LAKELAND FINANCIAL CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) September 30, 2022 December 31, 2021 (Unaudited) ASSETS Cash and due from banks $ 76,498 $ 51,830 Short-term investments 128,304 631,410 Total cash and cash equivalents 204,802 683,240 Securities available-for-sale, at fair value 1,192,186 1,398,558 Securities held-to-maturity, at amortized cost (fair value of $ 103,326 and $ 0 , respectively) 127,820 0 Real estate mortgage loans held-for-sale 1,097 7,470 Loans, net of allowance for credit losses of $ 67,239 and $ 67,773 4,422,596 4,220,068 Land, premises and equipment, net 58,486 59,309 Bank owned life insurance 97,702 97,652 Federal Reserve and Federal Home Loan Bank stock 12,840 13,772 Accrued interest receivable 22,822 17,674 Goodwill 4,970 4,970 Other assets 143,085 54,610 Total assets $ 6,288,406 $ 6,557,323 LIABILITIES Noninterest bearing deposits $ 1,832,328 $ 1,895,481 Interest bearing deposits 3,831,805 3,839,926 Total deposits 5,664,133 5,735,407 Borrowings - Federal Home Loan Bank advances 0 75,000 Accrued interest payable 2,200 2,619 Other liabilities 102,853 39,391 Total liabilities 5,769,186 5,852,417 STOCKHOLDERS’ EQUITY Common stock: 90,000,000 shares authorized, no par value 25,825,127 shares issued and 25,350,134 outstanding as of September 30, 2022 25,777,609 shares issued and 25,300,793 outstanding as of December 31, 2021 125,832 120,615 Retained earnings 630,337 583,134 Accumulated other comprehensive income (loss) ( 221,729 ) 16,093 Treasury stock at cost ( 474,993 shares as of September 30, 2022, 476,816 shares as of December 31, 2021) ( 15,309 ) ( 15,025 ) Total stockholders’ equity 519,131 704,817 Noncontrolling interest 89 89 Total equity 519,220 704,906 Total liabilities and equity $ 6,288,406 $ 6,557,323 The accompanying notes are an integral part of these consolidated financial statements. 1 Table of Contents CONSOLIDATED STATEMENTS OF INCOME (unaudited - dollars in thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 NET INTEREST INCOME Interest and fees on loans Taxable $ 52,707 $ 43,025 $ 136,580 $ 128,828 Tax exempt 462 119 911 324 Interest and dividends on securities Taxable 3,608 2,470 10,613 6,482 Tax exempt 5,009 3,556 14,609 8,915 Other interest income 772 125 1,501 348 Total interest income 62,558 49,295 164,214 144,897 Interest on deposits 10,066 3,479 18,037 11,587 Interest on borrowings Short-term 0 0 0 7 Long-term 0 75 127 222 Total interest expense 10,066 3,554 18,164 11,816 NET INTEREST INCOME 52,492 45,741 146,050 133,081 Provision for credit losses 0 1,300 417 1,077 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 52,492 44,441 145,633 132,004 NONINTEREST INCOME Wealth advisory fees 2,059 2,177 6,550 6,433 Investment brokerage fees 651 521 1,711 1,560 Service charges on deposit accounts 2,990 2,756 8,681 7,768 Loan and service fees 3,047 3,005 9,131 8,823 Merchant card fee income 941 838 2,660 2,226 Bank owned life insurance income (loss) 54 640 ( 212 ) 2,101 Interest rate swap fee income 88 180 492 934 Mortgage banking income (loss) ( 89 ) ( 32 ) 771 1,756 Net securities gains 0 0 0 797 Other income 423 1,029 1,559 2,613 Total noninterest income 10,164 11,114 31,343 35,011 NONINTEREST EXPENSE Salaries and employee benefits 14,650 14,230 43,840 44,377 Net occupancy expense 1,476 1,413 4,793 4,343 Equipment costs 1,380 1,371 4,250 4,134 Data processing fees and supplies 3,226 3,169 9,510 9,692 Corporate and business development 1,426 1,000 4,078 3,208 FDIC insurance and other regulatory fees 458 748 1,516 1,707 Professional fees 1,554 1,342 4,527 5,058 Other expense 3,724 2,694 10,262 6,842 Total noninterest expense 27,894 25,967 82,776 79,361 INCOME BEFORE INCOME TAX EXPENSE 34,762 29,588 94,200 87,654 Income tax expense 6,237 5,469 16,360 16,204 NET INCOME $ 28,525 $ 24,119 $ 77,840 $ 71,450 BASIC WEIGHTED AVERAGE COMMON SHARES 25,533,832 25,479,654 25,525,734 25,472,185 BASIC EARNINGS PER COMMON SHARE $ 1.12 $ 0.95 $ 3.05 $ 2.81 DILUTED WEIGHTED AVERAGE COMMON SHARES 25,734,613 25,635,288 25,710,088 25,608,655 DILUTED EARNINGS PER COMMON SHARE $ 1.11 $ 0.94 $ 3.03 $ 2.79 The accompanying notes are an integral part of these consolidated financial statements. 2 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited - dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income $ 28,525 $ 24,119 $ 77,840 $ 71,450 Other comprehensive income (loss) Change in available-for-sale and transferred securities: Unrealized holding gain (loss) on securities available-for-sale arising during the period ( 80,532 ) ( 14,411 ) ( 302,137 ) ( 20,656 ) Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity 504 0 995 0 Reclassification adjustment for gains included in net income 0 0 0 ( 797 ) Net securities gain (loss) activity during the period ( 80,028 ) ( 14,411 ) ( 301,142 ) ( 21,453 ) Tax effect 16,806 3,026 63,239 4,505 Net of tax amount ( 63,222 ) ( 11,385 ) ( 237,903 ) ( 16,948 ) Defined benefit pension plans: Amortization of net actuarial loss 36 61 108 181 Net gain activity during the period 36 61 108 181 Tax effect ( 9 ) ( 15 ) ( 27 ) ( 45 ) Net of tax amount 27 46 81 136 Total other comprehensive income (loss), net of tax ( 63,195 ) ( 11,339 ) ( 237,822 ) ( 16,812 ) Comprehensive income (loss) $ ( 34,670 ) $ 12,780 $ ( 159,982 ) $ 54,638 The accompanying notes are an integral part of these consolidated financial statements. 3 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - dollars in thousands, except share and per share data) Three Months Ended Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders’ Equity Noncontrolling Interest Total Equity Shares Stock Balance at July 1, 2021 25,289,966 $ 117,796 $ 552,063 $ 22,271 $ ( 14,748 ) $ 677,382 $ 89 $ 677,471 Comprehensive income: Net income 24,119 24,119 24,119 Other comprehensive income (loss), net of tax ( 11,339 ) ( 11,339 ) ( 11,339 ) Cash dividends declared and paid, $ 0.34 per share ( 8,664 ) ( 8,664 ) ( 8,664 ) Treasury shares purchased under deferred directors' plan ( 3,383 ) 214 ( 214 ) 0 0 Treasury shares sold and distributed under deferred directors' plan 0 0 0 0 0 Stock activity under equity compensation plans 12,595 ( 170 ) ( 170 ) ( 170 ) Stock based compensation expense 1,785 1,785 1,785 Balance at September 30, 2021 25,299,178 $ 119,625 $ 567,518 $ 10,932 $ ( 14,962 ) $ 683,113 $ 89 $ 683,202 Balance at July 1, 2022 25,345,162 $ 123,571 $ 612,026 $ ( 158,534 ) $ ( 15,089 ) $ 561,974 $ 89 $ 562,063 Comprehensive loss: Net income 28,525 28,525 28,525 Other comprehensive income (loss), net of tax ( 63,195 ) ( 63,195 ) ( 63,195 ) Cash dividends declared and paid, $ 0.40 per share ( 10,214 ) ( 10,214 ) ( 10,214 ) Treasury shares purchased under deferred directors' plan ( 3,158 ) 220 ( 220 ) 0 0 Treasury shares sold and distributed under deferred directors' plan 0 0 0 0 0 Stock activity under equity compensation plans 8,130 ( 52 ) ( 52 ) ( 52 ) Stock based compensation expense 2,093 2,093 2,093 Balance at September 30, 2022 25,350,134 $ 125,832 $ 630,337 $ ( 221,729 ) $ ( 15,309 ) $ 519,131 $ 89 $ 519,220 4 Table of Contents Nine Months Ended Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders’ Equity Noncontrolling Interest Total Equity Shares Stock Balance at January 1, 2021 25,239,748 $ 114,927 $ 529,005 $ 27,744 $ ( 14,581 ) $ 657,095 $ 89 $ 657,184 Adoption of ASU 2016-13 ( 6,951 ) ( 6,951 ) ( 6,951 ) Comprehensive income: Net income 71,450 71,450 71,450 Other comprehensive income (loss), net of tax ( 16,812 ) ( 16,812 ) ( 16,812 ) Cash dividends declared and paid, $ 1.02 per share ( 25,986 ) ( 25,986 ) ( 25,986 ) Treasury shares purchased under deferred directors' plan ( 7,959 ) 496 ( 496 ) 0 0 Treasury shares sold and distributed under deferred directors' plan 5,664 ( 115 ) 115 0 0 Stock activity under equity compensation plans 61,725 ( 1,818 ) ( 1,818 ) ( 1,818 ) Stock based compensation expense 6,135 6,135 6,135 Balance at September 30, 2021 25,299,178 $ 119,625 $ 567,518 $ 10,932 $ ( 14,962 ) $ 683,113 $ 89 $ 683,202 Balance at January 1, 2022 25,300,793 120,615 583,134 16,093 ( 15,025 ) $ 704,817 $ 89 $ 704,906 Comprehensive loss: Net income 77,840 77,840 77,840 