INDEPENDENT BANK CORP 10-Q

Item 1. Financial Statements INDEPENDENT BANK CORP. CONSOLIDATED BALANCE SHEETS (Unaudited—Dollars in thousands) June 30 2023 December 31 2022 Assets Cash and due from banks $ 181,810 $ 175,843 Interest-earning deposits with banks 126,454 177,090 Securities Trading 4,477 3,888 Equity 21,800 21,119 Available for sale (amortized cost $ 1,533,336 and $ 1,566,779 ) 1,372,903 1,399,154 Held to maturity (fair value $ 1,444,084 and $ 1,524,710 ) 1,623,892 1,705,120 Total securities 3,023,072 3,129,281 Loans held for sale (at fair value) 6,577 2,803 Loans Commercial and industrial 1,723,219 1,635,103 Commercial real estate 7,812,796 7,760,230 Commercial construction 1,022,796 1,154,413 Small business 237,092 219,102 Residential real estate 2,221,284 2,035,524 Home equity - first position 546,240 566,166 Home equity - subordinate positions 549,158 522,584 Other consumer 27,326 35,553 Total loans 14,139,911 13,928,675 Less: allowance for credit losses ( 140,647 ) ( 152,419 ) Net loans 13,999,264 13,776,256 Federal Home Loan Bank stock 39,488 5,218 Bank premises and equipment, net 193,642 196,504 Goodwill 985,072 985,072 Other intangible assets 21,537 25,068 Cash surrender value of life insurance policies 296,687 293,323 Other assets 527,328 527,716 Total assets $ 19,400,931 $ 19,294,174 Liabilities and Stockholders' Equity Deposits Noninterest-bearing demand deposits $ 4,861,092 $ 5,441,584 Savings and interest checking accounts 5,525,223 5,898,009 Money market 3,065,520 3,343,673 Time certificates of deposit 1,796,216 1,195,741 Total deposits 15,248,051 15,879,007 Borrowings Federal Home Loan Bank borrowings 788,479 637 Junior subordinated debentures (less unamortized debt issuance costs of $ 31 and $ 33 ) 62,857 62,855 5 Table of Contents Subordinated debentures (less unamortized debt issuance costs of $ 67 and $ 115 ) 49,933 49,885 Total borrowings 901,269 113,377 Other liabilities 396,697 415,089 Total liabilities 16,546,017 16,407,473 Commitments and contingencies — — Stockholders' equity Preferred stock, $ 0.01 par value, authorized: 1,000,000 shares, outstanding: none — — Common stock, $ 0.01 par value, authorized: 75,000,000 shares, issued and outstanding: 44,130,901 shares at June 30, 2023 and 45,641,238 shares at December 31, 2022 (includes 168,934 and 135,712 shares of unvested participating restricted stock awards, respectively) 440 455 Value of shares held in rabbi trust at cost: 80,955 shares at June 30, 2023 and 80,965 shares at December 31, 2022 ( 3,289 ) ( 3,227 ) Deferred compensation and other retirement benefit obligations 3,289 3,227 Additional paid in capital 1,997,674 2,114,888 Retained earnings 1,009,735 934,442 Accumulated other comprehensive loss, net of tax ( 152,935 ) ( 163,084 ) Total stockholders’ equity 2,854,914 2,886,701 Total liabilities and stockholders' equity $ 19,400,931 $ 19,294,174 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited—Dollars in thousands, except per share data) Three Months Ended Six Months Ended June 30 June 30 2023 2022 2023 2022 Interest income Interest and fees on loans $ 179,759 $ 133,988 $ 350,685 $ 263,613 Taxable interest and dividends on securities 15,581 11,281 30,890 21,324 Nontaxable interest and dividends on securities 2 2 3 3 Interest on loans held for sale 39 35 73 99 Interest on federal funds sold and short-term investments 3,312 2,817 3,977 3,703 Total interest and dividend income 198,693 148,123 385,628 288,742 Interest expense Interest on deposits 31,909 2,111 54,584 4,218 Interest on borrowings 14,238 1,151 19,500 2,231 Total interest expense 46,147 3,262 74,084 6,449 Net interest income 152,546 144,861 311,544 282,293 Provision for (release of) credit losses 5,000 — 12,250 ( 2,000 ) Net interest income after provision for credit losses 147,546 144,861 299,294 284,293 Noninterest income Deposit account fees 5,508 5,828 11,424 11,321 Interchange and ATM fees 4,478 4,027 8,662 7,636 Investment management 10,348 9,329 20,127 18,002 Mortgage banking income 670 1,042 978 2,404 Increase in cash surrender value of life insurance policies 1,940 1,871 3,794 3,666 Gain on life insurance benefits 176 123 187 123 Loan level derivative income 1,275 436 1,683 1,040 Other noninterest income 6,362 5,242 12,144 9,978 Total noninterest income 30,757 27,898 58,999 54,170 Noninterest expenses Salaries and employee benefits 53,975 49,538 110,950 98,249 Occupancy and equipment expenses 12,385 11,637 25,207 24,939 Data processing and facilities management 2,530 2,247 5,057 4,619 Consulting expense 1,935 2,760 4,012 4,510 Software maintenance 3,134 2,645 6,083 5,209 Debit card expense 2,217 1,861 4,388 3,626 Amortization of intangible assets 1,716 1,902 3,531 3,903 FDIC assessment 2,674 1,743 5,284 3,548 Merger and acquisition expense — — — 7,100 Other noninterest expenses 14,989 16,229 29,704 30,359 Total noninterest expenses 95,555 90,562 194,216 186,062 Income before income taxes 82,748 82,197 164,077 152,401 Provision for income taxes 20,104 20,421 40,186 37,528 Net income $ 62,644 $ 61,776 $ 123,891 $ 114,873 Basic earnings per share $ 1.42 $ 1.32 $ 2.78 $ 2.44 Diluted earnings per share $ 1.42 $ 1.32 $ 2.78 $ 2.44 Weighted average common shares (basic) 44,129,152 46,665,101 44,564,209 47,013,989 Common share equivalents 7,573 14,096 13,568 17,403 Weighted average common shares (diluted) 44,136,725 46,679,197 44,577,777 47,031,392 Cash dividends declared per common share $ 0.55 $ 0.51 $ 1.10 $ 1.02 The accompanying notes are an integral part of these unaudited consolidated financial statements. 7 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited—Dollars in thousands) Three Months Ended Six Months Ended June 30 June 30 2023 2022 2023 2022 Net income $ 62,644 $ 61,776 $ 123,891 $ 114,873 Other comprehensive (loss) income, net of tax Net change in fair value of securities available for sale ( 11,451 ) ( 23,734 ) 5,617 ( 86,290 ) Net change in fair value of cash flow hedges ( 5,448 ) ( 7,649 ) 4,715 ( 25,599 ) Net change in other comprehensive income for defined benefit postretirement plans ( 91 ) 121 ( 183 ) 242 Total other comprehensive (loss) income ( 16,990 ) ( 31,262 ) 10,149 ( 111,647 ) Total comprehensive income $ 45,654 $ 30,514 $ 134,040 $ 3,226 The accompanying notes are an integral part of these unaudited consolidated financial statements. 8 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Three Months Ended June 30, 2023 and 2022 (Unaudited—Dollars in thousands, except per share data) Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation Obligation Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Balance March 31, 2023 44,114,827 $ 439 $ ( 3,286 ) $ 3,286 $ 1,995,077 $ 971,338 $ ( 135,945 ) $ 2,830,909 Net income — — — — — 62,644 — 62,644 Other comprehensive loss — — — — — — ( 16,990 ) ( 16,990 ) Common dividend declared ($ 0.55 per share) — — — — — ( 24,247 ) — ( 24,247 ) Stock based compensation — — — — 1,921 — — 1,921 Restricted stock awards issued, net of awards surrendered 5,484 1 — — ( 1 ) — — — Shares issued under direct stock purchase plan 10,590 — — — 677 — — 677 Deferred compensation and other retirement benefit obligations — — ( 3 ) 3 — — — — Balance June 30, 2023 44,130,901 $ 440 $ ( 3,289 ) $ 3,289 $ 1,997,674 $ 1,009,735 $ ( 152,935 ) $ 2,854,914 Balance March 31, 2022 47,377,125 $ 472 $ ( 3,179 ) $ 3,179 $ 2,247,518 $ 795,651 $ ( 78,202 ) $ 2,965,439 Net income — — — — — 61,776 — 61,776 Other comprehensive loss — — — — — — ( 31,262 ) ( 31,262 ) Common dividend declared ($ 0.51 per share) — — — — — ( 23,570 ) — ( 23,570 ) Stock based compensation — — — — 1,632 — — 1,632 Restricted stock awards issued, net of awards surrendered 5,231 — — — ( 22 ) — — ( 22 ) Shares issued under direct stock purchase plan 7,574 — — — 588 — — 588 Shares repurchased under share repurchase program ( 1,320,169 ) ( 13 ) ( 103,383 ) ( 103,396 ) Deferred compensation and other retirement benefit obligations — — ( 17 ) 17 — — — — Balance June 30, 2022 46,069,761 $ 459 $ ( 3,196 ) $ 3,196 $ 2,146,333 $ 833,857 $ ( 109,464 ) $ 2,871,185 9 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Six Months Ended June 30, 2023 and 2022 (Unaudited—Dollars in thousands, except per share data) Common Stock Outstanding Common Stock Value of Shares Held in Rabbi Trust at Cost Deferred Compensation Obligation Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance December 31, 2022 45,641,238 $ 455 $ ( 3,227 ) $ 3,227 $ 2,114,888 $ 934,442 $ ( 163,084 ) $ 2,886,701 Net income — — — — — 123,891 — 123,891 Other comprehensive income — — — — — — 10,149 10,149 Common dividend declared ($ 1.10 per share) — — — — — ( 48,598 ) — ( 48,598 ) Proceeds from exercise of stock options, net of cash paid 1,666 — — — 80 — — 80 Stock based compensation — — — — 3,593 — — 3,593 Restricted stock awards issued, net of awards surrendered 86,559 1 — — ( 1,111 ) — — ( 1,110 ) Shares issued under direct stock purchase plan 18,471 — — — 1,319 — — 1,319 Shares repurchased under share repurchase program (1) ( 1,617,033 ) ( 16 ) — — ( 121,095 ) — — ( 121,111 ) Deferred compensation and other retirement benefit obligations — — ( 62 ) 62 — — — — Balance June 30, 2023 44,130,901 $ 440 $ ( 3,289 ) $ 3,289 $ 1,997,674 $ 1,009,735 $ ( 152,935 ) $ 2,854,914 Balance December 31, 2021 47,349,778 $ 472 $ ( 3,146 ) $ 3,146 $ 2,249,078 $ 766,716 $ 2,183 $ 3,018,449 Net income — — — — — 114,873 — 114,873 Other comprehensive loss — — — — — — ( 111,647 ) ( 111,647 ) Common dividend declared ($ 1.02 per share) — — — — — ( 47,732 ) — ( 47,732 ) Stock based compensation — — — — 2,466 — — 2,466 Restricted stock awards issued, net of awards surrendered 49,800 — — — ( 1,085 ) — — ( 1,085 ) Shares issued under direct stock purchase plan 14,176 — — — 1,159 — — 1,159 Shares repurchased under share repurchase program ( 1,343,993 ) ( 13 ) — — ( 105,285 ) — — ( 105,298 ) Deferred compensation and other retirement benefit obligations — — ( 50 ) 50 — — — — Balance June 30, 2022 46,069,761 $ 459 $ ( 3,196 ) $ 3,196 $ 2,146,333 $ 833,857 $ ( 109,464 ) $ 2,871,185 (1) Inclusive of $ 1.2 million impact of excise tax attributable to shares repurchased under the share repurchase program during the six months ended June 30, 2023 . The accompanying notes are an integral part of these unaudited consolidated financial statements. 10 Table of Contents INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited—Dollars in thousands) Six Months Ended June 30 2023 2022 Cash flow from operating activities Net income $ 123,891 $ 114,873 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 18,383 19,957 Change in unamortized net loan costs and fees ( 817 ) ( 5,662 ) (Accretion) amortization of acquired loans ( 688 ) 578 Provision for (release of) credit losses 12,250 ( 2,000 ) Deferred income tax expense 339 503 Net (gain) loss on equity securities ( 635 ) 2,077 Net loss on bank premises and equipment 115 426 Realized gain on sale leaseback transaction ( 193 ) ( 289 ) Stock based compensation 3,593 2,466 Increase in cash surrender value of life insurance policies ( 3,803 ) ( 3,666 ) Gain on life insurance benefits ( 187 ) ( 123 ) Operating lease payments ( 6,908 ) ( 12,437 ) Change in fair value on loans held for sale 3 426 Net change in: Trading assets ( 589 ) 83 Loans held for sale ( 3,777 ) 21,895 Other assets 15,903 38,380 Other liabilities ( 14,650 ) ( 5,049 ) Total adjustments 18,339 57,565 Net cash provided by operating activities 142,230 172,438 Cash flows used in investing activities Purchases of equity securities ( 284 ) ( 323 ) Proceeds from maturities and principal repayments of securities available for sale 33,346 79,842 Purchases of securities available for sale — ( 123,289 ) Proceeds from maturities and principal repayments of securities held to maturity 84,000 96,825 Purchases of securities held to maturity — ( 438,643 ) Net (purchases) redemptions of Federal Home Loan Bank stock ( 34,270 ) 5,158 Investments in low income housing projects ( 16,992 ) ( 13,733 ) Purchases of life insurance policies ( 99 ) ( 101 ) Proceeds from life insurance policies 11 218 Net increase in loans ( 233,753 ) ( 83,997 ) Purchases of bank premises and equipment ( 6,646 ) ( 16,153 ) Proceeds from the sale of bank premises and equipment 52 — Net cash used in investing activities ( 174,635 ) ( 494,196 ) Cash flows used in financing activities Net increase (decrease) in time deposits 600,435 ( 219,533 ) Net decrease in other deposits ( 1,231,431 ) ( 56,949 ) Net advances from short-term Federal Home Loan Bank borrowings 787,860 — 11 Table of Contents Repayments of long-term debt, net of issuance costs — ( 14,063 ) Net proceeds from exercise of stock options 80 — Restricted stock awards issued, net of awards surrendered ( 1,116 ) ( 1,085 ) Proceeds from shares issued under direct stock purchase plan 1,313 1,159 Payments for shares repurchased under share repurchase program ( 119,951 ) ( 105,298 ) Common dividends paid ( 49,454 ) ( 46,890 ) Net cash used in financing activities ( 12,264 ) ( 442,659 ) Net decrease in cash and cash equivalents ( 44,669 ) ( 764,417 ) Cash and cash equivalents at beginning of year 352,933 2,240,684 Cash and cash equivalents at end of period $ 308,264 $ 1,476,267 Supplemental schedule of noncash investing and financing activities Net increase in capital commitments relating to low income housing project investments $ 15,683 $ 4,472 Recognition of operating lease at commencement and/or at extension $ 3,943 $ 8,811 The accompanying notes are an integral part of these unaudited consolidated financial statements. 