LAKELAND FINANCIAL CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) March 31, 2023 December 31, 2022 (Unaudited) ASSETS Cash and due from banks $ 67,342 $ 80,992 Short-term investments 86,179 49,290 Total cash and cash equivalents 153,521 130,282 Securities available-for-sale, at fair value 1,108,281 1,185,528 Securities held-to-maturity, at amortized cost (fair value of $ 115,533 and $ 111,029 , respectively) 128,651 128,242 Real estate mortgage loans held-for-sale 508 357 Loans, net of allowance for credit losses of $ 71,215 and $ 72,606 4,683,713 4,637,790 Land, premises and equipment, net 58,707 58,097 Bank owned life insurance 107,026 108,407 Federal Reserve and Federal Home Loan Bank stock 15,795 15,795 Accrued interest receivable 26,883 27,994 Goodwill 4,970 4,970 Other assets 123,474 134,909 Total assets $ 6,411,529 $ 6,432,371 LIABILITIES Noninterest bearing deposits $ 1,548,066 $ 1,736,761 Interest bearing deposits 3,969,662 3,723,859 Total deposits 5,517,728 5,460,620 Federal Funds purchased 0 22,000 Federal Home Loan Bank advances 200,000 275,000 Total borrowings 200,000 297,000 Accrued interest payable 5,425 3,186 Other liabilities 86,370 102,678 Total liabilities 5,809,523 5,863,484 STOCKHOLDERS’ EQUITY Common stock: 90,000,000 shares authorized, no par value 25,896,764 shares issued and 25,430,917 outstanding as of March 31, 2023 25,825,127 shares issued and 25,349,225 outstanding as of December 31, 2022 125,840 127,004 Retained earnings 658,629 646,100 Accumulated other comprehensive income (loss) ( 167,370 ) ( 188,923 ) Treasury stock at cost ( 465,847 shares as of March 31, 2023, 475,902 shares as of December 31, 2022) ( 15,182 ) ( 15,383 ) Total stockholders’ equity 601,917 568,798 Noncontrolling interest 89 89 Total equity 602,006 568,887 Total liabilities and equity $ 6,411,529 $ 6,432,371 The accompanying notes are an integral part of these consolidated financial statements. 1 Table of Contents CONSOLIDATED STATEMENTS OF INCOME (unaudited - dollars in thousands, except share and per share data) Three Months Ended March 31, 2023 2022 NET INTEREST INCOME Interest and fees on loans Taxable $ 69,542 $ 39,735 Tax exempt 901 169 Interest and dividends on securities Taxable 3,513 3,278 Tax exempt 4,300 4,606 Other interest income 964 246 Total interest income 79,220 48,034 Interest on deposits 24,918 3,081 Interest on borrowings Short-term 2,783 0 Long-term 0 73 Total interest expense 27,701 3,154 NET INTEREST INCOME 51,519 44,880 Provision for credit losses 4,350 417 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 47,169 44,463 NONINTEREST INCOME Wealth advisory fees 2,200 2,287 Investment brokerage fees 534 519 Service charges on deposit accounts 2,630 2,809 Loan and service fees 2,846 2,889 Merchant card fee income 877 815 Bank owned life insurance income (loss) 691 ( 83 ) Interest rate swap fee income 0 50 Mortgage banking income (loss) ( 99 ) 509 Net securities gains 16 0 Other income 619 892 Total noninterest income 10,314 10,687 NONINTEREST EXPENSE Salaries and employee benefits 16,063 14,392 Net occupancy expense 1,572 1,629 Equipment costs 1,438 1,411 Data processing fees and supplies 3,452 3,081 Corporate and business development 1,431 1,219 FDIC insurance and other regulatory fees 795 439 Professional fees 2,121 1,559 Other expense 2,562 3,239 Total noninterest expense 29,434 26,969 INCOME BEFORE INCOME TAX EXPENSE 28,049 28,181 Income tax expense 3,771 4,539 NET INCOME $ 24,278 $ 23,642 BASIC WEIGHTED AVERAGE COMMON SHARES 25,583,026 25,515,271 BASIC EARNINGS PER COMMON SHARE $ 0.95 $ 0.93 DILUTED WEIGHTED AVERAGE COMMON SHARES 25,742,885 25,690,372 DILUTED EARNINGS PER COMMON SHARE $ 0.94 $ 0.92 The accompanying notes are an integral part of these consolidated financial statements. 2 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited - dollars in thousands) Three Months Ended March 31, 2023 2022 Net income $ 24,278 $ 23,642 Other comprehensive income (loss) Change in available-for-sale and transferred securities: Unrealized holding gain (loss) on securities available-for-sale arising during the period 26,793 ( 138,995 ) Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity 491 0 Reclassification adjustment for gains included in net income ( 16 ) 0 Net securities gain (loss) activity during the period 27,268 ( 138,995 ) Tax effect ( 5,726 ) 29,188 Net of tax amount 21,542 ( 109,807 ) Defined benefit pension plans: Amortization of net actuarial loss 15 36 Net gain activity during the period 15 36 Tax effect ( 4 ) ( 9 ) Net of tax amount 11 27 Total other comprehensive income (loss), net of tax 21,553 ( 109,780 ) Comprehensive income (loss) $ 45,831 $ ( 86,138 ) The accompanying notes are an integral part of these consolidated financial statements. 3 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - dollars in thousands, except share and per share data) Three Months Ended Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders’ Equity Noncontrolling Interest Total Equity Shares Stock Balance at January 1, 2022 25,300,793 $ 120,615 $ 583,134 $ 16,093 $ ( 15,025 ) $ 704,817 $ 89 $ 704,906 Comprehensive loss: Net income 23,642 23,642 23,642 Other comprehensive income (loss), net of tax ( 109,780 ) ( 109,780 ) ( 109,780 ) Cash dividends declared and paid, $ 0.40 per share ( 10,198 ) ( 10,198 ) ( 10,198 ) Treasury shares purchased under deferred directors' plan ( 2,587 ) 212 ( 212 ) 0 0 Treasury shares sold and distributed under deferred directors' plan 8,555 ( 221 ) 221 0 0 Stock activity under equity compensation plans 39,388 ( 1,728 ) ( 1,728 ) ( 1,728 ) Stock based compensation expense 2,260 2,260 2,260 Balance at March 31, 2022 25,346,149 $ 121,138 $ 596,578 $ ( 93,687 ) $ ( 15,016 ) $ 609,013 $ 89 $ 609,102 Balance at January 1, 2023 25,349,225 $ 127,004 $ 646,100 $ ( 188,923 ) $ ( 15,383 ) $ 568,798 $ 89 $ 568,887 Comprehensive income: Net income 24,278 24,278 24,278 Other comprehensive income (loss), net of tax 21,553 21,553 21,553 Cash dividends declared and paid, $ 0.46 per share ( 11,749 ) ( 11,749 ) ( 11,749 ) Treasury shares purchased under deferred directors' plan ( 2,800 ) 204 ( 204 ) 0 0 Treasury shares sold and distributed under deferred directors' plan 12,855 ( 405 ) 405 0 0 Stock activity under equity compensation plans 71,637 ( 3,124 ) ( 3,124 ) ( 3,124 ) Stock based compensation expense 2,161 2,161 2,161 Balance at March 31, 2023 25,430,917 $ 125,840 $ 658,629 $ ( 167,370 ) $ ( 15,182 ) $ 601,917 $ 89 $ 602,006 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 24,278 $ 23,642 Adjustments to reconcile net income to net cash from operating activities: Depreciation 1,538 1,516 Provision for credit losses 4,350 417 Amortization of loan servicing rights 133 223 Net change in loan servicing rights valuation allowance 0 ( 360 ) Loans originated for sale, including participations ( 795 ) ( 12,468 ) Net gain on sales of loans ( 34 ) ( 513 ) Proceeds from sale of loans, including participations 672 18,058 Net (gain) loss on sales of premises and equipment ( 4 ) 1 Net gain on sales and calls of securities available-for-sale ( 16 ) 0 Net securities amortization 1,192 1,654 Stock based compensation expense 2,161 2,260 Losses (earnings) on life insurance ( 691 ) 83 Tax benefit of stock award issuances ( 720 ) ( 500 ) Net change: Interest receivable and other assets 501 ( 2,822 ) Interest payable and other liabilities ( 5,122 ) 16,513 Total adjustments 3,165 24,062 Net cash from operating activities 27,443 47,704 Cash flows from investing activities: Proceeds from sale of securities available-for-sale 87,471 0 