LAKELAND FINANCIAL CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in 2022 was $103.8 million, up 8.4% from $95.7 million in 2021. Net income for 2021 was 13.5% higher than $84.3 million in 2020. Diluted net income per common share was $4.04 in 2022, $3.74 in 2021 and $3.30 in 2020. Return on average total assets was 1.62% in 2022 versus 1.56% in 2021 and 1.55% in 2020. Return on average total equity was 17.40% in 2022 versus 14.19% in 2021 and 13.51% in 2020. The dividend payout ratio, with respect to diluted earnings per share, was 39.60% in 2022, 36.36% in 2021 and 36.36% in 2020. The average equity to average assets ratio was 9.28% in 2022 compared to 10.96% in 2021 and 11.51% in 2020. Net income in 2022 was positively impacted by a $24.8 million increase in net interest income. Offsetting these positive impacts were a $5.9 million increase in noninterest expense, a $2.9 million decrease in noninterest income, and an $8.3 million increase in provision for credit losses. Net income in 2021 was positively impacted by a $15.1 million increase in net interest income and a $13.7 million decrease in provision for credit losses. Offsetting these positive impacts were a $13.1 million increase in noninterest expense and a $2.1 million decrease in noninterest income. Total assets were $6.432 billion as of December 31, 2022 versus $6.557 billion as of December 31, 2021, a decrease of $125.0 million or 1.9%. Early in 2022, the Company deployed $250.0 million of excess liquidity to the investment securities portfolio. Loan growth of $422.6 million during 2022 was funded by cash and cash equivalents as well as deposits. During the fourth quarter, deposit outflows from commercial and retail depositors contributed to the decline in deposits of $274.8 million during 2022. Borrowings increased $222.0 million during 2022. The increase was due to a $297.0 million increase in short-term borrowings at December 31, 2022, offset by the payoff of a $75.0 million long-term FHLB advance outstanding at December 31, 2021. Total investment securities decreased $84.8 million during the year. The decrease was driven primarily by a decrease in market value of available-for-sale securities as a result of the increased rate environment driven by the Federal Reserve's monetary tightening policy. The decrease in fair value of available-for-sale investment securities was $236.9 million for the year 2022, from an unrealized gain position of $21.6 million at December 31, 2021 to an unrealized loss position of $215.3 million at December 31, 2022. In addition, the Company elected to transfer securities from available-for-sale to held-to-maturity as an overall balance sheet management strategy in 2022. The fair value of securities transferred during the second quarter of 2022 was $127.0 million, with $24.4 million in unrealized losses recorded in accumulated comprehensive income (loss) to be amortized over the remaining life of the securities transferred. CRITICAL ACCOUNTING POLICIES 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. Allowance for Credit Losses 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 uncollectible. 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 29 Table of Contents conditions and historical loss analysis. In addition, management gives consideration to changes in the facts and circumstances 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 to a borrower experiencing financial difficulty 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; changes in collateral strength; 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 expected 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 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 state 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. The allowance is inherently uncertain as it represents the Company’s expectation of the future collectability of loans in its portfolio; actual collections may be greater than or less than expectations. Actual collections may be impacted by wider economic conditions such as changes in the competitive environment or in the levels of business investment or consumer 30 Table of Contents spending, or by the quality of borrowers’ management teams and the success of their strategy execution. Borrowers’ ability to repay may also change due to the effects of government monetary or fiscal policy, which could affect the level of demand for borrowers’ products or services. The Company’s allowance for credit losses is subject to changes in the inputs to the model, including the following: the number of delinquent loans, nonaccrual loans, material modification due to a borrower experiencing financial difficulty, or charge offs; the levels of charge offs and recoveries; projected unemployment rates and other economic indicators; the Company’s collateral position on adversely classified loans; or management’s qualitative judgment of the implication of trends in its loan portfolio or in the broader economy. RESULTS OF OPERATIONS Overview In 2022, the Company continued to grow loans organically in its geographic footprint of northern Indiana and in central Indiana in the Indianapolis market. The Company had 52 branches as of December 31, 2022. The Company’s net interest income was positively affected by the monetary tightening policy of the Federal Reserve during 2022. The rise in short-term interest rates and loan growth were the primary drivers of the 13.9% increase in net interest income for 2022. The increase in net interest income was the primary driver for the 8.4% increase in net income of $8.1 million, as noninterest expense increased 5.7%, noninterest income decreased 6.4% and the provision for credit losses increased 770.5%. Asset quality metrics remained stable with watch list loans as a percentage of total loans at a historic low of 3.42%. Fee based lines of business including treasury management services, commercial loan fees, interchange fee income and merchant interchange fee income positively contributed to growth in noninterest income. Overall, expense growth has reflected the Company's continued investment in people, technology and our branch infrastructure. The outlook for 2023 includes plans for continued loan growth, disciplined credit philosophy, continued investments in human capital, enhancements to the Lake City Bank digital platform, and targeted expansion of our branch network in the Indianapolis market with two new offices planned in the next 18 months. Selecte d income statement information for the years ended December 31, 2022, 2021 and 2020 is presented in the following table. (dollars in thousands) 2022 2021 2020 Income Statement Summary: Net interest income $ 202,887 $ 178,088 $ 163,008 Provision for credit losses 9,375 1,077 14,770 Noninterest income 41,862 44,720 46,843 Noninterest expense 110,210 104,287 91,205 Other Data: Efficiency ratio (1) 45.03 % 46.81 % 43.46 % Dilutive EPS $ 4.04 $ 3.74 $ 3.30 Total equity $ 568,887 $ 704,906 $ 657,184 Tangible capital ratio (2) 8.79 % 10.70 % 11.21 % Adjusted tangible capital ratio (3) 11.30 % 10.47 % 10.78 % Net charge-offs to average loans 0.10 % 0.09 % 0.09 % Net interest margin 3.40 % 3.07 % 3.19 % Net interest margin excluding PPP loans (4) 3.40 % 2.95 % 3.19 % Noninterest income to total revenue 17.10 % 20.07 % 22.32 % Pretax Pre-Provision Earnings (5) $ 134,539 $ 118,521 $ 118,646 (1) Noninterest expense/Net interest income plus Noninterest income. (2) Non-GAAP financial measure. Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity. Management believes this is an important measure because it is useful for planning and forecasting purposes. See reconciliation on the next page. (3) Non-GAAP financial measure. Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to prior periods. See reconciliation on the next page. 31 Table of Contents (4) Non-GAAP financial measure. Calculated by subtracting the impact PPP loans had on average earnings assets, loan interest income, average interest bearing liabilities, and interest expense. Management believes this is an important measure because it provide for better comparability to prior periods, given the expectation that PPP represents a limited governmental intervention in the lending market, designed to support small businesses through the pandemic, its low fixed interest rate of 1.0% 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. The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the company's financial performance. A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data). A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data). Year Ended Dec. 31, 2022 Dec. 31, 2021 Dec. 31, 2020 Total Equity $ 568,887 $ 704,906 $ 657,184 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,176 Tangible Common Equity 565,084 701,112 653,390 AOCI Market Value Adjustment 188,154 (17,056) (29.182) Adjusted Tangible Common Equity 753,238 684,056 653,361 Assets $ 6,432,371 $ 6,557,323 $ 5,830,435 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,176 Tangible Assets 6,428,568 6,553,529 5,826,641 Securities Market Value Adjustment 238,170 (21,589) (36,939) Adjusted Tangible Assets 6,666,738 6,531,940 5,789,702 Ending Common Shares Issued 25,536,026 25,488,508 25,424,307 Tangible Book Value Per Common Share $ 22.13 $ 27.50 $ 25.70 Tangible Common Equity/Tangible Assets 8.79 % 10.70 % 11.21 % Adjusted Tangible Common Equity/Adjusted Tangible Assets 11.30 % 10.47 % 10.78 % Net Interest Income $ 202,887 $ 178,088 $ 163,008 Plus: Noninterest Income 41,862 44,720 46,843 Minus: Noninterest Expense (110,210) (104,287) (91,205) Pretax Pre-Provision Earnings $ 134,539 $ 118,521 $ 118,646 32 Table of Contents The impact of the Paycheck Protection Program on Net Interest Margin FTE is provided below (dollars in thousands). Year Ended Dec. 31, 2022 Dec. 31, 2021 Dec. 31, 2020 