LAKELAND FINANCIAL CORP 10-Q

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in the first nine months of 2022 was $77.8 million, which increased $6.4 million, or 8.9%, from $71.5 million for the comparable period of 2021 . Diluted income per common share was $3.03 in the first nine months of 2022 , up 8.6% from $2.79 in the comparable period of 2021 . The increase in net income for 2022 was primarily due to growth in net interest income of $13.0 million and a decrease to the provision for credit losses of $660,000, offset by a decrease in noninterest income of $3.7 million and an increase in noninterest expense of $3.4 million . Pretax pre-provision earnings in the first nine months of 2022 were $94.6 million, an increase of $5.9 million, or 6.6%, compared to $88.7 million for the comparable period. Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense. Annualized return on average total equity was 16.89% in the first nine months of 2022 versus 14.29% in the comparable period of 2021 . Annualized return on average total assets was 1.61% in the first nine months of 2022 versus 1.57% for the comparable period of 2021 . The Company's average equity to average assets ratio was 9.53% in the first nine months of 2022 versus 11.01% in the comparable period of 2021 . Equity has been negatively impacted by unrealized losses form the available-for-sale investment securities portfolio. Net income in the third quarter of 2022 was $28.5 million, which increased $4.4 million, or 18.3%, from $24.1 million for the comparable period of 2021. Diluted earnings per common share was $1.11 in the third quarter of 2022, up 18.1% from $0.94 in the comparable period of 2021. The increase was driven primarily by growth in net interest income of $6.8 million and a decrease to the provision for credit losses of $1.3 million, offset by a decrease in noninterest income of $950,000 and an increase in noninterest expense of $1.9 million. Pretax pre-provision earnings in the third quarter of 2022 were $34.8 million, an increase of $3.9 million, or 12.5%, compared to $30.9 million for the comparable period of 2021. Annualized return on average total equity was 19.39% in the third quarter of 2022 versus 13.90% in the comparable period of 2021. Annualized return on average total assets was 1.80% in the third quarter of 2022 versus 1.56% in the comparable period of 2021. The average equity to average assets ratio was 9.27% in the third quarter of 2022 versus 11.19% the comparable period of 2021. The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 8.20% at September 30, 2022, compared to 10.92% at September 30, 2021 and 10.70% at December 31, 2021. Tangible equity and tangible assets have declined due to unrealized losses of the Company's available-for-sale investment securities portfolio. The market value decline was a result of the yield curve steepening caused by inflation and the tightening of monetary policy by the Federal Reserve Board beginning in March of 2022 and throughout the past six months. Unrealized losses from available-for-sale investment securities were $256.1 million as of September 30, 2022, compared to unrealized gains of $15.5 million at September 30, 2021 and unrealized gains of of $21.6 million at December 31, 2021. When excluding the impact of accumulated other comprehensive income on tangible common equity and tangible assets, the Company's adjusted tangible common equity to adjusted tangible assets ratio, which is a non-GAAP financial measure, was 11.22% at September 30, 2022 compared to 10.75% at September 30, 2021 and 10.47% at December 31, 2021. Total assets were $6.288 billion as of September 30, 2022 versus $6.557 billion as of December 31, 2021, a decrease of $268.9 million. Balance sheet contraction was driven primarily by decreases in cash and cash equivalents, deposits and borrowings during the first nine months of 2022. Cash and cash equivalents decreased $478.4 million, deposits decreased $71.3 million and borrowings decreased $75.0 million. Offsetting these decreases were increases to loans, net of the allowance for credit losses, of $202.5 million and other assets of $88.5 million. Tota l equity decreased by $185.7 million due primarily to a reduction to accumulated other comprehensive income of $237.8 million. The reduction in accumulated other comprehensive income was caused by a decrease in the fair value of available-for-sale securities due to the steepening of the yield curve during 2022 . The change in total equity was also impacted by net income inflows of $77.8 million and dividends declared and paid of $1.20 per share, totaling $30.6 million. CRITICAL ACCOUNTING POLICIES The Company’s accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. 35 Table of Contents Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for credit losses. See “Note 4 – Allowance for Credit Losses and Credit Quality” for more information on this critical accounting policy. RESULTS OF OPERATIONS Overview Selected income statement information for the three and nine months ended September 30, 2022 and 2021 is presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2022 2021 2022 2021 Income Statement Summary: Net interest income $ 52,492 $ 45,741 $ 146,050 $ 133,081 Provision for credit losses 0 1,300 417 1,077 Noninterest income 10,164 11,114 31,343 35,011 Noninterest expense 27,894 25,967 82,776 79,361 Other Data: Efficiency ratio (1) 44.52 % 45.67 % 46.66 % 47.21 % Diluted EPS $ 1.11 $ 0.94 $ 3.03 $ 2.79 Average Equity/Average Assets 9.27 % 11.19 % 9.53 % 11.01 % Tangible capital ratio (2) 8.20 % 10.92 % 8.20 % 10.92 % Adjusted tangible capital ratio (3) 11.22 % 10.75 % 11.22 % 10.75 % Net charge offs (recoveries) to average loans 0.03 % 0.00 % 0.03 % (0.05) % Net interest margin 3.57 % 3.13 % 3.25 % 3.11 % Net interest margin excluding PPP loans (4) 3.57 % 2.95 % 3.24 % 2.98 % Noninterest income to total revenue 16.22 % 19.55 % 17.67 % 20.83 % Pretax Pre-Provision Earnings (5) $ 34,762 $ 30,888 $ 94,617 $ 88,731 (1) Noninterest expense/net interest income plus noninterest income. (2) Non-GAAP financial measure. The Company believes that disclosing non-GAAP financial measures provides investors with information useful to understanding the Company’s financial performance. Additionally, these non-GAAP measures are used by management for planning and forecasting purposes, including measures based on “tangible common equity,” which is “total equity” excluding intangible assets, net of deferred