COMMUNITY FINANCIAL SYSTEM, INC.

Previous wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Financial System, Inc. (the “Company” or “CFSI”) as of and for the three months ended March 31, 2025 and 2024, although in some circumstances the fourth quarter of 2024 is also discussed in order to more fully explain recent trends. The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that appear on pages 3 through 35. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2025, “last year” and equivalent terms refer to calendar year 2024, “first quarter” refers to the three months ended March 31, and earnings per share (“EPS”) figures refer to diluted EPS.

Current wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Financial System, Inc. (the “Company” or “CFSI”) as of and for the three and six months ended June 30, 2025 and 2024, although in some circumstances the first quarter of 2025 is also discussed in order to more fully explain recent trends. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and related notes that appear on pages 3 through 39. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2025, “last year” and equivalent terms refer to calendar year 2024, “second quarter” refers to the three months ended June 30, 2025, “YTD” refers to the six months ended June 30, 2025, and earnings per share (“EPS”) figures refer to diluted EPS.

Previous wording

The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date. This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates. The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, origination vintage and payment structure. The Company utilizes three methods for calculating the ACL: cumulative loss, vintage loss and line loss. Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies. Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables. Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices including office property-specific price forecasts, office property-specific vacancy rates, automobile prices, gross domestic product, and median household income net of inflation. Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts. During the first quarter of 2025, the Company updated the ACL model to add 2024 data into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures. In addition, management adjusted the weighting of the three economic scenarios, increasing the weight for the downside scenario from 30% to 40% and decreasing the weight of the upside scenario from 30% to 20%, to capture additional economic uncertainty, and added additional reserves for business lending to capture additional risk in the portfolio due to the increase in size and volume of new business loans. The change in weighting of the economic scenarios increased the ACL by $0.7 million as compared to the previous weighting and the additional business lending qualitative factor increased the ACL by $2.2 million as compared to the previous factor.

Current wording

The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date. This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates. The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, origination vintage and payment structure. The Company utilizes three methods for calculating the ACL: cumulative loss, vintage loss and line loss. Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies. Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables. Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices including office property-specific price forecasts, office property-specific vacancy rates, automobile prices, gross domestic product, and median household income net of inflation. Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts. During first quarter of 2025, the Company updated the ACL model to add 2024 data into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures. In addition, management adjusted the weighting of the three economic scenarios, increasing the weight for the downside scenario from 30% to 40% and decreasing the weight of the upside scenario from 30% to 20%, to capture additional economic uncertainty. The Company also added additional reserves for business lending to capture additional risk in the portfolio due to the increase in size and volume of business loans, which was further increased in the second quarter of 2025. The change in weighting of the economic scenarios increases the ACL by $0.7 million as compared to the prior weighting in use at December 31, 2024. The additional business lending qualitative factor increases the ACL by $6.7 million as compared to the prior factor in use at December 31, 2024.

Previous wording

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts. Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next. To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 20% and 40%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at March 31, 2025 were 5.2% and 1.3%, respectively, compared to 4.8% and 1.8%, respectively, at December 31, 2024. The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 8.3% and an average unemployment rate of 7.0%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three months ended March 31, 2025 by approximately $3.4 million, and decrease net income by $2.6 million (net of tax). This change is reflective of the sensitivity of the various economic factors used in the ACL model. The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate at the same time that economic conditions are changing, which would affect the results of the ACL calculation. The impact that the economic factors have on the model is affected by the upside or downside severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments. Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative. The third party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment. The Company’s geographic distribution of loans primarily outside of major metropolitan areas, combined with low statistical correlation between its historical losses and national economic indicators, and this is reflected in the current methodology that would produce changes to the allowance that are less significant as compared to economic metric-based modeling that is more directly correlated, and therefore sensitive to fluctuations in historical and projected national economic activity.

Current wording

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts. Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next. To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 20% and 40%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at June 30, 2025 were 5.4% and 1.0%, respectively, compared to 4.8% and 1.8%, respectively, at December 31, 2024. The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 8.3% and an average unemployment rate of 7.0%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three and six months ended June 30, 2025 by approximately $3.5 million, and decrease net income by $2.7 million (net of tax). This change is reflective of the sensitivity of the various economic factors used in the ACL model. The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate at the same time that economic conditions are changing, which would affect the results of the ACL calculation. The impact that the economic factors have on the model is affected by the upside or downside severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments. Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative. The third-party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment. The Company’s geographic distribution of loans primarily outside of major metropolitan areas, combined with low statistical correlation between its historical losses and national economic indicators is reflected in the current methodology that would produce changes to the allowance that are less significant as compared to economic metric-based modeling that is more directly correlated, and therefore sensitive, to fluctuations in historical and projected national economic activity.

Previous wording

The Company also provides supplemental reporting of its results on an “operating” or “tangible” basis. Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, unrealized gain on equity securities and amortization of intangible assets. Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisition activity. In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, unrealized gain on equity securities and amortization of intangible assets from income before income taxes. Although operating pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with Current Expected Credit Loss (“CECL”) allowance methods, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. The Company also provides supplemental reporting of its interest income, net interest income and net interest margin on a fully tax-equivalent (“FTE”) basis, which includes an adjustment to interest income and net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent interest income, net interest income and net interest margin are non-GAAP measures, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax profiles. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 14.

Current wording

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

Previous wording

The Company’s core operating objectives are: (i) maintain diverse revenue streams to achieve positive operating results in all four of the Company’s business units: banking and corporate, employee benefit services, insurance services, and wealth management services, (ii) utilize technology to deliver customer-responsive products and services and improve efficiencies, (iii) increase the noninterest component of total revenues through both organic and acquisition strategies, (iv) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies, de novo expansions and divestitures/consolidations, (v) build profitable loan and deposit volume using both organic and acquisition strategies, and (vi) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and mitigate interest rate and liquidity risk and optimize net interest income generation.

