Level 3 inputs for the three months ended March 31, 2024 and 2023.

Available for Sale Securities
Three Months Ended
March 31, 2024 March 31, 2023
Balance at beginning of the period $ 3,310 $ 3,439
Included in other comprehensive income (95) 114
Principal payments 32 (91)
Ending balance $ 3,247 $ 3,462

There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or

liabilities held at March 31, 2024 or December 31, 2023.

Transfers Between Levels

There were no transfers in or out of Level 3 during the three months ended March 31, 2024 and 2023.

Nonrecurring Measurements

Following is a description of valuation methodologies used for instruments measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy at March 31, 2024, and December 31, 2023.

Fair Value Measurements Using
March 31, 2024 Fair Value Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) Significant Other<br>Observable<br>Inputs<br>(Level 2) Significant Unobservable<br>Inputs<br>(Level 3)
Collateral dependent loans $ 33,522 $ — $ — $ 33,522
Fair Value Measurements Using
--- --- --- --- --- --- --- --- ---
December 31, 2023 Fair Value Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) Significant Other<br>Observable<br> Inputs<br>(Level 2) Significant Unobservable<br>Inputs<br>(Level 3)
Collateral dependent loans $ 55,020 $ — $ — $ 55,020

Collateral Dependent Loans and Other Real Estate Owned

Determining fair value for collateral dependent loans and other real estate requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at March 31, 2024 and December 31, 2023.

March 31, 2024 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average)
State and municipal securities $ 3,212 Discounted cash flow Maturity/Call date 1 month to 15 years
US Muni BQ curve BBB
Discount rate 3.4% - 4.6%
Weighted-average coupon 3.3%
Corporate obligations and U.S. Government-sponsored mortgage-backed securities $ 35 Discounted cash flow Risk free rate 3 month CME Term SOFR plus 26bps
plus premium for illiquidity (basis points) plus 200bps
Weighted-average coupon 0%
Collateral dependent loans $ 33,522 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 0% - 10%
Weighted-average discount by loan balance 4.2%
December 31, 2023 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average)
--- --- --- --- --- ---
State and municipal securities $ 3,275 Discounted cash flow Maturity/Call date 1 month to 15 years
US Muni BQ curve A- to BBB
Discount rate 3.6% - 4.7%
Weighted-average coupon 3.3%
Corporate obligations and U.S. Government-sponsored mortgage-backed securities $ 35 Discounted cash flow Risk free rate 3 month CME Term<br><br>SOFR plus 26bps
plus premium for illiquidity (basis points) plus 200bps
Weighted-average coupon 0%
Collateral dependent loans $ 55,020 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 0% - 10%
Weighted-average discount by loan balance 4.1%

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

State and Municipal Securities, Corporate Obligations and U.S. Government-sponsored Mortgage-Backed Securities

The significant unobservable inputs used in the fair value measurement of the Corporation's state and municipal securities, corporate obligations and U.S. Government-sponsored mortgage-backed securities are premiums for unrated securities and marketability discounts. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, changes in either of those inputs will not affect the other input.

Fair Value of Financial Instruments

The following tables present estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2024 and December 31, 2023.

March 31, 2024
Quoted Prices in Active Markets<br>for Identical<br>Assets Significant<br>Other<br>Observable<br>Inputs Significant Unobservable<br>Inputs
Carrying Amount (Level 1) (Level 2) (Level 3) Total Fair Value
Assets:
Cash and due from banks $ 100,514 $ 100,514 $ — $ — $ 100,514
Interest-bearing deposits 410,497 410,497 — — 410,497
Investment securities available for sale 1,620,213 — 1,616,966 3,247 1,620,213
Investment securities held to maturity, net 2,163,361 — 1,810,678 9,773 1,820,451
Loans held for sale 15,118 — 15,118 — 15,118
Loans, net 12,260,901 — — 11,965,258 11,965,258
Federal Home Loan Bank stock 41,758 — 41,758 — 41,758
Derivative assets 89,743 — 89,743 — 89,743
Interest receivable 92,550 — 92,550 — 92,550
Liabilities:
Deposits $ 14,884,584 $ 12,451,569 $ 2,421,156 $ — 14,872,725
Borrowings:
Securities sold under repurchase agreements 130,264 — 130,254 — 130,254
Federal Home Loan Bank advances 612,778 — 602,913 — 602,913
Subordinated debentures and other borrowings 118,612 — 109,654 — 109,654
Derivative liabilities 89,437 — 89,437 — 89,437
Interest payable 19,262 — 19,262 — 19,262
December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Quoted Prices in Active Markets<br>for Identical<br>Assets Significant<br>Other<br>Observable<br>Inputs Significant Unobservable<br>Inputs
Carrying Amount (Level 1) (Level 2) (Level 3) Total Fair Value
Assets:
Cash and due from banks $ 112,649 $ 112,649 $ — $ — $ 112,649
Interest-bearing deposits 436,080 436,080 — — 436,080
Investment securities available for sale 1,627,112 — 1,623,802 3,310 1,627,112
Investment securities held to maturity, net 2,184,252 — 1,859,974 10,400 1,870,374
Loans held for sale 18,934 — 18,934 — 18,934
Loans, net 12,281,093 — — 11,958,301 11,958,301
Federal Home Loan Bank stock 41,769 — 41,769 — 41,769
Derivative assets 79,379 — 79,379 — 79,379
Interest receivable 97,664 — 97,664 — 97,664
Liabilities:
Deposits $ 14,821,453 $ 12,482,295 $ 2,329,662 $ — 14,811,957
Borrowings:
Securities sold under repurchase agreements 157,280 — 157,265 — 157,265
Federal Home Loan Bank advances 712,852 — 707,377 — 707,377
Subordinated debentures and other borrowings 158,644 — 149,995 — 149,995
Derivative liabilities 79,008 — 79,008 — 79,008
Interest payable 18,912 — 18,912 — 18,912

NOTE 6

QUALIFIED AFFORDABLE HOUSING INVESTMENTS

The Corporation has investments in various limited partnerships that sponsor affordable housing projects. The purpose of these investments is to earn an adequate return of capital through the receipt of low income housing tax credits and to assist the Corporation in achieving goals associated with the CRA. These investments are included in other assets on the Consolidated Balance Sheet, with any unfunded commitments included in other liabilities. The investments are amortized as a component of income tax expense.

The following table summarizes the Corporation’s affordable housing investments as of March 31, 2024 and December 31, 2023:

March 31, 2024 December 31, 2023
Investment Type Investment Unfunded Commitment Investment Unfunded Commitment
LIHTC $ 112,728 $ 88,433 $ 114,514 $ 96,408

The following table summarizes the amortization expense and tax credits recognized for the Corporation’s affordable housing investments for the three months ended March 31, 2024 and 2023, respectively:

Three Months Ended March 31,
2024 2023
Amortization expense $ 1,696 $ 244
Tax credits recognized 1,644 284

NOTE 7

BORROWINGS

The following table summarizes the Corporation’s borrowings as of March 31, 2024 and December 31, 2023:

March 31, 2024 December 31, 2023
Securities sold under repurchase agreements $ 130,264 $ 157,280
Federal Home Loan Bank advances 612,778 712,852
Subordinated debentures and other borrowings 118,612 158,644
Total Borrowings $ 861,654 $ 1,028,776

Securities sold under repurchase agreements consist of obligations of the Bank to other parties and are secured by U.S. Government-sponsored enterprise obligations. The maximum amount of outstanding agreements at any month-end during the first three months of 2024 and 2023 totaled $194.2 million and $242.2 million, respectively, and the average of such agreements totaled $172.7 million and $208.0 million during the same period of 2024 and 2023, respectively.