tax, and “tangible assets,” which is “total assets” excluding intangible assets, net of deferred tax. The tangible capital ratio is calculated by excluding the balance of goodwill, net of deferred taxes. See reconciliation on the next page. (3) Non-GAAP financial measure. Adjusted tangible capital ratio excludes the market value impact of available-for-sale investment securities on tangible common equity and tangible assets. See reconciliation on the next page. (4) Non-GAAP financial measure. Calculated by subtracting the impact PPP loans had on average earning assets, loan interest income, average interest bearing liabilities, and interest expense. Management believes this is an important measure because it provides for better comparability to prior periods, given the low fixed interest rate of 1.0% applicable to PPP loans, and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA. Management is actively monitoring net interest margin on a fully tax equivalent basis with and without PPP loan impact for the duration of this program. See reconciliation on the next page. (5) Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period. See reconciliation on the next page. 36 Table of Contents A reconciliation of non-GAAP measures is provided below (in thousands, except for per share data). As of and for the As of and for the Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2022 2021 2022 2021 Total Equity $ 519,220 $ 683,202 $ 519,220 $ 683,202 Less: Goodwill (4,970) (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,167 1,176 Tangible Common Equity (A) 515,417 679,408 515,417 679,408 AOCI Market Value Adjustment 220,847 (12,234) 220,847 (12,234) Adjusted Tangible Common Equity (C) 736,264 667,174 736,264 667,174 Total Assets $ 6,288,406 $ 6,222,916 $ 6,288,406 $ 6,222,916 Less: Goodwill (4,970) (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,167 1,176 Tangible Assets (B) 6,284,603 6,219,122 6,284,603 6,219,122 Market Value Adjustment 279,553 (15,486) 279,553 (15,486) Adjusted Tangible Assets (D) 6,564,156 6,203,636 6,564,156 6,203,636 Tangible Capital Ratio (A/B) 8.20 % 10.92 % 8.20 % 10.92 % Adjusted Tangible Capital Ratio (C/D) 11.22 % 10.75 % 11.22 % 10.75 % Net Interest Income $ 52,492 $ 45,741 $ 146,050 $ 133,081 Noninterest Income 10,164 11,114 31,343 35,011 Noninterest Expense (27,894) (25,967) (82,776) (79,361) Pretax Pre-Provision Earnings $ 34,762 $ 30,888 $ 94,617 $ 88,731 Impact of Paycheck Protection Program on Net Interest Margin FTE. As of and for the As of and for the Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Total Average Earnings Assets $ 5,991,630 $ 5,909,834 $ 6,178,787 $ 5,825,275 Less: Average Balance of PPP Loans (3,232) (142,917) (10,098) (296,938) Total Adjusted Earning Assets 5,988,398 5,766,917 6,168,689 5,528,337 Total Interest Income FTE $ 64,011 $ 50,271 $ 168,335 $ 147,351 Less: PPP Loan Income (58) (3,946) (767) (12,764) Total Adjusted Interest Income FTE 63,953 46,325 167,568 134,587 Adjusted Earning Asset Yield, net of PPP Impact 4.24 % 3.19 % 3.63 % 3.25 % Total Average Interest Bearing Liabilities $ 3,821,699 $ 3,737,707 $ 3,919,779 $ 3,728,339 Less: Average Balance of PPP Loans (3,232) (142,917) (10,098) (296,938) Total Adjusted Interest Bearing Liabilities 3,818,467 3,594,790 3,909,681 3,431,401 Total Interest Expense FTE $ 10,066 $ 3,554 $ 18,164 $ 11,816 Less: PPP Cost of Funds (2) (90) (19) (555) Total Adjusted Interest Expense FTE 10,064 3,464 18,145 11,261 Adjusted Cost of Funds, net of PPP Impact 0.67 % 0.24 % 0.39 % 0.27 % Net Interest Margin Excluding PPP Loans FTE 3.57 % 2.95 % 3.24 % 2.98 % 37 Table of Contents Net Income Net income was $77.8 million in the first nine months of 2022 , an increase of $6.4 million, or 8.9%, versus net income of $71.5 million in the first nine months of 2021 . The increase in net income for 2022 was primarily due to growth in net interest income of $13.0 million, or 9.7%, and a decrease to the provision for credit losses of $660,000, offset by a decrease to noninterest income of $3.7 million, or 10.5%, and an increase to noninterest expense of $3.4 million, or 4.3%. Net income was $28.5 million for the three months ended September 30, 2022, an increase of $4.4 million, or 18.3%, versus net income of $24.1 million for the three months ended September 30, 2021. The increase was primarily due to growth in net interest income which increased $6.8 million, or 14.8%, and a decrease to the provision for credit losses of $1.3 million, offset by a decrease to noninterest income of $950,000, or 8.5%, and an increase to noninterest expense of $1.9 million, or 7.4%. 38 Table of Contents Net Interest Income The following table sets forth consolidated information regarding average balances and rates: Nine Months Ended September 30, 2022 2021 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/ Rate Average Balance Interest Yield (1)/ Rate Earning Assets Loans: Taxable (2)(3) $ 4,351,009 $ 136,580 4.20 % $ 4,455,488 $ 128,828 3.87 % Tax exempt (1) 30,275 1,149 5.07 13,403 410 4.09 Investments: Securities (1) 1,472,807 29,105 2.64 977,955 17,765 2.43 Short-term investments 2,251 12 0.71 2,273 2 0.12 Interest bearing deposits 322,445 1,489 0.62 376,156 346 0.12 Total earning assets $ 6,178,787 $ 168,335 3.64 % $ 5,825,275 $ 147,351 3.38 % Less: Allowance for credit losses (67,684) (71,783) Nonearning Assets Cash and due from banks 72,240 69,066 Premises and equipment 59,026 59,652 Other nonearning assets 226,732 189,472 Total assets $ 6,469,101 $ 6,071,682 Interest Bearing Liabilities Savings deposits $ 421,363 $ 241 0.08 % $ 353,058 $ 204 0.08 % Interest bearing checking accounts 2,658,739 14,456 0.73 2,334,480 4,905 0.28 Time deposits: In denominations under $100,000 189,459 951 0.67 223,486 1,650 0.99 In denominations over $100,000 607,352 2,389 0.53 741,815 4,828 0.87 Miscellaneous short-term borrowings 9 0 0.00 500 7 1.87 Long-term borrowings and subordinated debentures 42,857 127 0.40 75,000 222 0.40 Total interest bearing liabilities $ 3,919,779 $ 18,164 0.62 % $ 3,728,339 $ 11,816 0.42 % Noninterest Bearing Liabilities Demand deposits 1,868,858 1,627,522 Other liabilities 64,262 47,169 Stockholders' Equity 616,202 668,652 Total liabilities and stockholders' equity $ 6,469,101 $ 6,071,682 Interest Margin Recap Interest income/average earning assets 168,335 3.64 147,351 3.38 % Interest expense/average earning assets 18,164 0.39 11,816 0.27 % Net interest income and margin $ 150,171 3.25 % $ 135,535 3.11 % (1) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $4.1 million and $2.5 million in the nine-month periods ended September 30, 2022 and September 30, 2021, respectively. (2) Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $690,000 and $10.5 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented. (3) Nonaccrual loans are included in the average balance of taxable loans. 