LAKELAND FINANCIAL CORP 10-Q

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in the first six months of 2022 was $49.3 million, which increased $2.0 million, or 4.2%, from $47.3 million for the comparable period of 2021 . Diluted income per common share was $1.92 in the first six months of 2022 , up 3.8% from $1.85 in the comparable period of 2021 . The increase in net income for 2022 was primarily due to growth in net interest income of $6.2 million, offset by a decrease in noninterest income of $2.7 million and an increase in noninterest expense of $1.5 million . Pretax pre-provision earnings in the first six months of 2022 were $59.9 million, an increase of $2.0 million, or 3.5%, compared to $57.8 million for the comparable period. Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense. Annualized return on average total equity was 15.72% in the first six months of 2022 versus 14.49% in the comparable period of 2021 . Annualized return on average total assets was 1.52% in the first six months of 2022 versus 1.58% for the comparable period of 2021 . The Company's average equity to average assets ratio was 9.65% in the first six months of 2022 versus 10.92% in the comparable period of 2021 . Net income in second quarter of 2022 was $25.7 million, up 5.4% from $24.3 million for the comparable period of 2021. Diluted earnings per common share was $1.00 in the second quarter of 2022, up 5.3% from $0.95 in the comparable period of 2021. The increase was driven primarily by growth in net interest income of $5.0 million, offset by a decrease in noninterest income of $848,000 and an increase in noninterest expense of $1.3 million. Additionally, the Company recorded a reversal to the provision for credit losses of $1.7 million for the second quarter of 2021, compared to no provision for credit losses recorded for the second quarter of 2022. Pretax pre-provision earnings in the second quarter of 2022 were $31.3 million, an increase of $2.9 million, or 10.2%, compared to $28.4 million for the comparable period of 2021. Annualized return on average total equity was 17.65% in the second quarter of 2022 versus 14.71% in the comparable period of 2021. Annualized return on average total assets was 1.59% in the second quarter of 2022 versus 1.58% in the comparable period of 2021. The average equity to average assets ratio was 9.03% in the second quarter of 2022 versus 10.76% the comparable period of 2021. The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 8.92% at June 30, 2022, compared to 10.81% at June 30, 2021 and 10.70% at December 31, 2021. Tangible equity and tangible assets have been negatively impacted by the decline in market value of the Company's available-for-sale investment securities portfolio. The market value decline was a result of the yield curve steepening during the first half of 2022. The increase in market interest rates led to an unrealized loss in market value of $175.6 million as of June 30, 2022, compared to an unrealized gain in market value of $29.9 million at June 30, 2021 and of $21.6 million at December 31, 2021. When excluding the impact of accumulated other comprehensive income on tangible common equity, the Company's adjusted tangible common equity to adjusted tangible assets ratio was 11.08% at June 30, 2022 compared to 10.49% at June 30, 2021 and 10.47% at December 31, 2021. The Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity designation on April 1, 2022 as a balance sheet management strategy. Total assets were $6.265 billion as of June 30, 2022 versus $6.557 billion as of December 31, 2021, a decrease of $292.2 million. Balance sheet contraction was driven primarily through decreases in cash and cash equivalents, deposits and borrowings during the first six months of 2022. Cash and cash equivalents decreased $513.7 million, deposits decreased $113.8 million and borrowings decreased $75.0 million. Offsetting these decreases were increases to loans, net of the allowance for credit losses, of $137.1 million, other assets of $58.4 million and total investment securities of $29.4 million. Tota l equity decreased by $142.8 million due primarily to a reduction to accumulated other comprehensive income (loss) of $174.6 million. The reduction in accumulated other comprehensive income was caused by a decrease in the fair value of available-for-sale securities due to the steepening of the yield curve during the first six months of 2022 . The change in total equity was also impacted by net income of $49.3 million and dividends declared and paid of $0.80 per share, totaling $20.4 million. 32 Table of Contents CRITICAL ACCOUNTING POLICIES The Company’s accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for credit losses. See “Note 4 – Allowance for Credit Losses and Credit Quality” for more information on this critical accounting policy. RESULTS OF OPERATIONS Overview Selected income statement information for the three and six months ended June 30, 2022 and 2021 is presented in the following table: Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2022 2021 2022 2021 Income Statement Summary: Net interest income $ 48,678 $ 43,661 $ 93,558 $ 87,340 Provision for credit losses 0 (1,700) 417 (223) Noninterest income 10,492 11,340 21,179 23,897 Noninterest expense 27,913 26,648 54,882 53,394 Other Data: Efficiency ratio (1) 47.17 % 48.45 % 47.83 % 48.00 % Diluted EPS $ 1.00 $ 0.95 $ 1.92 $ 1.85 Tangible capital ratio (2) 8.92 % 10.81 % 8.92 % 10.81 % Adjusted tangible capital ratio (3) 11.08 % 10.49 % 11.08 % 10.49 % Net charge offs (recoveries) to average loans 0.00 % (0.14) % 0.03 % (0.07) % Net interest margin 3.26 % 3.01 % 3.09 % 3.10 % Net interest margin excluding PPP loans (4) 3.26 % 2.95 % 3.08 % 3.00 % Noninterest income to total revenue 17.73 % 20.62 % 18.46 % 21.48 % Pretax Pre-Provision Earnings (5) $ 31,257 $ 28,353 $ 59,855 $ 57,843 (1) Noninterest expense/net interest income plus noninterest