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Lakeland Financial Corp
LKFN
#5273
Rank
$1.59 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$61.32
Share price
2.42%
Change (1 day)
19.67%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Lakeland Financial Corp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q2

Lakeland Financial Corp - 10-Q quarterly report FY2023 Q2


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana35-1559596
(State or Other Jurisdiction(IRS Employer
of Incorporation or Organization)Identification No.)
202 East Center Street,
Warsaw,Indiana46580
(Address of principal executive offices)(Zip Code)
(574) 267‑6144
(Registrant’s Telephone Number, Including Area Code)
Title of each class    Trading Symbol(s)    Name of each exchange on which registered
Common stock, No par valueLKFNThe NASDAQ Stock Market LLC
(Nasdaq Global Select Market)
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, 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 ☒
Number of shares of common stock outstanding at July 26, 2023:  25,433,215





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ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
June 30,
2023		December 31,
2022
(Unaudited)
ASSETS    
Cash and due from banks$75,081 $80,992 
Short-term investments98,056 49,290 
Total cash and cash equivalents173,137 130,282 
Securities available-for-sale, at fair value1,062,069 1,185,528 
Securities held-to-maturity, at amortized cost (fair value of $114,264 and $111,029, respectively)
129,070 128,242 
Real estate mortgage loans held-for-sale1,298 357 
Loans, net of allowance for credit losses of $72,058 and $72,606
4,790,202 4,637,790 
Land, premises and equipment, net58,839 58,097 
Bank owned life insurance107,738 108,407 
Federal Reserve and Federal Home Loan Bank stock21,420 15,795 
Accrued interest receivable27,398 27,994 
Goodwill4,970 4,970 
Other assets133,405 134,909 
Total assets$6,509,546 $6,432,371 
LIABILITIES
Noninterest bearing deposits$1,438,030 $1,736,761 
Interest bearing deposits3,985,029 3,723,859 
Total deposits5,423,059 5,460,620 
Federal Funds purchased0 22,000 
Federal Home Loan Bank advances400,000 275,000 
Total borrowings400,000 297,000 
Accrued interest payable9,833 3,186 
Other liabilities84,659 102,678 
Total liabilities5,917,551 5,863,484 
STOCKHOLDERS’ EQUITY
Common stock: 90,000,000 shares authorized, no par value
25,896,764 shares issued and 25,429,216 outstanding as of June 30, 2023
25,825,127 shares issued and 25,349,225 outstanding as of December 31, 2022
123,367 127,004 
Retained earnings661,447 646,100 
Accumulated other comprehensive income (loss)(177,645)(188,923)
Treasury stock at cost (467,548 shares as of June 30, 2023, 475,902 shares as of December 31, 2022)
(15,263)(15,383)
Total stockholders’ equity591,906 568,798 
Noncontrolling interest89 89 
Total equity591,995 568,887 
Total liabilities and equity$6,509,546 $6,432,371 
The accompanying notes are an integral part of these consolidated financial statements.
1



CONSOLIDATED STATEMENTS OF INCOME (unaudited - dollars in thousands, except share and per share data)
Three Months Ended
June 30,		Six Months Ended
June 30,
2023202220232022
NET INTEREST INCOME
Interest and fees on loans
Taxable$75,047 $44,138 $144,589 $83,873 
Tax exempt960 280 1,861 449 
Interest and dividends on securities
Taxable3,376 3,727 6,889 7,005 
Tax exempt4,064 4,994 8,364 9,600 
Other interest income1,035 483 1,999 729 
Total interest income84,482 53,622 163,702 101,656 
Interest on deposits33,611 4,890 58,529 7,971 
Interest on borrowings
Short-term2,347 0 5,130 0 
Long-term0 54 0 127 
Total interest expense35,958 4,944 63,659 8,098 
NET INTEREST INCOME48,524 48,678 100,043 93,558 
Provision for credit losses800 0 5,150 417 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES47,724 48,678 94,893 93,141 
NONINTEREST INCOME
Wealth advisory fees2,271 2,204 4,471 4,491 
Investment brokerage fees428 541 962 1,060 
Service charges on deposit accounts2,726 2,882 5,356 5,691 
Loan and service fees3,002 3,195 5,848 6,084 
Merchant card fee income929 904 1,806 1,719 
Bank owned life insurance income (loss)693 (183)1,384 (266)
Interest rate swap fee income794 354 794 404 
Mortgage banking income (loss)(35)351 (134)860 
Net securities gains3 0 19 0 
Other income690 244 1,309 1,136 
Total noninterest income11,501 10,492 21,815 21,179 
NONINTEREST EXPENSE
Salaries and employee benefits11,374 14,798 27,437 29,190 
Net occupancy expense1,681 1,688 3,253 3,317 
Equipment costs1,426 1,459 2,864 2,870 
Data processing fees and supplies3,474 3,203 6,926 6,284 
Corporate and business development1,298 1,433 2,729 2,652 
FDIC insurance and other regulatory fees803 619 1,598 1,058 
Professional fees2,049 1,414 4,170 2,973 
Wire fraud loss18,058 0 18,058 0 
Other expense2,571 3,299 5,133 6,538 
Total noninterest expense42,734 27,913 72,168 54,882 
INCOME BEFORE INCOME TAX EXPENSE16,491 31,257 44,540 59,438 
Income tax expense1,880 5,584 5,651 10,123 
NET INCOME$14,611 $25,673 $38,889 $49,315 
BASIC WEIGHTED AVERAGE COMMON SHARES25,607,663 25,527,896 25,595,412 25,521,618 
BASIC EARNINGS PER COMMON SHARE$0.57 $1.00 $1.52 $1.93 
DILUTED WEIGHTED AVERAGE COMMON SHARES25,686,354 25,697,577 25,696,370 25,699,908 
DILUTED EARNINGS PER COMMON SHARE$0.57 $1.00 $1.51 $1.92 
The accompanying notes are an integral part of these consolidated financial statements.
2



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited - dollars in thousands)
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Net income$14,611 $25,673 $38,889 $49,315 
Other comprehensive income (loss)
Change in available-for-sale and transferred securities:
Unrealized holding gain (loss) on securities available-for-sale arising during the period(13,511)(82,609)13,282 (221,605)
Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity494 386 985 386 
Reclassification adjustment for gains included in net income(3)0 (19)0 
Net securities gain (loss) activity during the period(13,020)(82,223)14,248 (221,219)
Tax effect2,734 17,349 (2,992)46,538 
Net of tax amount(10,286)(64,874)11,256 (174,681)
Defined benefit pension plans:
Amortization of net actuarial loss15 36 30 72 
Net gain activity during the period15 36 30 72 
Tax effect(4)(9)(8)(18)
Net of tax amount11 27 22 54 
Total other comprehensive income (loss), net of tax(10,275)(64,847)11,278 (174,627)
Comprehensive income (loss)$4,336 $(39,174)$50,167 $(125,312)
The accompanying notes are an integral part of these consolidated financial statements.
3



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - dollars in thousands, except share and per share data)
Three Months Ended
Common StockRetained
Earnings		Accumulated Other Comprehensive
Income (Loss)		Treasury
Stock		Total Stockholders’
Equity		Noncontrolling
Interest		Total
Equity
SharesStock
Balance at April 1, 2022
25,346,149 $121,138 $596,578 $(93,687)$(15,016)$609,013 $89 $609,102 
Comprehensive loss:
Net income25,673 25,673 25,673 
Other comprehensive income (loss), net of tax(64,847)(64,847)(64,847)
Cash dividends declared and paid, $0.40 per share
(10,225)(10,225)(10,225)
Treasury shares purchased under deferred directors' plan(987)73 (73)0 0 
Treasury shares sold and distributed under deferred directors' plan0 0 
Stock activity under equity compensation plans0 0 
Stock based compensation expense2,360 2,360 2,360 
Balance at June 30, 2022
25,345,162 $123,571 $612,026 $(158,534)$(15,089)$561,974 $89 $562,063 
Balance at April 1, 2023
25,430,917 $125,840 $658,629 $(167,370)$(15,182)$601,917 $89 $602,006 
Comprehensive income:
Net income14,611 14,611 14,611 
Other comprehensive income (loss), net of tax(10,275)(10,275)(10,275)
Cash dividends declared and paid, $0.46 per share
(11,793)(11,793)(11,793)
Treasury shares purchased under deferred directors' plan(1,701)81 (81)0 0 
Treasury shares sold and distributed under deferred directors' plan0 0 
Stock activity under equity compensation plans0 0 
Stock based compensation expense(2,554)(2,554)(2,554)
Balance at June 30, 2023
25,429,216 $123,367 $661,447 $(177,645)$(15,263)$591,906 $89 $591,995 
4



Six Months Ended
Common StockRetained
Earnings		Accumulated Other Comprehensive
Income (Loss)		Treasury
Stock		Total Stockholders’
Equity		Noncontrolling
Interest		Total
Equity
SharesStock
Balance at January 1, 2022
25,300,793 $120,615 $583,134 $16,093 $(15,025)$704,817 $89 $704,906 
Comprehensive loss:
Net income49,315 49,315 49,315 
Other comprehensive income (loss), net of tax(174,627)(174,627)(174,627)
Cash dividends declared and paid, $0.80 per share
(20,423)(20,423)(20,423)
Treasury shares purchased under deferred directors' plan(3,574)285 (285)0 0 
Treasury shares sold and distributed under deferred directors' plan8,555 (221)221 0 0 
Stock activity under equity compensation plans39,388 (1,728)(1,728)(1,728)
Stock based compensation expense4,620 4,620 4,620 
Balance at June 30, 2022
25,345,162 $123,571 $612,026 $(158,534)$(15,089)$561,974 $89 $562,063 
Balance at January 1, 2023
25,349,225 $127,004 $646,100 $(188,923)$(15,383)$568,798 $89 $568,887 
Comprehensive income:
Net income38,889 38,889 38,889 
Other comprehensive income (loss), net of tax11,278 11,278 11,278 
Cash dividends declared and paid, $0.92 per share
(23,542)(23,542)(23,542)
Treasury shares purchased under deferred directors' plan(4,501)285 (285)0 0 
Treasury shares sold and distributed under deferred directors' plan12,855 (405)405 0 0 
Stock activity under equity compensation plans71,637 (3,124)(3,124)(3,124)
Stock based compensation expense(393)(393)(393)
Balance at June 30, 2023
25,429,216 $123,367 $661,447 $(177,645)$(15,263)$591,906 $89 $591,995 
The accompanying notes are an integral part of these consolidated financial statements.
5



CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)
Six Months Ended June 30,20232022
Cash flows from operating activities:
Net income$38,889 $49,315 
Adjustments to reconcile net income to net cash from operating activities:
Depreciation3,069 3,020 
Provision for credit losses5,150 417 
Amortization of loan servicing rights286 385 
Net change in loan servicing rights valuation allowance0 (701)
Loans originated for sale, including participations(4,266)(23,082)
Net gain on sales of loans(127)(777)
Proceeds from sale of loans, including participations3,421 28,430 
Net (gain) loss on sales of premises and equipment(1)1 
Net gain on sales and calls of securities available-for-sale(19)0 
Net securities amortization2,369 3,245 
Stock based compensation expense(393)4,620 
Losses (earnings) on life insurance(1,384)266 
Tax benefit of stock award issuances(720)(500)
Net change:
Interest receivable and other assets(1,411)165 
Interest payable and other liabilities(7,958)26,355 
Total adjustments(1,984)41,844 
Net cash from operating activities36,905 91,159 
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale99,951 0 
Proceeds from maturities, calls and principal paydowns of securities available-for-sale38,886 59,617 
Proceeds from maturities, calls and principal paydowns of securities held-to-maturity6 5 
Purchases of securities available-for-sale(4,314)(313,905)
Purchase of life insurance(191)(657)
Net (increase) decrease in total loans(157,846)(137,525)
Proceeds from sales of land, premises and equipment13 1 
Purchases of land, premises and equipment(3,823)(2,314)
Purchase of Federal Home Loan Bank stock(5,625)0 
Proceeds from redemption of Federal Home Loan Bank stock0 932 
Net cash from investing activities(32,943)(393,846)
Cash flows from financing activities:
Net increase (decrease) in total deposits(37,561)(113,823)
Net increase (decrease) in short-term borrowings(22,000)0 
Payments on long-term FHLB borrowings0 (75,000)
Proceeds from short-term FHLB borrowings125,000 0 
Common dividends paid(23,529)(20,410)
Preferred dividends paid(13)(13)
Payments related to equity incentive plans(3,124)(1,728)
Purchase of treasury stock(285)(285)
Sale of treasury stock405 221 
Net cash from financing activities38,893 (211,038)
Net change in cash and cash equivalents42,855 (513,725)
Cash and cash equivalents at beginning of the period130,282 683,240 
Cash and cash equivalents at end of the period173,137 169,515 
Cash paid during the period for:
Interest$57,011 $8,768 
Income taxes7,125 7,065 
Supplemental non-cash disclosures:
Loans transferred to other real estate owned284 0 
Right-of-use assets obtained in exchange for lease liabilities0 1,612 
The accompanying notes are an integral part of these consolidated financial statements.
6




NOTE 1. BASIS OF PRESENTATION
This report is filed for Lakeland Financial Corporation (the "Company"), which has two wholly owned subsidiaries, Lake City Bank (the "Bank") and LCB Risk Management, a captive insurance company. Also included in this report are results for the Bank’s wholly owned subsidiary, LCB Investments II, Inc. ("LCB Investments"), which manages the Bank’s investment securities portfolio. LCB Investments owns LCB Funding, Inc. ("LCB Funding"), a real estate investment trust. All significant inter-company balances and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2023. The Company’s 2022 Annual Report on Form 10-K should be read in conjunction with these statements.
Adoption of New Accounting Standards
On March 31, 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures." The update amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and and class of financing receivable by year of origination. The update is available for entities that have adopted the amendments in update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company elected to early adopt the provisions of the ASU related to the discontinuance of TDR reporting, with retrospective application of modification reporting effective starting January 1, 2022. The Company adopted the provisions related to reporting of current-period gross write-offs within the vintage disclosures effective January 1, 2023. The adoption of the provisions contained within ASU 2022-02 did not have a material impact on the consolidated financial statements.
On March 28, 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method." ASC 815 previously permitted only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendment in this update allows nonrepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope allows an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. The update became effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU 2022-01 on January 1, 2023, which did not have a material impact on the consolidated financial statements.
Newly Issued But Not Yet Effective Accounting Standards
On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate ("SOFR"), amongst others. The Company has identified certain loans that renewed prior to 2021 and obtained updated reference rate language at the time of the renewal. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. The Company's policy is to adhere to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020.
The Company discontinued the use of new LIBOR-based loans by December 31, 2021, according to regulatory guidelines. The Company transitioned LIBOR-based loans to an alternative reference rate before June 30, 2023. On December 22, 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (ASC 848): Deferral of the Sunset Date of Topic 848", which definitively provided a sunset date of December 31, 2024 for the relief guidance allowed under Topic 848. The ASU was effective immediately upon issuance. The Company adopted the LIBOR transition relief allowed under this standard, and does not expect final adoption to have a material impact on the consolidated financial statements.

