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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-04-26 · 313 added, 169 removed, 289 unchanged (63% of the section changed)

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net income in the first three months of 2023 was $24.3 million, which increased $636,000, or 2.7%, from $23.6 million for the comparable period of 2022 .

Diluted income per common share was $0.94 in the first three months of 2023 , up 2.2% from $0.92 in the comparable period of 2022 .

The increase in net income for 2023 was primarily due to growth in net interest income of $6.6 million, offset by an increase to the provision for credit losses of $3.9 million, a decrease in noninterest income of $373,000 and an increase in noninterest expense of $2.5 million .

Pretax pre-provision earnings in the first three months of 2023 were $32.4 million, an increase of $3.8 million, or 13.3%, compared to $28.6 million for the comparable period of 2022.

Net income in the first six months of 2023 was $38.9 million, which decreased $10.4 million , or 21.1%, from $49.3 million for the comparable period of 2022 .

Diluted income per common share was $1.51 in the first six months of 2023 , a decrease of 21.4% from $1.92 in the comparable period of 2022 .

The decrease in net income for 2023 was primarily due to an increase in noninterest expense of $17.3 million, or 31.5%, and an increase in provision for credit losses expense of $4.7 million.

Offsetting these items was an increase to net interest income of $6.5 million, or 6.9%, and an increase to noninterest income of $636,000, or 3.0%.

Pretax pre-provision earnings in the first six months of 2023 were $49.7 million, a decrease of $10.2 million , or 17.0%, compared to $59.9 million for the comparable period of 2022 .

Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense.

Annualized return on average total equity was 16.81% in the first three months of 2023 versus 14.04% in the comparable period of 2022 .

Annualized return on average total assets was 1.54% in the first three months of 2023 versus 1.44% for the comparable period of 2022 .

The Company's average equity to average assets ratio was 9.13% in the first three months of 2023 versus 10.26% in the comparable period of 2022 .

Annualized return on average total equity was 13.18% in the first six months of 2023 versus 15.72% in the comparable period of 2022 .

Annualized return on average total assets was 1.22% in the first six months of 2023 versus 1.52% for the comparable period of 2022 .

The Company's average equity to average assets ratio was 9.26% in the first six months of 2023 versus 9.65% in the comparable period of 2022 .

Equity has been negatively impacted by unrealized losses from the available-for-sale investment securities portfolio, which are reported as a component of accumulated other comprehensive income (loss).

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 9.34% at March 31, 2023, compared to 9.22% at March 31, 2022 and 8.79% at December 31, 2022.

Tangible equity and tangible assets have been impacted by declines in the market value of the company's available-for-sale investment securities portfolio.

The market value decline is a result of rising interest rates caused by the tightening of monetary policy by the Federal Reserve beginning in March of 2022 to combat elevated levels of inflation affecting the U.S.

The rising interest rate environment has generated unrealized losses in the available-for-sale investment securities portfolio which are reflected in the company's reported accumulated other comprehensive income (loss).

Unrealized losses from available-for-sale investment securities were $188.5 million as of March 31, 2023, compared to unrealized losses of $117.4 million at March 31, 2022 and improved from unrealized losses of $215.3 million at December 31, 2022.

When excluding the impact of securities market value adjustments on tangible common equity and tangible assets, the Company's adjusted tangible common equity to adjusted tangible assets ratio, which is a non-GAAP financial measure, was 11.56% at March 31, 2023 compared to 10.44% at March 31, 2022 and 11.30% at December 31, 2022.

Total assets were $6.412 billion as of March 31, 2023 versus $6.432 billion as of December 31, 2022, a decrease of $20.8 million.

Balance sheet contraction was driven primarily by decreases in available-for-sale securities, noninterest bearing deposits and borrowings during the first three months of 2023.

Available-for-sale securities decreased $77.2 million, noninterest bearing deposits decreased $188.7 million and total borrowings decreased $97.0 million.

Offsetting these decreases were increases to short-term investments of $36.9 million, loans, net of the allowance for credit losses, of $45.9 million and interest bearing deposits of $245.8 million.

Tota l equity increased by $33.1 million, or 5.8%, due primarily to an increase to accumulated other comprehensive income (loss) of $21.6 million.

The increase in accumulated other comprehensive income (loss) was due to an improvement in available-for-sale securities fair market values during the first quarter of 2023 .

The change in total equity was also impacted by net income of $24.3 million and dividends declared and paid of $0.46 per share, totaling $11.7 million.

Net income in second quarter of 2023 was $14.6 million, down 43.1% from $25.7 million for the comparable period of 2022.

Diluted earnings per common share was $0.57 in the second quarter of 2023, down 43.0% from $1.00 in the comparable period of 2022.

The decrease was driven primarily by an increase in noninterest expense of $14.8 million, or 53.1%, partially offset by an increase in noninterest income of $1.0 million, or 9.6%.

Pretax pre-provision earnings in the second quarter of 2023 were $17.3 million, a decrease of $14.0 million, or 44.7%, compared to $31.3 million for the comparable period of 2022.

Annualized return on average total equity was 9.70% in the second quarter of 2023 versus 17.65% in the comparable period of 2022.

Annualized return on average total assets was 0.91% in the second quarter of 2023 versus 1.59% in the comparable period of 2022.

The average equity to average assets ratio was 9.39% in the second quarter of 2023 versus 9.03% the comparable period of 2022.

On June 30, 2023, the Company discovered that it had been the victim of international wire fraud resulting in an estimated loss of $18.1 million, which is net of estimated insurance coverage of $4.1 million.

The loss net of tax amounts to $13.6 million, or $0.53 diluted earnings per share for the three and six month periods ended June 30, 2023.

As a result, the Company’s core operational profitability, which is a non‐GAAP measure that excludes the estimated

effect of this one‐time loss, was $26.8 million for the quarter ended June 30, 2023, compared to $25.7 million for the three months ended June 30, 2022 and $24.3 million for the linked quarter ended March 31, 2023.

Core profitability improved 10% on a linked quarter basis and 4% on an annual basis.

The fraudulent wire activity resulted from a highly sophisticated business email compromise directed by a foreign threat actor that targeted a specific general ledger account at the Bank.

To facilitate the fraud, the threat actor compromised a single employee email account outside the Company's network and used a forged wire transfer form.

A third‐party forensic investigation determined that no client accounts were threatened by this activity, nor was

there any attempt to access any client information or funds.

Additionally, the investigation concluded that the Company's network was never penetrated and that the foreign threat actor made no attempt to penetrate the network.

On June 30, 2023, the Company notified its insurance carriers about the fraudulent wire activity and engaged a

forensic technology investigation firm to conduct a thorough investigation.

The Company also notified the United

States Secret Service, the FBI and the Financial Crimes Enforcement Network, or FinCEN.

In addition, the Company

has communicated actively with its primary regulators.

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 9.04% at June 30, 2023, compared to 8.92% at June 30, 2022 and 8.79% at December 31, 2022.

Tangible equity and tangible assets have been impacted by declines in the market value of the Company’s available-for-sale investment securities portfolio as a result of the rising interest rate environment.

These declines have generated unrealized losses in the available-for-sale investment securities portfolio which are reflected in the Company’s reported accumulated other comprehensive income (loss).

Unrealized losses from available-for-sale investment securities were $202.0 million at June 30, 2023, compared to $175.6 million at June 30, 2022 and $215.3 million at December 31, 2022.