income. (2) Non-GAAP financial measure. The Company believes that disclosing non-GAAP financial measures provides investors with information useful to understanding the Company’s financial performance. Additionally, these non-GAAP measures are used by management for planning and forecasting purposes, including measures based on “tangible common equity” which is “total equity” excluding intangible assets, net of deferred tax, and “tangible assets” which is “total assets” excluding intangible assets, net of deferred tax. See reconciliation on the next page. (3) Non-GAAP financial measure. Adjusted tangible capital ratio excludes the market value impact of available-for-sale investment securities on tangible common equity and tangible assets. See reconciliation on the next page. (4) Non-GAAP financial measure. Calculated by subtracting the impact PPP loans had on average earnings assets, loan interest income, average interest bearing liabilities, and interest expense. Management believes this is an important measure because it provides for better comparability to prior periods, given the low fixed interest rate of 1.0% applicable to PPP loans, and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA. Management is actively monitoring net interest margin on a fully tax equivalent basis with and without PPP loan impact for the duration of this program. See reconciliation on the next page. (5) Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period. See reconciliation on the next page. 33 Table of Contents A reconciliation of non-GAAP measures is provided below (in thousands, except for per share data). Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2022 2021 2022 2021 Total Equity $ 562,063 $ 677,471 $ 562,063 $ 677,471 Less: Goodwill (4,970) (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,167 1,176 Tangible Common Equity (A) 558,260 673,677 558,260 673,677 AOCI Market Value Adjustment 157,625 (23,618) 157,625 (23,618) Adjusted Tangible Common Equity (C) 715,885 650,059 715,885 650,059 Total Assets $ 6,265,087 $ 6,232,914 $ 6,265,087 $ 6,232,914 Less: Goodwill (4,970) (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,167 1,176 Tangible Assets (B) 6,261,284 6,229,120 6,261,284 6,229,120 Market Value Adjustment 199,525 (29,896) 199,525 (29,896) Adjusted Tangible Assets (D) 6,460,809 6,199,224 6,460,809 6,199,224 Tangible Capital Ratio (A/B) 8.92 % 10.81 % 8.92 % 10.81 % Adjusted Tangible Capital Ratio (C/D) 11.08 % 10.49 % 11.08 % 10.49 % Net Interest Income $ 48,678 $ 43,661 $ 93,558 $ 87,340 Noninterest Income 10,492 11,340 21,179 23,897 Noninterest Expense (27,913) (26,648) (54,882) (53,394) Pretax Pre-Provision Earnings $ 31,257 $ 28,353 $ 59,855 $ 57,843 Impact of Paycheck Protection Program on Net Interest Margin FTE. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Total Average Earnings Assets $ 6,157,051 $ 5,924,801 $ 6,273,914 $ 5,782,293 Less: Average Balance of PPP Loans (9,665) (348,026) (13,588) (375,226) Total Adjusted Earning Assets 6,147,386 5,576,775 6,260,326 5,407,067 Total Interest Income FTE $ 55,023 $ 48,416 $ 104,325 $ 97,080 Less: PPP Loan Income (204) (3,652) (710) (8,818) Total Adjusted Interest Income FTE 54,819 44,764 103,615 88,262 Adjusted Earning Asset Yield, net of PPP Impact 3.58 % 3.22 % 3.34 % 3.29 % Total Average Interest Bearing Liabilities $ 3,981,587 $ 3,828,499 $ 3,969,634 $ 3,723,580 Less: Average Balance of PPP Loans (9,665) (348,026) (13,588) (375,226) Total Adjusted Interest Bearing Liabilities 3,971,922 3,480,473 3,956,046 3,348,354 Total Interest Expense FTE $ 4,944 $ 3,964 $ 8,098 $ 8,262 Less: PPP Cost of Funds (6) (162) (17) (465) Total Adjusted Interest Expense FTE 4,938 3,802 8,081 7,797 Adjusted Cost of Funds, net of PPP Impact 0.32 % 0.27 % 0.26 % 0.29 % Net Interest Margin Excluding PPP Loans FTE 3.26 % 2.95 % 3.08 % 3.00 % 34 Table of Contents Net Income Net income was $49.3 million in the first six months of 2022 , an increase of $2.0 million, or 4.2%, versus net income of $47.3 million in the first six months of 2021 . The increase in net income for 2022 was primarily due to growth in net interest income of $6.2 million, or 7.1%, offset by a a decrease to noninterest income of $2.7 million, or 11.4% and an increase to noninterest expense of $1.5 million, or 2.8%. Additionally, the change in provision for credit losses recorded during the period impacted net income, as $417,000 provision for credit losses was recorded during the first six months of 2022 , compared to a reversal for provision expense of $223,000 during the first six months of 2021 . Net income was $25.7 million for the three months ended June 30, 2022, an increase of $1.3 million, or 5.4%, versus net income of $24.3 million for the three months ended June 30, 2021. The increase was primarily due to growth in net interest income which increased $5.0 million, or 11.5%, offset by a decrease to noninterest income of $848,000, or 7.5%, and an increase to noninterest expense of $1.3 million, or 4.7%. Additionally, the provision for credit losses recorded during the period impacted net income as no provision for credit losses was recorded during the three months ended June 30, 2022, compared to a reversal for credit losses of $1.7 million during the three months ended June 30, 2021. 