The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of March 31, 2024 and December 31, 2023 were:

March 31, 2024
Remaining Contractual Maturity of the Agreements
Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total
U.S. Government-sponsored mortgage-backed securities $ 130,264 $ — $ — $ — $ 130,264 December 31, 2023
--- --- --- --- --- --- --- --- --- --- ---
Remaining Contractual Maturity of the Agreements
Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total
U.S. Government-sponsored mortgage-backed securities $ 157,280 $ — $ — $ — $ 157,280

Contractual maturities of borrowings as of March 31, 2024, are as follows:

Maturities in Years Ending December 31: Securities Sold<br>Under Repurchase Agreements Federal Home<br>Loan Bank<br>Advances Subordinated<br>Debentures and<br>Term Loans
2024 $ 130,264 $ 60,000 $ 1,166
2025 — 95,000 —
2026 — 75,000 —
2027 — 250,000 —
2028 — 115,000 30,000
2029 and after — 17,778 91,029
ASC 805 fair value adjustments at acquisition — — (3,583)
$ 130,264 $ 612,778 $ 118,612

The terms of a security agreement with the Federal Home Loan Bank ("FHLB") require the Corporation to pledge, as collateral for advances, qualifying first mortgage loans, investment securities and multi-family loans in an amount equal to at least 145 percent of these advances depending on the type of collateral pledged. At March 31, 2024, the outstanding FHLB advances had interest rates from 0.35 to 4.94 percent and are subject to restrictions or penalties in the event of prepayment. The total available remaining borrowing capacity from the FHLB at March 31, 2024, was $721.2 million. As of March 31, 2024, the Corporation had $110.0 million of putable advances with the FHLB.

Subordinated Debentures and Term Loans. As of March 31, 2024 and December 31, 2023, subordinated debentures and term loans totaled $118.6 million and $158.6 million, respectively.

•First Merchants Capital Trust II (“FMC Trust II”). At March 31, 2024 and December 31, 2023, the Corporation had $41.7 million of subordinated debentures issued to FMC Trust II, a wholly-owned statutory business trust. FMC Trust II was formed in July 2007 for purposes of issuing trust preferred securities to investors. At that time, it simultaneously issued and sold its common securities to the Corporation, which constituted all of the issued and outstanding common securities of FMC Trust II. The subordinated debentures, which were purchased with the proceeds of the sale of the trust’s capital securities, are the sole assets of FMC Trust II and are fully and unconditionally guaranteed by the Corporation. As of March 31, 2024, the subordinated debentures and trust preferred securities bear interest at a variable rate equal to the three-month CME Term Secured Overnight Financing Rate ("SOFR"), plus the 0.26161 percent spread adjustment. The interest rate at March 31, 2024 was 7.15 percent. As of December 31, 2023, the subordinated debentures and the trust preferred securities bear interest at a variable rate equal to CME Term SOFR, plus the 0.26161 percent spread adjustment. The interest rate at December 31, 2023 was 7.21 percent. The trust preferred securities are currently redeemable at par and without penalty, subject to the Corporation having first redeemed the related subordinated debentures, with the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies. The trust preferred securities and the subordinated debentures of FMC Trust II will mature on September 15, 2037. The Corporation continues to hold all outstanding common securities of FMC Trust II.

•Ameriana Capital Trust I. At March 31, 2024 and December 31, 2023, the Corporation had $10.3 million of subordinated debentures issued to Ameriana Capital Trust I. On December 31, 2015, the Corporation acquired Ameriana Capital Trust I in conjunction with its acquisition of Ameriana Bancorp, Inc. With a trust preferred structure substantially similar to that described above for FMC Trust II, the subordinated debentures held by Ameriana Capital Trust I were purchased with the proceeds of the sale of the trust’s capital securities. As of March 31, 2024, the subordinated debentures and trust preferred securities bear interest at a variable rate equal to the three-month CME Term SOFR, plus the 0.26161 percent spread adjustment. The interest rate at March 31, 2024 was 7.09 percent. As of December 31, 2023, the subordinated debentures and the trust preferred securities bear interest at a variable rate equal to three-month CME Term SOFR, plus the 0.26161 percent spread adjustment. The interest rate at December 31, 2023 was 7.15 percent. The trust preferred securities of Ameriana Capital Trust I are currently redeemable at par and without penalty, subject to the Corporation having first redeemed the related subordinated debentures, with the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies. The trust preferred securities and the subordinated debentures of Ameriana Capital Trust I will mature in March 2036. The Corporation continues to hold all of the outstanding common securities of Ameriana Capital Trust I.

•First Merchants Senior Notes and Subordinated Notes. On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $70 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5 million (the “Senior Debt”) and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due 2028 in the aggregate principal amount of $65 million (the “Subordinated Debt”). The interest rate on the Senior Debt and Subordinated Debt remained fixed for the first ten (10) years and became floating thereafter. The rates converted to floating on October 30, 2023. As of March 31, 2024, the Senior Debt had an annual floating rate equal to the three-month CME Term SOFR, adjusted by the relevant spread adjustment (which is 0.26161 percent for a three-month tenor), plus 2.345 percent, or 7.91 percent, and the Subordinated Debt had an annual floating rate equal to the three-month CME Term SOFR, plus the 0.26161 percent spread adjustment, plus 4.095 percent, or 9.66 percent. The Corporation has an option to redeem the Subordinated Debt in whole or in part at a redemption price equal to 100 percent of the principal amount of the redeemed Subordinated Notes, plus accrued and unpaid interest to the date of the redemption. The option of redemption is subject to the approval of the Federal Reserve Board. The Corporation has an option to redeem the Senior Debt in whole or in part at a redemption price equal to 100 percent of the principal amount of the redeemed Senior Notes, plus accrued and unpaid interest to the date of the redemption; provided, however, that no Subordinated Notes (as defined in the Issuing and Paying Agency Agreement) may remain outstanding subsequent to any early redemption of Senior Notes. The Subordinated Debt and the Senior Debt options to redeem began with the interest payment date on October 30, 2023, or on any scheduled interest payment date thereafter. During the first quarter of 2024, the Corporation exercised its rights to redeem $40.0 million in principal and paid the debt on the scheduled interest payment date. Additionally, the Corporation issued notice in the first quarter of 2024 to the holders of the Subordinated Debt that it intends to exercise its rights to redeem $25.0 million in principal. This redemption occured in the second quarter of 2024 on the scheduled interest payment date. Both redemptions were permitted under the optional redemptions provisions of the Subordinated Note Certificate representing the Subordinated Debt. The Senior Debt agreement contains certain customary representations and warranties and financial and negative covenants. As of March 31, 2024 and December 31, 2023 the Corporation was in compliance with these covenants.

•Level One Subordinated Notes. On April 1, 2022, the Corporation assumed certain subordinated notes in conjunction with its acquisition of Level One. The $30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75 percent per annum, payable semiannually through December 18, 2024. The notes will bear a floating interest rate equal to the of three-month CME Term SOFR plus 3.11 percent, payable quarterly, after December 18, 2024 through maturity. The notes mature on December 18, 2029, and the Corporation has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or upon the occurrence of a tier 2 capital event or tax event.

•Other Borrowings. During the third quarter of 2023, the Corporation acquired a secured borrowing in conjunction with the purchase of the Indianapolis regional headquarters building. The secured borrowing bears a fixed interest rate of 3.41 percent, has a maturity date of March 2035, and had a balance of $7.3 million as of March 31, 2024 and December 31, 2023. On April 1, 2022, the Corporation acquired a secured borrowing in conjunction with its acquisition of Level One. The secured borrowing related to a certain loan participation sold by Level One that did not qualify for sales treatment. The secured borrowing bears a fixed rate of 1.00 percent and had a balance of $1.2 million as of March 31, 2024 and December 31, 2023.

NOTE 8

ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of March 31, 2024 and 2023:

Accumulated Other Comprehensive Income (Loss)
Unrealized Gains (Losses) on Securities Available for Sale Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Defined Benefit Plans Total
Balance at December 31, 2023 $ (173,654) $ — $ (2,316) $ (175,970)
Other comprehensive income (loss) before reclassifications (22,061) — — (22,061)
Amounts reclassified from accumulated other comprehensive income (loss) 2 — — 2
Period change (22,059) — — (22,059)
Balance at March 31, 2024 $ (195,713) $ — $ (2,316) $ (198,029)
Balance at December 31, 2022 $ (234,495) $ 130 $ (4,786) $ (239,151)
Other comprehensive income (loss) before reclassifications 39,038 (41) — 38,997
Amounts reclassified from accumulated other comprehensive income (loss) 1,241 (1) — 1,240
Period change 40,279 (42) — 40,237
Balance at March 31, 2023 $ (194,216) $ 88 $ (4,786) $ (198,914)

The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Condensed Statements of Income for the three months ended March 31, 2024 and 2023.

Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended March 31,
Details about Accumulated Other Comprehensive Income (Loss) Components 2024 2023 Affected Line Item in the Statements of Income
Unrealized gains (losses) on available for sale securities (1)
Realized securities gains (losses) reclassified into income $ (2) $ (1,571) Other income - net realized gains (losses) on sales of available for sale securities
Related income tax benefit (expense) — 330 Income tax expense
$ (2) $ (1,241)
Unrealized gains (losses) on cash flow hedges (2)
Interest rate contracts $ — $ 1 Interest expense - subordinated debentures and term loans
Related income tax benefit (expense) — — Income tax expense
$ — $ 1
Total reclassifications for the period, net of tax $ (2) $ (1,240)

(1) For additional detail related to unrealized gains (losses) on available for sale securities and related amounts reclassified from accumulated other comprehensive loss see NOTE 2. INVESTMENT SECURITIES of these Notes to Consolidated Condensed Financial Statements.

(2) For additional detail related to unrealized gains (losses) on cash flow hedges and related amounts reclassified from accumulated other comprehensive loss see NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.

NOTE 9

SHARE-BASED COMPENSATION

Stock options and Restricted Stock Awards ("RSA") have been issued to directors, officers and other management employees under the Corporation's 2009 Long-term Equity Incentive Plan, the 2019 Long-term Equity Incentive Plan, the Level One Bancorp, Inc. 2007 Stock Option Plan and the Equity Compensation Plan for Non-Employee Directors. The stock options, which have a ten year life, become 100 percent vested based on time ranging from one year to two years and are fully exercisable when vested. Option exercise prices equal the Corporation's common stock closing price on NASDAQ on the date of grant. The RSAs issued to employees and non-employee directors provide for the issuance of shares of the Corporation's common stock at no cost to the holder and generally vest after three years.  The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited.  For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited. The RSAs for employees and non-employee directors are either immediately vested at retirement, disability or death, or, continue to vest after retirement, disability or death, depending on the plan under which the shares were granted.

The Corporation’s 2019 Employee Stock Purchase Plan ("ESPP") provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000.

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings.  Awards are valued at

fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Condensed Statements of Income.

Share-based compensation expense recognized in the Consolidated Condensed Statements of Income is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 0.05 percent for the three months ended March 31, 2024, based on historical experience.

The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards.

Three Months Ended<br>March 31,
2024 2023
Stock and ESPP Options
Pre-tax compensation expense $ 67 $ 30
Income tax expense (benefit) — (57)
Stock and ESPP option expense, net of income taxes $ 67 $ (27)
Restricted Stock Awards
Pre-tax compensation expense $ 1,335 $ 1,167
Income tax expense (benefit) (264) (255)
Restricted stock awards expense, net of income taxes $ 1,071 $ 912
Total Share-Based Compensation
Pre-tax compensation expense $ 1,402 $ 1,197
Income tax expense (benefit) (264) (312)
Total share-based compensation expense, net of income taxes $ 1,138 $ 885

The grant date fair value of ESPP options was estimated to be approximately $67,000 at the beginning of the January 1, 2024 quarterly offering period. The ESPP options vested during the three months ending March 31, 2024, leaving no unrecognized compensation expense related to unvested ESPP options at March 31, 2024.

Stock option activity under the Corporation's stock option plans as of March 31, 2024 and changes during the three months ended March 31, 2024, were as follows:

Number of<br>Shares Weighted-Average Exercise Price Weighted Average Remaining<br>Contractual Term<br>(in Years) Aggregate<br>Intrinsic<br>Value
Outstanding at January 1, 2024 90,075 $ 20.21
Exercised — $ —
Outstanding March 31, 2024 90,075 $ 20.21 1.68 $ 1,323,548
Vested and Expected to Vest at March 31, 2024 90,075 $ 20.21 1.68 $ 1,323,548
Exercisable at March 31, 2024 90,075 $ 20.21 1.68 $ 1,323,548

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of the first three months of 2024 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on March 31, 2024.  The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock.

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2023 was $1.4 million. There were no stock options exercised during the three months ended March 31, 2024. Cash receipts of stock options exercised during the three months ended March 31, 2023 was $1.0 million.

The following table summarizes information on unvested RSAs outstanding as of March 31, 2024:

Number of Shares Weighted-Average<br>Grant Date Fair Value
Unvested RSAs at January 1, 2024 452,426 $ 37.94
Granted 8,859 $ 34.90
Vested (7,413) $ 45.30
Forfeited (275) $ 40.95
Unvested RSAs at March 31, 2024 453,597 $ 37.76

As of March 31, 2024, unrecognized compensation expense related to RSAs was $8.3 million and is expected to be recognized over a weighted-average period of 1.6 years. The Corporation did not have any unrecognized compensation expense related to stock options as of March 31, 2024.

NOTE 10

INCOME TAX

The following table summarizes the major components creating differences between income taxes at the federal statutory and the effective tax rate recorded in the consolidated statements of income for the three months ended March 31, 2024 and 2023:

Three Months Ended<br>March 31,
2024 2023
Reconciliation of Federal Statutory to Actual Tax Expense:
Federal statutory income tax at 21% $ 11,501 $ 15,833
Tax-exempt interest income (4,352) (4,867)
Non-deductible FDIC premiums 139 60
Share-based compensation 30 (61)
Tax-exempt earnings and gains on life insurance (334) (270)
Tax credits (304) (92)
State Income Tax 34 700
Other 111 14
Actual Tax Expense $ 6,825 $ 11,317
Effective Tax Rate 12.5 % 15.0 %

NOTE 11

NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted-average common shares outstanding during the reporting period. Diluted net income per common share is computed by dividing net income available to common stockholders by the combination of the weighted-average common shares outstanding during the reporting period and all potentially dilutive common shares. Potentially dilutive common shares include stock options and RSAs issued under the Corporation's share-based compensation plans. Potentially dilutive common shares are excluded from the computation of diluted earnings per common share in the periods where the effect would be antidilutive.

The following table reconciles basic and diluted net income per common share for the three months ended March 31, 2024 and 2023.

Three Months Ended March 31,
2024 2023
Net Income Available to Common Stockholders Weighted-Average Common Shares Per Share<br>Amount Net Income Available to Common Stockholders Weighted-Average Common Shares Per Share<br>Amount
Net income available to common stockholders $ 47,472 59,066,789 $ 0.80 $ 63,610 59,216,198 $ 1.07
Effect of potentially dilutive stock options and restricted stock awards 206,225 224,530
Diluted net income per common share $ 47,472 59,273,014 $ 0.80 $ 63,610 59,440,728 $ 1.07
RSAs excluded from the diluted average common share calculation(1) 87,287 51,470

(1) Anti-dilution occurs when the unrecognized compensation cost per share of an RSA exceeds the market price of the Corporation's stock.

NOTE 12

GENERAL LITIGATION AND REGULATORY EXAMINATIONS

The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business. Additionally, the Corporation is also subject to periodic examinations by various regulatory agencies. It is the general opinion of management that the disposition or ultimate resolution of any such routine litigation or regulatory examinations will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Corporation.