When excluding the impact of investment securities market

value adjustments on tangible common equity and tangible assets, the Company's adjusted tangible common equity to adjusted tangible assets ratio, which is a non-GAAP financial measure, was 11.37% at June 30, 2023, compared to 11.08% at June 30, 2022 and 11.30% at December 31, 2022.

Total assets were $6.510 billion as of June 30, 2023 versus $6.432 billion as of December 31, 2022, an increase of $77.2 million, or 1.2%.

Balance sheet expansion was driven primarily by loan portfolio growth.

Total loans, net of the allowance for credit losses, increased $152.4 million, or 3.3%, between June 30, 2023 and December 31, 2022.

Contributing further to the increase in total assets was an increase in cash and cash equivalents of $42.9 million, or 32.9%.

Offsetting these increases was a decrease in available-for-sale securities of $123.5 million, or 10.4%.

To fund the balance sheet expansion, total borrowings increased $103.0 million, or 34.7%, and was offset by a decrease in total deposits of $37.6 million, or less than 1%.

The deposit mix saw a shift from noninterest bearing deposits, which decreased $298.7 million, or 17.2%, to interest bearing deposits which increased $261.2 million, or 7.0%.

Total equity increased $23.1 million, or 4.1%, from $568.9 million at December 31, 2022 to $592.0 million at June 30, 2023.

Retained earnings increased $15.3 million, or 2.4%, as a result of net income of $38.9 million, offset by dividends declared and paid of $23.5 million.

Accumulated other comprehensive income (loss), increased $11.3 million, or 6.0%, due primarily to an improvement in available-for-sale securities fair market values during the six months ended June 30, 2023.

CRITICAL ACCOUNTING POLICIES

6 unchanged sentences

RESULTS OF OPERATIONS

Selected income statement information for the three months ended March 31, 2023 and 2022 is presented in the following table:

Three Months Ended March 31,

Selected income statement information for the three and six months ended June 30, 2023 and 2022 is presented in the following table:

Three Months Ended June 30, Six Months Ended June 30,

(dollars in thousands) 2023 2022 2023 2022

20 unchanged sentences

(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.

Calculated by removing the fair market value adjustment impact of the investment securities portfolio from tangible equity and tangible assets.

Management believes this is an important measure because it provides better comparability to prior periods.

3 unchanged sentences

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.

A reconciliation of non-GAAP measures is provided below (in thousands, except for per share data).

As of and For The

Three Months Ended March 31,

See reconciliation below.

Reconciliations of non-GAAP measures are provided below (in thousands, except for per share data).

As of and For The As of and For The

Three Months Ended June 30, Six Months Ended June 30,

(dollars in thousands) 2023 2022 2023 2022

9 unchanged sentences

Tangible Assets (B) 6,505,743 6,261,284 6,505,743 6,261,284

Market Value Adjustment 210,901 117,406

Securities Market Value Adjustment 223,922 199,525 223,922 199,525

Adjusted Tangible Assets (D) 6,729,665 6,460,809 6,729,665 6,460,809

7 unchanged sentences

Pretax Pre-Provision Earnings $ 17,291 $ 31,257 $ 49,690 $ 59,855

Net income was $24.3 million in the first three months of 2023 , an increase of $636,000, or 2.7%, versus net income of $23.6 million in the first three months of 2022 .

The increase in net income for 2023 was primarily due to growth in net interest income of $6.6 million, or 14.8%, offset by a decrease to the provision for credit losses of $3.9 million, a decrease to noninterest income of $373,000, or 3.5%, and an increase to noninterest expense of $2.5 million, or 9.1%.

Three Months Ended Six Months Ended

30, 2023 Jun.

Noninterest Expense $ 42,734 $ 72,168

Wire Fraud Loss (18,058) (18,058)

Salaries and Employee Benefits (5) 1,850 1,850

Adjusted Core Noninterest Expense $ 26,526 $ 55,960

Earnings Before Income Taxes $ 16,491 $ 44,540

Adjusted Core Noninterest Expense Impact 16,208 16,208

Adjusted Earnings Before Income Taxes 32,699 60,748

Tax Effect (5,873) (9,644)

Core Operational Profitability $ 26,826 $ 51,104

Core Operational Diluted Earnings Per Common Share $ 1.05 $ 1.99

Adjusted Core Efficiency Ratio 44.19 % 45.92 %

(5) Long-term, incentive-based compensation accruals were reduced as a result of the wire fraud loss.

Adjusted core noninterest expense, adjusted earnings before income taxes, core operational profitability, core operational diluted earnings per common share and adjusted core efficiency ratio are non‐GAAP financial measures calculated using GAAP amounts.

These adjusted amounts are calculated by excluding the impact of the wire fraud loss and corresponding reduction to salaries and employee benefits for the three‐ and six‐month periods ended June 30, 2023.

Management considers these measures of financial performance to be meaningful to understanding the company’s core business performance for these periods.

Net income was $38.9 million in the first six months of 2023, which decreased $10.4 million , or 21.1%, from $49.3 million for the comparable period of 2022 .

The decrease in net income for the first six months of 2023 was primarily due to an increase in noninterest expense of $17.3 million, or 31.5%, and an increase in provision for credit losses expense of $4.7 million.

Offsetting these items was an increase to net interest income of $6.5 million, or 6.9%, and an increase to noninterest income of $636,000, or 3.0%.

Net income in second quarter of 2023 was $14.6 million, down 43.1% from $25.7 million for the comparable period of 2022.

Diluted earnings per common share was $0.57 in the second quarter of 2023, down 43.0% from $1.00 in the comparable period of 2022.

The decrease was driven primarily by an increase in noninterest expense of $14.8 million, or 53.1%, partially offset by an increase in noninterest income of $1.0 million, or 9.6%.

On June 30, 2023, the Company discovered that it had been the victim of international wire fraud resulting in an estimated loss of $18.1 million.

The loss net of tax amounts to $13.6 million, or $0.53 diluted earnings per share for the three and six month periods ended June 30, 2023.

As a result, the Company’s core operational profitability, which is a non‐GAAP measure that excludes the estimated

Core profitability improved 10% on a linked quarter basis and 4% on an annual basis.

The fraudulent wire activity resulted from a highly sophisticated business email compromise directed by a foreign threat actor that targeted a specific general ledger account at the bank.

To facilitate the fraud, the threat actor compromised a single employee email account outside the company's network and used a forged wire transfer form.

N et Interest Income

The following table sets forth consolidated information regarding average balances and rates:

Three Months Ended March 31,

The following tables set forth consolidated information regarding average balances and rates:

Six Months Ended June 30,

(fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/

33 unchanged sentences

The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.

Taxable equivalent basis adjustments were $1.37 million and $1.27 million in the three-month periods ended March 31, 2023 and March 31, 2022, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended March 31, 2023 and 2022, are included as taxable loan interest income .

Taxable equivalent basis adjustments were $2.7 million for both the six-month periods ended June 30, 2023 and June 30, 2022.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the six months ended June 30, 2023 and 2022 , are included as taxable loan interest income .

(3) Nonaccrual loans are included in the average balance of taxable loans.

Net interest income increased $6.6 million, or 14.8%, to $51.5 million for the three months ended March 31, 2023, compared with $44.9 million for the first three months of 2022 .

Growth in average loans and an improvement in loan yields were the primary drivers behind the $31.3 million increase in tax-equivalent interest income between the two quarters.

An improvement in yields in securities and cash and cash equivalents also contributed to the increase in net interest income.