On March 28, 2023, the FASB issued ASU 2023-02, "Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." ASU 2014-01, "Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Qualified Affordable Housing Projects", previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items.
The amendments in this update permit reporting entities to elect to account for certain tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax benefits in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, all of the following conditions must be met: (1) It is probable that the income tax credits allocated to the tax equity investor will be available; (2) The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project; (3) Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits included income tax credits, other income tax benefits, and other non-income tax -related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project; (4) The tax equity investor's projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive; and (5) The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor's liability is limited to its capital investment. An accounting policy election is allowed to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The amendments in this update require specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The amendments require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understanding the following information about its investments that generate income tax credits and other income tax benefits from a tax credit program including: (1) The nature of its tax equity investments; and (2) The effect of its tax equity investments and related income tax credits and other income tax benefits on its financial position and results of operations.
For public business entities, the amendments in this update are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, the provisions shall be adopted as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is currently evaluating the impact of this standard for its LIHTC investments and the impact to noninterest income and income tax expense within the consolidated financial statements.
Reclassification
Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders' equity as previously reported.
7



NOTE 2. SECURITIES
Debt securities purchased with the intent and ability to hold to their maturity are classified as held-to-maturity securities. All other investment securities are classified as available-for-sale securities.

Available-for-Sale Securities

Information related to the amortized cost, fair value and allowance for credit losses of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the table below.
(dollars in thousands)Amortized
Cost		Gross Unrealized GainGross Unrealized LossesAllowance for Credit LossesFair Value
June 30, 2023
U.S. Treasury securities$3,251 $0 $(19)$0 $3,232 
U.S. government sponsored agencies151,029 0 (28,943)0 122,086 
Mortgage-backed securities: residential545,616 34 (83,617)0 462,033 
State and municipal securities564,165 10 (89,457)0 474,718 
Total$1,264,061 $44 $(202,036)$0 $1,062,069 
December 31, 2022
U.S. Treasury securities$3,057 $0 $(23)$0 $3,034 
U.S. government sponsored agencies156,184 0 (29,223)0 126,961 
Mortgage-backed securities: residential578,175 67 (85,934)0 492,308 
State and municipal securities663,367 157 (100,299)0 563,225 
Total$1,400,783 $224 $(215,479)$0 $1,185,528 
Held-to-Maturity Securities
Information related to the amortized cost, fair value and allowance for credit losses of securities held-to-maturity and the related gross unrealized gains and losses is presented in the table below.
(dollars in thousands)Amortized
Cost		Gross Unrealized GainGross Unrealized LossesAllowance for Credit LossesFair Value
June 30, 2023
State and municipal securities$129,070 $0 $(14,806)$0 $114,264 
December 31, 2022
State and municipal securities$128,242 $0 $(17,213)$0 $111,029 
On April 1, 2022, the Company elected to transfer securities from available-for-sale to held-to-maturity as an overall balance sheet management strategy. The fair value of securities transferred was $127.0 million from available-for-sale to held-to-maturity. The unrealized loss on the securities transferred from available-for-sale to held-to-maturity was $24.4 million ($19.3 million, net of tax) based on the fair value of the securities on the transfer date and was $21.9 million ($17.3 million, net of tax) at June 30, 2023. The Company has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or loss on the transferred securities included in accumulated other comprehensive income (loss) at the time of the transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. There have been no subsequent transfers of securities from available-for-sale to held-to-maturity.




8



Information regarding the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by maturity as of June 30, 2023 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.
Available-for-SaleHeld-to-Maturity
(dollars in thousands)Amortized CostFair
Value		Amortized CostFair
Value
Due in one year or less$4,331 $4,312 $0 $0 
Due after one year through five years8,799 8,052 0 0 
Due after five years through ten years30,996 29,763 0 0 
Due after ten years674,319 557,909 129,070 114,264 
718,445 600,036 129,070 114,264 
Mortgage-backed securities545,616 462,033 0 0 
Total debt securities$1,264,061 $1,062,069 $129,070 $114,264 
Available-for-sale securities proceeds, gross gains and gross losses are presented below.
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2023202220232022
Sales of securities available-for-sale
Proceeds$12,480 $0 $99,951 $0 
Gross gains28 0 439 0 
Gross losses(25)0 (420)0 
Number of securities22 0 103 0 
In accordance with ASU No. 2017-8, purchase premiums for callable securities are amortized to the earliest call date and premiums on non-callable securities as well as discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.
Securities with fair values of $811.1 million and $298.2 million were pledged as of June 30, 2023 and December 31, 2022, respectively, as collateral for borrowings from the Federal Home Loan Bank ("FHLB") and Federal Reserve Bank and for other purposes as permitted or required by law.
Unrealized Loss Analysis on Available-for-Sale and Held-to-Maturity Securities
Information regarding available-for-sale securities with unrealized losses as of June 30, 2023 and December 31, 2022 is presented on the following page. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.
9



Less than 12 months12 months or moreTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
June 30, 2023            
U.S. Treasury securities$2,836 $17 $396 $2 $3,232 $19 
U.S. government sponsored agencies0 0 122,086 28,943 122,086 28,943 
Mortgage-backed securities: residential23,595 1,374 436,450 82,243 460,045 83,617 
State and municipal securities41,561 1,543 421,684 87,914 463,245 89,457 
Total available-for-sale$67,992 $2,934 $980,616 $199,102 $1,048,608 $202,036 
December 31, 2022
U.S. Treasury securities$3,034 $23 $0 $0 $3,034 $23 
U.S. government sponsored agencies8,420 1,350 118,541 27,873 126,961 29,223 
Mortgage-backed securities: residential165,897 18,637 323,727 67,297 489,624 85,934 
State and municipal securities277,967 33,405 244,436 66,894 522,403 100,299 
Total available-for-sale$455,318 $53,415 $686,704 $162,064 $1,142,022 $215,479 
Information regarding held-to-maturity securities with unrealized losses as of June 30, 2023 and December 31, 2022 is presented below. The table divides the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.
Less than 12 months12 months or moreTotal
(dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
June 30, 2023
State and municipal securities$0 $0 $114,264 $14,806 $114,264 $14,806 
December 31, 2022
State and municipal securities$0 $0 $111,029 $17,213 $111,029 $17,213 
The total number of securities with unrealized losses as of June 30, 2023 and December 31, 2022 is presented below.
Available-for-saleHeld-to-maturity
Less than
12 months		12 months
or more		TotalLess than
12 months		12 months
or more		Total
June 30, 2023    
U.S. Treasury securities8 1 9 0 0 0 
U.S. government sponsored agencies0 17 17 0 0 0 
Mortgage-backed securities: residential29 102 131 0 0 0 
State and municipal securities56 367 423 0 41 41 
Total temporarily impaired93 487 580 0 41 41 
December 31, 2022
U.S. Treasury securities7 0 7 0 0 0 
U.S. government sponsored agencies1 16 17 0 0 0 
Mortgage-backed securities: residential95 41 136 0 0 0 
State and municipal securities269 223 492 0 41 41 
Total temporarily impaired372 280 652 0 41 41 

10



Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company 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 consolidated income statement. For available-for-sale debt securities that do not meet the above criteria and for held-to-maturity securities, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management 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 and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with 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 for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For available-for-sale debt securities, any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of applicable taxes.
No allowance for credit losses for available-for-sale or held-to-maturity debt securities was recorded at June 30, 2023 or December 31, 2022. Accrued interest receivable on securities totaled $7.9 million and $8.9 million at June 30, 2023 and December 31, 2022, respectively, and is excluded from the estimate of credit losses.
The U.S. government sponsored agencies and mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. State and municipal securities credit losses are benchmarked against highly rated municipal securities of similar duration, as published by Moody's, resulting in an immaterial allowance for credit losses.
11



NOTE 3. LOANS
(dollars in thousands)June 30,
2023		December 31,
2022
Commercial and industrial loans:
Working capital lines of credit loans$618,655 12.7 %$650,948 13.8 %
Non-working capital loans851,232 17.5 842,101 17.9 
Total commercial and industrial loans1,469,887 30.2 1,493,049 31.7 
Commercial real estate and multi-family residential loans:
Construction and land development loans590,860 12.1 517,664 11.0 
Owner occupied loans806,072 16.6 758,091 16.0 
Nonowner occupied loans724,799 14.9 706,107 15.0 
Multifamily loans254,662 5.2 197,232 4.2 
Total commercial real estate and multi-family residential loans2,376,393 48.8 2,179,094 46.2 
Agri-business and agricultural loans:
Loans secured by farmland176,807 3.6 201,200 4.3 
Loans for agricultural production198,155 4.1 230,888 4.9 
Total agri-business and agricultural loans374,962 7.7 432,088 9.2 
Other commercial loans:120,958 2.5 113,593 2.4 
Total commercial loans4,342,200 89.2 4,217,824 89.5 
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans229,078 4.7 212,742 4.5 
Open end and junior lien loans183,738 3.8 175,575 3.7 
Residential construction and land development loans18,569 0.4 19,249 0.4 
Total consumer 1-4 family mortgage loans431,385 8.9 407,566 8.6 
Other consumer loans92,139 1.9 88,075 1.9 
Total consumer loans523,524 10.8 495,641 10.5 
Subtotal4,865,724 100.0 %4,713,465 100.0 %
Less: Allowance for credit losses(72,058)(72,606)
Net deferred loan fees(3,464)(3,069)
Loans, net$4,790,202 $4,637,790 
The recorded investment in loans does not include accrued interest, which totaled $18.5 million and $18.4 million as of June 30, 2023 and December 31, 2022, respectively.
The Company had $471,000 and $306,000 in residential real estate loans in the process of foreclosure as of June 30, 2023 and December 31, 2022, respectively.
NOTE 4. ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.
The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the facts and circumstances
12



of watch list credits, which includes the security position of the borrower, in determining the appropriate level of the credit loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision.
The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for credit losses that generally includes consideration of changes in the nature and volume of the loan portfolio and overall portfolio quality, along with current and forecasted economic conditions that may affect borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. To determine the specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, an appropriate level of general allowance is determined by portfolio segment using a probability of default-loss given default (“PD/LGD”) model, subject to a floor. A default can be triggered by one of several different asset quality factors, including past due status, nonaccrual status, material modification status or if the loan has had a charge-off. This PD is then combined with a LGD derived from historical charge-off data to construct a default rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee’s Summary of Economic Projections, and other environmental factors based on the risks present for each portfolio segment. These environmental factors include consideration of the following: levels of, and trends in, delinquencies and nonperforming loans; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover probable losses inherent in the loan portfolio.
Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate it should be evaluated on an individual basis. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) the sufficiency of the customer’s cash flow or net worth to repay the loan; (b) the adequacy of the discounted value of collateral relative to the loan balance; (c) whether the loan has been criticized in a regulatory examination; (d) whether the loan is nonperforming; (e) any other reasons the ultimate collectability of the loan may be in question; or (f) any unique loan characteristics that require special monitoring.
Allocations are also applied to categories of loans considered not to be individually analyzed, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. These general pooled loan allocations are performed for portfolio segments of commercial and industrial; commercial real estate, multi-family, and construction; agri-business and agricultural; other commercial loans; and consumer 1-4 family mortgage and other consumer loans. General allocations of the allowance are determined by a historical loss rate based on the calculation of each pool’s probability of default-loss given default, subject to a floor. The length of the historical period for each pool is based on the average life of the pool. The historical loss rates are supplemented with consideration of economic conditions and portfolio trends.
Due to the imprecise nature of estimating the allowance for credit losses, the Company’s allowance for credit losses includes an immaterial unallocated component. The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of potential expected losses that may not be fully reflected in other allocations. As a practical expedient, the Company has elected to disclose accrued interest separately from loan principal balances on the consolidated balance sheet. Additionally, when a loan is placed on non-accrual, interest payments are reversed through interest income.
For off balance sheet credit exposures outlined in the ASU at 326-20-30-11, it is the Company’s position that nearly all of the unfunded amounts on lines of credit are unconditionally cancellable, and therefore not subject to having a liability recorded.


13



The following tables present the activity in the allowance for credit losses by portfolio segment for the periods ended:
(dollars in thousands)Commercial and IndustrialCommercial Real Estate and Multifamily ResidentialAgri-business and AgriculturalOther CommercialConsumer 1-4 Family MortgageOther ConsumerUnallocatedTotal
Three Months Ended June 30, 2023                
Beginning balance, April 1$31,190 $29,036 $4,621 $1,034 $3,398 $1,096 $840 $71,215 
Provision for credit losses(272)1,593 (219)86 51 50 (489)800 
Loans charged-off(7)0 0 0 (14)(369)0 (390)
Recoveries67 284 0 0 13 69 0 433 
Net loans (charged-off) recovered60 284 0 0 (1)(300)0 43 
Ending balance$30,978 $30,913 $4,402 $1,120 $3,448 $846 $351 $72,058 
(dollars in thousands)Commercial and IndustrialCommercial Real Estate and Multifamily ResidentialAgri-business and AgriculturalOther CommercialConsumer 1-4 Family MortgageOther ConsumerUnallocatedTotal
Three Months Ended June 30, 2022                
Beginning balance, April 1$31,322 $26,257 $4,761 $1,058 $2,606 $1,040 $482 $67,526 
Provision for credit losses(139)191 (8)(345)34 102 165 0 
Loans charged-off(13)0 0 0 0 (85)0 (98)
Recoveries25 0 0 0 34 36 0 95 
Net loans (charged-off) recovered12 0 0 0 34 (49)0 (3)
Ending balance$31,195 $26,448 $4,753 $713 $2,674 $1,093 $647 $67,523 
(dollars in thousands)Commercial and IndustrialCommercial Real Estate and Multifamily ResidentialAgri-business and AgriculturalOther CommercialConsumer 1-4 Family MortgageOther ConsumerUnallocatedTotal
Six Months Ended June 30, 2023
                
Beginning balance, January 1$35,290 $27,394 $4,429 $917 $3,001 $1,021 $554 $72,606 
Provision for credit losses1,232 3,235 (27)203 445 265 (203)5,150 
Loans charged-off(5,651)0 0 0 (14)(621)0 (6,286)
Recoveries107 284 0 0 16 181 0 588 
Net loans (charged-off) recovered(5,544)284 0 0 2 (440)0 (5,698)
Ending balance$30,978 $30,913 $4,402 $1,120 $3,448 $846 $351 $72,058 
(dollars in thousands)Commercial and IndustrialCommercial Real Estate and Multifamily ResidentialAgri-business and AgriculturalOther CommercialConsumer 1-4 Family MortgageOther ConsumerUnallocatedTotal
Six Months Ended June 30, 2022
                
