What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 233 added, 141 removed, 521 unchanged (42% of the section changed)

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

The following is management's discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of March 31, 2023, as compared to December 31, 2022, and operating results for the three months ended March 31, 2023 and 2022.

The following is management's discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of June 30, 2023, as compared to December 31, 2022, and operating results for the three and six months ended June 30, 2023 and 2022.

These comments should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes appearing elsewhere herein and our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

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risks related to mergers and acquisitions and the integration of acquired businesses;

developments and uncertainty related to the future use and availability of some reference rates, such as LIBOR, as well as other alternative reference rates, and the adoption of a substitute;

changes to U.S.

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Significant Developments and Transactions

Each item listed below affects the comparability of our results of operations for the three months ended March 31, 2023 and 2022, and our financial condition as of March 31, 2023 and December 31, 2022, and may affect the comparability of financial information we report in future fiscal periods.

Each item listed below affects the comparability of our results of operations for the three and six months ended June 30, 2023 and 2022, and our financial condition as of June 30, 2023 and December 31, 2022, and may affect the comparability of financial information we report in future fiscal periods.

Redemption of Subordinated Notes.

In the second quarter of 2023, the Company redeemed $6.6 million of outstanding subordinated notes.

The weighted average redemption price was 89.2% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.

The Company recorded gains totaling $0.7 million on these redemptions.

On October 15, 2022, the Company redeemed the outstanding Fixed-to-Floating Rate Subordinated Notes due October 15, 2027, having an aggregate principal amount of $40.0 million, in accordance with the terms of the notes.

The aggregate redemption price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.

Preferred Stock Issuance.

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During the third quarter of 2022, we committed to a plan to sell the commercial servicing rights asset and transferred $24.0 million of commercial FHA loan servicing rights to held for sale.

Servicing rights held for sale are recorded at the lower of their carrying amount or fair value less estimated costs to sell.

No impairment was recognized in the first quarter of 2023.

Redemption of Subordinated Notes.

The aggregate redemption price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.

The interest rate on the subordinated notes was 6.25%.

At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

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Recent Acquisitions.

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Results of Operations

The following table sets forth condensed income statement information of the Company for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table sets forth condensed income statement information of the Company for the three and six months ended June 30, 2023 and 2022:

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

(dollars in thousands, except per share data) 2023 2022 2023 2022

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Return on average shareholders' equity 11.14 % 13.65 % 11.32 % 13.22 %

During the three months ended March 31, 2023, we generated net income available to common shareholders of $19.5 million, or $0.86 per diluted share, compared to $20.7 million, or $0.92 per diluted share, in the three months ended March 31, 2022.

Earnings for the first quarter of 2023 compared to the first quarter of 2022 increased primarily due to a $3.7 million increase in net interest income, a $1.0 million decrease in provision for credit losses, and a $0.2 million increase in noninterest income.

These positive results were partially offset by a $3.6 million increase in noninterest expense and a $0.3 million increase in income tax expense.

These are discussed in further detail below.

During the three months ended June 30, 2023, we generated net income of $21.6 million, or diluted earnings per common share of $0.86, compared to net income of $21.9 million, or diluted earnings per common share of $0.97, in the three months ended June 30, 2022.

Earnings for the second quarter of 2023 compared to the second quarter of 2022 decreased slightly primarily due to a $2.5 million decrease in net interest income, a $0.4 million increase in provision for credit losses and a $1.6 million increase in noninterest expense.

These results were partially offset by a $4.1 million increase in noninterest income.

During the six months ended June 30, 2023, we generated net income of $43.3 million, or diluted earnings per common share of $1.72, compared to net income of $42.6 million, or diluted earnings per common share of $1.89, in the six months ended June 30, 2022.

Earnings for the six months ended June 30, 2023 compared to six months ended June 30, 2022 increased primarily due to a $1.2 million increase in net interest income, a $0.6 million decrease in provision for credit losses, and a $4.3 million increase in noninterest income.

These results were partially offset by a $5.2 million increase in noninterest expense and a $0.2 million increase in income tax expense.

Net Interest Income and Margin.

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Net interest margin is calculated as net interest income divided by average interest-earning assets.

Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for three months ended March 31, 2023 and 2022.

On March 22, 2023, the Federal Reserve enacted a quarter percentage point interest rate increase, expressing caution about the recent banking crisis and indicating that rate hikes are nearing an end.

Along with its ninth hike since March 2022, the rate-setting Federal Open Market Committee noted that future increases are not assured and will depend largely on incoming data.

The increase takes the benchmark federal funds rate to a target range between 4.75%-5.00%, compared to a target rate of 0.00%-0.25% at the beginning of 2022.

During the three months ended March 31, 2023 , net interest income, on a tax-equivalent basis, increased to $60.7 million with a tax-equivalent net interest margin of 3.39% compared to net interest income, on a tax-equivalent basis, of $57.2 million and a tax-equivalent net interest margin of 3.50% for the three months ended March 31, 2022 .