Interest expense, which increased by $24.5 million, partially offset the positive impact of increased loan and securities interest income, driven by increased funding costs from deposits and borrowings.

Average earning assets declined by $324.5 million, due primarily to a reduction in investment securities of $263.8 million and a decrease in demand deposits of $303.6 million.

Offsetting the contraction in average deposits was an increase in average short-term borrowings of $241.8 million, offset by a decrease in average long-term borrowings of $75.0 million.

Average loans outstanding increased $424.5 million to $4.725 billion during the three months ended March 31, 2023, compared to $4.301 billion during the same period of 2022 .

The earning asset contraction was offset by a decrease in deposits.

Average total deposits decreased $361.0 million to $5.488 billion during the three months ended March 31, 2023, compared to $5.849 billion for the same period of 2022 .

The decrease in average deposits was driven by a decrease in average noninterest bearing deposits, which decreased $303.6 million, or 15.4%, from $1.967 billion for the three months ended March 31, 2022, to $1.663 billion for the same period of 2023.

Offsetting the contraction in average deposits was an increase in average short-term borrowings of $241.8 million, offset by a decrease in average long-term borrowings of $75.0 million.

The tax equivalent net interest margin was 3.54 % for the three months ended March 31, 2023, compared to 2.93% during the first three months of 2022, representing a 61 basis point expansion between the two quarters.

Three Months Ended June 30,

(fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/

Rate Average Balance Interest Yield (1)/

Earning Assets

Taxable (2)(3) $ 4,739,885 $ 75,047 6.35 % $ 4,396,333 $ 44,138 4.03 %

Tax exempt (1) 57,857 1,198 8.31 29,380 353 4.82

Securities (1) 1,210,870 8,520 2.82 1,476,144 10,049 2.73

Short-term investments 2,308 26 4.52 2,301 2 0.35

Interest bearing deposits 85,364 1,009 4.74 252,893 481 0.76

Total earning assets $ 6,096,284 $ 85,800 5.65 % $ 6,157,051 $ 55,023 3.58 %

Allowance for credit losses (71,477) (67,527)

Nonearning Assets

Cash and due from banks 69,057 74,158

Premises and equipment 58,992 58,978

Other nonearning assets 280,073 238,228

Total assets $ 6,432,929 $ 6,460,888

Interest Bearing Liabilities

Savings deposits $ 360,173 $ 65 0.07 % $ 425,102 $ 81 0.08 %

Interest bearing checking accounts 2,930,285 27,226 3.73 2,710,674 3,784 0.56

Time deposits:

In denominations under $100,000 198,864 1,147 2.31 189,538 307 0.65

In denominations over $100,000 611,427 5,173 3.39 601,877 718 0.48

Miscellaneous short-term borrowings 186,418 2,347 5.05 0 0 0.00

Long-term borrowings and subordinated debentures 0 0 0.00 54,396 54 0.40

Total interest bearing liabilities $ 4,287,167 $ 35,958 3.36 % $ 3,981,587 $ 4,944 0.50 %

Noninterest Bearing Liabilities

Demand deposits 1,450,396 1,825,327

Other liabilities 91,367 70,650

Stockholders' Equity 603,999 583,324

Total liabilities and stockholders' equity $ 6,432,929 $ 6,460,888

Interest Margin Recap

Interest income/average earning assets 85,800 5.65 % 55,023 3.58 %

Interest expense/average earning assets 35,958 2.37 4,944 0.32

Net interest income and margin $ 49,842 3.28 % $ 50,079 3.26 %

(1) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate.

Taxable equivalent basis adjustments were $1.3 million and $1.4 million in the three-month periods ended June 30, 2023 and June 30, 2022, respectively.

(2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended June 30, 2023 and 2022, are included as taxable loan interest income .

(3) Nonaccrual loans are included in the average balance of taxable loans.

Net interest income, on a fully tax equivalent basis, increased $6.5 million, or 6.8%, to $102.7 million for the six months ended June 30, 2023, compared to $96.2 million for the first six months of 2022 .

Growth in average loans and an improvement in earning assets yields were the primary drivers behind the $62.1 million, or 59.5%.

increase in tax equivalent interest income between the two periods.

Offsetting these increases was a decrease in the average balance of investment securities.

Interest expense, which partially offset the positive impact of the increase to tax equivalent interest income, increased by $55.6 million, or 686.1%.

and was driven by increased funding costs from increased average interest bearing liabilities and decreased average noninterest bearing liabilities.

Total average earning assets were $6.082 billion for the six months ended June 30, 2023, a decrease of $191.9 million, or 3.1%, compared to $6.274 billion for the six months ended June 30, 2022.

A decrease to average investment securities of $264.6 million, or 17.7%, from $1.495 billion for the six months ended June 30, 2022 to $1.230 billion for the six months ended June 30, 2023, and a decrease to interest bearing deposits of $325.5 million, or 78.8%, from $413.0 million for the six months ended June 30, 2022 to $87.5 million for the six months ended June 30, 2023, drove the contraction in average earning assets between the two periods.

Offsetting these decreases was an increase in average loans outstanding, which increased $398.1 million, or 9.1%, to $4.762 billion during the six months ended June 30, 2023, compared to $4.364 billion during the same period of 2022 .

Total average interest bearing liabilities were $4.178 billion for the six months ended June 30, 2023, an increase of $208.0 million, or 5.2%, from $3.970 billion for the six months ended June 30, 2022.

This increase was driven by increased interest bearing deposits of $58.7 million, or 1.5%, from $3.905 billion for the six months ended June 30, 2022 to $3.964 billion for the six months ended June 30, 2023, and an increase in total average borrowings of $149.3 million, or 231.0%, from $64.6 million for the six months ended June 30, 2022 to $214.0 million for the six month ended June 30, 2023.

Noninterest bearing demand deposits decreased $339.5 million, or 17.9%, from $1.895 billion for the six months ended June 30, 2022 to $1.556 billion for the six months ended June 30, 2023.

The tax equivalent net interest margin was 3.41% for the six months ended June 30, 2023, compared to 3.09% during the first six months of 2022, representing a 32 basis point, or 10.4%, expansion between the two periods.

The net interest margin expansion was driven by a 500 basis point increase to the target Federal Funds rate implemented by the Federal Reserve through a series of rate increases beginning in March of 2022.

The target Federal Funds rate increased from a zero-bound range of 0.00%-0.25% in March 2022 to a range of 4.75%-5.00% at March 31, 2023.

The impact of the higher interest rate increased earning asset yields by 226 basis points to 5.39% for the first quarter of 2023, up from 3.13% for the first quarter of 2022.

However, this increase was offset by an increase in the company's funding costs as excess customer liquidity was utilized and the competition for deposits increased throughout the industry.

Interest expense as a percentage of average earning assets increased to 1.85% for the first quarter of 2023 from a historical low of 0.20% for the first quarter of 2022, an increase of 165 basis points .

Cost of funds may continue to rise throughout 2023 as a result of market competition for deposits.

The target Federal Funds rate increased from a zero-bound range of 0.00%-0.25% in March 2022 to a range of 5.00%-5.25% at June 30, 2023.

The impact of the higher interest rate environment has increased earning asset yields by 217 basis points, or 64.8%, to 5.52% for the six months ended June 30, 2023, up from 3.35% for the comparable period of 2022.

This increase was offset by an increase in the Company's funding costs, as excess customer liquidity in the form of deposits was utilized and the competition for deposits increased throughout the industry.