Beginning balance, January 1$30,595 $26,535 $5,034 $1,146 $2,866 $1,147 $450 $67,773 
Provision for credit losses591 510 (281)(433)(214)47 197 417 
Loans charged-off(32)(597)0 0 (22)(187)0 (838)
Recoveries41 0 0 0 44 86 0 171 
Net loans (charged-off) recovered9 (597)0 0 22 (101)0 (667)
Ending balance$31,195 $26,448 $4,753 $713 $2,674 $1,093 $647 $67,523 
14
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Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.
The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans are considered to be "Pass" rated when they are reviewed as part of the previously described process and do not meet the criteria above, which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with “Not Rated” loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status.
The following table summarizes the risk category of loans by loan segment and origination date as of June 30, 2023:
(dollars in thousands)20232022202120202019PriorTerm TotalRevolvingTotal
Commercial and industrial loans:                  
Working capital lines of credit loans:                  
Pass$231 $2,042 $2,468 $1,366 $0 $0 $6,107 $535,802 $541,909 
Special Mention0 0 0 0 0 0 0 69,844 69,844 
Substandard0 200 75 0 250 0 525 6,448 6,973 
Total231 2,242 2,543 1,366 250 0 6,632 612,094 618,726 
Working capital lines of credit loans:
Current period gross write offs0 0 0 0 0 0 0 115 115 
Non-working capital loans:
Pass106,680 267,890 107,070 73,313 38,285 17,517 610,755 203,682 814,437 
Special Mention0 429 1,356 2,696 2,818 6,333 13,632 5,679 19,311 
Substandard226 4,525 1,120 4,064 11 657 10,603 398 11,001 
Not Rated1,012 2,505 1,179 1,051 268 67 6,082 0 6,082 
Total107,918 275,349 110,725 81,124 41,382 24,574 641,072 209,759 850,831 
Non-working capital loans:
Current period gross write offs0 5,400 0 0 118 0 5,518 18 5,536 
Commercial real estate and multi-family residential loans:
Construction and land development loans:
Pass23,520 15,289 10,218 13,306 179 0 62,512 511,070 573,582 
Special Mention0 0 0 0 0 0 0 14,521 14,521 
Total23,520 15,289 10,218 13,306 179 0 62,512 525,591 588,103 
Construction and land development loans:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Owner occupied loans:
Pass88,769 131,307 161,898 135,249 66,660 136,902 720,785 57,223 778,008 
Special Mention0 702 9,148 0 2,257 11,890 23,997 0 23,997 
Substandard225 279 0 1,483 359 1,161 3,507 0 3,507 
15
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Total88,994 132,288 171,046 136,732 69,276 149,953 748,289 57,223 805,512 
Owner occupied loans:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Nonowner occupied loans:
Pass61,069 165,517 122,798 131,928 89,591 62,994 633,897 79,639 713,536 
Special Mention4,264 0 6,446 0 0 0 10,710 0 10,710 
Total65,333 165,517 129,244 131,928 89,591 62,994 644,607 79,639 724,246 
Nonowner occupied loans:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Multifamily loans:
Pass78,926 38,445 9,134 36,289 33,831 30,441 227,066 7,444 234,510 
Special Mention19,794 0 0 0 0 0 19,794 0 19,794 
Total98,720 38,445 9,134 36,289 33,831 30,441 246,860 7,444 254,304 
Multifamily loans:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Agri-business and agricultural loans:
Loans secured by farmland:
Pass15,727 33,900 26,271 29,075 10,112 23,210 138,295 38,369 176,664 
Special Mention0 0 0 0 12 0 12 0 12 
Substandard0 0 0 0 0 115 115 0 115 
Total15,727 33,900 26,271 29,075 10,124 23,325 138,422 38,369 176,791 
Loans secured by farmland:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Loans for agricultural production:
Pass25,929 8,801 28,747 26,880 4,111 11,513 105,981 91,211 197,192 
Special Mention0 0 211 352 0 0 563 500 1,063 
Total25,929 8,801 28,958 27,232 4,111 11,513 106,544 91,711 198,255 
Loans for agricultural production:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Other commercial loans:
Pass6,213 26,450 39,302 15,524 111 8,059 95,659 21,202 116,861 
Special Mention0 0 0 1,103 0 2,793 3,896 0 3,896 
Total6,213 26,450 39,302 16,627 111 10,852 99,555 21,202 120,757 
Other commercial loans:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans:
Pass5,795 10,782 12,147 10,249 4,647 6,286 49,906 4,607 54,513 
Special Mention0 0 0 535 0 0 535 0 535 
Substandard0 0 96 131 0 263 490 0 490 
Not Rated29,953 53,199 40,652 17,810 4,440 27,166 173,220 0 173,220 
Total35,748 63,981 52,895 28,725 9,087 33,715 224,151 4,607 228,758 
Closed end first mortgage loans:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Open end and junior lien loans:
Pass318 136 516 345 0 26 1,341 8,803 10,144 
Substandard0 0 0 0 28 48 76 133 209 
Not Rated13,104 36,410 10,690 2,105 2,824 2,483 67,616 107,610 175,226 
Total13,422 36,546 11,206 2,450 2,852 2,557 69,033 116,546 185,579 
Open end and junior lien loans:
Current period gross write offs0 0 14 0 0 0 14 0 14 
Residential construction loans:
Not Rated1,041 13,374 1,604 871 276 1,321 18,487 0 18,487 
Total1,041 13,374 1,604 871 276 1,321 18,487 0 18,487 
Residential construction loans:
Current period gross write offs0 0 0 0 0 0 0 0 0 
Other consumer loans:
Pass1,955 827 1,586 383 0 0 4,751 16,589 21,340 
Substandard0 0 0 0 5 0 5 0 5 
Not Rated14,116 20,994 12,049 7,402 2,411 2,762 59,734 10,832 70,566 
Total16,071 21,821 13,635 7,785 2,416 2,762 64,490 27,421 91,911 
Other consumer loans:
16
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Current period gross write offs0 191 91 6 212 1 501 120 621 
Total period gross write offs0 5,591 105 6 330 1 6,033 253 6,286 
Total Loans$498,867 $834,003 $606,781 $513,510 $263,486 $354,007 $3,070,654 $1,791,606 $4,862,260 
As of June 30, 2023, $1.5 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the Small Business Administration ("SBA").
The following table summarizes the risk category of loans by loan segment and origination date as of December 31, 2022:
(dollars in thousands)20222021202020192018PriorTerm TotalRevolvingTotal
Commercial and industrial loans:                  
Working capital lines of credit loans:                  
Pass$2,207 $2,718 $1,601 $0 $0 $0 $6,526 $597,108 $603,634 
Special Mention0 0 0 0 0 0 0 36,410 36,410 
Substandard200 0 0 300 0 0 500 10,495 10,995 
Total2,407 2,718 1,601 300 0 0 7,026 644,013 651,039 
Non-working capital loans:
Pass272,273 124,600 91,850 47,711 9,981 13,670 560,085 240,490 800,575 
Special Mention448 1,620 0 109 159 2,961 5,297 2,153 7,450 
Substandard11,831 872 5,021 194 1,351 3,979 23,248 4,171 27,419 
Not Rated2,891 1,550 1,254 413 120 23 6,251 0 6,251 
Total287,443 128,642 98,125 48,427 11,611 20,633 594,881 246,814 841,695 
Commercial real estate and multi-family residential loans:
Construction and land development loans:
Pass26,889 19,944 14,026 356 0 0 61,215 453,953 515,168 
Total26,889 19,944 14,026 356 0 0 61,215 453,953 515,168 
Owner occupied loans:
Pass113,656 179,014 139,880 97,353 65,519 97,335 692,757 40,533 733,290 
Special Mention2,960 7,608 0 446 1,491 8,054 20,559 0 20,559 
Substandard308 105 1,491 373 1,161 229 3,667 0 3,667 
Total116,924 186,727 141,371 98,172 68,171 105,618 716,983 40,533 757,516 
Nonowner occupied loans:
Pass194,294 125,190 134,661 91,907 15,109 64,874 626,035 68,603 694,638 
Special Mention0 11,024 0 0 0 0 11,024 0 11,024 
Total194,294 136,214 134,661 91,907 15,109 64,874 637,059 68,603 705,662 
Multifamily loans:
Pass38,460 25,741 36,929 35,695 2,046 28,866 167,737 7,349 175,086 
Special Mention21,855 0 0 0 0 0 21,855 0 21,855 
Total60,315 25,741 36,929 35,695 2,046 28,866 189,592 7,349 196,941 
Agri-business and agricultural loans:
Loans secured by farmland:
Pass38,344 28,684 29,741 9,656 8,145 19,638 134,208 63,094 197,302 
Special Mention260 0 1,676 1,780 0 15 3,731 0 3,731 
Substandard0 0 0 0 0 145 145 0 145 
Total38,604 28,684 31,417 11,436 8,145 19,798 138,084 63,094 201,178 
Loans for agricultural production:
Pass6,040 30,262 22,167 3,625 9,248 4,539 75,881 143,599 219,480 
Special Mention947 243 7,262 928 0 0 9,380 2,129 11,509 
Total6,987 30,505 29,429 4,553 9,248 4,539 85,261 145,728 230,989 
Other commercial loans:
Pass27,097 4,815 17,911 147 931 10,985 61,886 48,295 110,181 
Special Mention0 0 0 0 0 3,160 3,160 0 3,160 
Total27,097 4,815 17,911 147 931 14,145 65,046 48,295 113,341 
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans:
Pass8,768 12,809 12,289 4,805 4,045 3,860 46,576 5,634 52,210 
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Special Mention0 0 552 0 0 0 552 0 552 
Substandard0 0 0 0 83 1,944 2,027 0 2,027 
Not Rated57,404 44,331 20,023 5,936 2,970 27,004 157,668 0 157,668 
Total66,172 57,140 32,864 10,741 7,098 32,808 206,823 5,634 212,457 
Open end and junior lien loans:
Pass137 541 357 63 75 0 1,173 5,841 7,014 
Substandard0 0 0 31 49 0 80 111 191 
Not Rated44,472 13,597 3,014 3,616 1,476 2,252 68,427 101,750 170,177 
Total44,609 14,138 3,371 3,710 1,600 2,252 69,680 107,702 177,382 
Residential construction loans:
Not Rated14,463 2,167 897 291 129 1,223 19,170 0 19,170 
Total14,463 2,167 897 291 129 1,223 19,170 0 19,170 
Other consumer loans:
Pass1,344 1,841 432 600 0 948 5,165 16,152 21,317 
Substandard0 0 0 210 0 0 210 0 210 
Not Rated24,395 14,563 9,168 3,606 2,755 1,352 55,839 10,492 66,331 
Total25,739 16,404 9,600 4,416 2,755 2,300 61,214 26,644 87,858 
TOTAL$911,943 $653,839 $552,202 $310,151 $126,843 $297,056 $2,852,034 $1,858,362 $4,710,396 
As of December 31, 2022, $1.5 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA.
Nonaccrual and Past Due Loans:
The Company does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured.
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The following table presents the aging of the amortized cost basis in past due loans as of June 30, 2023 by class of loans and loans past due 90 days or more and still accruing by class of loan:
(dollars in thousands)Loans Not Past Due30-89 Days Past DueGreater than 89 Days Past Due and AccruingTotal AccruingTotal NonaccrualNonaccrual With No Allowance For Credit LossTotal
Commercial and industrial loans:            
Working capital lines of credit loans$612,932 $373 $0 $607,884 $5,421 $75 $618,726 
Non-working capital loans841,990 0 0 833,149 8,841 695 850,831 
Commercial real estate and multi-family residential loans:
Construction and land development loans588,103 0 0 588,103 0 0 588,103 
Owner occupied loans802,589 0 0 799,666 2,923 1,440 805,512 
Nonowner occupied loans724,246 0 0 724,246 0 0 724,246 
Multifamily loans254,304 0 0 254,304 0 0 254,304 
Agri-business and agricultural loans:
Loans secured by farmland176,635 41 0 176,561 115 0 176,791 
Loans for agricultural production198,255 0 0 198,255 0 0 198,255 
Other commercial loans120,757 0 0 120,757 0 0 120,757 
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans227,988 268 8 227,770 494 343 228,758 
Open end and junior lien loans185,060 312 0 185,165 207 207 185,579 
Residential construction loans18,487 0 0 18,487 0 0 18,487 
Other consumer loans91,694 213 0 91,903 4 4 91,911 
Total$4,843,040 $1,207 $8 $4,826,250 $18,005 $2,764 $4,862,260 
As of June 30, 2023 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the three and six month periods ended June 30, 2023.
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The following table presents the aging of the amortized cost basis in past due loans as of December 31, 2022 by class of loans and loans past due 90 days or more and still accruing by class of loan:
(dollars in thousands)Loans Not Past Due30-89 Days Past DueGreater than 89 Days Past Due and AccruingTotal AccruingTotal NonaccrualNonaccrual With No Allowance For Credit LossTotal
Commercial and industrial loans:            
Working capital lines of credit loans$649,529 $68 $0 $649,597 $1,442 $0 $651,039 
Non-working capital loans830,033 39 1 830,073 11,622 727 841,695 
Commercial real estate and multi-family residential loans:
Construction and land development loans515,168 0 0 515,168 0 0 515,168 
Owner occupied loans754,451 0 0 754,451 3,065 1,469 757,516 
Nonowner occupied loans705,662 0 0 705,662 0 0 705,662 
Multifamily loans196,941 0 0 196,941 0 0 196,941 
Agri-business and agricultural loans:
Loans secured by farmland201,033 0 0 201,033 145 0 201,178 
Loans for agricultural production230,989 0 0 230,989 0 0 230,989 
Other commercial loans113,341 0 0 113,341 0 0 113,341 
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans211,736 306 122 212,164 293 225 212,457 
Open end and junior lien loans176,758 436 0 177,194 188 188 177,382 
Residential construction loans19,170 0 0 19,170 0 0 19,170 
Other consumer loans87,333 316 0 87,649 209 6 87,858 
Total$4,692,144 $1,165 $123 $4,693,432 $16,964 $2,615 $4,710,396 
As of December 31, 2022 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the year ended December 31, 2022.
When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.







20



The following tables present the amortized cost basis of collateral dependent loans by class of loan as of:
June 30, 2023
(dollars in thousands)Real EstateGeneral
Business
 Assets		OtherTotal
Commercial and industrial loans:      
Working capital lines of credit loans$50 $5,221 $0 $5,271 
Non-working capital loans474 8,043 229 8,746 
Commercial real estate and multi-family residential loans:
Owner occupied loans638 1,483 1,161 3,282 
Agri-business and agricultural loans:
Loans secured by farmland0 115 0 115 
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans494 0 0 494 
Open end and junior lien loans207 0 0 207 
Other consumer loans0 0 4 4 
Total$1,863 $14,862 $1,394 $18,119 
December 31, 2022
(dollars in thousands)Real EstateGeneral
Business
 Assets		OtherTotal
Commercial and industrial loans:      
Working capital lines of credit loans$50 $5,402 $0 $5,452 
Non-working capital loans544 18,109 229 18,882 
Commercial real estate and multi-family residential loans:
Owner occupied loans413 1,491 1,161 3,065 
Agri-business and agricultural loans:
Loans secured by farmland0 145 0 145 
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans2,030 0 0 2,030 
Open end and junior lien loans188 0 0 188 
Other consumer loans0 0 7 7 
Total$3,225 $25,147 $1,397 $29,769 
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point to determine estimate such credit losses is historical loss information. The Company uses a probability of default/loss given default model to determine the allowance for credit losses recorded at origination. Occasionally, the Company subsequently modifies loans for borrowers experiencing financial distress by providing the following forms of relief: forgiveness of loan principal, extension of repayment terms, or an interest rate reduction, among other possible concessions. In some instances, the Company provides multiple types of concessions for such modifications. Because the effect of most modifications to borrowers experiencing financial difficulty is already included in the allowance for credit losses, no change to the allowance for credit losses is generally recorded for these modifications.