Total Average Earnings Assets $ 6,123,163 $ 5,906,640 $ 5,184,836 Less: Average Balance of PPP Loans (7,942) (237,951) (376,785) Total Adjusted Earning Assets 6,115,221 5,668,689 4,808,051 Total Interest Income FTE $ 245,194 $ 196,806 $ 195,549 Less: PPP Loan Income (772) (14,945) (12,832) Total Adjusted Interest Income FTE 244,422 181,861 182,717 Adjusted Earning Asset Yield, net of PPP Impact 4.00 % 3.21 % 3.80 % Total Average Interest Bearing Liabilities $ 3,913,195 $ 3,761,520 $ 3,437,338 Less: Average Balance of PPP Loans (7,942) (237,951) (376,785) Total Adjusted Interest Bearing Liabilities 3,905,253 $ 3,523,569 $ 3,060,553 Total Interest Expense FTE $ 36,680 $ 15,131 $ 30,095 Less: PPP Cost of Funds (20) (595) (956) Total Adjusted Interest Expense FTE 36,660 14,536 29,139 Adjusted Cost of Funds, net of PPP Impact 0.60 % 0.26 % 0.61 % Net Interest Margin FTE, net of PPP Impact 3.40 % 2.95 % 3.19 % Net Income Net income was $103.8 million in 2022, an increase of $8.1 million, or 8.4%, versus net income of $95.7 million in 2021. The increase in net income from 2021 to 2022 was primarily due to an increase in net interest income of $24.8 million, or 13.9%. Offsetting the increase in net interest income, noninterest expense increased $5.9 million, or 5.7%, noninterest income decreased $2.9 million, or 6.4%, and the provision for credit losses increased $8.3 million, or 770.5%. Net interest income for 2022 included $772,000 in PPP interest and fee income compared to $14.9 million for 2021. The increase in provision expense for 2022 was driven primarily by the downgrade of a single commercial relationship that occurred in late December 2022. The remaining increase in provision was driven by loan growth during the year. Net income was $95.7 million in 2021, an increase of $11.4 million, or 13.5%, versus net income of $84.3 million in 2020. The increase in net income from 2020 to 2021 was primarily due to an increase in net interest income of $15.1 million, or 9.3%, and a decrease in the provision for credit losses of $13.7 million, or 92.7%. Noninterest expense increased $13.1 million, or 14.3%, and noninterest income decreased $2.1 million, or 4.5%. Net interest income for 2021 included $14.9 million in PPP interest and fee income. The decrease in provision expense for 2021 was driven by improved economic conditions, which were supported by government stimulus programs and accommodative Federal Reserve Board's Federal Open Market Committee ("FOMC") monetary policy. Net Interest Income The following table presents a three-year average balance sheet and, for each major asset and liability category, its related interest income and yield or its expense and rate for the years ended December 31, 2022, 2021 and 2020. 33 Table of Contents THREE YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS 2022 2021 2020 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Earning Assets Loans: Taxable (1)(2) $ 4,391,590 $ 202,004 4.60 % $ 4,406,456 $ 170,081 3.86 % $ 4,405,994 $ 176,538 4.01 % Tax exempt (3) 35,576 2,094 5.89 14,638 594 4.06 18,478 813 4.40 Investments: (3) Securities 1,432,287 38,882 2.71 1,068,325 25,582 2.39 633,956 17,830 2.81 Short-term investments 2,266 30 1.32 2,254 2 0.09 25,046 67 0.27 Interest bearing deposits 261,444 2,184 0.84 414,967 547 0.13 101,362 301 0.30 Total earning assets $ 6,123,163 $ 245,194 4.00 % $ 5,906,640 $ 196,806 3.33 % $ 5,184,836 $ 195,549 3.77 % Less: Allowance for credit losses (67,717) (72,083) (56,824) Nonearning Assets Cash and due from banks 72,302 70,035 62,242 Premises and equipment 58,894 59,667 60,492 Other nonearning assets 240,937 189,521 174,050 Total assets $ 6,427,579 $ 6,153,780 $ 5,424,796 Interest Bearing Liabilities Savings deposits $ 419,997 $ 327 0.08 % $ 360,915 $ 278 0.08 % $ 270,010 $ 219 0.08 % Interest bearing checking accounts 2,689,572 31,182 1.16 2,392,220 6,759 0.28 1,862,077 9,268 0.50 Time deposits: In denominations under $100,000 185,215 1,289 0.70 218,624 2,038 0.93 262,040 4,361 1.66 In denominations over $100,000 579,797 3,483 0.60 714,353 5,752 0.81 946,569 15,494 1.64 Miscellaneous short-term borrowings 6,559 272 4.15 408 7 1.72 34,347 506 1.47 Long-term borrowings and subordinated debentures 32,055 127 0.40 75,000 297 0.40 62,295 247 0.40 Total interest bearing liabilities $ 3,913,195 $ 36,680 0.94 % $ 3,761,520 $ 15,131 0.40 % $ 3,437,338 $ 30,095 0.88 % Noninterest Bearing Liabilities Demand deposits 1,842,777 1,671,172 1,309,901 Other liabilities 75,120 46,451 53,384 Stockholders' Equity 596,487 674,637 624,173 Total liabilities and stockholders' equity $ 6,427,579 $ 6,153,780 $ 5,424,796 Interest Margin Recap Interest income/average earning assets 245,194 4.00 % 196,806 3.33 % 195,549 3.77 % Interest expense/average earning assets 36,680 0.60 15,131 0.26 30,095 0.58 Net interest income and margin $ 208,514 3.40 % $ 181,675 3.07 % $ 165,454 3.19 % (1) Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $692,000, $12.5 million and $9.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. (2) Nonaccrual loans are included in the average balance of taxable loans. 34 Table of Contents (3) 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 $5.6 million, $3.6 million and $2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31. NET INTEREST INCOME – RATE/VOLUME ANALYSIS (fully tax equivalent basis, dollars in thousands) 2022 Over (Under) 2021 (1) 2021 Over (Under) 2020 (1) Attributable to Total Change Attributable to Total Change Volume Rate Volume Rate Interest Income (2) Loans: Taxable $ (576) $ 32,499 $ 31,923 $ 18 $ (6,475) $ (6,457) Tax exempt 1,141 359 1,500 (158) (61) (219) Investments: Securities 9,552 3,748 13,300 10,724 (2,972) 7,752 Short-term investments 0 28 28 (37) (28) (65) Interest bearing deposits (272) 1,909 1,637 493 (247) 246 Total interest income 9,845 38,543 48,388 11,040 (9,783) 1,257 Interest Expense Savings deposits 46 3 49 71 (12) 59 Interest bearing checking accounts 941 23,482 24,423 2,186 (4,695) (2,509) Time deposits: In denominations under $100,000 (282) (467) (749) (636) (1,687) (2,323) In denominations over $100,000 (966) (1,303) (2,269) (3,172) (6,570) (9,742) Miscellaneous short-term borrowings 242 23 265 (571) 72 (499) Long-term borrowings and subordinated debentures (170) 0 (170) 50 0 50 Total interest expense (189) 21,738 21,549 (2,072) (12,892) (14,964) Net Interest Income (tax equivalent) $ 10,034 $ 16,805 $ 26,839 $ 13,112 $ 3,109 $ 16,221 (1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 2022, 2021 and 2020. The changes in net interest income are created by changes in interest rates and changes in the volumes of loans, investments, deposits and borrowings. In the table above, changes attributable to volume are computed using the change in volume from the prior year multiplied by the previous year’s rate, and changes attributable to rate are computed using the change in rate from the prior year multiplied by the previous year’s volume. The change in interest or expense due to both rate and volume has been allocated between factors in proportion to the relationship of the absolute dollar amounts of the change in each. (2) 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 TEFRA adjustment applicable to nondeductible interest expense. Net interest income increased by $24.8 million to $202.9 million in 2022 compared to 2021, partially due to a $216.5 million, or 3.7%, increase in average earning assets. The increase in average assets was primarily driven by a $364.0 million increase in average investment securities offset by a decrease in interest bearing deposits. The yield on average earning assets increased 67 basis points to 4.00% in 2022 from 3.33% in 2021. The higher earning asset yields and cost of funds were driven by the 425 basis points increase to the target Federal Funds rate implemented by the Federal Reserve Board beginning in 2022 to combat elevated levels of inflation affecting the U.S. economy. The target Federal Funds rate increased from a zero-bound range of 0.00% - 0.25% in March 2022 to a range of 4.25% - 4.50% at December 31, 2022. Additionally, net interest margin during the year ended December 31, 2022 was positively impacted by the recognition of nonaccrual interest resulting from the interest recovery of two nonaccrual commercial borrowers during the fourth quarter of 2022. The interest recovery was from 35 Table of Contents two loans placed on nonaccrual status in 2009 and 2021. The $1.9 million of nonaccrual interest income was recognized into loan interest income and contributed 3 basis points to the Company's net interest margin during 2022. The net interest margin increased to 3.40% in 2022 versus 3.07% in 2021. The net interest margin decreased to 3.07% in 2021 versus 3.19% in 2020, driven by margin compression from the lower interest rate environment and excess liquidity on the Company's balance sheet. During 2022, average loans increased $6.1 million and average investment securities increased $364.0 million. The growth in average assets and average investment securities was funded by a reduction of interest bearing deposits of $153.5 million, growth in interest bearing liabilities of $151.7 million and growth in average demand deposits of $171.6 million. The increase in average deposits for 2022 resulted from excess liquidity on our customers’ balance sheets resulting from a combination of PPP and economic stimulus. As a result of this excess liquidity on the Company's balance sheet, management deployed an additional $250 million into the available-for-sale investment securities portfolio during 2022, bringing total excess liquidity deployment to the investment securities portfolio of $902 million since the beginning of 2021. The utilization of commercial and retail lines of credit remained unchanged at 42% in 2022 and 2021 