Interest expense as a percentage of average earning assets increased to 2.11% for the six months ended June 30, 2023, up from 0.26% for the comparable period of 2022, an increase of 185 basis points, or 711.5%.

The Company anticipates the c ost of funds may continue to rise throughout 2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and increased utilization of FHLB borrowings.

Net interest income, on a fully tax equivalent basis, decreased by $237,000, or less than 1%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Tax equivalent net interest income benefited from increased average loan balances and yields between the two periods.

Offsetting this benefit were increased interest bearing liabilities and an increased funding costs.

Total average earning assets were $6.096 billion for the second quarter of 2023, a decrease of $60.8 million, or 1.0%, compared to $6.157 billion for the second quarter of 2022.

The decrease in average earning assets was driven by a decrease in average in average interest bearing deposits, which decreased $167.5 million, or 66.2%, from $252.9 million for the second quarter of 2022 to $85.4 million for the second quarter of 2023, and a decrease in average investment securities, which decreased $265.3 million, or 18.0%, from $1.476 billion for the second quarter of 2022 to $1.211 billion for the second quarter of 2023.

Offsetting these decreases was an increase in average loans of $372.0 million, or 8.4%, from $4.426 billion for the second quarter of 2022 to $4.798 billion for the second quarter of 2023.

Total average interest bearing liabilities were $4.287 billion for the second quarter of 2023, an increase of $305.6 million, or 7.7%, from $3.982 billion for the second quarter of 2022.

This increase was driven by increased interest bearing deposits of $173.6 million, or 4.4%, from $3.927 billion for the second quarter of 2022 to $4.101 billion for the second quarter of 2023 and increased total borrowings by $132.0 million, or 242.7%, from $54.4 million for the second quarter of 2022 to $186.4 million for the second quarter of 2023.

Noninterest bearing demand deposits decreased $374.9 million, or 20.5%, from $1.825 billion for the second quarter of 2022 to $1.450 billion for the second quarter of 2023.

The tax equivalent net interest margin expanded by 2 basis points, or less than 1%, to 3.28% for the second quarter of 2023, compared to 3.26% for the second quarter of 2022.

Earning asset yields expanded 207 basis points, or 57.8%, from 3.58% for the second quarter of 2022 to 5.65% for the second quarter of 2023.

This increase was offset by an increase in the Company's funding costs as interest expense as a percentage of average earning assets increased 205 basis points, or 640.6%, from 0.32% for the second quarter of 2022 to 2.37% for the second quarter of 2023.

Increases to the Company's earning asset yields and interest expense as a percentage of average earning assets between the two periods were driven by the Federal Reserve's action to increase the target Federal Funds rate to 5.25% from 0.25%.

The target Federal Funds rate was increased 350 basis points between June 30, 2022 and June 30, 2023, increasing the target Federal Funds rate range from 1.50%-1.75% to 5.00%-5.25%.

While the rate increases have positively affected the Company's yields on earning assets, the Company has experienced a corresponding increase to funding costs as excess customer liquidity was utilized and the competition for deposits has increased throughout the industry.

The Company anticipates the c ost of funds may continue to rise throughout

2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and increased utilization of FHLB borrowings.

Provision for Credit Losses

The Company recorded provision for credit losses expense of $4.4 million for the three months ended March 31, 2023 compared to provision expense of $417,000 during the comparable period of 2022 .

The increase in provision during the first quarter of 2023 compared to the first quarter of 2022 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets.

Net charge-offs were $5.7 million during the three month period ended March 31, 2023 compared to net recoveries of $664,000 during the comparable period of 2022 .

The increase in charge offs in the first quarter of 2023 compared to the first quarter of 2022 was the result of a further charge off of $5.5 million attributable to a single commercial customer.

The $10.7 million credit was downgraded in late December 2022, and a partial charge off of $3.7 million was recognized at that time.

The remaining $7.0 million was placed on nonaccrual status pending additional due diligence and financial analysis related to the borrower's debt service capacity.

During the first quarter of 2023, the outlook for repayment of the loan weakened significantly and resulted in the additional charge off of $5.5 million.

The charge off amount was fully allocated in the allowance for credit losses.

The Company recorded provision for credit losses expense of $5.2 million for the six months ended June 30, 2023, compared to provision expense of $417,000 during the comparable period of 2022, an increase of $4.7 million, or 1135.0%.

The increase in provision during the six months ended June 30, 2023, compared to the comparable period in 2022 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets.

Net charge-offs were $5.7 million during the six month period ended June 30, 2023, compared to net charge-offs of $667,000 during the comparable period of 2022, an increase of $5.0 million.

The increase in charge-offs during the six months ended June 30, 2023, compared to the comparable period in 2022 was the result of a charge-off of $5.5 million attributable to a single commercial borrower during the first quarter of 2023.

The Company recorded provision expense of $800,000 during the second quarter of 2023, compared to no provision expense recorded during the second quarter of 2022.

Provision expense during the quarter was primarily driven by growth in the loan portfolio.

Net charge-offs (recoveries) were ($43,000) during the second quarter of 2023, compared to $3,000 during the second quarter of 2022.

Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower.

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Noninterest Income

Noninterest income categories for the three-month period ended March 31, 2023 and 2022 are shown in the following table:

Noninterest income categories for the six-month and three-month period ended June 30, 2023 and 2022 are shown in the following tables:

Six Months Ended

(dollars in thousands) 2023 2022 Dollar Change Percent Change

Wealth advisory fees $ 4,471 $ 4,491 $ (20) (0.4) %

Investment brokerage fees 962 1,060 (98) (9.2)

Service charges on deposit accounts 5,356 5,691 (335) (5.9)

Loan and service fees 5,848 6,084 (236) (3.9)

Merchant card fee income 1,806 1,719 87 5.1

Bank owned life insurance income (loss) 1,384 (266) 1,650 (620.3)

Interest rate swap fee income 794 404 390 96.5

Mortgage banking income (loss) (134) 860 (994) (115.6)

Net securities gains 19 0 19 100.0

Other income 1,309 1,136 173 15.2

Total noninterest income $ 21,815 $ 21,179 $ 636 3.0 %

Noninterest income to total revenue 17.90 % 18.46 %

Three Months Ended

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Noninterest income to total revenue 19.16 % 17.73 %

The Company's noninterest income decreased $373,000, or 3.5%, to $10.3 million for the three months ended March 31, 2023 compared to $10.7 million in the prior year period.

The decrease in noninterest income was primarily driven by a decline in mortgage banking income of $608,000, from reduced levels of mortgage financing activity because of the increased rate environment.

Additionally, a decrease in other income of $273,000, or 30.6%, and decreased service charges on deposit accounts of $179,000, or 6.4%, contributed to the decrease in noninterest income.

The decrease in other income was the result of less income from partnership investments during the comparable quarters and the decrease in service charges on deposit accounts was primarily the result of increased earning credit rating for commercial depositors related to commercial treasury management fees.

Offsetting these decreases was an increase in bank owned life insurance income of $774,000.

Bank owned life insurance income benefited by improved market performance of the company's variable life insurance policies, which track to the overall performance of the equity markets.

In addition, increased general account bank owned life insurance income resulted from the purchase of insurance policies during the fourth quarter of 2022.

Noninterest income increased by $636,000, or 3.0%, to $21.8 million for the six months ended June 30, 2023, compared to $21.2 million for the prior year six month period.

The increase was driven by increases to bank owned life insurance income of $1.7 million, or 620.3%, interest rate swap fee income of $390,000, or 96.5%, and other income of $173,000, or 15.2%.

Bank owned life insurance income benefited from improved market performance of the Company's variable life insurance policies which track to the overall performance of the equity markets, and from the purchase of general life insurance policies during the fourth quarter of 2022.

Interest rate swap fee income increased due to increased demand for fixed rate loan arrangements among certain commercial borrowers and the Bank's utilization of back-to-back swaps to convert the fixed rate exposure to a floating rate.

Other income increased due to increased dividends from the the Company's Federal Home Loan Bank stock and activity from the Company's low income housing tax credit investment holdings.

These increases were offset by decreases to mortgage banking income of $994,000, or 115.6%, due to a decrease in mortgage volume, service charges on deposit accounts of $335,000, or 5.9%, and loan and service fees of $236,000, or 3.9%.

The Company’s noninterest income increased $1.0 million, or 9.6%, to $11.5 million for the second quarter of 2023, compared to $10.5 million for the second quarter of 2022.

The increase in noninterest income was primarily driven by an increase in bank owned life insurance income of $876,000, or 478.7%, an increase in other income of $446,000, or 182.8%, and an increase in interest rate swap fee income of $440,000, or 124.3%.

Offsetting these increases was a decrease to mortgage banking income of $386,000, or 110.0%, a decrease to loan and service fees of $193,000, or 6.0%, a decrease to service charges on deposit accounts of $156,000, or 5.4%, and a decrease to investment brokerage income of $113,000, or 20.9%.

These decreases were primarily volume driven.

Noninterest Expense

Noninterest expense categories for the three-month period ended March 31, 2023 and 2022 are shown in the following tables:

Noninterest expense categories for the six-month and three-month period ended June 30, 2023 and 2022 are shown in the following tables:

Six Months Ended

(dollars in thousands) 2023 2022 Dollar Change Percent Change

Salaries and employee benefits $ 27,437 $ 29,190 $ (1,753) (6.0) %

Net occupancy expense 3,253 3,317 (64) (1.9)

Equipment costs 2,864 2,870 (6) (0.2)

Data processing fees and supplies 6,926 6,284 642 10.2

Corporate and business development 2,729 2,652 77 2.9

FDIC insurance and other regulatory fees 1,598 1,058 540 51.0

Professional fees 4,170 2,973 1,197 40.3

Wire fraud loss 18,058 0 18,058 100.0

Other expense 5,133 6,538 (1,405) (21.5)

Total noninterest expense $ 72,168 $ 54,882 $ 17,286 31.5 %

Efficiency ratio 59.22 % 47.8 %

Three Months Ended

March 31, 2023

(dollars in thousands) 2023 2022 Dollar Change Percent Change

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Professional fees 2,049 1,414 635 44.9

Wire fraud loss 18,058 0 18,058 100.0

Other expense 2,571 3,299 (728) (22.1)

1 unchanged sentence

Efficiency ratio 71.19 % 47.2 %

The Company's noninterest expense increased by $2.5 million, or 9.1%, to $29.4 million for the three months ended March 31, 2023, from $27.0 million for the three months ended March 31, 2022.

Salaries and employee benefits expense contributed $1.7 million, or 11.6%, of the increase in noninterest expense primarily as a result of increased salaries and wages and health insurance expense.

Variable compensation expense, which is tied to market performance of the company's variable bank owned life insurance policies, increased due to improved market performance and also contributed to the increase in salaries and employee benefits expense.

Additionally, professional fees increased $562,000, or 36.0%, data processing fees and supplies increased $371,000, or 12.0%, FDIC insurance and other regulatory fees increased $356,000, or 81.1%, and corporate and business development expense increased $212,000, or 17.4%.

The increase in professional fees was a result of increased interest charges associated with the bank's swap collateral positions as well as continued investment in technology solutions for our retail and commercial digital applications.

This increased investment in technology was also primarily responsible for the increase in data processing fees and supplies expense.

The increase to FDIC insurance and other regulatory fees was caused by a blanket increase to the assessment rate used by the FDIC to calculate insurance premiums, effective during the first quarter of 2023.

Corporate and business development expense was impacted by increased spending for advertising and other corporate and business development activities.

These increases were offset by a decrease to other expense of $677,000, or 20.9%, driven by a decrease in accruals pertaining to ongoing legal matters between the two periods.

See "Note 11 – Loss Contingencies" for additional details.

The Company's efficiency ratio was 47.6% for the three months ended March 31, 2023 compared to 48.5% for the first three months of 2021.

The Company's income tax expense decreased $768,000, or 16.9%, in the three months ended March 31, 2023 compared to the same period in 2022.

The effective tax rate was 13.4% in the three months ended March 31, 2023, compared to 16.1% for the comparable period of 2022.

The year-to-date effective tax rate is reduced by income from tax-advantaged sources such as f ederally tax exempt municipal bond interest income as w ell as a tax benefit from stock-based compensation vesting of shares for plan participants.

Noninterest expense increased by $17.3 million, or 31.5%, for the six months ended June 30, 2023, from $54.9 million to $72.2 million.

The increase to noninterest expense during the year was driven primarily by the previously described wire fraud loss recorded as a component of noninterest expense in the amount of $18.1 million in June 2023.

Adjusted core noninterest expense, which is a non-GAAP financial measure, declined by $1.1 million, or 2.0%, as compared to the prior six months ended June 30, 2022, excluding the impact of the wire fraud loss on recurring operating expense, and the related reduction of performance-based, long-term incentive compensation The primary driver of the decline in noninterest expense was a decline in other expense which included settlement accruals in 2022 offset by increase of $1.2 million, or 40.3%, an increase of $642,000, or 10.2%, in data processing fees and supplies and an increase of $540,000, or 51.0%, in FDIC insurance and other regulatory fees.

Noninterest expense increased $14.8 million, or 53.1%, to $42.7 million for the second quarter of 2023, compared to $27.9 million during the second quarter of 2022.

The increase to noninterest expense during the quarter was driven primarily by the previously described wire fraud loss recorded as a component of noninterest expense in the amount of $18.1 million.

Adjusted core noninterest expense, which is a non-GAAP financial measure, declined by $1.4 million, or 5.0%, as compared to the prior year quarter ended June 30, 2022, excluding the impact of the wire fraud loss and the related reduction of performance-based, long-term incentive compensation.

Salaries and benefits decreased by 23.1%, or $3.4 million as compared to the prior year quarter due primarily to reduced performance-based accruals, offset partially by higher salary expense.

Other expense decreased $728,000, or 22.1%, driven by a decrease in accruals pertaining to ongoing legal matters.

Noninterest expense increases during the second quarter of 2023 compared to the prior year quarter included professional fees of $635,000, or 44.9%, data processing fees and supplies of $271,000, or 8.5%, and FDIC insurance and other regulatory fees of $184,000, or 29.7%.

The Company's income tax expense decreased $4.5 million, or 44.2%, in the six months ended June 30, 2023, compared to the same period in 2022.

The effective tax rate was 12.7% in the six months ended June 30, 2023, compared to 17.0% for the comparable period of 2022.

The year-to-date effective tax rate is reduced by the wire fraud loss, income from tax-advantaged sources such as f ederally tax exempt municipal bond interest income as w ell as a tax benefit from stock-based compensation vesting of shares for plan participants.

FINANCIAL CONDITION

Total assets were $6.412 billion as of March 31, 2023 versus $6.432 billion as of December 31, 2022, a decrease of $20.8 million.

Balance sheet contraction was driven primarily by decreases in available-for-sale securities, noninterest bearing deposits and borrowings during the first three months of 2023.