35 Table of Contents Net Interest Income The following table sets forth consolidated information regarding average balances and rates: Six Months Ended June 30, 2022 2021 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/ Rate Average Balance Interest Yield (1)/ Rate Earning Assets Loans: Taxable (2)(3) $ 4,337,938 $ 83,873 3.90 % $ 4,514,294 $ 85,803 3.83 % Tax exempt (1) 25,726 566 4.44 12,940 259 4.04 Investments: Securities (1) 1,494,979 19,157 2.58 864,250 10,795 2.52 Short-term investments 2,223 3 0.27 2,256 1 0.09 Interest bearing deposits 413,048 726 0.35 388,553 222 0.12 Total earning assets $ 6,273,914 $ 104,325 3.35 % $ 5,782,293 $ 97,080 3.39 % Less: Allowance for credit losses (67,787) (71,593) Nonearning Assets Cash and due from banks 73,037 69,753 Premises and equipment 59,143 59,565 Other nonearning assets 217,581 190,160 Total assets $ 6,555,888 $ 6,030,178 Interest Bearing Liabilities Savings deposits $ 416,755 $ 156 0.08 % $ 344,859 $ 133 0.08 % Interest bearing checking accounts 2,676,528 5,646 0.43 2,306,026 3,194 0.28 Time deposits: In denominations under $100,000 193,873 653 0.68 229,617 1,192 1.05 In denominations over $100,000 617,824 1,516 0.49 767,324 3,589 0.94 Miscellaneous short-term borrowings 13 0 0.00 754 7 1.87 Long-term borrowings and subordinated debentures 64,641 127 0.40 75,000 147 0.40 Total interest bearing liabilities $ 3,969,634 $ 8,098 0.41 % $ 3,723,580 $ 8,262 0.45 % Noninterest Bearing Liabilities Demand deposits 1,895,333 1,600,052 Other liabilities 58,188 47,857 Stockholders' Equity 632,733 658,689 Total liabilities and stockholders' equity $ 6,555,888 $ 6,030,178 Interest Margin Recap Interest income/average earning assets 104,325 3.35 97,080 3.39 % Interest expense/average earning assets 8,098 0.26 8,262 0.29 % Net interest income and margin $ 96,227 3.09 % $ 88,818 3.10 % (1) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $2.7 million and $1.5 million in the six-month periods ended June 30, 2022 and June 30, 2021 , respectively. (2) Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $641,000 and $6.9 million for the six months ended June 30, 2022 and June 30, 2021 , respectively. All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented. (3) Nonaccrual loans are included in the average balance of taxable loans. 36 Table of Contents The following table sets forth consolidated information regarding average balances and rates: Three Months Ended June 30, 2022 2021 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/ Rate Average Balance Interest Yield (1)/ Rate Earning Assets Loans: Taxable (2)(3) $ 4,396,333 $ 44,138 4.03 % $ 4,474,844 $ 42,342 3.80 % Tax exempt (1) 29,380 353 4.82 12,839 128 4.00 Investments: Securities(1) 1,476,144 10,049 2.73 955,242 5,811 2.44 Short-term investments 2,301 2 0.35 2,305 0 0.00 Interest bearing deposits 252,893 481 0.76 479,571 135 0.11 Total earning assets $ 6,157,051 $ 55,023 3.58 % $ 5,924,801 $ 48,416 3.28 % Less: Allowance for credit losses (67,527) (72,222) Nonearning Assets Cash and due from banks 74,158 68,798 Premises and equipment 58,978 59,848 Other nonearning assets 238,228 190,202 Total assets $ 6,460,888 $ 6,171,427 Interest Bearing Liabilities Savings deposits $ 425,102 $ 81 0.08 % $ 359,484 $ 71 0.08 % Interest bearing checking accounts 2,710,674 3,784 0.56 2,428,524 1,700 0.28 Time deposits: In denominations under $100,000 189,538 307 0.65 224,025 545 0.98 In denominations over $100,000 601,877 718 0.48 741,466 1,574 0.85 Miscellaneous short-term borrowings 0 0 0.00 0 0 0.00 Long-term borrowings and subordinated debentures 54,396 54 0.40 75,000 74 0.40 Total interest bearing liabilities $ 3,981,587 $ 4,944 0.50 % $ 3,828,499 $ 3,964 0.42 % Noninterest Bearing Liabilities Demand deposits 1,825,327 1,633,686 Other liabilities 70,650 45,249 Stockholders' Equity 583,324 663,993 Total liabilities and stockholders' equity $ 6,460,888 $ 6,171,427 Interest Margin Recap Interest income/average earning assets 55,023 3.58 48,416 3.28 % Interest expense/average earning assets 4,944 0.32 3,964 0.27 % Net interest income and margin $ 50,079 3.26 % $ 44,452 3.01 % (1) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.4 million and $791,000 in the three-month periods ended June 30, 2022 and June 30, 2021 , respectively. (2) Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $180,000 and $2.8 million for the three-months ended June 30, 2022 and June 30, 2021 , respectively. All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented. (3) Nonaccrual loans are included in the average balance of taxable loans. Net interest income increased $6.2 million, or 7.1%, to $93.6 million for the six months ended June 30, 2022, compared with $87.3 million for the first six months of 2021 . Growth in core loans and investment security balances coupled with rising interest rates positively impacted investment security and loan income and offset the decline in PPP loan income of $8.8 million during the period. In addition, interest expense declined by $164,000, further benefiting the increase in net interest income. Average earning assets increased by $491.6 million, due primarily to growth in investment securities of $630.7 million. Average loans outstanding decreased $163.6 million to $4.364 billion during the six months ended June 30, 2022, compared to $4.527 billion during the same period of 2021. Average PPP loans decreased by $361.6 million to $13.6 million for the first six months of 2022 compared to $375.2 million for the first six months of 2021 . Excluding PPP loans, average core loans increased $198.1 million to $4.350 billion during the six months ended June 30, 2022, compared to $4.152 billion during the 37 Table of Contents same period of 2021. The earning asset growth was funded through an increase in deposits. Average deposits increased $552.4 million to $5.800 billion during the six months ended June 30, 2022, compared to $5.248 billion for the same period of 2021 . The tax equivalent net interest margin was 3.09 % for the six months ended June 30, 2022 compared to 3.10% during the first six months of 2021 . The yield on earning assets totaled 3.35% during the six months ended June 30, 2022 compared to 3.39% in the same period of 2021 . Cost of funds (expressed as a percentage of average earning assets) totaled 0.26% during the first six months of 2022, compared to 0.29% in the same period of 2021 . The lower margin was caused by reduced levels of PPP income recognition and changes in the earning asset mix during 2021 and 2022 to reflect increased investment securities