Other comprehensive income (loss), net of tax ( 237,822 ) ( 237,822 ) ( 237,822 ) Cash dividends declared and paid, $ 1.20 per share ( 30,637 ) ( 30,637 ) ( 30,637 ) Treasury shares purchased under deferred directors' plan ( 6,732 ) 505 ( 505 ) 0 0 Treasury shares sold and distributed under deferred directors' plan 8,555 ( 221 ) 221 0 0 Stock activity under equity compensation plans 47,518 ( 1,780 ) ( 1,780 ) ( 1,780 ) Stock based compensation expense 6,713 6,713 6,713 Balance at September 30, 2022 25,350,134 $ 125,832 $ 630,337 $ ( 221,729 ) $ ( 15,309 ) $ 519,131 $ 89 $ 519,220 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income $ 77,840 $ 71,450 Adjustments to reconcile net income to net cash from operating activities: Depreciation 4,494 4,555 Provision for credit losses 417 1,077 Gain on sale and write down of other real estate owned 0 ( 53 ) Amortization of loan servicing rights 583 1,697 Net change in loan servicing rights valuation allowance ( 708 ) ( 197 ) Loans originated for sale, including participations ( 27,273 ) ( 92,728 ) Net gain on sales of loans ( 958 ) ( 3,609 ) Proceeds from sale of loans, including participations 34,299 98,655 Net loss on sales of premises and equipment 3 4 Net gain on sales and calls of securities available-for-sale 0 ( 797 ) Net securities amortization 4,817 3,457 Stock based compensation expense 6,713 6,135 Losses (earnings) on life insurance 212 ( 2,101 ) Gain on life insurance 0 ( 404 ) Tax benefit of stock award issuances ( 514 ) ( 266 ) Net change: Interest receivable and other assets ( 2,782 ) ( 2,090 ) Interest payable and other liabilities 37,707 1,081 Total adjustments 57,010 14,416 Net cash from operating activities 134,850 85,866 Cash flows from investing activities: Proceeds from sale of securities available-for-sale 0 13,964 Proceeds from maturities, calls and principal paydowns of securities available-for-sale 86,001 102,399 Proceeds from maturities, calls and principal paydowns of securities held-to-maturity 5 0 Purchases of securities available-for-sale ( 313,905 ) ( 640,364 ) Purchase of life insurance ( 727 ) ( 648 ) Net (increase) decrease in total loans ( 202,945 ) 410,323 Proceeds from sales of land, premises and equipment 4 6 Purchases of land, premises and equipment ( 3,678 ) ( 5,265 ) Proceeds from redemption of Federal Home Loan Bank stock 932 0 Proceeds from sales of other real estate 0 946 Proceeds from life insurance 0 931 Net cash from investing activities ( 434,313 ) ( 117,708 ) Cash flows from financing activities: Net increase (decrease) in total deposits ( 71,274 ) 377,833 Net increase (decrease) in short-term borrowings 0 ( 10,500 ) Payments on long-term FHLB borrowings ( 75,000 ) 0 Common dividends paid ( 30,624 ) ( 25,973 ) Preferred dividends paid ( 13 ) ( 13 ) Payments related to equity incentive plans ( 1,780 ) ( 1,818 ) Purchase of treasury stock ( 505 ) ( 496 ) Sale of treasury stock 221 115 Net cash from financing activities ( 178,975 ) 339,148 Net change in cash and cash equivalents ( 478,438 ) 307,306 Cash and cash equivalents at beginning of the period 683,240 249,927 Cash and cash equivalents at end of the period 204,802 557,233 Cash paid during the period for: Interest $ 18,583 $ 14,859 Income taxes 13,780 20,637 Supplemental non-cash disclosures: Loans transferred to other real estate owned 0 893 Securities purchases payable 0 4,982 Right-of-use assets obtained in exchange for lease liabilities 1,612 0 The accompanying notes are an integral part of these consolidated financial statements. 6 Table of Contents NOTE 1. BASIS OF PRESENTATION This report is filed for Lakeland Financial Corporation (the "Company"), which has two wholly owned subsidiaries, Lake City Bank (the "Bank") and LCB Risk Management, a captive insurance company. Also included in this report are results for the Bank’s wholly owned subsidiary, LCB Investments II, Inc. ("LCB Investments"), which manages the Bank’s investment securities portfolio. LCB Investments owns LCB Funding, Inc. ("LCB Funding"), a real estate investment trust. All significant inter-company balances and transactions have been eliminated in consolidation. The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2022. The Company’s 2021 Annual Report on Form 10-K should be read in conjunction with these statements. Newly Issued Accounting Standards On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, " Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. " ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate (“SOFR”), amongst others. The Company has identified certain loans that renewed prior to 2021 and obtained updated reference rate language at the time of renewal. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. The Company's policy is to adhere to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020. The Company discontinued the use of new LIBOR-based loans by December 31, 2021, according to regulatory guidelines. The Company is working to transition LIBOR-based loans to an alternative reference rate on or before June 30, 2023. The guidance under ASC 848 will be available for a limited time, generally through December 31, 2024. The Company adopted the LIBOR transition relief allowed under this standard, and does not expect final adoption to have a material impact on the consolidated financial statements. On March 28, 2022, the FASB issued ASU 2022-01, " Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method. " ASC 815 currently permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in this update allow nonprepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and nonpreapayble financial assets, thereby allowing consistent accounting for similar hedges. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements. On March 31, 2022, the FASB issued ASU 2022-02, " Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. " The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year, is permitted. The Company elected to early adopt the provisions of the ASU related to modifications during the second quarter of 2022, with retrospective application to January 1, 2022. Adoption of this portion of the standard did not have a material impact on the consolidated financial statements. The Company is currently assessing the impact of vintage disclosure provisions of ASU 2022-02 on its disclosures; however, the Company does not expect the adoption of this portion of the standard to have a material impact on the consolidated financial statements. Newly Proposed Accounting Standards On August 22, 2022, the FASB issued a proposed ASU, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)." The amendments in this proposed update would permit reporting entities to account for their tax equity investments, regardless of the program from which the tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). A reporting entity would make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than to apply the proportional amortization method at the reporting entity level or to individual investments. The proposal would require specific disclosures for all tax equity investments in a program to which an entity has elected to apply the proportional amortization method. The amendments in the proposed update are proposed to be applied on either a modified prospective or a retrospective basis. The proposed ASU does not yet include an effective date. The Company plans to assess the impact of the proposed amendments on the consolidated financial statements once final guidance is issued. On October 6, 2022, the FASB issued a proposed ASU, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in this proposed update would improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis. Significant expense categories and amounts subject to disclosure would be derived from expenses that are (1) regularly reported to an entity's chief operating decision-maker (CODM) and (2) included in a segment's reported measure of profit or loss. Public entities would also be required to disclose an amount for other segment items by reportable segment and a description of composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed under the significant expense principle and each reported measure of segment profit or loss. The amendment would also require all annual disclosures about a reportable segment's profit or loss and assets currently required by Topic 280 to be disclosed in interim periods. Additionally, the proposed amendments would also require the disclosure of the name and title of the CODM. The amendments in the proposed update are proposed to be applied retrospectively. The proposed ASU does not yet include an effective date. The Company plans to assess the impact of the proposed amendments on the consolidated financial statements once final guidance is issued. Reclassification Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders' equity as previously reported. 7 Table of Contents NOTE 2. SECURITIES Debt securities purchased with the intent and ability to hold to their maturity are classified as held-to-maturity securities. All other investment securities are classified as available-for-sale securities. Available-for-Sale Securities Information related to the amortized cost, fair value and allowance for credit losses of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the table below. (dollars in thousands) Amortized Cost Gross Unrealized Gain Gross Unrealized Losses Allowance for Credit Losses Fair Value September 30, 2022 U.S. Treasury securities $ 1,994 $ 0 $ ( 26 ) $ 0 $ 1,968 U.S. government sponsored agencies 159,169 0 ( 27,914 ) 0 131,255 Mortgage-backed securities: residential 597,258 80 ( 92,582 ) 0 504,756 State and municipal securities 689,902 10 ( 135,705 ) 0 554,207 Total $ 1,448,323 $ 90 $ ( 256,227 ) $ 0 $ 1,192,186 December 31, 2021 U.S. Treasury securities $ 900 $ 0 $ 0 $ 0 $ 900 U.S. government sponsored agencies 145,858 39 ( 2,445 ) 0 143,452 Mortgage-backed securities: residential 487,157 4,455 ( 4,936 ) 0 486,676 Mortgage-backed securities: commercial 522 1 0 0 523 State and municipal securities 742,532 25,749 ( 1,274 ) 0 767,007 Total $ 1,376,969 $ 30,244 $ ( 8,655 ) $ 0 $ 1,398,558 Held-to-Maturity Securities Information related to the amortized cost, fair value and allowance for credit losses of securities held-to-maturity and the related gross unrealized gains and losses is presented in the table below. (dollars in thousands) Amortized Cost Gross Unrealized Gain Gross Unrealized Losses Allowance for Credit Losses Fair Value September 30, 2022 State and municipal securities $ 127,820 $ 0 $ ( 24,494 ) $ 0 $ 103,326 On April 1, 2022, the Company elected to transfer securities from available-for-sale to held-to-maturity due to overall balance sheet management strategy. The fair value of securities transferred was $ 127.0 million from available-for-sale to held-to-maturity. The unrealized loss on the securities transferred from available-for-sale to held-to-maturity was $ 24.4 million ($ 19.3 million, net of tax) based on the fair value of the securities on the transfer date. The Company has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or loss on the transferred securities included in accumulated other comprehensive income (loss) at the time of the transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. There were no securities transferred from available-for-sale to held-to-maturity during the nine months ended September 30, 2021 and there were no securities classified as held-to-maturity at December 31, 2021. 8 Table of Contents Information regarding the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by maturity as of September 30, 2022 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty. Available-for-Sale Held-to-Maturity (dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Due in one year or less $ 2,233 $ 2,213 $ 0 $ 0 Due after one year through five years 8,401 8,324 0 0 Due after five years through ten years 67,060 62,754 0 0 Due after ten years 773,371 614,139 127,820 103,326 851,065 687,430 127,820 103,326 Mortgage-backed securities 597,258 504,756 0 0 Total debt securities $ 1,448,323 $ 1,192,186 $ 127,820 $ 103,326 Available-for-sale securities proceeds, gross gains and gross losses are presented below. Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2022 2021 2022 2021 Sales of securities available-for-sale Proceeds $ 0 $ 0 $ 0 $ 13,964 Gross gains 0 0 0 797 Gross losses 0 0 0 0 Number of securities 0 0 0 8 In accordance with ASU No. 2017-8, purchase premiums for callable securities are amortized to the earliest call date and premiums on non-callable securities as well as discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date. Securities with fair values of $ 239.5 million and $ 300.8 million were pledged as of September 30, 2022 and December 31, 2021, respectively, as collateral for borrowings from the Federal Home Loan Bank ("FHLB") and Federal Reserve Bank and for other purposes as permitted or required by law. Unrealized Loss Analysis on Available-for-Sale and Held-to-Maturity Securities Information regarding available-for-sale securities with unrealized losses as of September 30, 2022 and December 31, 2021 is presented on the following page. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more. 9 Table of Contents Less than 12 months 12 months or more Total (dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses September 30, 2022 U.S. Treasury securities $ 1,968 $ 26 $ 0 $ 0 $ 1,968 $ 26 U.S. government sponsored agencies 47,754 9,295 83,501 18,619 131,255 27,914 Mortgage-backed securities: residential 336,939 52,248 164,085 40,334 501,024 92,582 State and municipal securities 501,538 117,485 44,476 18,220 546,014 135,705 Total available-for-sale $ 888,199 $ 179,054 $ 292,062 $ 77,173 $ 1,180,261 $ 256,227 December 31, 2021 U.S. government sponsored agencies $ 85,968 $ 1,364 $ 28,676 $ 1,081 $ 114,644 $ 2,445 Mortgage-backed securities: residential 272,264 4,076 22,792 860 295,056 4,936 State and municipal securities 138,659 1,274 0 0 138,659 1,274 Total available-for-sale $ 496,891 $ 6,714 $ 51,468 $ 1,941 $ 548,359 $ 8,655 Information regarding held-to-maturity securities with unrealized losses as of September 30, 2022 is presented below. The table divides the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more. No investment securities were designated as held-to-maturity at December 31, 2021. Less than 12 months 12 months or more Total (dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses September 30, 2022 State and municipal securities $ 103,326 $ ( 24,494 ) $ 0 $ 0 $ 103,326 $ ( 24,494 ) The total number of securities with unrealized losses as of September 30, 2022 and December 31, 2021 is presented below. Available-for-sale Held-to-maturity Less than 12 months 12 months or more Total Less than 12 months 12 months or more Total September 30, 2022 U.S. Treasury securities 5 0 5 0 0 0 U.S. government sponsored agencies 5 12 17 0 0 0 Mortgage-backed securities: residential 114 24 138 0 0 0 State and municipal securities 507 54 561 41 0 41 Total temporarily impaired 631 90 721 41 0 41 December 31, 2021 U.S. government sponsored agencies 8 5 13 0 0 0 Mortgage-backed securities: residential 29 3 32 0 0 0 State and municipal securities 80 0 80 0 0 0 Total temporarily impaired 117 8 125 0 0 0 Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the consolidated income statement. For available-for-sale debt securities that do not meet the above criteria and for held-to-maturity securities, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is 10 Table of Contents less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For available-for-sale debt securities, any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of applicable taxes. No allowance for credit losses for available-for-sale debt securities was recorded at September 30, 2022 or December 31, 2021. No allowance for credit losses for held-to-maturity debt securities was recorded at September 30, 2022. Accrued interest receivable on securities totaled $ 8.8 million and $ 7.4 million at September 30, 2022 and December 31, 2021, respectively, and is excluded from the estimate of credit losses. The U.S. government sponsored agencies and mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. State and municipal securities credit losses are benchmarked against highly rated municipal securities of similar duration, as published by Moody's, resulting in an immaterial allowance for credit losses. 11 Table of Contents NOTE 3. LOANS (dollars in thousands) September 30, 2022 December 31, 2021 Commercial and industrial loans: Working capital lines of credit loans $ 684,281 15.2 % $ 652,861 15.2 % Non-working capital loans 827,014 18.4 736,608 17.2 Total commercial and industrial loans 1,511,295 33.6 1,389,469 32.4 Commercial real estate and multi-family residential loans: Construction and land development loans 468,288 10.4 379,813 8.9 Owner occupied loans 741,293 16.5 739,371 17.2 Nonowner occupied loans 655,975 14.6 588,458 13.7 Multifamily loans 191,212 4.3 247,204 5.8 Total commercial real estate and multi-family residential loans 2,056,768 45.8 1,954,846 45.6 Agri-business and agricultural loans: Loans secured by farmland 165,328 3.7 206,331 4.8 Loans for agricultural production 176,738 3.9 239,494 5.6 Total agri-business and agricultural loans 342,066 7.6 445,825 10.4 Other commercial loans: 100,831 2.2 73,490 1.7 Total commercial loans 4,010,960 89.2 3,863,630 90.1 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 196,077 4.4 176,561 4.1 Open end and junior lien loans 173,419 3.9 156,238 3.6 Residential construction and land development loans 18,775 0.4 11,921 0.3 Total consumer 1-4 family mortgage loans 388,271 8.7 344,720 8.0 Other consumer loans 93,026 2.1 82,755 1.9 Total consumer loans 481,297 10.8 427,475 9.9 Subtotal 4,492,257 100.0 % 4,291,105 100.0 % Less: Allowance for credit losses ( 67,239 ) ( 67,773 ) Net deferred loan fees ( 2,422 ) ( 3,264 ) Loans, net $ 4,422,596 $ 4,220,068 The recorded investment in loans does not include accrued interest, which totaled $ 13.6 million and $ 10.0 million at September 30, 2022 and December 31, 2021, respectively. The Company h ad $ 180,000 and $ 350,000 in residential real estate loans in the process of foreclosure as of September 30, 2022 and December 31, 2021, respectively. NOTE 4. ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control. The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the facts and circumstances 12 Table of Contents of watch list credits, which includes the security position of the borrower, in determining the appropriate level of the credit loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision. The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for credit losses that generally includes consideration of changes in the nature and volume of the loan portfolio and overall portfolio quality, along with current and forecasted economic conditions that may affect borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. To determine the specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, an appropriate level of general allowance is determined by portfolio segment using a probability of default-loss given default (“PD/LGD”) model, subject to a floor. A default can be triggered by one of several different asset quality factors, including past due status, nonaccrual status, material modification status or if the loan has had a charge-off. This PD is then combined with a LGD derived from historical charge-off data to construct a default rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee’s Summary of Economic Projections, and other environmental factors based on the risks present for each portfolio segment. These environmental factors include consideration of the following: levels of, and trends in, delinquencies and nonperforming loans; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover probable losses inherent in the loan portfolio. Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate it should be evaluated on an individual basis. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) the sufficiency of the customer’s cash flow or net worth to repay the loan; (b) the adequacy of the discounted value of collateral relative to the loan balance; (c) whether the loan has been criticized in a regulatory examination; (d) whether the loan is nonperforming; (e) any other reasons the ultimate collectability of the loan may be in question; or (f) any unique loan characteristics that require special monitoring. Allocations are also applied to categories of loans considered not to be individually analyzed, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. These general pooled loan allocations are performed for portfolio segments of commercial and industrial; commercial real estate, multi-family, and construction; agri-business and agricultural; other commercial loans; and consumer 1-4 family mortgage and other consumer loans. General allocations of the allowance are determined by a historical loss rate based on the calculation of each pool’s probability of default-loss given default, subject to a floor. The length of the historical period for each pool is based on the average life of the pool. The historical loss rates are supplemented with consideration of economic conditions and portfolio trends. Due to the imprecise nature of estimating the allowance for credit losses, the Company’s allowance for credit losses includes an unallocated component. The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of potential expected losses that may not be fully reflected in other allocations. As a practical expedient, the Company has elected to disclose accrued interest separately from loan principal balances on the consolidated balance sheet. Additionally, when a loan is placed on non-accrual, interest payments are reversed through interest income. For off balance sheet credit exposures outlined in the ASU at 326-20-30-11, it is the Company’s position that nearly all of the unfunded amounts on lines of credit are unconditionally cancellable, and therefore not subject to having a liability recorded. 13 Table of Contents The following tables present the activity in the allowance for credit losses by portfolio segment for the periods ended: (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total Three Months Ended September 30, 2022 Beginning balance, July 1 $ 31,195 $ 26,448 $ 4,753 $ 713 $ 2,674 $ 1,093 $ 647 $ 67,523 Provision for credit losses 1,357 ( 678 ) ( 547 ) 16 ( 197 ) 71 ( 22 ) 0 Loans charged-off ( 222 ) 0 0 0 ( 20 ) ( 131 ) 0 ( 373 ) Recoveries 18 25 0 0 3 43 0 89 Net loans (charged-off) recovered ( 204 ) 25 0 0 ( 17 ) ( 88 ) 0 ( 284 ) Ending balance $ 32,348 $ 25,795 $ 4,206 $ 729 $ 2,460 $ 1,076 $ 625 $ 67,239 (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total Three Months Ended September 30, 2021 Beginning balance, July 1 $ 33,130 $ 28,291 $ 3,930 $ 1,298 $ 3,165 $ 1,393 $ 506 $ 71,713 Provision for credit losses 3,507 ( 1,545 ) ( 244 ) 89 ( 265 ) ( 116 ) ( 126 ) 1,300 Loans charged-off ( 5 ) 0 0 0 ( 13 ) ( 72 ) 0 ( 90 ) Recoveries 44 0 0 0 14 67 0 125 Net loans (charged-off) recovered 39 0 0 0 1 ( 5 ) 0 35 Ending balance $ 36,676 $ 26,746 $ 3,686 $ 1,387 $ 2,901 $ 1,272 $ 380 $ 73,048 (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total Nine Months Ended September 30, 2022 Beginning balance, January 1 $ 30,595 $ 26,535 $ 5,034 $ 1,146 $ 2,866 $ 1,147 $ 450 $ 67,773 Provision for credit losses 1,948 ( 168 ) ( 828 ) ( 417 ) ( 411 ) 118 175 417 Loans charged-off ( 254 ) ( 597 ) 0 0 ( 42 ) ( 318 ) 0 ( 1,211 ) Recoveries 59 25 0 0 47 129 0 260 Net loans (charged-off) recovered ( 195 ) ( 572 ) 0 0 5 ( 189 ) 0 ( 951 ) Ending balance $ 32,348 $ 25,795 $ 4,206 $ 729 $ 2,460 $ 1,076 $ 625 $ 67,239 (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total Nine Months Ended September 30, 2021 Beginning balance, January 1 $ 28,333 $ 22,907 $ 3,043 $ 416 $ 2,619 $ 951 $ 3,139 $ 61,408 Impact of adopting ASC 326 4,312 4,316 1,060 941 953 349 ( 2,881 ) 9,050 Provision for credit losses 2,780 ( 420 ) ( 737 ) 30 ( 719 ) 21 122 1,077 Loans charged-off ( 254 ) ( 71 ) 0 0 ( 51 ) ( 217 ) 0 ( 593 ) Recoveries 1,505 14 320 0 99 168 0 2,106 Net loans (charged-off) recovered 1,251 ( 57 ) 320 0 48 ( 49 ) 0 1,513 Ending balance $ 36,676 $ 26,746 $ 3,686 $ 1,387 $ 2,901 $ 1,272 $ 380 $ 73,048 14 Table of Contents Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $ 250,000 . The Company uses the following definitions for risk ratings: Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans are considered to be "Pass" rated when they are reviewed as part of the previously described process and do not meet the criteria above, which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with “Not Rated” loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. 15 Table of Contents The following table summarizes the risk category of loans by loan segment and origination date as of September 30, 2022: (dollars in thousands) 2022 2021 2020 2019 2018 Prior Term Total Revolving Total Commercial and industrial loans: Working capital lines of credit loans: Pass $ 0 $ 2,841 $ 1,795 $ 0 $ 0 $ 0 $ 4,636 $ 622,729 $ 627,365 Special Mention 0 0 0 0 0 0 0 41,856 41,856 Substandard 0 0 0 0 0 0 0 15,122 15,122 Total 0 2,841 1,795 0 0 0 4,636 679,707 684,343 Non-working capital loans: Pass 240,076 134,468 98,133 52,784 14,249 18,906 558,616 232,421 791,037 Special Mention 479 4,741 0 111 197 3,388 8,916 207 9,123 Substandard 1,972 2,450 6,210 3 1,971 4,423 17,029 3,561 20,590 Not Rated 2,229 1,675 1,355 480 207 29 5,975 0 5,975 Total 244,756 143,334 105,698 53,378 16,624 26,746 590,536 236,189 826,725 Commercial real estate and multi-family residential loans: Construction and land development loans: Pass 23,795 19,247 20,833 422 0 0 64,297 401,951 466,248 Owner occupied loans: Pass 73,876 180,121 149,215 100,287 70,756 101,475 675,730 44,382 720,112 Special Mention 1,176 5,495 0 835 1,620 8,148 17,274 0 17,274 Substandard 322 106 1,492 0 1,161 231 3,312 0 3,312 Total 75,374 185,722 150,707 101,122 73,537 109,854 696,316 44,382 740,698 Nonowner occupied loans: Pass 126,326 128,907 140,706 93,016 13,844 75,388 578,187 66,248 644,435 Special Mention 0 11,232 0 0 0 0 11,232 0 11,232 Total 126,326 140,139 140,706 93,016 13,844 75,388 589,419 66,248 655,667 Multifamily loans: Pass 19,757 25,847 37,245 35,896 17,105 11,752 28,977 159,474 9,492 168,966 Special Mention 21,968 0 0 0 0 0 21,968 0 21,968 Total 41,725 25,847 37,245 35,896 11,752 28,977 181,442 9,492 190,934 Agri-business and agricultural loans: Loans secured by farmland: Pass 28,584 42,904 30,599 9,904 8,581 20,594 141,166 20,171 161,337 Special Mention 260 0 1,676 1,863 0 29 3,828 0 3,828 Substandard 0 0 0 0 0 145 145 0 145 Total 28,844 42,904 32,275 11,767 8,581 20,768 145,139 20,171 165,310 Loans for agricultural production: Pass 2,899 31,300 23,029 3,845 9,521 4,792 75,386 89,018 164,404 Special Mention 300 399 7,263 996 0 0 8,958 3,465 12,423 Total 3,199 31,699 30,292 4,841 9,521 4,792 84,344 92,483 176,827 Other commercial loans: Pass 19,286 5,854 19,079 156 995 12,817 58,187 39,046 97,233 Special Mention 0 0 0 0 0 3,341 3,341 0 3,341 Total 19,286 5,854 19,079 156 995 16,158 61,528 39,046 100,574 Consumer 1-4 family mortgage loans: Closed end first mortgage loans Pass 6,500 13,063 12,601 4,881 4,727 4,054 45,826 5,618 51,444 Special Mention 0 0 560 0 0 0 560 0 560 Substandard 0 0 0 0 0 1,749 1,749 0 1,749 Not Rated 39,377 44,681 20,174 6,187 3,082 28,548 142,049 0 142,049 Total 45,877 57,744 33,335 11,068 7,809 34,351 190,184 5,618 195,802 Open end and junior lien loans Pass 0 631 362 77 77 0 1,147 5,129 6,276 Not Rated 39,296 15,143 3,445 4,014 1,918 2,456 66,272 102,641 168,913 Total 39,296 15,774 3,807 4,091 1,995 2,456 67,419 107,770 175,189 Residential construction loans Not Rated 12,215 3,901 910 300 132 1,241 18,699 0 18,699 Total 12,215 3,901 910 300 132 1,241 18,699 0 18,699 Other consumer loans 16 Table of Contents Pass 1,484 1,919 488 600 0 992 5,483 22,394 27,877 Substandard 0 0 0 203 0 0 203 0 203 Not Rated 18,286 16,046 10,173 4,336 3,345 1,566 53,752 10,987 64,739 Total 19,770 17,965 10,661 5,139 3,345 2,558 59,438 33,381 92,819 TOTAL $ 680,463 $ 692,971 $ 587,343 $ 321,196 $ 148,135 $ 323,289 $ 2,753,397 $ 1,736,438 $ 4,489,835 As of September 30, 2022, $ 1.6 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA. 17 Table of Contents The following table summarizes the risk category of loans by loan segment and origination date as of December 31, 2021: (dollars in thousands) 2021 2020 2019 2018 2017 Prior Term Total Revolving Total Commercial and industrial loans: Working capital lines of credit loans: Pass $ 3,699 $ 830 $ 3,360 $ 0 $ 0 $ 0 $ 7,889 $ 558,634 $ 566,523 Special Mention 0 0 0 0 0 0 0 60,441 60,441 Substandard 0 0 35 0 0 0 35 25,928 25,963 Total 3,699 830 3,395 0 0 0 7,924 645,003 652,927 Non-working capital loans: Pass 185,374 139,157 79,477 38,899 19,415 18,489 480,811 203,794 684,605 Special Mention 17,728 0 225 979 2,350 1,426 22,708 0 22,708 Substandard 2,996 6,948 1,091 2,534 5,465 426 19,460 3,321 22,781 Not Rated 2,265 1,758 837 563 128 14 5,565 0 5,565 Total 208,363 147,863 81,630 42,975 27,358 20,355 528,544 207,115 735,659 Commercial real estate and multi-family residential loans: Construction and land development loans: Pass 35,136 30,224 1,276 998 0 0 67,634 310,396 378,030 Total 35,136 30,224 1,276 998 0 0 67,634 310,396 378,030 Owner occupied loans: Pass 135,861 169,404 124,117 85,070 78,155 93,925 686,532 29,611 716,143 Special Mention 6,555 0 880 933 7,387 1,235 16,990 0 16,990 Substandard 489 1,570 909 1,758 694 238 5,658 0 5,658 Total 142,905 170,974 125,906 87,761 86,236 95,398 709,180 29,611 738,791 Nonowner occupied loans: Pass 146,342 154,433 107,262 19,054 31,023 59,154 517,268 44,362 561,630 Special Mention 11,825 331 0 0 0 14,253 26,409 0 26,409 Total 158,167 154,764 107,262 19,054 31,023 73,407 543,677 44,362 588,039 Multifamily loans: Pass 84,678 53,195 36,575 12,286 14,574 9,793 211,101 13,434 224,535 Special Mention 0 0 0 0 22,252 0 22,252 0 22,252 Total 84,678 53,195 36,575 12,286 36,826 9,793 233,353 13,434 246,787 Agri-business and agricultural loans: Loans secured by farmland: Pass 47,532 37,035 16,249 10,469 10,454 17,021 138,760 61,774 200,534 Special Mention 0 1,985 2,303 0 180 30 4,498 918 5,416 Substandard 207 0 0 0 0 145 352 0 352 Total 47,739 39,020 18,552 10,469 10,634 17,196 143,610 62,692 206,302 Loans for agricultural production: Pass 36,238 25,855 4,224 11,072 1,331 4,178 82,898 138,142 221,040 Special Mention 448 8,642 1,171 0 0 0 10,261 8,272 18,533 Total 36,686 34,497 5,395 11,072 1,331 4,178 93,159 146,414 239,573 Other commercial loans: Pass 6,556 21,111 3,243 1,273 8,592 7,460 48,235 21,145 69,380 Special Mention 0 0 0 0 0 3,798 3,798 0 3,798 Total 6,556 21,111 3,243 1,273 8,592 11,258 52,033 21,145 73,178 Consumer 1-4 family mortgage loans: Closed end first mortgage loans Pass 14,635 16,173 5,312 5,903 3,049 3,221 48,293 5,005 53,298 Special Mention 0 0 0 0 0 1,274 1,274 0 1,274 Not Rated 45,089 27,738 9,248 5,217 7,628 26,321 121,241 482 121,723 Total 59,724 43,911 14,560 11,120 10,677 30,816 170,808 5,487 176,295 Open end and junior lien loans Pass 679 379 159 313 0 0 1,530 5,074 6,604 Substandard 0 0 0 0 0 0 0 98 98 Not Rated 21,945 5,624 5,987 3,899 1,653 1,526 40,634 110,523 151,157 Total 22,624 6,003 6,146 4,212 1,653 1,526 42,164 115,695 157,859 Residential construction loans Not Rated 7,926 1,537 960 138 171 1,125 11,857 0 11,857 Total 7,926 1,537 960 138 171 1,125 11,857 0 11,857 18 Table of Contents Other consumer loans Pass 3,401 957 1,523 0 1,155 0 7,036 12,998 20,034 Substandard 36 23 230 0 0 0 289 0 289 Not Rated 21,652 14,931 7,474 5,844 1,890 1,203 52,994 9,227 62,221 Total 25,089 15,911 9,227 5,844 3,045 1,203 60,319 22,225 82,544 TOTAL $ 839,292 $ 719,840 $ 414,127 $ 207,202 $ 217,546 $ 266,255 $ 2,664,262 $ 1,623,579 $ 4,287,841 As of December 31, 2021, $ 26.2 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA. 19 Table of Contents Nonaccrual and Past Due Loans: The Company does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured. The following table presents the aging of the amortized cost basis in past due loans as of September 30, 2022 by class of loans and loans past due 90 days or more and still accruing by class of loan: (dollars in thousands) Loans Not Past Due 30-89 Days Past Due Greater than 89 Days Past Due and Accruing Total Accruing Total Nonaccrual Nonaccrual With No Allowance For Credit Loss Total Commercial and industrial loans: Working capital lines of credit loans $ 684,320 $ 23 $ 0 $ 683,016 $ 1,327 $ 379 $ 684,343 Non-working capital loans 826,725 0 0 822,017 4,708 657 826,725 Commercial real estate and multi-family residential loans: Construction and land development loans 466,248 0 0 466,248 0 0 466,248 Owner occupied loans 740,698 0 0 737,618 3,080 1,483 740,698 Nonowner occupied loans 655,667 0 0 655,667 0 0 655,667 Multifamily loans 190,934 0 0 190,934 0 0 190,934 Agri-business and agricultural loans: Loans secured by farmland 165,310 0 0 165,165 145 0 165,310 Loans for agricultural production 176,827 0 0 176,827 0 0 176,827 Other commercial loans 100,574 0 0 100,574 0 0 100,574 Consumer 1‑4 family mortgage loans: Closed end first mortgage loans 195,196 581 25 195,597 205 136 195,802 Open end and junior lien loans 175,090 99 0 174,974 215 215 175,189 Residential construction loans 18,699 0 0 18,699 0 0 18,699 Other consumer loans 92,603 216 0 92,609 210 8 92,819 Total $ 4,488,891 $ 919 $ 25 $ 4,479,945 $ 9,890 $ 2,878 $ 4,489,835 As of September 30, 2022 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the nine month period ended September 30, 2022. 20 Table of Contents The following table presents the aging of the amortized cost basis in past due loans as of December 31, 2021 by class of loans and loans past due 90 days or more and still accruing by class of loan: (dollars in thousands) Loans Not Past Due 30-89 Days Past Due Greater than 89 Days Past Due and Accruing Total Accruing Total Nonaccrual Nonaccrual With No Allowance For Credit Loss Total Commercial and industrial loans: Working capital lines of credit loans $ 652,903 $ 24 $ 0 $ 646,961 $ 5,966 $ 5,200 $ 652,927 Non-working capital loans 735,658 1 0 731,063 4,596 229 735,659 Commercial real estate and multi-family residential loans: Construction and land development loans 378,030 0 0 378,030 0 0 378,030 Owner occupied loans 738,791 0 0 735,157 3,634 2,129 738,791 Nonowner occupied loans 588,039 0 0 588,039 0 0 588,039 Multifamily loans 246,787 0 0 246,787 0 0 246,787 Agri-business and agricultural loans: Loans secured by farmland 206,302 0 0 205,967 335 0 206,302 Loans for agricultural production 239,573 0 0 239,573 0 0 239,573 Other commercial loans 73,178 0 0 73,178 0 0 73,178 Consumer 1‑4 family mortgage loans: Closed end first mortgage loans 175,678 500 117 176,240 55 55 176,295 Open end and junior lien loans 157,729 130 0 157,761 98 98 157,859 Residential construction loans 11,857 0 0 11,857 0 0 11,857 Other consumer loans 82,472 72 0 82,255 289 0 82,544 Total $ 4,286,997 $ 727 $ 117 $ 4,272,868 $ 14,973 $ 7,711 $ 4,287,841 As of December 31, 2021 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the year ended December 31, 2021. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. 21 Table of Contents The following tables present the amortized cost basis of collateral dependent loans by class of loan as of: September 30, 2022 (dollars in thousands) Real Estate General Business Assets Other Total Commercial and industrial loans: Working capital lines of credit loans $ 0 $ 1,327 $ 0 $ 1,327 Non-working capital loans 476 9,441 229 10,146 Commercial real estate and multi-family residential loans: Owner occupied loans 428 1,492 1,161 3,081 Agri-business and agricultural loans: Loans secured by farmland 0 145 0 145 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,954 0 0 1,954 Open end and junior lien loans 216 0 0 216 Other consumer loans 0 0 8 8 Total $ 3,074 $ 12,405 $ 1,398 $ 16,877 December 31, 2021 (dollars in thousands) Real Estate General Business Assets Other Total Commercial and industrial loans: Working capital lines of credit loans $ 0 $ 5,966 $ 0 $ 5,966 Non-working capital loans 1,606 9,475 229 11,310 Commercial real estate and multi-family residential loans: Owner occupied loans 1,435 1,505 1,161 4,101 Agri-business and agricultural loans: Loans secured by farmland 190 145 0 335 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 3,081 0 0 3,081 Open end and junior lien loans 98 0 0 98 Other consumer loans 0 0 59 59 Total $ 6,312 $ 17,091 $ 1,449 $ 24,950 Modifications: The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the time of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time. During the three and nine months ended September 30, 2022, no loans received a material modification based on borrower financial difficulty. 22 Table of Contents Troubled Debt Restructurings (Prior to January 1, 2022): Prior to the partial adoption of ASU 2022-02 on January 1, 2022, which had an immaterial impact on the Company's allowance for credit losses, troubled debt restructured loans were included in the totals for individually analyzed loans. The following are disclosures related to troubled debt restructured loans in prior periods. Troubled debt restructured loans are included in the totals for individually analyzed loans. The Company has allocated $ 5.8 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2021. The Company is not committed to lend additional funds to debtors whose loans have been modified in a trouble debt restructuring. (dollars in thousands) December 31, 2021 Accruing troubled debt restructured loans $ 5,121 Nonaccrual troubled debt restructured loans 6,218 Total troubled debt restructured loans $ 11,339 During the three and nine months ended September 30, 2021, no loans were modified as troubled debt restructurings. NOTE 5. BORROWINGS No advances were outstanding with the FHLB as of September 30, 2022. For the period ended December 31, 2021, the Company had an advance of $ 75.0 million outstanding from the FHLB. The advance was a ten-year fixed-rate putable advance with an interest rate of 0.39 % and a maturity date of March 4, 2030. The note required monthly interest payments and was secured by residential real estate loans and securities. The FHLB exercised the putable option on the advance during the second quarter of 2022 and the note was repaid by the Company. On August 2, 2019 the Company entered into an unsecured revolving credit agreement with another financial institution allowing the Company to borrow up to $ 30.0 million; this credit agreement was subsequently amended and renewed on July 30, 2022. Funds provided under the agreement may be used to repurchase shares of the Company’s common stock under the share repurchase program, which was reauthorized by the Company’s board of directors on April 13, 2021 and expires on April 30, 2023, and for general operations. The credit agreement includes a negative pledge agreement whereby the Company agrees not to pledge or otherwise encumber the stock of the Bank. The credit agreement has a one year term which may be amended, extended, modified or renewed. There were no outstanding borrowings on the credit agreement at September 30, 2022 and December 31, 2021. NOTE 6. FAIR VALUE DISCLOSURES Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. 23 Table of Contents The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Securities: Securities available-for-sale and held-to-maturity are valued primarily by a third party pricing service. The fair values of securities available-for-sale and held-to-maturity are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs). The Company’s Finance Department, which is responsible for all accounting and SEC disclosure compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are new assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board are made aware of such assets at their next scheduled meeting. Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/- 5 %, government MBS/CMO +/- 3 % and U.S. treasuries +/- 1 %. If any securities fall outside the tolerance threshold and have a variance of $ 100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material changes are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service. Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2). Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2). Collateral dependent loans: Collateral dependent loans with specific allocations of the allowance for credit losses are generally based on the fair value of the underlying collateral when repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of collateral dependent loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0 - 50 % with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 35 - 65 %, depending on the marketability of the goods (b) finished goods are generally discounted by 30 - 60 %, depending on the ease of marketability, cost of transportation or 24 Table of Contents scope of use of the finished good (c) work in process inventory is typically discounted by 50 %- 100 %, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30 - 70 % after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10 %- 30 %, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value. Mortgage servicing rights: As of September 30, 2022, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $ 2.8 million, carried at amortized cost of $ 2.8 million less a $ 7,000 valuation reserve. These residential mortgage loans have a weighted average interest rate of 3.44 %, a weighted average maturity of 21 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A third-party valuation is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At September 30, 2022, the constant prepayment speed (“PSA”) used was 172 and discount rate used was 9.0 %. At December 31, 2021, the PSA used was 249 and the discount rate used was 9.5 %. Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Real estate mortgage loans held-for-sale : Real estate mortgage loans held-for-sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification. 25 Table of Contents The tables below present the balances of assets measured at fair value on a recurring basis: September 30, 2022 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets: U.S. Treasury securities $ 1,968 $ 0 $ 0 $ 1,968 U.S. government sponsored agency securities 0 131,255 0 131,255 Mortgage-backed securities: residential 0 504,756 0 504,756 State and municipal securities 0 550,888 3,319 554,207 Total securities 1,968 1,186,899 3,319 1,192,186 Mortgage banking derivative 0 83 0 83 Interest rate swap derivative 0 38,909 0 38,909 Total assets $ 1,968 $ 1,225,891 $ 3,319 $ 1,231,178 Liabilities: Mortgage banking derivative $ 0 $ 0 $ 0 $ 0 Interest rate swap derivative 0 38,910 0 38,910 Total liabilities $ 0 $ 38,910 $ 0 $ 38,910 December 31, 2021 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets: U.S. Treasury securities $ 900 $ 0 $ 0 $ 900 U.S. government sponsored agency securities 0 143,452 0 143,452 Mortgage-backed securities: residential 0 486,676 0 486,676 Mortgage-backed securities: commercial 0 523 0 523 State and municipal securities 0 764,964 2,043 767,007 Total securities available-for-sale 900 1,395,615 2,043 1,398,558 Mortgage banking derivative 0 398 0 398 Interest rate swap derivative 0 14,309 0 14,309 Total assets $ 900 $ 1,410,322 $ 2,043 $ 1,413,265 Liabilities: Mortgage banking derivative $ 0 $ 2 $ 0 $ 2 Interest rate swap derivative 0 14,329 0 14,329 Total liabilities $ 0 $ 14,331 $ 0 $ 14,331 The fair value of Level 3 available-for-sale securities was immaterial and thus did not require additional recurring fair value disclosure. 26 Table of Contents The tables below present the balances of assets measured at fair value on a nonrecurring basis: September 30, 2022 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets Collateral dependent loans: Commercial and industrial loans: Working capital lines of credit loans $ 0 $ 0 $ 275 $ 275 Non-working capital loans 0 0 3,006 3,006 Commercial real estate and multi-family residential loans: Owner occupied loans 0 0 498 498 Agri-business and agricultural loans: Loans secured by farmland 0 0 42 42 Total collateral dependent loans 0 0 3,821 3,821 Other real estate owned 0 0 196 196 Total assets $ 0 $ 0 $ 4,017 $ 4,017 December 31, 2021 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets Collateral dependent loans: Commercial and industrial loans: Working capital lines of credit loans $ 0 $ 0 $ 247 $ 247 Non-working capital loans 0 0 5,095 5,095 Commercial real estate and multi-family residential loans: Owner occupied loans 0 0 791 791 Agri-business and agricultural loans: Loans secured by farmland 0 0 231 231 Total collateral dependent loans 0 0 6,364 6,364 Other real estate owned 0 0 196 196 Total assets $ 0 $ 0 $ 6,560 $ 6,560 The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2022: (dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs Collateral dependent loans: Commercial and industrial $ 3,281 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 72 % 63 %- 99 % Collateral dependent loans: Commercial real estate and multi-family residential loans 498 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 54 % 37 %- 71 % Collateral dependent loans: Agribusiness and agricultural 42 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 71 % 71 % Other real estate owned 196 Appraisals Discount to reflect current market conditions and ultimate collectability 38 % 27 Table of Contents The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2021: (dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs Collateral dependent loans: Commercial and industrial $ 5,342 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 65 % 22 %- 99 % Collateral dependent loans: Commercial real estate and multi-family residential loans 791 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 51 % 34 %- 68 % Collateral dependent loans: Agribusiness and agricultural 231 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 35 % 3 %- 68 % Other real estate owned 196 Appraisals Discount to reflect current market conditions and ultimate collectability 38 % The following tables contain the estimated fair values and the related carrying values of the Company’s financial instruments. Items that are not financial instruments are not included. September 30, 2022 Carrying Value Estimated Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents $ 204,802 $ 203,588 $ 1,214 $ 0 $ 204,802 Securities available-for-sale 1,192,186 1,968 1,186,899 3,319 1,192,186 Securities held-to-maturity 127,820 0 103,326 0 103,326 Real estate mortgages held-for-sale 1,097 0 1,117 0 1,117 Loans, net 4,422,596 0 0 4,246,842 4,246,842 Mortgage banking derivative 83 0 83 0 83 Interest rate swap derivative 38,909 0 38,909 0 38,909 Federal Reserve and Federal Home Loan Bank Stock 12,840 N/A N/A N/A N/A Accrued interest receivable 22,822 0 9,201 13,621 22,822 Financial Liabilities: Certificates of deposit 750,304 0 751,974 0 751,974 All other deposits 4,913,829 4,913,829 0 0 4,913,829 Mortgage banking derivative 0 0 0 0 0 Interest rate swap derivative 38,910 0 38,910 0 38,910 Standby letters of credit 234 0 0 234 234 Accrued interest payable 2,200 184 2,016 0 2,200 28 Table of Contents December 31, 2021 Carrying Value Estimated Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents $ 683,240 $ 681,286 $ 1,954 $ 0 $ 683,240 Securities available-for-sale 1,398,558 900 1,395,615 2,043 1,398,558 Real estate mortgages held-for-sale 7,470 0 7,634 0 7,634 Loans, net 4,220,068 0 0 4,144,000 4,144,000 Mortgage banking derivative 398 0 398 0 398 Interest rate swap derivative 14,309 0 14,309 0 14,309 Federal Reserve and Federal Home Loan Bank Stock 13,772 N/A N/A N/A N/A Accrued interest receivable 17,674 0 7,689 9,985 17,674 Financial Liabilities: Certificates of deposit 829,518 0 833,617 0 833,617 All other deposits 4,905,889 4,905,889 0 0 4,905,889 Federal Home Loan Bank advances 75,000 0 66,118 0 66,118 Mortgage banking derivative 2 0 2 0 2 Interest rate swap derivative 14,329 0 14,329 0 14,329 Standby letters of credit 272 0 0 272 272 Accrued interest payable 2,619 84 2,535 0 2,619 NOTE 7. OFFSETTING ASSETS AND LIABILITIES The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at September 30, 2022 and December 31, 2021. September 30, 2022 Gross Amounts of Recognized Assets/Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts presented in the Statement of Financial Position Gross Amounts Not Offset in the Statement of Financial Position Net Amount (dollars in thousands) Financial Instruments Cash Collateral Position Assets Interest Rate Swap Derivatives $ 38,909 $ 0 $ 38,909 $ 0 $ ( 33,725 ) $ 5,184 Total Assets $ 38,909 $ 0 $ 38,909 $ 0 $ ( 33,725 ) $ 5,184 Liabilities Interest Rate Swap Derivatives $ 38,910 $ 0 $ 38,910 $ 0 $ ( 90 ) $ 38,820 Total Liabilities $ 38,910 $ 0 $ 38,910 $ 0 $ ( 90 ) $ 38,820 29 Table of Contents December 31, 2021 Gross Amounts of Recognized Assets/Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts presented in the Statement of Financial Position Gross Amounts Not Offset in the Statement of Financial Position Net Amount (dollars in thousands) Financial Instruments Cash Collateral Position Assets Interest Rate Swap Derivatives $ 14,309 $ 0 $ 14,309 $ 0 $ ( 2,255 ) $ 12,054 Total Assets $ 14,309 $ 0 $ 14,309 $ 0 $ ( 2,255 ) $ 12,054 Liabilities Interest Rate Swap Derivatives $ 14,329 $ 0 $ 14,329 $ 0 $ ( 7,995 ) $ 6,334 Total Liabilities $ 14,329 $ 0 $ 14,329 $ 0 $ ( 7,995 ) $ 6,334 If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions. NOTE 8. EARNINGS PER SHARE Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period, which includes shares held in treasury on behalf of participants in the Company’s Directors Fee Deferral Plan, and share repurchases. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based awards and warrants, none of which were antidilutive. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Weighted average shares outstanding for basic earnings per common share 25,533,832 25,479,654 25,525,734 25,472,185 Dilutive effect of stock based awards 200,781 155,634 184,354 136,470 Weighted average shares outstanding for diluted earnings per common share 25,734,613 25,635,288 25,710,088 25,608,655 Basic earnings per common share $ 1.12 $ 0.95 $ 3.05 $ 2.81 Diluted earnings per common share $ 1.11 $ 0.94 $ 3.03 $ 2.79 NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the three months ended September 30, 2022 and 2021, all shown net of tax: (dollars in thousands) Unrealized Gains and Losses on Available- for-Sales Securities Defined Benefit Pension Items Total Balance at July 1, 2022 $ ( 157,625 ) $ ( 909 ) $ ( 158,534 ) Other comprehensive income (loss) before reclassification ( 63,620 ) 0 ( 63,620 ) Amounts reclassified from accumulated other comprehensive income (loss) 398 27 425 Net current period other comprehensive income (loss) ( 63,222 ) 27 ( 63,195 ) Balance at September 30, 2022 $ ( 220,847 ) $ ( 882 ) $ ( 221,729 ) 30 Table of Contents (dollars in thousands) Unrealized Gains and Losses on Available- for-Sales Securities Defined Benefit Pension Items Total Balance at July 1, 2021 $ 23,619 $ ( 1,348 ) $ 22,271 Other comprehensive income (loss) before reclassification ( 11,385 ) 0 ( 11,385 ) Amounts reclassified from accumulated other comprehensive income (loss) 0 46 46 Net current period other comprehensive income (loss) ( 11,385 ) 46 ( 11,339 ) Balance at September 30, 2021 $ 12,234 $ ( 1,302 ) $ 10,932 The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, all shown net of tax: (dollars in thousands) Unrealized Gains and Losses on Available- for-Sales Securities Defined Benefit Pension Items Total Balance at January 1, 2022 $ 17,056 $ ( 963 ) $ 16,093 Other comprehensive income (loss) before reclassification ( 238,689 ) 0 ( 238,689 ) Amounts reclassified from accumulated other comprehensive income (loss) 786 81 867 Net current period other comprehensive income (loss) ( 237,903 ) 81 ( 237,822 ) Balance at September 30, 2022 $ ( 220,847 ) $ ( 882 ) $ ( 221,729 ) (dollars in thousands) Unrealized Gains and Losses on Available- for-Sales Securities Defined Benefit Pension Items Total Balance at January 1, 2021 $ 29,182 $ ( 1,438 ) $ 27,744 Other comprehensive income (loss) before reclassification ( 16,318 ) 0 ( 16,318 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 630 ) 136 ( 494 ) Net current period other comprehensive income (loss) ( 16,948 ) 136 ( 16,812 ) Balance at September 30, 2021 $ 12,234 $ ( 1,302 ) $ 10,932 Reclassifications out of other accumulated comprehensive loss for the three months ended September 30, 2022 are as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented (dollars in thousands) Amortization of unrealized losses on held-to-maturity securities ( 504 ) Interest income Tax effect 106 Income tax expense ( 398 ) Net of tax Amortization of defined benefit pension items ( 36 ) Other expense Tax effect 9 Income tax expense ( 27 ) Net of tax Total reclassifications for the period $ ( 425 ) Net income 31 Table of Contents Reclassifications out of other accumulated comprehensive income for the three months ended September 30, 2021 are as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented (dollars in thousands) Realized gains and losses on available-for-sale securities $ 0 Net securities gains Tax effect 0 Income tax expense 0 Net of tax Amortization of defined benefit pension items ( 61 ) Other expense Tax effect 15 Income tax expense ( 46 ) Net of tax Total reclassifications for the period $ ( 46 ) Net income Reclassifications out of other accumulated comprehensive loss for the nine months ended September 30, 2022 are as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented (dollars in thousands) Amortization of unrealized losses on held-to-maturity securities ( 995 ) Interest income Tax effect 209 Income tax expense ( 786 ) Net of tax Amortization of defined benefit pension items ( 108 ) Other expense Tax effect 27 Income tax expense ( 81 ) Net of tax Total reclassifications for the period $ ( 867 ) Net income Reclassifications out of other accumulated comprehensive income for the nine months ended September 30, 2021 are as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented (dollars in thousands) Realized gains and losses on available-for-sale securities $ 797 Net securities gains Tax effect ( 167 ) Income tax expense 630 Net of tax Amortization of defined benefit pension items ( 181 ) Other expense Tax effect 45 Income tax expense ( 136 ) Net of tax Total reclassifications for the period $ 494 Net income 32 Table of Contents NOTE 10. LEASES The Company leases certain office facilities under long-term operating lease agreements. The leases expire at various dates through 2037 and some include renewal options. Many of these leases require the payment of property taxes, insurance premiums, maintenance, utilities and other costs. In many cases, rentals are subject to increase in relation to a cost-of-living index. The Company accounts for lease and non-lease components together as a single lease component. The Company determines if an arrangement is a lease at inception. Operating leases are recorded as a right-of-use ("ROU") lease assets and are included in other assets on the consolidated balance sheet. The Company's corresponding lease obligations are included in other liabilities on the consolidated balance sheet. ROU lease assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as a practical expedient of the standard. The following is a maturity analysis of the operating lease liabilities as of September 30, 2022: Years ending December 31, (in thousands) Operating Lease Obligation 2022 $ 179 2023 727 2024 744 2025 756 2026 731 2027 and thereafter 2,938 Total undiscounted lease payments 6,075 Less imputed interest ( 634 ) Lease liability $ 5,441 Right-of-use asset $ 5,441 Three months ended September 30, Nine Months Ended September 30, (dollars in thousands) 2022 2021 2022 2021 Lease cost Operating lease cost $ 169 $ 133 $ 502 $ 403 Short-term lease cost 4 6 18 18 Total lease cost $ 173 $ 139 $ 520 $ 421 Other information Operating cash outflows from operating leases $ 169 $ 133 $ 502 $ 403 Weighted-average remaining lease term - operating leases 7.5 years 8.1 years 7.5 years 8.1 years Weighted average discount rate - operating leases 2.5 % 2.8 % 2.5 % 2.8 % 33 Table of Contents NOTE 11. CONTINGENCIES Lakeland Financial Corporation and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based on present information including advice of legal counsel, the ultimate resolution of these proceedings is not expected to have a material effect on the Company's consolidated financial position or results of operations. 34 Table of Contents