Proceeds from maturities, calls and principal paydowns of securities available-for-sale 19,500 29,647 Proceeds from maturities, calls and principal paydowns of securities held-to-maturity 5 0 Purchases of securities available-for-sale ( 4,046 ) ( 292,127 ) Purchase of life insurance ( 153 ) ( 43 ) Net (increase) decrease in total loans ( 50,273 ) ( 66,537 ) Proceeds from sales of land, premises and equipment 11 0 Purchases of land, premises and equipment ( 2,155 ) ( 1,091 ) Proceeds from redemption of Federal Home Loan Bank stock 0 932 Net cash from investing activities 50,360 ( 329,219 ) Cash flows from financing activities: Net increase (decrease) in total deposits 57,108 85,216 Net increase (decrease) in short-term borrowings ( 22,000 ) 0 Proceeds from short-term FHLB borrowings ( 75,000 ) 0 Common dividends paid ( 11,749 ) ( 10,198 ) Payments related to equity incentive plans ( 3,124 ) ( 1,728 ) Purchase of treasury stock ( 204 ) ( 212 ) Sale of treasury stock 405 221 Net cash from financing activities ( 54,564 ) 73,299 Net change in cash and cash equivalents 23,239 ( 208,216 ) Cash and cash equivalents at beginning of the period 130,282 683,240 Cash and cash equivalents at end of the period 153,521 475,024 Cash paid during the period for: Interest $ 25,462 $ 3,470 Supplemental non-cash disclosures: Securities purchases payable 0 2,146 Right-of-use assets obtained in exchange for lease liabilities 0 1,612 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents NOTE 1. BASIS OF PRESENTATION This report is filed for Lakeland Financial Corporation (the "Company"), which has two wholly owned subsidiaries, Lake City Bank (the "Bank") and LCB Risk Management, a captive insurance company. Also included in this report are results for the Bank’s wholly owned subsidiary, LCB Investments II, Inc. ("LCB Investments"), which manages the Bank’s investment securities portfolio. LCB Investments owns LCB Funding, Inc. ("LCB Funding"), a real estate investment trust. All significant inter-company balances and transactions have been eliminated in consolidation. The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2023. The Company’s 2022 Annual Report on Form 10-K should be read in conjunction with these statements. Adoption of New Accounting Standards On March 31, 2022, the FASB issued ASU 2022-02, " Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures ." The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company elected to early adopt the provisions of the ASU related to the discontinuance of TDR reporting, with retrospective application of modification reporting effective starting January 1, 2022. The Company adopted the provisions related to reporting of current-period gross write-offs within the vintage disclosures effective January 1, 2023. The adoption of the provisions contained within ASU 2022-02 did not have a material impact on the consolidated financial statements. On March 28, 2022, the FASB issued ASU 2022-01, " Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method ." ASC 815 previously permitted only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendment in this update allows nonrepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope allows an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance became effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU 2022-01 on January 1, 2023, which did not have a material impact on the consolidated financial statements. Newly Issued But Not Yet Effective Accounting Standards On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, " Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ." ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate ("SOFR"), amongst others. The Company has identified certain loans that renewed prior to 2021 and obtained updated reference rate language at the time of the renewal. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. The Company's policy is to adhere to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020. The Company discontinued the use of new LIBOR-based loans by December 31, 2021, according to regulatory guidelines. The Company is working to transition LIBOR-based loans to an alternative reference rate before June 30, 2023. On December 22, 2022, the FASB issued ASU 2022-06, " Reference Rate Reform (ASC 848): Deferral of the Sunset Date of Topic 848 ", which definitively provided a sunset date of December 31, 2024 for the relief guidance allowed under Topic 848. The ASU was effective immediately upon issuance. The Company adopted the LIBOR transition relief allowed under this standard, and does not expect final adoption to have a material impact on the consolidated financial statements. On March 28, 2023, the FASB issued ASU 2023-02, " Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method ." ASU 2014-01, " Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Qualified Affordable Housing Projects ", previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items. The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax benefits in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, all of the following conditions must be met: (1) It is probable that the income tax credits allocated to the tax equity investor will be available; (2) The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project; (3) Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits included income tax credits, other income tax benefits, and other non-income tax -related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project; (4) The tax equity investor's projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive; and (5) The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor's liability is limited to its capital investment. An accounting policy election is allowed to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The amendments in this update require specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The amendments require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understanding the following information about its investments that generate income tax credits and other income tax benefits from a tax credit program including: (1) The nature of its tax equity investments; and (2) The effect of its tax equity investments and related income tax credits and other income tax benefits on its financial position and results of operations. For public business entities, the amendments in this update are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, it shall adopt them as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is currently evaluating the impact of this standard for its LIHTC investments and the impact to noninterest income and income tax expense within the consolidated financial statements. Reclassification Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders' equity as previously reported. 