21



The following tables present the amortized cost basis of loans that were experiencing financial difficulty and received a modification of terms during the three and six months ended June 30, 2023, by class and 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 receivables is also presented below:
(dollars in thousands)Combination Principal Forgiveness, Term Extension and Interest Rate ReductionTotal Class of Financing Receivable
Three Months Ended June 30, 2023
Commercial and industrial loans:    
Non-working capital loans$1,600 0.20 %
(dollars in thousands)Combination Principal Forgiveness, Term Extension and Interest Rate ReductionTotal Class of Financing Receivable
Six Months Ended June 30, 2023
Commercial and industrial loans:    
Non-working capital loans$1,600 0.20 %
The Company has no material commitments to lend additional funds to borrowers included in the previous tables.
The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three and six months ended June 30, 2023:
(dollars in thousands)Principal ForgivenessWeighted-Average Interest Rate ReductionWeighted-Average Term ExtensionTotal Class of Financing Receivable
Three Months Ended June 30, 2023
Commercial and industrial loans:    
Non-working capital loans$9,380 
Prime+0.75%
reduced to
1.00% Fixed
260 months0.20 %
(dollars in thousands)Principal ForgivenessWeighted-Average Interest Rate ReductionWeighted-Average Term ExtensionTotal Class of Financing Receivable
Six Months Ended June 30, 2023
Commercial and industrial loans:    
Non-working capital loans$9,380 
Prime+0.75%
reduced to
1.00% Fixed
260 months0.20 %
During the three and six months ended June 30, 2022, no modifications were made to loans for borrowers experiencing financial difficulty.
The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. At June 30, 2023, no loans receiving such a modification within the last twelve months were 30 days or greater past due.
At June 30, 2023, no loans receiving a modification due to borrower financial difficulty within the last twelve months experienced a payment default.
Upon the Company's determination that a modified loan (or portion thereof) has subsequently been deemed uncollectible, the loan (or a portion thereof) is written 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.
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NOTE 5. BORROWINGS
For the period ended June 30, 2023, the Company had an advance outstanding from the Federal Home Loan Bank ("FHLB") in the amount of $400.0 million. The outstanding advance was a fixed rate bullet advance with an interest rate of 5.17% and matured July 13, 2023. For the period ended December 31, 2022, the Company had a fixed rate bullet advance from the FHLB with an interest rate of 4.21% in the amount of $275.0 million that matured on January 5, 2023.
On August 2, 2019 the Company entered into an unsecured revolving credit agreement with another financial institution allowing the Company to borrow up to $30.0 million; this credit agreement was subsequently amended and renewed on July 29, 2023 for $12.5 million. Funds provided under the agreement may be used to repurchase shares of the Company’s common stock under the share repurchase program, which was reauthorized by the Company’s board of directors on April 11, 2023 and expires on April 30, 2025, and for general operations. The credit agreement includes a negative pledge agreement whereby the Company agrees not to pledge or otherwise encumber the stock of the Bank. The credit agreement has a one year term which may be amended, extended, modified or renewed. There were no outstanding borrowings on the credit agreement at June 30, 2023 and December 31, 2022.
NOTE 6. FAIR VALUE DISCLOSURES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3  Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities:  Securities available-for-sale are valued primarily by a third party pricing service. The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).
The Company’s Finance Department, which is responsible for all accounting and SEC disclosure compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are new assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board are made aware of such assets at their next scheduled meeting.
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Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/-5%, government MBS/CMO +/-3% and U.S. treasuries +/-1%. If any securities fall outside the tolerance threshold and have a variance of $100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material changes are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.
Mortgage banking derivative:  The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2).
Interest rate swap derivatives:  Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).
Collateral dependent loans:  Collateral dependent loans with specific allocations of the allowance for credit losses are generally based on the fair value of the underlying collateral when repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of collateral dependent loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 30-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 40-60%, depending on the marketability of the goods (b) finished goods are generally discounted by 40-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 60%-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 20-50% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10%-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.
Mortgage servicing rights:  As of June 30, 2023, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $2.4 million, carried at amortized cost and no valuation reserve. These residential mortgage loans have a weighted average interest rate of 3.5%, a weighted average maturity of 20 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A third-party valuation is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At June 30, 2023, the constant prepayment speed (“PSA”) used was 150 and used a discount rate range of 9.50%-11.50%. At December 31, 2022, the PSA used was 159 and the discount rate used was 9.5%.
24



Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Real estate mortgage loans held-for-sale: Real estate mortgage loans held-for-sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.
The tables below present the balances of assets measured at fair value on a recurring basis:
June 30, 2023
Fair Value Measurements UsingAssets
at Fair Value
(dollars in thousands)Level 1Level 2Level 3
Assets:
U.S. Treasury securities$3,232 $0 $0 $3,232 
U.S. government sponsored agency securities0 122,086 0 122,086 
Mortgage-backed securities: residential0 462,033 0 462,033 
State and municipal securities0 471,701 3,017 474,718 
Total securities available-for-sale3,232 1,055,820 3,017 1,062,069 
Mortgage banking derivative0 68 0 68 
Interest rate swap derivative0 35,660 0 35,660 
Total assets$3,232 $1,091,548 $3,017 $1,097,797 
Liabilities:
Interest rate swap derivative0 35,661 0 35,661 
Total liabilities$0 $35,661 $0 $35,661 
December 31, 2022
Fair Value Measurements UsingAssets
at Fair Value
(dollars in thousands)Level 1Level 2Level 3
Assets:        
U.S. Treasury securities$3,034 $0 $0 $3,034 
U.S. government sponsored agency securities0 126,961 0 126,961 
Mortgage-backed securities: residential0 492,308 0 492,308 
State and municipal securities0 561,150 2,075 563,225 
Total securities available-for-sale3,034 1,180,419 2,075 1,185,528 
Mortgage banking derivative0 43 0 43 
Interest rate swap derivative0 36,920 0 36,920 
Total assets$3,034 $1,217,382 $2,075 $1,222,491 
Liabilities:
Interest rate swap derivative0 36,921 0 36,921 
Total liabilities$0 $36,921 $0 $36,921 
The fair value of Level 3 available-for-sale securities was immaterial and thus did not require additional recurring fair value disclosure.


25



The tables below present the balances of assets measured at fair value on a nonrecurring basis:
June 30, 2023
Fair Value Measurements UsingAssets
at Fair Value
(dollars in thousands)Level 1Level 2Level 3
Assets
Collateral dependent loans:
Commercial and industrial loans:
Working capital lines of credit loans$0 $0 $2,644 $2,644 
Non-working capital loans0 0 3,139 3,139 
Commercial real estate and multi-family residential loans:
Owner occupied loans0 0 326 326 
Agri-business and agricultural loans:
Loans secured by farmland0 0 25 25 
Total collateral dependent loans0 0 6,134 6,134 
Other real estate owned0 0 384 384 
Total assets$0 $0 $6,518 $6,518 
December 31, 2022
Fair Value Measurements UsingAssets
at Fair Value
(dollars in thousands)Level 1Level 2Level 3
Assets        
Collateral dependent loans:        
Commercial and industrial loans:        
Working capital lines of credit loans$0 $0 $3,178 $3,178 
Non-working capital loans0 0 8,354 8,354 
Commercial real estate and multi-family residential loans:
Owner occupied loans0 0 425 425 
Agri-business and agricultural loans:
Loans secured by farmland0 0 35 35 
Total collateral dependent loans0 0 11,992 11,992 
Other real estate owned0 0 100 100 
Total assets$0 $0 $12,092 $12,092 
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at June 30, 2023:
(dollars in thousands)Fair ValueValuation MethodologyUnobservable InputsAverageRange of Inputs
Collateral dependent loans:          
Commercial and industrial$5,783 Collateral based measurementsDiscount to reflect current market conditions and ultimate collectability62 %
25%-99%
Collateral dependent loans:    
Commercial real estate and multi-family residential loans326 Collateral based measurementsDiscount to reflect current market conditions and ultimate collectability78 %
Collateral dependent loans:
Agri-business and agricultural25 Collateral based measurementsDiscount to reflect current market conditions and ultimate collectability78 %
Other real estate owned384 AppraisalsDiscount to reflect current market conditions and ultimate collectability36 %
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The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2022:
(dollars in thousands)Fair ValueValuation MethodologyUnobservable InputsAverageRange of Inputs
Collateral dependent loans:          
Commercial and industrial$11,532 Collateral based measurementsDiscount to reflect current market conditions and ultimate collectability62 %
29%-99%
Collateral dependent loans:    
Commercial real estate and multi-family residential loans425 Collateral based measurementsDiscount to reflect current market conditions and ultimate collectability57 %
37%-76%
Collateral dependent loans:    
Agri-business and agricultural35 Collateral based measurementsDiscount to reflect current market conditions and ultimate collectability76 %
Other real estate owned100 AppraisalsDiscount to reflect current market conditions and ultimate collectability68 %
The following tables contain the estimated fair values and the related carrying values of the Company’s financial instruments. Items that are not financial instruments are not included.
June 30, 2023
Carrying
Value		Estimated Fair Value
(dollars in thousands)Level 1Level 2Level 3Total
Financial Assets:          
Cash and cash equivalents$173,137 $172,892 $245 $0 $173,137 
Securities available-for-sale1,062,069 3,232 1,055,820 3,017 1,062,069 
Securities held-to-maturity129,070 0 114,264 0 114,264 
Real estate mortgages held-for-sale1,298 0 1,342 0 1,342 
Loans, net4,790,202 0 0 4,606,769 4,606,769 
Mortgage banking derivative68 0 68 0 68 
Interest rate swap derivative35,660 0 35,660 0 35,660 
Federal Reserve and Federal Home Loan Bank Stock21,420 N/AN/AN/AN/A
Accrued interest receivable27,398 0 8,859 18,539 27,398 
Financial Liabilities:
Certificates of deposit822,797 0 824,292 0 824,292 
All other deposits4,600,262 4,600,262 0 0 4,600,262 
Federal Home Loan Bank advances400,000 400,003 0 0 400,003 
Interest rate swap derivative35,661 0 35,661 0 35,661 
Standby letters of credit133 0 0 133 133 
Accrued interest payable9,833 441 9,392 0 9,833 
27



December 31, 2022
Carrying
Value		Estimated Fair Value
(dollars in thousands)Level 1Level 2Level 3Total
Financial Assets:          
Cash and cash equivalents$130,282 $129,069 $1,213 $0 $130,282 
Securities available-for-sale1,185,528 3,034 1,180,419 2,075 1,185,528 
Securities held-to-maturity128,242 0 111,029 0 111,029 
Real estate mortgages held-for-sale357 0 372 0 372 
Loans, net4,637,790 0 0 4,454,678 4,454,678 
Mortgage banking derivative43 0 43 0 43 
Interest rate swap derivative36,920 0 36,920 0 36,920 
Federal Reserve and Federal Home Loan Bank Stock15,795 N/AN/AN/AN/A
Accrued interest receivable27,994 0 9,598 18,396 27,994 
Financial Liabilities:
Certificates of deposit626,186 0 621,206 0 621,206 
All other deposits4,834,434 4,834,434 0 0 4,834,434 
Federal Funds purchased22,000 22,000 0 0 22,000 
Federal Home Loan Bank advances275,000 275,000 0 0 275,000 
Interest rate swap derivative36,921 0 36,921 0 36,921 
Standby letters of credit249 0 0 249 249 
Accrued interest payable3,186 486 2,700 0 3,186 
NOTE 7. OFFSETTING ASSETS AND LIABILITIES
The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at June 30, 2023 and December 31, 2022.
June 30, 2023
Gross Amounts of Recognized Assets/LiabilitiesGross Amounts Offset in the Statement of Financial PositionNet Amounts presented in the Statement of Financial PositionGross Amounts Not Offset in the Statement of Financial PositionNet Amount
(dollars in thousands)Financial InstrumentsCash Collateral Position
Assets            
Interest Rate Swap Derivatives$35,660 $0 $35,660 $0 $(27,965)$7,695 
Total Assets$35,660 $0 $35,660 $0 $(27,965)$7,695 
Liabilities
Interest Rate Swap Derivatives$35,661 $0 $35,661 $0 $(90)$35,571 
Total Liabilities$35,661 $0 $35,661 $0 $(90)$35,571 
28



December 31, 2022
Gross Amounts of Recognized Assets/LiabilitiesGross Amounts Offset in the Statement of Financial PositionNet Amounts presented in the Statement of Financial PositionGross Amounts Not Offset in the Statement of Financial PositionNet Amount
(dollars in thousands)Financial InstrumentsCash Collateral Position
Assets
Interest Rate Swap Derivatives$36,920 $0 $36,920 $0 $(34,185)$2,735 
Total Assets$36,920 $0 $36,920 $0 $(34,185)$2,735 
Liabilities
Interest Rate Swap Derivatives$36,921 $0 $36,921 $0 $(90)$36,831 
Total Liabilities$36,921 $0 $36,921 $0 $(90)$36,831 
If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.
NOTE 8. EARNINGS PER SHARE
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period, which includes shares held in treasury on behalf of participants in the Company’s Directors Fee Deferral Plan, and share repurchases. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based awards and warrants, none of which were antidilutive.
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Weighted average shares outstanding for basic earnings per common share25,607,663 25,527,896 25,595,412 25,521,618 
Dilutive effect of stock based awards78,691 169,681 100,958 178,290 
Weighted average shares outstanding for diluted earnings per common share25,686,354 25,697,577 25,696,370 25,699,908 
Basic earnings per common share$0.57 $1.00 $1.52 $1.93 
Diluted earnings per common share$0.57 $1.00 $1.51 $1.92 
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the three months ended June 30, 2023 and 2022, all shown net of tax:
(dollars in thousands)Unrealized Gains and Losses on Available-
for-Sales Securities		Defined Benefit Pension ItemsTotal
Balance at April 1, 2023
$(166,612)$(758)$(167,370)
Other comprehensive income (loss) before reclassification(10,674)0 (10,674)
Amounts reclassified from accumulated other comprehensive income (loss)388 11 399 
Net current period other comprehensive income (loss)(10,286)11 (10,275)
Balance at June 30, 2023$(176,898)$(747)$(177,645)