12 Table of Contents NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907. All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current year’s presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other interim period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the "2022 Form 10-K"). NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 848 "Reference Rate Reform" Update No. 2020-04. Update No. 2020-04 was issued in March 2020 to provide optional expedients and exceptions for applying GAAP to certain contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The amendments did not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 for which an entity elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this update were effective for all entities as of March 12, 2020 through December 31, 2022 and do not apply to contract modifications made after December 31, 2022. FASB ASC Topic 848 "Reference Rate Reform" Update No. 2021-01 was subsequently issued in January 2021 and expanded application of the optional expedients to derivative transactions affected by the discounting transition. The Company established a working group to guide the Company’s transition from LIBOR, whose responsibilities included the identification of products utilizing LIBOR, the implementation of fallback language into the applicable contracts, the evaluation of platforms and systems, as well as the determination of an alternative index to be offered for new and existing products. The Company has determined that the transition from LIBOR, which reached its final retirement date on June 30, 2023, did not have a material impact on the Company's financial statements. 13 Table of Contents NOTE 3 - SECURITIES Trading Securities The Company had trading securities of $ 4.5 million and $ 3.9 million as of June 30, 2023 and December 31, 2022, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s non-qualified 401(k) Restoration Plan and Non-qualified Deferred Compensation Plan. Equity Securities The Company had equity securities of $ 21.8 million and $ 21.1 million as of June 30, 2023 and December 31, 2022, respectively. These securities consist primarily of mutual funds held in a rabbi trust and will be used for future payments associated with the Company’s supplemental executive retirement plans. The following table represents a summary of the gains and losses recognized within non-interest income and non-interest expense within the consolidated statements of income that relate to equity securities for the periods indicated: Three Months Ended Six Months Ended June 30 June 30 2023 2022 2023 2022 Dollars in thousands Net gains (losses) recognized during the period on equity securities $ 267 $ ( 1,450 ) 635 ( 2,077 ) Less: net gains recognized during the period on equity securities sold during the period — 4 1 8 Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date $ 267 $ ( 1,454 ) $ 634 $ ( 2,085 ) Available for Sale Securities The following table summarizes the amortized cost, allowance for credit losses, and fair value of available for sale securities and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated: June 30, 2023 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value (Dollars in thousands) U.S. government agency securities $ 230,570 $ — $ ( 28,079 ) $ — $ 202,491 $ 230,936 $ — $ ( 28,636 ) $ — $ 202,300 U.S. treasury securities 874,319 — ( 76,458 ) — 797,861 874,035 — ( 82,694 ) — 791,341 Agency mortgage-backed securities 332,086 23 ( 44,691 ) — 287,418 359,068 54 ( 45,434 ) — 313,688 Agency collateralized mortgage obligations 38,901 — ( 3,116 ) — 35,785 41,874 — ( 3,031 ) — 38,843 State, county, and municipal securities 194 — ( 4 ) — 190 193 — ( 2 ) — 191 Pooled trust preferred securities issued by banks and insurers 1,205 — ( 180 ) — 1,025 1,203 — ( 169 ) — 1,034 Small business administration pooled securities 56,061 — ( 7,928 ) — 48,133 59,470 — ( 7,713 ) — 51,757 Total available for sale securities $ 1,533,336 $ 23 $ ( 160,456 ) $ — $ 1,372,903 $ 1,566,779 $ 54 $ ( 167,679 ) $ — $ 1,399,154 Excluded from the table above is accrued interest on available for sale securities of $ 2.8 million and $ 3.6 million at June 30, 2023 and December 31, 2022, respectively, which is included within other assets on the consolidated balance sheets. Additionally, the Company did not record any write-offs of accrued interest income on available for sale securities during the three and six months ended June 30, 2023 and 2022. Furthermore, no securities held by the Company were delinquent on contractual payments nor were any securities placed on non-accrual status at June 30, 2023 and December 31, 2022. 14 Table of Contents When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company had no sales of securities available for sale during the three and six months ended June 30, 2023 and 2022, and therefore no gains or losses were realized during the periods presented. The following tables show the gross unrealized losses and fair value of the Company’s available for sale securities in an unrealized loss position as of the dates indicated. These available for sale securities are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position: June 30, 2023 Less than 12 months 12 months or longer Total # of holdings Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in thousands) U.S. government agency securities 9 $ — $ — $ 202,491 $ ( 28,079 ) $ 202,491 $ ( 28,079 ) U.S. treasury securities 18 — — 797,861 ( 76,458 ) 797,861 ( 76,458 ) Agency mortgage-backed securities 135 10,660 ( 464 ) 275,316 ( 44,227 ) 285,976 ( 44,691 ) Agency collateralized mortgage obligations 13 2,701 ( 41 ) 33,085 ( 3,075 ) 35,786 ( 3,116 ) State, county, and municipal securities 1 190 ( 4 ) — — 190 ( 4 ) Pooled trust preferred securities issued by banks and insurers 1 — — 1,025 ( 180 ) 1,025 ( 180 ) Small business administration pooled securities 8 3,593 ( 274 ) 44,539 ( 7,654 ) 48,132 ( 7,928 ) Total impaired available for sale securities 185 $ 17,144 $ ( 783 ) $ 1,354,317 $ ( 159,673 ) $ 1,371,461 $ ( 160,456 ) December 31, 2022 Less than 12 months 12 months or longer Total # of holdings Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in thousands) U.S. government agency securities 9 $ 60,575 $ ( 7,292 ) $ 141,725 $ ( 21,344 ) $ 202,300 $ ( 28,636 ) U.S. treasury securities 18 43,035 ( 6,350 ) 748,306 ( 76,344 ) 791,341 ( 82,694 ) Agency mortgage-backed securities 123 155,944 ( 15,186 ) 154,653 ( 30,248 ) 310,597 ( 45,434 ) Agency collateralized mortgage obligations 13 38,843 ( 3,031 ) — — 38,843 ( 3,031 ) State, county, and municipal securities 1 191 ( 2 ) — — 191 ( 2 ) Pooled trust preferred securities issued by banks and insurers 1 — — 1,034 ( 169 ) 1,034 ( 169 ) Small business administration pooled securities 8 34,511 ( 3,550 ) 17,246 ( 4,163 ) 51,757 ( 7,713 ) Total impaired available for sale securities 173 $ 333,099 $ ( 35,411 ) $ 1,062,964 $ ( 132,268 ) $ 1,396,063 $ ( 167,679 ) The Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell each security before the recovery of its amortized cost basis. In addition, management does not believe that any of the securities are impaired due to reasons of credit quality. As a result, the Company did not recognize a provision for credit losses on these investments during the three and six months ended June 30, 2023 and 2022. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations. 15 Table of Contents As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category were as follows at June 30, 2023: • U.S. Government Agency Securities, U.S. Treasury Securities, Agency Mortgage-Backed Securities, Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities: These portfolios have contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies. • State, County and Municipal Securities : This portfolio has contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. • Pooled Trust Preferred Securities: This portfolio consists of one below investment grade security which is performing. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic and regulatory environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments. Held to Maturity Securities The following table summarizes the amortized cost, fair value and allowance for credit losses of held to maturity securities and the corresponding amounts of gross unrealized gains and losses recognized at the dates indicated: June 30, 2023 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for credit losses Fair Value (Dollars in thousands) U.S. government agency securities $ 30,395 $ — $ ( 1,907 ) $ — $ 28,488 $ 31,258 $ — $ ( 2,222 ) $ — $ 29,036 U.S. treasury securities 100,673 — ( 11,509 ) — 89,164 100,634 — ( 11,755 ) — 88,879 Agency mortgage-backed securities 851,418 15 ( 82,235 ) — 769,198 898,927 408 ( 83,383 ) — 815,952 Agency collateralized mortgage obligations 506,591 — ( 77,944 ) — 428,647 535,971 — ( 77,554 ) — 458,417 Single issuer trust preferred securities issued by banks 1,500 — ( 131 ) — 1,369 1,500 8 — — 1,508 Small business administration pooled securities 133,315 327 ( 6,424 ) — 127,218 136,830 313 ( 6,225 ) — 130,918 Total held to maturity securities $ 1,623,892 $ 342 $ ( 180,150 ) $ — $ 1,444,084 $ 1,705,120 $ 729 $ ( 181,139 ) $ — $ 1,524,710 Substantially all held to maturity securities held by the Company are guaranteed by the U.S. federal government or other government sponsored agencies and have a long history of no credit losses. As a result, management has determined these securities to have a zero loss expectation and therefore the Company did not record a provision for estimated credit losses on any held to maturity securities during the three and six months ended June 30, 2023 and 2022. Excluded from the table above is accrued interest on held to maturity securities of $ 4.4 million as of June 30, 2023 and December 31, 2022, respectively, which is included within other assets on the consolidated balance sheets. Additionally, the Company did not record any write-offs of accrued interest income on held to maturity securities during the three and six months ended June 30, 2023 and 2022. Furthermore, no securities held by the Company were delinquent on contractual payments nor were any securities placed on non-accrual status at June 30, 2023 and December 31, 2022. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company had no sales of held to maturity securities during the three and six months ended June 30, 2023 and 2022, and therefore no gains or losses were realized for such periods. The Company monitors the credit quality of held to maturity securities through the use of credit ratings. Credit ratings are monitored by the Company on at least a quarterly basis. As of June 30, 2023, all held to maturity securities held by the Company were rated investment grade or higher. 