NOTE 13

SUBSEQUENT EVENT

In April 2024, the Corporation was informed by a borrower that, for the foreseeable future, it planned to discontinue the repayment of principal and interest because of the renegotiation and cessation of several key governmental contracts which provided material cash flow for the repayment of the borrower's loan. As of March 31, 2024, the Corporation's borrower was current, risk graded as Substandard, and had an outstanding loan balance of $38.6 million. The Corporation is evaluating the borrower’s restructuring plan and its impact on the Corporation's collateral position. At this time, the Corporation is unable to determine the extent of potential loss of principal and/or interest.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

From time to time, we include forward-looking statements in our oral and written communication. We may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, in other written materials and in oral statements made by senior management to analysts, investors, representatives of the media and others. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of these safe harbor provisions. Forward-looking statements can often be identified by the use of words like “believe”, “continue”, “pattern”, “estimate”, “project”, “intend”, “anticipate”, “expect” and similar expressions or future or conditional verbs such as “will”, “would”, “should”, “could”, “might”, “can”, “may”, or similar expressions. These forward-looking statements include:

•statements of the Corporation's goals, intentions and expectations;

•statements regarding the Corporation's business plan and growth strategies;

•statements regarding the asset quality of the Corporation's loan and investment portfolios; and

•estimates of the Corporation's risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events:

•fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations and expense expectations;

•adverse changes in the economy, which might affect our business prospects and could cause credit-related losses and expenses;

•the impacts of epidemics, pandemics or other infectious disease outbreaks;

•the impacts related to or resulting from recent bank failures or adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks;

•adverse developments in our loan and investment portfolios;

•competitive factors in the banking industry, such as the trend towards consolidation in our market;

•changes in the banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like our affiliate bank;

•acquisitions of other businesses by us and integration of such acquired businesses;

•changes in market, economic, operational, liquidity, credit and interest rate risks associated with our business; and

•the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our anticipated future results.

BUSINESS SUMMARY

First Merchants Corporation (the “Corporation”) is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s common stock is traded on the Nasdaq’s Global Select Market System under the symbol FRME. The Corporation conducts its banking operations through First Merchants Bank (the “Bank”), a wholly-owned subsidiary that opened for business in Muncie, Indiana, in March 1893. The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank includes 116 banking locations in Indiana, Ohio, Michigan and Illinois. In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

Through the Bank, the Corporation offers a broad range of financial services, including accepting time, savings and demand deposits; making consumer, commercial, agri-business, public finance and real estate mortgage loans; providing personal and corporate trust services; offering full-service brokerage and private wealth management; and providing letters of credit, repurchase agreements and other corporate services.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

HIGHLIGHTS FOR THE FIRST QUARTER OF 2024

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

•Earnings per fully diluted common share for the first quarter of 2024 totaled $0.80 compared to $1.07 in the first quarter of 2023 and $0.71 in the fourth quarter of 2023.

•Earnings per fully diluted common share for the first quarter of 2024, excluding income on Paycheck Protection Program ("PPP") loans and non-core expenses, totaled $0.85 compared to $1.07 in the first quarter of 2023 and $0.87 in the fourth quarter of 2023. These adjusted earnings per share amounts are non-GAAP measures. For reconciliations of GAAP measures to the corresponding non-GAAP measures, see "NON-GAAP FINANCIAL MEASURES" within the "Results of Operations" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

•Total loans decreased $24.3 million, or 0.8 percent annualized on a linked quarter basis.

•Total deposits increased $63.1 million, or 1.7 percent annualized on a linked quarter basis.

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

RESULTS OF OPERATIONS

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

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

As of March 31, 2024, total assets equaled $18.3 billion, a decrease from the December 31, 2023 total of $18.4 billion.

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

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

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

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

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

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

Total borrowings decreased $167.1 million as of March 31, 2024, compared to December 31, 2023. Securities sold under repurchase and FHLB advances decreased $27.0 million and $100.1 million, respectively, compared to December 31, 2023 as the Corporation utilized excess liquidity to pay down borrowings in 2024. Additionally, subordinated debt decreased due to the paydown of $40.0 million in principal on the scheduled interest payment date during the first quarter of 2024. Additionally, the Corporation issued notice in the first quarter of 2024 to the holders of subordinated debt that it intends to exercise its rights to redeem $25.0 million in principal in the second quarter of 2024.

The Corporation continued to maintain all regulatory capital ratios in excess of the regulatory definition of “well-capitalized.” Details of the Stock Repurchase Program and regulatory capital ratios are discussed within the “CAPITAL” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

NON-GAAP FINANCIAL MEASURES

The Corporation's accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Corporation provides non-GAAP performance measures, which management believes are useful because they assist investors in assessing the Corporation's performance. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure can be found in the following tables.

Adjusted earnings per share, excluding PPP loans and non-core expenses, are meaningful non-GAAP financial measures for management, as they provide a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of the Corporation's business, because management does not consider these items to be relevant to ongoing financial performance on a per share basis.

Non-GAAP financial measures such as tangible common equity to tangible assets, tangible earnings per share, return on average tangible assets and return on average tangible equity are important measures of the strength of the Corporation's capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the Corporation’s financial position without regard to the effects of intangible assets and preferred stock, but do retain the effect of accumulated other comprehensive gains (losses) in stockholders' equity. Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

ADJUSTED NET INCOME AND DILUTED EARNINGS PER COMMON SHARE - non-GAAP
(Dollars in thousands, except per share amounts)
December 31, March 31,
2023 2023
Net Income Available to Common Stockholders - GAAP 47,472 $ 42,010 $ 63,610
Adjustments:
PPP loan income (7) (25)
Non-core expenses 1,2 12,682 —
Tax on adjustment (3,088) 6
Adjusted Net Income Available to Common Stockholders - non-GAAP 50,105 $ 51,597 $ 63,591
Average Diluted Common Shares Outstanding (in thousands) 59,556 59,441
Diluted Earnings Per Common Share - GAAP 0.80 $ 0.71 $ 1.07
Adjustments:
PPP loan income — —
Non-core expenses 1,2 0.21 —
Tax on adjustment (0.05) —
Adjusted Diluted Earnings Per Common Share - non-GAAP 0.85 $ 0.87 $ 1.07
1 - Non-core expenses in the three months ended December 31, 2023 included 4.3 million from the FDIC special assessment, 6.3 million from early retirement and severance costs, and 2.1 million from a lease termination.
2 - Non-core expenses in the three months ended March 31, 2024 included 1.1 million from the FDIC special assessment and 2.4 million from digital platform conversion costs.

All values are in US Dollars.

TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS - non-GAAP
(Dollars in thousands, except per share amounts)
March 31, 2024 December 31, 2023
Total Stockholders' Equity (GAAP) $ 2,224,803 $ 2,247,713
Less: Preferred stock (GAAP) (25,125) (25,125)
Less: Intangible assets (GAAP) (737,144) (739,101)
Tangible common equity (non-GAAP) $ 1,462,534 $ 1,483,487
Total assets (GAAP) $ 18,317,803 $ 18,405,887
Less: Intangible assets (GAAP) (737,144) (739,101)
Tangible assets (non-GAAP) $ 17,580,659 $ 17,666,786
Stockholders' Equity to Assets (GAAP) 12.15 % 12.21 %
Tangible common equity to tangible assets (non-GAAP) 8.32 % 8.40 %
Tangible common equity (non-GAAP) $ 1,462,534 $ 1,483,487
Plus: Tax benefit of intangibles (non-GAAP) 5,398 5,819
Tangible common equity, net of tax (non-GAAP) $ 1,467,932 $ 1,489,306
Common Stock outstanding 58,565 59,424
Book Value (GAAP) $ 37.56 $ 37.40
Tangible book value - common (non-GAAP) $ 25.07 $ 25.06
TANGIBLE EARNINGS PER SHARE, RETURN ON TANGIBLE ASSETS AND RETURN ON TANGIBLE EQUITY - non-GAAP
--- --- --- --- --- --- ---
(Dollars in thousands, except per share amounts)
Three Months Ended March 31,
2024 2023
Average goodwill (GAAP) $ 712,002 $ 712,002
Average other intangibles (GAAP) 26,017 34,630
Average deferred tax on other intangibles (GAAP) (5,587) (7,442)
Intangible adjustment (non-GAAP) $ 732,432 $ 739,190
Average stockholders' equity (GAAP) $ 2,242,139 $ 2,083,125
Average preferred stock (GAAP) (25,125) (25,125)
Intangible adjustment (non-GAAP) (732,432) (739,190)
Average tangible capital (non-GAAP) $ 1,484,582 $ 1,318,810
Average assets (GAAP) $ 18,430,521 $ 18,022,195
Intangible adjustment (non-GAAP) (732,432) (739,190)
Average tangible assets (non-GAAP) $ 17,698,089 $ 17,283,005
Net income available to common stockholders (GAAP) $ 47,472 $ 63,610
Other intangible amortization, net of tax (GAAP) 1,546 1,734
Preferred stock dividend 469 469
Tangible net income available to common stockholders (non-GAAP) $ 49,487 $ 65,813
Per Share Data:
Diluted net income available to common stockholders (GAAP) $ 0.80 $ 1.07
Diluted tangible net income available to common stockholders (non-GAAP) $ 0.83 $ 1.11
Ratios:
Return on average GAAP capital (ROE) 8.47 % 12.21 %
Return on average tangible capital 13.21 % 19.82 %
Return on average assets (ROA) 1.04 % 1.42 %
Return on average tangible assets 1.12 % 1.52 %