and interest bearing deposits, which are lower yielding assets. Net interest margin excluding PPP loans was 3.08% for the six months ended June 30, 2022 compared to 3.00% for the same period of 2021 . Net interest income increased by $5.0 million, or 11.5%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increased level of net interest income during the second quarter of 2022 was largely driven by an increase in average earning assets of $232.3 million, due primarily to growth in securities of $520.9 million. This earning asset growth was funded through an increase in deposits. Average deposits increased $365.3 million to $5.753 billion for the second quarter of 2022, compared to $5.387 billion for the comparable period of 2021. During this same period, average core deposits increased $365.4 million. The Company defines "core deposits" as total deposits (including all deposits by municipalities and other government agencies), excluding brokered deposits. Long-term borrowings have decreased by $20.6 million during these comparable periods due to repayment of a putable $75.0 million advance with the FHLB during the three months ended June 30, 2022. The company’s net interest margin increased 25 basis points to 3.26% for the second quarter of 2022 compared to 3.01% for the second quarter of 2021. The increased margin in the second quarter of 2022 compared to the prior year period was due to higher yields on loans, partially offset by a higher cost of funds. The higher yields were driven by three Federal Reserve Bank increases to the target Federal Funds rate in March, May, and June of 2022. The overall effect of these rate increases raised the Federal Funds rate by a cumulative 150 basis points and increased the target Federal Funds rate range from a zero-bound range of 0.00% - 0.25% prior to the first rate increase in March of 2022 to a range of 1.50 - 1.75% at June 30, 2022. Total PPP loan income recognized for the second quarter of 2022 was $204,000 compared to $3.7 million for the second quarter of 2021, a decrease of 94%. PPP interest and fees had a nominal impact on the second quarter 2022 net interest margin compared to net interest margin compression of 6 basis points for the second quarter 2021. Despite the decrease in PPP loan fee income, earning asset yields increased 30 basis points from 3.28% for the second quarter of 2021 to 3.58% for the second quarter of 2022. Offsetting the increased yield on earning assets was an increase to the company's cost of funds of 5 basis points. Interest expense as a percentage of earning assets increased to 0.32% for the three-month period ended June 30, 2022, from 0.27% for the three-month period ended June 30, 2021. Provision for Credit Losses The Company recorded no provision for credit losses expense for the three months ended June 30, 2022 compared to a reversal for provision expense of $1.7 million during the comparable period of 2021 . Net charge offs were $3,000 during the three month period ended June 30, 2022 compared to net recoveries of $1.6 million during the comparable period of 2021 . The Company recorded provision for credit losses expense of $417,000 for the six months ended June 30, 2022 compared to a reversal for provision expense of $223,000 during the comparable period of 2021. Net charge-offs were $667,000 during the six month period ended June 30, 2022 compared to net recoveries of $1.5 million during the comparable period of 2021. Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower. Management’s overall view on current credit quality was also a factor in the determination of the provision for credit losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans. 38 Table of Contents Noninterest Income Noninterest income categories for the six-month and three-month periods ended June 30, 2022 and 2021 are shown in the following table: Six Months Ended June 30, (dollars in thousands) 2022 2021 Dollar Change Percent Change Wealth advisory fees $ 4,491 $ 4,256 $ 235 5.5 % Investment brokerage fees 1,060 1,039 21 2.0 Service charges on deposit accounts 5,691 5,012 679 13.5 Loan and service fees 6,084 5,818 266 4.6 Merchant card fee income 1,719 1,388 331 23.8 Bank owned life insurance income (loss) (266) 1,461 (1,727) (118.2) Interest rate swap fee income 404 754 (350) (46.4) Mortgage banking income 860 1,788 (928) (51.9) Net securities gains 0 797 (797) (100.0) Other income 1,136 1,584 (448) (28.3) Total noninterest income $ 21,179 $ 23,897 $ (2,718) (11.4) % Noninterest income to total revenue 18.5 % 21.5 % Three Months Ended June 30, (dollars in thousands) 2022 2021 Dollar Change Percent Change Wealth advisory fees $ 2,204 $ 2,078 $ 126 6.1 % Investment brokerage fees 541 575 (34) (5.9) Service charges on deposit accounts 2,882 2,521 361 14.3 Loan and service fees 3,195 3,042 153 5.0 Merchant card fee income 904 766 138 18.0 Bank owned life insurance income (loss) (183) 705 (888) (126.0) Interest rate swap fee income 354 505 (151) (29.9) Mortgage banking income 351 415 (64) (15.4) Net securities gains 0 44 (44) (100.0) Other income 244 689 (445) (64.6) Total noninterest income $ 10,492 $ 11,340 $ (848) (7.5) % Noninterest income to total revenue 17.7 % 20.6 % The Company's noninterest income decreased $2.7 million, or 11.4%, to $21.2 million for the six months ended June 30, 2022 compared to $23.9 million in the prior year period. Notably, the fee-based businesses of wealth advisory fees improved by 5.5%, service charges on deposit accounts improved by 13.5%, loan and service fees improved by 4.6% and merchant card fee income improved by 23.8%. The decrease in noninterest income resulted primarily from reduced bank owned life insurance income of $1.7 million due to decline in the equity markets as well as $928,000 decline in mortgage banking income due to the impact of rising interest rates on reduced mortgage loan origination volumes. 39 Table of Contents The Company's noninterest income decreased by $848,000, or 7.5%, to $10.5 million for the second quarter of 2022, compared to $11.3 million for the second quarter of 2021. Noninterest income was positively impacted by elevated service charges on deposit accounts which increased by $361,000, or 14.3%, as a result of increased economic activity in the Company's operating footprint. In addition, loan and service fee income increased by $153,000, or 5.0%, merchant card fee income increased by $138,000, or 18.0% and wealth advisory fees increased by $126,000, or 6.1%. Driving the decrease was a reduction of $888,000 in bank owned life insurance income related to the company's variable life insurance policies. These policies are tied to the equity markets and can be subject to volatility based on market performance. In addition, other income decreased $445,000 which was caused by a reduction in income recognized during the quarter related to various limited partnership investment holdings and other non-recurring items. Noninterest Expense Noninterest expense categories for the six-month and three-month periods ended June 30, 2022 and 2021 are shown in the following tables: Six Months Ended June 30, 2022 (dollars in thousands) 2022 2021 Dollar Change Percent Change Salaries and employee benefits $ 29,190 $ 30,147 $ (957) (3.2) % Net occupancy expense 3,317 2,930 387 13.2 Equipment costs 2,870 2,763 107 3.9 Data processing fees and supplies 6,284 6,523 (239) (3.7) Corporate and business development 2,652 2,208 444 20.1 FDIC insurance and other regulatory fees 1,058 959 99 10.3 Professional fees 2,973 3,716 (743) (20.0) Other expense 6,538 4,148 2,390 57.6 Total noninterest expense $ 54,882 $ 53,394 $ 1,488 2.8 % Efficiency ratio 47.8 % 48.0 % (dollars in thousands) Three Months Ended June 30, 2022 (dollars in thousands) 2022 2021 Dollar Change Percent Change Salaries and employee benefits $ 14,798 $ 15,762 $ (964) (6.1) % Net occupancy expense 1,688 1,427 261 18.3 Equipment costs 1,459 1,318 141 10.7 Data processing fees and supplies 3,203 3,204 (1) 0.0 Corporate and business development 1,433 699 734 105.0 FDIC insurance and other regulatory fees 619 495 124 25.1 Professional fees 1,414 1,839 (425) (23.1) Other expense 3,299 1,904 1,395 73.3 Total noninterest expense $ 27,913 $ 26,648 $ 1,265 4.7 % Efficiency ratio 47.2 % 48.5 % The Company's noninterest expense increased $1.5 million, or 2.8%, to $54.9 million for the six months ended June 30, 2022, from $53.4 million for the six months ended June 30, 2021. The increase was due primarily due to an increase in other expense of $2.4 million, or 57.6%, driven by accruals for ongoing legal matters, offset by decreases in salaries and benefits of $957,000 and reduced professional fees of $743,000, or 20.0%. The Company's noninterest expense increased by $1.3 million, or 4.7%, to $27.9 million in the second quarter of 2022, compared to $26.6 million in the second quarter of 2021. Other expense increased $1.4 million driven by accruals for ongoing legal matters. In addition, corporate and business development expenses increased $734,000, or 105.0%, and net occupancy expense increased $261,000, or 18.3%. The increase in corporate and business development expenses was primarily a result of increased sponsorships and contributions, including $150,000 given in $10,000 increments to the fifteen community foundations in our market footprint in recognition of Lake City Bank's 150th anniversary. In addition, corporate and business development expense reflects higher advertising costs and increased client development expense. The increase to net occupancy 40 Table of Contents expense was caused by budgeted repairs to company facilities. Salaries and employee benefits decreased by $964,000, or 6.1%, and professional fees decreased $425,000, or 23.1%. The decrease to salary and benefits was driven by reduced deferred compensation expense, which is tied to equity market performance of the underlying funds which are directed by the plan participants, and the reduction in professional fees was a result of reduced legal expenses during the second quarter of 2022. The Company's efficiency ratio was 47.8% for the six months ended June 30, 2022 compared to 48.0% for the first six months of 2021. The Company's efficiency ratio was 47.2% for the second quarter of 2022 and 48.5% for the second quarter of 2021. As previously disclosed, in the third quarter of 2019, t he Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al ., which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and has agreed to stay prosecution of the action through August 31, 2022. The action is focused on a series of business transactions among the client, related entities, and the Bank, which the liquidating trustee alleges are voidable under applicable federal bankruptcy and state law. The complaint also addresses treatment of the Bank’s claims filed in the bankruptcy cases. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank and the Company intend to vigorously defend themselves against all allegations asserted in the complaint. The Company's income tax expense decreased $612,000, or 5.7%, in the six months ended June 30, 2022 compared to the same period in 2021. The effective tax rate was 17.0% in the six months ended June 30, 2022, compared to 18.5% for the comparable period of 2021. The year-to-date effective tax rate for 2022 decreased as compared to the prior year primarily due to a higher percentage of income being derived from tax-advantaged sources as well as a larger tax benefit from stock-based compensation payments. FINANCIAL CONDITION Overview Total assets of the Company were $6.265 billion as of June 30, 2022, a decrease of $292.2 million, when compared to $6.557 billion as of December 31, 2021. This decrease was primarily due to a $513.7 million decrease in cash and cash equivalents, offset by increases in loans net of the allowance for credit losses of $137.1 million, other assets of $58.4 million and secruities of $29.4 million. Loans excluding PPP loans increased by $157.8 million, or 3.7%, from $4.262 billion at December 31, 2021 to $4.419 billion at June 30, 2022. Total deposits decreased $113.8 million, or 2.0%. The decrease in deposits was primarily driven by contraction in retail and commercial deposits, which declined $117.5 million and $169.9 million, respectively. Public funds deposits increased by $173.5 million since year end. Core deposits were $5.612 billion as of June 30, 2022 compared to $5.725 billion as of December 31, 2021 . Uses of Funds Total Cash and Cash Equivalents Total cash and cash equivalents decreased by $513.7 million, or 75.2%, to $169.5 million at June 30, 2022, from $683.2 million at December 31, 2021. The decrease in cash and cash equivalents at June 30, 2022 reflects an additional deployment of $250 million in funds to the available-for-sale investment securities portfolio, funding of loan growth of $157.8 million, and repayment of an FHLB advance of $75.0 million. Cash and cash equivalents include short-term investments. Short-term investments include cash on deposit that earns interest such as excess liquidity maintained at the Federal Reserve Bank. Cash and cash equivalents balances will vary depending on the cyclical nature of the bank’s liquidity position. 41 Table of Contents Investment Portfolio The Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity on April 1, 2022 as an overall balance sheet management strategy. The fair value of securities transferred was $127.0 million. The amortized cost and the fair value of securities as of June 30, 2022 and December 31, 2021 were as follows: June 30, 2022 December 31, 2021 (dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Available-for-Sale U.S Treasury securities $ 2,249 $ 2,234 $ 900 $ 900 U.S government sponsored agencies 161,587 142,261 145,858 143,452 Mortgage-backed securities: residential 619,651 558,122 487,157 486,676 Mortgage-backed securities: commercial 0 0 522 523 State and municipal securities 692,698 597,963 742,532 767,007 Total Available-for-Sale $ 1,476,185 $ 1,300,580 $ 1,376,969 $ 1,398,558 Held-to-maturity State and municipal securities $ 127,411 $ 113,350 $ 0 $ 0 Total Held-to-Maturity $ 127,411 $ 113,350 $ 0 $ 0 Total Investment Portfolio $ 1,603,596 $ 1,413,930 $ 1,376,969 $ 1,398,558 At June 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity. Management is aware that, as interest rates rise, any unrealized loss in the available-for-sale investment securities portfolio will increase, and as interest rates fall the unrealized gain in the investment portfolio will rise. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses. Purchases of securities available-for-sale totaled $313.9 million in the first six months of 2022. The purchases consisted of U.S. Treasury securities, securities issued by government sponsored entities, mortgage-backed securities issued by government sponsored entities and state and municipal securities. The investment security purchases reflect the deployment of excess liquidity to the available-for-sale investment securities portfolio. Investment securities represented 22.8% of total assets on June 30, 2022 compared to 21.3% of total assets on December 31, 2021. The Company paused additions to the investment securities portfolio at the end of the second quarter as excess liquidity on the balance sheet was reduced by loan growth and deposit outflows during the quarter. Management expects to use cash flows from the investment securities portfolio to help fund loan growth and for the investment securities portfolio to represent a lower percent of total assets over time. Paydowns from prepayments and scheduled payments of $53.9 million were received in the first six months of 2022, and the amortization of premiums, net of the accretion of discounts, was $3.2 million. Maturities and calls of securities totaled $5.7 million in the first six months of 2022. There were no sales of available-for-sale investment securities in the first six months of 2022. No allowance for credit losses was recognized for available-for-sale or held-to-maturity securites in the first six months of 2022. The fair value of the investment securities portfolio as of June 30, 2022 included an unrealized losses of $175.6 million compared to unrealized gains of $21.6 million as of December 31, 2021. Unrealized losses in the investment securities portfolio resulted from rising interest rates during the first six months of 2022. The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio to a minimal level. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 42 Table of Contents Real Estate Mortgage Loans Held-for-Sale Real estate mortgage loans held-for-sale decreased by $4.8 million, or 64.6%, to $2.6 million at June 30, 2022, from $7.5 million at December 31, 2021. The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $28.4 million in the first six months of 2022 compared to $71.0 million in the first six months of 2021. Management expects the volume of loans originated for sale in the secondary market to decline as compared to volumes originated in 2021 due to the rise in mortgage interest rates that have occurred during the first half of 2022. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $379.8 million and $375.4 million as of June 30, 2022 and December 31, 2021, respectively. Loan Portfolio The loan portfolio by portfolio segment as of June 30, 2022 and December 31, 2021 is summarized as follows: (dollars in thousands) June 30, 2022 December 31, 2021 Current Period Change Commercial and industrial loans $ 1,529,792 34.6 % $ 1,389,469 32.4 % $ 140,323 Commercial real estate and multi-family residential loans 1,954,167 44.1 1,954,846 45.6 (679) Agri-business and agricultural loans 387,902 8.8 445,825 10.4 (57,923) Other commercial loans 93,157 2.1 73,490 1.7 19,667 Consumer 1-4 family mortgage loans 373,512 8.4 344,720 8.0 28,792 Other consumer loans 88,683 2.0 82,755 1.9 5,928 Subtotal, gross loans 4,427,213 100.0 % 4,291,105 100.0 % 136,108 Less: Allowance for credit losses (67,523) (67,773) 250 Net deferred loan fees (2,514) (3,264) 750 Loans, net $ 4,357,176 $ 4,220,068 $ 137,108 Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $136.1 million to $4.427 billion at June 30, 2022 from $4.291 billion at December 31, 2021. The increase was primarily driven by originations of loans concentrated in the commercial and industrial categories and was offset by seasonal paydowns in the agri-business and agricultural loans segments and forgiveness of outstanding PPP loans. Total loans excluding PPP loans increased by $157.8 million, as of June 30, 2022 as compared to December 31, 2021. 43 Table of Contents The following table summarizes the Company’s non-performing assets as of June 30, 2022 and December 31, 2021: (dollars in thousands) June 30, 2022 December 31, 2021 Nonaccrual loans including nonaccrual troubled debt restructured loans (1) $ 12,494 $ 14,973 Loans past due over 90 days and still accruing 105 117 Total nonperforming loans 12,599 15,090 Other real estate owned 196 196 Repossessions 0 0 Total nonperforming assets $ 12,795 $ 15,286 Individually analyzed loans including troubled debt restructurings (1) $ 19,986 $ 25,581 Nonperforming loans to total loans 0.28 % 0.35 % Nonperforming assets to total assets 0.20 % 0.23 % Performing troubled debt restructured loans (1) $ 0 $ 5,121 Nonperforming troubled debt restructured loans (included in nonaccrual loans) (1) 0 6,218 Total troubled debt restructured loans (1) $ 0 $ 11,339 (1) On April 1, 2022, the Company adopted certain aspects of ASU 2022-02, whereby the Company no longer recognizes or accounts for TDRs. Adoption of this standard was retrospective to January 1, 2022. Total nonperforming assets decreased by $2.5 million, or 16.3%, to $12.8 million during the six month period ended June 30, 2022. The ratio of nonperforming assets to total assets at June 30, 2022 decreased from 0.23% at December 31, 2021 to 0.20% at June 30, 2022. A loan is individually analyzed when full payment under the original loan terms is not expected. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral. Total individually analyzed loans decreased by $5.6 million to $20.0 million at June 30, 2022 from $25.6 million at December 31, 2021. Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb current expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other current expected losses in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. General allowance is determined after considering the following factors: application of loss percentages using a probability of default/loss given default approach subject to a floor, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention applies to loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for credit losses for any assets where management has identified conditions or circumstances that indicate an asset is nonperforming. If an asset or portion, thereof is classified as a loss, the Company’s policy is to either establish specified allowances for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount. At June 30, 2022, the allowance for credit losses was 1.53% of total loans outstanding, versus 1.58% of total loans outstanding at December 31, 2021. At June 30, 2022, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge offs and delinquencies could rise and require increases in the allowance for credit losses. The process of identifying credit losses is a subjective process. 44 Table of Contents The Company has a relatively high percentage of commercial and commercial real estate loans, which are extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area. As of June 30, 2022, based on management’s review of the loan portfolio, the Company had 57 credit relationships totaling $192.1 million on the classified loan list versus 81 credit relationships totaling $234.5 million on December 31, 2021. The decrease in classified loans for the first six months of 2022 resulted primarily from paydowns and borrower risk rating upgrades to previously classified loans on the non-individually analyzed portion of the watchlist. As of June 30, 2022, the Company had $149.8 million of assets classified as Special Mention, $42.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $176.6 million, $57.9 million, $0 and $0, respectively, at December 31, 2021. Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions and a reasonably supportable forecast period. The Company has annual discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio based upon loan segment. In accordance with CECL accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. For a more thorough discussion of the allowance for credit losses methodology see the Critical Accounting Policies section of this Item 2. The allowance for credit losses decreased $250,000, from $67.8 million at December 31, 2021 to $67.5 million at June 30, 2022. Most of the Company’s recent loan growth has been concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining credit loss allocations. Sources of Funds The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the six months ended June 30, 2022 and 2021 are summarized in the following table: Six months ended June 30, 2022 2021 (dollars in thousands) Balance Rate Balance Rate Noninterest bearing demand deposits $ 1,895,333 0.00 % $ 1,600,052 0.00 % Savings and transaction accounts: Savings deposits 416,755 0.08 344,859 0.08 Interest bearing demand deposits 2,676,528 0.43 2,306,026 0.28 Time deposits: . Deposits of $100,000 or more 617,824 0.49 767,324 0.94 Other time deposits 193,873 0.68 229,617 1.05 Total deposits $ 5,800,313 0.28 % $ 5,247,878 0.31 % FHLB advances and other borrowings 64,654 0.40 75,754 0.41 Total funding sources $ 