16 Table of Contents The actual maturities of certain available for sale or held to maturity securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of available for sale and held to maturity securities as of June 30, 2023 is presented below: Due in one year or less Due after one year to five years Due after five to ten years Due after ten years Total Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value (Dollars in thousands) Available for sale securities U.S. government agency securities $ — $ — $ 141,548 $ 125,881 $ 89,022 $ 76,610 $ — $ — $ 230,570 $ 202,491 U.S. treasury securities 149,901 145,725 674,982 608,868 49,436 43,268 — — 874,319 797,861 Agency mortgage-backed securities 7,144 7,024 87,582 78,115 96,895 81,586 140,465 120,693 332,086 287,418 Agency collateralized mortgage obligations — — — — 3,305 2,981 35,596 32,804 38,901 35,785 State, county, and municipal securities — — 194 190 — — — — 194 190 Pooled trust preferred securities issued by banks and insurers — — — — — — 1,205 1,025 1,205 1,025 Small business administration pooled securities — — — — — — 56,061 48,133 56,061 48,133 Total available for sale securities $ 157,045 $ 152,749 $ 904,306 $ 813,054 $ 238,658 $ 204,445 $ 233,327 $ 202,655 $ 1,533,336 $ 1,372,903 Held to maturity securities U.S. government agency securities $ — $ — $ 30,395 $ 28,488 $ — $ — $ — $ — $ 30,395 $ 28,488 U.S. treasury securities — — 99,681 88,340 992 824 — — 100,673 89,164 Agency mortgage-backed securities 23 23 278,067 259,168 356,972 309,733 216,356 200,274 851,418 769,198 Agency collateralized mortgage obligations — — 29,508 27,911 38,560 33,774 438,523 366,962 506,591 428,647 Single issuer trust preferred securities issued by banks — — 1,500 1,369 — — — — 1,500 1,369 Small business administration pooled securities — — — — 6,303 5,680 127,012 121,538 133,315 127,218 Total held to maturity securities $ 23 $ 23 $ 439,151 $ 405,276 $ 402,827 $ 350,011 $ 781,891 $ 688,774 $ 1,623,892 $ 1,444,084 Total $ 157,068 $ 152,772 $ 1,343,457 $ 1,218,330 $ 641,485 $ 554,456 $ 1,015,218 $ 891,429 $ 3,157,228 $ 2,816,987 Included in the table above are $ 24.9 million of callable securities at June 30, 2023. The carrying value of securities pledged to secure public funds, trust deposits, and for other purposes, as required or permitted by law, was $ 1.8 billion and $ 959.8 million at June 30, 2023 and December 31, 2022, respectively. At June 30, 2023 and December 31, 2022, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated stockholders’ equity. 17 Table of Contents NOTE 4 - LOANS, ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY Loans Held for Investment and Allowance for Credit Losses The following table summarizes the change in allowance for credit losses by loan category, and bifurcates the amount of loans allocated to each loan category for the period indicated: Three Months Ended June 30, 2023 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance $ 36,932 $ 76,198 $ 9,248 $ 3,338 $ 20,454 $ 12,428 $ 533 $ 159,131 Charge-offs ( 23,190 ) — — ( 59 ) — — ( 518 ) ( 23,767 ) Recoveries 16 — — 8 — 10 249 283 Provision for (release of) credit losses 1,384 2,198 ( 210 ) 319 1,011 ( 5 ) 303 5,000 Ending balance (1) $ 15,142 $ 78,396 $ 9,038 $ 3,606 $ 21,465 $ 12,433 $ 567 $ 140,647 Three Months Ended June 30, 2022 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance $ 14,169 $ 84,436 $ 11,867 $ 3,159 $ 18,388 $ 11,750 $ 749 $ 144,518 Charge-offs — — — ( 11 ) — ( 98 ) ( 435 ) ( 544 ) Recoveries 29 — — 33 — 14 269 345 Provision for (release of) credit losses ( 91 ) ( 980 ) ( 157 ) ( 397 ) 1,362 74 189 — Ending balance (1) $ 14,107 $ 83,456 $ 11,710 $ 2,784 $ 19,750 $ 11,740 $ 772 $ 144,319 Six Months Ended June 30, 2023 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance $ 27,559 $ 77,799 $ 10,762 $ 2,834 $ 20,973 $ 11,504 $ 988 $ 152,419 Charge-offs ( 23,471 ) — — ( 87 ) — — ( 1,024 ) ( 24,582 ) Recoveries 21 — — 39 — 26 474 560 Provision for (release of) credit losses 11,033 597 ( 1,724 ) 820 492 903 129 12,250 Ending balance (1) $ 15,142 $ 78,396 $ 9,038 $ 3,606 $ 21,465 $ 12,433 $ 567 $ 140,647 Six Months Ended June 30, 2022 (Dollars in thousands) Commercial and Industrial Commercial Real Estate Commercial Construction Small Business Residential Real Estate Home Equity Other Consumer Total Allowance for credit losses Beginning balance $ 14,402 $ 83,486 $ 12,316 $ 3,508 $ 14,484 $ 17,986 $ 740 $ 146,922 Charge-offs — — — ( 59 ) — ( 122 ) ( 1,069 ) ( 1,250 ) Recoveries 42 3 — 59 — 40 503 647 Provision for (release of) credit losses ( 337 ) ( 33 ) ( 606 ) ( 724 ) 5,266 ( 6,164 ) 598 ( 2,000 ) Ending balance (1) $ 14,107 $ 83,456 $ 11,710 $ 2,784 $ 19,750 $ 11,740 $ 772 $ 144,319 (1) Balances of accrued interest receivable excluded from amortized cost and the calculation of allowance for credit losses amounted to $ 54.0 million and $ 39.0 million as of June 30, 2023 and June 30, 2022, respectively. 18 Table of Contents The balance of allowance for credit losses decreased to $ 140.6 million as of June 30, 2023 compared to $ 152.4 million at December 31, 2022. The decrease was driven primarily by outsized charge-offs and specific reserve allocations over certain commercial loans. For the purpose of estimating the allowance for credit losses, management segregated the loan portfolio into the portfolio segments detailed in the above tables. Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. Some of the characteristics unique to each loan category include: Commercial Portfolio • Commercial and Industrial : Consists of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of accounts receivable, inventory, plant and equipment, real estate, or other business assets. The primary source of repayment is operating cash flow and, secondarily, liquidation of assets. • Commercial Real Estate : Consists of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties and is inclusive of owner-occupied commercial properties. Loans are typically written with amortizing payment structures. Collateral values are determined based upon third party appraisals and evaluations. Permissible loan to value ratios at origination are governed by Company policy and regulatory guidelines. The primary source of repayment is cash flow from operating leases and rents and, secondarily, liquidation of assets. • Commercial Construction : Consists of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property. Project types include residential land development, one-to-four family, condominium, and multi-family home construction, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project. Collateral values are determined based upon third party appraisals and evaluations. Permissible loan to value ratios at origination are governed by Company policy and regulatory guidelines. Repayment sources vary depending upon the type of project and may consist of proceeds from the sale or lease of units, operating cash flows or liquidation of other assets. • Small Business: Consists of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, or real estate if applicable. The primary source of repayment is operating cash flows and, secondarily, liquidation of assets. For the commercial portfolio it is the Company’s policy to obtain personal guarantees for payment from individuals holding material ownership interests in the borrowing entities. Consumer Portfolio • Residential Real Estate : Residential mortgage loans held in the Company’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral. Collateral consists of mortgage liens on one-to-four family residential properties. Residential mortgage loans also include loans to construct owner-occupied one-to-four family residential properties. • Home Equity : Home equity loans and credit lines are made to qualified individuals and are primarily secured by senior or junior mortgage liens on owner-occupied one-to-four family homes, condominiums or vacation homes. Each home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. The majority of home equity lines of credit have a variable rate and are billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the then outstanding principal balance plus all accrued interest over a predetermined repayment period, as set forth in the note. Additionally, the Company has the option of renewing each line of credit for additional draw periods. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines. • Other Consumer: Other consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. These loans may be secured or unsecured. 19 Table of Contents Credit Quality The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as adversely risk-rated, delinquent, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point credit risk-rating system, which assigns a risk-grade to each loan obligation based on a number of quantitative and qualitative factors associated with a commercial or small business loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-rating categories for the commercial portfolio are defined as follows: • Pass: Risk-rating “1” through “6” comprises of loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing or above average leverage and/or weakening market fundamentals that indicate below average asset quality, margins and market share. Collateral coverage is protective. • Potential Weakness: Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Company’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned. • Definite Weakness Loss Unlikely: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loans may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation. • Partial Loss Probable: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. • Definite Loss: Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Company is not warranted. The Company utilizes a comprehensive, continuous strategy for evaluating and monitoring commercial credit quality. Initially, credit quality is determined at loan origination and is re-evaluated when subsequent actions, such as renewals, modifications or reviews, occur. Actively managed commercial borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by experienced credit professionals, while continuous portfolio monitoring techniques are employed to evaluate changes in credit quality for smaller loan relationships. Any changes in credit quality are reflected in risk-rating changes. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis. For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. As a result, for this portfolio the Company utilizes a pass/default risk-rating system, based on an age analysis (i.e., days past due) associated with each consumer loan. Under this structure, consumer loans less than 90 days past due are assigned a "pass" rating, while any consumer loans 90 days or more past due are assigned a "default" rating. 20 Table of Contents The following table details the amortized cost balances of the Company's loan portfolios, presented by credit quality indicator and origination year as of the dates indicated below: June 30, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving converted to Term Total (1) (Dollars in thousands) Commercial and industrial Pass (2) $ 255,397 $ 206,214 $ 117,268 $ 98,942 $ 49,317 $ 120,734 $ 819,928 $ — $ 1,667,800 Potential weakness 136 1,331 660 805 653 666 27,334 — 31,585 Definite weakness - loss unlikely 170 6,797 1,282 148 1,086 387 13,964 — 23,834 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial and industrial $ 255,703 $ 214,342 $ 119,210 $ 99,895 $ 51,056 $ 121,787 $ 861,226 $ — $ 1,723,219 Current-period gross write-offs $ — $ — $ — $ — $ — $ 34 $ 23,437 $ — $ 23,471 Commercial real estate Pass $ 508,627 $ 1,189,436 $ 1,384,305 $ 1,318,126 $ 662,064 $ 2,264,182 $ 66,612 $ 857 $ 7,394,209 Potential weakness 62,601 22,115 72,507 15,215 3,268 131,636 — — 307,342 Definite weakness - loss unlikely 542 24,678 13,688 20,421 13,911 23,786 — — 97,026 Partial loss probable — 14,219 — — — — — — 14,219 Definite loss — — — — — — — — — Total commercial real estate $ 571,770 $ 1,250,448 $ 1,470,500 $ 1,353,762 $ 679,243 $ 2,419,604 $ 66,612 $ 857 $ 7,812,796 Current-period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial construction Pass $ 112,698 $ 489,700 $ 247,726 $ 48,793 $ 48,062 $ 4,749 $ 25,148 $ — $ 976,876 Potential weakness 16,910 5,023 — 3,866 — — — — 25,799 Definite weakness - loss unlikely 8,659 11,462 — — — — — — 20,121 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial construction $ 138,267 $ 506,185 $ 247,726 $ 52,659 $ 48,062 $ 4,749 $ 25,148 $ — $ 1,022,796 Current-period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Small business Pass $ 26,279 $ 53,998 $ 41,861 $ 28,187 $ 14,902 $ 24,741 $ 43,853 $ — $ 233,821 Potential weakness — — — 157 — 216 305 — 678 Definite weakness - loss unlikely 370 135 137 335 — 551 1,065 — 2,593 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total small business $ 26,649 $ 54,133 $ 41,998 $ 28,679 $ 14,902 $ 25,508 $ 45,223 $ — $ 237,092 Current-period gross write-offs $ — $ — $ — $ — $ — $ — $ 87 $ — $ 87 Residential real estate Pass $ 246,831 $ 652,380 $ 411,534 $ 188,281 $ 91,726 $ 627,591 $ — $ — $ 2,218,343 Default — — — 594 — 2,347 — — 2,941 Total residential real estate $ 246,831 $ 652,380 $ 411,534 $ 188,875 $ 91,726 $ 629,938 $ — $ — $ 2,221,284 Current-period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — 21 Table of Contents Home equity Pass $ 14,533 $ 41,442 $ 57,879 $ 52,017 $ 30,658 $ 132,915 $ 762,582 $ 2,288 $ 1,094,314 Default — — — — — — 942 142 1,084 Total home equity $ 14,533 $ 41,442 $ 57,879 $ 52,017 $ 30,658 $ 132,915 $ 763,524 $ 2,430 $ 1,095,398 Current-period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Other consumer (3) Pass $ 307 $ 457 $ 1,542 $ 1,075 $ 559 $ 2,445 $ 20,940 $ — $ 27,325 Default — — — — — — 1 — 1 Total other consumer $ 307 $ 457 $ 1,542 $ 1,075 $ 559 $ 2,445 $ 20,941 $ — $ 27,326 Current-period gross write-offs $ 1,003 $ — $ — $ — $ — $ 7 $ 14 $ — $ 1,024 Total $ 1,254,060 $ 2,719,387 $ 2,350,389 $ 1,776,962 $ 916,206 $ 3,336,946 $ 1,782,674 $ 3,287 $ 14,139,911 Total current-period gross write-offs $ 1,003 $ — $ — $ — $ — $ 41 $ 23,538 $ — $ 24,582 22 Table of Contents June 30, 2022 2021 2020 2019 2018 2017 Prior Revolving Loans Revolving converted to Term Total (1) (Dollars in thousands) Commercial and industrial Pass (2) $ 220,435 $ 188,007 $ 136,331 $ 79,699 $ 98,598 $ 26,321 $ 751,261 $ — $ 1,500,652 Potential weakness 221 1,022 1,054 872 84 1,017 4,229 — 8,499 Definite weakness - loss unlikely 354 1,283 — 44 407 2,645 27,162 — 31,895 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial and industrial $ 221,010 $ 190,312 $ 137,385 $ 80,615 $ 99,089 $ 29,983 $ 782,652 $ — $ 1,541,046 Commercial real estate Pass $ 543,108 $ 1,488,142 $ 1,306,131 $ 874,026 $ 781,208 $ 2,122,989 $ 131,883 $ 516 $ 7,248,003 Potential weakness 40,003 63,294 53,347 5,996 68,671 197,553 13,620 2,578 445,062 Definite weakness - loss unlikely 1,113 8,181 4,263 2,904 14,822 67,409 — — 98,692 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial real estate $ 584,224 $ 1,559,617 $ 1,363,741 $ 882,926 $ 864,701 $ 2,387,951 $ 145,503 $ 3,094 $ 7,791,757 Commercial construction Pass $ 362,544 $ 369,399 $ 269,581 $ 65,520 $ 28,097 $ 11,420 $ 33,583 $ 3 $ 1,140,147 Potential weakness 13,054 — 3,319 — — 21,304 — — 37,677 Definite weakness - loss unlikely — 16,753 — — — — — — 16,753 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total commercial construction $ 375,598 $ 386,152 $ 272,900 $ 65,520 $ 28,097 $ 32,724 $ 33,583 $ 3 $ 1,194,577 Small business Pass $ 30,065 $ 48,840 $ 33,910 $ 18,528 $ 10,999 $ 22,481 $ 37,755 $ — $ 202,578 Potential weakness — 173 415 373 195 141 707 — 2,004 Definite weakness - loss unlikely 103 — 551 13 4 230 470 — 1,371 Partial loss probable — — — — — — — — — Definite loss — — — — — — — — — Total small business $ 30,168 $ 49,013 $ 34,876 $ 18,914 $ 11,198 $ 22,852 $ 38,932 $ — $ 205,953 Residential real estate Pass $ 396,321 $ 432,105 $ 200,912 $ 99,019 $ 102,471 $ 610,183 $ — $ — $ 1,841,011 Default — — 123 — 974 1,949 — — 3,046 Total residential real estate $ 396,321 $ 432,105 $ 201,035 $ 99,019 $ 103,445 $ 612,132 $ — $ — $ 1,844,057 Home equity Pass $ 28,727 $ 63,208 $ 58,488 $ 33,501 $ 30,145 $ 130,197 $ 717,115 $ 2,559 $ 1,063,940 Default — — — 122 — 292 1,156 — 1,570 Total home equity $ 28,727 $ 63,208 $ 58,488 $ 33,623 $ 30,145 $ 130,489 $ 718,271 $ 2,559 $ 1,065,510 Other consumer (3) Pass $ 379 $ 2,862 $ 2,317 $ 1,671 $ 576 $ 4,350 $ 20,697 $ — $ 32,852 Default — — — — — 12 — — 12 Total other consumer $ 379 $ 2,862 $ 2,317 $ 1,671 $ 576 $ 4,362 $ 20,697 $ — $ 32,864 Total $ 1,636,427 $ 2,683,269 $ 2,070,742 $ 1,182,288 $ 1,137,251 $ 3,220,493 $ 1,739,638 $ 5,656 $ 13,675,764 23 Table of Contents (1) Loan origination dates in the tables above reflect the original origination date, or the date of a material modification of a previously originated loan. (2) Loans originated as part of the Paycheck Protection Program ("PPP") established by the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") are included within commercial and industrial under the 2021 and 2020 vintage year and "pass" category as these loans are 100% guaranteed by the U.S. Government. Outstanding PPP loans totaled $ 5.7 million and $ 30.6 million as of June 30, 2023 and 2022, respectively. (3) Other consumer portfolio is inclusive of deposit account overdrafts recorded as loan balances and the associated gross write-offs. For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) scores and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a regular basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential real estate and home equity portfolios, periodically. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios at the dates indicated below: June 30 2023 December 31 2022 Residential real estate portfolio FICO score (re-scored)(1) 754 753 LTV (re-valued)(2) 59.5 % 57.0 % Home equity portfolio FICO score (re-scored)(1) 771 771 LTV (re-valued)(2)(3) 44.1 % 41.3 % (1) The average FICO scores at June 30, 2023 are based upon rescores from June 2023, as available for previously originated loans, or origination score data for loans booked in June 2023. The average FICO scores at December 31, 2022 were based upon rescores available from December 2022, as available for previously originated loans, or origination score data for loans booked in December 2022. (2) The combined LTV ratios for June 30, 2023 are based upon updated automated valuations as of May 2023, when available, and/or the most current valuation data available. The combined LTV ratios for December 31, 2022 were based upon updated automated valuations as of November 2022, when available, and/or the most current valuation data available as of such date. The updated automated valuations provide new information on loans that may be available since the previous valuation was obtained. If no new information is available, the valuation will default to the previously obtained data or most recent appraisal. (3) For home equity loans and lines in a subordinate lien, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines. Unfunded Commitments Management evaluates the need for a reserve on unfunded lending commitments in a manner consistent with loans held for investment. At June 30, 2023 and December 31, 2022, the Company's estimated reserve for unfunded commitments amounted to $ 1.5 million and $ 1.3 million, respectively. Asset Quality The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of collection specialists and the Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans. The Company also may use discretion regarding other loans 90 days or more delinquent if the loan is well secured and/or in process of collection. 24 Table of Contents The following table shows information regarding nonaccrual loans as of the dates indicated: Nonaccrual Balances June 30, 2023 December 31, 2022 With Allowance for Credit Losses Without Allowance for Credit Losses Total With Allowance for Credit Losses Without Allowance for Credit Losses Total (1) (Dollars in thousands) Commercial and industrial $ 2,937 $ 298 $ 3,235 $ 26,395 $ 298 $ 26,693 Commercial real estate 27,197 2,713 29,910 12,961 2,769 15,730 Small business 344 4 348 99 5 104 Residential real estate 8,179 — 8,179 8,479 — 8,479 Home equity 3,944 — 3,944 3,400 — 3,400 Other consumer 86 — 86 475 — 475 Total nonaccrual loans $ 42,687 $ 3,015 $ 45,702 $ 51,809 $ 3,072 $ 54,881 (1) Nonaccrual balances at December 31, 2022 included $ 11.5 million of nonaccruing troubled debt restructures ("TDRs"). It is the Company's policy to reverse any accrued interest when a loan is put on nonaccrual status, and, as such, the Company did not record any interest income on nonaccrual loans during the six months ended June 30, 2023 and 2022, except for instances where nonaccrual loans were paid off in excess of the recorded book balance. The following table shows information regarding foreclosed residential real estate property at the dates indicated: June 30, 2023 December 31, 2022 (Dollars in thousands) Foreclosed residential real estate property held by the creditor $ 110 $ — Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure $ 2,425 $ 1,615 The following tables show the age analysis of past due financing receivables as of the dates indicated: June 30, 2023 30-59 days 60-89 days 90 days or more Total Past Due Total Financing Receivables Amortized Cost >90 Days and Accruing Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Current (Dollars in thousands) Loan Portfolio Commercial and industrial 1 $ 29 2 $ 77 2 $ 339 5 $ 445 $ 1,722,774 $ 1,723,219 $ — Commercial real estate — — 3 29,338 5 3,282 8 32,620 7,780,176 7,812,796 — Commercial construction — — — — — — — — 1,022,796 1,022,796 — Small business 11 365 9 185 7 111 27 661 236,431 237,092 — Residential real estate 15 2,997 5 695 16 2,245 36 5,937 2,215,347 2,221,284 — Home equity 18 1,290 6 182 14 1,084 38 2,556 1,092,842 1,095,398 — Other consumer (1) 370 335 9 63 3 3 382 401 26,925 27,326 — Total 415 $ 5,016 34 $ 30,540 47 $ 7,064 496 $ 42,620 $ 14,097,291 $ 14,139,911 $ — 25 Table of Contents December 31, 2022 30-59 days 60-89 days 90 days or more Total Past Due Total Financing Receivables Amortized Cost >90 Days and Accruing Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Current (Dollars in thousands) Loan Portfolio Commercial and industrial 3 $ 49 1 $ 175 3 $ 23,726 7 $ 23,950 $ 1,611,153 $ 1,635,103 $ — Commercial real estate 7 2,052 5 4,971 3 2,977 15 10,000 7,750,230 7,760,230 — Commercial construction — — — — — — — — 1,154,413 1,154,413 — Small business 12 111 3 25 3 5 18 141 218,961 219,102 — Residential real estate 8 1,654 8 1,105 16 1,725 32 4,484 2,031,040 2,035,524 — Home equity 19 1,647 3 201 17 965 39 2,813 1,085,937 1,088,750 — Other consumer (1) 432 421 15 83 4 28 451 532 35,021 35,553 — Total 481 $ 5,934 35 $ 6,560 46 $ 29,426 562 $ 41,920 $ 13,886,755 $ 13,928,675 $ — (1) Other consumer portfolio is inclusive of deposit account overdrafts recorded as loan balances. (2) The amount of net deferred costs on originated loans included in the ending balance was $ 6.1 million and $ 5.0 million at June 30, 2023 and December 31, 2022, respectively. Loan Modifications In the course of resolving nonperforming loans, the Company may choose to restructure the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include principal forgiveness, interest rate reductions, term extensions, other-than-insignificant payment delays, and/or any combinations thereof. Any loans that are modified are reviewed by the Company to determine whether the modification is the direct result of a borrower experiencing financial difficulty, as the Company adopted the accounting and disclosure requirements for loan modifications made to borrowers experiencing financial difficulty and ceased to recognize TDRs effective January 1, 2023. Loan modifications made to borrowers experiencing financial difficulty are evaluated on a collective basis with loans sharing similar risk characteristics in accordance with the current expected credit loss ("CECL") methodology. Under previously applicable accounting guidance, the Company determined the amount of allowance for credit losses on TDRs using a discounted cash flow analysis or a fair value of collateral approach if the loan was determined to be individually evaluated. This change in methodology did not have a material impact on the Company's allowance for credit loss estimate. 26 Table of Contents The following table presents the amortized cost basis of loans modified to borrowers experiencing financial difficulty during the three and six month periods ended June 30, 2023, disaggregated by class of financing receivable and type of modification granted: Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Term Extension Amortized Cost Basis % of Total Class of Financing Receivable Amortized Cost Basis % of Total Class of Financing Receivable Loan Category (Dollars in thousands) Commercial and industrial $ 8,193 0.48 % $ 8,193 0.48 % Commercial real estate 15,921 0.20 % 18,461 0.24 % Commercial construction 2,369 0.23 % 2,369 0.23 % Small business — — % 105 0.04 % Total $ 26,483 $ 29,128 Other-Than-Insignificant Payment Delay Amortized Cost Basis % of Total Class of Financing Receivable Amortized Cost Basis % of Total Class of Financing Receivable Loan Category (Dollars in thousands) Commercial and industrial $ — — % $ 2,805 0.16 % Commercial real estate — — % 7,013 0.09 % Total $ — $ 9,818 Combination - Interest Rate Reduction and Term Extension Amortized Cost Basis % of Total Class of Financing Receivable Amortized Cost Basis % of Total Class of Financing Receivable Loan Category (Dollars in thousands) Small business $ — — % $ 44 0.02 % Total $ — $ 44 Combination - Term Extension and Other-Than-Insignificant Payment Delay Amortized Cost Basis % of Total Class of Financing Receivable Amortized Cost Basis % of Total Class of Financing Receivable Loan Category (Dollars in thousands) Commercial and industrial $ 1,965 0.11 % $ 1,965 0.11 % Commercial real estate 6,857 0.09 % 6,857 0.09 % Total $ 8,822 $ 8,822 The table above is reflective of all modifications during the periods presented, which may in certain instances include multiple modifications of the same loan. As such, the above amounts may not reflect outstanding balances at period end. 27 Table of Contents The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty for the three and six months ending June 30, 2023: Three Months Ended June 30, 2023 Term Extension Loan Category Financial Effect Commercial and industrial Added a weighted-average contractual term of 1 month to the life of the loans Commercial real estate Added a weighted-average contractual term of 1.9 years to the life of the loans Commercial construction Added a weighted-average contractual term of 2 months to the life of the loans Six Months Ended June 30, 2023 Term Extension Loan Category Financial Effect Commercial and industrial Added a weighted-average contractual term of 1 month to the life of the loans Commercial real estate Added a weighted-average contractual term of 1.8 years to the life of the loans Commercial construction Added a weighted-average contractual term of 2 months to the life of the loans Small business Added a weighted-average contractual term of 4.3 years to the life of the loans Interest Rate Reduction Loan Category Financial Effect Small business Reduced weighted-average contractual interest rate from 10.00 % to 6.50 % The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months as of June 30, 2023: June 30, 2023 Payment Status (Amortized Cost Basis) Current (1) 30-89 Days Past Due 90+ Days Past Due (Dollars in thousands) Loan Type Commercial and industrial $ 12,963 $ — $ — Commercial real estate 17,211 15,120 — Commercial construction 2,369 — — Small business 149 — — Total $ 32,692 $ 15,120 $ — (1) Current amounts above are inclusive of $ 19.6 million of loans on nonaccrual status as it is the Company's policy for loans to remain current with respect to principal and interest for up to six months prior being restored to accrual status. The Company considers a loan to have defaulted when it reaches 90 days past due. During the six months ended June 30, 2023, there were no loans modified to borrowers experiencing financial difficulty within the previous 12 months that subsequently defaulted, and during the six months ended June 30, 2022 there were no TDRs modified during the previous 12 months that subsequently defaulted. 