29



(dollars in thousands)Unrealized Gains and Losses on Available-
for-Sales Securities		Defined Benefit Pension ItemsTotal
Balance at April 1, 2022
$(92,751)$(936)$(93,687)
Other comprehensive income (loss) before reclassification(65,179)0 (65,179)
Amounts reclassified from accumulated other comprehensive income (loss)305 27 332 
Net current period other comprehensive income (loss)(64,874)27 (64,847)
Balance at June 30, 2022$(157,625)$(909)$(158,534)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, all shown net of tax:
(dollars in thousands)Unrealized Gains and Losses on Available-
for-Sales Securities		Defined Benefit Pension ItemsTotal
Balance at January 1, 2023$(188,154)$(769)$(188,923)
Other comprehensive income (loss) before reclassification10,493 0 10,493 
Amounts reclassified from accumulated other comprehensive income (loss)763 22 785 
Net current period other comprehensive income (loss)11,256 22 11,278 
Balance at June 30, 2023
$(176,898)$(747)$(177,645)
(dollars in thousands)Unrealized Gains and Losses on Available-
for-Sales Securities		Defined Benefit Pension ItemsTotal
Balance at January 1, 2022$17,056 $(963)$16,093 
Other comprehensive income (loss) before reclassification(174,986)0 (174,986)
Amounts reclassified from accumulated other comprehensive income (loss)305 54 359 
Net current period other comprehensive income (loss)(174,681)54 (174,627)
Balance at June 30, 2022
$(157,625)$(909)$(158,534)
Reclassifications out of other accumulated other comprehensive income (loss) for the three months ended June 30, 2023 are as follows:
Details about
Accumulated Other
Comprehensive
Income (Loss) Components		 Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)		Affected Line Item
in the Statement Where Net Income is Presented
(dollars in thousands)
Amortization of unrealized losses on held-to-maturity securities$(494)Interest income
Realized gains and (losses) on available-for-sale securities3 Net securities gains
Tax effect103 Income tax expense
(388)Net of tax
Amortization of defined benefit pension items(15)Other expense
Tax effect4 Income tax expense
(11)Net of tax
Total reclassifications for the period$(399)Net income

30



Reclassifications out of other accumulated comprehensive income (loss) for the three months ended June 30, 2022 are as follows:
Details about
Accumulated Other
Comprehensive
Income (Loss) Components		Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)		Affected Line Item
in the Statement Where Net Income is Presented
(dollars in thousands)
Amortization of unrealized losses on held-to-maturity securities$(386)Interest income
Tax effect81 Income tax expense
(305)Net of tax
Amortization of defined benefit pension items(36)Other expense
Tax effect9 Income tax expense
(27)Net of tax
Total reclassifications for the period$(332)Net income
Reclassifications out of accumulated comprehensive loss for the six months ended June 30, 2023 are as follows:
Details about
Accumulated Other
Comprehensive
Income (Loss) Components		Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)		Affected Line Item
in the Statement Where Net Income is Presented
(dollars in thousands)
Amortization of unrealized losses on held-to-maturity securities$(985)Interest income
Realized gains and (losses) on available-for-sale securities19 Net securities gains
Tax effect203 Income tax expense
(763)Net of tax
Amortization of defined benefit pension items(30)Other expense
Tax effect8 Income tax expense
(22)Net of tax
Total reclassifications for the period$(785)Net income
Reclassifications out of accumulated other comprehensive income (loss) for the six months ended June 30, 2022 are as follows:
Details about
Accumulated Other
Comprehensive
Income (Loss) Components		Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)		Affected Line Item
in the Statement Where Net Income is Presented
(dollars in thousands)
Amortization of unrealized losses on held-to-maturity securities$(386)Interest income
Tax effect81 Income tax expense
(305)Net of tax
Amortization of defined benefit pension items(72)Other expense
Tax effect18 Income tax expense
(54)Net of tax
Total reclassifications for the period$(359)Net income
31



NOTE 10. LEASES
The Company leases certain office facilities under long-term operating lease agreements. The leases expire at various dates through 2037 and some include renewal options. Many of these leases require the payment of property taxes, insurance premiums, maintenance, utilities and other costs. In many cases, rentals are subject to increase in relation to a cost-of-living index. The Company accounts for lease and non-lease components together as a single lease component. The Company determines if an arrangement is a lease at inception. Operating leases are recorded as a right-of-use ("ROU") lease assets and are included in other assets on the consolidated balance sheet. The Company's corresponding lease obligations are included in other liabilities on the consolidated balance sheet. ROU lease assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as a practical expedient of the standard.
The following is a maturity analysis of the operating lease liabilities as of June 30, 2023:
Years ending December 31, (in thousands)Operating Lease Obligation
2023$365 
2024744 
2025756 
2026730 
2027753 
2028 and thereafter
2,185 
Total undiscounted lease payments5,533 
Less imputed interest(534)
Lease liability$4,999 
Right-of-use asset$4,999 
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2023202220232022
Lease cost    
Operating lease cost$300 $163 $478 $333 
Short-term lease cost4 8 8 14 
Total lease cost$304 $171 $486 $347 
Other information
Operating cash outflows from operating leases$300 $163 $478 $333 
Weighted-average remaining lease term - operating leases6.8 years8.5 years6.8 years8.5 years
Weighted average discount rate - operating leases2.5 %2.5 %2.5 %2.5 %
32



NOTE 11. LOSS CONTINGENCIES

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

The Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al., which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and agreed to stay prosecution of the action through August 31, 2022. The original complaint focused on a series of business transactions among the client, related entities and the Bank, which the liquidating trustee alleged are voidable under applicable federal bankruptcy and state law. The complaint also addressed treatment of the Bank's claims filed in the bankruptcy cases.

On August 31, 2022, the trustee filed his amended complaint against the former client, the Bank, the Company, four officers of the Bank and one independent director of the Bank. The amended complaint alleged that the former client engaged in a check kiting scheme involving multiple banks. The amended complaint alleged that a series of business transactions among the client, his related entities and the Bank are voidable under applicable bankruptcy and state laws. The amended complaint also alleged that the Bank, the Company and the five individual bank representatives who are named as defendants violated various federal and state laws in assisting the former client in his check kiting scheme. On October 26, 2022, the trustee filed his second amended complaint which was virtually identical to his amended complaint. On January 5, 2023, the Bank, the Company and the five individual bank representatives filed motions to dismiss the second amended complaint. On May 30, 2023, the court issued its decision granting the defendants’ motion to dismiss in part and denying it in part. The court dismissed all claims against the Company and the Bank’s independent director. The court dismissed several of the claims against the defendants but granted the trustee the right to file an amended complaint. On June 20, 2023, the trustee filed his third amended complaint. The trustee alleges many of the same claims that were alleged in his second amended complaint. The defendants will file a motion to dismiss the third amended complaint on July 25, 2023. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank, and the four individual Bank representatives who are named as defendants in the third amended complaint intend to vigorously defend themselves against all allegations asserted in the third amended complaint.

33



ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income in the first six months of 2023 was $38.9 million, which decreased $10.4 million, or 21.1%, from $49.3 million for the comparable period of 2022. Diluted income per common share was $1.51 in the first six months of 2023, a decrease of 21.4% from $1.92 in the comparable period of 2022. The decrease in net income for 2023 was primarily due to an increase in noninterest expense of $17.3 million, or 31.5%, and an increase in provision for credit losses expense of $4.7 million. Offsetting these items was an increase to net interest income of $6.5 million, or 6.9%, and an increase to noninterest income of $636,000, or 3.0%. Pretax pre-provision earnings in the first six months of 2023 were $49.7 million, a decrease of $10.2 million, or 17.0%, compared to $59.9 million for the comparable period of 2022. Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense.
Annualized return on average total equity was 13.18% in the first six months of 2023 versus 15.72% in the comparable period of 2022. Annualized return on average total assets was 1.22% in the first six months of 2023 versus 1.52% for the comparable period of 2022. The Company's average equity to average assets ratio was 9.26% in the first six months of 2023 versus 9.65% in the comparable period of 2022. Equity has been negatively impacted by unrealized losses from the available-for-sale investment securities portfolio, which are reported as a component of accumulated other comprehensive income (loss).
Net income in second quarter of 2023 was $14.6 million, down 43.1% from $25.7 million for the comparable period of 2022. Diluted earnings per common share was $0.57 in the second quarter of 2023, down 43.0% from $1.00 in the comparable period of 2022. The decrease was driven primarily by an increase in noninterest expense of $14.8 million, or 53.1%, partially offset by an increase in noninterest income of $1.0 million, or 9.6%. Pretax pre-provision earnings in the second quarter of 2023 were $17.3 million, a decrease of $14.0 million, or 44.7%, compared to $31.3 million for the comparable period of 2022.
Annualized return on average total equity was 9.70% in the second quarter of 2023 versus 17.65% in the comparable period of 2022. Annualized return on average total assets was 0.91% in the second quarter of 2023 versus 1.59% in the comparable period of 2022. The average equity to average assets ratio was 9.39% in the second quarter of 2023 versus 9.03% the comparable period of 2022.

On June 30, 2023, the Company discovered that it had been the victim of international wire fraud resulting in an estimated loss of $18.1 million, which is net of estimated insurance coverage of $4.1 million. The loss net of tax amounts to $13.6 million, or $0.53 diluted earnings per share for the three and six month periods ended June 30, 2023.
As a result, the Company’s core operational profitability, which is a non‐GAAP measure that excludes the estimated
effect of this one‐time loss, was $26.8 million for the quarter ended June 30, 2023, compared to $25.7 million for the three months ended June 30, 2022 and $24.3 million for the linked quarter ended March 31, 2023. Core profitability improved 10% on a linked quarter basis and 4% on an annual basis. The fraudulent wire activity resulted from a highly sophisticated business email compromise directed by a foreign threat actor that targeted a specific general ledger account at the Bank. To facilitate the fraud, the threat actor compromised a single employee email account outside the Company's network and used a forged wire transfer form.

A third‐party forensic investigation determined that no client accounts were threatened by this activity, nor was
there any attempt to access any client information or funds. Additionally, the investigation concluded that the Company's network was never penetrated and that the foreign threat actor made no attempt to penetrate the network.

On June 30, 2023, the Company notified its insurance carriers about the fraudulent wire activity and engaged a
forensic technology investigation firm to conduct a thorough investigation. The Company also notified the United
States Secret Service, the FBI and the Financial Crimes Enforcement Network, or FinCEN. In addition, the Company
has communicated actively with its primary regulators.

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 9.04% at June 30, 2023, compared to 8.92% at June 30, 2022 and 8.79% at December 31, 2022. Tangible equity and tangible assets have been impacted by declines in the market value of the Company’s available-for-sale investment securities portfolio as a result of the rising interest rate environment. These declines have generated unrealized losses in the available-for-sale investment securities portfolio which are reflected in the Company’s reported accumulated other comprehensive income (loss). Unrealized losses from available-for-sale investment securities were $202.0 million at June 30, 2023, compared to $175.6 million at June 30, 2022 and $215.3 million at December 31, 2022. When excluding the impact of investment securities market
34



value adjustments on tangible common equity and tangible assets, the Company's adjusted tangible common equity to adjusted tangible assets ratio, which is a non-GAAP financial measure, was 11.37% at June 30, 2023, compared to 11.08% at June 30, 2022 and 11.30% at December 31, 2022.
Total assets were $6.510 billion as of June 30, 2023 versus $6.432 billion as of December 31, 2022, an increase of $77.2 million, or 1.2%. Balance sheet expansion was driven primarily by loan portfolio growth. Total loans, net of the allowance for credit losses, increased $152.4 million, or 3.3%, between June 30, 2023 and December 31, 2022. Contributing further to the increase in total assets was an increase in cash and cash equivalents of $42.9 million, or 32.9%. Offsetting these increases was a decrease in available-for-sale securities of $123.5 million, or 10.4%. To fund the balance sheet expansion, total borrowings increased $103.0 million, or 34.7%, and was offset by a decrease in total deposits of $37.6 million, or less than 1%. The deposit mix saw a shift from noninterest bearing deposits, which decreased $298.7 million, or 17.2%, to interest bearing deposits which increased $261.2 million, or 7.0%. Total equity increased $23.1 million, or 4.1%, from $568.9 million at December 31, 2022 to $592.0 million at June 30, 2023. Retained earnings increased $15.3 million, or 2.4%, as a result of net income of $38.9 million, offset by dividends declared and paid of $23.5 million. Accumulated other comprehensive income (loss), increased $11.3 million, or 6.0%, due primarily to an improvement in available-for-sale securities fair market values during the six months ended June 30, 2023.
CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for credit losses. See “Note 4 – Allowance for Credit Losses and Credit Quality” for more information on this critical accounting policy.
RESULTS OF OPERATIONS
Overview
Selected income statement information for the three and six months ended June 30, 2023 and 2022 is presented in the following table:
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2023202220232022
Income Statement Summary:
Net interest income$48,524 48,678 $100,043 $93,558 
Provision for credit losses800 0 5,150 417 
Noninterest income11,501 10,492 21,815 21,179 
Noninterest expense42,734 27,913 72,168 54,882 
Other Data:
Efficiency ratio (1)71.19 %47.17 %59.22 %47.83 %
Diluted EPS$0.57 $1.00 $1.51 $1.92 
Average Equity/Average Assets9.39 %9.03 %9.26 %9.65 %
Tangible capital ratio (2)9.04 8.92 9.04 8.92 
Adjusted tangible capital ratio (3)11.37 11.08 11.37 11.08 
Net charge-offs to average loans0.00 0.00 0.24 0.03 
Net interest margin3.28 3.26 3.41 3.09 
Noninterest income to total revenue19.16 17.73 17.90 18.46 
Pretax pre-provision earnings (4)$17,291 $31,257 $49,690 $59,855 

35




(1)Noninterest expense/net interest income plus noninterest income.
(2)Non-GAAP financial measure. The Company believes that disclosing non-GAAP financial measures provides investors with information useful to understanding the Company’s financial performance. Additionally, these non-GAAP measures are used by management for planning and forecasting purposes, including measures based on “tangible common equity,” which is “total equity” excluding intangible assets, net of deferred tax, and “tangible assets,” which is “total assets” excluding intangible assets, net of deferred tax. The tangible capital ratio is calculated by excluding the balance of goodwill, net of deferred taxes. See reconciliation on the next page.
(3)Non-GAAP financial measure. Calculated by removing the fair market value adjustment impact of the investment securities portfolio from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to prior periods. See reconciliation on the next page.
(4)Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period. See reconciliation below.

Reconciliations of non-GAAP measures are provided below (in thousands, except for per share data).
As of and For TheAs of and For The
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2023202220232022
Total Equity$591,995 $562,063 $591,995 $562,063 
Less: Goodwill(4,970)(4,970)(4,970)(4,970)
Plus: Deferred Tax Assets Related to Goodwill1,167 1,167 1,167 1,167 
Tangible Common Equity (A)588,192 558,260 588,192 558,260 
AOCI Market Value Adjustment176,898 157,625 176,898 157,625 
Adjusted Tangible Common Equity (C)765,090 715,885 765,090 715,885 
Total Assets$6,509,546 $6,265,087 $6,509,546 $6,265,087 
Less: Goodwill(4,970)(4,970)(4,970)(4,970)
Plus: Deferred Tax Assets Related to Goodwill1,167 1,167 1,167 1,167 
Tangible Assets (B)6,505,743 6,261,284 6,505,743 6,261,284 
Securities Market Value Adjustment223,922 199,525 223,922 199,525 
Adjusted Tangible Assets (D)6,729,665 6,460,809 6,729,665 6,460,809 
Ending Common Shares Issued (E)25,607,663 25,527,896 25,607,663 25,527,896 
Tangible Book Value per Common Share (A/E)$22.97 $21.87 $22.97 $21.87 
Tangible Capital Ratio (A/B)9.04 %8.92 %9.04 %8.92 %
Adjusted Tangible Capital Ratio (C/D)11.37 11.08 11.37 11.08 
Net Interest Income$48,524 $48,678 100,043 93,558 
Noninterest Income11,501 10,492 21,815 21,179 
Noninterest Expense(42,734)(27,913)(72,168)(54,882)
Pretax Pre-Provision Earnings$17,291 $31,257 $49,690 $59,855 
36



Three Months EndedSix Months Ended
Jun. 30, 2023Jun. 30, 2023
Noninterest Expense$42,734 $72,168 
Less: Wire Fraud Loss(18,058)(18,058)
Plus: Salaries and Employee Benefits (5)1,850 1,850 
Adjusted Core Noninterest Expense$26,526 $55,960 
Earnings Before Income Taxes$16,491 $44,540 
Adjusted Core Noninterest Expense Impact16,208 16,208 
Adjusted Earnings Before Income Taxes32,699 60,748 
Tax Effect(5,873)(9,644)
Core Operational Profitability$26,826 $51,104 
Core Operational Diluted Earnings Per Common Share$1.05 $1.99 
Adjusted Core Efficiency Ratio44.19 %45.92 %
(5)     Long-term, incentive-based compensation accruals were reduced as a result of the wire fraud loss.