On May 3, 2023, the Federal Reserve approved its 10th interest rate increase in just a little over a year.

The increase takes the federal funds rate to a target range of 5.00%-5.25%, the highest since August 2007.

At its June meeting, the Federal

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Reserve decided to leave interest rates unchanged.

The Federal Reserve indicated they will take another six weeks to see the impacts of policy moves as they continue to fight an inflation battle.

The benchmark federal funds rate remains at a target range between 5.00%-5.25%, compared to a target rate of 0.00%-0.25% at the beginning of 2022.

During the three months ended June 30, 2023, net interest income, on a tax-equivalent basis, decreased to $59.0 million compared to $61.7 million for the three months ended June 30, 2022.

The tax-equivalent net interest margin decreased to 3.23% for the second quarter of 2023 compared to 3.65% in the second quarter of 2022.

During the six months ended June 30, 2023 , net interest income, on a tax-equivalent basis, increased to $119.8 million with a tax-equivalent net interest margin of 3.31% compared to net interest income, on a tax-equivalent basis, of $118.9 million and a tax-equivalent net interest margin of 3.58% for the six months ended June 30, 2022 .

Average Balance Sheet, Interest and Yield/Rate Analysis.

The following tables present the average balance sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended March 31, 2023 and 2022.

The following tables present the average balance sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the three and six months ended June 30, 2023 and 2022.

The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

Three Months Ended March 31,

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Three Months Ended June 30,

(tax-equivalent basis, dollars in thousands) Average

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(1) Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.

Tax-equivalent adjustments totaled $244,000 and $369,000 for the three months ended March 31, 2023 and 2022, respectively.

Tax-equivalent adjustments totaled $0.2 million and $0.3 million for the three months ended June 30, 2023 and 2022, respectively.

(2) Average loan balances include nonaccrual loans.

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(i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

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Six Months Ended June 30,

(tax-equivalent basis, dollars in thousands) Average

balance Interest

& fees Yield/

balance Interest

& fees Yield/

Interest-earning assets:

Federal funds sold and cash investments $ 76,201 $ 1,832 4.85 % $ 304,938 $ 639 0.42 %

Investment securities :

Taxable investment securities 770,403 12,269 3.19 737,569 7,952 2.16

Investment securities exempt from federal income tax (1)

65,368 1,012 3.10 119,002 1,942 3.26

Total securities 835,771 13,281 3.18 856,571 9,894 2.31

6,283,259 178,809 5.74 5,406,467 119,529 4.46

Loans exempt from federal income tax (1)

55,046 1,078 3.95 70,570 1,344 3.84

Total loans 6,338,305 179,887 5.72 5,477,037 120,873 4.45

Loans held for sale 2,794 75 5.42 20,501 297 2.93

Nonmarketable equity securities 46,416 1,394 6.05 36,358 971 5.39

Total interest-earning assets 7,299,487 196,469 5.43 6,695,405 132,674 4.00

Noninterest-earning assets 611,528 623,224

Total assets $ 7,911,015 $ 7,318,629

Interest-bearing liabilities:

Checking and money market deposits $ 3,729,261 $ 50,457 2.73 % $ 3,266,076 $ 4,156 0.26 %

Savings deposits 638,413 639 0.20 707,111 137 0.04

Time deposits 754,090 8,253 2.21 621,274 1,570 0.51

Brokered time deposits 35,384 673 3.84 19,290 108 1.13

Total interest-bearing deposits 5,157,148 60,022 2.35 4,613,751 5,971 0.26

Short-term borrowings 30,291 39 0.26 64,642 45 0.14

FHLB advances and other borrowings 505,945 11,402 4.54 309,436 2,647 1.72

Subordinated debt 98,538 2,705 5.54 139,186 4,022 5.78

Trust preferred debentures 50,133 2,518 10.13 49,527 1,138 4.64

Total interest-bearing liabilities 5,842,055 76,686 2.65 5,176,542 13,823 0.54

Noninterest-bearing liabilities:

Noninterest-bearing deposits 1,219,050 1,418,083

Other noninterest-bearing liabilities 77,895 73,878

Total noninterest-bearing liabilities 1,296,945 1,491,961

Shareholders’ equity 772,015 650,126

Total liabilities and shareholders’ equity $ 7,911,015 $ 7,318,629

Net interest income / net interest margin (3)

$ 119,783 3.31 % $ 118,851 3.58 %

(1) Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.

Tax-equivalent adjustments totaled $0.4 million and $0.7 million for the six months ended June 30, 2023 and 2022, respectively.

(2) Average loan balances include nonaccrual loans.

Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

(3) Net interest margin during the periods presented represents:

(i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

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Interest Rates and Operating Interest Differential.

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Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.

Three Months Ended March 31, 2023 compared with Three Months Ended March 31, 2022

Three Months Ended June 30, 2023 compared with Three Months Ended June 30, 2022 Six Months Ended June 30, 2023 compared with Six Months Ended June 30, 2022

Change due to:

(tax-equivalent basis, dollars in thousands) Volume Rate

Variance Change due to:

(tax-equivalent basis, dollars in thousands) Volume Rate Volume Rate

EARNING ASSETS:

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Interest Income.