39 Table of Contents The following table sets forth consolidated information regarding average balances and rates: Three Months Ended September 30, 2022 2021 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/ Rate Average Balance Interest Yield (1)/ Rate Earning Assets Loans: Taxable (2)(3) $ 4,376,724 $ 52,707 4.78 % $ 4,339,792 $ 43,025 3.93 % Tax exempt (1) 39,220 583 5.90 14,312 150 4.16 Investments: Securities(1) 1,429,186 9,949 2.76 1,201,657 6,971 2.30 Short-term investments 2,307 9 1.55 2,304 0 0.00 Interest bearing deposits 144,193 763 2.10 351,769 125 0.14 Total earning assets $ 5,991,630 $ 64,011 4.24 % $ 5,909,834 $ 50,271 3.37 % Less: Allowance for credit losses (67,481) (72,157) Nonearning Assets Cash and due from banks 70,672 67,715 Premises and equipment 58,796 59,824 Other nonearning assets 244,741 188,118 Total assets $ 6,298,358 $ 6,153,334 Interest Bearing Liabilities Savings deposits $ 430,428 $ 85 0.08 % $ 369,191 $ 71 0.08 % Interest bearing checking accounts 2,623,747 8,809 1.33 2,390,462 1,712 0.28 Time deposits: In denominations under $100,000 180,774 298 0.65 211,911 457 0.86 In denominations over $100,000 586,750 874 0.59 691,143 1,239 0.71 Miscellaneous short-term borrowings 0 0 0.00 0 0 0.00 Long-term borrowings and subordinated debentures 0 0 0.00 75,000 75 0.40 Total interest bearing liabilities $ 3,821,699 $ 10,066 1.04 % $ 3,737,707 $ 3,554 0.38 % Noninterest Bearing Liabilities Demand deposits 1,816,770 1,681,565 Other liabilities 76,210 45,810 Stockholders' Equity 583,679 688,252 Total liabilities and stockholders' equity $ 6,298,358 $ 6,153,334 Interest Margin Recap Interest income/average earning assets 64,011 4.24 50,271 3.37 % Interest expense/average earning assets 10,066 0.67 3,554 0.24 % Net interest income and margin $ 53,945 3.57 % $ 46,717 3.13 % (1) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.45 million and $976,000 in the three-month periods ended September 30, 2022 and September 30, 2021, respectively. (2) Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $50,000 and $3.57 million for the three months ended September 30, 2022 and September 30, 2021, respectively. All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented. (3) Nonaccrual loans are included in the average balance of taxable loans. Net interest income increased $13.0 million, or 9.7%, to $146.1 million for the nine months ended September 30, 2022, compared with $133.1 million for the first nine months of 2021 . Growth in core loans and investment security balances coupled with rising interest rates positively impacted investment security and loan income and offset the decline in PPP loan income of $12.0 million during the period. Interest expense increased by $6.3 million, partially offsetting the positive impact of increased loan and securities interest income. Average earning assets increased by $353.5 million, due primarily to growth in investment securities of $494.8 million. Average loans outstanding decreased $87.6 million to $4.381 billion during the nine months ended September 30, 2022, compared to $4.469 billion during the same period of 2021. Average PPP loans decreased by $286.8 million to $10.1 million for the first nine months of 2022 compared to $296.9 million for the first nine months of 2021 . Excluding PPP loans, average core loans increased $199.2 million to $4.371 billion during the nine months ended 40 Table of Contents September 30, 2022, compared to $4.172 billion during the same period of 2021 . The earning asset growth was funded through an increase in deposits. Average deposits increased $465.4 million to $5.746 billion during the nine months ended September 30, 2022, compared to $5.280 billion for the same period of 2021 . The tax equivalent net interest margin was 3.25 % for the nine months ended September 30, 2022, compared to 3.11% during the first nine months of 2021 . The increased margin was caused by increased yields on loans and securities, and partially offset by increased rates on interest bearing liabilities. Also contributing to the increased margin was an increase to earning assets of $353.5 million, or 6.1%, which was funded by an increase in average deposits. The higher yields and increased cost of funds were driven by a series of rate increases beginning in March of 2022 to the target Federal Funds rate by the Federal Reserve Board. The cumulative effect of these rate increases raised the target Federal Funds rate 300 basis points since March 2022, increasing the target Federal Funds rate range from a zero-bound range of 0.00% - 0.25% prior to the first rate increase to a range of 3.00% - 3.25% at September 30, 2022. Total PPP loan income recognized for the nine months ended September 30, 2022 was $767,000 compared to $12.8 million for the comparable period in 2021 . PPP interest and fees provided a benefit of 1 basis point on the net interest margin for the nine months ended September 30, 2022, compared to a benefit of 13 basis points for the same period in 2021 . Net interest margin, excluding PPP, was 3.24% for the nine months ended September 30, 2022, compared to 2.98% for the same period in 2021. Despite the decrease in PPP loan fee income, earning asset yields increased 26 basis points, from 3.38% for the nine months ended September 30, 2021, to 3.64% for the nine months ended September 30, 2022 due primarily to the repricing of variable rate loans. Offsetting the increased yield on earning assets was an increase to the Company's cost of funds of 12 basis points as interest expense as a percentage of earning assets increased from 0.27% for the nine months ended September 30, 2021 to 0.39% for the nine months ended September 30, 2022. Net interest income increased by $6.8 million, or 14.8%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase in net interest income during the third quarter of 2022 was driven by the increase in loan interest income due primarily to the rising interest rate environment and an increase in average earning assets of $81.8 million. This earning asset growth was funded through an increase in average deposits of $294.2 