Adjusted core noninterest expense, adjusted earnings before income taxes, core operational profitability, core operational diluted earnings per common share and adjusted core efficiency ratio are non‐GAAP financial measures calculated using GAAP amounts. These adjusted amounts are calculated by excluding the impact of the wire fraud loss and corresponding reduction to salaries and employee benefits for the three‐ and six‐month periods ended June 30, 2023. Management considers these measures of financial performance to be meaningful to understanding the company’s core business performance for these periods.
Net Income
Net income was $38.9 million in the first six months of 2023, which decreased $10.4 million, or 21.1%, from $49.3 million for the comparable period of 2022. The decrease in net income for the first six months of 2023 was primarily due to an increase in noninterest expense of $17.3 million, or 31.5%, and an increase in provision for credit losses expense of $4.7 million. Offsetting these items was an increase to net interest income of $6.5 million, or 6.9%, and an increase to noninterest income of $636,000, or 3.0%.
Net income in second quarter of 2023 was $14.6 million, down 43.1% from $25.7 million for the comparable period of 2022. Diluted earnings per common share was $0.57 in the second quarter of 2023, down 43.0% from $1.00 in the comparable period of 2022. The decrease was driven primarily by an increase in noninterest expense of $14.8 million, or 53.1%, partially offset by an increase in noninterest income of $1.0 million, or 9.6%.
On June 30, 2023, the Company discovered that it had been the victim of international wire fraud resulting in an estimated loss of $18.1 million. The loss net of tax amounts to $13.6 million, or $0.53 diluted earnings per share for the three and six month periods ended June 30, 2023.
As a result, the Company’s core operational profitability, which is a non‐GAAP measure that excludes the estimated
effect of this one‐time loss, was $26.8 million for the quarter ended June 30, 2023, compared to $25.7 million for the three months ended June 30, 2022 and $24.3 million for the linked quarter ended March 31, 2023. Core profitability improved 10% on a linked quarter basis and 4% on an annual basis. The fraudulent wire activity resulted from a highly sophisticated business email compromise directed by a foreign threat actor that targeted a specific general ledger account at the bank. To facilitate the fraud, the threat actor compromised a single employee email account outside the company's network and used a forged wire transfer form.


37




Net Interest Income
The following tables set forth consolidated information regarding average balances and rates:
Six Months Ended June 30,
20232022
(fully tax equivalent basis, dollars in thousands)Average BalanceInterest Yield (1)/
Rate		Average BalanceInterest Yield (1)/
Rate
Earning Assets            
Loans:          
Taxable (2)(3)$4,704,075 $144,589 6.20 %$4,337,938 $83,873 3.90 %
Tax exempt (1)57,709 2,322 8.11 25,726 566 4.44 
Investments:
Securities (1)1,230,421 17,476 2.86 1,494,979 19,157 2.58 
Short-term investments2,275 48 4.25 2,223 3 0.27 
Interest bearing deposits87,529 1,951 4.49 413,048 726 0.35 
Total earning assets$6,082,009 $166,386 5.52 %$6,273,914 $104,325 3.35 %
Less: Allowance for credit losses(72,366)(67,787)
Nonearning Assets
Cash and due from banks72,797 73,037 
Premises and equipment58,657 59,143 
Other nonearning assets281,465 217,581 
Total assets$6,422,562 $6,555,888 
Interest Bearing Liabilities
Savings deposits$376,281 $137 0.07 %$416,755 $156 0.08 %
Interest bearing checking accounts2,844,181 48,627 3.45 2,676,528 5,646 0.43 
Time deposits:
In denominations under $100,000189,734 1,789 1.90 193,873 653 0.68 
In denominations over $100,000553,472 7,976 2.91 617,824 1,516 0.49 
Miscellaneous short-term borrowings213,990 5,130 4.83 13 0 0.00 
Long-term borrowings and subordinated debentures0 0 0.00 64,641 127 0.40 
Total interest bearing liabilities$4,177,658 $63,659 3.07 %$3,969,634 $8,098 0.41 %
Noninterest Bearing Liabilities
Demand deposits1,555,877 1,895,333 
Other liabilities94,175 58,188 
Stockholders' Equity594,852 632,733 
Total liabilities and stockholders' equity$6,422,562 $6,555,888 
Interest Margin Recap
Interest income/average earning assets166,386 5.52 %104,325 3.35 %
Interest expense/average earning assets63,659 2.11 8,098 0.26 
Net interest income and margin$102,727 3.41 %$96,227 3.09 %
(1)Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $2.7 million for both the six-month periods ended June 30, 2023 and June 30, 2022.
(2)Loan fees, which are immaterial in relation to total taxable loan interest income for the six months ended June 30, 2023 and 2022, are included as taxable loan interest income.
(3)Nonaccrual loans are included in the average balance of taxable loans.
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Three Months Ended June 30,
20232022
(fully tax equivalent basis, dollars in thousands)Average BalanceInterest Yield (1)/
Rate		Average BalanceInterest Yield (1)/
Rate
Earning Assets            
Loans:          
Taxable (2)(3)$4,739,885 $75,047 6.35 %$4,396,333 $44,138 4.03 %
Tax exempt (1)57,857 1,198 8.31 29,380 353 4.82 
Investments:
Securities (1)1,210,870 8,520 2.82 1,476,144 10,049 2.73 
Short-term investments2,308 26 4.52 2,301 2 0.35 
Interest bearing deposits85,364 1,009 4.74 252,893 481 0.76 
Total earning assets$6,096,284 $85,800 5.65 %$6,157,051 $55,023 3.58 %
Less: Allowance for credit losses(71,477)(67,527)
Nonearning Assets
Cash and due from banks69,057 74,158 
Premises and equipment58,992 58,978 
Other nonearning assets280,073 238,228 
Total assets$6,432,929 $6,460,888 
Interest Bearing Liabilities
Savings deposits$360,173 $65 0.07 %$425,102 $81 0.08 %
Interest bearing checking accounts2,930,285 27,226 3.73 2,710,674 3,784 0.56 
Time deposits:
In denominations under $100,000198,864 1,147 2.31 189,538 307 0.65 
In denominations over $100,000611,427 5,173 3.39 601,877 718 0.48 
Miscellaneous short-term borrowings186,418 2,347 5.05 0 0 0.00 
Long-term borrowings and subordinated debentures0 0 0.00 54,396 54 0.40 
Total interest bearing liabilities$4,287,167 $35,958 3.36 %$3,981,587 $4,944 0.50 %
Noninterest Bearing Liabilities
Demand deposits1,450,396 1,825,327 
Other liabilities91,367 70,650 
Stockholders' Equity603,999 583,324 
Total liabilities and stockholders' equity$6,432,929 $6,460,888 
Interest Margin Recap
Interest income/average earning assets85,800 5.65 %55,023 3.58 %
Interest expense/average earning assets35,958 2.37 4,944 0.32 
Net interest income and margin$49,842 3.28 %$50,079 3.26 %
(1)Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.3 million and $1.4 million in the three-month periods ended June 30, 2023 and June 30, 2022, respectively.
(2)Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended June 30, 2023 and 2022, are included as taxable loan interest income.
(3)Nonaccrual loans are included in the average balance of taxable loans.
Net interest income, on a fully tax equivalent basis, increased $6.5 million, or 6.8%, to $102.7 million for the six months ended June 30, 2023, compared to $96.2 million for the first six months of 2022. Growth in average loans and an improvement in earning assets yields were the primary drivers behind the $62.1 million, or 59.5%. increase in tax equivalent interest income between the two periods. Offsetting these increases was a decrease in the average balance of investment securities. Interest expense, which partially offset the positive impact of the increase to tax equivalent interest income, increased by $55.6 million, or 686.1%. and was driven by increased funding costs from increased average interest bearing liabilities and decreased average noninterest bearing liabilities.
    
39



Total average earning assets were $6.082 billion for the six months ended June 30, 2023, a decrease of $191.9 million, or 3.1%, compared to $6.274 billion for the six months ended June 30, 2022. A decrease to average investment securities of $264.6 million, or 17.7%, from $1.495 billion for the six months ended June 30, 2022 to $1.230 billion for the six months ended June 30, 2023, and a decrease to interest bearing deposits of $325.5 million, or 78.8%, from $413.0 million for the six months ended June 30, 2022 to $87.5 million for the six months ended June 30, 2023, drove the contraction in average earning assets between the two periods. Offsetting these decreases was an increase in average loans outstanding, which increased $398.1 million, or 9.1%, to $4.762 billion during the six months ended June 30, 2023, compared to $4.364 billion during the same period of 2022. Total average interest bearing liabilities were $4.178 billion for the six months ended June 30, 2023, an increase of $208.0 million, or 5.2%, from $3.970 billion for the six months ended June 30, 2022. This increase was driven by increased interest bearing deposits of $58.7 million, or 1.5%, from $3.905 billion for the six months ended June 30, 2022 to $3.964 billion for the six months ended June 30, 2023, and an increase in total average borrowings of $149.3 million, or 231.0%, from $64.6 million for the six months ended June 30, 2022 to $214.0 million for the six month ended June 30, 2023. Noninterest bearing demand deposits decreased $339.5 million, or 17.9%, from $1.895 billion for the six months ended June 30, 2022 to $1.556 billion for the six months ended June 30, 2023.

The tax equivalent net interest margin was 3.41% for the six months ended June 30, 2023, compared to 3.09% during the first six months of 2022, representing a 32 basis point, or 10.4%, expansion between the two periods. The net interest margin expansion was driven by a 500 basis point increase to the target Federal Funds rate implemented by the Federal Reserve through a series of rate increases beginning in March of 2022. The target Federal Funds rate increased from a zero-bound range of 0.00%-0.25% in March 2022 to a range of 5.00%-5.25% at June 30, 2023. The impact of the higher interest rate environment has increased earning asset yields by 217 basis points, or 64.8%, to 5.52% for the six months ended June 30, 2023, up from 3.35% for the comparable period of 2022. This increase was offset by an increase in the Company's funding costs, as excess customer liquidity in the form of deposits was utilized and the competition for deposits increased throughout the industry. Interest expense as a percentage of average earning assets increased to 2.11% for the six months ended June 30, 2023, up from 0.26% for the comparable period of 2022, an increase of 185 basis points, or 711.5%. The Company anticipates the cost of funds may continue to rise throughout 2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and increased utilization of FHLB borrowings.
Net interest income, on a fully tax equivalent basis, decreased by $237,000, or less than 1%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Tax equivalent net interest income benefited from increased average loan balances and yields between the two periods. Offsetting this benefit were increased interest bearing liabilities and an increased funding costs.
Total average earning assets were $6.096 billion for the second quarter of 2023, a decrease of $60.8 million, or 1.0%, compared to $6.157 billion for the second quarter of 2022. The decrease in average earning assets was driven by a decrease in average in average interest bearing deposits, which decreased $167.5 million, or 66.2%, from $252.9 million for the second quarter of 2022 to $85.4 million for the second quarter of 2023, and a decrease in average investment securities, which decreased $265.3 million, or 18.0%, from $1.476 billion for the second quarter of 2022 to $1.211 billion for the second quarter of 2023. Offsetting these decreases was an increase in average loans of $372.0 million, or 8.4%, from $4.426 billion for the second quarter of 2022 to $4.798 billion for the second quarter of 2023. Total average interest bearing liabilities were $4.287 billion for the second quarter of 2023, an increase of $305.6 million, or 7.7%, from $3.982 billion for the second quarter of 2022. This increase was driven by increased interest bearing deposits of $173.6 million, or 4.4%, from $3.927 billion for the second quarter of 2022 to $4.101 billion for the second quarter of 2023 and increased total borrowings by $132.0 million, or 242.7%, from $54.4 million for the second quarter of 2022 to $186.4 million for the second quarter of 2023. Noninterest bearing demand deposits decreased $374.9 million, or 20.5%, from $1.825 billion for the second quarter of 2022 to $1.450 billion for the second quarter of 2023.
The tax equivalent net interest margin expanded by 2 basis points, or less than 1%, to 3.28% for the second quarter of 2023, compared to 3.26% for the second quarter of 2022. Earning asset yields expanded 207 basis points, or 57.8%, from 3.58% for the second quarter of 2022 to 5.65% for the second quarter of 2023. This increase was offset by an increase in the Company's funding costs as interest expense as a percentage of average earning assets increased 205 basis points, or 640.6%, from 0.32% for the second quarter of 2022 to 2.37% for the second quarter of 2023. Increases to the Company's earning asset yields and interest expense as a percentage of average earning assets between the two periods were driven by the Federal Reserve's action to increase the target Federal Funds rate to 5.25% from 0.25%. The target Federal Funds rate was increased 350 basis points between June 30, 2022 and June 30, 2023, increasing the target Federal Funds rate range from 1.50%-1.75% to 5.00%-5.25%. While the rate increases have positively affected the Company's yields on earning assets, the Company has experienced a corresponding increase to funding costs as excess customer liquidity was utilized and the competition for deposits has increased throughout the industry. The Company anticipates the cost of funds may continue to rise throughout
40



2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and increased utilization of FHLB borrowings.

Provision for Credit Losses
The Company recorded provision for credit losses expense of $5.2 million for the six months ended June 30, 2023, compared to provision expense of $417,000 during the comparable period of 2022, an increase of $4.7 million, or 1135.0%. The increase in provision during the six months ended June 30, 2023, compared to the comparable period in 2022 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets. Net charge-offs were $5.7 million during the six month period ended June 30, 2023, compared to net charge-offs of $667,000 during the comparable period of 2022, an increase of $5.0 million. The increase in charge-offs during the six months ended June 30, 2023, compared to the comparable period in 2022 was the result of a charge-off of $5.5 million attributable to a single commercial borrower during the first quarter of 2023.
The Company recorded provision expense of $800,000 during the second quarter of 2023, compared to no provision expense recorded during the second quarter of 2022. Provision expense during the quarter was primarily driven by growth in the loan portfolio. Net charge-offs (recoveries) were ($43,000) during the second quarter of 2023, compared to $3,000 during the second quarter of 2022.
Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower. Management’s overall view on current credit quality was also a factor in the determination of the provision for credit losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans.