Return on average tangible capital is tangible net income available to common stockholders (annualized) expressed as a percentage of average tangible capital.  Return on average tangible assets is tangible net income available to common stockholders (annualized) expressed as a percentage of average tangible assets.

NET INTEREST INCOME

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

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

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

Average Balance Sheet

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

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

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

Average borrowings decreased $281.5 million for the three months ended March 31, 2024 compared to the same period in 2023. Average securities sold under repurchase, Federal Funds purchased and FHLB advances decreased $35.3 million, $98.5 million and $127.1 million, respectively, in the first quarter of 2024 compared to the same period in 2023 as the Corporation utilized excess liquidity to pay down borrowings in 2024. Additionally, average subordinated debt decreased $27.6 million due to the paydown of $40.0 million in principal on the scheduled interest payment date during the first quarter of 2024. Additionally, the Corporation issued notice in the first quarter of 2024 to the holders of subordinated debt that it intends to exercise its rights to redeem $25.0 million in principal in the second quarter of 2024.

Interest Income/Expense and Average Yields

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

Interest costs increased 125 basis points, which mitigated the 59 basis point increase in asset yields and resulted in a 66 basis point FTE decrease in net interest spread when compared to the same period in 2023. Interest costs have increased during the quarter and year due to deposit pricing pressure and deposit portfolio mix changes as a result of customers migrating out of noninterest-bearing deposit products into interest-bearing deposit products.

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

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

(Dollars in Thousands)
March 31, 2023
Interest<br> Income /<br>Expense Average<br>Rate Average Balance Interest<br> Income /<br>Expense Average<br>Rate
Assets:
Interest-bearing deposits 575,699 $ 6,493 4.51 % $ 172,814 $ 637 1.47 %
Federal Home Loan Bank stock 835 8.00 39,759 542 5.45
Investment Securities: (1)
Taxable 8,748 1.96 1,924,079 9,087 1.89
Tax-Exempt (2) 17,229 3.07 2,552,371 20,342 3.19
Total Investment Securities 25,977 2.58 4,476,450 29,429 2.63
Loans held for sale 328 6.02 23,538 360 6.12
Loans: (3)
Commercial 159,209 7.41 8,483,879 139,661 6.58
Real estate mortgage 22,357 4.20 1,914,640 18,391 3.84
Installment 16,129 7.85 840,450 13,941 6.64
Tax-Exempt (2) 10,367 4.59 872,877 9,758 4.47
Total Loans 208,390 6.68 12,135,384 182,111 6.00
Total Earning Assets 241,695 5.65 % 16,824,407 212,719 5.06 %
Total Non-Earning Assets 1,197,788
Total Assets 18,430,521 $ 18,022,195
Liabilities:
Interest-Bearing Deposits:
Interest-bearing deposits 5,419,821 $ 39,491 2.91 % $ 5,263,601 $ 24,662 1.87 %
Money market deposits 27,383 3.60 2,746,047 13,577 1.98
Savings deposits 3,801 0.97 1,826,209 2,965 0.65
Certificates and other time deposits 27,610 4.55 1,466,275 9,481 2.59
Total Interest-Bearing Deposits 98,285 3.16 11,302,132 50,685 1.79
Borrowings 10,552 4.17 1,293,309 11,594 3.59
Total Interest-Bearing Liabilities 108,837 3.23 12,595,441 62,279 1.98
Noninterest-bearing deposits 3,121,277
Other liabilities 222,352
Total Liabilities 15,939,070
Stockholders' Equity 2,083,125
Total Liabilities and Stockholders' Equity 18,430,521 108,837 $ 18,022,195 62,279
Net Interest Income (FTE) $ 132,858 $ 150,440
Net Interest Spread (FTE) (4) 2.42 % 3.08 %
Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets 5.65 % 5.06 %
Interest Expense / Average Earning Assets 2.55 % 1.48 %
Net Interest Margin (FTE) (5) 3.10 % 3.58 %
(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments. Annualized amounts are computed utilizing a 30/360 day basis.
(2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2024 and 2023. These totals equal 5,795 and 6.321 for the three months ended March 31, 2024 and 2023, respectively.
(3) Nonaccruing loans have been included in the average balances.
(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average interest-bearing liabilities.
(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets.

All values are in US Dollars.

NONINTEREST INCOME

Noninterest income totaled $26.6 million for the first quarter of 2024, a $1.6 million, or 6.6 percent, increase from the first quarter of 2023. The first quarter of 2024 included $2,000 of net realized losses on sales of available for sale securities, compared to $1.6 million in the same period of 2023.

NONINTEREST EXPENSE

Noninterest expense totaled $96.9 million for the first quarter of 2024, a $3.2 million, or 3.4 percent, increase from the first quarter of 2023. The increase was primarily due to non-core charges incurred during the three months ended March 31, 2024 of $3.5 million, which included a $1.1 million accrual estimate for an additional FDIC special assessment, and $2.4 million of digital platform conversion costs.

Partially offsetting these increases, other expenses decreased $1.9 million in the first quarter of 2024 compared to the same period of 2023, primarily due to gains on the sales of former banking center facilities recorded in the first quarter of 2024.

INCOME TAXES

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

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

The detailed reconciliation of federal statutory to actual tax expense is shown in NOTE 10. INCOME TAX of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

CAPITAL

Preferred Stock

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

Stock Repurchase Program

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

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

Regulatory Capital

Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by four ratios that are calculated according to the regulations: total risk-based capital, tier 1 risk-based capital, common equity tier 1 ("CET1"), and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios.

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, tier 1 capital, and common equity tier 1 capital, in each case, to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the regulations. Banks with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is in an unsafe or unsound practice. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.

Basel III requires the Corporation and the Bank to maintain the minimum capital and leverage ratios as defined in the regulation and as illustrated in the table below, which capital to risk-weighted asset ratios include a 2.5 percent capital conservation buffer. Under Basel III, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a 2.5 percent capital conservation buffer above the adequately capitalized CET1 to risk-weighted assets ratio (which buffer is reflected in the required ratios below). Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of March 31, 2024, the Bank met all capital adequacy requirements to be considered well capitalized under the fully phased-in Basel III capital rules. There is no threshold for well capitalized status for bank holding companies.

As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced. Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available. While the Consolidated Appropriations Act of 2021 provided for a further extension of the mandatory adoption of CECL until January 1, 2022, the federal banking regulators elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects. Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the Coronavirus Aid, Relief and Economice Security Act, or CARES Act. As a result, because implementation of the CECL standard was delayed by the Corporation until January 1, 2021, it began phasing in the cumulative effect of the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition period that began on January 1, 2021. Under that phase-in schedule, the cumulative effect of the adoption is fully reflected in regulatory capital on January 1, 2024.