and down from 43% at December 31, 2020. However, available lines of credit have increased by a record $651 million to $4.752 billion at December 31, 2022 compared to $4.101 billion at December 31, 2021, or 16% growth. While overall line usage as a percentage of total line availability remained unchanged, management remains encouraged because of the healthy expansion in overall line availability due to strong demand for traditional working capital from our commercial and industrial client base as well as continued development activity within our commercial real estate markets. Provision for Credit Losses The Company recorded a provision for credit losses of $9.4 million in 2022 compared to $1.1 million in 2021 and $14.8 million in 2020. The increased provision in 2022 was driven by provision expense of $7.0 million related to the downgrade of a single $10.7 million commercial relationship. The remainder of the increase was due to growth in the overall loan portfolio. The Company’s allowance for credit losses as of December 31, 2022 was $72.6 million compared to $67.8 million as of December 31, 2021 and $61.4 million as of December 31, 2020. The allowance for credit losses represented 1.54% of total loans as of December 31, 2022 versus 1.58% at December 31, 2021 and 1.32% at December 31, 2020. The company’s credit loss reserve to total loans, excluding PPP loans, was 1.54% at December 31, 2022 compared to 1.59% at December 31, 2021 and 1.45% at December 31, 2020. PPP loans are guaranteed by the United States SBA and have not been allocated for within the allowance for credit losses. Net charge-offs of $4.5 million, or 0.10%, and $3.8 million, or 0.09%, of average loans, were recorded in 2022 and 2021, respectively. The charge offs for 2022 and 2021 resulted primarily from a single commercial credit each year. Management believes the charge offs were isolated instances that were negatively impacted by unique circumstances resulting from the pandemic and are not reflective of deteriorating trends in the loan portfolio. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions including inflation and the resulting impact on the interest rate environment, and other factors that may influence the assessment of the collectability of loans. The Company adopted CECL on January 1, 2021. Prior to this date, provision expense was recorded under the incurred loss methodology. The day one impact of the adoption was an increase in the allowance for credit losses of $9.1 million, with an offset, net of taxes, to stockholders' equity. 36 Table of Contents Noninterest Income The following table presents changes in the components of noninterest income for the years ended December 31, 2020, 2021 and 2022. % Change From Prior Year (dollars in thousands) 2022 2021 2020 2022 2021 Wealth advisory fees $ 8,636 $ 8,750 $ 7,468 (1.3) % 17.2 % Investment brokerage fees 2,318 1,975 1,670 17.4 % 18.3 % Service charges on deposit accounts 11,595 10,608 10,110 9.3 % 4.9 % Loan and service fees 12,214 11,922 10,085 2.4 % 18.2 % Merchant and interchange fee income 3,560 3,023 2,408 17.8 % 25.5 % Bank owned life insurance income 432 2,467 2,105 (82.5) % 17.2 % Interest rate swap fee income 579 1,035 5,089 (44.1) % (79.7) % Mortgage banking income 633 1,418 3,911 (55.4) % (63.7) % Net securities gains 21 797 433 (97.4) % 84.1 % Other income 1,874 2,725 3,564 (31.2) % (23.5) % Total noninterest income $ 41,862 $ 44,720 $ 46,843 (6.4) % (4.5) % Noninterest income to total revenue 17.1 % 20.1 % 22.3 % Noninterest income was $41.9 million in 2022 versus $44.7 million in 2021, a decrease of $2.9 million, or 6.4%. Market value declines impacted the overall decrease in noninterest income. Bank owned life insurance income for the year ended December 31, 2022 decreased by $2.0 million, primarily due to declines in the market value of variable life insurance policies that are tied to the equity markets. A reduction of market value of $950,000 was recorded during 2022 compared to market value gains of $1.1 million for 2021. The valuation changes to the variable life insurance policies are offset by similar changes to the deferred compensation expense that is recognized in salary and employee benefits. Excluding the impact of the variable life insurance policy market value changes, noninterest income was $42.8 million for the year ended December 31, 2022, compared to $43.7 million for the year-ended December 31, 2021, a decline of $840,000, or 2.1%. In addition, other income decreased $851,000, mortgage banking income decreased by $785,000, gains on securities sales decreased by $776,000 and interest rate swap fee income decreased by $456,000. Notably, fee-based noninterest income increased by a cumulative $2.0 million primarily due to volume, including improvements in service charges on deposit accounts of $987,000, or 9.3%, merchant and interchange fee income of $537,000, or 17.8%, investment brokerage fees of $343,000, or 17.4%, and loan and service fees of $292,000, or 2.4%. Wealth advisory fees declined by $114,000, or 1.3%, and were negatively impacted by market value declines of 8.0% in trust assets from $2.5 billion at December 31, 2021 to $2.3 billion at December 31, 2022. Noninterest income was $44.7 million in 2021 compared to $46.8 million in 2020, a decrease of $2.1 million, or 4.5%. The decrease was primarily driven by a $4.1 million decrease in interest rate swap fees generated from commercial lending transactions, as well as a $2.5 million decrease in mortgage banking income. Demand for interest rate swap arrangements decreased in 2021. The carrying value of mortgage servicing rights was negatively impacted by increased prepayment speeds, resulting from the low interest rate environment. Offsetting these decreases were an increase in loan service fees of $1.8 million, an increase in wealth advisory and investment brokerage fees of $1.6 million, an increase in merchant and interchange fees of $615,000, and an increase in service charges on deposit accounts of $498,000. The increases in fee income were driven by growth in fee-based business including from the wealth advisory group, merchant services, debit card interchange and institutional services areas due to higher transaction volumes and increased economic activity. 37 Table of Contents Noninterest Expense The following table presents changes in the components of noninterest expense for the years ended December 31, 2020, 2021 and 2022. % Change From Prior Year (dollars in thousands) 2022 2021 2020 2022 2021 Salaries and employee benefits $ 58,530 $ 57,882 $ 49,413 1.1 % 17.1 % Net occupancy expense 6,287 5,728 5,851 9.8 % (2.1) % Equipment costs 5,763 5,530 5,766 4.2 % (4.1) % Data processing fees and supplies 12,826 12,674 11,864 1.2 % 6.8 % Corporate and business development 5,198 4,262 3,093 22.0 % 37.8 % FDIC insurance and other regulatory fees 1,999 2,242 1,707 (10.8) % 31.3 % Professional fees 6,483 7,064 5,314 (8.2) % 32.9 % Other expense 13,124 8,905 8,197 47.4 % 8.6 % Total noninterest expense $ 110,210 $ 104,287 $ 91,205 5.7 % 14.3 % Noninterest expense increased by $5.9 million, or 5.7%, for the year ended December 31, 2022, to $110.2 million compared to $104.3 million for the year ended December 31, 2021. The increase was due primarily to an increase of $4.2 million in other expense caused by accruals for ongoing legal matters of $3.5 million. See "Note 1 – Summary of Significant Accounting Policies" for additional details regarding loss contingencies. Corporate and business development expense increased $936,000, or 22.0%, driven by increased corporate development spending, advertising expense and charitable and foundation contributions, including contributions associated with the Company's sesquicentennial celebration. Salaries and benefits expense increased $648,000, or 1.1%. Offsetting these increases was a decrease in professional fees of $581,000, or 8.2%, due to a decrease in legal expense incurred during the year. FDIC insurance and other regulatory fee expense decreased by $243,000, or 10.8%, due to declining deposits and reduced total assets of the Company. Noninterest expense increased by $13.1 million, or 14.3%, to $104.3 million for the year ended December 31, 2021 as compared to $91.2 million for 2020. Salaries and employee benefits increased by $8.5 million due primarily to increased performace-based compensation, increased salaries and increased health insurance expense. Additionally, increased legal fees and costs associated with the digital platform conversion to LCB Digital contributed to an overall increase of $1.8 million in professional fees. Corporate and business development expenses increased as the 2021 economy re-opened, and client events and contributions increased in 2021. Income Taxes The Company recognized income tax expense in 2022 of $21.3 million, compared to $21.7 million in 2021 and $19.5 million in 2020. The effective tax rate was 17.1% in 2022, compared to 18.5% in 2021 and 18.8% in 2020. The effective tax rate declined due to the Indiana Financial Institution Tax rate being 5.0% in 2022, 5.5% in 2021 and 6.0% in 2020 as well as an increase in tax-free interest income from municipal securities and loans during 2022 and 2021. For a detailed analysis of the Company’s income taxes see "Note 12 – Income Taxes". CERTAIN STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES We are required to provide certain statistical disclosures as a bank holding company under the SEC's Industry Guide 3. The following table provides certain of those disclosures. Year ended December 31, 2022 2021 2020 Return on average assets 1.62 % 1.56 % 1.55 % Return on equity 17.40 % 14.19 % 13.51 % Average equity to average assets 9.28 % 10.96 % 11.51 % Dividend payout ratio 39.60 % 36.36 % 36.36 % 38 Table of Contents Return on average assets