Interest income, on a tax-equivalent basis, increased $32.7 million to $95.8 million in the first quarter of 2023 as compared to the same quarter of 2022 due to the impact of rising interest rates over the past 12 months and growth in our average loan balances.

The yield on earning assets increased 148 basis points to 5.35% from 3.87%.

Average earning assets increased to $7.26 billion in the first quarter of 2023 from $6.62 billion in the same quarter of 2022.

An increase in average loans of $1.05 billion was partially offset by decreases in federal funds sold and cash investments and investment securities of $299.1 million and $84.8 million, respectively.

Average loans increased $1.05 billion in the first quarter of 2023 compared to the same quarter of 2022.

Interest income, on a tax-equivalent basis, increased $31.1 million to $100.7 million in the three months ended June 30, 2023 as compared to the same quarter in 2022, primarily due to improved yields on earning assets.

The yield on earning assets increased 139 basis points to 5.51% from 4.12% primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.33 billion in the second quarter of 2023 from $6.77 billion in the same quarter in 2022.

Increases in average loans and investment securities of $678.2 million and $42.5 million, respectively, were partially offset by a decrease in federal funds sold and cash investments of $159.1 million.

Average loans increased $678.2 million in the second quarter of 2023 compared to the same quarter of 2022.

Average commercial loans increased $115.5 million.

Included in commercial loans are commercial FHA warehouse lines and PPP loans.

Commercial FHA warehouse lines decreased $33.2 million to $13.3 million in the first quarter of 2023.

PPP loan balances averaged $0.1 million in first quarter of 2023, compared to $36.2 million in the first quarter of 2022.

Excluding the changes in the commercial FHA warehouse line and PPP loan portfolios, average commercial loans increased $213.3 million in the first quarter of 2023 compared to the same period one year prior.

Average commercial real estate loans increased this quarter by $511.2 million, compared to the prior year first quarter.

Average balances in our consumer loans, construction loans and lease portfolios also increased this quarter by $150.0 million, $129.5 million and $76.0 million, respectively, compared to the prior year first quarter.

Consumer loan growth was primarily the result of our new relationship with an additional consumer loan origination firm and our continuing relationship with GreenSky.

On January 24, 2023, we notified GreenSky of our intent to terminate our participation in their loan origination program in October 2023, pursuant to our contractual notice requirements.

Following the termination, GreenSky is expected to continue servicing all loans originated through the program.

Included in this category are commercial FHA warehouse lines.

Average commercial FHA warehouse lines decreased $93.2 million to $13.4 million in the second quarter of 2023.

Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $208.7 million in the second quarter of 2023 compared to the same period one year prior.

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Average commercial real estate loans increased this quarter by $229.7 million, compared to the prior year's second quarter.

Average balances in our construction loans, consumer loans and lease portfolios also increased this quarter by $154.0 million, $68.0 million and $70.6 million, respectively, compared to the prior year second quarter.

For the six months ended June 30, 2023, interest income, on a tax-equivalent basis, increased $63.8 million to $196.5 million as compared to the same period in 2022, primarily due to improved yields on earning assets.

The yield on earning assets increased 143 points to 5.43% from 4.00%, primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.30 billion in the first six months of 2023 from $6.70 billion in the same period in 2022.

An increase in average loans of $861.3 million was partially offset by a $228.7 million decrease in federal funds sold and cash investments.

Average commercial loans increased $129.9 million for the six months ended June 30, 2023 compared to the same period of 2022.

Commercial FHA warehouse lines decreased $63.4 million to $13.4 million in the first half of 2023.

Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $193.3 million for the six months ended June 30, 2023 compared to the same period one year prior.

Average balances in our commercial real estate loan portfolio increased by $369.7 million for the six months ended June 30, 2023 compared to the same period of 2022.

Average construction loans, consumer loans and lease portfolios also increased $141.8 million, $108.8 million and $73.3 million, respectively, for the six months ended June 30, 2023 compared to the same period of 2022.

Interest Expense.

Interest expense increased $29.1 million to $35.0 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The cost of interest-bearing liabilities increased to 2.46% for the first quarter of 2023, compared to 0.47% for the first quarter of 2022, due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

Interest expense on deposits increased $24.2 million to $26.4 million for the three months ended March 31, 2023 from the comparable period in 2022.

Interest expense increased $33.7 million to $41.7 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The cost of interest-bearing liabilities increased to 2.83% for the second quarter of 2023 compared to 0.60% for the second quarter of 2022 due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

Interest expense on deposits increased $29.8 million to $33.6 million for the three months ended June 30, 2023 from the comparable period in 2022 .

The increase was primarily due to an increase in rates paid on deposits.

Average balances of interest-bearing deposit accounts increased $546.3 million, or 12.1%, to $5.05 billion for the three months ended March 31, 2023 compared to the same period one year earlier.

The increase in volume was attributable to increases of retail deposits, commercial deposits, servicing deposits, and brokered deposits of $168.1 million, $30.1 million, $54.0 million, and $78.1 million, respectively.

In addition, our Insured Cash Sweep product balances increased $219.1 million.

Interest expense on FHLB advances and other borrowings increased $4.8 million for the three months ended March 31, 2023, from the comparable period in 2022.

Average balances increased $229.0 million for the three months ended March 31, 2023, from the comparable period in 2022, to provide funding for the increase in earning assets.

Interest expense on subordinated debt decreased $0.6 million for the three months ended March 31, 2023, from the comparable period in 2022, primarily due to the redemption of $40.0 million of subordinated debt on October 15, 2022.

The interest rate on the subordinated notes was 6.25%.

Interest expense on trust preferred debentures increased $0.7 million for the three months ended March 31, 2023, from the comparable period in 2022, due to interest rate increases, as these debt instruments reprice quarterly.

Average balances of interest-bearing deposit accounts increased $540.4 million, or 11.45%, to $5.26 billion for the three months ended June 30, 2023 compared to the same period one year earlier.

The increase in volume was attributable to increases of retail deposits, servicing deposits and brokered deposits of $148.5 million, $41.3 million, and $58.4 million, respectively.

In addition, our Insured Cash Sweep product average balances increased $351.7 million.

For the six month period ended June 30, 2023, interest expense increased $62.9 million to $76.7 million compared to the six months ended June 30, 2022.

The cost of interest-bearing liabilities increased to 2.65% for the first six months of 2023 compared to 0.54% for the same period of 2022.

I nterest expense on deposits increased to $60.0 million from $6.0 million for the comparable period in 2022 , primarily due to increases in interest rates on deposits.

Interest expense on FHLB advances and other borrowings increased $4.0 million and $8.8 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022.

Average balances increased $164.4 million and $196.5 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022.

Interest expense on subordinated debt decreased $0.7 million and $1.3 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022.

The Company redeemed $6.6 million of subordinated debt in the second quarter of 2023 and $40.0 million of subordinated debt on October 15, 2022.

Interest expense on trust preferred debentures increased $0.7 million and $1.4 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022, due to interest rate increases, as these debt instruments reprice quarterly.

Provision for Credit Losses.

The Company's provision for credit losses totaled $3.1 million for the three months ended March 31, 2023, all of which was attributable to loans.

Provision expense for the three months ended March 31, 2022 totaled $4.2 million, with $4.1 million expense attributable to loans, $0.3 million expense related to unfunded loan commitments and a $0.2 million benefit related to investment securities.

The provision for credit losses on loans recognized during the three months ended March 31, 2023 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

The Company's provision for credit losses totaled $5.9 million for the three months ended June 30, 2023, all of which was attributable to loans.

Provision for credit losses for the three months ended June 30, 2022 was $5.4 million, with $4.7 million expense attributable to loans and $0.7 million expense related to unfunded loan commitments.

For the six months ended June 30, 2023 and 2022 , the Company recorded provision expense of $9.0 million and $9.6 million, respectively.

The provision for credit losses on loans recognized during the three and six months ended June 30, 2023 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

A detailed evaluation of the adequacy

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of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.

Noninterest Income.

Noninterest income increased 1.06% for the three months ended March 31, 2023, compared to the same period of 2022.

The following table sets forth the major components of our noninterest income for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, Increase

Noninterest income increased 28.33% for the three months ended June 30, 2023, compared to the same period one year prior, and increased 14.25% for the six months ended June 30, 2023, compared to the same period one year prior.

The following table sets forth the major components of our noninterest income for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Increase

(decrease) Six Months Ended June 30, Increase

(dollars in thousands) 2023 2022 2023 2022

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Wealth management revenue .

Wealth management revenue decreased $0.7 million for the three months ended March 31, 2023, as compared to the same period in 2022.

Assets under administration decreased to $3.50 billion at March 31, 2023 from $3.93 billion at March 31, 2022, primarily due to a decline in market performance in 2022, resulting in a decrease in revenue.

Wealth management revenue decreased $0.6 million for the six months ended June 30, 2023, as compared to the same period in 2022.

Assets under administration increased to $3.59 billion at June 30, 2023 from $3.50 billion at June 30, 2022, primarily due to an increase in market performance in 2023.

Loss on sale of investment securities .

T he Company took advantage of certain market conditions during the first quarter of 2023 to reposition out of lower yielding tax-exempt securities into other structures, which should result in improved overall margin, liquidity and capital allocations.

These transactions resulted in losses of $0.6 million in the current quarter, with expected paybacks to occur within the calendar year.

The Company took advantage of certain market conditions during the three and six months ended June 30, 2023 to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations.

These transactions resulted in losses of $0.9 million and $1.5 million in the three and six months ended June 30, 2023, with expected paybacks to occur within a one year period.

Other noninterest income.

Other income totaled $2.8 million for the three months ended March 31, 2023, an increase of $0.9 million, as compared to the same period of 2022 .

As a result of designating our commercial FHA loan servicing rights as held for sale, we no longer amortize the servicing asset nor record impairment.

In the first quarter of 2022, amortization and impairment totaled $0.7 million and $0.4 million, respectively.

Other income increased $3.2 million and $4.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022.

As mentioned previously, the Company recognized a gain of $0.7 million on the redemption of subordinated debt in the second quarter of 2023.

Also in the second quarter of 2023, we recognized a gain of $0.8 million on the sale of OREO.

Net unrealized gains on our equity securities increased $0.6 million and $1.3 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

As a result of designating our commercial FHA loan servicing rights as held for sale, we did not amortize the servicing asset nor record impairment in 2023.

In the three and six months ended June 30, 2022, amortization expense totaled $0.6 million and $1.3 million, respectively.

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Noninterest Expense.

The following table sets forth the major components of noninterest expense for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, Increase

The following table sets forth the major components of noninterest expense for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Increase

(decrease) Six Months Ended June 30, Increase

(dollars in thousands) 2023 2022 2023 2022

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Salaries and employee benefits.

For the three months ended March 31, 2023, salaries and employee benefits expense increased $2.4 million as compared to the same period in 2022, primarily due to annual salary increases, a modest increase in staffing levels and increased medical insurance expense.

The Company employed 931 employees at March 31, 2023 compared to 920 employees at March 31, 2022.

For the six months ended June 30, 2023, salaries and employee benefits expense increased $2.6 million as compared to the same period in 2022, primarily due to annual salary increases and increased medical insurance expense.

The Company employed 915 employees at June 30, 2023 compared to 932 employees at June 30, 2022.

Occupancy and Equipment Expense.

For the three months ended March 31, 2023, occupancy and equipment expense increased $0.7 million as compared to the same period in 2022 primarily as a result of the non-controllable seasonal expenses, including snow removal.

For the six months ended June 30, 2023, occupancy and equipment expense increased $1.1 million as compared to the same period in 2022 primarily as a result of the non-controllable seasonal expenses in the first quarter of 2023, including snow removal.

In addition, the Company transitioned to an outsourced facilities management program and incurred increased repair expenses as a result of deferred maintenance.

Data processing fees.

The $0.5 million and $0.9 million increases in data processing fees for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 were primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes.

FDIC Insurance Expense.

For the three months ended March 31, 2023, FDIC insurance expense increased $0.5 million as compared to the same period in 2022, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

For the three and six months ended June 30, 2023, FDIC insurance expense increased $0.4 million and $0.9 million, respectively, as compared to the same periods in 2022, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

Income Tax Expense.

Income tax expense was $6.9 million for the three months ended March 31, 2023, as compared to $6.6 million for the three months ended March 31, 2022.

The resulting effective tax rates were 24.0% and 24.2% for the three months ended March 31, 2023 and 2022, respectively.

Income tax expense was $7.2 million for the three months ended June 30, 2023, as compared to $7.3 million for the three months ended June 30, 2022.

The resulting effective tax rates were 25.1% and 25.0% for the three months ended June 30, 2023 and 2022, respectively.

Income tax expense was $14.1 million for the six months ended June 30, 2023, as compared to $13.9 million for the six months ended June 30, 2022.

The resulting effective tax rates were 24.6% for each of the six months ended June 30, 2023 and 2022.

Financial Condition

Total assets increased to $7.93 billion at March 31, 2023, as compared to $7.86 billion at December 31, 2022.

Total assets increased to $8.03 billion at June 30, 2023, as compared to $7.86 billion at December 31, 2022.

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The loan portfolio is the largest category of our assets.

At March 31, 2023, total loans were $6.35 billion as compared to $6.31 billion at December 31, 2022.

The following table shows loans by category as of March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

At June 30, 2023, total loans were $6.37 billion as compared to $6.31 billion at December 31, 2022.

The following table shows loans by category as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

(dollars in thousands) Book Value % Book Value %

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Commercial FHA lines 30,522 0.5 25,029 0.4

SBA PPP loans 90 — 1,916 —

Other commercial loans 962,756 15.1 872,794 13.8

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Total loans, net $ 6,302,394 $ 6,245,416

Total loans increased $47.8 million to $6.35 billion at March 31, 2023, as compared to December 31, 2022.

The loan growth was primarily reflected in our commercial loans and leases and commercial real estate portfolios, which increased $84.1 million and $15.0 million, respectively.

Commercial loans and leases, which includes commercial FHA warehouse lines, increased $84.1 million to $2.09 billion at March 31, 2023, as compared to December 31, 2022.

Advances on commercial FHA warehouse lines decreased $14.8 million to $10.3 million at March 31, 2023.

Excluding the decrease in commercial FHA warehouse lines, commercial loans and leases increased $98.9 million, primarily from our equipment financing business.

Consumer loans decreased $61.1 million at March 31, 2023 primarily due to a decrease in loans originated through the program with GreenSky.

Total loans increased $60.9 million to $6.37 billion at June 30, 2023, as compared to December 31, 2022.

The loan growth was primarily reflected in our commercial loans and leases, and construction and land development portfolios, which increased $102.1 million and $45.7 million, respectively.

Commercial loans and leases, which includes commercial FHA warehouse lines, increased $102.1 million to $2.11 billion at June 30, 2023, as compared to December 31, 2022.

Advances on commercial FHA warehouse lines increased $5.5 million to $30.5 million at June 30, 2023.

Excluding the increase in commercial FHA warehouse lines, commercial loans and leases increased $96.6 million.

Consumer loans decreased $103.2 million at June 30, 2023 primarily due to a decrease in loans originated through the program with GreenSky.

On January 24, 2023, the Company notified GreenSky that, effective October 21, 2023, the Company would terminate its participation in GreenSky’s loan origination program.

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Interest reserves are generally established on real estate construction loans.

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Residential real estate loans.

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The financing is secured by a first priority interest in the financed asset and generally requires monthly payments.

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at March 31, 2023:

March 31, 2023

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at June 30, 2023:

June 30, 2023

Within One Year One Year to Five Years Five Years to 15 Years After 15 Years

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Analysis of the Allowance for Credit Losses on Loans.

The allowance for credit losses on loans was $62.1 million, or 0.98% of total loans, at March 31, 2023 compared to $61.1 million, or 0.97% of total loans, at December 31, 2022.

The allowance for credit losses on loans was $65.0 million, or 1.02% of total loans, at June 30, 2023 compared to $61.1 million, or 0.97% of total loans, at December 31, 2022.

The following table allocates the allowance for credit losses on loans by loan category:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(dollars in thousands) Allowance % (1)

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Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

The allowance allocated to commercial loans totaled $15.8 million, or 1.00% of total commercial loans, at March 31, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022.

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The allowance allocated to commercial loans totaled $15.3 million, or 0.95% of total commercial loans, at June 30, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022.

Modeled expected credit losses increased $0.2 million and qualitative factor ("Q-Factor") adjustments related to commercial loans increased $0.5 million.

The allowance allocated to commercial real estate loans totaled $28.2 million, or 1.15% of total commercial real estate loans, at March 31, 2023 compared to $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022.

Modeled expected credit losses related to commercial real estate loans decreased $1.1 million and Q-Factor adjustments related to commercial real estate loans increased $0.2 million.

Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis increased from $1.5 million at December 31, 2022 to $1.7 million at March 31, 2023.

The allowance allocated to consumer loans totaled $4.1 million, or 0.37% of total consumer loans at March 31, 2023, compared to $3.6 million, or 0.30%, at December 31, 2022.

The allowance allocated to residential real estate loans totaled $5.6 million, or 1.49% of total residential real estate loans at June 30, 2023, compared to $4.3 million, or 1.17%, at December 31, 2022.

Modeled expected credit losses increased $0.9 million and Q-Factor adjustments increased $0.3 million.

The allowance allocated to the lease portfolio totaled $7.2 million, or 1.41% of total commercial leases, at March 31, 2023, increasing $0.4 million from $6.8 million, or 1.38% of total commercial leases at December 31, 2022.

Modeled expected credit losses and Q-Factor adjustments related to commercial leases each increased $0.2 million.

In estimating expected credit losses as of March 31, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models.

The forecasted projections included, among other things, (i) growth of U.S.

gross domestic product slowing from approximately 2.0% in the first half of 2023 to -0.5% in the second half of 2023 and first quarter of 2024;

(ii) Federal Reserve raising the policy rate by 25 basis points at the May 2023 meeting;

and (iii) Illinois Unemployment rate averaging 5.82% through the fourth quarter of 2023.

These economic metrics forecast a slowing economy in 2023.

The allowance allocated to consumer loans totaled $4.0 million, or 0.37% of total consumer loans at June 30, 2023, compared to $3.6 million, or 0.30%, at December 31, 2022.

The allowance allocated to the GreenSky portfolio increased to 30 basis points as of June 30, 2023 compared to 25 basis points as of December 31, 2022, due to residual risk as the portfolio starts paying down and credit enhancements shrink.

In addition, specific allocations for consumer loans that were evaluated for expected credit losses on an individual basis increased $0.2 million.

The allowance allocated to the lease portfolio totaled $7.5 million, or 1.51% of total commercial leases, at June 30, 2023, increasing $0.7 million from $6.8 million, or 1.38% of total commercial leases at December 31, 2022.

Modeled expected credit losses increased $0.5 million and specific allocations for leases that were evaluated for expected credit losses on an individual basis increased $0.2 million.

In estimating expected credit losses as of June 30, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models.

The forecasted projections included, among other things, (i) expectations of a recession to occur in second half of 2023 because of past rate hikes by the Fed and the lagged effect of recent tightening in lending standards;

gross domestic product growth of 1.3% for 2023 and 0.4% for 2024;

(ii) Federal Reserve holding the policy rate through year end with a gradual decrease in 2024;

and (iii) unemployment rate averaging 3.9% for 2023, increasing to an average of 5.2% for 2024.

While these economic metrics indicate an improvement from the prior quarter, they still point to a slowing economy.

We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools.

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Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment.

As a result of this assessment as of March 31, 2023, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 52 basis points of total loans, increasing from 50 basis points at December 31, 2022.

The Q-Factor adjustment at

March 31, 2023 was based primarily on declining economic conditions, including rising inflation fears and an increasing risk of recession and the impact of rising fuel prices on businesses and consumers.

The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

As a result of this assessment as of June 30, 2023, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 52 basis points of total loans, increasing from 50 basis points at December 31, 2022.

The Q-Factor adjustment at June 30, 2023 was based primarily on declining economic conditions, including rising inflation fears.

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The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three and six months ended June 30, 2023 and 2022:

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

(dollars in thousands) 2023 2022 2023 2022

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Recoveries on loans previously charged off are added to the allowance.

Net charge-offs for the three months ended March 31, 2023 totaled $2.1 million, compared to $2.3 million for the same period one year ago.

Net charge-offs to average loans were 0.14% and 0.17% for the three months ended March 31, 2023 and 2022, respectively.

Net charge-offs for the three months ended June 30, 2023 totaled $3.0 million, compared to $2.8 million for the same period one year ago.

For the six months ended June 30, 2023, net charge-offs totaled $5.1 million, compared to $5.0 million for the same period one year ago.

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Nonperforming Loans .

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The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.

(dollars in thousands) March 31, 2023 December 31, 2022

(dollars in thousands) June 30, 2023 December 31, 2022

Nonperforming loans:

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Allowance for credit losses to nonperforming loans 118.43 % 123.53 %

We did not recognize interest income on nonaccrual loans during the three months ended March 31, 2023 or 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.

We did not recognize interest income on nonaccrual loans during the three months ended June 30, 2023 or 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 and $1.6 million for the three and six months ended June 30, 2023, respectively, and $0.5 million and $1.3 million for the three and six months ended June 30, 2022, respectively.

We utilize an asset risk classification system in compliance with guidelines established by the Federal Reserve as part of our efforts to improve asset quality.

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(dollars in thousands) 7 8 (1)

March 31, 2023 $ 20,273 $ 8,582 $ 35,510 $ 82,732 $ 210 $ 8,406 $ 155,713

June 30, 2023 $ 10,545 $ 29,183 $ 28,440 $ 95,203 $ 60 $ 6,000 $ 169,431

December 31, 2022 12,693 9,579 42,770 82,949 210 8,415 156,616

(1) Includes only those 8-rated loans that are not included in nonperforming loans.

Commercial loans with a risk rating of 7 or 8 increased $6.6 million to $28.9 million as of March 31, 2023, compared to $22.3 million as of December 31, 2022.

Commercial real estate loans with a risk rating of 7 or 8 decreased $7.5 million to $118.2 million as of March 31, 2023, compared to $125.7 million as of December 31, 2022, primarily due to risk rating upgrades within the portfolio.

Commercial loans with a risk rating of 7 or 8 increased $17.5 million to $39.7 million as of June 30, 2023, compared to $22.3 million as of December 31, 2022.

The increase was due to a single commercial loan that was down graded in the second quarter of 2023.

Commercial real estate loans with a risk rating of 7 or 8 decreased $2.1 million to $123.6 million as of June 30, 2023, compared to $125.7 million as of December 31, 2022, primarily due to risk rating upgrades within the portfolio.

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Investment Securities.

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The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.

The following table sets forth the book value and percentage of each category of investment securities at March 31, 2023 and December 31, 2022.

The following table sets forth the book value and percentage of each category of investment securities at June 30, 2023 and December 31, 2022.

The book value for investment securities classified as available for sale is equal to fair market value.

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(dollars in thousands) Book

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Total investment securities, available for sale, at fair value $ 882,715 100.0 % $ 768,234 100.0 %

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at March 31, 2023.

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at June 30, 2023.

The book value for investment securities classified as available for sale is equal to fair market value.

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(dollars in thousands) Book value % of total Weighted average yield

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(1) Weighted average yield for tax-exempt securities are presented on a tax-equivalent basis assuming a federal income tax rate of 21%.

The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at March 31, 2023.

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The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at June 30, 2023.

Amortized Estimated Average credit rating

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Total investment securities, available for sale $ 988,643 $ 882,715 $ 134,553 $ 710,103 $ 16,722 $ 21,337 $ — $ —

Cash and Cash Equivalents.

Cash and cash equivalents decreased $22.3 million to $138.3 million at March 31, 2023 compared to December 31, 2022, as the excess liquidity was used to fund loan growth during the quarter.

At March 31, 2023, liabilities totaled $7.15 billion compared to $7.10 billion at December 31, 2022.

At June 30, 2023, liabilities totaled $7.26 billion compared to $7.10 billion at December 31, 2022.

We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources.

Our deposits consist of noninterest-bearing and interest-bearing demand, savings and time deposit accounts.

Total deposits increased $60.5 million to $6.43 billion at March 31, 2023, as compared to December 31, 2022.

Interest rate promotions offered during the first quarter of 2023 on money market and time deposit products resulted in increases in balances of $79.7 million and $143.6 million, respectively, at March 31, 2023, compared to December 31, 2022.

Total deposits increased $61.9 million to $6.43 billion at June 30, 2023, as compared to December 31, 2022.

Interest rate promotions offered in 2023 on money market and time deposit products resulted in increases in balances of $42.4 million and $251.1 million, respectively, at June 30, 2023, compared to December 31, 2022.

These increases were partially offset by a decrease in noninterest-bearing demand account balances of $199.3 million, as a result of increasing deposit rates in response to the rate increases announced by the Federal Reserve.

(dollars in thousands) March 31, 2023 December 31, 2022

(dollars in thousands) June 30, 2023 December 31, 2022

Book Value % of Total Book Value % of Total

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Total deposits $ 6,426,548 100.0 % $ 6,364,652 100.0 %

The following table summarizes our average deposit balances and weighted average rates for the three months ended March 31, 2023 and 2022:

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The following table summarizes our average deposit balances and weighted average rates for the three months ended June 30, 2023 and 2022:

Three months ended

March 31, 2023 Three months ended

March 31, 2022

June 30, 2023 Three months ended

June 30, 2022

(dollars in thousands) Average

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Total deposits $ 6,446,772 2.09 % $ 6,120,027 0.25 %

The Company estimates that uninsured deposits (1) totaled $1.32 billion, or 21% of total deposits, at March 31, 2023 compared to $1.55 billion, or 24%, at December 31, 2022.

The following table sets forth the maturity of uninsured time deposits as of March 31, 2023:

The Company estimates that uninsured deposits (1) totaled $1.21 billion, or 19% of total deposits, at June 30, 2023 compared to $1.55 billion, or 24%, at December 31, 2022.

The following table sets forth the maturity of uninsured time deposits as of June 30, 2023:

(dollars in thousands) Amount

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Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available-for-sale investment securities and cash flow hedges.

Shareholders’ equity increased $17.1 million to $775.6 million at March 31, 2023 as compared to December 31, 2022.

The Company generated net income of $21.8 million during 2023 and accumulated other comprehensive loss decreased by $6.0 million.

Offsetting these increases to shareholders’ equity were dividends to common shareholders of $6.7 million, dividends to preferred shareholders of $2.2 million and repurchases of common stock of $2.8 million.

Shareholders’ equity increased $18.2 million to $776.8 million at June 30, 2023 as compared to December 31, 2022.

The Company generated net income of $43.3 million during 2023.

Offsetting this increase to shareholders’ equity were dividends to common shareholders of $13.4 million, dividends to preferred shareholders of $4.5 million, repurchases of common stock of $9.0 million and an increase in accumulated other comprehensive losses of $1.0 million.

The Company has a share repurchase program, whereby the Board of Directors authorized the Company to repurchase up to $25.0 million of its common stock.

This program terminates December 31, 2023.

As of March 31, 2023, $2.8 million, or 124,266 shares of the Company’s common stock, had been repurchased under the program, with approximately $22.2 million of remaining repurchase authority.

As of June 30, 2023, $8.9 million, or 432,809 shares of the Company’s common stock, had been repurchased under the program, with approximately $16.1 million of remaining repurchase authority.

Liquidity Management.

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We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

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Integral to our liquidity management is the administration of short-term borrowings.

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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 table below presents our sources of liquidity as of March 31, 2023 and December 31, 2022:

(dollars in millions) March 31, 2023 December 31, 2022

Investment securities with a carrying amount of $28.8 million and $46.1 million at June 30, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.

The table below presents our sources of liquidity as of June 30, 2023 and December 31, 2022:

(dollars in thousands) June 30, 2023 December 31, 2022

Cash and cash equivalents $ 160,695 $ 160,631

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There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company.

Management believed at March 31, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Management believed at June 30, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

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The Company is adopting the capital transition relief over the permissible five-year period.

At March 31, 2023, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at March 31, 2023:

At June 30, 2023, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

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The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at June 30, 2023:

Ratio Actual Minimum

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The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

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We use Net Interest Income at Risk (“NII at Risk”) to model interest rate risk utilizing various assumptions for assets, liabilities, and derivatives.

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(dollars in thousands) -100 +100 +200

March 31, 2023:

June 30, 2023:

Dollar change $ (9,439) $ 10,748 $ 20,948

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It models −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months.

We were within board policy limits for the -100, +100 and +200 basis point scenarios at March 31, 2023.

We were within board policy limits for the -100, +100 and +200 basis point scenarios at June 30, 2023.

Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet.

NII at Risk reported at March 31, 2023 projects that our earnings exhibit reduced sensitivity to changes in interest rates for all three scenarios compared to December 31, 2022.

NII at Risk reported at June 30, 2023 projects that our earnings exhibit increasing sensitivity to changes in interest rates for both rising rate scenarios compared to December 31, 2022.

Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting.

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The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk”.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis