Midland States Bancorp, Inc. 10-Q

ITEM 1 – FINANCIAL STATEMENTS MIDLAND STATES BANCORP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) March 31, 2023 December 31, 2022 (unaudited) Assets Cash and due from banks $ 136,116 $ 153,345 Federal funds sold 2,194 7,286 Cash and cash equivalents 138,310 160,631 Investment securities available for sale, at fair value 812,285 768,234 Equity securities, at fair value 8,720 8,626 Loans 6,354,271 6,306,467 Allowance for credit losses on loans ( 62,067 ) ( 61,051 ) Total loans, net 6,292,204 6,245,416 Loans held for sale 2,747 1,286 Premises and equipment, net 80,582 78,293 Other real estate owned 6,729 6,729 Nonmarketable equity securities 53,131 46,201 Accrued interest receivable 20,534 20,313 Loan servicing rights, at lower of cost or fair value 1,117 1,205 Commercial FHA mortgage loan servicing rights held for sale 20,745 20,745 Goodwill 161,904 161,904 Other intangible assets, net 19,575 20,866 Company-owned life insurance 151,319 150,443 Other assets 160,272 164,609 Total assets $ 7,930,174 $ 7,855,501 Liabilities and Shareholders’ Equity Liabilities: Deposits: Noninterest-bearing demand deposits $ 1,215,758 $ 1,362,158 Interest-bearing deposits 5,209,443 5,002,494 Total deposits 6,425,201 6,364,652 Short-term borrowings 31,173 42,311 Federal Home Loan Bank advances and other borrowings 482,000 460,000 Subordinated debt 99,849 99,772 Trust preferred debentures 50,135 49,975 Accrued interest payable and other liabilities 66,173 80,217 Total liabilities 7,154,531 7,096,927 Shareholders’ Equity: Preferred stock, $ 2.00 par value; 4,000,000 shares authorized; 115,000 Series A shares, $ 1,000 per share liquidation preference, issued and outstanding at March 31, 2023 and December 31, 2022, respectively 110,548 110,548 Common stock, $ 0.01 par value; 40,000,000 shares authorized; 22,111,454 and 22,214,913 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively 221 222 Capital surplus 447,471 449,196 Retained earnings 295,200 282,405 Accumulated other comprehensive loss, net of tax ( 77,797 ) ( 83,797 ) Total shareholders’ equity 775,643 758,574 Total liabilities and shareholders’ equity $ 7,930,174 $ 7,855,501 The accompanying notes are an integral part of the consolidated financial statements. 3 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME — (UNAUDITED) (dollars in thousands, except per share data) Three Months Ended March 31, 2023 2022 Interest income: Loans including fees: Taxable $ 87,459 $ 56,586 Tax exempt 425 548 Loans held for sale 16 220 Investment securities: Taxable 5,370 3,897 Tax exempt 494 842 Nonmarketable equity securities 795 484 Federal funds sold and cash investments 980 171 Total interest income 95,539 62,748 Interest expense: Deposits 26,405 2,161 Short-term borrowings 25 23 Federal Home Loan Bank advances and other borrowings 6,006 1,212 Subordinated debt 1,370 2,011 Trust preferred debentures 1,229 514 Total interest expense 35,035 5,921 Net interest income 60,504 56,827 Provision for credit losses: Provision for credit losses on loans 3,135 4,132 Provision for credit losses on unfunded commitments — 256 Recapture of other credit losses — ( 221 ) Total provision for credit losses 3,135 4,167 Net interest income after provision for credit losses 57,369 52,660 Noninterest income: Wealth management revenue 6,411 7,139 Residential mortgage banking revenue 405 599 Service charges on deposit accounts 2,568 2,068 Interchange revenue 3,412 3,280 Loss on sales of investment securities, net ( 648 ) — Impairment on commercial mortgage servicing rights — ( 394 ) Company-owned life insurance 876 1,019 Other income 2,755 1,902 Total noninterest income 15,779 15,613 Noninterest expense: Salaries and employee benefits 24,243 21,870 Occupancy and equipment 4,443 3,755 Data processing 6,311 5,873 FDIC insurance 1,329 830 Professional 1,760 1,972 Marketing 703 688 Communications 511 712 Loan expense 818 943 Amortization of intangible assets 1,291 1,398 Other expense 3,073 2,843 Total noninterest expense 44,482 40,884 Income before income taxes 28,666 27,389 Income taxes 6,894 6,640 Net income 21,772 20,749 Preferred dividends 2,228 — Net income available to common shareholders $ 19,544 $ 20,749 Per common share data: Basic earnings per common share $ 0.86 $ 0.92 Diluted earnings per common share $ 0.86 $ 0.92 Weighted average common shares outstanding 22,478,808 22,274,884 Weighted average diluted common shares outstanding 22,501,970 22,350,307 The accompanying notes are an integral part of the consolidated financial statements. 4 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — (UNAUDITED) (dollars in thousands) Three Months Ended March 31, 2023 2022 Net income $ 21,772 $ 20,749 Other comprehensive income (loss): Investment securities available for sale: Unrealized gains (losses) that occurred during the period 5,364 ( 50,776 ) Recapture of credit loss expense — ( 221 ) Reclassification adjustment for realized net losses on sales of investment securities included in net income 648 — Income tax effect ( 1,622 ) 14,024 Change in investment securities available for sale, net of tax 4,390 ( 36,973 ) Cash flow hedges: Net unrealized derivative gains on cash flow hedges 2,206 5,105 Income tax effect ( 596 ) ( 1,404 ) Change in cash flow hedges, net of tax 1,610 3,701 Other comprehensive income (loss), net of tax 6,000 ( 33,272 ) Total comprehensive income $ 27,772 $ ( 12,523 ) The accompanying notes are an integral part of the consolidated financial statements . 5 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY — (UNAUDITED) (dollars in thousands, except per share data) Preferred stock Common stock Capital surplus Retained earnings Accumulated other comprehensive (loss) income Total shareholders' equity Balances, December 31, 2022 $ 110,548 $ 222 $ 449,196 $ 282,405 $ ( 83,797 ) $ 758,574 Net income — — — 21,772 — 21,772 Other comprehensive income — — — — 6,000 6,000 Common dividends declared ($ 0.30 per share) — — — ( 6,749 ) — ( 6,749 ) Preferred dividends declared ($ 19.375 per share) — — — ( 2,228 ) — ( 2,228 ) Common stock repurchased — ( 1 ) ( 2,800 ) — — ( 2,801 ) Share-based compensation expense — — 625 — — 625 Issuance of common stock under employee benefit plans — — 450 — — 450 Balances, March 31, 2023 $ 110,548 $ 221 $ 447,471 $ 295,200 $ ( 77,797 ) $ 775,643 Balances, December 31, 2021 $ — $ 221 $ 445,907 $ 212,472 $ 5,237 $ 663,837 Net income — — — 20,749 — 20,749 Other comprehensive loss — — — — ( 33,272 ) ( 33,272 ) Common dividends declared ($ 0.29 per share) — — — ( 6,464 ) — ( 6,464 ) Common stock repurchased — ( 1 ) ( 1,108 ) — — ( 1,109 ) Share-based compensation expense — — 527 — — 527 Issuance of common stock under employee benefit plans — — 718 — — 718 Balances, March 31, 2022 $ — $ 220 $ 446,044 $ 226,757 $ ( 28,035 ) $ 644,986 The accompanying notes are an integral part of the consolidated financial statements. 6 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED) (dollars in thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 21,772 $ 20,749 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 3,135 4,167 Depreciation on premises and equipment 1,208 1,255 Amortization of intangible assets 1,291 1,398 Amortization of operating lease right-of-use asset 421 439 Amortization of loan servicing rights 88 771 Share-based compensation expense 625 527 Increase in cash surrender value of life insurance ( 876 ) ( 831 ) Gain on proceeds from company-owned life insurance — ( 188 ) Investment securities (accretion) amortization, net ( 47 ) 852 Loss on sales of investment securities, net 648 — Gain on sales of other real estate owned — ( 42 ) Impairment on other real estate owned — 337 Origination of loans held for sale ( 7,507 ) ( 79,601 ) Proceeds from sales of loans held for sale 6,261 103,133 Gain on sale of loans held for sale ( 264 ) ( 484 ) Impairment on commercial mortgage servicing rights — 394 Net change in operating assets and liabilities: Accrued interest receivable ( 221 ) ( 361 ) Other assets 4,423 ( 14,107 ) Accrued expenses and other liabilities ( 14,949 ) 669 Net cash provided by operating activities 16,008 39,077 Cash flows from investing activities: Purchases of investment securities available for sale ( 136,881 ) ( 15,873 ) Proceeds from sales of investment securities available for sale 84,493 — Maturities and payments on investment securities available for sale 13,748 21,773 Purchases of equity securities ( 139 ) ( 312 ) Net increase in loans ( 49,923 ) ( 317,486 ) Purchases of premises and equipment ( 2,788 ) ( 414 ) Proceeds from sale of premises and equipment 8 — Purchases of nonmarketable equity securities ( 11,315 ) ( 109 ) Proceeds from sales of nonmarketable equity securities 4,385 — Proceeds from sales of other real estate owned — 315 Proceeds from settlements of company-owned life insurance — 1,337 Net cash used in investing activities ( 98,412 ) ( 310,769 ) Cash flows from financing activities: Net increase (decrease) in deposits 60,549 ( 53,109 ) Net decrease in short-term borrowings ( 11,138 ) ( 16,451 ) Proceeds from FHLB borrowings 4,108,000 50,000 Payments made on FHLB borrowings and other borrowings ( 4,086,000 ) ( 50,000 ) Cash dividends paid on preferred stock ( 2,228 ) — Cash dividends paid on common stock ( 6,749 ) ( 6,464 ) Common stock repurchased ( 2,801 ) ( 1,109 ) Proceeds from issuance of common stock under employee benefit plans 450 718 Net cash provided by (used in) financing activities 60,083 ( 76,415 ) Net decrease in cash and cash equivalents ( 22,321 ) ( 348,107 ) Cash and cash equivalents: Beginning of period 160,631 680,371 End of period $ 138,310 $ 332,264 Supplemental disclosures of cash flow information: Cash payments for: Interest paid on deposits and borrowed funds $ 34,888 $ 6,591 Income tax paid (net of refunds) 1,409 1,912 Supplemental disclosures of noncash investing and financing activities: Transfer of loans to other real estate owned — 88 Right of use assets obtained in exchange for lease obligations 1,130 121 The accompanying notes are an integral part of the consolidated financial statements . 