Available-for-sale securities decreased $77.2 million, noninterest bearing deposits decreased $188.7 million and total borrowings decreased $97.0 million.

Offsetting these decreases were increases to short-term investments of $36.9 million, loans, net of the allowance for credit losses, of $45.9 million and interest bearing deposits of $245.8 million.

Total assets were $6.510 billion as of June 30, 2023 versus $6.432 billion as of December 31, 2022, an increase of $77.2 million, or 1.2%.

Balance sheet expansion was driven primarily by increases to loans net of the allowance for credit losses of $152.4 million, or 3.3%, and an increase in cash and cash equivalents of $42.9 million, or 32.9%.

These increases were offset by a decrease in available-for-sale securities of $123.5 million, or 10.4%.

To fund the balance sheet expansion, total borrowings increased $103.0 million, or 34.7%.

Total deposits decreased $37.6 million, or less than 1%, with a shift in the deposit mix from noninterest bearing deposits, which decreased $298.7 million, or 17.2%, to interest bearing deposits, which increased $261.2 million, or 7.0%.

Total equity increased $23.1 million, or 4.1%, from $568.9 million at December 31, 2022 to $592.0 million at June 30, 2023.

Retained earnings increased $15.3 million, or 2.4%, as a result of net income of $38.9 million, offset by dividends declared and paid of $23.5 million.

Uses of Funds

Total Cash and Cash Equivalents

Total cash and cash equivalents increased by $23.2 million, or 17.8%, to $153.5 million at March 31, 2023, from $130.3 million at December 31, 2022.

Total cash and cash equivalents increased by $42.9 million, or 32.9%, to $173.1 million at June 30, 2023, from $130.3 million at December 31, 2022.

Cash and cash equivalents include short-term investments.

The increase in cash and cash equivalents at March 31, 2023 was driven by an increase in interest bearing short-term investment accounts of $36.9 million, or 74.8%, offset by a decrease in cash and due from banks of $13.7 million, or 16.9%.

These fluctuations are reflective of a normalization of activity as excess levels of liquidity experienced throughout 2021 and 2022 have decreased through deployments of cash to the investment securities portfolio and utilization of excess cash balances by deposit customers.

The increase in cash and cash equivalents at June 30, 2023 was driven by an increase in interest bearing short-term investment accounts of $48.8 million, or 98.9%, offset by a decrease in cash and due from banks of $5.9 million, or 7.3%.

These fluctuations are reflective of a normalization of activity as excess levels of liquidity experienced throughout 2021 and 2022 have decreased through deployments of cash to the investment securities portfolio, loan growth in 2023 and utilization of excess cash balances by deposit customers.

Investment Portfolio

The amortized cost and the fair value of securities as of March 31, 2023 and December 31, 2022 were as follows:

March 31, 2023 December 31, 2022

The amortized cost and the fair value of securities as of June 30, 2023 and December 31, 2022 were as follows:

June 30, 2023 December 31, 2022

(dollars in thousands) Amortized

10 unchanged sentences

Total Investment Portfolio $ 1,393,131 $ 1,176,333 $ 1,529,025 $ 1,296,557

At March 31, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S.

At June 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S.

government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity.

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This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses.

Purchases of securities available-for-sale totaled $4.0 million in the first three months of 2023.

Purchases of securities available-for-sale totaled $4.3 million in the first six months of 2023.

The purchases consisted of U.S.

Treasury securities and mortgage-backed securities issued by government sponsored entities.

Investment securities represented 19.3% of total assets on March 31, 2023, compared to 20.4% of total assets on December 31, 2022.

The ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 14%.

The increase in this ratio resulted from the deployment of excess liquidity during 2021 and 2022 to the investment securities portfolio as an earning asset alternative of excess balance sheet liquidity stemming from increased levels of core deposits from government stimulus programs.

The Company expects the investment securities portfolio to represent a lower percentage of total assets over time as proceeds from pay downs, sales and maturities of these investment securities are used to fund loan portfolio growth and for other general liquidity purposes.

Paydowns from prepayments and scheduled payments of $13.0 million were received in the first three months of 2023, and the amortization of premiums, net of the accretion of discounts, was $1.2 million.

Maturities and calls of securities totaled $6.1 million in the first three months of 2023.

Sales of available-for-sale investment securities totaled $87.5 million in the first three months of 2023 and resulted in net gains of $16,000.

No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of March 31, 2023 and December 31, 2022.

The fair value of the available-for-sale investment securities portfolio as of March 31, 2023 included net unrealized losses of $188.5 million compared to net unrealized losses of $215.3 million as of December 31, 2022.

Unrealized losses in the available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities.

Treasury securities and mortgage-backed securities issued by government sponsored entities for CRA purposes.

Investment securities represented 18.3% of total assets on June 30, 2023, compared to 20.4% of total assets on December 31, 2022.

Effective duration for the investment portfolio was 6.6 years at June 30, 2023, compared to 4.0 years at December 31, 2019 before the pandemic, and 6.5 years at December 31, 2022.

Duration of the portfolio extended following the deployment of excess liquidity to the portfolio and the dramatic rise in interest rates during 2022 and into 2023.

The ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 12-14% during 2014 to 2020.

The increase in this ratio resulted from the deployment of excess liquidity during 2021 and 2022 to the investment securities portfolio as an earning asset alternative for excess balance sheet liquidity stemming from increased levels of core deposits from government stimulus programs.

The Company expects the investment securities portfolio as a percentage of assets to decrease over time as the proceeds from pay downs, sales and maturities of these investment securities are used to fund loan portfolio growth and for other general liquidity purposes.

Paydowns from prepayments and scheduled payments of $28.9 million were received in the first six months of 2023, and the amortization of premiums, net of the accretion of discounts, was $2.4 million.

Maturities and calls of securities totaled $10.0 million in the first six months of 2023.

Sales of available-for-sale investment securities totaled $100.0 million in the first six months of 2023 and resulted in net gains of $19,000.

No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of June 30, 2023 and December 31, 2022.

The fair value of the available-for-sale investment securities portfolio as of June 30, 2023 included net unrealized losses of $202.0 million, compared to net unrealized losses of $215.3 million as of December 31, 2022.

Unrealized losses in the

available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities.

These declines were driven by the rising interest rate environment as a result of the Federal Reserve's monetary tightening policy to combat elevated levels of inflation affecting the U.S.

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Real Estate Mortgage Loans Held-for-Sale

Real estate mortgage loans held-for-sale increased by $151,000, or 42.3%, to $508,000 at March 31, 2023, from $357,000 at December 31, 2022.

The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market.

Real estate mortgage loans held-for-sale increased by $941,000, or 263.6%, to $1.3 million at June 30, 2023, from $357,000 at December 31, 2022.

The balance of this asset category is subject to a high degree of variability depending on, among other factors, recent mortgage loan rates and the timing of loan sales into the secondary market.

The Company generally sells conforming qualifying mortgage loans it originates on the secondary market.

Proceeds from sales of residential mortgages totaled $672,000 in the first three months of 2023 compared to $18.1 million in the first three months of 2022.

Management expects the volume of loans originated for sale in the secondary market to remain at reduced levels due to the rise in mortgage rates.

Proceeds from sales of residential mortgages totaled $3.4 million in the first six months of 2023, compared to $28.4 million in the first six months of 2022.

Management expects the volume of loans originated for sale in the secondary market to remain at reduced levels due to elevated mortgage rates, limited inventory, and existing homeowners being locked in at historically low rates.