Noninterest Income

Noninterest income categories for the six-month and three-month period ended June 30, 2023 and 2022 are shown in the following tables:
Six Months Ended
June 30,
(dollars in thousands)20232022Dollar ChangePercent Change
Wealth advisory fees$4,471 $4,491 $(20)(0.4)%
Investment brokerage fees962 1,060 (98)(9.2)
Service charges on deposit accounts5,356 5,691 (335)(5.9)
Loan and service fees5,848 6,084 (236)(3.9)
Merchant card fee income1,806 1,719 87 5.1 
Bank owned life insurance income (loss)1,384 (266)1,650 (620.3)
Interest rate swap fee income794 404 390 96.5 
Mortgage banking income (loss)(134)860 (994)(115.6)
Net securities gains19 0 19 100.0 
Other income1,309 1,136 173 15.2 
Total noninterest income$21,815 $21,179 $636 3.0 %
Noninterest income to total revenue17.90 %18.46 %

41



Three Months Ended
June 30,
(dollars in thousands)20232022Dollar ChangePercent Change
Wealth advisory fees$2,271 $2,204 $67 3.0 %
Investment brokerage fees428 541 (113)(20.9)
Service charges on deposit accounts2,726 2,882 (156)(5.4)
Loan and service fees3,002 3,195 (193)(6.0)
Merchant card fee income929 904 25 2.8 
Bank owned life insurance income (loss)693 (183)876 (478.7)
Interest rate swap fee income794 354 440 124.3 
Mortgage banking income (loss)(35)351 (386)(110.0)
Net securities gains3 0 3 100.0 
Other income690 244 446 182.8 
Total noninterest income$11,501 $10,492 $1,009 9.6 %
Noninterest income to total revenue19.16 %17.73 %
Noninterest income increased by $636,000, or 3.0%, to $21.8 million for the six months ended June 30, 2023, compared to $21.2 million for the prior year six month period. The increase was driven by increases to bank owned life insurance income of $1.7 million, or 620.3%, interest rate swap fee income of $390,000, or 96.5%, and other income of $173,000, or 15.2%. Bank owned life insurance income benefited from improved market performance of the Company's variable life insurance policies which track to the overall performance of the equity markets, and from the purchase of general life insurance policies during the fourth quarter of 2022. Interest rate swap fee income increased due to increased demand for fixed rate loan arrangements among certain commercial borrowers and the Bank's utilization of back-to-back swaps to convert the fixed rate exposure to a floating rate. Other income increased due to increased dividends from the the Company's Federal Home Loan Bank stock and activity from the Company's low income housing tax credit investment holdings. These increases were offset by decreases to mortgage banking income of $994,000, or 115.6%, due to a decrease in mortgage volume, service charges on deposit accounts of $335,000, or 5.9%, and loan and service fees of $236,000, or 3.9%.
The Company’s noninterest income increased $1.0 million, or 9.6%, to $11.5 million for the second quarter of 2023, compared to $10.5 million for the second quarter of 2022. The increase in noninterest income was primarily driven by an increase in bank owned life insurance income of $876,000, or 478.7%, an increase in other income of $446,000, or 182.8%, and an increase in interest rate swap fee income of $440,000, or 124.3%. Offsetting these increases was a decrease to mortgage banking income of $386,000, or 110.0%, a decrease to loan and service fees of $193,000, or 6.0%, a decrease to service charges on deposit accounts of $156,000, or 5.4%, and a decrease to investment brokerage income of $113,000, or 20.9%. These decreases were primarily volume driven.
Noninterest Expense
Noninterest expense categories for the six-month and three-month period ended June 30, 2023 and 2022 are shown in the following tables:
Six Months Ended
June 30,
(dollars in thousands)20232022Dollar ChangePercent Change
Salaries and employee benefits$27,437 $29,190 $(1,753)(6.0)%
Net occupancy expense3,253 3,317 (64)(1.9)
Equipment costs2,864 2,870 (6)(0.2)
Data processing fees and supplies6,926 6,284 642 10.2 
Corporate and business development2,729 2,652 77 2.9 
FDIC insurance and other regulatory fees1,598 1,058 540 51.0 
Professional fees4,170 2,973 1,197 40.3 
Wire fraud loss18,058 0 18,058 100.0 
Other expense5,133 6,538 (1,405)(21.5)
Total noninterest expense$72,168 $54,882 $17,286 31.5 %
Efficiency ratio59.22 %47.8 %
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Three Months Ended
June 30,
(dollars in thousands)20232022Dollar ChangePercent Change
Salaries and employee benefits$11,374 $14,798 $(3,424)(23.1)%
Net occupancy expense1,681 1,688 (7)(0.4)
Equipment costs1,426 1,459 (33)(2.3)
Data processing fees and supplies3,474 3,203 271 8.5 
Corporate and business development1,298 1,433 (135)(9.4)
FDIC insurance and other regulatory fees803 619 184 29.7 
Professional fees2,049 1,414 635 44.9 
Wire fraud loss18,058 0 18,058 100.0 
Other expense2,571 3,299 (728)(22.1)
Total noninterest expense$42,734 $27,913 $14,821 53.1 %
Efficiency ratio71.19 %47.2 %
Noninterest expense increased by $17.3 million, or 31.5%, for the six months ended June 30, 2023, from $54.9 million to $72.2 million. The increase to noninterest expense during the year was driven primarily by the previously described wire fraud loss recorded as a component of noninterest expense in the amount of $18.1 million in June 2023. Adjusted core noninterest expense, which is a non-GAAP financial measure, declined by $1.1 million, or 2.0%, as compared to the prior six months ended June 30, 2022, excluding the impact of the wire fraud loss on recurring operating expense, and the related reduction of performance-based, long-term incentive compensation The primary driver of the decline in noninterest expense was a decline in other expense which included settlement accruals in 2022 offset by increase of $1.2 million, or 40.3%, an increase of $642,000, or 10.2%, in data processing fees and supplies and an increase of $540,000, or 51.0%, in FDIC insurance and other regulatory fees.
Noninterest expense increased $14.8 million, or 53.1%, to $42.7 million for the second quarter of 2023, compared to $27.9 million during the second quarter of 2022. The increase to noninterest expense during the quarter was driven primarily by the previously described wire fraud loss recorded as a component of noninterest expense in the amount of $18.1 million. Adjusted core noninterest expense, which is a non-GAAP financial measure, declined by $1.4 million, or 5.0%, as compared to the prior year quarter ended June 30, 2022, excluding the impact of the wire fraud loss and the related reduction of performance-based, long-term incentive compensation. Salaries and benefits decreased by 23.1%, or $3.4 million as compared to the prior year quarter due primarily to reduced performance-based accruals, offset partially by higher salary expense. Other expense decreased $728,000, or 22.1%, driven by a decrease in accruals pertaining to ongoing legal matters. Noninterest expense increases during the second quarter of 2023 compared to the prior year quarter included professional fees of $635,000, or 44.9%, data processing fees and supplies of $271,000, or 8.5%, and FDIC insurance and other regulatory fees of $184,000, or 29.7%.
The Company's income tax expense decreased $4.5 million, or 44.2%, in the six months ended June 30, 2023, compared to the same period in 2022. The effective tax rate was 12.7% in the six months ended June 30, 2023, compared to 17.0% for the comparable period of 2022. The year-to-date effective tax rate is reduced by the wire fraud loss, income from tax-advantaged sources such as federally tax exempt municipal bond interest income as well as a tax benefit from stock-based compensation vesting of shares for plan participants.
FINANCIAL CONDITION
Overview
Total assets were $6.510 billion as of June 30, 2023 versus $6.432 billion as of December 31, 2022, an increase of $77.2 million, or 1.2%. Balance sheet expansion was driven primarily by increases to loans net of the allowance for credit losses of $152.4 million, or 3.3%, and an increase in cash and cash equivalents of $42.9 million, or 32.9%. These increases were offset by a decrease in available-for-sale securities of $123.5 million, or 10.4%. To fund the balance sheet expansion, total borrowings increased $103.0 million, or 34.7%. Total deposits decreased $37.6 million, or less than 1%, with a shift in the deposit mix from noninterest bearing deposits, which decreased $298.7 million, or 17.2%, to interest bearing deposits, which increased $261.2 million, or 7.0%. Total equity increased $23.1 million, or 4.1%, from $568.9 million at December 31, 2022 to $592.0 million at June 30, 2023. Retained earnings increased $15.3 million, or 2.4%, as a result of net income of $38.9 million, offset by dividends declared and paid of $23.5 million. Accumulated other comprehensive income (loss), increased $11.3 million, or 6.0%, due primarily to an improvement in available-for-sale securities fair market values during the six months ended June 30, 2023.
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Uses of Funds
Total Cash and Cash Equivalents
Total cash and cash equivalents increased by $42.9 million, or 32.9%, to $173.1 million at June 30, 2023, from $130.3 million at December 31, 2022. Cash and cash equivalents include short-term investments. The increase in cash and cash equivalents at June 30, 2023 was driven by an increase in interest bearing short-term investment accounts of $48.8 million, or 98.9%, offset by a decrease in cash and due from banks of $5.9 million, or 7.3%. These fluctuations are reflective of a normalization of activity as excess levels of liquidity experienced throughout 2021 and 2022 have decreased through deployments of cash to the investment securities portfolio, loan growth in 2023 and utilization of excess cash balances by deposit customers.
Investment Portfolio
The amortized cost and the fair value of securities as of June 30, 2023 and December 31, 2022 were as follows:
June 30, 2023December 31, 2022
(dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Available-for-Sale
U.S Treasury securities$3,251 $3,232 $3,057 $3,034 
U.S government sponsored agencies151,029 122,086 156,184 126,961 
Mortgage-backed securities: residential545,616 462,033 578,175 492,308 
State and municipal securities564,165 474,718 663,367 563,225 
Total available-for-sale$1,264,061 $1,062,069 $1,400,783 $1,185,528 
Held-to-Maturity
State and municipal securities$129,070 $114,264 $128,242 $111,029 
Total Investment Portfolio$1,393,131 $1,176,333 $1,529,025 $1,296,557 
At June 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity. Management is aware that, as interest rates rise, any unrealized loss in the available-for-sale investment securities portfolio will increase, and as interest rates fall the unrealized gain in the investment portfolio will rise. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses.
Purchases of securities available-for-sale totaled $4.3 million in the first six months of 2023. The purchases consisted of U.S. Treasury securities and mortgage-backed securities issued by government sponsored entities for CRA purposes. Investment securities represented 18.3% of total assets on June 30, 2023, compared to 20.4% of total assets on December 31, 2022. Effective duration for the investment portfolio was 6.6 years at June 30, 2023, compared to 4.0 years at December 31, 2019 before the pandemic, and 6.5 years at December 31, 2022. Duration of the portfolio extended following the deployment of excess liquidity to the portfolio and the dramatic rise in interest rates during 2022 and into 2023. The ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 12-14% during 2014 to 2020. The increase in this ratio resulted from the deployment of excess liquidity during 2021 and 2022 to the investment securities portfolio as an earning asset alternative for excess balance sheet liquidity stemming from increased levels of core deposits from government stimulus programs. The Company expects the investment securities portfolio as a percentage of assets to decrease over time as the proceeds from pay downs, sales and maturities of these investment securities are used to fund loan portfolio growth and for other general liquidity purposes. Paydowns from prepayments and scheduled payments of $28.9 million were received in the first six months of 2023, and the amortization of premiums, net of the accretion of discounts, was $2.4 million. Maturities and calls of securities totaled $10.0 million in the first six months of 2023. Sales of available-for-sale investment securities totaled $100.0 million in the first six months of 2023 and resulted in net gains of $19,000. No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of June 30, 2023 and December 31, 2022.
The fair value of the available-for-sale investment securities portfolio as of June 30, 2023 included net unrealized losses of $202.0 million, compared to net unrealized losses of $215.3 million as of December 31, 2022. Unrealized losses in the
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available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities. These declines were driven by the rising interest rate environment as a result of the Federal Reserve's monetary tightening policy to combat elevated levels of inflation affecting the U.S. economy.

The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Real Estate Mortgage Loans Held-for-Sale
Real estate mortgage loans held-for-sale increased by $941,000, or 263.6%, to $1.3 million at June 30, 2023, from $357,000 at December 31, 2022. The balance of this asset category is subject to a high degree of variability depending on, among other factors, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $3.4 million in the first six months of 2023, compared to $28.4 million in the first six months of 2022. Management expects the volume of loans originated for sale in the secondary market to remain at reduced levels due to elevated mortgage rates, limited inventory, and existing homeowners being locked in at historically low rates. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $348.4 million and $364.3 million, as of June 30, 2023 and December 31, 2022, respectively.
Loan Portfolio
The loan portfolio by portfolio segment as of June 30, 2023 and December 31, 2022 is summarized as follows:
(dollars in thousands)June 30,
2023		December 31,
2022		Current Period Change
Commercial and industrial loans$1,469,887 30.2 %$1,493,049 31.7 %$(23,162)
Commercial real estate and multi-family residential loans2,376,393 48.8 2,179,094 46.2 197,299 
Agri-business and agricultural loans374,962 7.7 432,088 9.2 (57,126)
Other commercial loans120,958 2.5 113,593 2.4 7,365 
Consumer 1-4 family mortgage loans431,385 8.9 407,566 8.6 23,819 
Other consumer loans92,139 1.9 88,075 1.9 4,064 
Subtotal, gross loans4,865,724 100.0 %4,713,465 100.0 %152,259 
Less: Allowance for credit losses(72,058)(72,606)548 
Net deferred loan fees(3,464)(3,069)(395)
Loans, net$4,790,202 $4,637,790 $152,412 
Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $152.4 million, or 3.2%, to $4.866 billion at June 30, 2023 from $4.713 billion at December 31, 2022. The increase was primarily driven by originations of loans concentrated in the commercial real estate and multi-famly residential, other commercial, and consumer 1-4 family mortgage loans categories and was offset by paydowns in commercial and industrial loans and the agri-business and agricultural loans segments, the latter of which traditionally experiences seasonal fluctuations in activity.
45



The following table summarizes the Company’s non-performing assets as of June 30, 2023 and December 31, 2022:
(dollars in thousands)June 30,
2023		December 31,
2022
Nonaccrual loans$18,004 $16,964 
Loans past due over 90 days and still accruing8 123 
Total nonperforming loans18,012 17,087 
Other real estate owned384 100 
Repossessions20 37 
Total nonperforming assets$18,416 $17,224 
Individually analyzed loans$18,465 $31,327 
Nonperforming loans to total loans0.37 %0.36 %
Nonperforming assets to total assets0.28 %0.27 %