7 Table of Contents MIDLAND STATES BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED) NOTE 1 – BUSINESS DESCRIPTION Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Our wholly owned banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management services, and insurance and financial planning services. Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial Federal Housing Administration ("FHA") mortgage loan servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for credit losses and income tax expense. NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for annual periods presented herein, have been included. Certain reclassifications of 2022 amounts have been made to conform to the 2023 presentation but do not have an effect on net income or shareholders’ equity. Principles of Consolidation The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements. Accounting Guidance Adopted in 2023 FASB ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures – In March 2022, the FASB issued ASU No. 2022-02, which 1) eliminates the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty; and 2) requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022 and the amendments should be applied prospectively, although the entity has the option to apply a modified retrospective transition method for the recognition and measurement of TDRs, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted this guidance on January 1, 2023 and elected to apply on a prospective basis. The adoption of this accounting pronouncement did not have an impact on the consolidated financial statements aside from additional and revised disclosures. Accounting Guidance Issued But Not Yet Adopted FASB ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU No. 2020-04, allowing for optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision based on the expectations of when LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023. 8 Table of Contents In December 2022, to ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the FASB issued ASU No. 2022-06, which defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company has been monitoring its volume of commercial loans tied to LIBOR. In 2021, the Company began prioritizing SOFR as the preferred alternative reference rate with plans to cease booking LIBOR based commitments after the end of 2021. Loans with a maturity after June 2023 are being reviewed and monitored to ensure there is appropriate fallback language in place when LIBOR is no longer published. Loans with a maturity date before that time should naturally mature and be re-underwritten with the alternative index rate. The Company believes the adoption of this guidance will not have a material impact on the consolidated financial statements. NOTE 3 – INVESTMENT SECURITIES Investment Securities Available for Sale Investment securities available for sale at March 31, 2023 and December 31, 2022 were as follows: March 31, 2023 (dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value Investment securities available for sale U.S. Treasury securities $ 56,913 $ — $ 4,115 $ 52,798 U.S. government sponsored entities and U.S. agency securities 57,925 27 3,816 54,136 Mortgage-backed securities - agency 559,278 475 70,262 489,491 Mortgage-backed securities - non-agency 46,300 — 3,786 42,514 State and municipal securities 72,732 26 6,502 66,256 Collateralized loan obligations 22,695 — — 22,695 Corporate securities 95,219 — 10,824 84,395 Total available for sale securities $ 911,062 $ 528 $ 99,305 $ 812,285 December 31, 2022 (dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value Investment securities available for sale U.S. Treasury securities $ 86,313 $ 113 $ 5,196 $ 81,230 U.S. government sponsored entities and U.S. agency securities 41,775 71 4,337 37,509 Mortgage-backed securities - agency 522,028 268 74,146 448,150 Mortgage-backed securities - non-agency 24,922 — 4,168 20,754 State and municipal securities 102,719 149 8,232 94,636 Corporate securities 95,266 — 9,311 85,955 Total available for sale securities $ 873,023 $ 601 $ 105,390 $ 768,234 The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at March 31, 2023. Expected maturities may differ from contractual maturities in mortgage-backed securities 9 Table of Contents because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity. (dollars in thousands) Amortized cost Fair value Investment securities available for sale Within one year $ 23,696 $ 23,664 After one year through five years 117,660 110,921 After five years through ten years 141,115 125,290 After ten years 23,013 20,405 Mortgage-backed securities 605,578 532,005 Total available for sale securities $ 911,062 $ 812,285 Proceeds and gross realized gains and losses on sales of investment securities available for sale for the three months ended March 31, 2023 and 2022 are summarized as follows: Three Months Ended March 31, (dollars in thousands) 2023 2022 Investment securities available for sale Proceeds from sales $ 84,493 $ — Gross realized gains on sales 338 — Gross realized losses on sales ( 986 ) — Unrealized losses and fair values for investment securities available for sale as of March 31, 2023 and December 31, 2022, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows: March 31, 2023 Less than 12 Months 12 Months or more Total (dollars in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Investment securities available for sale U.S. Treasury securities $ 975 $ 2 $ 51,823 $ 4,113 $ 52,798 $ 4,115 U.S. government sponsored entities and U.S. agency securities 19,902 38 24,207 3,778 44,109 3,816 Mortgage-backed securities - agency 107,933 4,163 331,581 66,099 439,514 70,262 Mortgage-backed securities - non-agency — — 20,604 3,786 20,604 3,786 State and municipal securities 7,700 78 51,423 6,424 59,123 6,502 Corporate securities 9,999 501 74,396 10,323 84,395 10,824 Total available for sale securities $ 146,509 $ 4,782 $ 554,034 $ 94,523 $ 700,543 $ 99,305 10 Table of Contents December 31, 2022 Less than 12 Months 12 Months or more Total (dollars in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Investment securities available for sale U.S. Treasury securities $ 1,839 $ 24 $ 59,865 $ 5,172 $ 61,704 $ 5,196 U.S. government sponsored entities and U.S. agency securities 10,288 40 23,453 4,297 33,741 4,337 Mortgage-backed securities - agency 152,657 9,736 273,353 64,410 426,010 74,146 Mortgage-backed securities - non-agency 1,924 270 18,830 3,898 20,754 4,168 State and municipal securities 35,603 1,662 41,538 6,570 77,141 8,232 Corporate securities 39,595 3,400 46,360 5,911 85,955 9,311 Total available for sale securities $ 241,906 $ 15,132 $ 463,399 $ 90,258 $ 705,305 $ 105,390 At March 31, 2023, 329 investment securities available for sale had unrealized losses with aggregate depreciation of 12.42 % from their amortized cost basis. For all of the above investment securities, the unrealized losses were generally due to changes in interest rates, and unrealized losses were considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity dates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The Company does not intend to sell and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery. NOTE 4 – LOANS The following table presents total loans outstanding by portfolio class, as of March 31, 2023 and December 31, 2022: (dollars in thousands) March 31, 2023 December 31, 2022 Commercial: Commercial $ 823,847 $ 786,877 Commercial other 756,553 727,697 Commercial real estate: Commercial real estate non-owner occupied 1,636,316 1,591,399 Commercial real estate owner occupied 460,133 496,786 Multi-family 281,559 277,889 Farmland 70,150 67,085 Construction and land development 326,836 320,882 Total commercial loans 4,355,394 4,268,615 Residential real estate: Residential first lien 309,637 304,243 Other residential 60,273 61,851 Consumer: Consumer 112,882 105,880 Consumer other 1,006,056 1,074,134 Lease financing 510,029 491,744 Total loans $ 6,354,271 $ 6,306,467 Total loans include net deferred loan costs of $ 5.7 million and $ 4.4 million at March 31, 2023 and December 31, 2022, respectively, and unearned discounts of $ 67.2 million and $ 62.6 million within the lease financing portfolio at March 31, 2023 and December 31, 2022, respectively. At March 31, 2023, the Company had residential real estate loans held for sale totaling $ 2.7 million, compared to $ 1.3 million at December 31, 2022. The Company sold commercial real estate, residential real estate and consumer loans with proceeds totaling $ 6.3 million and $ 103.1 million during the three months ended March 31, 2023 and 2022, respectively. 