Current wording

The Company’s core operating objectives are: (i) maintain diverse revenue streams to achieve positive operating results in all four of the Company’s business units: banking and corporate, employee benefit services, insurance services, and wealth management services, (ii) increase the noninterest component of total revenues through both organic and acquisition strategies, (iii) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies, de novo expansions and divestitures/consolidations, (iv) build profitable loan and deposit bases using both organic and acquisition strategies, (v) utilize technology to deliver customer-responsive products and services and improve efficiencies, and (vi) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and mitigate interest rate and liquidity risk and optimize net interest income generation.

Previous wording

Net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, increased 26 basis points between the first quarter of 2024 and the first quarter of 2025. The yield on average interest earning assets increased 27 basis points compared to the prior year first quarter driven by an improvement in the yield on average loans. The yield on average loans for the first quarter increased 33 basis points compared to the first quarter of 2024 while the yield on average investments, including cash equivalents, decreased one basis point compared to the prior year. The Company’s total cost of funds increased two basis points from the year earlier period, as the rate paid on interest-bearing deposits increased three basis points and the rate paid on borrowings decreased 18 basis points.

Current wording

Net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, increased 26 basis points between both the second quarter of 2024 and the second quarter of 2025 and on a YTD basis. The yield on average interest-earning assets increased 21 basis points compared to the prior year’s second quarter and 23 basis points compared to the prior YTD period, as the yield on average loans and average investments both improved. The yield on average loans for the second quarter increased 25 basis points compared to the second quarter of 2024 and 29 basis points between comparable YTD periods. The yield on average investments, including cash equivalents, increased 10 basis points compared to the prior year’s second quarter and 4 basis points on a YTD basis. The Company’s total cost of funds decreased 5 basis points from last year’s second quarter and 1 basis point YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both decreased.

Previous wording

Loan balances increased on both an average and ending basis as compared to the prior year first quarter, reflective of organic loan growth between the periods. Deposit balances also increased on both an average and ending basis as compared to the first quarter of 2024 due primarily to growth in governmental deposit balances. Investment balances, excluding cash equivalents, increased on both an average basis and ending basis between the first quarter of 2024 and the first quarter of 2025, driven by purchases of mortgage-backed securities between the periods. Over the same period, the balance of cash equivalents decreased on an average basis and was impacted by the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the first quarter of 2024, while cash equivalents increased on an ending basis driven by net deposit inflows. Borrowing balances decreased on an average basis and increased on an ending basis compared to the prior year’s first quarter. The decrease on an average basis was reflective of the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the prior year’s first quarter while the increase on an ending basis was due to Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings between the periods to support the funding of loan growth.

Current wording

Loan balances increased on both an average and ending basis as compared to the prior year second quarter and YTD period, reflective of organic loan growth between the periods. Deposit balances also increased on both an average and ending basis as compared to the second quarter of 2024 and YTD comprised of growth in both governmental and non-governmental deposit balances. Investment balances increased on both an average and ending basis as compared to the prior year second quarter and YTD period, driven by purchases of mortgage-backed securities between the periods. Borrowing balances increased on an average basis compared to the second quarter of 2024 and YTD reflective of the Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings during the prior year’s second and third quarters to support the funding of continued loan growth, while total borrowings decreased on an ending basis compared to June 30, 2024.

Previous wording

Banking services noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $0.8 million, or 4.7%, as compared to the prior year’s first quarter, primarily due to an increase in mortgage banking revenues. Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $4.7 million, or 9.0%, as compared to the prior year’s first quarter, due to a $3.1 million increase in insurance services revenues, a $0.9 million increase in employee benefit services revenues and a $0.7 million increase in wealth management services revenues.

Current wording

Banking services noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $0.4 million, or 2.1%, as compared to the prior year’s second quarter, and increased $1.3 million, or 3.4%, between the comparable YTD periods. The growth between both periods was primarily due to increases in customer interest rate swap fee revenues and CRE financing and advisory revenues. Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $0.3 million, or 0.6%, as compared to the prior year’s second quarter and increased $5.0 million, or 4.7%, compared to the prior YTD period, reflecting revenue growth in all three segments.

Previous wording

First quarter operating net income, a non-GAAP measure, increased $8.3 million, or 19.0%, as compared to the first quarter of 2024. Operating earnings per share, a non-GAAP measure, of $0.98 for the first quarter increased $0.16 compared to the first quarter of 2024 while operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.22 compared to the prior year’s first quarter. These results demonstrate improvement in the Company’s core operating performance between the periods.

Current wording

Second quarter and YTD operating net income, a non-GAAP measure, increased $4.9 million, or 9.7%, as compared to the second quarter of 2024 and increased $13.1 million, or 13.9%, compared to June YTD 2024. Second quarter and YTD operating earnings per share, a non-GAAP measure, increased $0.09 compared to the second quarter of 2024 and increased $0.25 compared to June YTD 2024. Second quarter and YTD operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.12 compared to the second quarter of 2024 and increased $0.35 compared to June YTD 2024. These results demonstrate improvement in the Company’s core operating performance between the periods.

Previous wording

As shown in Table 1, net income for the first quarter of $49.6 million increased $8.7 million, or 21.4%, as compared to the first quarter of 2024. Earnings per share of $0.93 for the first quarter of 2025 increased $0.17, or 22.4%, compared to the first quarter of 2024. The increase in net income and earnings per share was due to increases in net interest income and noninterest revenues and a decrease in the number of fully diluted shares outstanding, partially offset by increases in the provision for credit losses, noninterest expenses and income taxes. Operating net income, a non-GAAP measure, of $52.1 million for the first quarter increased $8.3 million, or 19.0%, as compared to the first quarter of 2024. Operating earnings per share, a non-GAAP measure, of $0.98 for the first quarter increased $0.16 compared to the first quarter of 2024. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

Current wording

As shown in Table 1, net income for the second quarter and June YTD of $51.3 million and $100.9 million, respectively, increased $3.4 million, or 7.1%, as compared to the second quarter of 2024 and increased $12.2 million, or 13.7%, compared to June YTD 2024. Earnings per share of $0.97 for the second quarter of 2025 was $0.06 higher than the second quarter of 2024, while earnings per share for the first six months of 2025 of $1.90 was $0.23 higher than the first six months of 2024. The increase in net income and earnings per share for the quarter was the result of an increase in net interest income, partially offset by increases in noninterest expenses and provision for credit losses. The increase in net income and earnings per share for the YTD period as compared to the prior year was the result of an increase in net interest income and noninterest revenues, partially offset by an increase in noninterest expenses, income taxes and the provision for credit losses. Operating net income, a non-GAAP measure, of $55.4 million and $107.5 million for the second quarter and June YTD 2025, respectively, increased $4.9 million, or 9.7%, as compared to the second quarter of 2024 and increased $13.1 million, or 13.9%, compared to June YTD 2024. Operating earnings per share, a non-GAAP measure, of $1.04 for the second quarter increased $0.09 compared to the second quarter of 2024, while operating earnings per share of $2.02 for the first six months of 2025 increased $0.25 compared to the first six months of 2024. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

Previous wording

As reflected in Table 1, first quarter net interest income of $120.2 million increased $13.2 million, or 12.4%, from the comparable prior year period. The increase was primarily the result of higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to organic loan growth.

Current wording

As reflected in Table 1, second quarter net interest income of $124.7 million increased $15.3 million, or 14.0%, from the comparable prior year period. Net interest income for the first six months of 2025 increased $28.6 million, or 13.2%, compared to the first six months of 2024. The quarterly and YTD increases were primarily the result of higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to organic loan growth, as well as a decrease in the rate paid on interest-bearing liabilities, partially offset by an increase in the balance of interest-bearing liabilities.

Previous wording

Net interest income totaled $120.2 million for the first quarter of 2025 compared to $107.0 million for the first quarter of 2024. As shown in Table 2, fully tax-equivalent net interest income, a non-GAAP measure, for the first quarter was $121.1 million, a $13.1 million, or 12.1%, increase from the same period last year. The increase resulted from a $586.7 million increase in average interest-earnings asset balances, a 27 basis point increase in the yield on average interest-earning assets and a two basis point decrease in the rate paid on average interest-bearing liabilities, partially offset by a $563.2 million increase in average interest-bearing liability balances. As reflected in Table 3, the favorable impacts of the volume increase in average interest-earning asset balances of $6.3 million, the increase in the yield on average interest-earning assets of $8.5 million and the decrease in the rate paid on average interest-bearing liabilities of $0.7 million were partially offset by the unfavorable net interest income impact of the volume increase in average interest-bearing liability balances of $2.4 million. The net interest margin of 3.21% and fully tax-equivalent net interest margin of 3.24%, a non-GAAP measure, for the first quarter of 2025, both increased 26 basis points from the first quarter of 2024, driven by higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to organic loan growth.

Current wording

Net interest income totaled $124.7 million for the second quarter of 2025 compared to $109.4 million for the second quarter of 2024. As shown in Table 2a, fully tax-equivalent net interest income, a non-GAAP measure, for the second quarter was $125.6 million, an increase of $15.3 million from the prior year second quarter. The increase was driven by a 21 basis point increase in the yield on average interest-earning assets, a $684.6 million increase in average interest-earning asset balances and a 9 basis point decrease in the rate paid on average interest-bearing liabilities, partially offset by a $599.4 million increase in average interest-bearing liability balances in comparison to the second quarter of 2024. As reflected in Table 3 for the quarter, the favorable net interest income impacts of the increase in the yield on average interest-earning assets of $8.2 million, the volume increase in average interest-earning asset balances of $7.6 million and the decrease in the rate paid on average interest-bearing liabilities of $2.2 million were partially offset by the volume increase in average interest-bearing liability balances of $2.7 million.

Previous wording

The higher yield on average interest-earning assets for the quarter was the result of an increase in the yield on average loans, partially offset by a decrease in the yield on average investments including cash equivalents. The yield on average loans for the first quarter increased by 33 basis points compared to the first quarter of 2024, reflective of an increase in the proportion of higher rate new loan originations and the increase of certain variable and adjustable-rate loan yields. The first quarter of 2025 yield on average investments, including cash equivalents, decreased one basis point compared to the prior year, due to a decrease in the yield on cash equivalents, partially offset by the net effect of the sales and maturities of lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods. The current quarter’s yield on average investments, excluding cash equivalents, increased 10 basis points due to the aforementioned investment securities sales, maturities and purchases.

Current wording

The 21 basis point increase in the average yield on interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents. The yield on average loans for the second quarter increased by 25 basis points compared to the second quarter of 2024. The second quarter of 2025 yield on average investments including cash equivalents increased 12 basis points compared to the prior year while the yield on average investments excluding cash equivalents increased 7 basis points for the same timeframe. The 23 basis point increase in the yield on interest-earning assets for the first six months of 2025 was the result of a 29 basis point increase in the yield on average loans and a 6 basis point increase in the yield on average investments, including cash equivalents, compared to the prior YTD period. Excluding cash equivalents, the yield on average investments increased 9 basis points compared to the prior YTD period. The increase in loan yields were reflective of an increase in the proportion of higher rate new loan originations and the increase of certain variable and adjustable-rate loan yields. As the majority of the Company’s investment portfolio, excluding cash equivalents, is comprised of fixed yield securities, the increase in investment yields were driven by the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods.

Previous wording

The average book balance of investments in the first quarter, including cash equivalents, decreased $27.6 million, or 0.6%, as compared to the corresponding prior year period due to a $99.7 million decrease in average cash equivalents, partially offset by a $72.0 million, or 1.6%, increase in average investment balances, reflective of purchases of investment securities between the periods. Investment purchases outpaced sales, maturities, calls and principal payments during the first quarter of 2025, driven by $45.3 million of government agency mortgage-backed securities purchases classified as held-to-maturity. Average loan balances were $614.3 million, or 6.3%, greater than the prior year’s first quarter balances with increases in all five major loan portfolios due to solid organic growth.

Current wording

The second quarter and YTD average book balance of investments, including cash equivalents, increased $198.4 million and $85.6 million, respectively, as compared to the corresponding prior year periods, reflective of purchases of investment securities between the periods as well as sales and maturities of investment securities. Investment purchases outpaced sales, maturities, calls and principal payments during the second quarter and YTD periods, driven by $83.1 million of YTD government agency mortgage-backed securities purchases classified as held-to-maturity. The cash equivalents component of average interest-earning assets increased $110.8 million and $5.7 million for the second quarter and YTD periods, respectively, compared to the prior year periods. Average loan balances increased $486.2 million for the quarter and $550.4 million YTD as compared to the prior year, with increases in all five major loan portfolios between both periods due to organic growth.

Previous wording

Table 2 below sets forth information related to average interest-earning assets and average interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 25.1% in 2025 and 24.4% in 2024. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan swap, prepayment, late and other fees and the accretion of acquired loan marks. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

Current wording

Tables 2a and 2b below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on an FTE basis using a marginal income tax rate of 25.1% in 2025 and 24.4% in 2024. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan prepayments, late and other fees and the amortization or accretion of acquired loan purchase discounts and premiums. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

Previous wording

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 38.5% for the quarter ended March 31, 2025 versus 39.4% for the equivalent period of 2024. The decrease was driven by a 12.1% increase in fully tax-equivalent net interest income, a non-GAAP measure, while operating noninterest revenues, a non-GAAP measure, increased 7.9%.

Current wording

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 37.2% for the quarter and 37.9% for the six months ended June 30, 2025, respectively, compared to 40.1% and 39.7% for the corresponding periods of 2024. The decrease between the quarterly periods was due to a 13.8% increase in fully tax-equivalent net interest income, a non-GAAP measure, while operating noninterest revenues, a non-GAAP measure, increased 1.0%. The year-to-date decrease was a function of a 13.0% increase in fully tax-equivalent net interest income, a non-GAAP measure, while operating noninterest revenues, a non-GAAP measure, increased 4.4%.

Previous wording

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

Current wording

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

Previous wording

The increase in salaries and benefits expense was driven by merit and market-related increases in employee wages and incentive compensation. Data processing increases were reflective of the Company’s continued investment in key technologies, including artificial intelligence applications and customer payment fraud and cybersecurity risk management software. Increases in occupancy and equipment expenses were primarily due to higher property maintenance costs along with incremental expenses associated with the Bank’s de novo branches opened between the periods.

Current wording

The increases in salaries and benefits expense were driven by merit and market-related increases in employee wages and incentive compensation, select staff additions and higher employee medical costs. Data processing increases were reflective of the Company’s continued investment in key technologies, including artificial intelligence applications, customer payment fraud and cybersecurity risk management software, credit administration software and other workflow modernization initiatives. Increases in occupancy and equipment expenses were primarily due to higher property maintenance costs along with incremental expenses associated with the Bank’s de novo branches opened between the periods. The Company also recorded $1.5 million in costs related to severance payments accrued for a workforce optimization plan due to planned branch consolidations and other consumer banking operational initiatives.

Previous wording

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 61.9% for the first quarter of 2025, 2.2 percentage points favorable to the comparable quarter of 2024. This resulted from operating revenues (FTE), a non-GAAP measure as described above, increasing by 10.4% while operating noninterest expenses, a non-GAAP measure as described above, increased a lesser 6.6%. Current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets were 10 basis points higher than the prior year. First quarter operating noninterest expenses, a non-GAAP measure as defined above, increased 6.6% year-over-year, while average assets increased 4.1% primarily due to the aforementioned organic loan growth.

Current wording

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 62.2% for the second quarter, 0.3 percentage points favorable to the comparable quarter of 2024. This resulted from operating revenues (FTE), a non-GAAP measure as described above, increasing 8.7% while operating noninterest expenses, a non-GAAP measure as described above, increased 7.9%. The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, of 62.0% for the first six months of 2025 was 1.3 percentage points favorable compared to the first six months of 2024 due to operating revenues (FTE), a non-GAAP measure as described above, increasing by 9.6% while operating noninterest expenses, a non-GAAP measure as described above, increased 7.2%.

Previous wording

The first quarter 2025 effective income tax rate was 22.8%, compared to 22.9% for the first quarter of 2024. The Company recorded $0.5 million of tax benefit associated with stock-based compensation and $0.3 million of tax expense associated with the amortization of income tax credit investments in the first quarter of 2025 compared with $0.2 million tax expense associated with stock-based compensation and $0.3 million of tax expense associated with the amortization of income tax credit investments in the first quarter of 2024. Total income tax expense was $14.7 million and $12.2 million for the first quarter of 2025 and first quarter of 2024, respectively. The effective tax rates, excluding the stock-based compensation tax benefits and amortization of income tax credit investments, were 23.1% for the first quarter of 2025 and 22.0% for the first quarter of 2024, an increase of 1.1 percentage points. This increase was primarily due to a higher full-year 2025 pre-tax income projection as compared to the prior year, and a decrease in the proportion of nontaxable interest income to total interest income.

Current wording

The second quarter and YTD 2025 effective income tax rates were 22.3% and 22.5%, respectively, as compared to 22.8% and 22.9% for the comparable periods of 2024. The decreases in the second quarter and YTD 2025 effective income tax rates are primarily attributable to an increase in stock-based compensation tax benefits between the periods. The Company recorded a $0.1 million and $0.6 million income tax benefit associated with stock-based compensation for the second quarter and YTD 2025, respectively. The Company recorded a $0.2 million tax expense associated with stock-based compensation for YTD 2024, while the tax expense associated with stock-based compensation was immaterial for the second quarter of 2024. The second quarter and YTD 2025 tax expense associated with the amortization of income tax credit investments was $3.0 million and $3.3 million, respectively, as compared to $0.3 million and $0.6 million for the comparable periods of 2024. The effective tax rates adjusted to exclude the income tax impact of stock-based compensation and amortization of income tax credit investments for the second quarter and YTD 2025 were 18.0% and 20.5%, respectively, as compared to 22.3% and 22.1% for the comparable periods of 2024, due to an increase in federal income tax credits associated with the Company’s investment in tax credits generated by a solar energy producing company.

Previous wording

The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $4.30 billion at the end of the first quarter, an increase of $83.0 million, or 2.0%, from December 31, 2024 and $149.2 million, or 3.6%, higher than March 31, 2024. The book value (excluding unrealized gains and losses) of investment securities increased $31.4 million from December 31, 2024 and increased $79.5 million from March 31, 2024, driven by government agency mortgage-backed securities purchases. During the first quarter of 2025, the Company purchased $44.8 million of government agency mortgage-backed securities with an average yield of 5.35%, which the Company classified as held-to-maturity. These additions were offset by $16.2 million from investment maturities, calls, and principal payments during the first three months of 2025. Additionally, there was $9.5 million of net accretion on investment securities during the first quarter of 2025. The effective duration of the investment securities portfolio was 6.0 years at the end of the first quarter of 2025, as compared to 6.2 years at the end of 2024 and 6.8 years at the end of the first quarter of 2024.

Current wording

The carrying value of investment securities (including unrealized gains and losses) was $4.35 billion at the end of the second quarter, an increase of $131.7 million, or 3.1%, from December 31, 2024 and an increase of $183.5 million, or 4.4%, from June 30, 2024. The book value of investment securities (excluding unrealized gains and losses) of $4.68 billion at the end of the second quarter increased $61.8 million, or 1.3%, from December 31, 2024 and increased $87.3 million, or 1.9%, from June 30, 2024, driven by government agency mortgage-backed securities purchases. During the first six months of 2025, the Company purchased $82.2 million of government agency mortgage-backed securities with an average yield of 5.41%, which the Company classified as held-to-maturity. These additions were offset by $36.1 million of investment maturities, calls and principal payments during the first six months of 2025. Additionally, there was $19.0 million of net accretion on investment securities during the first six months of 2025. The effective duration of the investment securities portfolio was 5.8 years at the end of the second quarter of 2025, as compared to 6.2 years at the end of 2024 and 6.6 years at the end of the second quarter of 2024.

Previous wording

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At March 31, 2025, the investment portfolio (excluding held-to-maturity investment securities) had a $353.0 million net unrealized loss, a $51.6 million decrease from the $404.6 million net unrealized loss at December 31, 2024 and a $69.7 million decrease from the $422.7 million net unrealized loss at March 31, 2024. This increase is reflective of movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases, sales and maturities that occurred during the past 12 months.

Current wording

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At June 30, 2025, the investment portfolio (excluding held-to-maturity investment securities) had a $334.7 million net unrealized loss, a $69.9 million decrease from the $404.6 million net unrealized loss at December 31, 2024 and a $96.2 million decrease from the $430.9 million net unrealized loss at June 30, 2024. These decreases were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities sales and maturities that occurred during the past 12 months.

Previous wording

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

Current wording

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

Previous wording

Mortgages on commercial property combined with general-purpose business lending to commercial, industrial, non-profit and governmental customers and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $319.8 million, or 7.6%, from March 31, 2024, and $34.8 million, or 0.8%, from December 31, 2024, driven by net organic growth over both periods. As compared to December 31, 2024, multifamily increased $77.7 million, or 10.7% and business non-real estate loans, including commercial and industrial lending, increased $37.6 million, or 3.3%, while non-owner occupied commercial real estate decreased $74.2 million, or 4.2%, and owner-occupied commercial real estate decreased $6.3 million, or 0.7%. The change from December 31, 2024 includes $68.1 million of construction loans that were reclassified from non-owner occupied to multifamily during the first quarter of 2025. While certain macroeconomic concerns persist related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to these portfolios is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 24% of total loans and 191% of total bank-level regulatory capital. Commercial real estate (“CRE”) lending represents 74.0% of the total business lending portfolio at March 31, 2025 while other commercial and industrial lending represents the remaining 26.0% of total business lending. The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 17.7% of total business lending, followed by office and lodging, at 8.5% and 7.2%, respectively. The Company’s largest owner-occupied lending concentration by industry is retail trade at 6.2% of total business lending, followed by arts, entertainment and recreation at 1.9% and health care and social assistance at 1.8%. These levels demonstrate the Company’s diversity in the lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 14% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas. See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

Current wording

Mortgages on commercial property combined with general-purpose business lending to commercial, industrial, non-profit and governmental customers and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $247.0 million, or 5.8%, from June 30, 2024, and $36.0 million, or 0.8%, from December 31, 2024, driven by net organic growth over both periods. As compared to December 31, 2024, multifamily increased $66.6 million, or 9.2% and business non-real estate loans, including commercial and industrial lending, increased $97.7 million, or 8.6%, while non-owner occupied CRE decreased $108.5 million, or 6.1%, and owner-occupied CRE decreased $19.7 million, or 2.3%. The change from December 31, 2024 includes $80.3 million of construction loans that were reclassified from non-owner occupied to multifamily during the first quarter of 2025. While certain macroeconomic concerns persist related to non-owner occupied and multifamily CRE, the Company’s exposure to these portfolios is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 24% of total loans and 184% of total bank-level regulatory capital. CRE lending represents 72.7% of the total business lending portfolio at June 30, 2025, compared to 74.7% at December 31, 2024 and 74.5% at June 30, 2024. Other commercial and industrial lending represents the remaining 27.3% of total business lending at June 30, 2025, compared to 25.3% at December 31, 2024 and 25.5% at June 30, 2024. The Company’s largest non-owner occupied CRE lending concentration by property type is multifamily at 23.9% of total business lending, followed by office and lodging, at 10.9% and 10.3%, respectively. The Company’s largest owner-occupied lending concentration by industry is retail trade at 8.7% of total business lending, followed by real estate rental and leasing and health care and social assistance that each comprise 2.5% of total business lending. These levels demonstrate the Company’s diversity in the lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 14% of the CRE portfolio and a very low level of CRE lending being conducted in major metropolitan areas. See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

Previous wording

The business loan balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas, as well as the Company’s strong liquidity profile relative to competitors that creates opportunities to gain market share. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong credit quality and producing profitable margins. The Company intends the composition of its growth in its business lending portfolio over the remainder of 2025 to be proportionally higher for business non-real estate lending than commercial real estate lending compared to what was experienced by the Company over the past several years, with the intent of keeping CRE loans’ share of the total business portfolio relatively constant. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category. To assist business lending customers in managing their interest rate risk, the Company enters into interest rate swaps which have associated interest rate and credit risk; for additional detail on the Company’s use of interest rate swaps, see Note K beginning on page 30 of this Form 10-Q.

Current wording

The business loan balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas, as well as the Company’s strong liquidity profile relative to competitors that creates opportunities to gain market share. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong credit quality and producing profitable margins. The Company intends the composition of its growth in its business lending portfolio over the remainder of 2025 to be proportionally higher for business non-real estate lending than CRE lending compared to what was experienced by the Company over the past several years, with the intent of keeping CRE loans’ share of the total business portfolio at or below recent levels. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category. To assist business lending customers in managing their interest rate risk, the Company enters into interest rate swaps which have associated interest rate and credit risk; for additional detail on the Company’s use of interest rate swaps, see Note K beginning on page 33 of this Form 10-Q.

Previous wording

Consumer mortgages increased $186.7 million, or 5.6%, from one year ago and increased $14.4 million, or 0.4%, from December 31, 2024, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of organic production. The Company sold $17.6 million and $75.2 million of consumer mortgage production during the first quarter of 2025 and over the last twelve months, respectively. Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment. Home equity loans increased $35.2 million, or 7.9%, from one year ago and increased $3.8 million, or 0.8%, from December 31, 2024, in part a result of lower levels of payoffs and paydowns related to consumer mortgage refinancing in the higher interest rate environment.

Current wording

Consumer mortgages increased $154.9 million, or 4.6%, from one year ago and increased $33.2 million, or 1.0%, from December 31, 2024, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of new volume production. The Company sold $16.6 million and $34.1 million of consumer mortgage production during the three and six months ended 2025, respectively. Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment. Home equity loans increased $42.2 million, or 9.3%, from one year ago and increased $16.8 million, or 3.5%, from December 31, 2024, in part a result of lower levels of payoffs and paydowns related to consumer mortgage refinancing in a relatively high interest rate environment as compared to medium to long-term history.

Previous wording

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), decreased $4.0 million, or 0.2%, from one year ago, and decreased $64.2 million, or 3.3%, from December 31, 2024. The decrease was primarily due to a weather-related reduction in vehicle sales volume in the Company’s footprint. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer installment loans have historically provided attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

Current wording

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), increased $51.2 million, or 2.7%, from one year ago, and increased $0.7 million, or 0.1%, from December 31, 2024. The increases were primarily due to the Company offering competitive pricing, benefitting from reduced participation by certain competitors and capturing an increased share of the sales volumes that existed in its market area and dealer network, which resulted in growth in the Company’s consumer installment portfolio, partially offset by a weather-related reduction in vehicle sales volumes in the Company’s footprint during the beginning of 2025 that recovered during the second quarter of 2025 as conditions improved. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer direct loans have historically provided attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

Previous wording

The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the periods indicated, as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to change when the risk factors of each component part change. The allocation is not indicative of the specific amount of future net charge-offs that is expected to be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 9, total allowance for credit losses at the end of the first quarter was $82.8 million, an increase of $12.7 million, or 18.2%, from one year earlier and up $3.7 million, or 4.7%, from the end of 2024.

Current wording

The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the periods indicated, as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to change when the risk factors of each component part change. The allocation is not indicative of the specific amount of future net charge-offs that is expected to be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 9, total allowance for credit losses at the end of the first quarter was $81.9 million, an increase of $10.5 million, or 14.6%, from one year earlier and up $2.7 million, or 3.5%, from the end of 2024.

Previous wording

As demonstrated in Table 9, the consumer direct and indirect installment loan portfolios carry higher credit risk than the business lending, consumer mortgage and home equity portfolios and therefore the Company allocates a higher proportional allowance to these portfolios. The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at March 31, 2025 was consistent with December 31, 2024 and March 31, 2024.

Current wording

As demonstrated in Table 9, the consumer direct and indirect installment loan portfolios and the business lending portfolio carry higher credit risk than the consumer mortgage and home equity portfolios; therefore, the Company allocates a higher proportional allowance to these portfolios. The unallocated allowance is maintained for potential losses not captured in the specific allowance categories due to model imprecision. The unallocated allowance of $1.0 million at June 30, 2025 was consistent with December 31, 2024 and June 30, 2024.

Previous wording

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

Current wording

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

Previous wording

Other real estate owned (“OREO”) at March 31, 2025 was $2.7 million as compared to $1.7 million at March 31, 2024 and $2.8 million at December 31, 2024. At March 31, 2025, OREO consisted of 46 residential properties with a total value of $2.7 million and no commercial properties. This compares to 44 residential properties with a total value of $2.8 million and no commercial properties at December 31, 2024, and 23 residential properties with a total value of $1.3 million and two commercial properties with a total value of $0.4 million at March 31, 2024. The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.

Current wording

Other real estate owned (“OREO”) at June 30, 2025 was $8.0 million. This compares to $2.8 million at December 31, 2024 and $1.7 million at June 30, 2024. At June 30, 2025, OREO consisted of 44 residential properties with a total value of $2.6 million and one commercial lending relationship consisting of multiple properties with an aggregate value of $5.4 million. This compares to 44 residential properties with a total value of $2.8 million and no commercial properties at December 31, 2024, and 24 residential properties with a total value of $1.4 million and one commercial property with a value of $0.3 million at June 30, 2024. The increase in OREO over the last twelve months was primarily driven by commercial OREO related to an investment in a special purpose entity that holds the property underlying the previously mentioned charged-off CRE loan, while the increase in residential OREO is related to the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.

Previous wording

Approximately 55% of the nonperforming loans at March 31, 2025 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type. Of the nonperforming loans in the business lending portfolio, multifamily represents 30% of the balance, non - owner occupied commercial real estate represents 29% of the balance, other commercial and industrial loans represents 24% of the balance and owner - occupied commercial real estate represents 17% of the balance. The level of nonperforming business loans increased from the prior year primarily due to changes in the financial conditions and loan repayment performance of three business lending relationships that were individually assessed for a specific allocation of the allowance for credit losses.

Current wording

Approximately 34% of the nonperforming loans at June 30, 2025 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type. Of the nonperforming loans in the business lending portfolio, other commercial and industrial loans represents 55% of the balance, owner-occupied CRE represents 36% of the balance, non-owner occupied CRE represents 8% of the balance and multifamily represents the remaining 1% of the balance. Nonperforming business loans decreased 49 basis points as compared to December 31, 2024 and were consistent as compared to June 30, 2024. The decrease in nonperforming business loans as compared to December 31, 2024 is primarily related to the charge-off of one non-owner occupied CRE loan relationship previously mentioned and the substantial repayment of one multifamily CRE nonperforming loan relationship.

Previous wording

Approximately 41% of nonperforming loans at March 31, 2025 were comprised of consumer mortgages. Collateral values of residential properties within most of the Company’s market areas have generally remained stable or increased over the past several years. Although high levels of inflation has had some adverse impact on consumers, the unemployment rate remains low and this has contributed to the credit performance in the consumer mortgage loan portfolio remaining favorable. The remaining 4% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages. Consumer installment loans generally have very low non-performing levels because they are usually charged off prior to becoming 90 or more days delinquent or reaching non-accrual status. The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 110% at the end of the first quarter, as compared to 108% at year-end 2024 and 142% at March 31, 2024. The decrease in this ratio between the annual quarterly periods was due to nonperforming loans increasing proportionally more than the allowance for credit losses, primarily driven by the aforementioned increase in nonperforming business loans.

Current wording

Approximately 58% of nonperforming loans at June 30, 2025 were comprised of consumer mortgages. Collateral values of residential properties within most of the Company’s market areas have generally remained stable or increased over the past several years. Inflation rates have become lower and more stable, and the unemployment rate remains low; this has contributed to the credit performance in the consumer mortgage loan portfolio remaining favorable. The remaining 8% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages. The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 153% at the end of the second quarter, as compared to 108% at year-end 2024 and 141% at June 30, 2024. The increase in this ratio versus the end of 2024 and one year ago was due to the allowance for credit losses increasing proportionally more than nonperforming loans.

Previous wording

Despite the recent slight declines in certain asset quality metrics, including net charge-offs and delinquent and nonperforming loans, these levels remain relatively low compared to the banking industry, reflecting the Company’s robust risk management practices and credit quality standards.

Current wording

The Company’s asset quality metrics, including net charge-offs and delinquent and nonperforming loans, remain relatively low compared to the banking industry, reflecting the Company’s robust risk management practices and disciplined credit quality standards.

Previous wording

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 1.29% at the end of the first quarter of 2025, five basis points above the year-end 2024 ratio of 1.24% and 36 basis points above the March 31, 2024 ratio of 0.93%. The business lending delinquency ratio at the end of the first quarter was 27 basis points above the level at December 31, 2024 and 80 basis points above the level at March 31, 2024. The delinquency rates for the consumer mortgage, consumer indirect and consumer direct portfolios all increased as compared to the levels at March 31, 2024 while the home equity delinquency rate decreased. The consumer direct, consumer indirect, and consumer mortgage delinquency rates were lower than the rate at December 31, 2024 while home equity was consistent.

Current wording

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 1.01% at the end of the second quarter, 23 basis points below the 1.24% at year-end 2024 and 6 basis points above the 0.95% at June 30, 2024. The business lending delinquency ratio at the end of the second quarter of 0.50% was 48 basis points below the level of 0.98% at December 31, 2024 and 8 basis points above the level of 0.42% at June 30, 2024. The changes in the delinquent loan ratios over the indicated prior periods were related to the previously mentioned charged-off and substantially repaid CRE loans. The delinquency rates for all loan portfolios except for consumer mortgage decreased as compared to the levels at December 31, 2024. The delinquency rates for business lending and consumer mortgage increased as compared to the levels at June 30, 2024, while consumer installment and home equity decreased.

Previous wording

The Company recorded a $6.7 million provision for credit losses in the first quarter of 2025. The first quarter provision for credit losses was $0.6 million higher than the equivalent prior year period’s provision for credit losses of $6.1 million. The allowance for credit losses of $82.8 million as of March 31, 2025 increased $12.7 million from the level one year ago. The current quarter provision for credit losses is reflective of the Company increasing its qualitative assessment for economic uncertainty as well as an increase in the specific reserve on one non-owner occupied CRE loan relationship placed on nonaccrual status during the fourth quarter of 2023. The allowance for credit losses to total loans ratio was 0.79% at March 31, 2025, eight basis points higher than the level at March 31, 2024 and three basis points higher than the level at December 31, 2024. Refer to Note E: Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

Current wording

The Company recorded a $4.1 million provision for credit losses in the second quarter of 2025. The second quarter provision for credit losses was $1.4 million higher than the equivalent prior year period’s provision for credit losses of $2.7 million. The allowance for credit losses of $81.9 million as of June 30, 2025 increased $10.5 million from the level one year ago. The current quarter provision for credit losses is reflective of the Company increasing its qualitative assessment for business lending. The allowance for credit losses to total loans ratio was 0.78% at June 30, 2025, 2 basis points higher than the levels at December 31, 2024 and 7 basis points higher than June 30, 2024. Refer to Note E: Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

Previous wording

As of March 31, 2025, the net purchase discount related to the $860.5 million of remaining non-Purchased Credit Deteriorated (“PCD”) loan balances acquired through prior period acquisition transactions was approximately $16.8 million, or 2.0% of that portfolio.

Current wording

As of June 30, 2025, the net purchase discount related to the $837.3 million of remaining non-purchased credit deteriorated (“PCD”) loan balances acquired through prior period acquisition transactions was approximately $16.1 million, or 1.9% of that portfolio.

Previous wording

As shown in Table 11, average deposits of $13.57 billion in the first quarter were $538.7 million, or 4.1%, higher than the first quarter of 2024. Total average deposit balances increased $96.4 million, or 0.7%, from the fourth quarter of last year, while on an ending basis, total deposits increased $450.3 million, or 3.4%, from December 31, 2024. The mix of average deposit balances changed as the weighting of non-maturity deposits (noninterest checking, interest checking, savings and money markets) to total deposits has decreased from the prior year levels. Average noninterest checking deposits as a percentage of average total deposits was 25.9% in the first quarter compared to 27.4% in the first quarter of 2024 and 26.7% in the fourth quarter of last year. Average non-maturity deposits represented 84.1% of the Company’s average deposit funding base in the first quarter of 2025, while time deposits represented 15.9% of total average deposits. In comparison, time deposits represented 14.3% of total average deposits during the first quarter of 2024 and 16.2% of total average deposits during the fourth quarter of last year due in part to customers responding to changes in market interest rates by moving funds into and out of higher yielding time deposit accounts. The quarterly average cost of deposits was 1.17% for the first quarter of 2025, compared to 1.14% in the first quarter of 2024, reflective of a decline in the proportion of noninterest and low-rate deposit balances. The Company continues to focus on expanding its deposit relationship base through its competitive product offerings, high quality customer service and market expansion initiatives.

Current wording

As shown in Table 11, average deposits of $13.74 billion in the second quarter were $528.8 million, or 4.0%, higher than the second quarter of 2024 and increased $267.4 million, or 2.0%, from the fourth quarter of last year. On an ending basis, total deposits increased $260.0 million, or 1.9%, from December 31, 2024 and were $563.9 million, or 4.3%, higher than one year prior. Average noninterest checking deposits as a percentage of average total deposits was 25.6% in the second quarter compared to 26.7% in the second quarter of 2024 and 26.7% in the fourth quarter of last year. Average non-maturity deposits represented 84.5% of the Company’s average deposit funding base in the second quarter of 2025, while time deposits represented 15.5% of total average deposits. In comparison, time deposits represented 15.3% of total average deposits during the second quarter of 2024 and 16.2% of total average deposits during the fourth quarter of last year. The quarterly average cost of deposits was 1.19% for the second quarter of 2025, compared to 1.23% in the second quarter of 2024, reflective of the decrease in certain deposit interest rates as a result of changing market conditions. The Company continues to focus on expanding its deposit relationship base through its competitive product offerings, high-quality customer service, and market expansion initiatives.

Previous wording

The Company’s deposit base is well diversified across customer segments, which as of March 31, 2025 is comprised of approximately 58% consumer, 25% business and 17% governmental, and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship of approximately $70,000, while the Company’s total average deposit account balance is under $20,000. In addition, at the end of the quarter, 64% of the Company’s total deposit balances were in checking and low-rate savings accounts and the weighted-average age of the Company’s non-maturity deposit accounts was approximately 15 years. The total estimated amount of deposits that exceeded the $250,000 insured limit provided by the FDIC, net of collateralized and intercompany deposits, was approximately $2.34 billion at March 31, 2025. This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not external customers and are therefore eliminated in consolidation, and governmental deposits whose uninsured balances are collateralized by certain pledged investment securities. The Bank Call Report estimated uninsured deposit balances at March 31, 2025 are reported gross at $4.75 billion, which includes intercompany account balances of $284.6 million, and collateralized deposits of $2.13 billion. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of ending total deposits at March 31, 2025. These estimates are based on the determination of known deposit account balances of each depositor and the insurance guidelines provided by the FDIC.

Current wording

The Company’s deposit base is well diversified across customer segments, which as of June 30, 2025 is comprised of approximately 59% consumer, 27% business and 14% governmental, and broadly dispersed with an average consumer deposit balance per account of approximately $12,000 and average business deposit relationship of approximately $74,000, while the Company’s total average deposit balance per account is under $20,000. In addition, at the end of the quarter, 65% of the Company’s total deposit balances were in checking and low-rate savings accounts and the weighted-average age of the Company’s non-maturity deposit accounts was approximately 15 years. The total estimated amount of deposits that exceeded the $250,000 insured limit provided by the FDIC, net of collateralized and intercompany deposits, was approximately $2.41 billion at June 30, 2025. This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not external customers and are therefore eliminated in consolidation, and municipal deposits whose uninsured balances are collateralized by certain pledged investment securities. The Bank Call Report estimated uninsured deposit balances at June 30, 2025, reported gross, totaled $4.53 billion, which includes intercompany account balances of $310.6 million, and collateralized deposits of $1.81 billion. Estimated insured deposits, net of collateralized and intercompany deposits, represent 82% of ending total deposits at June 30, 2025. These estimates are based on the determination of known deposit account balances of each depositor and the insurance guidelines provided by the FDIC.

Previous wording

Average non-governmental deposits for the first quarter of 2025 decreased $24.6 million, or 0.2%, versus the fourth quarter of 2024 and increased $176.0 million, or 1.6%, versus the year-earlier period primarily driven by the higher average balances of consumer time deposits. Average governmental deposits for the first quarter increased $121.0 million, or 5.9%, from the fourth quarter of 2024 primarily due to the seasonal receipt of property tax payments and increased $362.7 million, or 20.1%, from the first quarter of 2024, reflective of competitive price offerings and expansion of its governmental deposit relationship base due to the Company’s business development efforts. Average governmental deposits as a percentage of total average deposits increased from 13.8% in the first quarter of 2024 to 16.0% in the first quarter of 2025.

Current wording

Average non-governmental and reciprocal deposits for the second quarter of 2025 increased $136.2 million, or 1.2%, versus the fourth quarter of 2024 and increased $234.0 million, or 2.1%, versus the year-earlier period, primarily driven by higher average balances of consumer money market deposits. Average governmental deposits for the second quarter increased $131.2 million, or 6.4%, from the fourth quarter of 2024 and $294.8 million, or 15.7%, from the second quarter of 2024. Average governmental deposits as a percentage of total average deposits increased from 14.2% in the second quarter of 2024 to 15.8% in the second quarter of 2025. The increase in average governmental and non-governmental and reciprocal deposit balances were reflective of competitive price offerings and expansion of the Company’s deposit relationship base due to the Company’s business development efforts.