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.

The unpaid principal balances of loans serviced for others were $355.9 million and $364.3 million as of March 31, 2023 and December 31, 2022, respectively.

The unpaid principal balances of loans serviced for others were $348.4 million and $364.3 million, as of June 30, 2023 and December 31, 2022, respectively.

Loan Portfolio

The loan portfolio by portfolio segment as of March 31, 2023 and December 31, 2022 is summarized as follows:

(dollars in thousands) March 31,

The loan portfolio by portfolio segment as of June 30, 2023 and December 31, 2022 is summarized as follows:

(dollars in thousands) June 30,

2023 December 31,

10 unchanged sentences

Loans, net $ 4,790,202 $ 4,637,790 $ 152,412

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $44.8 million to $4.758 billion at March 31, 2023 from $4.713 billion at December 31, 2022.

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $152.4 million, or 3.2%, to $4.866 billion at June 30, 2023 from $4.713 billion at December 31, 2022.

The increase was primarily driven by originations of loans concentrated in the commercial real estate and multi-famly residential, other commercial, and consumer 1-4 family mortgage loans categories and was offset by paydowns in commercial and industrial loans and the agri-business and agricultural loans segments, the latter of which traditionally experiences seasonal fluctuations in activity.

The following table summarizes the Company’s non-performing assets as of March 31, 2023 and December 31, 2022:

(dollars in thousands) March 31,

The following table summarizes the Company’s non-performing assets as of June 30, 2023 and December 31, 2022:

(dollars in thousands) June 30,

2023 December 31,

8 unchanged sentences

Nonperforming assets to total assets 0.28 % 0.27 %

Total nonperforming assets increased by $698,000, or 4.1%, to $17.9 million during the three month period ended March 31, 2023.

The ratio of nonperforming assets to total assets increased from 0.27% at December 31, 2022 to 0.28% at March 31, 2023.

Total nonperforming assets increased by $1.2 million, or 6.9%, to $18.4 million during the six month period ended June 30, 2023.

The ratio of nonperforming assets to total assets increased from 0.27% at December 31, 2022 to 0.28% at June 30, 2023.

A loan is individually analyzed when full payment under the original loan terms is not expected.

1 unchanged sentence

If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral.

Total individually analyzed loans decreased by $13.1 million, or 41.9%, to $18.2 million at March 31, 2023 from $31.3 million at December 31, 2022.

Total individually analyzed loans decreased by $12.9 million, or 41.1%, to $18.5 million at June 30, 2023 from $31.3 million at December 31, 2022, due primarily to a charge off of a single commercial credit during the first quarter of 2023.

Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible.

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If an asset or portion, thereof is classified as a loss, the Company’s policy is to either establish specified allowances for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.

At March 31, 2023, the allowance for credit losses was 1.50% of total loans outstanding, versus 1.54% of total loans outstanding at December 31, 2022.

At March 31, 2023, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio.

At June 30, 2023, the allowance for credit losses was 1.48% of total loans outstanding, versus 1.54% of total loans outstanding at December 31, 2022.

At June 30, 2023, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio.

However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses.

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The Company manages this risk by utilizing relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area.

The Company has limited exposure to commercial office space borrowers.

Loans totaling $33.6 million for this sector represent 0.71% of total loans at March 31, 2023.

As of March 31, 2023, based on management’s review of the loan portfolio, the Company had 59 credit relationships totaling $174.9 million on the classified loan list versus 58 credit relationships totaling $161.0 million as of December 31, 2022.

The increase in classified loans for the first three months of 2023 resulted primarily from borrower risk rating downgrades of pass rated loans to the non-individually analyzed portion of the watch list.

As of March 31, 2023, the Company had $142.6 million of assets classified as Special Mention, $32.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $115.7 million, $45.3 million, $0 and $0, respectively, at December 31, 2022.

Watch list loans as a percentage of total loans increased to 3.68% as of March 31, 2023, up from a historical low at 3.42% as of December 31, 2022.

The Company has limited exposure to commercial

office space borrowers, all of which are located in the Bank's Indiana markets.

Loans totaling $68.8 million for this sector represented only 1.4% of total loans at June 30, 2023.

As of June 30, 2023, based on management’s review of the loan portfolio, the Company had 59 credit relationships totaling $186.0 million on the classified loan list versus 58 credit relationships totaling $161.0 million as of December 31, 2022.

The increase in classified loans for the first six months of 2023 resulted primarily from borrower risk rating downgrades of pass rated loans to the non-individually analyzed portion of the watch list.

As of June 30, 2023, the Company had $163.7 million of assets classified as Special Mention, $21.5 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $115.7 million, $45.3 million, $0 and $0, respectively, at December 31, 2022.

Watch list loans as a percentage of total loans increased to 3.83% as of June 30, 2023, up from a historical low at 3.42% as of December 31, 2022.

Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions and a reasonably supportable forecast period.

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For a more thorough discussion of the allowance for credit losses methodology see the ("Critical Accounting Policies") section of this Item 2.

The allowance for credit losses decreased $1.4 million, from $72.6 million at December 31, 2022 to $71.2 million at March 31, 2023.

The decrease was a result of net charge offs recorded during the quarter of $5.7 million, offset by provision expense of $4.4 million.

Of the $5.7 million in net charge offs, $5.5 million was attributable to the previously described deteriorated commercial relationship which was reserved for in the allowance for credit losses.

The increased provision expense recorded during the first quarter of 2023 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets.

The allowance for credit losses decreased $548,000, or less than 1%, from $72.6 million at December 31, 2022 to $72.1 million at June 30, 2023.

The decrease was a result of net charge-offs recorded during the period of $5.7 million, offset by provision expense of $5.2 million.

Of the $5.7 million in net charge-offs, $5.5 million was attributable to a single deteriorated commercial relationship which was reserved for in the allowance for credit losses.

The increased provision expense recorded during the six months ended June 30, 2023 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets as well as portfolio loan growth.

As the bulk of the Company’s lending activity is concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits, management has historically considered growth and portfolio composition when determining credit loss allocations.

Sources of Funds

The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes approximately 130,000 commercial, retail and public funds deposit accounts.

The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes a stable mix of commercial, retail and public funds deposit accounts.

While the traditional base of core deposits represents the primary source of funding for the Company, the Company has access to a robust array of other liquidity sources, including secured borrowings available from the Federal Home Loan Bank, the Federal Reserve Bank Discount Window and the Federal Reserve Bank Term Funding Program.

In addition, the Company has access to unsecured borrowing capacity through long established relationships within the brokered deposit markets, Federal Funds lines from correspondent bank partners and Insured Cash Sweep (ICS) one-way buy funds available from the Intrafi network.

As of March 31, 2023, the Company had access to $3.03 billion in unused liquidity available from these aggregate sources compared to $2.99 billion at December 31, 2022.

The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the three months ended March 31, 2023 and 2022 are summarized in the following table:

Three months ended March 31,

As of June 30, 2023, the Company had access to $2.89 billion in unused liquidity available from these aggregate sources, compared to $2.99 billion at December 31, 2022.

The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the six months ended June 30, 2023 and 2022 are summarized in the following table:

Six months ended June 30,

(dollars in thousands) Balance Rate Balance Rate

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Total funding sources $ 5,733,535 2.24 % $ 5,864,967 0.28 %

Average total deposits were $5.488 billion for the first quarter of 2023, a decrease of $361.0 million, or 6.2%, from the first quarter of 2022.