11 Table of Contents Classifications of Loan Portfolio The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Company monitors the performance of its loan portfolio and estimates its allowance for credit losses on loans. Commercial —Loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are predominately secured by equipment, inventory, accounts receivable, and other sources of repayment. Commercial FHA warehouse lines of $ 10.3 million and $ 25.0 million as of March 31, 2023 and December 31, 2022, respectively, were included in this classification. Commercial real estate —Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans. Construction and land development —Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a real estate commercial loan at the completion of the construction period. Secured development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots/land by the developers within twelve months of the completion date. Interest reserves may be established on real estate construction loans. Residential real estate —Loans secured by residential properties that generally do not qualify for secondary market sale; however, the risk to return and/or overall relationship are considered acceptable to the Company. This category also includes loans whereby consumers utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan. Consumer —Loans to consumers primarily for the purpose of home improvements or acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers. Lease financing —Our equipment leasing business provides financing leases to varying types of businesses, nationwide, for purchases of business equipment and software. The financing is secured by a first priority interest in the financed assets and generally requires monthly payments. Commercial, commercial real estate, and construction and land development loans are collectively referred to as the Company’s commercial loan portfolio, while residential real estate, consumer loans and lease financing receivables are collectively referred to as the Company’s other loan portfolio. We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. These loans were made in the ordinary course of business upon substantially the same terms, including collateralization and interest rates prevailing at the time. The aggregate loans outstanding to the Company's directors, executive officers, principal shareholders and their affiliates totaled $ 19.5 million and $ 19.8 million at March 31, 2023 and December 31, 2022, respectively. The new loans, other additions, repayments and other reductions for the three months ended March 31, 2023 and 2022, are summarized as follows: Three Months Ended March 31, (dollars in thousands) 2023 2022 Beginning balance $ 19,776 $ 13,869 New loans and other additions — 9,805 Repayments and other reductions ( 257 ) ( 300 ) Ending balance $ 19,519 $ 23,374 12 Table of Contents The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three months ended March 31, 2023 and 2022: Commercial Loan Portfolio Other Loan Portfolio (dollars in thousands) Commercial Commercial real estate Construction and land development Residential real estate Consumer Lease financing Total Changes in allowance for credit losses on loans for the three months ended March 31, 2023: Balance, beginning of period $ 14,639 $ 29,290 $ 2,435 $ 4,301 $ 3,599 $ 6,787 $ 61,051 Provision for credit losses on loans 1,998 ( 330 ) 7 63 700 697 3,135 Charge-offs ( 969 ) ( 746 ) — ( 31 ) ( 263 ) ( 390 ) ( 2,399 ) Recoveries 94 2 — 17 93 74 280 Balance, end of period $ 15,762 $ 28,216 $ 2,442 $ 4,350 $ 4,129 $ 7,168 $ 62,067 Changes in allowance for credit losses on loans for the three months ended March 31, 2022: Balance, beginning of period $ 14,375 $ 22,993 $ 972 $ 2,695 $ 2,558 $ 7,469 $ 51,062 Provision for credit losses on loans 389 3,444 ( 156 ) 584 257 ( 386 ) 4,132 Charge-offs ( 2,154 ) ( 227 ) ( 6 ) ( 104 ) ( 305 ) ( 206 ) ( 3,002 ) Recoveries 11 67 6 113 162 387 746 Balance, end of period $ 12,621 $ 26,277 $ 816 $ 3,288 $ 2,672 $ 7,264 $ 52,938 The Company utilizes a combination of models which measure probability of default and loss given default methodology in determining expected future credit losses. The probability of default is the risk that the borrower will be unable or unwilling to repay its debt in full or on time. The risk of default is derived by analyzing the obligor’s capacity to repay the debt in accordance with contractual terms. Probability of default is generally associated with financial characteristics such as inadequate cash flow to service debt, declining revenues or operating margins, high leverage, declining or marginal liquidity, and the inability to successfully implement a business plan. In addition to these quantifiable factors, the borrower’s willingness to repay also must be evaluated. The probability of default is forecasted, for most commercial and retail loans, using a regression model that determines the likelihood of default within the twelve month time horizon. The regression model uses forward-looking economic forecasts including variables such as gross domestic product, housing price index, and real disposable income to predict default rates. The forecasting method for the equipment financing portfolio assumes a rolling twelve-month average of the through-the-cycle default rate, to predict default rates for the twelve month time horizon. The loss given default component is the percentage of defaulted loan balance that is ultimately charged off. As a method for estimating the allowance, a form of migration analysis is used that combines the estimated probability of loans experiencing default events and the losses ultimately associated with the loans experiencing those defaults. Multiplying one by the other gives the Company its loss rate, which is then applied to the loan portfolio balance to determine expected future losses. Within the model, the loss given default approach produces segmented loss given default estimates using a loss curve methodology, which is based on historical net losses from charge-off and recovery information. The main principle of a loss curve model is that the loss follows a steady timing schedule based on how long the defaulted loan has been on the books. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2012 through the current period on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data. Historical data is evaluated in multiple components of the expected credit loss, including the reasonable and supportable forecast and the post-reversion period of each loan segment. The historical experience is used to infer probability of default and loss given default in the reasonable and supportable forecast period. In the post-reversion period, long-term average loss rates are segmented by loan pool. 13 Table of Contents Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible. The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of borrower and concentrations, historical or expected credit loss patterns, and reasonable and supportable forecast periods. Within the probability of default segmentation, credit metrics are identified to further segment the financial assets. The Company utilizes risk ratings for the commercial portfolios and days past due for the consumer and the lease financing portfolios. The Company has defined five transitioning risk states for each asset pool within the expected credit loss model. The below table illustrates the transition matrix: Risk state Commercial loans risk rating Consumer loans and equipment finance loans and leases days past due 1 0-5 0 - 14 2 6 15 - 29 3 7 30 - 59 4 8 60 - 89 Default 9+ and nonaccrual 90 + and nonaccrual Expected Credit Losses In calculating expected credit losses, the Company individually evaluates loans on nonaccrual status with a balance greater than $ 500,000 , loans past due 90 days or more and still accruing interest, and loans that do not share risk characteristics with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 (dollars in thousands) Nonaccrual with allowance