5,864,967 0.28 % $ 5,323,632 0.31 % Deposits and Borrowings As of June 30, 2022, total deposits decreased by $113.8 million, or 2.0%, from December 31, 2021. Core deposits decreased by $113.8 million to $5.612 billion as of June 30, 2022 from $5.725 billion as of December 31, 2021. Total brokered deposits were $10.0 million at June 30, 2022 compared to $10.0 million at December 31, 2021 reflecting a $5,000 increase during the first six months of 2022. Since December 31, 2021, the change in core deposits was comprised of increases in public funds deposits of $173.5 million, and decreases of commercial deposits of $169.9 million, and retail deposits of $117.5 million. Total public 45 Table of Contents funds deposits, including public funds transaction accounts, were $1.458 billion at June 30, 2022 and $1.285 billion at December 31, 2021. The following table summarizes deposit composition at June 30, 2022 and December 31, 2021: (dollars in thousands) June 30, 2022 December 31, 2021 Current Period Change Retail $ 2,061,051 $ 2,178,534 $ (117,483) Commercial 2,092,346 2,262,229 (169,883) Public funds 1,458,179 1,284,641 173,538 Core deposits $ 5,611,576 $ 5,725,404 $ (113,828) Brokered deposits 10,008 10,003 5 Total deposits $ 5,621,584 $ 5,735,407 $ (113,823) During the three months ended June 30, 2022, the Company repaid a $75.0 million putable advance with the FHLB. The Company utilizes wholesale funding, including brokered deposits and Federal Home Loan Bank advances, to supplement funding of assets, which is primarily used for loan and investment securities growth. Capital As of June 30, 2022, total stockholders’ equity was $562.1 million, a decrease of $142.8 million, or 20.3%, from $704.9 million at December 31, 2021. Net income of $49.3 million increased equity. Offsetting the increase to stockholders’ equity was a decrease of $174.6 million in accumulated other comprehensive income (loss), which was primarily driven by a net decrease in the fair value of available-for-sale securities. Dividends declared and paid of $0.80 per share, or $20.4 million, also contributed the decrease to total stockholders equity. The impact on equity for other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of June 30, 2022, the Company's capital levels remained characterized as “well-capitalized”. 46 Table of Contents The actual capital amounts and ratios of the Company and the Bank as of June 30, 2022 and December 31, 2021, are presented in the table below. Capital ratios for June 30, 2022 are preliminary until the Call Report and FR Y-9C are filed. Actual Minimum Required For Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of June 30, 2022: Total Capital (to Risk Weighted Assets) Consolidated $ 780,031 15.15 % $ 411,935 8.00 % $ 540,664 N/A N/A N/A Bank $ 759,555 14.88 % $ 408,286 8.00 % $ 535,876 10.50 % $ 510,358 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 715,537 13.90 % $ 308,951 6.00 % $ 437,680 N/A N/A N/A Bank $ 695,625 13.63 % $ 306,215 6.00 % $ 433,804 8.50 % $ 408,286 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 715,537 13.90 % $ 231,713 4.50 % $ 360,443 N/A N/A N/A Bank $ 695,625 13.63 % $ 229,661 4.50 % $ 357,251 7.00 % $ 331,733 6.50 % Tier I Capital (to Average Assets) Consolidated $ 715,537 10.83 % $ 264,382 4.00 % $ 264,382 N/A N/A N/A Bank $ 695,625 10.58 % $ 263,088 4.00 % $ 263,088 4.00 % $ 328,860 5.00 % As of December 31, 2021: Total Capital (to Risk Weighted Assets) Consolidated $ 744,421 15.35 % $ 388,020 8.00 % $ 509,276 N/A N/A N/A Bank $ 726,091 15.01 % $ 387,118 8.00 % $ 508,093 10.50 % $ 483,898 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 683,754 14.10 % $ 291,015 6.00 % $ 412,271 N/A N/A N/A Bank $ 665,424 13.75 % $ 290,339 6.00 % $ 411,313 8.50 % $ 387,118 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 683,754 14.10 % $ 218,261 4.50 % $ 339,518 N/A N/A N/A Bank $ 665,424 13.75 % $ 217,754 4.50 % $ 338,729 7.00 % $ 314,534 6.50 % Tier I Capital (to Average Assets) Consolidated $ 683,754 10.73 % $ 254,898 4.00 % $ 254,898 N/A N/A N/A Bank $ 665,424 10.46 % $ 254,425 4.00 % $ 254,425 4.00 % $ 318,030 5.00 % 47 Table of Contents FORWARD-LOOKING STATEMENTS This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation: • the effects of future economic, business and market conditions and changes, including prevailing interest rates, the rate of inflation and the effects of the COVID-19 pandemic; • governmental monetary and fiscal policies and the impact the current economic environment will have on these; • the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities; • changes in borrowers’ credit risks and payment behaviors; • the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates; • changes in the prices, values and sales volumes of residential and commercial real estate; • the effects of disruption and volatility in capital markets on the value of our investment portfolio; • the risk of labor availability, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector; • changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages; • changes in the availability and cost of credit and capital in the financial markets; • the anticipated phase out of most LIBOR tenors by mid-2023 and establishment of a new reference rate or rates; • the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; • the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators; • risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company; • changes in technology or products that may be more difficult or costly, or less effective than anticipated; • the effects of any employee or customer fraud; • the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; • changes in accounting policies, rules and practices; • the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; and 48 Table of Contents • the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2021, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.