6 Table of Contents NOTE 2. SECURITIES Debt securities purchased with the intent and ability to hold to their maturity are classified as held-to-maturity securities. All other investment securities are classified as available-for-sale securities. Available-for-Sale Securities Information related to the amortized cost, fair value and allowance for credit losses of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the table below. (dollars in thousands) Amortized Cost Gross Unrealized Gain Gross Unrealized Losses Allowance for Credit Losses Fair Value March 31, 2023 U.S. Treasury securities $ 3,363 $ 2 $ ( 13 ) $ 0 $ 3,352 U.S. government sponsored agencies 153,928 0 ( 25,933 ) 0 127,995 Mortgage-backed securities: residential 561,865 81 ( 77,484 ) 0 484,462 State and municipal securities 577,603 93 ( 85,224 ) 0 492,472 Total $ 1,296,759 $ 176 $ ( 188,654 ) $ 0 $ 1,108,281 December 31, 2022 U.S. Treasury securities $ 3,057 $ 0 $ ( 23 ) $ 0 $ 3,034 U.S. government sponsored agencies 156,184 0 ( 29,223 ) 0 126,961 Mortgage-backed securities: residential 578,175 67 ( 85,934 ) 0 492,308 State and municipal securities 663,367 157 ( 100,299 ) 0 563,225 Total $ 1,400,783 $ 224 $ ( 215,479 ) $ 0 $ 1,185,528 Held-to-Maturity Securities Information related to the amortized cost, fair value and allowance for credit losses of securities held-to-maturity and the related gross unrealized gains and losses is presented in the table below. (dollars in thousands) Amortized Cost Gross Unrealized Gain Gross Unrealized Losses Allowance for Credit Losses Fair Value March 31, 2023 State and municipal securities $ 128,651 $ 0 $ ( 13,118 ) $ 0 $ 115,533 December 31, 2022 State and municipal securities $ 128,242 $ 0 $ ( 17,213 ) $ 0 $ 111,029 On April 1, 2022, the Company elected to transfer securities from available-for-sale to held-to-maturity as an overall balance sheet management strategy. The fair value of securities transferred was $ 127.0 million from available-for-sale to held-to-maturity. The unrealized loss on the securities transferred from available-for-sale to held-to-maturity was $ 24.4 million ($ 19.3 million, net of tax) based on the fair value of the securities on the transfer date and was $ 22.4 million ($ 17.7 million, net of tax) at March 31, 2023. The Company has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or loss on the transferred securities included in accumulated other comprehensive income (loss) at the time of the transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. There were no securities transferred from available-for-sale to held-to-maturity during the three months ended March 31, 2023 or March 31, 2022. 7 Table of Contents Information regarding the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by maturity as of March 31, 2023 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty. Available-for-Sale Held-to-Maturity (dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Due in one year or less $ 3,275 $ 3,265 $ 0 $ 0 Due after one year through five years 4,727 4,729 0 0 Due after five years through ten years 35,349 33,808 0 0 Due after ten years 691,543 582,017 128,651 115,533 734,894 623,819 128,651 115,533 Mortgage-backed securities 561,865 484,462 0 0 Total debt securities $ 1,296,759 $ 1,108,281 $ 128,651 $ 115,533 Available-for-sale securities proceeds, gross gains and gross losses are presented below. Three Months Ended March 31, Three Months Ended March 31, (dollars in thousands) 2023 2022 Sales of securities available-for-sale Proceeds $ 87,471 $ 0 Gross gains 411 0 Gross losses ( 395 ) 0 Number of securities 81 0 In accordance with ASU No. 2017-8, purchase premiums for callable securities are amortized to the earliest call date and premiums on non-callable securities as well as discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date. Securities with fair values of $ 855.0 million and $ 298.2 million were pledged as of March 31, 2023 and December 31, 2022, respectively, as collateral for borrowings from the Federal Home Loan Bank ("FHLB") and Federal Reserve Bank and for other purposes as permitted or required by law. Unrealized Loss Analysis on Available-for-Sale and Held-to-Maturity Securities Information regarding available-for-sale securities with unrealized losses as of March 31, 2023 and December 31, 2022 is presented on the following page. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more. 8 Table of Contents Less than 12 months 12 months or more Total (dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses March 31, 2023 U.S. Treasury securities $ 1,373 $ 6 $ 791 $ 7 $ 2,164 $ 13 U.S. government sponsored agencies 0 0 127,995 25,933 127,995 25,933 Mortgage-backed securities: residential 29,080 1,120 452,186 76,364 481,266 77,484 State and municipal securities 48,383 1,431 421,798 83,793 470,181 85,224 Total available-for-sale $ 78,836 $ 2,557 $ 1,002,770 $ 186,097 $ 1,081,606 $ 188,654 December 31, 2022 U.S. Treasury securities $ 3,034 $ 23 $ 0 $ 0 $ 3,034 $ 23 U.S. government sponsored agencies 8,420 1,350 118,541 27,873 126,961 29,223 Mortgage-backed securities: residential 165,897 18,637 323,727 67,297 489,624 85,934 State and municipal securities 277,967 33,405 244,436 66,894 522,403 100,299 Total available-for-sale $ 455,318 $ 53,415 $ 686,704 $ 162,064 $ 1,142,022 $ 215,479 Information regarding held-to-maturity securities with unrealized losses as of March 31, 2023 is presented below. The table divides the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more. Less than 12 months 12 months or more Total (dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses March 31, 2023 State and municipal securities $ 0 $ 0 $ 115,533 $ 13,118 $ 115,533 $ 13,118 December 31, 2022 State and municipal securities $ 0 $ 0 $ 111,029 $ 17,213 $ 111,029 $ 17,213 The total number of securities with unrealized losses as of March 31, 2023 and December 31, 2022 is presented below. Available-for-sale Held-to-maturity Less than 12 months 12 months or more Total Less than 12 months 12 months or more Total March 31, 2023 U.S. Treasury securities 3 2 5 0 0 0 U.S. government sponsored agencies 0 17 17 0 0 0 Mortgage-backed securities: residential 32 98 130 0 0 0 State and municipal securities 57 363 420 0 41 41 Total temporarily impaired 92 480 572 0 41 41 December 31, 2022 U.S. Treasury securities 7 0 7 0 0 0 U.S. government sponsored agencies 1 16 17 0 0 0 Mortgage-backed securities: residential 95 41 136 0 0 0 State and municipal securities 269 223 492 0 41 41 Total temporarily impaired 372 280 652 0 41 41 9 Table of Contents Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the consolidated income statement. For available-for-sale debt securities that do not meet the above criteria and for held-to-maturity securities, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For available-for-sale debt securities, any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of applicable taxes. No allowance for credit losses for available-for-sale or held-to-maturity debt securities was recorded at March 31, 2023 or December 31, 2022. Accrued interest receivable on securities totaled $ 7.6 million and $ 8.9 million at March 31, 2023 and December 31, 2022, respectively, and is excluded from the estimate of credit losses. The U.S. government sponsored agencies and mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. State and municipal securities credit losses are benchmarked against highly rated municipal securities of similar duration, as published by Moody's, resulting in an immaterial allowance for credit losses. 