is computed by dividing net income by average assets for each indicated fiscal year. Average assets is computed by adding total assets as of each date during the indicated fiscal year and dividing by the number of days in the fiscal year. Return on average total equity is computed by dividing net income by average equity for each indicated fiscal year. Average equity is computed by adding the total equity attributable to the Company as of each date during the indicated fiscal year and dividing by the number of days in the fiscal year. Average equity to average assets is computed by dividing average equity by average assets for each indicated fiscal year, as calculated in accordance with the previous explanation. Dividend payout ratio is computed by dividing dividends declared per common share by earnings per diluted common share for each indicated fiscal year. Refer to the "Financial Condition - Loan Portfolio", "Financial Condition - Sources of Funds" and "Risk Management - Loan Portfolio" sections of this MD&A and to the Notes to Consolidated Financial Statements of this Form 10-K for the other required statistical disclosures. FINANCIAL CONDITION Overview Total assets of the Company were $6.432 billion as of December 31, 2022, a decrease of $125.0 million, or 1.9%, when compared to $6.557 billion as of December 31, 2021. Total loans, excluding PPP loans, increased by $447.2 million, or 10.5%, to $4.709 billion as of December 31, 2022 from $4.262 billion at December 31, 2021. Total loans outstanding increased by $422.6 million, or 9.9%, to $4.710 billion at December 31, 2022 from $4.288 billion at December 31, 2021. PPP loans outstanding were $1.5 million as of December 31, 2022, compared to $26.2 million at December 31, 2021. Total deposits decreased $274.8 million, from $5.735 billion at December 31, 2021, to $5.461 billion at December 31, 2022, as retail and commercial depositors utilized excess liquidity on their balance sheets. Deposits contracted $274.8 million in 2022 and $203.5 million of that decrease occurred during the fourth quarter. The $553.0 million decrease in cash and cash equivalents was utilized to fund $447.2 million in net organic loan growth during 2022. Additionally, the Company deployed $250.0 million for the purchase of available-for-sale investment securities during the first quarter of 2022. In mid 2022, the Company elected to utilize principal and interest cash flows from the investment securities portfolio to supplement liquidity for funding loans. Cash flows from the investment securities portfolio provided $114.0 million of liquidity during 2022. In addition, the Company utilized short-term borrowings of $297.0 million to offset deposit outflows. Uses of Funds Investment Portfolio At year end 2022, 2021 and 2020, there were no holdings of securities of any one issuer, other than the U.S. government, government agencies and government sponsored agencies, in an amount greater than 10% of stockholders’ equity. See "Note 2 – Securities" for more information on these investments. On April 1, 2022, 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 as an overall balance sheet management strategy. The fair value of these securities transferred was $127.0 million. Purchases of securities available-for-sale totaled $315.3 million in 2022, $835.0 million in 2021 and $216.5 million in 2020. Growth of the investment portfolio during the past three years served to provide an earning asset alternative for excess balance sheet liquidity stemming from increased levels of core deposits as a result of the U.S. government's COVID-19 pandemic stimulus programs. The Company deployed $250 million of excess liquidity to the investment securities portfolio during 2022, $652 million in 2021 and $100 million in 2020 to preserve net interest margin prior to the Federal Reserve Board's tightening cycle, which began in March of 2022. Investment securities represented 20% of total assets on December 31, 2022 compared to 21% on December 31, 2021 and 13% on December 31, 2020. Management expects the investment securities portfolio as a percentage of assets to decrease over time and return to historical levels of approximately 14% as the proceeds from paydowns and maturities of these investment securities are used to fund future loan portfolio growth. 39 Table of Contents Securities sales totaled $25.3 million in 2022, $14.0 million in 2021 and $8.0 million in 2020. Paydowns from prepayments and scheduled payments of $98.8 million , $113.1 million and $90.4 million were received in 2022, 2021 and 2020, and the amortization of premiums, net of the accretion of discounts, was $6.3 million, $5.0 million and $4.0 million, respectively. Maturities and calls of securities totaled $9.3 million , $24.7 million and $7.6 million in 2022, 2021 and 2020, respectively. No provision for allowance for credit loss was recorded in connection with the investment securities portfolio in 2022 or 2021, and n o other-than-temporary impairment was recognized in 2020. The investment portfolio is managed to provide for an appropriate balance between liquidit y, credit risk and investment return and to limit the Company’s exposure to risk to an acceptable level. The longer duration of the investment security portfolio serves to balance the shorter duration of the loan portfolio. The weighted average yields and maturity distribution for the securities portfolio at December 31, 2022, were as follows: Within One Year After One Within Five Years After Five Years Within Ten years After Ten Years (fully tax equivalent basis, dollars in thousands) Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield U.S. Treasury securities $ 1,673 2.08 % $ 1,361 2.46 % $ 0 0.00 % $ 0 0.00 % U.S. government sponsor agency 0 0.00 % 0 0.00 % 4,209 1.00 % 122,752 1.57 % Mortgage-backed securities: residential 4,960 3.40 % 6,579 3.32 % 36,979 2.51 % 443,790 2.12 % State and municipal securities 1,386 3.60 % 5,070 4.44 % 51,228 3.43 % 616,570 3.02 % Total Securities $ 8,019 3.16 % $ 13,010 3.67 % $ 92,416 2.96 % $ 1,183,112 2.62 % The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds in the Volcker Rule. Real Estate Mortgage Loans Held For Sale Real estate mortgages held for sale decreased by $7.1 million to $357,000 at December 31, 2022 from $7.5 million at December 31, 2021 as a result of reduced mortgage refinancing demand caused by the rising interest rate environment. 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 almost all of the conforming mortgage loans it originates in the secondary market. Proceeds from sales totaled $36.5 million in 2022, $126.4 million in 2021 and $114.2 million in 2020. 40 Table of Contents Loan Portfolio The loan portfolio by class as of December 31, 2022, 2021 and 2020 was as follows: (dollars in thousands) 2022 2021 2020 Commercial and industrial loans: Working capital lines of credit loans $ 650,948 $ 652,861 $ 626,023 Non-working capital loans 842,101 736,608 1,165,355 Total commercial and industrial loans 1,493,049 1,389,469 1,791,378 Commercial real estate and multi-family residential loans: Construction and land development loans 517,664 379,813 362,653 Owner occupied loans 758,091 739,371 648,019 Nonowner occupied loans 706,107 588,458 579,625 Multi-family loans 197,232 247,204 304,717 Total commercial real estate and multi-family residential loans 2,179,094 1,954,846 1,895,014 Agri-business and agricultural loans: Loans secured by farmland 201,200 206,331 195,410 Loans for agricultural production 230,888 239,494 234,234 Total agri-business and agricultural loans 432,088 445,825 429,644 Other commercial loans 113,593 73,490 94,013 Total commercial loans 4,217,824 3,863,630 4,210,049 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 212,742 176,561 167,847 Open end and junior lien loans 175,575 156,238 163,664 Residential construction and land development loans 19,249 11,921 12,007 Total consumer 1-4 family mortgage loans 407,566 344,720 343,518 Other consumer loans 88,075 82,755 103,616 Total consumer loans 495,641 427,475 447,134 Gross loans 4,713,465 4,291,105 4,657,183 Less: Allowance for credit losses (72,606) (67,773) (61,408) Net deferred loan fees (3,069) (3,264) (8,027) Loans, net $ 4,637,790 $ 4,220,068 $ 4,587,748 The ratio of loans to total loans by portfolio segment as of December 31, 2022, 2021 and 2020 was as follows: 2022 2021 2020 Commercial and industrial loans 31.68 % 32.38 % 38.46 % Commercial real estate and multi-family residential loans 46.23 % 45.56 % 40.69 % Agri-business and agricultural loans 9.17 % 10.39 % 9.23 % Other commercial loans 2.41 % 1.71 % 2.02 % Consumer 1-4 family mortgage loans 8.64 % 8.03 % 7.38 % Other consumer loans 1.87 % 1.93 % 2.22 % Total Loans 100.00 % 100.00 % 100.00 % 41 Table of Contents In 2022, net loan balances increased by $417.7 million to $4.638 billion, and excludes approximately $28.7 million in loans originated for sale. In 2021, net loan balances decreased by $367.7 million to $4.220 billion, and excluded approximately $119.4 million in loans originated for sale. In 2020, net loan balances increased by $572.6 million to $4.588 billion, and excluded approximately $117.6 million in loans originated for sale. PPP loans of $1.5 million, $26.2 million and $412.0 million were included in non-working capital loans of commercial and industrial loans at December 31, 2022, 2021 and 2020, respectively. The mix of The Company's loan portfolio consists primarily of commercial loans and the Bank's lending focus is on the commercial sector of the Lake City Bank footprint. Owner occupied commercial real estate loans represent in many instances the buildings and factories of our commercial and industrial borrowers. Commercial and industrial loans together with owner occupied commercial real estate loans represented 47.8% and 