The Corporation's and Bank's actual and required capital ratios as of March 31, 2024 and December 31, 2023 were as follows:

Prompt Corrective Action Thresholds
Actual Basel III Minimum Capital Required Well Capitalized
March 31, 2024 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation $ 1,976,448 13.34 % $ 1,555,978 10.50 % N/A N/A
First Merchants Bank 1,909,328 12.87 1,557,432 10.50 $ 1,483,268 10.00 %
Tier 1 capital to risk-weighted assets
First Merchants Corporation $ 1,692,633 11.42 % $ 1,259,601 8.50 % N/A N/A
First Merchants Bank 1,723,518 11.62 1,260,778 8.50 $ 1,186,615 8.00 %
CET1 capital to risk-weighted assets
First Merchants Corporation $ 1,667,633 11.25 % $ 1,037,319 7.00 % N/A N/A
First Merchants Bank 1,723,518 11.62 1,038,288 7.00 $ 964,124 6.50 %
Tier 1 capital to average assets
First Merchants Corporation $ 1,692,633 9.56 % $ 708,018 4.00 % N/A N/A
First Merchants Bank 1,723,518 9.74 707,625 4.00 $ 884,532 5.00 %
Prompt Corrective Action Thresholds
--- --- --- --- --- --- --- --- --- --- --- --- ---
Actual Basel III Minimum Capital Required Well Capitalized
December 31, 2023 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation $ 2,021,124 13.67 % $ 1,552,685 10.50 % N/A N/A
First Merchants Bank 1,931,810 13.06 1,553,600 10.50 $ 1,479,619 10.00 %
Tier 1 capital to risk-weighted assets
First Merchants Corporation $ 1,703,626 11.52 % $ 1,256,935 8.50 % N/A N/A
First Merchants Bank 1,746,299 11.80 1,257,676 8.50 $ 1,183,695 8.00 %
Common equity tier 1 capital to risk-weighted assets
First Merchants Corporation $ 1,678,626 11.35 % $ 1,035,123 7.00 % N/A N/A
First Merchants Bank 1,746,299 11.80 1,035,733 7.00 $ 961,752 6.50 %
Tier 1 capital to average assets
First Merchants Corporation $ 1,703,626 9.64 % $ 707,091 4.00 % N/A N/A
First Merchants Bank 1,746,299 9.89 706,331 4.00 $ 882,913 5.00 %

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

Management believes the disclosed capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of tier 1 capital known as CET1. Because the Federal Reserve has long indicated that voting common stockholders equity (essentially tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories. Tier I regulatory capital consists primarily of total common stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses.

A reconciliation of regulatory measures are detailed in the following table as of the dates indicated.

March 31, 2024 December 31, 2023
(Dollars in thousands) First Merchants Corporation First Merchants Bank First Merchants Corporation First Merchants Bank
Total Risk-Based Capital
Total Stockholders' Equity (GAAP) $ 2,224,803 $ 2,257,109 $ 2,247,713 $ 2,291,788
Adjust for Accumulated Other Comprehensive (Income) Loss (1) 198,029 196,163 175,970 174,103
Less: Preferred Stock (25,125) (125) (25,125) (125)
Add: Qualifying Capital Securities 25,000 25,000 —
Less: Disallowed Goodwill and Intangible Assets (729,734) (729,286) (731,315) (730,867)
Add: Modified CECL Transition Amount — — 11,514 11,514
Less: Disallowed Deferred Tax Assets (340) (343) (131) (114)
Total Tier 1 Capital (Regulatory) 1,692,633 1,723,518 1,703,626 1,746,299
Qualifying Subordinated Debentures 98,176 132,174 —
Allowance for Loan Losses Includible in Tier 2 Capital 185,639 185,810 185,324 185,511
Total Risk-Based Capital (Regulatory) $ 1,976,448 $ 1,909,328 $ 2,021,124 $ 1,931,810
Net Risk-Weighted Assets (Regulatory) $ 14,818,838 $ 14,832,683 $ 14,787,474 $ 14,796,189
Average Assets (Regulatory) $ 17,700,447 $ 17,690,630 $ 17,677,268 $ 17,658,269
Total Risk-Based Capital Ratio (Regulatory) 13.34 % 12.87 % 13.67 % 13.06 %
Tier 1 Capital to Risk-Weighted Assets 11.42 % 11.62 % 11.52 % 11.80 %
Tier 1 Capital to Average Assets 9.56 % 9.74 % 9.64 % 9.89 %
CET1 Capital Ratio
Total Tier 1 Capital (Regulatory) $ 1,692,633 $ 1,723,518 $ 1,703,626 $ 1,746,299
Less: Qualified Capital Securities (25,000) — (25,000) —
CET1 Capital (Regulatory) $ 1,667,633 $ 1,723,518 $ 1,678,626 $ 1,746,299
Net Risk-Weighted Assets (Regulatory) $ 14,818,838 $ 14,832,683 $ 14,787,474 $ 14,796,189
CET1 Capital Ratio (Regulatory) 11.25 % 11.62 % 11.35 % 11.80 %

(1) Includes net unrealized gains or losses on available for sale securities, net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

In management's view, certain non-GAAP financial measures, when taken together with the corresponding GAAP financial measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP financial measures and ratios in assessing our operating results, related trends and when forecasting future periods. However, these non-GAAP financial measures should be considered in addition to, and not a substitute for or preferable to, financial measures and ratios presented in accordance with GAAP.

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

Non-GAAP financial measures such as tangible common equity to tangible assets, tangible earnings per share, return on average tangible assets and return on average tangible equity are important measures of the strength of the Corporation's capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the Corporation’s financial position without regard to the effects of intangible assets and preferred stock, but retain the effect of accumulated other comprehensive gains (losses) in shareholder's equity. Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

The tables within the “NON-GAAP FINANCIAL MEASURES” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations reconcile traditional GAAP measures to these non-GAAP financial measures at March 31, 2024 and December 31, 2023.

LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS

The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification.  Commercial loans are individually underwritten and judgmentally risk rated.  They are periodically monitored and prompt corrective actions are taken on deteriorating loans.  Consumer loans are typically underwritten with statistical decision-making tools and are managed throughout their life cycle on a portfolio basis.

Loan Maturities

The following tables present the maturity distribution of our loan portfolio, excluding loans held for sale, by collateral classification at March 31, 2024 according to contractual maturities of (1) one year or less, (2) after one year but within five years and (3) after five years. The tables also present the portion of loans by loan classification that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

(Dollars in Thousands) Maturing<br>Within 1 Year Maturing<br>1-5 Years Maturing Over<br>5 Years Total
Commercial and industrial loans $ 742,794 $ 2,640,946 $ 338,625 $ 3,722,365
Agricultural land, production and other loans to farmers 65,777 39,671 128,983 234,431
Real estate loans:
Construction 390,187 378,326 173,213 941,726
Commercial real estate, non-owner occupied 421,956 975,532 970,872 2,368,360
Commercial real estate, owner occupied 100,208 600,087 437,599 1,137,894
Residential 19,731 150,826 2,145,933 2,316,490
Home Equity 24,943 31,939 561,376 618,258
Individuals' loans for household and other personal expenditures 15,692 95,811 49,956 161,459
Public finance and other commercial loans 2,698 59,026 902,875 964,599
Total $ 1,783,986 $ 4,972,164 $ 5,709,432 $ 12,465,582
(Dollars in Thousands) Maturing<br>Within 1 Year Maturing<br>1-5 Years Maturing Over<br>5 Years Total
--- --- --- --- --- --- --- --- ---
Commercial and industrial loans $ 37,298 $ 424,315 $ 165,021 $ 626,634
Agricultural land, production and other loans to farmers 1,919 27,561 10,374 39,854
Real estate loans:
Construction 14,834 26,621 135,137 176,592
Commercial real estate, non-owner occupied 122,262 451,414 145,253 718,929
Commercial real estate, owner occupied 58,199 374,809 125,507 558,515
Residential 13,677 114,157 923,224 1,051,058
Home Equity 5,794 10,983 10,474 27,251
Individuals' loans for household and other personal expenditures 3,051 72,406 19,987 95,444
Public finance and other commercial loans 2,646 34,945 873,061 910,652
Total loans with fixed interest rates $ 259,680 $ 1,537,211 $ 2,408,038 $ 4,204,929
(Dollars in Thousands) Maturing<br>Within 1 Year Maturing<br>1-5 Years Maturing Over<br>5 Years Total
--- --- --- --- --- --- --- --- ---
Commercial and industrial loans $ 705,496 $ 2,216,631 $ 173,604 $ 3,095,731
Agricultural land, production and other loans to farmers 63,858 12,110 118,609 194,577
Real estate loans:
Construction 375,353 351,705 38,076 765,134
Commercial real estate, non-owner occupied 299,694 524,118 825,619 1,649,431
Commercial real estate, owner occupied 42,009 225,278 312,092 579,379
Residential 6,054 36,669 1,222,709 1,265,432
Home Equity 19,149 20,956 550,902 591,007
Individuals' loans for household and other personal expenditures 12,641 23,405 29,969 66,015
Public finance and other commercial loans 52 24,081 29,814 53,947
Total loans with variable interest rates $ 1,524,306 $ 3,434,953 $ 3,301,394 $ 8,260,653

Loan Quality

The quality of the loan portfolio and the amount of nonperforming loans may increase or decrease as a result of acquisitions, organic portfolio growth, problem loan recognition and resolution through collections, sales or charge-offs. The performance of any loan can be affected by external factors such as economic conditions, or internal factors specific to a particular borrower, such as the actions of a customer's internal management.

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

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

According to applicable accounting guidance, loans that no longer exhibit similar risk characteristics are evaluated individually to determine if there is a need for a specific reserve. Commercial loans under $500,000 and consumer loans are not individually evaluated. The determination for individual evaluation is made based on current information or events that may suggest it is probable that not all amounts due of principal and interest, according to the contractual terms of the loan agreement, will be substantially collected.

The Corporation's nonperforming assets plus accruing loans 90-days or more delinquent and individually evaluated loans are presented in the table below.

(Dollars in Thousands) March 31, 2024 December 31, 2023
Nonperforming Assets:
Non-accrual loans $ 62,478 $ 53,580
OREO and Repossessions 4,886 4,831
Nonperforming assets (NPA) 67,364 58,411
Loans 90-days or more delinquent and still accruing 2,838 172
NPAs and loans 90-days or more delinquent $ 70,202 $ 58,583

The composition of nonperforming assets plus accruing loans 90-days or more delinquent is reflected in the following table by loan class.

(Dollars in Thousands) March 31, 2024 December 31, 2023
Nonperforming assets and loans 90-days or more delinquent:
Commercial and industrial loans $ 8,725 $ 9,136
Agricultural land, production and other loans to farmers 56 58
Real estate loans:
Construction — 520
Commercial real estate, non-owner occupied 27,933 16,652
Commercial real estate, owner occupied 2,687 3,041
Residential 27,251 25,178
Home equity 3,517 3,945
Individuals' loans for household and other personal expenditures 33 19
Public finance and other commercial loans — 34
Nonperforming assets and loans 90-days or more delinquent: $ 70,202 $ 58,583

Provision and Allowance for Credit Losses on Loans

The Corporation adopted FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2021. CECL replaced the previous "incurred loss" model with an "expected loss" model of measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost based on historical experiences, current conditions and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. Additional details of the Corporation's CECL methodology and allowance calculation are discussed within NOTE 3. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

The CECL allowance is maintained through the provision for credit losses, which is a charge against earnings. Based on management’s judgment as to the appropriate level of the allowance for credit losses, the amount provided in any period may be greater or less than net loan losses for the same period. The determination of the provision amount and the adequacy of the allowance in any period is based on management’s continuing review and evaluation of the loan portfolio.

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

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

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

Three Months Ended March 31,
(Dollars in Thousands) 2024 2023
Net charge-offs (recoveries):
Commercial and industrial loans $ 1,280 $ (287)
Real estate loans:
Commercial real estate, non-owner occupied 342 (44)
Commercial real estate, owner occupied (44) (8)
Residential 366 30
Home equity 50 183
Individuals' loans for household and other personal expenditures 259 351
Total net charge-offs (recoveries) $ 2,253 $ 225

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

LIQUIDITY

Liquidity management is the process by which the Corporation ensures that adequate liquid funds are available for the holding company and its subsidiaries. These funds are necessary in order to meet financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit obligations to borrowers, paying dividends to stockholders, paying operating expenses, funding capital expenditures, and maintaining deposit reserve requirements. Liquidity is monitored and closely managed by the asset/liability committee.

The Corporation’s liquidity is dependent upon the receipt of dividends from the Bank, which is subject to certain regulatory limitations and access to other funding sources.  Liquidity of the Bank is derived primarily from core deposit growth, principal payments received on loans, the sale and maturity of investment securities, net cash provided by operating activities, and access to other funding sources.

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

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

In March 2023, the Federal Reserve created the Bank Term Funding Program (“BTFP”). The BTFP was a new facility established in response to recent liquidity concerns within the banking industry in part due to recent deposit runs that resulted in a few large bank failures. The BTFP was designed to provide available additional funding to eligible depository institutions in order to help assure that banks have the ability to meet the needs of all their depositors. Under the program, eligible depository institutions could obtain loans of up to one year in length by pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets were valued at par. The BTFP was intended to eliminate the need for depository institutions to quickly sell their securities if they were experiencing stress on their liquidity. As of March 11, 2024, the program was discontinued and the Bank had no outstanding balance as of March 31, 2024.

The Corporation and the Bank receive outside credit ratings from Moody's. Both the Corporation and the Bank currently have Issuer Ratings of Baa1. Additionally, the Bank has a Baseline Credit Assessment Rating of a3. Management considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper. Because of the Corporation's and Bank's current levels of long-term debt, management believes it could generate additional liquidity from various sources should the need arise.

The following table presents the Corporation's material cash requirements from known contractual and other obligations at March 31, 2024:

Payments Due In
(Dollars in Thousands) One Year or Less Over One Year Total
Deposits without stated maturity $ 12,451,569 $ — $ 12,451,569
Certificates and other time deposits 2,349,132 83,883 2,433,015
Securities sold under repurchase agreements 130,264 — 130,264
Federal Home Loan Bank advances 80,000 532,778 612,778
Subordinated debentures and other borrowings 1,326 117,286 118,612
Total $ 15,012,291 $ 733,947 $ 15,746,238

Also, in the normal course of business, the Bank is a party to a number of other off-balance sheet activities that contain credit, market and operational risk that are not reflected in whole or in part in our consolidated financial statements.  These activities primarily consist of traditional off-balance sheet credit-related financial instruments such as loan commitments and standby letters of credit.

Summarized credit-related financial instruments at March 31, 2024 are as follows:

(Dollars in Thousands) March 31, 2024
Amounts of commitments:
Loan commitments to extend credit $ 4,993,077
Standby and commercial letters of credit 72,956
$ 5,066,033

Since many of the commitments are expected to expire unused or be only partially used, the total amount of unused commitments in the preceding table does not necessarily represent future cash requirements.

INTEREST SENSITIVITY AND DISCLOSURE ABOUT MARKET RISK

Asset/Liability management has been an important factor in the Corporation's ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation's liquidity and interest sensitivity positions at regular meetings to review how changes in interest rates may affect earnings.  Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation’s exposure to changes in net interest income given various rate scenarios and the economic and competitive environments.

It is the objective of the Corporation to monitor and manage risk exposure to net interest income caused by changes in interest rates.  It is the goal of the Corporation’s Asset/Liability management function to provide optimum and stable net interest income. To accomplish this, management uses two asset liability tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation Modeling are constructed, presented and monitored quarterly. Management believes that the Corporation's liquidity and interest sensitivity position at March 31, 2024, remained adequate to meet the Corporation’s primary goal of achieving optimum interest margins while avoiding undue interest rate risk.

Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. The Corporation's asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Corporation.

The base scenario is highly dependent on numerous assumptions embedded in the model, including assumptions related to future interest rates. While the base sensitivity analysis incorporates management's best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity products, such as savings, money market, interest-bearing and demand deposits, reflect management's best estimate of expected future behavior. Historical retention rate assumptions are applied to non-maturity deposits for modeling purposes.

The comparative rising 200 basis points and falling 100 basis points scenarios below, as of March 31, 2024 and December 31, 2023, assume further interest rate changes in addition to the base simulation discussed above. These changes are immediate and parallel changes to the base case scenario.

Results for the rising 200 basis points and falling 100 basis points interest rate scenarios are listed below based upon the Corporation’s rate sensitive assets and liabilities at March 31, 2024 and December 31, 2023. The change from the base scenario represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.

March 31, 2024 December 31, 2023
Rising 200 basis points from base case 2.6 % 4.0 %
Falling 100 basis points from base case (4.2) % (5.0) %

OTHER

The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that address is (http://www.sec.gov).

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required under this item is included as part of Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the headings “LIQUIDITY” and “INTEREST SENSITIVITY AND DISCLOSURE ABOUT MARKET RISK”.

ITEM 4.  CONTROLS AND PROCEDURES

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation discussed above that occurred during the Corporation’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

ITEM 1.  LEGAL PROCEEDINGS

There are no pending legal proceedings, other than litigation incidental to the ordinary business of the Corporation or its subsidiaries, of a material nature to which the Corporation or its subsidiaries is a party or of which any of their properties is subject. Further, there are no material legal proceedings in which any director, officer, principal shareholder, or affiliate of the Corporation, or any associate of any such director, officer or principal shareholder, is a party, or has a material interest, adverse to the Corporation or any of its subsidiaries.

None of the routine legal proceedings, individually or in the aggregate, in which the Corporation or its affiliates are involved are expected to have a material adverse impact on the financial position or the results of operations of the Corporation.

ITEM 1A.  RISK FACTORS

There have been no material changes to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a. None

b. None

c. Issuer Purchases of Equity Securities

The following table presents information relating to our purchases of equity securities during the three months ended March 31, 2024.

Period Total Number<br><br>of Shares<br><br>Purchased (1) Average<br>Price Paid<br>per Share Total Number of Shares<br><br>Purchased as part of Publicly announced Plans or Programs (2) Maximum Number of Shares<br><br>that may yet be Purchased<br><br>Under the Plans or Programs (2)
January, 2024 48,777 $ 34.55 48,396 2,638,502
February, 2024 543,942 $ 33.66 543,942 2,094,560
March, 2024 296,471 $ 33.74 296,104 1,798,456
Total 889,190 888,442

(1) During the three months ended March 31, 2024, there were 888,442 shares repurchased pursuant to the Corporation's share repurchase program described in note (2) below. The amounts in January 2024 and March 2024 also include 381 and 367 shares, respectively, repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of the Corporation's restricted stock awards and are not a part of the Corporation's share repurchase program described in note (2) below.

(2) On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100,000,000. The program does not have an expiration date. However, it may be discontinued by the Board at any time. Since commencing the program, the Corporation has repurchased a total of 1,534,544 shares of common stock for a total aggregate investment of $55,416,721.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5.  OTHER INFORMATION

a. None

b. None

c. During the three months ended March 31, 2024, no director or officer of the Corporation adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.

ITEM 6.  EXHIBITS

Exhibit No: Description of Exhibits:
3.1 First Merchants Corporation Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of registrant’s Form 8-K filed on March 24, 2022) (SEC No. 000-17071)
3.2 Bylaws of First Merchants Corporation effective as of November 9, 2023 (Incorporated by reference to Exhibit 3.2 of registrant’s Form 10-K filed on February 29, 2024) (SEC No. 001-41342)
4.1 First Merchants Corporation Amended and Restated Declaration of Trust of First Merchants Capital Trust II dated as of July 2, 2007 (Incorporated by reference to Exhibit 4.1 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.2 Indenture dated as of July 2, 2007 (Incorporated by reference to Exhibit 4.2 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.3 Guarantee Agreement dated as of July 2, 2007 (Incorporated by reference to Exhibit 4.3 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.4 Form of Capital Securities Certification of First Merchants Capital Trust II (Incorporated by reference to Exhibit 4.4 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.5 First Merchants Corporation Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to registrant’s Prospectus filed pursuant to Rule 424(b)(3) on July 17, 2020) (SEC No. 333-229527)
4.6 Upon request, the registrant agrees to furnish supplementally to the Commission a copy of the instruments defining the rights of holders of its (a) 5.00% Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5 million and (b) 6.75% Fixed-to-Floating Rate Subordinated Notes due 2028 in aggregate principal amount of $65 million.
4.7 Deposit Agreement by and among First Merchants Corporation, Broadridge Corporate Issuer Solutions, Inc., as depositary, and holders from time to time of the depositary receipts described therein, as amended on March 30, 2022 (Incorporated by reference to Exhibit 4.1 of registrant’s Form 8-A filed on March 30, 2022) (SEC No. 001-41342)
4.8 Form of Depositary Receipt (Incorporated by reference to Exhibit 4.2 of registrant’s Form 8-A filed on March 30, 2022) (SEC No. 001-41342)
4.9 Indenture, dated as of December 18, 2019, between First Merchants Corporation (as successor to Level One Bancorp, Inc.) and Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibit 4.1 of Level One Bancorp, Inc.’s Form 8-K filed on December 19, 2019) (SEC No. 001-38458)
4.10 First Supplemental Indenture, dated as of March 31, 2022, among First Merchants Corporation, Level One Bancorp, Inc. and Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibit 4.11 of registrant’s Form 10-K filed on March 1, 2023) (SEC No. 001-41342)
4.11 Form of 4.75% Fixed-to-Floating Rate Subordinated Notes due 2029 (Incorporated by reference to Exhibit 4.2 of Level One Bancorp, Inc.’s Form 8-K filed on December 19, 2019) (SEC No. 001-38458)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (1)
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (1)
32 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (1)
101.SCH Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)
104 Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)
(1) Filed herewith.
(2) Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

First Merchants Corporation
(Registrant)
May 1, 2024 by /s/ Mark K. Hardwick
Mark K. Hardwick
Chief Executive Officer
(Principal Executive Officer)
May 1, 2024 by /s/ Michele M. Kawiecki
Michele M. Kawiecki
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)

57

Document

PART II: OTHER INFORMATION

ITEM 6. EXHIBITS

EXHIBIT-31.1

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Mark K. Hardwick, Chief Executive Officer of First Merchants Corporation, certify that:

1.    I have reviewed this Quarterly Report on Form 10-Q of First Merchants Corporation;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d.    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May 1, 2024

By: /s/ Mark K. Hardwick
Mark K. Hardwick
Chief Executive Officer
(Principal Executive Officer)

Document

PART II: OTHER INFORMATION

ITEM 6. EXHIBITS

EXHIBIT-31.2

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Michele M. Kawiecki, Executive Vice President and Chief Financial Officer of First Merchants Corporation, certify that:

1.    I have reviewed this Quarterly Report on Form 10-Q of First Merchants Corporation;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d.    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May 1, 2024

By: /s/ Michele M. Kawiecki
Michele M. Kawiecki
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)

Document

PART II: OTHER INFORMATION

ITEM 6. EXHIBITS

EXHIBIT-32

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of First Merchants Corporation (the “Corporation”) on Form 10-Q for the period ending March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark K. Hardwick, Chief Executive Officer of the Corporation, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

May 1, 2024

By: /s/ Mark K. Hardwick
Mark K. Hardwick
Chief Executive Officer
(Principal Executive Officer)

A signed copy of this written statement required by Section 906 has been provided to First Merchants Corporation and will be retained by First Merchants Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

_____________________________________________________

In connection with the Quarterly Report of First Merchants Corporation (the “Corporation”) on Form 10-Q for the period ending March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michele M. Kawiecki, Executive Vice President, and Chief Financial Officer of the Corporation, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

May 1, 2024

By: /s/ Michele M. Kawiecki
Michele M. Kawiecki
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)

A signed copy of this written statement required by Section 906 has been provided to First Merchants Corporation and will be retained by First Merchants Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

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