10 Table of Contents NOTE 3. LOANS (dollars in thousands) March 31, 2023 December 31, 2022 Commercial and industrial loans: Working capital lines of credit loans $ 636,171 13.4 % $ 650,948 13.8 % Non-working capital loans 823,447 17.3 842,101 17.9 Total commercial and industrial loans 1,459,618 30.7 1,493,049 31.7 Commercial real estate and multi-family residential loans: Construction and land development loans 591,812 12.4 517,664 11.0 Owner occupied loans 750,840 15.8 758,091 16.0 Nonowner occupied loans 705,830 14.8 706,107 15.0 Multifamily loans 217,274 4.5 197,232 4.2 Total commercial real estate and multi-family residential loans 2,265,756 47.5 2,179,094 46.2 Agri-business and agricultural loans: Loans secured by farmland 178,683 3.8 201,200 4.3 Loans for agricultural production 214,299 4.5 230,888 4.9 Total agri-business and agricultural loans 392,982 8.3 432,088 9.2 Other commercial loans: 132,284 2.8 113,593 2.4 Total commercial loans 4,250,640 89.3 4,217,824 89.5 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 221,616 4.7 212,742 4.5 Open end and junior lien loans 175,907 3.7 175,575 3.7 Residential construction and land development loans 20,393 0.4 19,249 0.4 Total consumer 1-4 family mortgage loans 417,916 8.8 407,566 8.6 Other consumer loans 89,734 1.9 88,075 1.9 Total consumer loans 507,650 10.7 495,641 10.5 Subtotal 4,758,290 100.0 % 4,713,465 100.0 % Less: Allowance for credit losses ( 71,215 ) ( 72,606 ) Net deferred loan fees ( 3,362 ) ( 3,069 ) Loans, net $ 4,683,713 $ 4,637,790 The recorded investment in loans does not include accrued interest, which totaled $ 18.4 million at both March 31, 2023 and December 31, 2022. The Company h ad $ 558,000 and $ 306,000 in residential real estate loans in the process of foreclosure as of March 31, 2023 and December 31, 2022, respectively. NOTE 4. ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control. The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the facts and circumstances 11 Table of Contents of watch list credits, which includes the security position of the borrower, in determining the appropriate level of the credit loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision. The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for credit losses that generally includes consideration of changes in the nature and volume of the loan portfolio and overall portfolio quality, along with current and forecasted economic conditions that may affect borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. To determine the specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, an appropriate level of general allowance is determined by portfolio segment using a probability of default-loss given default (“PD/LGD”) model, subject to a floor. A default can be triggered by one of several different asset quality factors, including past due status, nonaccrual status, material modification status or if the loan has had a charge-off. This PD is then combined with a LGD derived from historical charge-off data to construct a default rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee’s Summary of Economic Projections, and other environmental factors based on the risks present for each portfolio segment. These environmental factors include consideration of the following: levels of, and trends in, delinquencies and nonperforming loans; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover probable losses inherent in the loan portfolio. Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate it should be evaluated on an individual basis. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) the sufficiency of the customer’s cash flow or net worth to repay the loan; (b) the adequacy of the discounted value of collateral relative to the loan balance; (c) whether the loan has been criticized in a regulatory examination; (d) whether the loan is nonperforming; (e) any other reasons the ultimate collectability of the loan may be in question; or (f) any unique loan characteristics that require special monitoring. Allocations are also applied to categories of loans considered not to be individually analyzed, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. These general pooled loan allocations are performed for portfolio segments of commercial and industrial; commercial real estate, multi-family, and construction; agri-business and agricultural; other commercial loans; and consumer 1-4 family mortgage and other consumer loans. General allocations of the allowance are determined by a historical loss rate based on the calculation of each pool’s probability of default-loss given default, subject to a floor. The length of the historical period for each pool is based on the average life of the pool. The historical loss rates are supplemented with consideration of economic conditions and portfolio trends. Due to the imprecise nature of estimating the allowance for credit losses, the Company’s allowance for credit losses includes an immaterial unallocated component. The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of potential expected losses that may not be fully reflected in other allocations. As a practical expedient, the Company has elected to disclose accrued interest separately from loan principal balances on the consolidated balance sheet. Additionally, when a loan is placed on non-accrual, interest payments are reversed through interest income. For off balance sheet credit exposures outlined in the ASU at 326-20-30-11, it is the Company’s position that nearly all of the unfunded amounts on lines of credit are unconditionally cancellable, and therefore not subject to having a liability recorded. 12 Table of Contents The following tables present the activity in the allowance for credit losses by portfolio segment for the periods ended: (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total Three Months Ended March 31, 2023 Beginning balance, January 1 $ 35,290 $ 27,394 $ 4,429 $ 917 $ 3,001 $ 1,021 $ 554 $ 72,606 Provision for credit losses 1,504 1,642 192 117 394 215 286 4,350 Loans charged-off ( 5,644 ) 0 0 0 0 ( 252 ) 0 ( 5,896 ) Recoveries 40 0 0 0 3 112 0 155 Net loans (charged-off) recovered ( 5,604 ) 0 0 0 3 ( 140 ) 0 ( 5,741 ) Ending balance $ 31,190 $ 29,036 $ 4,621 $ 1,034 $ 3,398 $ 1,096 $ 840 $ 71,215 (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total Three Months Ended March 31, 2022 Beginning balance, January 1 $ 30,595 $ 26,535 $ 5,034 $ 1,146 $ 2,866 $ 1,147 $ 450 $ 67,773 Provision for credit losses 730 319 ( 273 ) ( 88 ) ( 248 ) ( 55 ) 32 417 Loans charged-off ( 19 ) ( 597 ) 0 0 ( 22 ) ( 102 ) 0 ( 740 ) Recoveries 16 0 0 0 10 50 0 76 Net loans (charged-off) recovered ( 3 ) ( 597 ) 0 0 ( 12 ) ( 52 ) 0 ( 664 ) Ending balance $ 31,322 $ 26,257 $ 4,761 $ 1,058 $ 2,606 $ 1,040 $ 482 $ 67,526 Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $ 250,000 . The Company uses the following definitions for risk ratings: Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans are considered to be "Pass" rated when they are reviewed as part of the previously described process and do not meet the criteria above, which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with “Not Rated” loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. 13 Table of Contents The following table summarizes the risk category of loans by loan segment and origination date as of March 31, 2023: (dollars in thousands) 2023 2022 2021 2020 2019 Prior Term Total Revolving Total Commercial and industrial loans: Working capital lines of credit loans: Pass $ 0 $ 2,124 $ 2,593 $ 1,481 $ 0 $ 0 $ 6,198 $ 556,280 $ 562,478 Special Mention 0 0 0 0 0 0 0 60,734 60,734 Substandard 0 200 75 0 294 0 569 12,481 13,050 Total 0 2,324 2,668 1,481 294 0 6,767 629,495 636,262 Working capital lines of credit loans: Current period gross write offs 0 0 0 0 0 0 0 115 115 Non-working capital loans: Pass 43,158 281,527 114,682 80,677 43,048 19,298 582,390 207,400 789,790 Special Mention 228 438 2,710 182 1,516 4,197 9,271 3,774 13,045 Substandard 0 4,657 847 5,005 63 3,517 14,089 0 14,089 Not Rated 481 2,689 1,362 1,149 347 100 6,128 0 6,128 Total 43,867 289,311 119,601 87,013 44,974 27,112 611,878 211,174 823,052 Non-working capital loans: Current period gross write offs 0 5,400 0 0 118 0 5,518 11 5,529 Commercial real estate and multi-family residential loans: Construction and land development loans: Pass 11,178 21,680 10,108 13,394 307 0 56,667 532,319 588,986 Total 11,178 21,680 10,108 13,394 307 0 56,667 532,319 588,986 Construction and land development loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Owner occupied loans: Pass 41,335 133,261 161,199 133,597 71,267 148,460 689,119 37,815 726,934 Special Mention 0 709 9,240 0 340 9,400 19,689 0 19,689 Substandard 228 293 105 1,484 367 1,161 3,638 0 3,638 Total 41,563 134,263 170,544 135,081 71,974 159,021 712,446 37,815 750,261 Owner occupied loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Nonowner occupied loans: Pass 14,636 183,211 122,667 135,383 90,727 77,127 623,751 70,798 694,549 Special Mention 4,311 0 6,538 0 0 0 10,849 0 10,849 Total 18,947 183,211 129,205 135,383 90,727 77,127 634,600 70,798 705,398 Nonowner occupied loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Multifamily loans: Pass 24,397 38,336 25,633 36,606 34,018 30,589 189,579 7,484 197,063 Special Mention 0 19,935 0 0 0 0 19,935 0 19,935 Total 24,397 58,271 25,633 36,606 34,018 30,589 209,514 7,484 216,998 Multifamily loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Agri-business and agricultural loans: Loans secured by farmland: Pass 10,479 36,609 26,692 28,470 9,103 24,951 136,304 38,774 175,078 Special Mention 0 0 0 1,676 1,760 15 3,451 0 3,451 Substandard 0 0 0 0 0 135 135 0 135 Total 10,479 36,609 26,692 30,146 10,863 25,101 139,890 38,774 178,664 Loans secured by farmland: Current period gross write offs 0 0 0 0 0 0 0 0 0 Loans for agricultural production: Pass 4,692 6,438 29,344 21,411 3,305 12,161 77,351 125,107 202,458 Special Mention 0 946 224 7,248 928 0 9,346 2,594 11,940 Total 4,692 7,384 29,568 28,659 4,233 12,161 86,697 127,701 214,398 Loans for agricultural production: Current period gross write offs 0 0 0 0 0 0 0 0 0 Other commercial loans: Pass 14,621 26,709 39,515 17,279 133 11,139 109,396 19,727 129,123 Special Mention 0 0 0 0 0 2,916 2,916 0 2,916 14 Table of Contents Total 14,621 26,709 39,515 17,279 133 14,055 112,312 19,727 132,039 Other commercial loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Consumer 1-4 family mortgage loans: Closed end first mortgage loans: Pass 1,845 10,792 12,589 11,867 4,727 6,621 48,441 4,404 52,845 Special Mention 0 0 0 544 0 0 544 0 544 Substandard 0 0 96 0 0 305 401 0 401 Not Rated 16,117 56,666 42,402 18,380 5,104 28,844 167,513 0 167,513 Total 17,962 67,458 55,087 30,791 9,831 35,770 216,899 4,404 221,303 Closed end first mortgage loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Open end and junior lien loans: Pass 0 137 529 351 0 74 1,091 6,903 7,994 Substandard 0 0 0 0 29 48 77 138 215 Not Rated 4,234 40,983 12,227 2,560 3,303 3,183 66,490 103,040 169,530 Total 4,234 41,120 12,756 2,911 3,332 3,305 67,658 110,081 177,739 Open end and junior lien loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Residential construction loans: Not Rated 965 15,099 1,739 884 283 1,337 20,307 0 20,307 Total 965 15,099 1,739 884 283 1,337 20,307 0 20,307 Residential construction loans: Current period gross write offs 0 0 0 0 0 0 0 0 0 Other consumer loans: Pass 2,006 846 1,699 408 0 0 4,959 16,793 21,752 Substandard 0 0 0 0 209 0 209 0 209 Not Rated 6,118 22,920 13,291 8,145 2,950 3,326 56,750 10,810 67,560 Total 8,124 23,766 14,990 8,553 3,159 3,326 61,918 27,603 89,521 Other consumer loans: Current period gross write offs 0 106 62 6 7 1 182 70 252 Total period gross write offs 0 5,506 62 6 125 1 5,700 196 5,896 Total Loans $ 201,029 $ 907,205 $ 638,106 $ 528,181 $ 274,128 $ 388,904 $ 2,937,553 $ 1,817,375 $ 4,754,928 As of March 31, 2023, $ 1.5 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the Small Business Administration ("SBA"). 15 Table of Contents The following table summarizes the risk category of loans by loan segment and origination date as of December 31, 2022: (dollars in thousands) 2022 2021 2020 2019 2018 Prior Term Total Revolving Total Commercial and industrial loans: Working capital lines of credit loans: Pass $ 2,207 $ 2,718 $ 1,601 $ 0 $ 0 $ 0 $ 6,526 $ 597,108 $ 603,634 Special Mention 0 0 0 0 0 0 0 36,410 36,410 Substandard 200 0 0 300 0 0 500 10,495 10,995 Total 2,407 2,718 1,601 300 0 0 7,026 644,013 651,039 Non-working capital loans: Pass 272,273 124,600 91,850 47,711 9,981 13,670 560,085 240,490 800,575 Special Mention 448 1,620 0 109 159 2,961 5,297 2,153 7,450 Substandard 11,831 872 5,021 194 1,351 3,979 23,248 4,171 27,419 Not Rated 2,891 1,550 1,254 413 120 23 6,251 0 6,251 Total 287,443 128,642 98,125 48,427 11,611 20,633 594,881 246,814 841,695 Commercial real estate and multi-family residential loans: Construction and land development loans: Pass 26,889 19,944 14,026 356 0 0 61,215 453,953 515,168 Total 26,889 19,944 14,026 356 0 0 61,215 453,953 515,168 Owner occupied loans: Pass 113,656 179,014 139,880 97,353 65,519 97,335 692,757 40,533 733,290 Special Mention 2,960 7,608 0 446 1,491 8,054 20,559 0 20,559 Substandard 308 105 1,491 373 1,161 229 3,667 0 3,667 Total 116,924 186,727 141,371 98,172 68,171 105,618 716,983 40,533 757,516 Nonowner occupied loans: Pass 194,294 125,190 134,661 91,907 15,109 64,874 626,035 68,603 694,638 Special Mention 0 11,024 0 0 0 0 11,024 0 11,024 Total 194,294 136,214 134,661 91,907 15,109 64,874 637,059 68,603 705,662 Multifamily loans: Pass 38,460 25,741 36,929 35,695 2,046 28,866 167,737 7,349 175,086 Special Mention 21,855 0 0 0 0 0 21,855 0 21,855 Total 60,315 25,741 36,929 35,695 2,046 28,866 189,592 7,349 196,941 Agri-business and agricultural loans: Loans secured by farmland: Pass 38,344 28,684 29,741 9,656 8,145 19,638 134,208 63,094 197,302 Special Mention 260 0 1,676 1,780 0 15 3,731 0 3,731 Substandard 0 0 0 0 0 145 145 0 145 Total 38,604 28,684 31,417 11,436 8,145 19,798 138,084 63,094 201,178 Loans for agricultural production: Pass 6,040 30,262 22,167 3,625 9,248 4,539 75,881 143,599 219,480 Special Mention 947 243 7,262 928 0 0 9,380 2,129 11,509 Total 6,987 30,505 29,429 4,553 9,248 4,539 85,261 145,728 230,989 Other commercial loans: Pass 27,097 4,815 17,911 147 931 10,985 61,886 48,295 110,181 Special Mention 0 0 0 0 0 3,160 3,160 0 3,160 Total 27,097 4,815 17,911 147 931 14,145 65,046 48,295 113,341 Consumer 1-4 family mortgage loans: Closed end first mortgage loans: Pass 8,768 12,809 12,289 4,805 4,045 3,860 46,576 5,634 52,210 Special Mention 0 0 552 0 0 0 552 0 552 Substandard 0 0 0 0 83 1,944 2,027 0 2,027 Not Rated 57,404 44,331 20,023 5,936 2,970 27,004 157,668 0 157,668 Total 66,172 57,140 32,864 10,741 7,098 32,808 206,823 5,634 212,457 Open end and junior lien loans: Pass 137 541 357 63 75 0 1,173 5,841 7,014 Substandard 0 0 0 31 49 0 80 111 191 Not Rated 44,472 13,597 3,014 3,616 1,476 2,252 68,427 101,750 170,177 Total 44,609 14,138 3,371 3,710 1,600 2,252 69,680 107,702 177,382 Residential construction loans: Not Rated 14,463 2,167 897 291 129 1,223 19,170 0 19,170 16 Table of Contents Total 14,463 2,167 897 291 129 1,223 19,170 0 19,170 Other consumer loans: Pass 1,344 1,841 432 600 0 948 5,165 16,152 21,317 Substandard 0 0 0 210 0 0 210 0 210 Not Rated 24,395 14,563 9,168 3,606 2,755 1,352 55,839 10,492 66,331 Total 25,739 16,404 9,600 4,416 2,755 2,300 61,214 26,644 87,858 TOTAL $ 911,943 $ 653,839 $ 552,202 $ 310,151 $ 126,843 $ 297,056 $ 2,852,034 $ 1,858,362 $ 4,710,396 As of December 31, 2022, $ 1.5 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA. 17 Table of Contents Nonaccrual and Past Due Loans: The Company does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured. The following table presents the aging of the amortized cost basis in past due loans as of March 31, 2023 by class of loans and loans past due 90 days or more and still accruing by class of loan: (dollars in thousands) Loans Not Past Due 30-89 Days Past Due Greater than 89 Days Past Due and Accruing Total Accruing Total Nonaccrual Nonaccrual With No Allowance For Credit Loss Total Commercial and industrial loans: Working capital lines of credit loans $ 628,672 $ 1,750 $ 0 $ 624,582 $ 5,840 $ 75 $ 636,262 Non-working capital loans 815,150 31 0 807,310 7,871 747 823,052 Commercial real estate and multi-family residential loans: Construction and land development loans 588,986 0 0 588,986 0 0 588,986 Owner occupied loans 747,217 0 0 744,173 3,044 1,454 750,261 Nonowner occupied loans 705,398 0 0 705,398 0 0 705,398 Multifamily loans 216,998 0 0 216,998 0 0 216,998 Agri-business and agricultural loans: Loans secured by farmland 178,529 0 0 178,394 135 0 178,664 Loans for agricultural production 214,398 0 0 214,398 0 0 214,398 Other commercial loans 132,039 0 0 132,039 0 0 132,039 Consumer 1‑4 family mortgage loans: Closed end first mortgage loans 220,501 373 25 220,495 404 252 221,303 Open end and junior lien loans 177,388 138 0 177,313 213 213 177,739 Residential construction loans 20,307 0 0 20,307 0 0 20,307 Other consumer loans 89,203 111 0 89,107 207 5 89,521 Total $ 4,734,786 $ 2,403 $ 25 $ 4,719,500 $ 17,714 $ 2,746 $ 4,754,928 As of March 31, 2023 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the three month period ended March 31, 2023. 18 Table of Contents The following table presents the aging of the amortized cost basis in past due loans as of December 31, 2022 by class of loans and loans past due 90 days or more and still accruing by class of loan: (dollars in thousands) Loans Not Past Due 30-89 Days Past Due Greater than 89 Days Past Due and Accruing Total Accruing Total Nonaccrual Nonaccrual With No Allowance For Credit Loss Total Commercial and industrial loans: Working capital lines of credit loans $ 649,529 $ 68 $ 0 $ 649,597 $ 1,442 $ 0 $ 651,039 Non-working capital loans 830,033 39 1 830,073 11,622 727 841,695 Commercial real estate and multi-family residential loans: Construction and land development loans 515,168 0 0 515,168 0 0 515,168 Owner occupied loans 754,451 0 0 754,451 3,065 1,469 757,516 Nonowner occupied loans 705,662 0 0 705,662 0 0 705,662 Multifamily loans 196,941 0 0 196,941 0 0 196,941 Agri-business and agricultural loans: Loans secured by farmland 201,033 0 0 201,033 145 0 201,178 Loans for agricultural production 230,989 0 0 230,989 0 0 230,989 Other commercial loans 113,341 0 0 113,341 0 0 113,341 Consumer 1‑4 family mortgage loans: Closed end first mortgage loans 211,736 306 122 212,164 293 225 212,457 Open end and junior lien loans 176,758 436 0 177,194 188 188 177,382 Residential construction loans 19,170 0 0 19,170 0 0 19,170 Other consumer loans 87,333 316 0 87,649 209 6 87,858 Total $ 4,692,144 $ 1,165 $ 123 $ 4,693,432 $ 16,964 $ 2,615 $ 4,710,396 As of December 31, 2022 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the year ended December 31, 2022. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. 19 Table of Contents The following tables present the amortized cost basis of collateral dependent loans by class of loan as of: March 31, 2023 (dollars in thousands) Real Estate General Business Assets Other Total Commercial and industrial loans: Working capital lines of credit loans $ 50 $ 5,640 $ 0 $ 5,690 Non-working capital loans 527 7,017 229 7,773 Commercial real estate and multi-family residential loans: Owner occupied loans 765 1,484 0 2,249 Agri-business and agricultural loans: Loans secured by farmland 0 135 1,161 1,296 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 404 0 0 404 Open end and junior lien loans 213 0 0 213 Other consumer loans 0 0 5 5 Total $ 1,959 $ 14,276 $ 1,395 $ 17,630 December 31, 2022 (dollars in thousands) Real Estate General Business Assets Other Total Commercial and industrial loans: Working capital lines of credit loans $ 50 $ 5,402 $ 0 $ 5,452 Non-working capital loans 544 18,109 229 18,882 Commercial real estate and multi-family residential loans: Owner occupied loans 413 1,491 1,161 3,065 Agri-business and agricultural loans: Loans secured by farmland 0 145 0 145 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 2,030 0 0 2,030 Open end and junior lien loans 188 0 0 188 Other consumer loans 0 0 7 7 Total $ 3,225 $ 25,147 $ 1,397 $ 29,769 Loan Modifications Made to Borrowers Experiencing Financial Difficulty: The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the time of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time. During the three months ended March 31, 2023 and March 31, 2022, no loans received a material modification based on borrower financial difficulty. 20 Table of Contents NOTE 5. BORROWINGS For the period ended March 31, 2023, the Company had an advance outstanding from the Federal Home Loan Bank ("FHLB") in the amount of $ 200.0 million. The outstanding advance was a fixed rate bullet advance with an interest rate of 4.86 % and matured April 4, 2023. For the period ended December 31, 2022, the Company had a fixed rate bullet advance from the FHLB with an interest rate of 4.21 % of $ 275.0 million that matured on January 5, 2023. On August 2, 2019 the Company entered into an unsecured revolving credit agreement with another financial institution allowing the Company to borrow up to $ 30.0 million; this credit agreement was subsequently amended and renewed on July 30, 2022. Funds provided under the agreement may be used to repurchase shares of the Company’s common stock under the share repurchase program, which was reauthorized by the Company’s board of directors on April 11, 2023 and expires on April 30, 2025, and for general operations. The credit agreement includes a negative pledge agreement whereby the Company agrees not to pledge or otherwise encumber the stock of the Bank. The credit agreement has a one year term which may be amended, extended, modified or renewed. There were no outstanding borrowings on the credit agreement at March 31, 2023 and December 31, 2022. NOTE 6. FAIR VALUE DISCLOSURES Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Securities: Securities available-for-sale are valued primarily by a third party pricing service. The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs). The Company’s Finance Department, which is responsible for all accounting and SEC disclosure compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are new assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board are made aware of such assets at their next scheduled meeting. 21 Table of Contents Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/- 5 %, government MBS/CMO +/- 3 % and U.S. treasuries +/- 1 %. If any securities fall outside the tolerance threshold and have a variance of $ 100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material changes are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service. Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2). Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2). Collateral dependent loans: Collateral dependent loans with specific allocations of the allowance for credit losses are generally based on the fair value of the underlying collateral when repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of collateral dependent loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 30 - 50 % with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 40 - 60 %, depending on the marketability of the goods (b) finished goods are generally discounted by 40 - 60 %, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 60 %- 100 %, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 20 - 50 % after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10 %- 30 %, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value. Mortgage servicing rights: As of March 31, 2023, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $ 2.5 million, carried at amortized cost and no valuation reserve. These residential mortgage loans have a weighted average interest rate of 3.5 %, a weighted average maturity of 20 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A third-party valuation is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At March 31, 2023, the constant prepayment speed (“PSA”) used was 157 and discount rate used was 9.5 %. At December 31, 2022, the PSA used was 159 and the discount rate used was 9.5 %. 22 Table of Contents Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Real estate mortgage loans held-for-sale : Real estate mortgage loans held-for-sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification. The tables below present the balances of assets measured at fair value on a recurring basis: March 31, 2023 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets: U.S. Treasury securities $ 3,352 $ 0 $ 0 $ 3,352 U.S. government sponsored agency securities 0 127,995 0 127,995 Mortgage-backed securities: residential 0 484,462 0 484,462 State and municipal securities 0 490,437 2,035 492,472 Total securities available-for-sale 3,352 1,102,894 2,035 1,108,281 Mortgage banking derivative 0 47 0 47 Interest rate swap derivative 0 30,011 0 30,011 Total assets $ 3,352 $ 1,132,952 $ 2,035 $ 1,138,339 Liabilities: Mortgage banking derivative $ 0 $ 4 $ 0 $ 4 Interest rate swap derivative 0 30,013 0 30,013 Total liabilities $ 0 $ 30,017 $ 0 $ 30,017 December 31, 2022 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets: U.S. Treasury securities $ 3,034 $ 0 $ 0 $ 3,034 U.S. government sponsored agency securities 0 126,961 0 126,961 Mortgage-backed securities: residential 0 492,308 0 492,308 State and municipal securities 0 561,150 2,075 563,225 Total securities available-for-sale 3,034 1,180,419 2,075 1,185,528 Mortgage banking derivative 0 43 0 43 Interest rate swap derivative 0 36,920 0 36,920 Total assets $ 3,034 $ 1,217,382 $ 2,075 $ 1,222,491 Liabilities: Mortgage banking derivative $ 0 $ 0 $ 0 $ 0 Interest rate swap derivative 0 36,921 0 36,921 Total liabilities $ 0 $ 36,921 $ 0 $ 36,921 The fair value of Level 3 available-for-sale securities was immaterial and thus did not require additional recurring fair value disclosure. 23 Table of Contents The tables below present the balances of assets measured at fair value on a nonrecurring basis: March 31, 2023 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets Collateral dependent loans: Commercial and industrial loans: Working capital lines of credit loans $ 0 $ 0 $ 2,858 $ 2,858 Non-working capital loans 0 0 2,559 2,559 Commercial real estate and multi-family residential loans: Owner occupied loans 0 0 429 429 Agri-business and agricultural loans: Loans secured by farmland 0 0 33 33 Total collateral dependent loans 0 0 5,879 5,879 Other real estate owned 0 0 100 100 Total assets $ 0 $ 0 $ 5,979 $ 5,979 December 31, 2022 Fair Value Measurements Using Assets at Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Assets Collateral dependent loans: Commercial and industrial loans: Working capital lines of credit loans $ 0 $ 0 $ 3,178 $ 3,178 Non-working capital loans 0 0 8,354 8,354 Commercial real estate and multi-family residential loans: Owner occupied loans 0 0 425 425 Agri-business and agricultural loans: Loans secured by farmland 0 0 35 35 Total collateral dependent loans 0 0 11,992 11,992 Other real estate owned 0 0 100 100 Total assets $ 0 $ 0 $ 12,092 $ 12,092 The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2023: (dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs Collateral dependent loans: Commercial and industrial $ 5,417 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 66 % 40 %- 99 % Collateral dependent loans: Commercial real estate and multi-family residential loans 429 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 56 % 37 %- 76 % Collateral dependent loans: Agri-business and agricultural 33 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 76 % Other real estate owned 100 Appraisals Discount to reflect current market conditions and ultimate collectability 68 % The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2022: 24 Table of Contents (dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs Collateral dependent loans: Commercial and industrial $ 11,532 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 62 % 29 %- 99 % Collateral dependent loans: Commercial real estate and multi-family residential loans 425 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 57 % 37 %- 76 % Collateral dependent loans: Agri-business and agricultural 35 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 76 % Other real estate owned 100 Appraisals Discount to reflect current market conditions and ultimate collectability 68 % The following tables contain the estimated fair values and the related carrying values of the Company’s financial instruments. Items that are not financial instruments are not included. March 31, 2023 Carrying Value Estimated Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents $ 153,521 $ 152,800 $ 721 $ 0 $ 153,521 Securities available-for-sale 1,108,281 3,352 1,102,894 2,035 1,108,281 Securities held-to-maturity 128,651 0 115,533 0 115,533 Real estate mortgages held-for-sale 508 0 518 0 518 Loans, net 4,683,713 0 0 4,505,890 4,505,890 Mortgage banking derivative 47 0 47 0 47 Interest rate swap derivative 30,011 0 30,011 0 30,011 Federal Reserve and Federal Home Loan Bank Stock 15,795 N/A N/A N/A N/A Accrued interest receivable 26,883 0 8,532 18,351 26,883 Financial Liabilities: Certificates of deposit 764,163 0 762,852 0 762,852 All other deposits 4,753,565 4,753,565 0 0 4,753,565 Mortgage banking derivative 4 0 4 0 4 Interest rate swap derivative 30,013 0 30,013 0 30,013 Standby letters of credit 216 0 0 216 216 Accrued interest payable 5,425 420 5,005 0 5,425 25 Table of Contents December 31, 2022 Carrying Value Estimated Fair Value (dollars in thousands) Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents $ 130,282 $ 129,069 $ 1,213 $ 0 $ 130,282 Securities available-for-sale 1,185,528 3,034 1,180,419 2,075 1,185,528 Securities held-to-maturity 128,242 0 111,029 0 111,029 Real estate mortgages held-for-sale 357 0 372 0 372 Loans, net 4,637,790 0 0 4,454,678 4,454,678 Mortgage banking derivative 43 0 43 0 43 Interest rate swap derivative 36,920 0 36,920 0 36,920 Federal Reserve and Federal Home Loan Bank Stock 15,795 N/A N/A N/A N/A Accrued interest receivable 27,994 0 9,598 18,396 27,994 Financial Liabilities: Certificates of deposit 626,186 0 621,206 0 621,206 All other deposits 4,834,434 4,834,434 0 0 4,834,434 Federal Funds purchased 22,000 22,000 0 0 22,000 Federal Home Loan Bank advances 275,000 275,000 0 0 275,000 Interest rate swap derivative 36,921 0 36,921 0 36,921 Standby letters of credit 249 0 0 249 249 Accrued interest payable 3,186 486 2,700 0 3,186 NOTE 7. OFFSETTING ASSETS AND LIABILITIES The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at March 31, 2023 and December 31, 2022. March 31, 2023 Gross Amounts of Recognized Assets/Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts presented in the Statement of Financial Position Gross Amounts Not Offset in the Statement of Financial Position Net Amount (dollars in thousands) Financial Instruments Cash Collateral Position Assets Interest Rate Swap Derivatives $ 30,011 $ 0 $ 30,011 $ 0 $ ( 27,385 ) $ 2,626 Total Assets $ 30,011 $ 0 $ 30,011 $ 0 $ ( 27,385 ) $ 2,626 Liabilities Interest Rate Swap Derivatives $ 30,013 $ 0 $ 30,013 $ 0 $ ( 90 ) $ 29,923 Total Liabilities $ 30,013 $ 0 $ 30,013 $ 0 $ ( 90 ) $ 29,923 26 Table of Contents December 31, 2022 Gross Amounts of Recognized Assets/Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts presented in the Statement of Financial Position Gross Amounts Not Offset in the Statement of Financial Position Net Amount (dollars in thousands) Financial Instruments Cash Collateral Position Assets Interest Rate Swap Derivatives $ 36,920 $ 0 $ 36,920 $ 0 $ ( 34,185 ) $ 2,735 Total Assets $ 36,920 $ 0 $ 36,920 $ 0 $ ( 34,185 ) $ 2,735 Liabilities Interest Rate Swap Derivatives $ 36,921 $ 0 $ 36,921 $ 0 $ ( 90 ) $ 36,831 Total Liabilities $ 36,921 $ 0 $ 36,921 $ 0 $ ( 90 ) $ 36,831 If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions. NOTE 8. EARNINGS PER SHARE Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period, which includes shares held in treasury on behalf of participants in the Company’s Directors Fee Deferral Plan, and share repurchases. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based awards and warrants, none of which were antidilutive. Three Months Ended March 31, 2023 2022 Weighted average shares outstanding for basic earnings per common share 25,583,026 25,515,271 Dilutive effect of stock based awards 159,859 175,101 Weighted average shares outstanding for diluted earnings per common share 25,742,885 25,690,372 Basic earnings per common share $ 0.95 $ 0.93 Diluted earnings per common share $ 0.94 $ 0.92 NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022, all shown net of tax: (dollars in thousands) Unrealized Gains and Losses on Available- for-Sales Securities Defined Benefit Pension Items Total Balance at January 1, 2023 $ ( 188,154 ) $ ( 769 ) $ ( 188,923 ) Other comprehensive income (loss) before reclassification 21,167 0 21,167 Amounts reclassified from accumulated other comprehensive income (loss) 375 11 386 Net current period other comprehensive income (loss) 21,542 11 21,553 Balance at March 31, 2023 $ ( 166,612 ) $ ( 758 ) $ ( 167,370 ) 27 Table of Contents (dollars in thousands) Unrealized Gains and Losses on Available- for-Sales Securities Defined Benefit Pension Items Total Balance at January 1, 2022 $ 17,056 $ ( 963 ) $ 16,093 Other comprehensive income (loss) before reclassification ( 109,807 ) 0 ( 109,807 ) Amounts reclassified from accumulated other comprehensive income (loss) 0 27 27 Net current period other comprehensive income (loss) ( 109,807 ) 27 ( 109,780 ) Balance at March 31, 2022 $ ( 92,751 ) $ ( 936 ) $ ( 93,687 ) Reclassifications out of other accumulated comprehensive loss for the three months ended March 31, 2023 are as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented (dollars in thousands) Amortization of unrealized losses on held-to-maturity securities $ ( 491 ) Interest income Realized gains and (losses) on available-for-sale securities 16 Net securities gains Tax effect 100 Income tax expense ( 375 ) Net of tax Amortization of defined benefit pension items ( 15 ) Other expense Tax effect 4 Income tax expense ( 11 ) Net of tax Total reclassifications for the period $ ( 386 ) Net income Reclassifications out of other accumulated comprehensive income for the three months ended March 31, 2022 are as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented (dollars in thousands) Amortization of defined benefit pension items $ ( 36 ) Other expense Tax effect 9 Income tax expense ( 27 ) Net of tax Total reclassifications for the period $ ( 27 ) Net income 28 Table of Contents NOTE 10. LEASES The Company leases certain office facilities under long-term operating lease agreements. The leases expire at various dates through 2037 and some include renewal options. Many of these leases require the payment of property taxes, insurance premiums, maintenance, utilities and other costs. In many cases, rentals are subject to increase in relation to a cost-of-living index. The Company accounts for lease and non-lease components together as a single lease component. The Company determines if an arrangement is a lease at inception. Operating leases are recorded as a right-of-use ("ROU") lease assets and are included in other assets on the consolidated balance sheet. The Company's corresponding lease obligations are included in other liabilities on the consolidated balance sheet. ROU lease assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as a practical expedient of the standard. The following is a maturity analysis of the operating lease liabilities as of March 31, 2023: Years ending December 31, (in thousands) Operating Lease Obligation 2023 $ 547 2024 744 2025 756 2026 730 2027 753 2028 and thereafter 2,185 Total undiscounted lease payments 5,715 Less imputed interest ( 566 ) Lease liability $ 5,149 Right-of-use asset $ 5,149 Three Months Ended March 31, (dollars in thousands) 2023 2022 Lease cost Operating lease cost $ 178 $ 170 Short-term lease cost 4 6 Total lease cost $ 182 $ 176 Other information Operating cash outflows from operating leases $ 178 $ 170 Weighted-average remaining lease term - operating leases 7.0 years 8.9 years Weighted average discount rate - operating leases 2.5 % 2.5 % 29 Table of Contents NOTE 11. LOSS CONTINGENCIES Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al. , which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and agreed to stay prosecution of the action through August 31, 2022. The original complaint focused on a series of business transactions among the client, related entities and the Bank, which the liquidating trustee alleged are voidable under applicable federal bankruptcy and state law. The complaint also addressed treatment of the Bank's claims filed in the bankruptcy cases. On August 31, 2022, the trustee filed his amended complaint against the former client, the Bank, the Company, four officers of the Bank and one independent director of the Bank. The amended complaint alleges that the former client engaged in a check kiting scheme involving multiple banks. The amended complaint alleges that a series of business transactions among the client, his related entities and the Bank are voidable under applicable bankruptcy and state laws. The amended complaint also alleges that the Bank, the Company and the five individual bank representatives who are named as defendants violated various federal and state laws in assisting the former client in his check kiting scheme. On October 26, 2022, the trustee filed his second amended complaint which was virtually identical to his amended complaint. On January 5, 2023, the Bank, the Company and the five individual bank representatives filed motions to dismiss the second amended complaint. The motions are being briefed and will then be considered by the court. The hearing for the parties to argue the Company's motion to dismiss the Trustee's second amended complaint was held on April 17, 2023. The judge took the matter under advisement and a ruling is expected within 30 days of the hearing. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank, the Company and the five individual Bank representatives who are named as defendants intend to vigorously defend themselves against all allegations asserted in this amended complaint. 30 Table of Contents