million during the three months ended September 30, 2022. Offsetting this growth in average deposits was a decrease in long-term borrowings of $75.0 million due to repayment of a putable $75.0 million advance with the FHLB during the second quarter of 2022. The Company’s net interest margin increased 44 basis points to 3.57% for the third quarter of 2022 compared to 3.13% for the third quarter of 2021. The increased margin in the third quarter of 2022 compared to the prior year period was primarily due to higher yields on loans and securities and partially offset by a higher cost of funds. The higher yields were driven by the rising rate environment in 2022 and redeployment of excess liquidity from interest bearing deposits, that was used to fund loan growth during the period also benefited net interest margin. The Company expects deposit betas to increase in the fourth quarter of 2022 as the Federal Reserve Bank is expected to continue tightening. Total PPP loan income recognized for the third quarter of 2022 was $58,000 compared to $3.9 million for the third quarter of 2021. PPP interest and fees had a nominal impact on the third quarter 2022 net interest margin compared to an expansionary benefit to net interest margin of 18 basis points for the third quarter 2021. Net interest margin, excluding PPP, was 3.57% for the three months ended September 30, 2022, compared to 2.95% for the same period in 2021. Despite the decrease in PPP loan fee income, earning asset yields increased 87 basis points from 3.37% for the third quarter of 2021 to 4.24% for the third quarter of 2022. Offsetting the increased yield on earning assets was an increase to the Company's cost of funds of 43 basis points. Interest expense as a percentage of earning assets increased to 0.67% for the three months ended September 30, 2022, from 0.24% for the three months ended September 30, 2021. Provision for Credit Losses The Company recorded provision for credit losses expense of $417,000 for the nine months ended September 30, 2022 compared to provision expense of $1.1 million during the comparable period of 2021 . Net charge-offs were $951,000 during the nine month period ended September 30, 2022 compared to net recoveries of $1.5 million during the comparable period of 2021 . The Company recorded no provision for credit losses expense for the three months ended September 30, 2022 compared to provision expense of $1.3 million during the comparable period of 2021 . Net charge offs were $284,000 during the three month period ended September 30, 2022 compared to net recoveries of $35,000 during the comparable period of 2021 . Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower. Management’s overall view on current credit quality was also a factor in the determination of the provision for credit losses. The Company’s management continues to monitor the adequacy 41 Table of Contents of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans. Noninterest Income Noninterest income categories for the nine-month and three-month periods ended September 30, 2022 and 2021 are shown in the following table: Nine Months Ended September 30, (dollars in thousands) 2022 2021 Dollar Change Percent Change Wealth advisory fees $ 6,550 $ 6,433 $ 117 1.8 % Investment brokerage fees 1,711 1,560 151 9.7 Service charges on deposit accounts 8,681 7,768 913 11.8 Loan and service fees 9,131 8,823 308 3.5 Merchant card fee income 2,660 2,226 434 19.5 Bank owned life insurance income (loss) (212) 2,101 (2,313) (110.1) Interest rate swap fee income 492 934 (442) (47.3) Mortgage banking income 771 1,756 (985) (56.1) Net securities gains 0 797 (797) (100.0) Other income 1,559 2,613 (1,054) (40.3) Total noninterest income $ 31,343 $ 35,011 $ (3,668) (10.5) % Noninterest income to total revenue 17.7 % 20.8 % Three Months Ended September 30, (dollars in thousands) 2022 2021 Dollar Change Percent Change Wealth advisory fees $ 2,059 $ 2,177 $ (118) (5.4) % Investment brokerage fees 651 521 130 25.0 Service charges on deposit accounts 2,990 2,756 234 8.5 Loan and service fees 3,047 3,005 42 1.4 Merchant card fee income 941 838 103 12.3 Bank owned life insurance income 54 640 (586) (91.6) Interest rate swap fee income 88 180 (92) (51.1) Mortgage banking income (loss) (89) (32) (57) 178.1 Other income 423 1,029 (606) (58.9) Total noninterest income $ 10,164 $ 11,114 $ (950) (8.5) % Noninterest income to total revenue 16.2 % 19.5 % The Company's noninterest income decreased $3.7 million, or 10.5%, to $31.3 million for the nine months ended September 30, 2022 compared to $35.0 million in the prior year period. Notably, the Company's fee-based businesses of wealth advisory fees improved by 1.8%, investment brokerage fees improved by 9.7%, service charges on deposit accounts improved by 11.8%, loan and service fees improved by 3.5% and merchant card fee income improved by 19.5%. Market value declines impacted the overall decrease in noninterest income. Bank owned life insurance income decreased by $2.3 million primarily due to declines in market value of variable life insurance policies of $1.1 million during the nine months ended September 30, 2022, compared to market value gains of $1.1 million for the comparable period of 2021. In addition, other income decreased by $1.1 million, mortgage banking income decreased by $985,000, net securities gains decreased by $797,000 and interest rate swap income decreased $442,000. Other income declined due to income declines in various limited partnership investment holdings and other non-recurring items. The decline in mortgage banking income was caused by a decrease in volume due to a slowdown in mortgage demand because of the higher interest rate environment. Excluding the impact of the variable life insurance policies market value changes, noninterest income was $32.5 million for the nine months ended September 30, 2022, compared to $34.0 million for the nine months ended September 30, 2021, a decline of $1.5 million, or 4.4%. The valuation changes to the variable life insurance policies are offset by similar changes to the deferred compensation expense that is recognized in salaries and employee benefits. 42 Table of Contents The Company's noninterest income decreased by $950,000, or 8.5%, to $10.2 million for the third quarter of 2022, compared to $11.1 million for the third quarter of 2021. Noninterest income was positively impacted by increases in fee-based lines of business due to fee generating volume for the respective service lines. In particular, service charges on deposit accounts increased $234,000, or 8.5%, investment brokerage fees increased $130,000, or 25.0%, and merchant card fee income increased $103,000, or 12.3%. Wealth advisory fees declined by $118,000, or 5.4%, and were negatively impacted by market value declines of 15% in trust assets during 2022. Other income declined by $606,000 due to income declines in various limited partnership holdings and other non-recurring items. In addition, bank owned life insurance income decreased by $586,000. This decrease was primarily caused by market value declines of the Company's variable life insurance policies which are tied to the equity markets and declined in value by $234,000 during the third quarter of 2022, compared to an increase of $284,000 during the third quarter of 2021. Noninterest Expense Noninterest expense categories for the nine-month and three-month periods ended September 30, 2022 and 2021 are shown in the following tables: Nine Months Ended September 30, 2022 (dollars in thousands) 2022 2021 Dollar Change Percent Change Salaries and employee benefits $ 43,840 $ 44,377 $ (537) (1.2) % Net occupancy expense 4,793 4,343 450 10.4 Equipment costs 4,250 4,134 116 2.8 Data processing fees and supplies 9,510 9,692 (182) (1.9) Corporate and business development 4,078 3,208 870 27.1 FDIC insurance and other regulatory fees 1,516 1,707 (191) (11.2) Professional fees 4,527 5,058 (531) (10.5) Other expense 10,262 6,842 3,420 50.0 Total noninterest expense $ 82,776 $ 79,361 $ 3,415 4.3 % Efficiency ratio 46.7 % 47.2 % (dollars in thousands) Three Months Ended September 30, 2022 (dollars in thousands) 2022 2021 Dollar Change Percent Change Salaries and employee benefits $ 14,650 $ 14,230 $ 420 3.0 % Net occupancy expense 1,476 1,413 63 4.5 Equipment costs 1,380 1,371 9 0.7 Data processing fees and supplies 3,226 3,169 57 1.8 Corporate and business development 1,426 1,000 426 42.6 FDIC insurance and other regulatory fees 458 748 (290) (38.8) Professional fees 1,554 1,342 212 15.8 Other expense 3,724 2,694 1,030 38.2 Total noninterest expense $ 27,894 $ 25,967 $ 1,927 7.4 % Efficiency ratio 44.5 % 45.7 % The Company's noninterest expense increased by $3.4 million, or 4.3%, to $82.8 million for the nine months ended September 30, 2022, from $79.4 million for the nine months ended September 30, 2021. The increase was due primarily due to an increase in other expense of $3.4 million, or 50.0%, driven by accruals for ongoing legal matters, Corporate and business development expense increased $870,000, or 27.1%, caused by increased advertising, charitable contributions, including contributions associated with the company's sesquicentennial celebration, and other corporate development activities. Net occupancy expense increased $450,000, or 10.4%, driven by budgeted repairs, ongoing upgrades to existing facilities and the opening of a new branch in Elkhart. Offsetting these increases are decreases in salaries and employee benefits of $537,000, or 1.2%, and professional fees of $531,000, or 10.5%, due to a decrease in legal expense. The decline in salaries and benefits was impacted by a decline in deferred compensation of $2.4 million, offset by increases in salaries and wages of $758,000, increased performance-based compensation of $499,000 and increased health insurance expense of $329,000. Deferred compensation expense was $1.2 million for the nine months ended September 30, 2021. Operating expenses excluding the 43 Table of Contents effects of legal settlement accruals of $3.0 million and market value declines from the deferred compensation program of $1.2 million, were $81.0 million for the nine months ended September 30, 2022, compared to $78.2 million for the comparable period in 2021, an increase of $2.8 million, or 3.6%. The Company's noninterest expense increased by $1.9 million, or 7.4%, to $27.9 million in the third quarter of 2022 , compared to $26.0 million in the third quarter of 2021 . Other expense increased $1.0 million, or 38.2%, driven by accruals for ongoing legal matters. In addition, corporate and business development expenses increased $426,000, or 42.6%, and salaries and employee benefits increased $420,000, or 3.0%. The increase in corporate and business development expenses was primarily a result of increased client development activities, advertising costs and increased contributions to our communities. The increase to salaries and employee benefits was driven primarily by increased salaries and wages of $415,000, increases to performance-based compensation expense of $367,000 and increased employee health insurance expense of $113,000, offset by declines in deferred compensation expense of $519,000. Deferred compensation expense was $279,000 for the three months ended September 30, 2021. Operating expenses, excluding the effects of one-time legal settlement accruals of $1.1 million and market value volatility declines of $240,000 from the deferred compensation program, were $27.0 million for the three months ended September 30, 2022, compared to $25.7 million for the comparable period during 2021, an increase of $1.3 million, or 5.1%. The Company's efficiency ratio was 46.7% for the nine months ended September 30, 2022 compared to 47.2% for the first nine months of 2021. The Company's efficiency ratio was 44.5% for the third quarter of 2022 and 45.7% for the third quarter of 2021. As previously disclosed, in the third quarter of 2019, the Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al ., which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and agreed to stay prosecution of the action through August 31, 2022. The original complaint focused on a series of business transactions among the client, related entities, and the Bank, which the liquidating trustee alleged are voidable under applicable federal bankruptcy and state law. The complaint also addressed treatment of the Bank’s claims filed in the bankruptcy cases. On August 31, 2022, the trustee filed his amended complaint against the former client, the Bank, the Company, four officers of the Bank and one independent director of the Bank. The amended complaint alleges that the former client engaged in a check kiting scheme involving multiple banks. The amended complaint alleges that a series of business transactions among the client, his related entities and the Bank are voidable under applicable bankruptcy and state laws. The amended complaint also alleges that the Bank, the Company and the five individual bank representatives who are named as defendants violated various federal and state laws in assisting the former client in his check kiting scheme. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank, the Company and the five individual Bank representatives who are named as defendants intend to vigorously defend themselves against all allegations asserted in the amended complaint. The Company's income tax expense increased $156,000, or 1.0%, in the nine months ended September 30, 2022 compared to the same period in 2021. The effective tax rate was 17.4% in the nine months ended September 30, 2022, compared to 18.5% for the comparable period of 2021. The year-to-date effective tax rate is reduced by income from tax-advantaged sources such as f ederally tax exempt municipal bond interest income as w ell as a tax benefit from stock-based compensation vesting of shares for plan participants. FINANCIAL CONDITION Overview Total assets of the Company were $6.288 billion as of September 30, 2022, a decrease of $268.9 million, when compared to $6.557 billion as of December 31, 2021. This decrease was primarily due to a $478.4 million decrease in cash and cash equivalents, offset by increases in loans, net of the allowance for credit losses, of $202.5 million and in other assets of $88.5 million. Loans excluding PPP loans increased by $226.5 million, or 5.3%, from $4.262 billion at December 31, 2021 to $4.488 billion at September 30, 2022. Total deposits decreased $71.3 million, or 1.2%. The decrease in deposits was primarily driven by contraction in retail and commercial deposits, which declined $121.9 million and $145.8 million, respectively. Public funds deposits increased by $196.5 million since year end. Core deposits were $5.654 billion as of September 30, 2022, a decrease of $71.3 million, compared to $5.725 billion as of December 31, 2021 . 44 Table of Contents Uses of Funds Total Cash and Cash Equivalents Total cash and cash equivalents decreased by $478.4 million, or 70.0%, to $204.8 million at September 30, 2022, from $683.2 million at December 31, 2021. The decrease in cash and cash equivalents at September 30, 2022 reflects an additional deployment of $250 million in funds to the available-for-sale investment securities portfolio in the first quarter of 2022, funding of core loan growth of $226.5 million, and repayment of an FHLB advance of $75.0 million, offset by a reduction in deposits of $71.3 million. Cash and cash equivalents include short-term investments. Short-term investments include cash on deposit that earns interest such as excess liquidity maintained at the Federal Reserve Bank. Cash and cash equivalents balances will vary depending on the cyclical nature of the bank’s liquidity position. Investment Portfolio The amortized cost and the fair value of securities as of September 30, 2022 and December 31, 2021 were as follows: September 30, 2022 December 31, 2021 (dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Available-for-Sale U.S Treasury securities $ 1,994 $ 1,968 $ 900 $ 900 U.S government sponsored agencies 159,169 131,255 145,858 143,452 Mortgage-backed securities: residential 597,258 504,756 487,157 486,676 Mortgage-backed securities: commercial 0 0 522 523 State and municipal securities 689,902 554,207 742,532 767,007 Total Available-for-Sale $ 1,448,323 $ 1,192,186 $ 1,376,969 $ 1,398,558 Held-to-maturity State and municipal securities $ 127,820 $ 103,326 $ 0 $ 0 Total Held-to-Maturity $ 127,820 $ 103,326 $ 0 $ 0 Total Investment Portfolio $ 1,576,143 $ 1,295,512 $ 1,376,969 $ 1,398,558 The Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity on April 1, 2022 as part of an overall balance sheet management strategy. The fair value of securities transferred was $127.0 million. At September 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity. Management is aware that, as interest rates rise, any unrealized loss in the available-for-sale investment securities portfolio will increase, and as interest rates fall the unrealized gain in the investment portfolio will rise. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses. Purchases of securities available-for-sale totaled $313.9 million in the first nine months of 2022. The purchases consisted of U.S. Treasury securities, securities issued by government sponsored entities, mortgage-backed securities issued by government sponsored entities and state and municipal securities. The investment security purchases reflect the deployment of excess liquidity to the available-for-sale investment securities portfolio. Investment securities represented 21.0% of total assets on September 30, 2022, compared to 21.3% of total assets on December 31, 2021. The Company deployed $35.0 million of cash flows from the investment securities portfolio to fund loan growth during 2022 and expects the investment securities portfolio to represent a lower percentage of total assets over time, towards historical levels of 14% of total assets. Paydowns from prepayments and scheduled payments of $77.5 million were received in the first nine months of 2022, and the amortization of premiums, net of the accretion of discounts, was $4.8 million. Maturities and calls of securities totaled $8.5 million in the first nine months of 2022. There were no sales of available-for-sale investment securities in the first nine months of 2022. No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities in the first nine months of 2022. 45 Table of Contents The fair value of the available-for-sale investment securities portfolio as of September 30, 2022 included unrealized losses of $256.1 million compared to unrealized gains of $21.6 million as of December 31, 2021. Unrealized losses in the available-for-sale investment securities portfolio resulted from the rising interest rate environment during the first nine months of 2022. The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Real Estate Mortgage Loans Held-for-Sale Real estate mortgage loans held-for-sale decreased by $6.4 million, or 85.3%, to $1.1 million at September 30, 2022, from $7.5 million at December 31, 2021. The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $34.3 million in the first nine months of 2022 compared to $98.7 million in the first nine months of 2021. Management expects the volume of loans originated for sale in the secondary market to decline as compared to volumes originated in 2021 due to the rise in mortgage interest rates that have occurred during 2022. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $372.3 million and $375.4 million as of September 30, 2022 and December 31, 2021, respectively. Loan Portfolio The loan portfolio by portfolio segment as of September 30, 2022 and December 31, 2021 is summarized as follows: (dollars in thousands) September 30, 2022 December 31, 2021 Current Period Change Commercial and industrial loans $ 1,511,295 33.6 % $ 1,389,469 32.4 % $ 121,826 Commercial real estate and multi-family residential loans 2,056,768 45.8 1,954,846 45.6 101,922 Agri-business and agricultural loans 342,066 7.6 445,825 10.4 (103,759) Other commercial loans 100,831 2.2 73,490 1.7 27,341 Consumer 1-4 family mortgage loans 388,271 8.7 344,720 8.0 43,551 Other consumer loans 93,026 2.1 82,755 1.9 10,271 Subtotal, gross loans 4,492,257 100.0 % 4,291,105 100.0 % 201,152 Less: Allowance for credit losses (67,239) (67,773) 534 Net deferred loan fees (2,422) (3,264) 842 Loans, net $ 4,422,596 $ 4,220,068 $ 202,528 Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $201.2 million to $4.492 billion at September 30, 2022 from $4.291 billion at December 31, 2021. The increase was primarily driven by originations of loans concentrated in the commercial and industrial and commercial real estate and multi-famly residential categories and was offset by seasonal paydowns in the agri-business and agricultural loans segments. Total loans, excluding PPP loans, increased by $226.5 million, as of September 30, 2022 as compared to December 31, 2021. 46 Table of Contents The following table summarizes the Company’s non-performing assets as of September 30, 2022 and December 31, 2021: (dollars in thousands) September 30, 2022 December 31, 2021 Nonaccrual loans including nonaccrual troubled debt restructured loans (1) $ 9,892 $ 14,973 Loans past due over 90 days and still accruing 25 117 Total nonperforming loans 9,917 15,090 Other real estate owned 196 196 Repossessions 0 0 Total nonperforming assets $ 10,113 $ 15,286 Individually analyzed loans including troubled debt restructurings (1) $ 17,313 $ 25,581 Nonperforming loans to total loans 0.22 % 0.35 % Nonperforming assets to total assets 0.16 % 0.23 % Performing troubled debt restructured loans (1) $ 0 $ 5,121 Nonperforming troubled debt restructured loans (included in nonaccrual loans) (1) 0 6,218 Total troubled debt restructured loans (1) $ 0 $ 11,339 (1) On April 1, 2022, the Company adopted certain aspects of ASU 2022-02, whereby the Company no longer recognizes or accounts for TDRs. Adoption of this standard was retrospective to January 1, 2022. Total nonperforming assets decreased by $5.2 million, or 33.8%, to $10.1 million during the nine month period ended September 30, 2022. The ratio of nonperforming assets to total assets decreased from 0.23% at December 31, 2021 to 0.16% at September 30, 2022. A loan is individually analyzed when full payment under the original loan terms is not expected. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral. Total individually analyzed loans decreased by $8.3 million to $17.3 million at September 30, 2022 from $25.6 million at December 31, 2021. Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb current expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other current expected losses in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. General allowance is determined after considering the following factors: application of loss percentages using a probability of default/loss given default approach subject to a floor, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention applies to loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for credit losses for any assets where management has identified conditions or circumstances that indicate an asset is nonperforming. If an asset or portion, thereof is classified as a loss, the Company’s policy is to either establish specified allowances for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount. At September 30, 2022, the allowance for credit losses was 1.50% of total loans outstanding, versus 1.58% of total loans outstanding at December 31, 2021. At September 30, 2022, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain 47 Table of Contents borrowers may experience difficulty and the level of nonperforming loans, charge offs and delinquencies could rise and require increases in the allowance for credit losses. The process of identifying credit losses is a subjective process. The Company has a relatively high percentage of commercial and commercial real estate loans, which are extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area. As of September 30, 2022, based on management’s review of the loan portfolio, the Company had 55 credit relationships totaling $163.2 million on the classified loan list versus 81 credit relationships totaling $234.5 million on December 31, 2021. The decrease in classified loans for the first nine months of 2022 resulted primarily from paydowns and borrower risk rating upgrades to previously classified loans on the non-individually analyzed portion of the watchlist. As of September 30, 2022, the Company had $121.0 million of assets classified as Special Mention, $42.1 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $176.6 million, $57.9 million, $0 and $0, respectively, at December 31, 2021. Watch list loans as a percentage of total loans, excluding PPP loans, decreased to a historical low of 3.64% as of September 30, 2022, compared to 5.50% as of December 31, 2021. Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions and a reasonably supportable forecast period. The Company has annual discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio based upon loan segment. In accordance with applicable accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. For a more thorough discussion of the allowance for credit losses methodology see the ("Critical Accounting Policies") section of this Item 2. The allowance for credit losses decreased $534,000, from $67.8 million at December 31, 2021 to $67.2 million at September 30, 2022. Most of the Company’s recent loan growth has been concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining credit loss allocations. Sources of Funds The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the nine months ended September 30, 2022 and 2021 are summarized in the following table: Nine months ended September 30, 2022 2021 (dollars in thousands) Balance Rate Balance Rate Noninterest bearing demand deposits $ 1,868,858 0.00 % $ 1,627,522 0.00 % Savings and transaction accounts: Savings deposits 421,363 0.08 353,058 0.08 Interest bearing demand deposits 2,658,739 0.73 2,334,480 0.28 Time deposits: . Deposits of $100,000 or more 607,352 0.53 741,815 0.87 Other time deposits 189,459 0.67 223,486 0.99 Total deposits $ 5,745,771 0.42 % $ 5,280,361 0.29 % FHLB advances and other borrowings 42,866 0.40 75,500 0.41 Total funding sources $ 5,788,637 0.42 % $ 5,355,861 0.29 % Deposits and Borrowings As of September 30, 2022, total deposits decreased by $71.3 million, or 1.2%, from December 31, 2021. Core deposits, which excludes brokered deposits, decreased by $71.3 million to $5.654 billion as of September 30, 2022 from $5.725 billion as of December 31, 2021. Total brokered deposits were $10.0 million at September 30, 2022 and December 31, 2021. 48 Table of Contents Since December 31, 2021, the change in core deposits was comprised of increases in public funds deposits of $196.5 million, and decreases in commercial deposits of $145.8 million, and in retail deposits of $121.9 million. Total public funds deposits, including public funds transaction accounts, were $1.481 billion at September 30, 2022 and $1.285 billion at December 31, 2021. The following table summarizes deposit composition at September 30, 2022 and December 31, 2021: (dollars in thousands) September 30, 2022 December 31, 2021 Current Period Change Retail $ 2,056,626 $ 2,178,534 $ (121,908) Commercial 2,116,390 2,262,229 (145,839) Public funds 1,481,100 1,284,641 196,459 Core deposits $ 5,654,116 $ 5,725,404 $ (71,288) Brokered deposits 10,017 10,003 14 Total deposits $ 5,664,133 $ 5,735,407 $ (71,274) During the nine months ended September 30, 2022, the Company repaid a $75.0 million putable advance with the FHLB. The Company utilizes wholesale funding, including brokered deposits and Federal Home Loan Bank advances, to supplement funding of assets, which is primarily used for loan and investment securities growth. Capital As of September 30, 2022, total stockholders’ equity was $519.2 million, a decrease of $185.7 million, or 26.3%, from $704.9 million at December 31, 2021. Net income of $77.8 million increased equity. Offsetting this increase to stockholders’ equity was a decrease of $237.8 million in accumulated other comprehensive income (loss), which was primarily driven by a net decrease in the fair value of available-for-sale securities. Dividends declared and paid of $1.20 per share, or $30.6 million, also contributed the decrease to total stockholders' equity. The impact on equity for other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of September 30, 2022, the Company's capital levels remained characterized as “well-capitalized”. 49 Table of Contents The actual capital amounts and ratios of the Company and the Bank as of September 30, 2022 and December 31, 2021, are presented in the table below. Capital ratios for September 30, 2022 are preliminary until the Call Report and FR Y-9C are filed. Actual Minimum Required For Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of September 30, 2022: Total Capital (to Risk Weighted Assets) Consolidated $ 801,514 15.29 % $ 419,289 8.00 % $ 550,317 N/A N/A N/A Bank $ 781,100 15.04 % $ 415,614 8.00 % $ 545,493 10.50 % $ 519,517 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 735,890 14.04 % $ 314,467 6.00 % $ 445,494 N/A N/A N/A Bank $ 716,042 13.78 % $ 311,710 6.00 % $ 441,590 8.50 % $ 415,614 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 735,890 14.04 % $ 235,850 4.50 % $ 366,878 N/A N/A N/A Bank $ 716,042 13.78 % $ 233,783 4.50 % $ 363,662 7.00 % $ 337,686 6.50 % Tier I Capital (to Average Assets) Consolidated $ 735,890 11.40 % $ 258,221 4.00 % $ 258,221 N/A N/A N/A Bank $ 716,042 11.12 % $ 257,601 4.00 % $ 257,601 4.00 % $ 322,002 5.00 % As of December 31, 2021: Total Capital (to Risk Weighted Assets) Consolidated $ 744,421 15.35 % $ 388,020 8.00 % $ 509,276 N/A N/A N/A Bank $ 726,091 15.01 % $ 387,118 8.00 % $ 508,093 10.50 % $ 483,898 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 683,754 14.10 % $ 291,015 6.00 % $ 412,271 N/A N/A N/A Bank $ 665,424 13.75 % $ 290,339 6.00 % $ 411,313 8.50 % $ 387,118 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 683,754 14.10 % $ 218,261 4.50 % $ 339,518 N/A N/A N/A Bank $ 665,424 13.75 % $ 217,754 4.50 % $ 338,729 7.00 % $ 314,534 6.50 % Tier I Capital (to Average Assets) Consolidated $ 683,754 10.73 % $ 254,898 4.00 % $ 254,898 N/A N/A N/A Bank $ 665,424 10.46 % $ 254,425 4.00 % $ 254,425 4.00 % $ 318,030 5.00 % 50 Table of Contents FORWARD-LOOKING STATEMENTS This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation: • the effects of future economic, business and market conditions and changes, including prevailing interest rates, the rate of inflation and the effects of the COVID-19 pandemic; • governmental monetary and fiscal policies and the impact the current economic environment will have on these; • the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities; • changes in borrowers’ credit risks and payment behaviors; • the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates; • the effects of disruption and volatility in capital markets on the value of our investment portfolio; • the risk of labor availability, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector; • changes in the prices, values and sales volumes of residential and commercial real estate; • changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages; • changes in the availability and cost of credit and capital in the financial markets; • the outcome of pending litigation and other claims we may be subject to from time to time; • the anticipated phase out of most LIBOR tenors by mid-2023 and establishment of a new reference rate or rates; • the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; • the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators; • risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company; • changes in technology or products that may be more difficult or costly, or less effective than anticipated; • the effects of any employee or customer fraud; • the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; • changes in accounting policies, rules and practices; • the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; and 51 Table of Contents • the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2021, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.