49.6% of total loans as of December 31, 2022 and 2021, respectively. Loans to the agriculture and agri-business sector of our Indiana footprint represent a significant loan segment of the overall loan portfolio. This loan segment is well diversified with loans to corn, soybean, poultry, dairy, swine, beef and egg growers. The residential construction and land development loans class included construction loans totaling $12.0 million and $3.3 million as of December 31, 2022 and 2021. Increases in consumer loans during 2022 resulted from an increased focus on indirect lending to consumers and the introduction of a new adjustable rate mortgage product. The Bank generally sells conforming mortgage loans, which it originates locally, into the secondary market. These loans generally represent mortgage loans that are made to clients with long-term or substantial relationships with the Bank on terms consistent with secondary market requirements. The loan classifications are based on the nature of the loans as of the loan origination date. There were no foreign loans included in the loan portfolio for the periods presented. Repricing opportunities of the loan portfolio occur either according to predetermined float rate indices, adjustable rate schedules included in the related loan agreements or upon maturity of each principal payment. The following table indicates the scheduled maturities of the loan portfolio as of December 31, 2022: (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multi-family Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Total Percent Within one year $ 619,769 $ 520,497 $ 158,548 $ 15,116 $ 11,477 $ 19,654 $ 1,345,061 28.54 % After one year, within five years 652,489 1,025,947 161,555 51,769 74,856 31,822 1,998,438 42.40 % Over five years 207,727 629,585 111,840 46,708 320,752 36,390 1,353,002 28.70 % Nonaccrual loans 13,064 3,065 145 0 481 209 16,964 0.36 % Total loans $ 1,493,049 $ 2,179,094 $ 432,088 $ 113,593 $ 407,566 $ 88,075 $ 4,713,465 100.00 % At maturity, credits are reviewed and, if renewed, are renewed at rates and conditions that prevail at the time of maturity. Based upon the table above, all loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 2022 amounted to $1.729 billion and $1.622 billion, respectively. Bank Owned Life Insurance Bank owned life insurance increased by $10.8 million to $108.4 million at December 31, 2022 and by $2.4 million to $97.7 million at December 31, 2021 from $95.2 million at December 31, 2020. The increase during 2022 was primarily due to the purchase of additional life insurance policies on officers of the Bank. The increase during 2021 was primarily due to investment returns on the life insurance policies of pre-existing life insurance policies. Bank owned life insurance investment income is used as an offset to the cost of life insurance purchased by the Bank as a benefit for bank officers. 42 Table of Contents Sources of Funds The average daily deposits and borrowings together with the average rates paid on those deposits and borrowings for the years ended December 31, 2022, 2021 and 2020 are summarized in the following table: 2022 2021 2020 % Balance Change From Prior Year (dollars in thousands) Balance Rate Balance Rate Balance Rate 2022 2021 Noninterest bearing demand deposits $ 1,842,777 0.00 % $ 1,671,172 0.00 % $ 1,309,901 0.00 % 10.27 % 27.58 % Savings and transaction accounts: Savings deposits 419,997 0.08 360,915 0.08 270,010 0.08 16.37 33.67 Interest bearing demand deposits 2,689,572 1.16 2,392,220 0.28 1,862,077 0.50 12.43 28.47 Time deposits: Deposits of $100,000 or more 579,797 0.60 714,353 0.81 946,569 1.64 (18.84) (24.53) Other time deposits 185,215 0.70 218,624 0.93 262,040 1.66 (15.28) (16.57) Total deposits $ 5,717,358 0.63 % $ 5,357,284 0.28 % $ 4,650,597 0.63 % 6.72 % 15.20 % FHLB advances and other borrowings 38,614 1.03 75,408 0.40 96,642 0.78 (48.79) (21.97) Total funding sources $ 5,755,972 0.64 % $ 5,432,692 0.28 % $ 4,747,239 0.63 % 5.95 % 14.44 % Time deposits as of December 31, 2022 will mature as follows: (dollars in thousands) $100,000 or more $100,000 or less Total % of Total Within three months $ 98,463 $ 32,775 $ 131,238 20.96 % Over three months, within six months 59,341 28,947 88,288 14.10 Over six months, within twelve months 113,361 46,573 159,934 25.54 Over twelve months 184,262 62,464 246,726 39.40 Total time certificates of deposit $ 455,427 $ 170,759 $ 626,186 100.00 % Deposits Total deposits decreased by $274.8 million to $5.461 billion, at December 31, 2022 compared to December 31, 2021. The decrease in deposits was attributable to a decrease in core deposits. Total deposit contraction was led by a decrease of $243.7 million, or 11.2%, in retail deposits. In addition, commercial deposits decreased $176.3 million, or 7.8%, while public funds deposits increased by $145.2 million, or 11.3%. The decrease in deposits during 2022 reflects the normalization of excess liquidity in our customer's deposit accounts and occurred primarily during the fourth quarter of 2022. Rising inflation is considered a contributor to the decline in deposits during 2022 after the surge in deposits experienced during 2020 and 2021 from PPP funding and COVID-related stimulus programs. Total deposits increased by $698.6 million to $5.735 billion, at December 31, 2021 compared to December 31, 2020. The growth in deposits consisted of $703.6 million in core deposit growth offset by a decrease of $5.0 million in brokered deposits. Total deposit growth was led by an increase of $321.9 million, or 16.6%, in commercial deposits. In addition, retail deposits increased by $259.5 million, or 13.5%, while public funds deposits increased by $122.2 million, or 10.5%. PPP loan proceeds to borrowers and government stimulus to consumers impacted the increase in deposits during 2021 as loan proceeds and other stimulus payments were deposited into customer checking and savings accounts at the Bank. Proceeds from the sale of customer businesses also contributed to the increase in deposits during 2021. 43 Table of Contents As previously noted, 26% of the Company’s deposit base is attributable to public fund entities which primarily represent customers in the Company’s geographic footprint. A majority of public fund balances represent customers with operating accounts at the Bank. A shift in funding away from public fund deposits could require the Company to execute alternative funding plans under the Contingency Funding Plan discussed in further detail under “Liquidity Risk”. The following table presents total deposits by portfolio segment as of December 31, 2022, 2021 and 2020: (dollars in thousands) 2022 2021 2020 Commercial $ 2,085,934 38.2 % $ 2,262,229 39.4 % $ 1,940,306 38.5 % Retail 1,934,787 35.4 2,178,534 38.0 1,919,040 38.1 Public funds 1,429,872 26.1 1,284,641 22.3 1,162,457 23.0 Core deposits $ 5,450,593 99.7 % $ 5,725,404 99.7 % $ 5,021,803 99.6 % Brokered deposits 10,027 0.3 10,003 0.3 15,002 0.4 Total deposits $ 5,460,620 100.0 % $ 5,735,407 100.0 % $ 5,036,805 100.0 % FHLB Advances and Other Borrowings During 2022, average total short-term borrowings increased by $6.2 million to $6.6 million, as the Company's excess liquidity position normalized after experiencing a reduction in cash and short-term investments. Ending balances of short-term and miscellaneous borrowings increased to $297.0 million at December 31, 2022, from $0 at December 31, 2021. Average total long-term borrowings decreased by $42.9 million to $32.1 million, due to the repayment of a $75.0 million long-term, putable FHLB advance. The FHLB excercised its putable option during the second quarter of 2022 . During 2021, average total short-term borrowings decreased by $33.9 million to $408,000, primarily due to lower short-term FHLB borrowings and lower usage of the Company's holding company line of credit. Ending balances of short-term and miscellaneous borrowings decreased by $10.5 million during 2021 to $0. The decrease was due to the payoff of the Company's holding company line of credit which was used in connection with its share repurchase activity during 2020. The holding company's line repayment was funded by a dividend from the Bank. Capital The Company believes that a strong, appropriately managed capital position is critical to support continued growth of loans and earnings. Capital is used primarily to fund continued organic loan growth and to support dividends to shareholders. The Company had a total risk-based capital ratio of 15.07%, a Tier I risk-based capital ratio of 13.82% and a common Tier 1 risk-based capital ratio of 13.82% as of December 31, 2022. These ratios met or exceeded the Federal Reserve Bank’s “well-capitalized” minimums of 10.0%, 8.0% and 6.5%, respectively. The Company also had a Tier 1 leverage ratio of 11.50% and a tangible equity ratio of 8.79%. When excluding the impact of accumulated other comprehensive income (loss) on tangible common equity, the Company's adjusted tangible common equity to adjusted tangible assets was 11.30%. See "Note 15 – Capital Requirements and Restrictions on Retained Earnings" for more information. The ability to maintain these ratios is a function of the balance between net income and a prudent dividend policy. Total stockholders’ equity decreased by 19.3% to $568.9 million as of December 31, 2022 from $704.9 million as of December 31, 2021. The Company earned $103.8 million in 2022 and $95.7 million in 2021. The Company declared cash dividends of $1.60 per share in 2022, which decreased equity by $40.9 million. The Company declared cash dividends of $1.36 per share in 2021, which decreased equity by $34.7 million. Total stockholder's equity has been impacted by declines in the market value of the Company's available-for-sale investment securities portfolio. The market value decline, resulting from rising interest rates during 2022, has generated unrealized losses in the available-for-sale portfolio. Unrealized losses from the available-for-sale investment securities portfolio are recorded, net of tax, in accumulated other comprehensive income (loss) in the statement of stockholders' equity. Changes in the fair value of available-for-sale securities and the defined benefit pension plan negatively impacted equity by $205.0 million in 2022 compared to a decrease of $11.7 million in 2021. The impact to equity due to other comprehensive income (loss) is not included in regulatory capital. 44 Table of Contents RISK MANAGEMENT Overview The Company, with the oversight of the Corporate Risk Committee of the board of directors, has developed a company-wide risk management program intended to help identify, manage and mitigate the various business risks it faces. Following is a discussion addressing the risks identified as most significant to the Company – Credit, Liquidity, Interest Rate and Market Risk. Item 7A. includes additional discussion about market risk. Credit Risk Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Our primary credit risks result from lending and to a lesser extent, investment activities. Investment Portfolio The Company’s investment portfolio consists of U.S. treasuries, government agencies and municipal bonds subject to an investment security policy that is approved annually by the board of directors. During 2022, purchases in the securities portfolio consisted of primarily municipal bonds, agency securities and mortgage-backed securities. As of December 31, 2022, the Company’s investment in U.S government sponsored mortgage-backed securities represented approximately 38% of total investment securities fair value consisting of Collateralized Mortgage Obligations, Commercial Mortgage-Backed Securities and mortgage pools issued by Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae, Fannie Mae and Freddie Mac securities are each guaranteed by their respective agencies as to principal and interest. All mortgage securities purchased by the Company in 2022 were within risk tolerances for price, prepayment, extension and original life risk characteristics contained in the Company’s investment policy. As of December 31, 2022, all mortgage-backed securities were performing in a manner consistent with management’s expectations at time of purchase. Municipal securities represent 52% of total investment securities fair value as of December 31, 2022 and were rated investment grade at the time of purchase and continue to be rated investment grade. The Company uses analytics provided by its third party portfolio advisor to evaluate and monitor credit risk for all investments on a quarterly basis. Based upon these analytics as of December 31, 2022, the securities in the combined available-for-sale and held-to-maturity portfolios had an effective duration of approximately 6.5 years. The analysis indicated a negative 17.98% change in market value in the event of a 300 basis point upward, instantaneous rate shock and an approximate positive 6.54% change in market value in the event of a 100 basis point downward, instantaneous rate shock. Loan Portfolio The Company has a relatively high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area and by obtaining personal loan guarantees. There were no loan concentrations within industries, which exceeded ten percent of total loans, except commercial real estate. Commercial real estate was $2.179 billion, or 46.2% , of total loans at December 31, 2022. The owner occupied commercial real estate portfolio generally represents the financing of factories and operational facilities for the Bank's commercial and industrial borrowers. The Company’s in-house lending limit is $40.0 million. M anufacturing loans are included in the commercial and industrial loans total and are well diversified by industry. Agri-business and agricultural loans represent 9.2% of total loans as of December 31, 2022 and are not concentrated to any agricultural sector. Nearly all of the Bank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries. 45 Table of Contents The following is a summary of nonperforming loans as of December 31, 2022 and 2021. (dollars in thousands) 2022 2021 Amount of loans outstanding, net of deferred fees, December 31, $ 4,710,396 $ 4,287,841 Commercial and industrial loans Past due accruing loans (90 days or more) 1 0 Nonaccrual loans(1) 13,064 10,562 Subtotal nonperforming loans 13,065 10,562 Commercial real estate and multi-family residential loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans(1) 3,065 3,634 Subtotal nonperforming loans 3,065 3,634 Agri-business and agricultural loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans(1) 145 335 Subtotal nonperforming loans 145 335 Other commercial loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans(1) 0 0 Subtotal nonperforming loans 0 0 Consumer 1-4 family mortgage loans Past due accruing loans (90 days or more) 122 117 Nonaccrual loans(1) 481 153 Subtotal nonperforming loans 603 270 Other consumer loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans(1) 209 289 Subtotal nonperforming loans 209 289 Total nonperforming loans $ 17,087 $ 15,090 Ratio: Nonperforming loans to total loans 0.36 % 0.35 % (1) Includes nonaccrual troubled debt restructured loans at December 31, 2021. Nonperforming assets of the Company include nonperforming loans (as indicated above), nonaccrual investments and other real estate owned and repossessions, the total of which amounted to $17.2 million and $15.3 million at December 31, 2022 and 2021, respectively. Nonperforming loans increased by $2.0 million during 2022, due primarily to one commercial relationship, partially offset by paydowns and upgrades. During the fourth quarter 2022, the Company downgraded a single $10.7 million commercial relationship that the Bank became aware of in early 2023. As a result of the deterioration of this credit, $3.7 million of the balance was charged off with the remaining $7.0 million placed on nonaccrual status. The relationship was downgraded due to the severe impact on the business caused by the improving conditions related to the COVID-19 pandemic. The borrower is a manufacturer of name brand home and commercial cleaning and disinfecting products that are sold through third party firms to regional and national grocery and retail chains. Demand for these products substantially declined during 2022 as the pandemic subsided. As a result, the borrower's largest customer encountered financial challenges, precipitated by the dramatic decline in demand for these products, and ceased operations. The credit is supported by an unlimited personal guarantee of the business owner and the Bank 46 Table of Contents is actively working with the borrower to structure a long-term repayment plan. Offsetting the increase to nonperforming assets caused by the placement of this credit on nonaccrual status were payoffs to other nonaccrual notes during 2022. Loans for which the borrower appears to be unable or unwilling to repay its debt in full or on time, and the collateral is insufficient to cover all principal and accrued interest, will be reclassified as nonperforming to the extent they are unsecured, on or before the date when the loan becomes 90 days delinquent, with the exception of small dollar other consumer loans which are not placed on nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued, all unpaid accrued interest is reversed and interest income is subsequently recorded only to the extent cash payments are received. Accrual status is resumed when all contractually due payments are brought current and future payments are reasonably assured. A loan is individually analyzed when full payment under the original loan terms is not expected. Reserves are evaluated in total for smaller-balance loans of similar nature not in nonaccrual status such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans including material modifications made to borrowers experiencing financial difficulty. 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 flow or at the fair value of collateral if repayment is expected solely from the collateral. Total nonperforming loans were $17.1 million, or 0.36% of total loans, at December 31, 2022 versus $15.1 million, or 0.35% of total loans, at December 31, 2021. There were 39 loans totaling $31.3 million classified as individually analyzed as of December 31, 2022 versus 34 loans totaling $25.6 million at the end of 2021. The increase in individually analyzed loans during 2022 resulted primarily from the downgrade of the previously described $10.7 million commercial loan relationship placed on nonaccrual status. The credit is supported by an unlimited personal guarantee of the business owner and the Bank is actively working with the borrower to structure a long-term repayment plan. Paydowns and upgrades of other individually analyzed loans offset the increase to individually analyzed loans for the year ended December 31, 2022. Loans renegotiated as modifications to borrowers experiencing financial difficulty are those loans for which either the contractual interest rate has been reduced below market rates and/or other concessions to market terms are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan. No loans received a material modification as a result of borrower financial difficulty during the year ended December 31, 2022. Prior to January 1, 2022, loans renegotiated as troubled debt restructurings are those for which either the contractual interest rate has been reduced below market rates and/or other concessions to market terms are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan. As of December 31, 2021, there were 27 loans totaling $11.3 million renegotiated as troubled debt restructurings of which $217,000 wer e modified in 2021. Of these loans, $6.2 million w ere included in nonaccrual loans in the previous table and the remaining $5.1 million w ere performing under their modified terms. The Company has no commitments to lend additional funds to any of the borrowers. 