Nonaccrual with no allowance Total nonaccrual Nonaccrual with allowance Nonaccrual with no allowance Total nonaccrual Commercial: Commercial $ 1,838 $ 969 $ 2,807 $ 1,910 $ 1,111 $ 3,021 Commercial other 2,820 — 2,820 3,169 — 3,169 Commercial real estate: Commercial real estate non-owner occupied 11,780 9,968 21,748 1,345 11,899 13,244 Commercial real estate owner occupied 6,410 — 6,410 7,118 — 7,118 Multi-family 141 8,148 8,289 154 8,949 9,103 Farmland 25 — 25 25 — 25 Construction and land development 200 — 200 202 — 202 Total commercial loans 23,214 19,085 42,299 13,923 21,959 35,882 Residential real estate: Residential first lien 3,140 570 3,710 2,925 572 3,497 Other residential 786 — 786 871 — 871 Consumer: Consumer 119 — 119 120 — 120 Lease financing 2,155 — 2,155 1,606 — 1,606 Total loans $ 29,414 $ 19,655 $ 49,069 $ 19,445 $ 22,531 $ 41,976 14 Table of Contents There was no interest income recognized on nonaccrual loans during the three months ended March 31, 2023 and 2022 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $ 0.8 million for both the three months ended March 31, 2023 and 2022. Collateral Dependent Financial Assets A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent. The table below presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of March 31, 2023 and December 31, 2022: Type of Collateral (dollars in thousands) Real Estate Blanket Lien Equipment Total March 31, 2023 Commercial: Commercial $ — $ 969 $ — $ 969 Commercial real estate: Non-owner occupied 21,577 — — 21,577 Owner occupied 3,752 — — 3,752 Multi-family 8,150 — — 8,150 Lease financing — — 101 101 Total collateral dependent loans $ 33,479 $ 969 $ 101 $ 34,549 December 31, 2022 Commercial: Commercial $ — $ 1,604 $ — $ 1,604 Commercial real estate: Non-owner occupied 13,033 — — 13,033 Owner occupied 3,874 — — 3,874 Multi-family 8,950 — — 8,950 Residential real estate Residential first lien 220 — — 220 Total collateral dependent loans $ 26,077 $ 1,604 $ — $ 27,681 15 Table of Contents The aging status of the recorded investment in loans by portfolio as of March 31, 2023 was as follows: Accruing loans (dollars in thousands) 30-59 days past due 60-89 days past due Past due 90 days or more Total past due Nonaccrual Current Total Commercial: Commercial $ 360 $ 89 $ 44 $ 493 $ 2,807 $ 820,547 $ 823,847 Commercial other 8,214 3,102 732 12,048 2,820 741,685 756,553 Commercial real estate: Commercial real estate non-owner occupied 4,105 113 — 4,218 21,748 1,610,350 1,636,316 Commercial real estate owner occupied 121 — — 121 6,410 453,602 460,133 Multi-family 141 — — 141 8,289 273,129 281,559 Farmland 104 — — 104 25 70,021 70,150 Construction and land development 199 — — 199 200 326,437 326,836 Total commercial loans 13,244 3,304 776 17,324 42,299 4,295,771 4,355,394 Residential real estate: Residential first lien 35 123 — 158 3,710 305,769 309,637 Other residential 78 — — 78 786 59,409 60,273 Consumer: Consumer 224 32 — 256 119 112,507 112,882 Consumer other 4,823 3,187 766 8,776 — 997,280 1,006,056 Lease financing 4,552 1,293 102 5,947 2,155 501,927 510,029 Total loans $ 22,956 $ 7,939 $ 1,644 $ 32,539 $ 49,069 $ 6,272,663 $ 6,354,271 The aging status of the recorded investment in loans by portfolio as of December 31, 2022 was as follows: Accruing loans (dollars in thousands) 30-59 days past due 60-89 days past due Past due 90 days or more Total past due Nonaccrual Current Total Commercial: Commercial $ 7 $ 112 $ — $ 119 $ 3,021 $ 783,737 $ 786,877 Commercial other 6,035 2,365 — 8,400 3,169 716,128 727,697 Commercial real estate: Commercial real estate non-owner occupied 1,008 999 — 2,007 13,244 1,576,148 1,591,399 Commercial real estate owner occupied 73 — — 73 7,118 489,595 496,786 Multi-family — — — — 9,103 268,786 277,889 Farmland — — — — 25 67,060 67,085 Construction and land development — 6,000 — 6,000 202 314,680 320,882 Total commercial loans 7,123 9,476 — 16,599 35,882 4,216,134 4,268,615 Residential real estate: Residential first lien 82 456 428 966 3,497 299,780 304,243 Other residential 188 13 — 201 871 60,779 61,851 Consumer: Consumer 139 18 12 169 120 105,591 105,880 Consumer other 5,381 3,559 733 9,673 — 1,064,461 1,074,134 Lease financing 4,415 1,522 — 5,937 1,606 484,201 491,744 Total loans $ 17,328 $ 15,044 $ 1,173 $ 33,545 $ 41,976 $ 6,230,946 $ 6,306,467 16 Table of Contents Loan Restructurings On January 1, 2023, the Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows. The Company may offer various types of concessions when modifying a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for loans that have been modified in a loan restructuring is measured based on the probability of default and loss given default model, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. In some cases, the Company will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession such as an interest rate reduction or principal forgiveness, may be granted. During the three months ended March 31, 2023 the Company restructured two loans for borrowers experiencing financial difficulties with principal balances totaling $ 0.1 million. One of the restructured loans was provided a term extension with the other receiving an interest rate reduction and a term extension. Credit Quality Monitoring The Company maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally within the Company’s four main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. In addition, our specialty finance division does nationwide bridge lending for FHA and HUD developments and originates loans for multifamily, assisted and senior living and multi-use properties. Our equipment leasing business provides financing to business customers across the country. The Company has a loan approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities. The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Company’s Consumer Collections Group for resolution. Credit quality for the entire consumer loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred. Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly. 17 Table of Contents The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company. Credit Quality Indicators The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and coverage and payment behavior as shown in the borrower’s financial statements. The risk grades also measure the quality of the borrower’s management and the repayment support offered by any guarantors. The Company considers all loans with Risk Grades 1 - 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered "watch credits" categorized as special mention and the frequency of loan officer contact and receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 - 10 are considered problematic and require special care. Risk Grade 8 is categorized as substandard, 9 as substandard - nonaccrual and 10 as doubtful. Further, loans with Risk Grades of 7 - 10 are managed regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to exit, as well as potential management by the Company's Special Assets Group. Loans not graded in the commercial loan portfolio are monitored by aging status and payment activity. 18 Table of Contents The following tables present the recorded investment of the commercial loan portfolio by risk category as of March 31, 2023 and December 31, 2022: March 31, 2023 Term Loans Amortized Cost Basis by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving loans Total Commercial Commercial Acceptable credit quality $ 92,019 $ 138,413 $ 101,512 $ 56,991 $ 19,195 $ 50,975 $ 338,272 $ 797,377 Special mention — 3,975 2,024 — 6,956 3,160 124 16,239 Substandard — — — — 203 5,329 1,892 7,424 Substandard – nonaccrual — — 340 43 91 282 2,051 2,807 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 92,019 142,388 103,876 57,034 26,445 59,746 342,339 823,847 Commercial other Acceptable credit quality 120,499 253,610 138,294 93,257 54,541 11,681 76,477 748,359 Special mention — 150 — 716 2,278 410 480 4,034 Substandard 41 250 — — — 77 818 1,186 Substandard – nonaccrual 51 330 1,167 444 520 308 — 2,820 Doubtful — — — — — — — — Not graded — 154 — — — — — 154 Subtotal 120,591 254,494 139,461 94,417 57,339 12,476 77,775 756,553 Commercial real estate Non-owner occupied Acceptable credit quality 31,008 679,676 411,690 160,098 86,550 159,214 6,083 1,534,319 Special mention — — 184 472 165 6,910 — 7,731 Substandard — 1,886 — — 35,495 35,137 — 72,518 Substandard – nonaccrual — — 685 999 7,573 12,491 — 21,748 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 31,008 681,562 412,559 161,569 129,783 213,752 6,083 1,636,316 Owner occupied Acceptable credit quality 15,780 118,881 112,201 63,048 23,955 99,056 1,882 434,803 Special mention — — 1,124 — 86 11,753 19 12,982 Substandard — 34 270 76 1,888 3,670 — 5,938 Substandard – nonaccrual — 210 4,043 210 144 1,499 304 6,410 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 15,780 119,125 117,638 63,334 26,073 115,978 2,205 460,133 Multi-family Acceptable credit quality 487 164,103 26,420 29,279 10,380 23,441 799 254,909 Special mention — — — — — 14,695 14,695 Substandard — — — — — 3,666 — 3,666 Substandard – nonaccrual — — 904 — 109 7,276 — 8,289 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 487 164,103 27,324 29,279 10,489 49,078 799 281,559 Farmland Acceptable credit quality 6,557 7,396 15,614 13,152 3,972 21,271 1,381 69,343 Special mention — — — — — 102 — 102 Substandard — — 14 — 22 445 199 680 Substandard – nonaccrual — — — — — 25 — 25 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 6,557 7,396 15,628 13,152 3,994 21,843 1,580 70,150 Construction and land development Acceptable credit quality 5,904 177,393 91,453 1,430 674 1,256 37,712 315,822 Special mention — — — — — 210 — 210 Substandard — — 6,000 — — 2,407 — 8,407 Substandard – nonaccrual — — — — 200 — — 200 Doubtful — — — — — — — — Not graded — 1,946 216 7 — 28 — 2,197 Subtotal 5,904 179,339 97,669 1,437 874 3,901 37,712 326,836 Total Acceptable credit quality 272,254 1,539,472 897,184 417,255 199,267 366,894 462,606 4,154,932 Special mention — 4,125 3,332 1,188 9,485 37,240 623 55,993 Substandard 41 2,170 6,284 76 37,608 50,731 2,909 99,819 Substandard – nonaccrual 51 540 7,139 1,696 8,637 21,881 2,355 42,299 Doubtful — — — — — — — — Not graded — 2,100 216 7 — 28 — 2,351 Total commercial loans $ 272,346 $ 1,548,407 $ 914,155 $ 420,222 $ 254,997 $ 476,774 $ 468,493 $ 4,355,394 19 Table of Contents December 31, 2022 Term Loans Amortized Cost Basis by Origination Year (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving loans Total Commercial Commercial Acceptable credit quality $ 111,087 $ 102,966 $ 61,751 $ 28,063 $ 12,547 $ 45,168 $ 404,100 $ 765,682 Special mention 3,559 2,106 — 227 551 3,154 159 9,756 Substandard — — — 206 1,722 3,915 2,575 8,418 Substandard – nonaccrual — 340 — 132 83 246 2,220 3,021 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 114,646 105,412 61,751 28,628 14,903 52,483 409,054 786,877 Commercial other Acceptable credit quality 283,465 153,788 105,980 64,218 15,459 163 96,509 719,582 Special mention — — 754 2,331 455 — 55 3,595 Substandard 250 — — 12 80 — 848 1,190 Substandard – nonaccrual 524 1,247 444 463 491 — — 3,169 Doubtful — — — — — — — — Not graded 161 — — — — — — 161 Subtotal 284,400 155,035 107,178 67,024 16,485 163 97,412 727,697 Commercial real estate Non-owner occupied Acceptable credit quality 679,040 403,952 145,235 72,504 18,249 160,992 4,833 1,484,805 Special mention 1,407 186 477 10,633 195 8,452 — 21,350 Substandard 569 — 7,458 32,731 1,587 29,655 — 72,000 Substandard – nonaccrual — 701 — 48 10,246 2,249 — 13,244 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 681,016 404,839 153,170 115,916 30,277 201,348 4,833 1,591,399 Owner occupied Acceptable credit quality 120,141 122,321 64,720 31,916 29,454 88,928 4,305 461,785 Special mention — 1,161 — 7,917 — 12,161 22 21,261 Substandard 141 272 79 1,984 — 3,771 375 6,622 Substandard – nonaccrual 155 4,165 225 146 333 1,790 304 7,118 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 120,437 127,919 65,024 41,963 29,787 106,650 5,006 496,786 Multi-family Acceptable credit quality 163,647 31,605 29,458 208 24,490 14,574 1,101 265,083 Special mention — — — — — — — — Substandard — — — — — 3,703 — 3,703 Substandard – nonaccrual — 927 — 113 — 8,063 — 9,103 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 163,647 32,532 29,458 321 24,490 26,340 1,101 277,889 Farmland Acceptable credit quality 8,659 16,138 13,467 4,117 3,129 19,102 1,593 66,205 Special mention — — — — — 159 — 159 Substandard — 14 — 23 113 347 199 696 Substandard – nonaccrual — — — — — 25 — 25 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 8,659 16,152 13,467 4,140 3,242 19,633 1,792 67,085 Construction and land development Acceptable credit quality 171,243 79,747 10,676 8,388 98 1,420 37,997 309,569 Special mention — — — — — 210 — 210 Substandard — 6,000 — — 2,415 — — 8,415 Substandard – nonaccrual — — — 202 — — — 202 Doubtful — — — — — — — — Not graded 2,112 337 8 — — 29 — 2,486 Subtotal 173,355 86,084 10,684 8,590 2,513 1,659 37,997 320,882 Total Acceptable credit quality 1,537,282 910,517 431,287 209,414 103,426 330,347 550,438 4,072,711 Special mention 4,966 3,453 1,231 21,108 1,201 24,136 236 56,331 Substandard 960 6,286 7,537 34,956 5,917 41,391 3,997 101,044 Substandard – nonaccrual 679 7,380 669 1,104 11,153 12,373 2,524 35,882 Doubtful — — — — — — — — Not graded 2,273 337 8 — — 29 — 2,647 Total commercial loans $ 1,546,160 $ 927,973 $ 440,732 $ 266,582 $ 121,697 $ 408,276 $ 557,195 $ 4,268,615 20 Table of Contents The following table presents the gross charge-offs by class of loan and year of origination on the commercial loan portfolio for the three months ended March 31, 2023: March 31, 2023 Term Loans by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total Commercial Commercial $ — $ — $ — $ — $ 9 $ 11 $ — $ 20 Commercial Other — 559 64 — — 326 — 949 Commercial Real Estate Non-owner occupied — — — — — — — — Owner occupied — — — — — — — — Multi-family — — — — — 746 — 746 Farmland — — — — — — — Construction and land development — — — — — — — Total gross commercial charge-offs $ — $ 559 $ 64 $ — $ 9 $ 1,083 $ — $ 1,715 The Company evaluates the credit quality of its other loan portfolios, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be nonperforming for purposes of credit quality evaluation. The following tables present the recorded investment of our other loan portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming as of March 31, 2023 and December 31, 2022: March 31, 2023 Term Loans Amortized Cost Basis by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total Residential real estate Residential first lien Performing $ 10,844 $ 75,904 $ 38,573 $ 31,100 $ 20,688 $ 128,742 $ 76 $ 305,927 Nonperforming — 50 — — 259 3,401 — 3,710 Subtotal 10,844 75,954 38,573 31,100 20,947 132,143 76 309,637 Other residential Performing 817 1,306 480 513 1,008 2,687 52,676 59,487 Nonperforming — — — — — 197 589 786 Subtotal 817 1,306 480 513 1,008 2,884 53,265 60,273 Consumer Consumer Performing 14,924 29,952 38,164 8,240 3,113 15,646 2,724 112,763 Nonperforming — 12 3 7 — 95 2 119 Subtotal 14,924 29,964 38,167 8,247 3,113 15,741 2,726 112,882 Consumer other Performing 153,241 511,526 215,786 79,778 30,437 10,716 3,806 1,005,290 Nonperforming 766 — — — — — — 766 Subtotal 154,007 511,526 215,786 79,778 30,437 10,716 3,806 1,006,056 Leases financing Performing 65,650 198,441 101,715 75,448 48,465 18,053 — 507,772 Nonperforming — 679 224 563 637 154 — 2,257 Subtotal 65,650 199,120 101,939 76,011 49,102 18,207 — 510,029 Total Performing 245,476 817,129 394,718 195,079 103,711 175,844 59,282 1,991,239 Nonperforming 766 741 227 570 896 3,847 591 7,638 Total other loans $ 246,242 $ 817,870 $ 394,945 $ 195,649 $ 104,607 $ 179,691 $ 59,873 $ 1,998,877 21 Table of Contents December 31, 2022 Term Loans Amortized Cost Basis by Origination Year (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving loans Total Residential real estate Residential first lien Performing $ 75,449 $ 38,774 $ 31,566 $ 20,780 $ 21,691 $ 109,067 $ 336 $ 297,663 Nonperforming 101 — 104 414 987 4,974 — 6,580 Subtotal 75,550 38,774 31,670 21,194 22,678 114,041 336 304,243 Other residential Performing 1,722 496 534 1,060 1,496 1,515 53,159 59,982 Nonperforming 17 — — 7 18 208 1,619 1,869 Subtotal 1,739 496 534 1,067 1,514 1,723 54,778 61,851 Consumer Consumer Performing 32,561 40,374 9,411 3,476 2,768 14,756 2,346 105,692 Nonperforming 33 50 7 1 13 79 5 188 Subtotal 32,594 40,424 9,418 3,477 2,781 14,835 2,351 105,880 Consumer other Performing 669,015 260,360 92,148 34,501 6,637 5,430 5,310 1,073,401 Nonperforming 733 — — — — — — 733 Subtotal 669,748 260,360 92,148 34,501 6,637 5,430 5,310 1,074,134 Leases financing Performing 215,084 110,294 84,458 54,684 21,767 3,088 — 489,375 Nonperforming — 522 736 818 254 39 — 2,369 Subtotal 215,084 110,816 85,194 55,502 22,021 3,127 — 491,744 Total Performing 993,831 450,298 218,117 114,501 54,359 133,856 61,151 2,026,113 Nonperforming 884 572 847 1,240 1,272 5,300 1,624 11,739 Total other loans $ 994,715 $ 450,870 $ 218,964 $ 115,741 $ 55,631 $ 139,156 $ 62,775 $ 2,037,852 The following table presents the gross charge-offs by class of loan and year of origination on the other loan portfolio for the three months ended March 31, 2023: March 31, 2023 Term Loans by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total Residential real estate Residential first lien $ — $ — $ 9 $ — $ — $ — $ — $ 9 Other residential — — — — — 9 13 22 Consumer Consumer — 1 5 — 5 20 — 31 Consumer other — 53 32 14 31 102 — 232 Lease financing — 57 192 83 22 36 — 390 Total gross other charge-offs $ — $ 111 $ 238 $ 97 $ 58 $ 167 $ 13 $ 684 22 Table of Contents NOTE 5 – PREMISES, EQUIPMENT AND LEASES A summary of premises and equipment at March 31, 2023 and December 31, 2022 is as follows: (dollars in thousands) 2023 2022 Land $ 16,004 $ 16,004 Buildings and improvements 74,201 71,837 Furniture and equipment 34,473 34,081 Lease right-of-use assets 7,710 7,001 Total 132,388 128,923 Accumulated depreciation ( 51,806 ) ( 50,630 ) Premises and equipment, net $ 80,582 $ 78,293 Depreciation expense for the three months ended March 31, 2023 and 2022 was $ 1.2 million and $ 1.3 million, respectively. The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 2 months to 15 years, some of which may include options to extend the lease terms for up to an additional 10 years. The options to extend are included if they are reasonably certain to be exercised. The Company had operating lease right-of-use assets of $ 7.7 million and $ 7.0 million as of March 31, 2023 and December 31, 2022, respectively, included in premises and equipment on our consolidated balance sheets. The operating lease liabilities of the Company were $ 9.6 million and $ 8.9 million as of March 31, 2023 and December 31, 2022, respectively, and are included in accrued interest payable and other liabilities on our consolidated balance sheets. Information related to operating leases for the three months ended March 31, 2023 and 2022 was as follows: Three Months Ended March 31, (dollars in thousands) 2023 2022 Operating lease cost $ 484 $ 508 Operating cash flows from leases 590 606 Right-of-use assets obtained in exchange for lease obligations 1,130 121 Weighted average remaining lease term 8.10 years 7.43 years Weighted average discount rate 3.26 % 2.87 % The projected minimum rental payments under the terms of the leases as of March 31, 2023 were as follows: (dollars in thousands) Amount Year ending December 31: 2023 remaining $ 1,469 2024 1,972 2025 1,069 2026 939 2027 838 Thereafter 4,676 Total future minimum lease payments 10,963 Less imputed interest ( 1,407 ) Total operating lease liabilities $ 9,556 23 Table of Contents NOTE 6 – LOAN SERVICING RIGHTS A summary of loan servicing rights at March 31, 2023 and December 31, 2022 is as follows: March 31, 2023 December 31, 2022 (dollars in thousands) Serviced Loans Carrying Value Serviced Loans Carrying Value SBA $ 43,787 $ 599 $ 46,081 $ 656 Residential 247,426 518 255,298 549 Commercial FHA held for sale 2,201,277 20,745 2,255,617 20,745 Total $ 2,492,490 $ 21,862 $ 2,556,996 $ 21,950 Commercial FHA Mortgage Loan Servicing During the third quarter of 2022, the Company committed to a plan to sell our commercial FHA servicing portfolio and, therefore, transferred $ 24.0 million to commercial FHA servicing rights held for sale. Servicing rights held for sale are recorded at the lower of their carrying value or fair value less estimated costs to sell. At March 31, 2023 and December 31, 2022, the $ 20.7 million carrying amount of the asset reflected its estimated fair value less estimated selling costs. Fair value was based on a letter of intent to purchase from an interested buyer. Changes in our commercial FHA loan servicing rights for the three months ended March 31, 2022 are summarized as follows: Three Months Ended March 31, (dollars in thousands) 2022 Loan servicing rights: Balance, beginning of period $ 27,386 Amortization ( 660 ) Refinancing fee received from third party ( 221 ) Permanent impairment ( 394 ) Balance, end of period $ 26,111 Fair value: At beginning of period $ 28,368 At end of period 27,941 NOTE 7 – DERIVATIVE INSTRUMENTS As part of the Company’s overall management of interest rate sensitivity, the Company utilizes derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility, including interest rate lock commitments, forward commitments to sell mortgage-backed securities, cash flow hedges and interest rate swap contracts. Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities The Company issues interest rate lock commitments on originated fixed-rate commercial and residential real estate loans to be sold. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets or other liabilities in the consolidated balance sheets. Changes in the fair value of derivative financial instruments are recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income. The following table summarizes the interest rate lock commitments and forward commitments to sell mortgage-backed securities held by the Company, their notional amount and estimated fair values at March 31, 2023 and December 31, 2022: 24 Table of Contents Notional amount Fair value gain (dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Derivative instruments (included in other assets): Interest rate lock commitments $ 4,601 $ 2,078 $ 114 $ 49 Notional amount Fair value loss (dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Derivative instruments (included in other liabilities): Interest rate lock commitments $ 4,419 $ 4,419 $ 15 $ 15 Forward commitments to sell mortgage-backed securities 9,357 6,669 14 — Total $ 13,776 $ 11,088 $ 29 $ 15 During both the three months ended March 31, 2023 and 2022, the Company recognized net gains of $ 0.1 million on derivative instruments in residential mortgage banking revenue in the consolidated statements of income. Cash Flow Hedges In the first quarter of 2022, the Company entered into interest rate swap agreements, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. The following table summarizes the Company's receive-fixed, pay-variable interest rate swaps on certain pools of loans indexed to prime at March 31, 2023 and December 31, 2022: (dollars in thousands) March 31, 2023 December 31, 2022 Notional Amount $ 200,000 $ 200,000 Fair value loss included in other liabilities ( 7,793 ) ( 9,999 ) Tax effected amount included in accumulated other comprehensive (loss) income ( 5,689 ) ( 7,300 ) Average remaining life 3.12 3.37 Weighted average pay rate 7.80 % 7.23 % Weighted average receive rate 5.48 % 5.48 % Interest Rate Swap Contracts Not Designated as Hedges The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting. The notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $ 7.3 million and $ 7.4 million at March 31, 2023 and December 31, 2022, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $ 0.3 million at both March 31, 2023 and December 31, 2022, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets. 25 Table of Contents NOTE 8 – DEPOSITS The following table summarizes the classification of deposits as of March 31, 2023 and December 31, 2022: (dollars in thousands) March 31, 2023 December 31, 2022 Noninterest-bearing demand $ 1,215,758 $ 1,362,158 Interest-bearing: Checking 2,502,827 2,494,073 Money market 1,263,813 1,184,101 Savings 636,832 661,932 Time 805,971 662,388 Total deposits $ 6,425,201 $ 6,364,652 NOTE 9 – SHORT-TERM BORROWINGS The following table presents the distribution of short-term borrowings and related weighted average interest rates as of March 31, 2023 and December 31, 2022: Repurchase agreements (dollars in thousands) As of and for the Three Months Ended March 31, 2023 As of and for the Year Ended December 31,2022 Outstanding at period-end $ 31,173 $ 42,311 Average amount outstanding 38,655 58,688 Maximum amount outstanding at any month end 43,718 76,807 Weighted average interest rate: During period 0.26 % 0.18 % End of period 0.25 % 0.26 % Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $ 33.9 million and $ 46.1 million at March 31, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase. The Company had available lines of credit of $ 207.7 million and $ 12.2 million at March 31, 2023 and December 31, 2022, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans and investment securities totaling $ 250.3 million and $ 14.3 million at March 31, 2023 and December 31, 2022, respectively. There were no outstanding borrowings under these lines at March 31, 2023 and 2022. At March 31, 2023, the Company had available federal funds lines of credit totaling $ 394.0 million. These lines of credit were unused at March 31, 2023. 26 Table of Contents NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS The following table summarizes our FHLB advances and other borrowings as of March 31, 2023 and December 31, 2022: (dollars in thousands) March 31, 2023 December 31, 2022 FHLB advances – fixed rate, fixed term at rates averaging 4.18 % at March 31, 2023 - maturing through February 2028 $ 55,000 $ — FHLB advances – putable fixed rate at rates averaging 2.70 % and 2.35 % at March 31, 2023 and December 31, 2022, respectively – maturing through February 2028 with call provisions through February 2024 160,000 110,000 FHLB advances –SOFR floater at rates averaging 6.45 % and 5.92 % at March 31, 2023 and December 31, 2022, respectively – maturing in October 2023 100,000 100,000 FHLB advances – Short term fixed rate at rates averaging 4.86 % and 4.31 % at March 31, 2023 and December 31, 2022, respectively– maturing in April 2023 167,000 250,000 Total FHLB advances and other borrowings $ 482,000 $ 460,000 The Company’s advances from the FHLB are collateralized by a blanket collateral agreement of qualifying mortgage and home equity line of credit loans and certain commercial real estate loans totaling approximately $ 2.88 billion and $ 2.90 billion at March 31, 2023 and December 31, 2022, respectively. NOTE 11 – SUBORDINATED DEBT The following table summarizes the Company’s subordinated debt at March 31, 2023 and December 31, 2022: Subordinated debt Fixed to Float Fixed (dollars in thousands) Issued September 2019 Issued September 2019 Issued June 2015 Total At March 31, 2023 Outstanding amount $ 72,750 $ 27,250 $ 550 $ 100,550 Carrying amount 72,364 26,937 548 99,849 Current rate 5.00 % 5.50 % 6.50 % At December 31, 2022 Outstanding amount $ 72,750 $ 27,250 $ 550 $ 100,550 Carrying amount 72,300 26,925 547 99,772 Current rate 5.00 % 5.50 % 6.50 % Maturity date 9/30/2029 9/30/2034 6/18/2025 Optional redemption date 9/30/2024 9/30/2029 N/A Fixed to variable conversion date 9/30/2024 9/30/2029 N/A Variable rate 3-month SOFR plus 3.61 % 3-month SOFR plus 4.05 % N/A Interest payment terms Semiannually Semiannually Semiannually The value of subordinated debentures have been reduced by the debt issuance costs, which are being amortized on a straight line basis through the earlier of the redemption option or maturity date. All of the subordinated debentures above may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. NOTE 12 – EARNINGS PER COMMON SHARE Earnings per common share is calculated utilizing the two-class method. Basic earnings per common share is calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards. The diluted earnings per common share computation for the three months ended March 31, 2023 and 2022 excluded antidilutive stock options of 265,831 and 15,597 , respectively, because the exercise prices of these stock options exceeded the average market 27 Table of Contents prices of the Company’s common shares for those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, (dollars in thousands, except per share data) 2023 2022 Net income $ 21,772 $ 20,749 Preferred dividends declared ( 2,228 ) — Net income available to common shareholders 19,544 20,749 Common shareholder dividends ( 6,669 ) ( 6,389 ) Unvested restricted stock award dividends ( 80 ) ( 75 ) Undistributed earnings to unvested restricted stock awards ( 151 ) ( 163 ) Undistributed earnings to common shareholders $ 12,644 $ 14,122 Basic Distributed earnings to common shareholders $ 6,669 $ 6,389 Undistributed earnings to common shareholders 12,644 14,122 Total common shareholders earnings, basic $ 19,313 $ 20,511 Diluted Distributed earnings to common shareholders $ 6,669 $ 6,389 Undistributed earnings to common shareholders 12,644 14,122 Total common shareholders earnings 19,313 20,511 Add back: Undistributed earnings reallocated from unvested restricted stock awards — — Total common shareholders earnings, diluted $ 19,313 $ 20,511 Weighted average common shares outstanding, basic 22,478,808 22,274,884 Options 23,162 75,423 Weighted average common shares outstanding, diluted 22,501,970 22,350,307 Basic earnings per common share $ 0.86 $ 0.92 Diluted earnings per common share 0.86 0.92 NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows: • Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets. • Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that 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: Investment securities. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For investment securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the 28 Table of Contents three months ended March 31, 2023 or December 31, 2022 for assets measured at fair value on a recurring basis. The fair value of equity securities is determined using quoted prices or market prices for similar securities (Level 2). Loans held for sale. The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2). Derivative instruments. The fair value of derivative instruments are determined based on derivative valuation models using observable market data as of the measurement date (Level 2). Loan servicing rights. In accordance with GAAP , the Company records impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions (Level 3). Mortgage servicing rights held for sale. Mortgage servicing rights held for sale consist of commercial FHA mortgage servicing rights that management has committed to a plan to sell and has the ability to sell them to a buyer in their present condition. Mortgage servicing rights held for sale are carried at the lower of their carrying value or fair value less estimated costs to sell (Level 2). Nonperforming loans. Nonperforming loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure nonperforming loans based on the estimated fair value of such collateral. In cases where the Company has an agreed upon selling price for the collateral, the fair value is set at the selling price (Level 1). The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral (Level 2). When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable (Level 3). The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment. Other Real Estate Owned. OREO is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost basis. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Fair value for OREO is based on an appraisal performed upon foreclosure. Property is evaluated regularly to ensure the recorded amount is supported by its fair value less estimated costs to dispose. After the initial foreclosure appraisal, fair value is generally determined by an annual appraisal unless known events warrant adjustments to the recorded value. Assets held for sale. Assets held for sale represent the fair value of the banking facilities that are expected to be sold. The fair value of the assets held for sale was based on estimated market prices from independently prepared current appraisals (Level 2). 29 Table of Contents Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis at March 31, 2023 and December 31, 2022, are summarized below: March 31, 2023 (dollars in thousands) Carrying amount Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets and liabilities measured at fair value on a recurring basis: Assets Investment securities available for sale: U.S. Treasury securities $ 52,798 $ 52,798 $ — $ — U.S. government sponsored entities and U.S. agency securities 54,136 — 54,136 — Mortgage-backed securities - agency 489,491 — 489,491 — Mortgage-backed securities - non-agency 42,514 — 42,514 — State and municipal securities 66,256 — 66,256 — Collateralized loan obligations 22,694 — 22,694 — Corporate securities 84,396 — 84,396 — Equity securities 8,720 8,720 — — Loans held for sale 2,747 — 2,747 — Derivative assets 451 — 451 — Total $ 824,203 $ 61,518 $ 762,685 $ — Liabilities Derivative liabilities $ 8,159 $ — $ 8,159 $ — Total $ 8,159 $ — $ 8,159 $ — Assets measured at fair value on a non-recurring basis: Loan servicing rights $ 1,117 $ — $ — $ 1,117 Commercial FHA loan servicing rights held for sale 20,745 — 20,745 — Nonperforming loans 50,713 10,159 31,979 8,575 Other real estate owned 6,729 — 6,729 — Assets held for sale 178 — 178 — 30 Table of Contents December 31, 2022 (dollars in thousands) Carrying amount Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets and liabilities measured at fair value on a recurring basis: Assets Investment securities available for sale: U.S. Treasury securities $ 81,230 $ 81,230 $ — $ — U.S. government sponsored entities and U.S. agency securities 37,509 — 37,509 — Mortgage-backed securities - agency 448,150 — 448,150 — Mortgage-backed securities - non-agency 20,754 — 20,754 — State and municipal securities 94,636 — 94,636 — Corporate securities 85,955 — 85,955 — Equity securities 8,626 8,626 — — Loans held for sale 1,286 — 1,286 — Derivative assets 481 — 481 — Total $ 778,627 $ 89,856 $ 688,771 $ — Liabilities Derivative liabilities $ 10,446 $ — $ 10,446 $ — Total $ 10,446 $ — $ 10,446 $ — Assets measured at fair value on a non-recurring basis: Loan servicing rights $ 1,205 $ — $ — $ 1,205 Mortgage servicing rights held for sale 20,745 — 20,745 — Nonperforming loans 49,423 5,478 34,406 9,539 Other real estate owned 6,729 — 6,729 — Assets held for sale 356 — 356 — There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2023. The following table provides a reconciliation of activity for Level 3 assets for the three months ended March 31, 2022: (dollars in thousands) For the three months ended March 31, 2022 Balance, beginning of period $ 935 Total realized in earnings (1) 4 Total unrealized in other comprehensive income (2) — Net settlements (principal and interest) ( 4 ) Balance, end of period $ 935 (1) Amounts included in interest income from investment securities taxable in the consolidated statements of income. (2) Represents change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period. 31 Table of Contents The following table presents losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, (dollars in thousands) 2023 2022 Commercial mortgage servicing rights $ — $ 394 Nonperforming loans 1,103 1,930 Other real estate owned — 337 Total losses on assets measured on a nonrecurring basis $ 1,103 $ 2,661 The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at March 31, 2023 and December 31, 2022: (dollars in thousands) Fair value Valuation technique Unobservable input / assumptions Range (weighted average) (1) March 31, 2023 Loan servicing rights: SBA servicing rights $ 816 Discounted cash flow Prepayment speed 15.00 % - 16.54 % ( 15.67 %) Discount rate No range ( 13.75 %) Residential servicing rights 2,786 Discounted cash flow Prepayment speed 6.96 % - 26.28 % ( 7.50 %) Discount rate 9.50 % - 12.00 % ( 10.63 %) December 31, 2022 Loan servicing rights: SBA servicing rights 876 Discounted cash flow Prepayment speed 14.49 % - 15.44 % ( 15.00 %) Discount rate No range ( 13.00 %) Residential servicing rights 2,770 Discounted cash flow Prepayment speed 7.56 % - 26.28 % ( 7.92 %) Discount rate 9.00 % - 11.50 % ( 10.13 %) (1) Unobservable inputs were weighted by the relative fair value of the instruments. ASC Topic 825, Financial Instruments , requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements. The Company has elected the fair value option for newly originated commercial and residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification. The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 (dollars in thousands) Aggregate fair value Difference Contractual principal Aggregate fair value Difference Contractual principal Residential loans held for sale $ 2,747 $ 140 $ 2,607 $ 1,286 $ 42 $ 1,244 32 Table of Contents The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, (dollars in thousands) 2023 2022 Commercial loans held for sale $ — $ 18 Residential loans held for sale 99 ( 381 ) Total loans held for sale $ 99 $ ( 363 ) The carrying values and estimated fair value of certain financial instruments not carried at fair value at March 31, 2023 and December 31, 2022 were as follows: March 31, 2023 (dollars in thousands) Carrying amount Fair value Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Cash and due from banks $ 136,116 $ 136,116 $ 136,116 $ — $ — Federal funds sold 2,194 2,194 2,194 — — Loans, net 6,292,204 6,297,002 — — 6,297,002 Accrued interest receivable 20,534 20,534 — 20,534 — Liabilities Deposits $ 6,425,201 $ 6,365,577 $ — $ 6,365,577 $ — Short-term borrowings 31,173 31,173 — 31,173 — FHLB and other borrowings 482,000 481,298 — 481,298 — Subordinated debt 99,849 84,403 — 84,403 — Trust preferred debentures 50,135 51,050 — 51,050 — December 31, 2022 (dollars in thousands) Carrying amount Fair value Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets Cash and due from banks $ 143,035 $ 143,035 $ 143,035 $ — $ — Federal funds sold 7,286 7,286 7,286 — — Loans, net 6,245,416 6,121,026 — — 6,121,026 Accrued interest receivable 20,313 20,313 — 20,313 — Liabilities Deposits $ 6,364,652 $ 6,344,534 $ — $ 6,344,534 $ — Short-term borrowings 42,311 42,311 — 42,311 — FHLB and other borrowings 460,000 457,998 — 457,998 — Subordinated debt 99,772 95,301 — 95,301 — Trust preferred debentures 49,975 54,668 — 54,668 — The methods utilized to measure fair value of financial instruments at March 31, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ. 33 Table of Contents NOTE 14 – COMMITMENTS, CONTINGENCIES AND CREDIT RISK In the normal course of business, there are outstanding various contingent liabilities such as claims and legal actions, which are not reflected in the consolidated financial statements. No material losses are anticipated as a result of these actions or claims. We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of March 31, 2023 and December 31, 2022 were as follows: (dollars in thousands) March 31, 2023 December 31, 2022 Commitments to extend credit $ 1,264,040 $ 1,276,263 Financial guarantees – standby letters of credit 17,762 23,748 The Company establishes a mortgage repurchase liability to reflect management’s estimate of losses on loans for which the Company could have a repurchase obligation based on the volume of loans sold in 2023 and years prior, borrower default expectations, historical investor repurchase demand and appeals success rates, and estimated loss severity. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. Any difference between the loan’s fair value and the outstanding principal amount is charged or credited to the mortgage repurchase liability, as appropriate. Subsequent to repurchase, such loans are carried in loans receivable. There were no losses as a result of make-whole requests and loan repurchases for the three months ended March 31, 2023 and 2022. The liability for unresolved repurchase demands totaled $ 0.2 million at March 31, 2023 and December 31, 2022 . NOTE 15 – SEGMENT INFORMATION Our business segments are defined as Banking, Wealth Management, and Other. The reportable business segments are consistent with the internal reporting and evaluation of the principle lines of business of the Company. The Banking segment provides a wide range of financial products and services to consumers and businesses, including commercial, commercial real estate, mortgage and other consumer loan products; commercial equipment financing; mortgage loan sales and servicing; letters of credit; various types of deposit products, including checking, savings and time deposit accounts; merchant services; and corporate treasury management services. The Wealth Management segment consists of trust and fiduciary services, brokerage and retirement planning services. The Other segment includes the operating results of the parent company, our captive insurance business unit, and the elimination of intercompany transactions. 34 Table of Contents Selected business segment financial information for the three months ended March 31, 2023 and 2022 were as follows: (dollars in thousands) Banking Wealth Management Other Total Three Months Ended March 31, 2023 Net interest income (expense) $ 62,608 $ — $ ( 2,104 ) $ 60,504 Provision for credit losses 3,135 — — 3,135 Noninterest income 9,621 6,411 ( 253 ) 15,779 Noninterest expense 39,847 4,841 ( 206 ) 44,482 Income (loss) before income taxes (benefit) 29,247 1,570 ( 2,151 ) 28,666 Income taxes (benefit) 7,206 439 ( 751 ) 6,894 Net income (loss) $ 22,041 $ 1,131 $ ( 1,400 ) $ 21,772 Total assets $ 7,918,339 $ 29,828 $ ( 17,993 ) $ 7,930,174 Three Months Ended March 31, 2022 Net interest income (expense) $ 59,353 $ — $ ( 2,526 ) $ 56,827 Provision for credit losses 4,167 — — 4,167 Noninterest income 8,406 7,139 68 15,613 Noninterest expense 36,247 4,675 ( 38 ) 40,884 Income (loss) before income taxes (benefit) 27,345 2,464 ( 2,420 ) 27,389 Income taxes (benefit) 6,715 690 ( 765 ) 6,640 Net income (loss) $ 20,630 $ 1,774 $ ( 1,655 ) $ 20,749 Total assets $ 7,355,117 $ 29,828 $ ( 46,230 ) $ 7,338,715 35 Table of Contents NOTE 16 – REVENUE FROM CONTRACTS WITH CUSTOMERS The Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income in the consolidated statements of income. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2023 and 2022. Three Months Ended March 31, (dollars in thousands) 2023 2022 Noninterest income - in-scope of Topic 606 Wealth management revenue: Trust management/administration fees $ 5,636 $ 5,982 Investment brokerage fees 431 598 Other 344 559 Service charges on deposit accounts: Nonsufficient fund fees 1,698 1,332 Other 870 736 Interchange revenues 3,412 3,280 Other income: Merchant services revenue 358 356 Other 630 768 Noninterest income - out-of-scope of Topic 606 2,400 2,002 Total noninterest income $ 15,779 $ 15,613 Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net, are also not in scope of Topic 606. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The noninterest income streams considered in-scope by Topic 606 are discussed below. Wealth Management Revenue Wealth management revenue is primarily comprised of fees earned from the management and administration of trusts and other customer assets. Previously, the Company also earned investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of these instances is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and contractually determined fee schedules. Payment is generally received a few days after month end through a direct charge to each customer’s account. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Fees generated from transactions executed by the Company’s third party broker dealer are remitted to the Company on a monthly basis for that month’s transactional activity. Service Charges on Deposit Accounts Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account. 36 Table of Contents Interchange Revenue Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed. Other Noninterest Income The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction. 37 Table of Contents