28 Table of Contents The following table shows the Company’s total TDRs and other pertinent information as of the date indicated: December 31, 2022 (Dollars in thousands) TDRs on accrual status $ 11,278 TDRs on nonaccrual 11,520 Total TDRs $ 22,798 There were no new TDRs during the three or six months ended June 30, 2022. At June 30, 2023, the Company did not have any additional commitments to lend to borrowers experiencing financial difficulty who were party to a loan modification. At December 31, 2022, the Company had additional commitments to lend to borrowers who had been a party to a TDR of $ 64,000 . NOTE 5 - BORROWINGS Federal Home Loan Bank Borrowings The Company typically utilizes FHLB advances for certain short-term and long-term borrowing needs, as deemed necessary. During the first quarter of 2023, the Company entered into net advances with the Federal Home Loan Bank ("FHLB") of $ 879.0 million, due primarily to deposit balance reductions, share repurchase activity, and a proactive strategy to bolster on-balance sheet liquidity at March 31, 2023. During the second quarter, the Company experienced a stabilizing deposit base, lowered the amount of on balance sheet liquidity maintained, and as a result reduced the total amount of outstanding FHLB borrowings at June 30, 2023 to $ 788.5 million. The June 30, 2023 FHLB balances were comprised of the following: Weighted Average Effective Rate, Total Contractual Net of Outstanding Rate Hedges (Dollars in thousands) Overnight Borrowings $ 87,860 5.27 % n/a 1-Month Term 300,000 5.29 % n/a 1-Month Term 400,000 5.32 % 3.94 % Amortizing 619 1.65 % n/a Total $ 788,479 At June 30, 2023 and December 31, 2022, the Company had sufficient collateral at the FHLB to support its obligations and was in compliance with the FHLB's collateral pledging program. The Company’s FHLB advances are collateralized by a blanket pledge agreement on the Bank’s FHLB stock, certain qualified investment securities, deposits at the FHLB, residential mortgages, and by certain commercial real estate loans held in the Bank’s portfolio. The carrying value of loans pledged as collateral for these borrowings totaled $ 3.7 billion and $ 2.7 billion at June 30, 2023 and December 31, 2022, respectively, resulting in available borrowing capacity with the FHLB of $ 1.8 billion both June 30, 2023 and December 31, 2022. 29 Table of Contents Long-Term Debt The following table summarizes long-term debt, net of debt issuances costs, at the dates indicated: June 30 December 31 2023 2022 (Dollars in thousands) Junior subordinated debentures Capital Trust V 51,516 51,514 Central Trust I 5,258 5,258 Central Trust II 6,083 6,083 Subordinated debentures 49,933 49,885 Total long-term debt $ 112,790 $ 112,740 The interest expense on long-term debt was $ 3.3 million and $ 1.9 million for the six months ended June 30, 2023 and 2022, respectively. Junior Subordinated Debentures : The junior subordinated debentures are issued to various trust subsidiaries of the Company. These trusts were formed for the purpose of issuing trust preferred securities, which were then sold in a private placement offering. The proceeds from the sale of the securities and the issuance of common stock by these trusts were invested in these Junior Subordinated Debentures issued by the Company. These trust preferred securities bear interest at a rate of three-month LIBOR ( 5.55 % at June 30, 2023) plus applicable spread, or equivalent alternate rate. Information relating to these trust preferred securities at June 30, 2023 is as follows: Trust Principal Amount Maturity Date Interest Rate Spread All-in Rate (Dollars in thousands) Capital Trust V $ 50,000 3/15/2037 1.48 % 7.03 % Central Trust I (1) $ 5,100 9/16/2034 2.44 % 7.99 % Central Trust II (1) $ 5,900 3/15/2037 1.65 % 7.20 % (1) These securities noted above are callable quarterly until maturity. Subordinated Debentures : On March 14, 2019 the Company issued subordinated debentures with an aggregate principal amount of $ 50.0 million in a private placement transaction to institutional accredited investors, which remained outstanding at June 30, 2023 and December 31, 2022. The subordinated debentures mature on March 15, 2029. However, with regulatory approval, the Company may redeem the subordinated debentures without penalty at any scheduled payment date on or after March 15, 2024 with 30 days notice. The subordinated debentures carry a fixed rate of interest of 4.75 % through March 15, 2024, after which interest converts to a variable rate of the then current three-month LIBOR rate plus 219 basis points, or equivalent alternate rate. At June 30, 2023, the Company held no long-term debt scheduled to mature within the next 5 years. 30 Table of Contents NOTE 6 - STOCK BASED COMPENSATION During the six months ended June 30, 2023, the Company had the following activity related to stock based compensation: Time Vested Restricted Stock Awards The Company made the following awards of time vested restricted stock: Date Shares Granted Plan Grant Date Fair Value Per Share Vesting Period 2/16/2023 77,525 2005 Employee Stock Plan $ 80.65 Ratably over 3 years from grant date 2/16/2023 12,309 2005 Employee Stock Plan $ 80.65 Ratably over 5 years, on each anniversary of February 6, 2023 start date 5/15/2023 1,080 2005 Employee Stock Plan $ 46.21 Ratably over 3 years from grant date 5/23/2023 12,410 2018 Non-Employee Director Stock Plan $ 48.35 Shares vested immediately 5/30/2023 890 2023 Omnibus Incentive Plan (1) $ 45.09 Ratably over 3 years from grant date (1) The 2023 Omnibus Incentive Plan was approved by the Company's shareholders on May 18, 2023 and replaces the Company's Second Amended and Restated 2005 Employee Stock Plan. Performance-Based Restricted Stock Awards On February 16, 2023, the Company granted 32,200 performance-based restricted stock awards, representing the maximum number of shares that may be earned under the awards, to certain executive level employees. These performance-based restricted stock awards were issued from the 2005 Employee Stock Plan and were determined to have a grant date fair value per share of $ 80.65 . The number of shares to be vested is contingent upon the Company's attainment of certain performance criteria to be measured at the end of a three year performance period ending December 31, 2025 . The awards will vest upon the earlier of the date on which it is determined if the performance goal is achieved subsequent to the performance period or March 31, 2026. On March 13, 2023, the performance-based restricted stock awards that were awarded on February 27, 2020 vested at 80 % of the maximum target shares awarded, or 12,880 shares, net of forfeitures. 31 Table of Contents NOTE 7 - DERIVATIVE AND HEDGING ACTIVITIES The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives, foreign exchange contracts and risk participation agreements to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer related positions by entering into similar offsetting positions with broker-dealers. Derivative instruments are carried at fair value in the Company's financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship. The Company does not enter into proprietary trading positions for any derivatives. The Company is subject to over-the-counter derivative clearing requirements which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House ("CME"). This clearing house requires the Company to post initial and variation margin to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. Interest Rate Positions The Company may utilize various interest rate derivatives as hedging instruments against interest rate risk associated with the Company’s borrowings and loan portfolios. An interest rate derivative is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. 32 Table of Contents The following tables reflect the Company's derivative positions at the dates indicated below for interest rate swaps which qualify as cash flow hedges for accounting purposes: June 30, 2023 Weighted Average Rate Notional Amount Average Maturity Current Rate Received Pay Fixed Swap Rate Fair Value (in thousands) (in years) (in thousands) Interest rate swaps on borrowings $ 400,000 3.09 5.05 % 3.67 % $ 7,298 Current Rate Paid Receive Fixed Swap Rate Interest rate swaps on loans $ 1,050,000 2.48 5.18 % 2.66 % $ ( 43,497 ) Current Rate Paid Receive Fixed Swap Rate Cap - Floor Interest rate collars on loans 400,000 1.78 5.18 % 3.09 % - 2.19 % ( 9,951 ) Total $ 1,850,000 $ ( 46,150 ) December 31, 2022 Weighted Average Rate Notional Amount Average Maturity Current Rate Paid Receive Fixed Swap Rate Fair Value (in thousands) (in years) (in thousands) Interest rate swaps on loans 1,050,000 2.97 4.24 % 2.66 % ( 42,005 ) Current Rate Paid Receive Fixed Swap Rate Cap - Floor Interest rate collars on loans 400,000 2.27 4.22 % 3.09 % - 2.19 % ( 10,239 ) Total $ 1,450,000 $ ( 52,244 ) The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is 5.7 years. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of the gains or losses is reported as a component of other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company expects approximately $ 6.1 million (pre-tax) to be reclassified as an increase to interest income and $ 30.0 million (pre-tax) to be reclassified as an increase to interest expense, from OCI related to the Company’s cash flow hedges in the twelve months following June 30, 2023. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve at June 30, 2023. The Company had no fair value hedges as of June 30, 2023 or December 31, 2022. Customer Related Positions Loan level derivatives, primarily interest rate swaps, offered to commercial borrowers through the Company’s loan level derivative program do not qualify as hedges for accounting purposes. The Company believes that its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. Derivatives with dealer counterparties are then either cleared through a clearinghouse or settled directly with a single counterparty. The commercial customer derivative program allows the Company to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. The amounts relating to the notional principal amount are not actually exchanged. 33 Table of Contents Foreign exchange contracts offered to commercial borrowers through the Company’s derivative program do not qualify as hedges for accounting purposes. The Company acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Company enters into similar offsetting positions. The amounts relating to the notional principal amount are exchanged. The Company has entered into risk participation agreements with other dealer banks in commercial loan agreements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and, therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. 34 Table of Contents The following table reflects the Company’s customer related derivative positions at the dates indicated below for those derivatives not designated as hedging: Notional Amount Maturing Number of Positions (1) Less than 1 year Less than 2 years Less than 3 years Less than 4 years Thereafter Total Fair Value June 30, 2023 (Dollars in thousands) Loan level swaps Receive fixed, pay variable 283 $ 73,452 $ 157,031 $ 245,369 $ 247,733 $ 976,983 $ 1,700,568 $ ( 117,280 ) Pay fixed, receive variable 283 73,452 157,031 245,369 247,733 976,983 1,700,568 117,282 Foreign exchange contracts Buys foreign currency, sells U.S. currency 31 77,550 24,092 — — — 101,642 1,932 Buys U.S. currency, sells foreign currency 31 77,550 24,092 — — — 101,642 ( 1,876 ) Risk participation agreements Participation out 17 — 24,452 — — 128,075 152,527 257 Participation in 7 10,646 — — 19,166 8,133 37,945 ( 12 ) Notional Amount Maturing Number of Positions (1) Less than 1 year Less than 2 years Less than 3 years Less than 4 years Thereafter Total Fair Value December 31, 2022 (Dollars in thousands) Loan level swaps Receive fixed, pay variable 283 $ 80,531 $ 96,613 $ 256,924 $ 193,096 $ 1,016,312 $ 1,643,476 $ ( 118,930 ) Pay fixed, receive variable 283 80,531 96,613 256,924 193,096 1,016,312 1,643,476 118,928 Foreign exchange contracts Buys foreign currency, sells U.S. currency 49 124,982 13,363 — — — 138,345 306 Buys U.S. currency, sells foreign currency 49 124,982 13,363 — — — 138,345 ( 232 ) Risk participation agreements Participation out 13 2,595 — 24,538 — 95,514 122,647 161 Participation in 6 27,365 — — — 25,849 53,214 ( 15 ) (1) The Company may enter into one dealer swap agreement which offsets multiple commercial borrower swap agreements. 35 Table of Contents Mortgage Derivatives The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that loans may be sold subsequently in the secondary market. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. These commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded within mortgage banking income. In addition, the Company has elected the fair value option to carry loans held for sale at fair value. The change in fair value of loans held for sale is recorded in current period earnings as a component of mortgage banking income in accordance with the Company's fair value election. The fair value of loans held for sale increased by $ 14,000 and $ 122,000 for the three months ended June 30, 2023 and 2022, respectively, and decreased by $ 3,000 and $ 426,000 for the six months ended June 30, 2023 and 2022, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives. Outstanding loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might change from inception of the rate lock to funding of the loan due to changes in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. To protect against the price risk inherent in derivative loan commitments, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Included in the mandatory delivery forward commitments are To Be Announced securities ("TBAs"). Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The accuracy of underlying assumptions will impact the ultimate effectiveness of any hedging strategies. With mandatory delivery contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a "pair-off" fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Generally, the Company makes this type of commitment once mortgage loans have been funded and are held for sale, in order to minimize the risk of failure to deliver the requisite volume of loans to the investor and paying pair-off fees as a result. The Company also sells TBA securities to offset potential changes in the fair value of derivative loan commitments. Generally, the Company sells TBA securities by entering into derivative loan commitments for settlement in 30 to 90 days. The Company expects that mandatory delivery contracts, including TBA securities, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments. With best effort contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, best efforts cash contracts have no pair off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments. The aggregate amount of net realized gains or losses on sales of such loans included within mortgage banking income was net realized gains of $ 170,000 and net realized losses of $ 278,000 for the three months ended June 30, 2023 and 2022, respectively and net realized gains of $ 344,000 and $ 321,000 for the six months ended June 30, 2023 and 2022, respectively. Balance Sheet Offsetting The Company does not offset fair value amounts recognized for derivative instruments. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be maintained at dealer banks by the Company is monitored and adjusted as necessary. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company's financial statements are not equal and offsetting. 36 Table of Contents The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet and the potential effect of netting arrangements on its financial position, at the dates indicated: Asset Derivatives (1) Liability Derivatives (2) Fair Value at Fair Value at Fair Value at Fair Value at June 30 2023 December 31 2022 June 30 2023 December 31 2022 (Dollars in thousands) Derivatives designated as hedges Interest rate derivatives $ 7,298 (3) $ — $ 53,448 (4) $ 52,244 (4) Derivatives not designated as hedges Customer Related Positions Loan level derivatives 121,395 (3) 123,372 (3) 121,393 (4) 123,374 (4) Foreign exchange contracts 2,756 4,352 2,700 4,278 Risk participation agreements 257 161 12 15 Mortgage Derivatives Interest rate lock commitments 28 43 — — Forward sale loan commitments 197 30 — — Total derivatives not designated as hedges 124,633 127,958 124,105 127,667 Total 131,931 127,958 177,553 179,911 Netting Adjustments (5) ( 62,834 ) ( 57,784 ) 37,827 33,245 Net Derivatives on the Balance Sheet 69,097 70,174 139,726 146,666 Financial instruments (6) 16,965 20,019 16,965 20,019 Cash collateral pledged (received) — — — — Net Derivative Amounts $ 52,132 $ 50,155 $ 122,761 $ 126,647 (1) All asset derivatives are reflected in other assets on the balance sheet. (2) All liability derivatives are reflected in other liabilities on the balance sheet. (3) As of June 30, 2023, approximately $ 323,000 and $ 2.8 million of accrued interest receivable is included in the fair value of interest rate and loan level derivative assets, respectively. Accrued interest receivable of approximately $ 2.2 million is included in the fair value of loan level derivative assets at December 31, 2022. (4) Approximately $ 2.1 million and $ 2.8 million of accrued interest payable is included in the fair value of interest rate and loan level derivative liabilities, respectively, at June 30, 2023, in comparison to accrued interest payable of approximately $ 1.3 million and $ 2.2 million, respectively, at December 31, 2022. (5) Netting adjustments represent the amounts recorded to convert derivative assets and liabilities cleared through CME from a gross basis to a net basis, inclusive of the variation margin payments, in accordance with applicable accounting guidance. (6) Reflects offsetting derivative positions with the same counterparty that are not netted on the balance sheet. 37 Table of Contents The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated: Three Months Ended Six Months Ended June 30 June 30 2023 2022 2023 2022 (Dollars in thousands) Derivatives designated as hedges (Loss) gain in OCI on derivatives (effective portion), net of tax $ ( 5,448 ) $ ( 7,649 ) $ 4,715 $ ( 25,599 ) (Loss) gain reclassified from OCI into interest income or interest expense (effective portion) $ ( 7,020 ) $ 3,515 $ ( 13,259 ) $ 8,020 Derivatives not designated as hedges Changes in fair value of customer related positions Other income $ 98 $ 32 $ 370 $ 121 Other expense ( 208 ) ( 89 ) ( 285 ) ( 172 ) Changes in fair value of mortgage derivatives Mortgage banking income 198 ( 225 ) 152 ( 644 ) Total $ 88 $ ( 282 ) $ 237 $ ( 695 ) The Company's derivative agreements with institutional counterparties contain various credit-risk related contingent provisions, such as requiring the Company to maintain a well-capitalized capital position. If the Company fails to meet these conditions, the counterparties could request the Company make immediate payment or demand that the Company provide immediate and ongoing full collateralization on derivative positions in net liability positions. All derivative instruments with credit-risk contingent features were in a net asset position at June 30, 2023 and December 31, 2022. By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company's credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company's Board of Directors. In addition, certain derivative contracts executed bilaterally with a dealer counterparty in the over-the-counter market are cleared through a clearinghouse, whereby the clearinghouse becomes the counterparty to the transaction. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote. The Company's exposure relating to institutional counterparties was $ 126.6 million and $ 121.2 million at June 30, 2023 and December 31, 2022, respectively. The Company’s exposure relating to customer counterparties was approximately $ 2.1 million and $ 2.2 million at June 30, 2023 and December 31, 2022, respectively. Credit exposure may be reduced by the value of collateral pledged by the counterparty. NOTE 8 - FAIR VALUE MEASUREMENTS Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the assumptions applied by the Company when determining fair value reflect those that the Company determines market participants would use to price the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received if the asset were to be sold or that would be paid if the liability were to be transferred in an orderly market transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When determining fair value, the Company considers pricing information and other inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and other inputs may be reduced for certain instruments, or not available at all. The unavailability or reduced availability of pricing or other input information could cause an instrument to be reclassified from one level to another. The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the FASB ASC are described below: 38 Table of Contents Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation Techniques There were no changes in the valuation techniques used during the six months ended June 30, 2023. Securities Trading and Equity Securities These equity securities are valued based on market quoted prices. These securities are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied. U.S. Government Agency and U.S. Treasury Securities Fair value is estimated using either multi-dimensional spread tables or benchmarks. The inputs used include benchmark yields, reported trades, and broker/dealer quotes. These securities are classified as Level 2. Agency Mortgage-Backed Securities Fair value is estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities are categorized as Level 2. Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities The valuation model for these securities is volatility-driven and ratings based, and uses multi-dimensional spread tables. The inputs used include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. State, County, and Municipal Securities The fair value is estimated using a valuation matrix with inputs including bond interest rate tables, recent transactions, and yield relationships. These securities are categorized as Level 2. Single and Pooled Issuer Trust Preferred Securities The fair value of trust preferred securities, including pooled and single issuer preferred securities, is estimated using external pricing models, discounted cash flow methodologies or similar techniques. The inputs used in these valuations include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. Loans Held for Sale The Company has elected the fair value option to account for originated closed loans intended for sale. The fair value is measured on an individual loan basis using quoted market prices and when not available, comparable market value or discounted cash flow analysis may be utilized. These assets are typically classified as Level 2. 39 Table of Contents Derivative Instruments Derivatives The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings. Additionally, in conjunction with fair value measurement guidance, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate derivatives and risk participation agreements may also utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of June 30, 2023 and December 31, 2022, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are properly classified as Level 2. Mortgage Derivatives The fair value of mortgage derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified as Level 2 within the fair value hierarchy. Individually Assessed Collateral Dependent Loans In accordance with the CECL standard, expected credit losses on individually assessed loans deemed to be collateral dependent are valued based upon the lower of amortized cost or fair value of the underlying collateral less costs to sell. The inputs used in the appraisals of the collateral are not always observable, and in such cases the loans may be classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. Other Real Estate Owned and Other Foreclosed Assets Other Real Estate Owned ("OREO") and Other Foreclosed Assets, when applicable, are valued at the lower of cost or fair value of the property, less estimated costs to sell. The fair values are generally estimated based upon recent appraisal values of the property less costs to sell the property. Certain inputs used in appraisals are not always observable, and therefore OREO and Other Foreclosed Assets may be classified as Level 3 within the fair value hierarchy. Goodwill and Other Intangible Assets Goodwill and other intangible assets are subject to impairment testing. The Company conducts an annual impairment test of goodwill in the third quarter of each year, or more frequently if necessary. Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. To estimate the fair value of goodwill and, if necessary, other intangible assets, the Company utilizes both a comparable analysis of relevant price multiples in recent market transactions and a discounted cash flow analysis. Both valuation models require a significant degree of management judgment. In the event the fair value as determined by the valuation model is less than the carrying value, the intangibles may be impaired. If the impairment testing resulted in impairment, the Company would classify the impaired goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3. 40 Table of Contents Assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows at the dates indicated: Fair Value Measurements at Reporting Date Using Balance Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2023 (Dollars in thousands) Recurring fair value measurements Assets Trading securities $ 4,477 $ 4,477 $ — $ — Equity securities 21,800 21,800 — — Securities available for sale U.S. government agency securities 202,491 — 202,491 — U.S. treasury securities 797,861 — 797,861 — Agency mortgage-backed securities 287,418 — 287,418 — Agency collateralized mortgage obligations 35,785 — 35,785 — State, county, and municipal securities 190 — 190 — Pooled trust preferred securities issued by banks and insurers 1,025 — 1,025 — Small business administration pooled securities 48,133 — 48,133 — Loans held for sale 6,577 — 6,577 — Derivative instruments 131,931 — 131,931 — Liabilities Derivative instruments 177,553 — 177,553 — Total recurring fair value measurements $ 1,360,135 $ 26,277 $ 1,333,858 $ — Nonrecurring fair value measurements Assets Individually assessed collateral dependent loans (1) $ 12,595 $ — $ — $ 12,595 Total nonrecurring fair value measurements $ 12,595 $ — $ — $ 12,595 41 Table of Contents Fair Value Measurements at Reporting Date Using Balance Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 (Dollars in thousands) Recurring fair value measurements Assets Trading securities $ 3,888 $ 3,888 $ — $ — Equity securities 21,119 21,119 — — Securities available for sale U.S. government agency securities 202,300 — 202,300 — U.S. treasury securities 791,341 — 791,341 — Agency mortgage-backed securities 313,688 — 313,688 — Agency collateralized mortgage obligations 38,843 — 38,843 — State, county, and municipal securities 191 — 191 — Pooled trust preferred securities issued by banks and insurers 1,034 — 1,034 — Small business administration pooled securities 51,757 — 51,757 — Loans held for sale 2,803 — 2,803 — Derivative instruments 127,958 — 127,958 — Liabilities Derivative instruments 179,911 — 179,911 — Total recurring fair value measurements, net $ 1,375,011 $ 25,007 $ 1,350,004 $ — Nonrecurring fair value measurements Assets Individually assessed collateral dependent loans (1) $ 16,092 $ — $ — $ 16,092 Total nonrecurring fair value measurements $ 16,092 $ — $ — $ 16,092 (1) The carrying value of individually assessed collateral dependent loans is based on the lower of amortized cost or fair value of the underlying collateral less costs to sell. The fair value of the underlying collateral is generally determined through independent appraisals, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary. 42 Table of Contents The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below at the dates indicated: Fair Value Measurements at Reporting Date Using Carrying Value Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2023 (Dollars in thousands) Financial assets Securities held to maturity (a) U.S. government agency securities $ 30,395 $ 28,488 $ — $ 28,488 $ — U.S. treasury securities 100,673 89,164 — 89,164 — Agency mortgage-backed securities 851,418 769,198 — 769,198 — Agency collateralized mortgage obligations 506,591 428,647 — 428,647 — Single issuer trust preferred securities issued by banks 1,500 1,369 — 1,369 — Small business administration pooled securities 133,315 127,218 — 127,218 — Loans, net of allowance for credit losses (b) 13,986,669 13,144,820 — — 13,144,820 Federal Home Loan Bank stock (c) 39,488 39,488 — 39,488 — Cash surrender value of life insurance policies (d) 296,687 296,687 — 296,687 — Financial liabilities Deposit liabilities, other than time deposits (e) $ 13,451,835 $ 13,451,835 $ — $ 13,451,835 $ — Time certificates of deposits (f) 1,796,216 1,771,767 — 1,771,767 — Federal Home Loan Bank borrowings (f) 788,479 788,196 — 788,196 — Junior subordinated debentures (g) 62,857 56,142 — 56,142 — Subordinated debentures (f) 49,933 46,602 — — 46,602 43 Table of Contents Fair Value Measurements at Reporting Date Using Carrying Value Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 (Dollars in thousands) Financial assets Securities held to maturity (a) U.S. government agency securities $ 31,258 $ 29,036 $ — $ 29,036 $ — U.S. treasury securities 100,634 88,879 — 88,879 — Agency mortgage-backed securities 898,927 815,952 — 815,952 — Agency collateralized mortgage obligations 535,971 458,417 — 458,417 — Single issuer trust preferred securities issued by banks 1,500 1,508 — 1,508 — Small business administration pooled securities 136,830 130,918 — 130,918 — Loans, net of allowance for credit losses (b) 13,760,164 13,260,873 — — 13,260,873 Federal Home Loan Bank stock (c) 5,218 5,218 — 5,218 — Cash surrender value of life insurance policies (d) 293,323 293,323 — 293,323 — Financial liabilities Deposit liabilities, other than time deposits (e) $ 14,683,266 $ 14,683,266 $ — $ 14,683,266 $ — Time certificates of deposits (f) 1,195,741 1,164,892 — 1,164,892 — Federal Home Loan Bank borrowings (f) 637 563 — 563 — Junior subordinated debentures (g) 62,855 60,002 — 60,002 — Subordinated debentures (f) 49,885 45,891 — — 45,891 (a) The fair values presented are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analysis. (b) Fair value of loans is measured using the exit price valuation method, determined primarily by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or cash flows, while incorporating liquidity and credit assumptions. Additionally, this amount excludes individually assessed collateral dependent loans, which are deemed to be marked to fair value on a nonrecurring basis. (c) FHLB stock has no quoted market value and is carried at cost; therefore, the carrying amount approximates fair value. (d) Cash surrender value of life insurance policies is recorded at its cash surrender value (or the amount that can be realized upon surrender of the policy), therefore, carrying amount approximates fair value. (e) Fair value of demand deposits, savings and interest checking accounts and money market deposits is the amount payable on demand at the reporting date. (f) Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities. (g) Fair value was determined based upon market prices of securities with similar terms and maturities. This summary excludes certain financial assets and liabilities for which the carrying value approximates fair value. For financial assets, these may include cash and due from banks, federal funds sold and short-term investments. For financial liabilities, these may include federal funds purchased. These instruments would all be considered to be classified as Level 1 within the fair value hierarchy. Also excluded from the summary are financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described. The Company considers its current use of financial instruments to be the highest and best use of the instruments. 44 Table of Contents NOTE 9 - REVENUE RECOGNITION A portion of the Company's noninterest income is derived from contracts with customers, and as such, the revenue recognized depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company accounts for such revenues in accordance with ASC 606 - Revenue from Contracts with Customers and considers the terms of the contract and all relevant facts and circumstances when applying this guidance. To ensure its alignment with this core principle, the Company measures revenue and the timing of recognition by applying the following five steps: 1. Identify the contract(s) with customers 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when (or as) the entity satisfies a performance obligation The Company has disaggregated its revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table presents the revenue streams that the Company has disaggregated as of the periods indicated: Three Months Ended Six Months Ended June 30 2023 June 30 2022 June 30 2023 June 30 2022 (Dollars in thousands) Deposit account fees (inclusive of cash management fees) $ 5,508 $ 5,828 $ 11,424 $ 11,321 Interchange fees 3,008 2,738 5,796 5,210 ATM fees 1,000 993 1,938 1,834 Investment management - wealth management and advisory services 8,858 7,825 17,043 15,729 Investment management - retail investments and insurance revenue 1,490 1,504 3,084 2,273 Merchant processing income 432 350 902 728 Credit card income 555 474 1,048 846 Other noninterest income 1,807 1,472 3,005 2,868 Total noninterest income in-scope of ASC 606 22,658 21,184 44,240 40,809 Total noninterest income out-of-scope of ASC 606 8,099 6,714 14,759 13,361 Total noninterest income $ 30,757 $ 27,898 $ 58,999 $ 54,170 In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and service requirements are generally explicitly identified in the associated contracts. Additional information related to each of the revenue streams is further noted below. Deposit Account Fees The Company offers various deposit account products to its customers governed by specific deposit agreements applicable to either personal customers or business customers. These agreements identify the general conditions and obligations of both parties, and include standard information regarding deposit account related fees. Deposit account services include providing access to deposit accounts as well as access to the various deposit transactional services of the Company. These transactional services are primarily those that are identified in the standard fee schedule, and include, but are not limited to, services such as overdraft protection, wire transfer, and check collection. Revenue is recognized in conjunction with the various services being provided. For example, the Company may assess monthly fixed service fees associated with the customer having access to a deposit account, which can vary depending on the account type and daily account balance. In addition, the Company may also assess separate fixed fees associated with and at the time specific transactions are entered into by the customer. As such, the Company considers its performance obligations to be met concurrently with providing the account access or completing the requested deposit transaction. 45 Table of Contents Cash Management Cash management services are a subset of the Deposit account fees revenue stream. These services primarily include ACH transaction processing, positive pay and remote deposit services. These services are also governed by separate agreements entered into with the customer. The fee arrangement for these services is structured to assess fees under one of two scenarios, either a per transaction fee arrangement or an earnings credit analysis arrangement. Under the per transaction fee arrangement, fixed fees are assessed concurrently with customers executing the transactions, and as such, the Company considers its performance obligations to be met concurrently with completing the requested transaction. Under the earnings credit analysis arrangement, the Company provides a monthly earnings credit to the customer that is negotiated and determined based on various factors. The credit is then available to absorb the per transaction fees that are assessed on the customer's deposit account activity for the month. Any amount of the transactional fees in excess of the earnings credit is recognized as revenue in that month. Interchange Fees The Company earns interchange revenue from its issuance of credit and debit cards granted through its membership in various card payment networks. The Company provides credit cards and debit cards to its customers which are authorized and settled through these payment networks, and in exchange, the Company earns revenue as determined by each payment network's interchange program. The revenue is recognized concurrently with the settlement of card transactions within each network. ATM Fees The Company deploys automated teller machines (ATMs) as part of its overall branch network. Certain transactions performed at the ATMs require customers to acknowledge and pay a fee for the requested service. Certain ATM fees are disclosed in the deposit account agreement fee schedules, whereas those assessed to non-Rockland Trust deposit holders are solely determined during the transaction at the machine. The ATM fee is a fixed dollar per transaction amount, and as such, is recognized concurrently with the overall daily processing and settlement of the ATM activity. Investment Management - Wealth Management and Advisory Services The Company offers investment management and trust services to individuals, institutions, small businesses and charitable institutions. Each investment management product is governed by its own contract along with a separate identifiable fee schedule unique to that product. The Company also offers additional services, such as estate settlement, financial planning, tax services and other special services quoted at the client's request. Asset management and/or custody fees are based upon a percentage of the monthly valuation of the principal assets in the customer's account, whereas fees for additional or special services are fixed in nature and are charged as services are rendered. As the fees are dependent on assets under management, which are susceptible to market factors outside of the Company's control, this variable consideration is constrained and therefore no revenue is estimated at contract initiation. As such, all revenue is recognized in correlation to the monthly management fee determinations or as transactional services are provided. Due to the fact that payments are primarily made subsequent to the valuation period, the Company records a receivable for revenue earned but not received. The following table provides the amount of investment management revenue earned but not received as of the dates indicated: June 30, 2023 December 31, 2022 (Dollars in thousands) Receivables, included in other assets $ 5,416 $ 5,261 Investment Management - Retail Investments and Insurance Revenue The Company offers the sale of mutual fund shares, unit investment trust shares, third party model portfolios, general securities, fixed and variable annuities and life insurance products through registered representatives who are both employed by the Company and licensed and contracted with various Broker General Agents to offer these products to the Company’s customer base. As such, the Company performs these services as an agent and earns a fixed commission on the sales of these 46 Table of Contents products and services. To a lesser degree, production bonus commissions can also be earned based upon the Company meeting certain volume thresholds. In general, the Company recognizes commission revenue at the point of sale, and for certain insurance products, may also earn and recognize annual residual commissions commensurate with annual premiums being paid. Merchant Processing Income The Company refers customers to third party merchant processing partners in exchange for commission and fee income. The income earned is comprised of multiple components, including a fixed referral fee per each referred customer, a rebate amount determined primarily as a percentage of net revenue earned by the third party from services provided to each referred customer, and overall production bonus commissions if certain new account production thresholds are met. Merchant processing income is recognized in conjunction with either completing the referral to earn the fixed fee amount or as the merchant activity is processed to derive the Company's rebate and/or production bonus amounts. Credit Card Income The Company provides consumer and business credit card solutions to its customers by soliciting new accounts on behalf of a third party credit card provider in exchange for a fee. The income earned is comprised of new account incentive payments as well as a percentage of interchange income earned by the third party provider offering the consumer and business purpose revolving credit accounts. The credit card income is recognized in conjunction with the establishment of each new credit card member or as the interchange is earned by the third party in connection with net purchase transactions made by the credit card member. Other Noninterest Income The Company earns various types of other noninterest income that fall within the scope of the new revenue recognition rules, and have been aggregated into one general revenue stream in the table noted above. This amount includes, but is not limited to, the following types of revenue with customers: Safe Deposit Rent The Company rents out the use of safe deposit boxes to its customers, which can be accessed when the bank is open for business. The safe deposit box rental fee is paid upfront and is recognized as revenue ratably over the annual term of the contract. 1031 Exchange Fee Revenue The Company provides like-kind exchange services pursuant to Section 1031 of the Internal Revenue Code. Fee income is recognized in conjunction with completing the exchange transactions. Foreign Currency The Company earns fee income associated with various transactions related to foreign currency product offerings, including foreign currency bank notes and drafts and foreign currency wires. The majority of this income is derived from commissions earned related to customers executing the above mentioned foreign currency transactions through arrangements with third party correspondents. 47 Table of Contents NOTE 10 - OTHER COMPREHENSIVE INCOME (LOSS) The following tables present a reconciliation of the changes in the components of other comprehensive income (loss) for the periods indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss): Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Pre-Tax Amount Tax (Expense) Benefit After Tax Amount Pre-Tax Amount Tax (Expense) Benefit After Tax Amount (Dollars in thousands) Change in fair value of securities available for sale $ ( 14,993 ) $ 3,542 $ ( 11,451 ) $ 7,192 $ ( 1,575 ) $ 5,617 Less: net security losses reclassified into other noninterest expense — — — — — — Net change in fair value of securities available for sale ( 14,993 ) 3,542 ( 11,451 ) 7,192 ( 1,575 ) 5,617 Change in fair value of cash flow hedges ( 14,599 ) 4,105 ( 10,494 ) ( 6,700 ) 1,884 ( 4,816 ) Less: net cash flow hedge losses reclassified into interest income or interest expense ( 7,020 ) 1,974 ( 5,046 ) ( 13,259 ) 3,728 ( 9,531 ) Net change in fair value of cash flow hedges ( 7,579 ) 2,131 ( 5,448 ) 6,559 ( 1,844 ) 4,715 Amortization of net actuarial gains ( 137 ) 39 ( 98 ) ( 274 ) 77 ( 197 ) Amortization of net prior service costs 9 ( 2 ) 7 19 ( 5 ) 14 Net change in other comprehensive income for defined benefit postretirement plans (1) ( 128 ) 37 ( 91 ) ( 255 ) 72 ( 183 ) Total other comprehensive (loss) income $ ( 22,700 ) $ 5,710 $ ( 16,990 ) $ 13,496 $ ( 3,347 ) $ 10,149 Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Pre-Tax Amount Tax (Expense) Benefit After Tax Amount Pre-Tax Amount Tax (Expense) Benefit After Tax Amount (Dollars in thousands) Change in fair value of securities available for sale $ ( 30,734 ) $ 7,000 $ ( 23,734 ) $ ( 112,353 ) $ 26,063 $ ( 86,290 ) Less: net security losses reclassified into other noninterest expense — — — — — — Net change in fair value of securities available for sale ( 30,734 ) 7,000 ( 23,734 ) ( 112,353 ) 26,063 ( 86,290 ) Change in fair value of cash flow hedges ( 7,126 ) 2,004 ( 5,122 ) ( 27,606 ) 7,772 ( 19,834 ) Less: net cash flow hedge gains reclassified into interest income or interest expense 3,515 ( 988 ) 2,527 8,020 ( 2,255 ) 5,765 Net change in fair value of cash flow hedges ( 10,641 ) 2,992 ( 7,649 ) ( 35,626 ) 10,027 ( 25,599 ) Amortization of net actuarial losses 158 ( 44 ) 114 317 ( 89 ) 228 Amortization of net prior service costs 9 ( 2 ) 7 19 ( 5 ) 14 Net change in other comprehensive income for defined benefit postretirement plans (1) 167 ( 46 ) 121 336 ( 94 ) 242 Total other comprehensive loss $ ( 41,208 ) $ 9,946 $ ( 31,262 ) $ ( 147,643 ) $ 35,996 $ ( 111,647 ) (1) The amortization of prior service costs is included in the computation of net periodic pension cost as disclosed in Note 13 - Employee Benefit Plans within the Notes to the Consolidated Financial Statements included in Item 8 of the Company's 2022 Form 10-K. 48 Table of Contents Information on the Company’s accumulated other comprehensive income (loss), net of tax, is comprised of the following components as of the dates indicated: Unrealized Gain (Loss) on Securities Unrealized Gain (Loss) on Cash Flow Hedge Defined Benefit Postretirement Plans Accumulated Other Comprehensive Income (Loss) (Dollars in thousands) 2023 Beginning balance: January 1, 2023 $ ( 128,657 ) $ ( 36,630 ) $ 2,203 $ ( 163,084 ) Net change in other comprehensive income (loss) 5,617 4,715 ( 183 ) 10,149 Ending balance: June 30, 2023 $ ( 123,040 ) $ ( 31,915 ) $ 2,020 $ ( 152,935 ) 2022 Beginning balance: January 1, 2022 $ ( 9,667 ) $ 14,137 $ ( 2,287 ) $ 2,183 Net change in other comprehensive income (loss) ( 86,290 ) ( 25,599 ) 242 ( 111,647 ) Ending balance: June 30, 2022 $ ( 95,957 ) $ ( 11,462 ) $ ( 2,045 ) $ ( 109,464 ) NOTE 11 - COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Company enters into various transactions to meet the financing needs of its customers, which, in accordance with GAAP, are not included in its consolidated balance sheets. These transactions include commitments to extend credit and standby letters of credit, and loan exposures with recourse, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of these commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company has certain loan exposures for which there is recourse. These loan relationships could require the Company to repurchase or cover certain losses per agreements for certain loans that are either sold or referred to third parties. Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. The fees collected in connection with the issuance of standby letters of credit are representative of the fair value of the Company's obligation undertaken in issuing the guarantee. In accordance with applicable accounting standards related to guarantees, fees collected in connection with the issuance of standby letters of credit are deferred. The fees are then recognized in income proportionately over the life of the standby letter of credit agreement. The deferred standby letter of credit fees represent the fair value of the Company's potential obligations under the standby letter of credit guarantees. The following table summarizes the above financial instruments at the dates indicated: June 30, 2023 December 31, 2022 (Dollars in thousands) Commitments to extend credit $ 4,666,173 $ 4,566,041 Loan exposures sold with recourse 161,136 167,274 Standby letters of credit 23,931 24,941 Deferred standby letter of credit fees 227 168 49 Table of Contents Lease Commitments The Company leases office and parking space, space for ATM locations, and certain branch locations under noncancellable operating leases. Several of these leases contain renewal options to extend lease terms for a period of 1 to 20 years. There has been no significant change in the future minimum lease payments payable by the Company since December 31, 2022. See the Company's 2022 Form 10-K for information regarding leases and other commitments. Other Contingencies At June 30, 2023, the Bank was involved in pending lawsuits that arose in the ordinary course of business. Management has reviewed these pending lawsuits with legal counsel and has taken into consideration the view of counsel as to their outcome. In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.