47 Table of Contents The following is a summary of the credit loss experience for the years ended December 31, 2022, 2021 and 2020. (dollars in thousands) 2022 2021 2020 Amount of loans outstanding, net of deferred fees, December 31, $ 4,710,396 $ 4,287,841 $ 4,649,156 Average daily loans outstanding during the year ended December 31, $ 4,427,166 $ 4,421,094 $ 4,424,472 Allowance for credit losses, January 1, $ 67,773 $ 61,408 $ 50,652 Impact of adopting ASC 326 0 9,050 0 Loans charged-off: Commercial and industrial loans 4,022 5,575 4,524 Commercial real estate and multi-family residential loans 597 70 72 Agri-business and agricultural loans 0 0 0 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 42 51 141 Other consumer loans 473 287 516 Total loans charged-off 5,134 5,983 5,253 Recoveries of loans previously charged-off: Commercial and industrial loans 71 1,559 428 Commercial real estate and multi-family residential loans 277 14 315 Agri-business and agricultural loans 0 320 0 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 52 122 333 Other consumer loans 192 206 163 Total recoveries 592 2,221 1,239 Net loans charged-off (recovered) 4,542 3,762 4,014 Provision for credit loss charged to expense 9,375 1,077 14,770 Balance, December 31, $ 72,606 $ 67,773 $ 61,408 Ratios: Net charge-offs to average daily loans outstanding: Commercial and industrial loans 0.09 % 0.09 % 0.09 % Commercial real estate and multi-family residential loans 0.01 0.00 0.00 Agri-business and agricultural loans 0.00 0.00 0.00 Other commercial loans 0.00 0.00 0.00 Consumer 1-4 family mortgage loans 0.00 0.00 0.00 Other consumer loans 0.00 0.00 0.00 Total ratio of net charge-offs (recoveries) 0.10 % 0.09 % 0.09 % Allowance for credit losses on loans to: Total loans 1.54 % 1.58 % 1.32 % Total loans (excluding PPP loans) 1.54 % 1.59 % 1.45 % Ratio of allowance for credit losses to nonperforming loans 424.91 % 449.13 % 507.42 % 48 Table of Contents The following is a summary of the allocation for credit losses as of December 31, 2022 and 2021. (dollars in thousands) 2022 2021 Allocated allowance for credit losses: Commercial and industrial loans $ 35,290 $ 30,595 Commercial real estate and multi-family residential loans 27,394 26,535 Agri-business and agricultural loans 4,429 5,034 Other commercial loans 917 1,146 Consumer 1-4 family mortgage loans 3,001 2,866 Other consumer loans 1,021 1,147 Total allocated allowance for credit losses 72,052 67,323 Unallocated allowance for credit losses 554 450 Total allowance for credit losses $ 72,606 $ 67,773 At December 31, 2022, the allowance for credit losses was 1.54% of total loans outstanding, versus 1.58% of total loans outstanding at December 31, 2021. The allowance for credit losses was 1.54% of total loans outstanding, excluding PPP loans of $1.5 million, as of December 31, 2022 versus 1.59% of total loans outstanding, excluding PPP loans of $26.2 million, as of December 31, 2021. This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for credit losses calculation. Management believes the allowance for credit losses is at a level commensurate with the overall risk exposure of the loan portfolio. The process of identifying expected credit losses is a subjective process. Therefore, the Company maintains a general allowance to cover expected credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the credit loss reserve includes the considerations below. 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 for expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other expected credit losses inherent 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 and forecasted 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. An appropriate level of qualitative and environmental allowance is determined after considering the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality, changes in collateral strength and current economic conditions that may affect the borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. 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 is defined as 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 loss, the Company’s policy is to either establish specific allocations for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount. At December 31, 2022, on the basis of management’s review of the loan portfolio, the Company had 58 credits totaling $161.0 million on the classified loan list versus 81 credits totaling $234.5 million on December 31, 2021. These amounts represent outstanding balances, excluding deferred fees and costs. The decrease in classified loans during 2022 reflects the continued strengthening of the Company’s asset quality to historically strong levels and is reflective of the resilience of the Company's borrowers despite recent economic challenges presented by disruptions to the supply chain, the availability of labor, and elevated levels of inflation. As of December 31, 2022, the Company had $ 115.7 million of assets classified as Special Mention , $45.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $176.6 million, $57.9 million, $0 and $0, respectively, at December 31, 2021. The balances reported in "Note 4 – Allowance for Credit Losses and Credit Quality" include deferred fees and costs. 49 Table of Contents There were no material modifications to borrowers experiencing financial difficulty performed during 2022 included in the classified loan amounts for December 31, 2022. Included in the classified loan amounts for December 31, 2021 were the following troubled debt restructured loans: 13 mortgage loans totaling $1.2 million with total allocations of $209,000, and 7 commercial loans totaling $3.9 million with total allocations of $1.6 million. In accordance with Section 4013 of the CARES Act, loan deferrals granted to customers that resulted from the impact of COVID-19 and who were not past due at the time of deferral were not considered trouble debt restructurings as of December 31, 2021. This provision expired January 1, 2022 under the Consolidated Appropriations Act, 2021. At the time of the expiration of the provision, one retail borrower in the amount of $11,000 had a COVID-19 related deferral and was not considered to be a troubled debt restructuring. Allowance estimates are developed by management taking into account actual loss experience, subject to a floor, adjusted for current economic conditions and a reasonably supportable forecast period. The Company has regular 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 accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility 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 increased 7.1%, or $4.8 million, from $67.8 million at December 31, 2021 to $72.6 million at December 31, 2022 due primarily to provision expense of $7.0 million recorded in the fourth quarter related to the previously described commercial loan placed on nonaccrual status. Pooled loan allocations decreased $492,000 from $58.7 million at December 31, 2021 to $58.2 million at December 31, 2022. The unallocated component of the allowance for credit losses was $554,000 at December 31, 2022, which increased from $450,000 reported at December 31, 2021 . The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of expected losses that may not be fully reflected in other allocations. The Company has experienced growth in total loans, excluding PPP loans, over the last several years with organic growth exclusive of PPP loans of $447.2 million, or 10.5%, from December 31, 2021 to December 31, 2022. The concentration of this loan growth was 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. Management believes that it is prudent to continue to provide for credit losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions. Watch list loans were $73.5 million lower at $161.0 million as of December 31, 2022, compared to $234.5 million at December 31, 2021. Watch list loans represent 3.42% of total loans at December 31, 2022 compared to 5.47% at December 31, 2021. Watch list loans excluding PPP loans reached a historic low of 3.42% of total loans at December 31, 2022 compared to 5.50% at December 31, 2021. This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for credit losses calculation. The reduction in watch list loans resulted primarily from upgrades of $19.3 million and payoffs of $43.2 million . The Company's continued growth strategy promotes diversification among industries as well as continued focus on the enforcement of a disciplined credit culture and a conservative portion in loan work-out situations. Liquidity Risk Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. Liquidity is monitored and closely managed by the ALCO Committee. Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The liquidity structure is expressly detailed in the Company’s Contingency Funding Plan, which is discussed below. The Company relies on a number of different sources in order to meet these potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio. The cash flow from the securities portfolio is expected to provide approximately $115.6 million of potential contingent funding in 2023. 50 Table of Contents During 2022, the Company's liquidity levels normalized as commercial and retail depositors utilized liquidity that had built up in their accounts during 2020 and 2021. Management expects future liquidity needs to be met by a combination of proceeds from paydowns, calls and maturities from the investment securities portfolio, deposit growth and borrowings. The Company has approval of $3.292 billion in secondary funding sources available as of December 31, 2022, of which $307.0 million was utilized. The Company had $350.0 million of availability in federal funds lines with eleven correspondent banks, of which $22.0 million was drawn on as of December 31, 2022. The Company has board of directors approval to borrow up to $800.0 million at the FHLB, but given the Company’s current collateral structure and outstanding borrowings as of December 31, 2022, the Company could have only borrowed up to $66.5 million under this authority. The Company has additional collateral that could be pledged to the FHLB of $486.2 million as of December 31, 2022 to generate additional liquidity. Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $758.3 million given its current collateral structure at the Federal Reserve Bank discount window program and the terms of that facility at December 31, 2022, with no balances outstanding at December 31, 2022. The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the IntraFi Network CD Option One-Way Buy program, to access these funds when desired with settlement of funds in one to two weeks’ time. Additionally, the Bank has entered agreements with IntraFi Network relative to their Insured Cash Sweep One-Way Buy program. As of December 31, 2022, the total amount available to the Bank via this program was $100.0 million, of which $10.0 million was drawn. The Bank is also a member of the American Financial Exchange (AFX) where overnight fed funds purchased can be obtained from other banks on the exchange that have approved the Bank for an unsecured, overnight line. These funds are only available if the approving banks have an ‘offer’ out to sell that day. As of December 31, 2022, the total amount approved for the Bank via AFX banks was $319.0 million and none was outstanding at year end. The Company had 91% of its securities in the available-for-sale portfolio at December 31, 2022, allowing the Company extensive flexibility to sell securities to meet funding demands. The remaining portion of investments securities were designated as held-to-maturity. Management believes the majority of the securities in investment portfolio are of high quality and marketable. Approximately 48% of this portfolio is comprised of U.S. government agency securities or mortgage-backed securities directly or indirectly backed by the U.S. government. At December 31, 2022, 93% of municipal securities owned by the Company were AAA or AA rated with a diversified geography of state issuer. In addition, the Company has historically sold the majority of its originated mortgage loans on the secondary market to reduce interest rate risk and to create an additional source of funding. The Company has a formalized Contingency Funding Plan (“CFP”). The Board and management recognize the importance of liquidity during times of normal operations and in times of stress. The CFP was developed to ensure that the multiple liquidity sources available to the Company are readily available. The CFP specifically considers liquidity at the Bank and the Company level. The CFP identifies the potential funding sources at the Bank level, which includes the FHLB, the Federal Reserve Bank, brokered deposits, one-way buy products via the IntraFi Network (CD Option and ICS) and Federal Funds. The CFP also addresses the Bank’s ability to liquidate its securities portfolio. The CFP funding sources at the holding company level include a holding company committed line of credit, as well as the ability to transfer securities from the investment subsidiary of the Bank to the Company. The Company’s committed line of credit has availability up to $30.0 million, of which $0 was drawn upon as of December 31, 2022. Further, the CFP identifies CFP team members and expressly details their respective roles. Potential risk scenarios are identified and the plan includes multiple scenarios, including short-term and long-term funding crisis situations. Under the long-term funding crisis, two additional scenarios are identified: a moderate risk scenario and a highly stressed scenario. The CFP details the responsibilities and the actions to be taken by the CFP team under each scenario. Quarterly reports to management and the Board under the CFP include an early warning indicator matrix and pro forma cash flows for the various scenarios. The following table discloses information on the maturity of the Company’s contractual long-term obligations as of December 31, 2022. Payments Due by Period (dollars in thousands) Total One year or less 1-3 years 3-5 years After 5 years Operating leases $ 5,896 $ 727 $ 1,500 $ 1,484 $ 2,185 Pension and SERP plans 2,263 328 579 550 806 Total contractual long-term cash obligations $ 8,159 $ 1,055 $ 2,079 $ 2,034 $ 2,991 51 Table of Contents During the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended revolving lines of credit. The Company follows the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as it follows for those loans that are recorded in its financial statements. The Company’s exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments. Off-balance sheet transactions are more fully discussed in "Note 17 – Commitments, Off-Balance Sheet Risks and Contingencies". The following table discloses information on the maturity of the Company’s commitments. Amount of Commitment Expiration Per Period (dollars in thousands) Total Amount Committed One year or less Over one year Unused loan commitments $ 2,654,071 $ 1,400,103 $ 1,253,968 Standby letters of credit 48,406 45,415 2,991 Total commitments and letters of credit $ 2,702,477 $ 1,445,518 $ 1,256,959 Interest Rate Risk Interest rate risk is the risk that the estimated fair value of the Company’s assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that net income will be significantly reduced by interest rate changes. Interest rate risk represents the Company’s primary market risk exposure. The Company does not have material exposure to foreign currency exchange risk and does not maintain a trading portfolio. The Corporate Risk Committee of the Board annually reviews and approves the ALCO policy and the Derivatives and Hedging policy used to manage interest rate risk. These policies set guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income, but it does not necessarily indicate the effect on future net interest income. Given the Company’s mix of interest bearing liabilities and interest bearing assets on December 31, 2022 and using changes in the interest rate environment over a one-year period, the net interest margin could be expected to decline in a falling interest rate environment and increase in a rising interest rate environment. Earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve Board. During 2022 the FOMC increased the target federal funds rate a total of 425 basis points through seven rate moves. Commencing in March 2022, rate increases were implemented at every remaining FOMC meeting for the year. The combined effect of these actions increased the target federal funds rate to a range of 4.25% to 4.50%. The FOMC statement released for the meeting in December 2022 repeated their commitment to lowering inflation to 2% and to further tightening, while also noting modest economic growth, strong employment growth and an unemployment rate that remains low. The FOMC anticipates that ongoing increases to the target range will be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. The updated economic projections released at the December meeting project the median federal funds rate rising to 5.1% in 2023 before easing to 4.1% in 2024. Additionally, the longer run median forecast for the federal funds rate was left unchanged at 2.50%. The combined result of the increase in the yield on earning assets offset by an increase in the cost of funding earning assets led to increase net interest margin from 3.07% for 2021 to 3.40% for 2022 given the Company’s asset sensitive balance sheet. The Company’s yield on earning assets increased 67 basis points during 2022 as assets repriced at higher rates primarily due to the FOMC rate increases noted above and a significantly higher yield curve as when compared to 2021. The commercial loan portfolio represents 89% of the total loan portfolio. Approximately 67% of the commercial loan portfolio are variable rate loans which are primarily indexed to Prime, 1 Month Term SOFR, 1 Month LIBOR and FHLB indices. The rate paid on deposit accounts and purchased funds increased 36 basis points for 2022 mainly due to increased rates paid on public fund transactional accounts as these accounts are typically more sensitive to interest rates. The realized increase in the rate paid on deposit accounts and purchased funds was lessened by an increase in the average balance of non-interest bearing demand deposit accounts for 2022 verses 2021, primarily in commercial deposit accounts. 52 Table of Contents Future changes in the net interest margin will be dependent upon multiple factors including further actions by the FOMC during 2023 in response to inflation, economic conditions and geopolitical concerns, the results of any of the administration’s changes to economic policy and laws, competitive pressures in the various markets served, and changes in the structure of the balance sheet as a result of changes in customer demands for products and services. In general, we expect loans to reprice quicker than deposits in a rising and falling rate environment as quantified in the sensitivity to market rates table in Item 7A. The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index (“CPI”) coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by the Company. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the reverse situation may occur.