Total nonperforming assets increased by $1.2 million, or 6.9%, to $18.4 million during the six month period ended June 30, 2023. The ratio of nonperforming assets to total assets increased from 0.27% at December 31, 2022 to 0.28% at June 30, 2023.
A loan is individually analyzed when full payment under the original loan terms is not expected. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral. Total individually analyzed loans decreased by $12.9 million, or 41.1%, to $18.5 million at June 30, 2023 from $31.3 million at December 31, 2022, due primarily to a charge off of a single commercial credit during the first quarter of 2023.
Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb current expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other current expected losses in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. General allowance is determined after considering the following factors: application of loss percentages using a probability of default/loss given default approach subject to a floor, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention applies to loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for credit losses for any assets where management has identified conditions or circumstances that indicate an asset is nonperforming. If an asset or portion, thereof is classified as a loss, the Company’s policy is to either establish specified allowances for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.
At June 30, 2023, the allowance for credit losses was 1.48% of total loans outstanding, versus 1.54% of total loans outstanding at December 31, 2022. At June 30, 2023, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses. The process of identifying credit losses is a subjective process.
The Company has a relatively high percentage of commercial and commercial real estate loans, which are extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area. The Company has limited exposure to commercial
46



office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $68.8 million for this sector represented only 1.4% of total loans at June 30, 2023.
As of June 30, 2023, based on management’s review of the loan portfolio, the Company had 59 credit relationships totaling $186.0 million on the classified loan list versus 58 credit relationships totaling $161.0 million as of December 31, 2022. The increase in classified loans for the first six months of 2023 resulted primarily from borrower risk rating downgrades of pass rated loans to the non-individually analyzed portion of the watch list. As of June 30, 2023, the Company had $163.7 million of assets classified as Special Mention, $21.5 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $115.7 million, $45.3 million, $0 and $0, respectively, at December 31, 2022. Watch list loans as a percentage of total loans increased to 3.83% as of June 30, 2023, up from a historical low at 3.42% as of December 31, 2022.
Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions and a reasonably supportable forecast period. The Company has annual discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio based upon loan segment. In accordance with applicable accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. For a more thorough discussion of the allowance for credit losses methodology see the ("Critical Accounting Policies") section of this Item 2.
The allowance for credit losses decreased $548,000, or less than 1%, from $72.6 million at December 31, 2022 to $72.1 million at June 30, 2023. The decrease was a result of net charge-offs recorded during the period of $5.7 million, offset by provision expense of $5.2 million. Of the $5.7 million in net charge-offs, $5.5 million was attributable to a single deteriorated commercial relationship which was reserved for in the allowance for credit losses. The increased provision expense recorded during the six months ended June 30, 2023 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets as well as portfolio loan growth. As the bulk of the Company’s lending activity is concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits, management has historically considered growth and portfolio composition when determining credit loss allocations.
Sources of Funds
The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes a stable mix of commercial, retail and public funds deposit accounts. While the traditional base of core deposits represents the primary source of funding for the Company, the Company has access to a robust array of other liquidity sources, including secured borrowings available from the Federal Home Loan Bank, the Federal Reserve Bank Discount Window and the Federal Reserve Bank Term Funding Program. In addition, the Company has access to unsecured borrowing capacity through long established relationships within the brokered deposit markets, Federal Funds lines from correspondent bank partners and Insured Cash Sweep (ICS) one-way buy funds available from the Intrafi network. As of June 30, 2023, the Company had access to $2.89 billion in unused liquidity available from these aggregate sources, compared to $2.99 billion at December 31, 2022.








47



The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the six months ended June 30, 2023 and 2022 are summarized in the following table:
Six months ended June 30,
20232022
(dollars in thousands)BalanceRateBalanceRate
Noninterest bearing demand deposits$1,555,877 0.00 %$1,895,333 0.00 %
Savings and transaction accounts:
Savings deposits376,281 0.07 416,755 0.08 
Interest bearing demand deposits2,844,181 3.45 2,676,528 0.43 
Time deposits:.
Deposits of $100,000 or more553,472 1.90 617,824 0.49 
Other time deposits189,734 2.91 193,873 0.68 
Total deposits$5,519,545 2.14 %$5,800,313 0.28 %
FHLB advances and other borrowings213,990 4.83 64,654 0.40 
Total funding sources$5,733,535 2.24 %$5,864,967 0.28 %
Average total deposits were $5.520 billion for the six months ended June 30, 2023, a decrease of $280.8 million, or 4.8%, from the comparable period in 2022. Average total borrowings were $214.0 million for the six months ended June 30, 2023, an increase of $149.3 million, or 231.0%, from the comparable period in 2022. Total average deposit costs increased 186 basis points from 0.28% for the six months ended June 30, 2022, compared to 2.14% for the six months ended June 30, 2023. Total average borrowing costs increased 443 basis points from 0.40% for the six months ended June 302, 2022 to 4.83% for the six months ended June 30, 2023. In aggregate, these increases raised total funding costs from these sources by 196 basis points from 0.28% for the six months ended June 30, 2022, to 2.24% for the six months ended June 30, 2023.
Deposits and Borrowings
As of June 30, 2023, total deposits decreased by $37.6 million, or less than 1%, from December 31, 2022. Core deposits, which excludes brokered deposits, decreased by $95.9 million, or 1.8%, to $5.355 billion as of June 30, 2023 from $5.451 billion as of December 31, 2022. Total brokered deposits were $68.4 million at June 30, 2023, compared to $10.0 million at December 31, 2022.

The following table summarizes deposit composition at June 30, 2023 and December 31, 2022:
(dollars in thousands)June 30,
2023		Percentage of TotalDecember 31,
2022		Percentage of TotalCurrent
Period
Change
Retail$1,821,607 33.6 %$1,934,787 35.4 %$(113,180)
Commercial2,082,564 38.4 2,085,934 38.2 (3,370)
Public funds1,450,527 26.7 1,429,872 26.2 20,655 
Core deposits$5,354,698 98.7 %$5,450,593 99.8 %$(95,895)
Brokered deposits68,361 1.3 10,027 0.2 58,334 
Total deposits$5,423,059 100.0 %$5,460,620 100.0 %$(37,561)
Commercial, retail and public funds deposit composition remained stable between June 30, 2023 and December 31, 2022. On June 30, 2023 and December 31, 2022, commercial deposits represented 38% of total deposits. Retail deposits represented 34% at June 30, 2023 versus 35% at December 31, 2022. Public Funds deposits represented 27% at June 30, 2023 versus 26% at December 31, 2022. Commercial deposits contracted $3.4 million, or less than 1%, from $2.086 billion at December 31, 2022 to $2.083 billion at June 30, 2023; retail deposits contracted $113.2 million, or 5.8%, from $1.935 billion at December 31, 2022 to $1.822 billion at June 30, 2023; and public funds deposits grew $20.7 million, or 1.4%, from $1.430 billion at December 31, 2022 to $1.451 billion at June 30, 2023.

Uninsured deposits, not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (PDIF), were 28% of total deposits as of June 30, 2023, versus 30% as of December 31, 2022. Deposits not insured by FDIC Insurance coverage (including those public fund deposits that are covered by the PDIF) were 54% as of June 30, 2023, versus 56% at
48



December 31, 2022. As of June 30, 2023 and December 31, 2022, 98% of deposit accounts had deposit balances less than $250,000 and 2% of deposit accounts had deposit balances greater than $250,000.

Capital
As of June 30, 2023, total stockholders’ equity was $592.0 million, an increase of $23.1 million, or 4.1%, from $568.9 million at December 31, 2022. Net income of $38.9 million increased equity. In addition, an increase of $11.3 million in accumulated other comprehensive income (loss), primarily driven by a net increase in the fair value of available-for-sale securities, contributed to the increase. Dividends declared and paid of $0.92 per share, or $23.5 million, offset the increase to total stockholders' equity.
The impact on equity for other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of June 30, 2023, the Company's capital levels remained characterized as “well-capitalized”.
The actual capital amounts and ratios of the Company and the Bank as of June 30, 2023 and December 31, 2022, are presented in the table below. Capital ratios for June 30, 2023 are preliminary until the Call Report and FR Y-9C are filed.
ActualMinimum Required For Capital Adequacy PurposesFor Capital Adequacy Purposes Plus Capital Conservation BufferMinimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations
(dollars in thousands)AmountRatioAmountRatioAmountRatioAmountRatio
As of June 30, 2023:
Total Capital (to Risk Weighted Assets)
Consolidated$834,541 14.94 %$447,004 8.00 %$586,602 N/AN/AN/A
Bank$814,283 14.58 %$446,819 8.00 %$586,450 10.50 %$558,524 10.00 %
Tier I Capital (to Risk Weighted Assets)
Consolidated$764,580 13.68 %$335,253 6.00 %$474,942 N/AN/AN/A
Bank$744,351 13.33 %$335,114 6.00 %$474,745 8.50 %$446,819 8.00 %
Common Equity Tier 1 (CET1)
Consolidated$764,580 13.68 %$251,440 4.50 %$391,128 N/AN/AN/A
Bank$744,351 13.33 %$251,336 4.50 %$390,967 7.00 %$363,041 6.50 %
Tier I Capital (to Average Assets)
Consolidated$764,580 11.54 %$264,931 4.00 %$264,931 N/AN/AN/A
Bank$744,351 11.27 %$264,263 4.00 %$264,263 4.00 %$330,328 5.00 %
As of December 31, 2022:
Total Capital (to Risk Weighted Assets)
Consolidated$821,008 15.07 %$435,786 8.00 %$571,969 N/AN/AN/A
Bank$801,044 14.74 %$434,758 8.00 %$570,620 10.50 %$543,448 10.00 %
Tier I Capital (to Risk Weighted Assets)
Consolidated$752,751 13.82 %$326,840 6.00 %$463,023 N/AN/AN/A
Bank$732,966 13.49 %$326,069 6.00 %$461,930 8.50 %$434,758 8.00 %
Common Equity Tier 1 (CET1)
Consolidated$752,751 13.82 %$245,130 4.50 %$381,313 N/AN/AN/A
Bank$732,966 13.49 %$244,551 4.50 %$380,413 7.00 %$353,241 6.50 %
Tier I Capital (to Average Assets)
Consolidated$752,751 11.50 %$261,859 4.00 %$261,859 N/AN/AN/A
Bank$732,966 11.22 %$261,222 4.00 %$261,222 4.00 %$326,527 5.00 %
49




FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:
•the effects of future economic, business and market conditions and changes, including prevailing interest rates and the rate of inflation;
•governmental monetary and fiscal policies and the impact the current economic environment will have on these;
•the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;
•changes in borrowers’ credit risks and payment behaviors;
•the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates;
•the effects of disruption and volatility in capital markets on the value of our investment portfolio;
•the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
•risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company;
•the risks related to the recent failures of First Republic Bank, Silicon Valley Bank and Signature Bank, including the effects on FDIC premiums, increased regulation, and increased deposit volatility;
•the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;
•changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages;
•changes in the prices, values and sales volumes of residential and commercial real estate;
•the risk of labor availability, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector;
•changes in the availability and cost of credit and capital in the financial markets;
•the outcome of pending litigation and other claims we may be subject to from time to time;
•the phase out of most LIBOR tenors by mid-2023 and establishment of a new reference rate or rates;
•changes in technology or products that may be more difficult or costly, or less effective than anticipated;
•the effects of fraud by or affecting employees, customers or third parties;
•the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;
•changes in accounting policies, rules and practices;
•the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and
50



demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; and
•the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk represents the Company’s primary market risk exposure. The Company does not have a material exposure to foreign currency exchange risk, does not have any material amount of derivative financial instruments and does not maintain a trading portfolio. The Corporate Risk Committee of the Board of Directors annually reviews and approves the policy used to manage interest rate risk. The policy was last reviewed and approved in July 2023. The policy sets guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income but do not necessarily indicate the effect on future net interest income. The Company, through the Bank's Asset and Liability Committee, manages interest rate risk by monitoring the computer simulated earnings impact of various rate scenarios and general market conditions. The Company then modifies its long-term risk parameters by attempting to generate the types of loans, investments, and deposits that currently fit the Company’s needs, as determined by the Asset and Liability Committee. This computer simulation analysis measures the net interest income impact of various interest rate scenario changes during the next twelve months. The Company continually evaluates the assumptions used in the model. The current balance sheet structure is considered to be within acceptable risk levels.
Interest rate scenarios for the base, falling 300 basis points, falling 200 basis points, falling 100 basis points, falling 50 basis points, falling 25 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points and rising 300 basis points are listed below based upon the Company’s rate sensitive assets and liabilities at June 30, 2023. The net interest income shown 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.
The base scenario is an annual calculation that is highly dependent on numerous assumptions embedded in the model. 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 core deposit products, such as savings, money market, NOW and demand deposits reflect management’s best estimate of expected future behavior.
(dollars in thousands)BaseFalling (300 Basis Points)Falling (200 Basis Points)Falling
(100 Basis
Points)		Falling
(50
Basis
Points)		Falling (25 
Basis
Points)		Rising (25 
Basis
Points)		Rising
(50 
Basis
Points)		Rising (100 Basis Points)Rising
(200 
Basis
Points)		Rising
(300 
Basis
Points)
Net interest income$205,656 $186,099 $193,536 $200,092 $203,008 $204,371 $206,655 $207,652 $209,644 $213,665 $217,768 
Variance from Base$(19,557)$(12,120)$(5,564)$(2,648)$(1,285)$999 $1,996 $3,988 $8,009 $12,112 
Percent of change from Base(9.51)%(5.89)%(2.71)%(1.29)%(0.62)%0.49 %0.97 %1.94 %3.89 %5.89 %
51



ITEM 4 – CONTROLS AND PROCEDURES
As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2023. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
During the quarter ended June 30, 2023, there were no changes to the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
52



PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Lakeland Financial Corporation and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an ongoing basis management, after consultation with legal counsel, assesses the Company's liabilities and contingencies in connection with such proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although the Company does not believe that the outcome of pending legal matters will be material to the Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A. of Part I of the Company’s Form 10-K for the year ended December 31, 2022. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PARTIES
On April 11, 2023, the Company's board of directors reauthorized and extended a share repurchase program through April 30, 2025, under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company's common stock with an aggregate purchase price of up to $30 million. Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended or discontinued at any time. There were no repurchases under this plan during the three months ended June 30, 2023.
During the quarter ended June 30, 2023, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement, in each case as defined in Item 408 of Regulation S-K.
The following table provides information as of June 30, 2023 with respect to shares of common stock repurchased by the Company during the quarter then ended:
PeriodTotal Number of
Shares Purchased (a)		Average Price
Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (b)
April 1 - 300 $0.00 0 $30,000,000 
May 1 - 311,701 47.85 0 30,000,000 
June 1 - 300 0.00 0 30,000,000 
Total1,701 $47.85 0 $30,000,000 

(a)The shares purchased during May were credited to the deferred share accounts of non-employee directors under the Company’s directors’ deferred compensation plan. These shares are held in treasury stock of the Company and were purchased in the ordinary course of business and consistent with past practice.
(b)Following the renewal and extension of the Company's share repurchase program on April 11, 2023, the maximum dollar value of shares that may bet be repurchased under the program is $30 million. The share repurchase program terminates April 30, 2025.

Item 3. Defaults Upon Senior Securities
None


53



Item 4. Mine Safety Disclosures
N/A

Item 5. Other Information
During the three months ended June 30, 2023, no director or officer of the Company 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
31.1
31.2
32.1
32.2
101Interactive Data File
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2023 and June 30, 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and June 30, 2022; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2023 and June 30, 2022; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and June 30, 2022; and (vi) Notes to Unaudited Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

54



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.
LAKELAND FINANCIAL CORPORATION
(Registrant)
Date: August 2, 2023
/s/ David M. Findlay
 David M. Findlay – Chief Executive Officer
Date: August 2, 2023
/s/ Lisa M. O’Neill
 Lisa M. O’Neill – Executive Vice President and
 Chief Financial Officer
 (principal financial officer)
Date: August 2, 2023
/s/ Brok A. Lahrman
 Brok A. Lahrman – Senior Vice President and Chief Accounting Officer
 (principal accounting officer)
55

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