Average total borrowings were $241.9 million for the first quarter of 2023, an increase of $166.8 million from the first quarter of 2023.

Average total deposits were $5.520 billion for the six months ended June 30, 2023, a decrease of $280.8 million, or 4.8%, from the comparable period in 2022.

Average total borrowings were $214.0 million for the six months ended June 30, 2023, an increase of $149.3 million, or 231.0%, from the comparable period in 2022.

Total average deposit costs increased 186 basis points from 0.28% for the six months ended June 30, 2022, compared to 2.14% for the six months ended June 30, 2023.

Total average borrowing costs increased 443 basis points from 0.40% for the six months ended June 302, 2022 to 4.83% for the six months ended June 30, 2023.

In aggregate, these increases raised total funding costs from these sources by 196 basis points from 0.28% for the six months ended June 30, 2022, to 2.24% for the six months ended June 30, 2023.

Deposits and Borrowings

As of March 31, 2023, total deposits increased by $57.1 million, or 1.0%, from December 31, 2022.

Core deposits, which excludes brokered deposits, decreased by $93.5 million, or 1.7%, to $5.357 billion as of March 31, 2023 from $5.451 billion as of December 31, 2022.

Total brokered deposits were $160.7 million at March 31, 2023 compared to $10.0 million at December 31, 2022.

The following table summarizes deposit composition at March 31, 2023 and December 31, 2022:

(dollars in thousands) March 31,

As of June 30, 2023, total deposits decreased by $37.6 million, or less than 1%, from December 31, 2022.

Core deposits, which excludes brokered deposits, decreased by $95.9 million, or 1.8%, to $5.355 billion as of June 30, 2023 from $5.451 billion as of December 31, 2022.

Total brokered deposits were $68.4 million at June 30, 2023, compared to $10.0 million at December 31, 2022.

The following table summarizes deposit composition at June 30, 2023 and December 31, 2022:

(dollars in thousands) June 30,

2023 Percentage of Total December 31,

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Total deposits $ 5,423,059 100.0 % $ 5,460,620 100.0 % $ (37,561)

Commercial, retail and public funds deposit composition remained stable between March 31, 2023 and December 31, 2022.

On March 31, 2023 and December 31, 2022, commercial deposits represented 38% of total deposits.

Retail deposits represented 34% at March 31, 2023 versus 35% at December 31, 2022.

Public Funds deposits represented 25% at March 31, 2023 versus 26% at December 31, 2022.

Commercial deposits grew $19.6 million, or 0.9%, from $2.086 billion at December 31, 2022;

retail deposits contracted $40.1 million, or 2.1%, from $1.935 billion at December 31, 2022;

and public funds deposits contracted $73.0 million, or 5.1%, from $1.430 billion at December 31, 2022.

Commercial checking accounts increased in number of accounts and balances since year end and average balances per account remain elevated above pre-pandemic levels.

Retail checking accounts have increased, but balances have declined.

Average retail checking account balances per account have declined modestly but remain elevated above pre-pandemic levels.

Public Fund accounts are unchanged, but balances have decreased.

Average public fund checking account balances are lower on a linked quarter basis but remain elevated as compared to pre-pandemic levels.

Uninsured deposits, not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (PDIF), were 29% of total deposits as of March 31, 2023, versus 30% as of December 31, 2022.

Deposits not insured by FDIC Insurance coverage (including the public fund deposits that are covered by the PDIF) were 54% as of March 31, 2023, versus 56% at December 31, 2022.

As of March 31, 2023, and December 31, 2022, 98% of deposit accounts have deposit balances less than $250,000 and 2% of accounts have deposit balances greater than $250,000.

Utilization of other sources of liquidity totaled $360.7 million at March 31, 2023, compared to $307.0 million at December 31, 2022, an increase of $53.7 million, or 17.5%.

Brokered deposits of $160.7 million at March 31, 2023 drove the increase up $150.6 million from $10.0 million at December 31, 2022.

Total borrowings decreased $97.0 million, or 32.7%, from $297.0 million at December 31, 2022 to $200.0 million at March 31, 2023, driven by a decrease in Federal Funds purchased of $22.0 million, and a decrease in FHLB advances of $75.0 million, or 27.3%.

As of March 31, 2023, total stockholders’ equity was $602.0 million, an increase of $33.1 million, or 5.8%, from $568.9 million at December 31, 2022.

Commercial, retail and public funds deposit composition remained stable between June 30, 2023 and December 31, 2022.

On June 30, 2023 and December 31, 2022, commercial deposits represented 38% of total deposits.

Retail deposits represented 34% at June 30, 2023 versus 35% at December 31, 2022.

Public Funds deposits represented 27% at June 30, 2023 versus 26% at December 31, 2022.

Commercial deposits contracted $3.4 million, or less than 1%, from $2.086 billion at December 31, 2022 to $2.083 billion at June 30, 2023;

retail deposits contracted $113.2 million, or 5.8%, from $1.935 billion at December 31, 2022 to $1.822 billion at June 30, 2023;

and public funds deposits grew $20.7 million, or 1.4%, from $1.430 billion at December 31, 2022 to $1.451 billion at June 30, 2023.

Uninsured deposits, not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (PDIF), were 28% of total deposits as of June 30, 2023, versus 30% as of December 31, 2022.

Deposits not insured by FDIC Insurance coverage (including those public fund deposits that are covered by the PDIF) were 54% as of June 30, 2023, versus 56% at

December 31, 2022.

As of June 30, 2023 and December 31, 2022, 98% of deposit accounts had deposit balances less than $250,000 and 2% of deposit accounts had deposit balances greater than $250,000.

As of June 30, 2023, total stockholders’ equity was $592.0 million, an increase of $23.1 million, or 4.1%, from $568.9 million at December 31, 2022.

Net income of $38.9 million increased equity.

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banking organizations.

As of March 31, 2023, the Company's capital levels remained characterized as “well-capitalized”.

The actual capital amounts and ratios of the Company and the Bank as of March 31, 2023 and December 31, 2022, are presented in the table below.

Capital ratios for March 31, 2023 are preliminary until the Call Report and FR Y-9C are filed.

As of June 30, 2023, the Company's capital levels remained characterized as “well-capitalized”.

The actual capital amounts and ratios of the Company and the Bank as of June 30, 2023 and December 31, 2022, are presented in the table below.

Capital ratios for June 30, 2023 are preliminary until the Call Report and FR Y-9C are filed.

Actual Minimum Required For Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio

As of March 31, 2023:

As of June 30, 2023:

Total Capital (to Risk Weighted Assets)

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• the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

• the risks related to the recent failures of Silicon Valley Bank and Signature Bank, including the effects on FDIC premiums, increased regulation, and increased deposit volatility;

• risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company;

• the risks related to the recent failures of First Republic Bank, Silicon Valley Bank and Signature Bank, including the effects on FDIC premiums, increased regulation, and increased deposit volatility;

• the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;

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• the outcome of pending litigation and other claims we may be subject to from time to time;

• the anticipated phase out of most LIBOR tenors by mid-2023 and establishment of a new reference rate or rates;

• risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company;

• the phase out of most LIBOR tenors by mid-2023 and establishment of a new reference rate or rates;

• changes in technology or products that may be more difficult or costly, or less effective than anticipated;

• the effects of any employee or customer fraud;

• the effects of fraud by or affecting employees, customers or third parties;

• the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

• changes in accounting policies, rules and practices;

• the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets;

demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets;

• the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis