Midland States Bancorp, Inc. 10-Q

ITEM 1 – FINANCIAL STATEMENTS MIDLAND STATES BANCORP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) June 30, 2023 December 31, 2022 (unaudited) Assets Cash and due from banks $ 159,637 $ 153,345 Federal funds sold 1,058 7,286 Cash and cash equivalents 160,695 160,631 Investment securities available for sale, at fair value 882,715 768,234 Equity securities, at fair value 4,288 8,626 Loans 6,367,344 6,306,467 Allowance for credit losses on loans ( 64,950 ) ( 61,051 ) Total loans, net 6,302,394 6,245,416 Loans held for sale 5,632 1,286 Premises and equipment, net 81,006 78,293 Other real estate owned 202 6,729 Nonmarketable equity securities 46,876 46,201 Accrued interest receivable 21,000 20,313 Loan servicing rights, at lower of cost or fair value 21,611 1,205 Commercial FHA mortgage loan servicing rights held for sale — 20,745 Goodwill 161,904 161,904 Other intangible assets, net 18,367 20,866 Company-owned life insurance 152,210 150,443 Other assets 175,821 164,609 Total assets $ 8,034,721 $ 7,855,501 Liabilities and Shareholders’ Equity Liabilities: Deposits: Noninterest-bearing demand deposits $ 1,162,909 $ 1,362,158 Interest-bearing deposits 5,263,639 5,002,494 Total deposits 6,426,548 6,364,652 Short-term borrowings 21,783 42,311 Federal Home Loan Bank advances and other borrowings 575,000 460,000 Subordinated debt 93,404 99,772 Trust preferred debentures 50,296 49,975 Accrued interest payable and other liabilities 90,869 80,217 Total liabilities 7,257,900 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 June 30, 2023 and December 31, 2022, respectively 110,548 110,548 Common stock, $ 0.01 par value; 40,000,000 shares authorized; 21,854,800 and 22,214,913 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively 218 222 Capital surplus 442,886 449,196 Retained earnings 307,888 282,405 Accumulated other comprehensive loss, net of tax ( 84,719 ) ( 83,797 ) Total shareholders’ equity 776,821 758,574 Total liabilities and shareholders’ equity $ 8,034,721 $ 7,855,501 The accompanying notes are an integral part of the consolidated financial statements. 3 Table o f Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME — (UNAUDITED) (dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Interest income: Loans including fees: Taxable $ 91,350 $ 62,943 $ 178,809 $ 119,529 Tax exempt 427 514 852 1,062 Loans held for sale 59 77 75 297 Investment securities: Taxable 6,899 4,055 12,269 7,952 Tax exempt 305 692 799 1,534 Nonmarketable equity securities 599 487 1,394 971 Federal funds sold and cash investments 852 468 1,832 639 Total interest income 100,491 69,236 196,030 131,984 Interest expense: Deposits 33,617 3,810 60,022 5,971 Short-term borrowings 14 22 39 45 Federal Home Loan Bank advances and other borrowings 5,396 1,435 11,402 2,647 Subordinated debt 1,335 2,011 2,705 4,022 Trust preferred debentures 1,289 624 2,518 1,138 Total interest expense 41,651 7,902 76,686 13,823 Net interest income 58,840 61,334 119,344 118,161 Provision for credit losses: Provision for credit losses on loans 5,879 4,741 9,014 8,873 Provision for credit losses on unfunded commitments — 700 — 956 Recapture of other credit losses — — — ( 221 ) Total provision for credit losses 5,879 5,441 9,014 9,608 Net interest income after provision for credit losses 52,961 55,893 110,330 108,553 Noninterest income: Wealth management revenue 6,269 6,143 12,680 13,282 Residential mortgage banking revenue 540 384 945 983 Service charges on deposit accounts 2,677 2,304 5,245 4,372 Interchange revenue 3,696 3,590 7,108 6,870 Loss on sales of investment securities, net ( 869 ) ( 101 ) ( 1,517 ) ( 101 ) Impairment on commercial mortgage servicing rights — ( 869 ) — ( 1,263 ) Company-owned life insurance 891 840 1,767 1,859 Other income 5,549 2,322 8,304 4,224 Total noninterest income 18,753 14,613 34,532 30,226 Noninterest expense: Salaries and employee benefits 22,857 22,645 47,100 44,515 Occupancy and equipment 3,879 3,489 8,322 7,244 Data processing 6,544 6,082 12,855 11,955 FDIC insurance 1,196 826 2,525 1,656 Professional 1,663 1,516 3,423 3,488 Marketing 670 733 1,373 1,421 Communications 496 635 1,007 1,347 Loan expense 1,420 1,137 2,238 2,080 Amortization of intangible assets 1,208 1,318 2,499 2,716 Other expense 2,961 2,958 6,034 5,801 Total noninterest expense 42,894 41,339 87,376 82,223 Income before income taxes 28,820 29,167 57,486 56,556 Income taxes 7,245 7,284 14,139 13,924 Net income 21,575 21,883 43,347 42,632 Preferred dividends 2,228 — 4,456 — Net income available to common shareholders $ 19,347 $ 21,883 $ 38,891 $ 42,632 Per common share data: Basic earnings per common share $ 0.86 $ 0.97 $ 1.72 $ 1.89 Diluted earnings per common share $ 0.86 $ 0.97 $ 1.72 $ 1.89 Weighted average common shares outstanding 22,200,917 22,305,590 22,338,627 22,290,486 Weighted average diluted common shares outstanding 22,205,079 22,360,819 22,348,981 22,355,936 The accompanying notes are an integral part of the consolidated financial statements. 4 Table o f Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — (UNAUDITED) (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net income $ 21,575 $ 21,883 $ 43,347 $ 42,632 Other comprehensive loss: Investment securities available for sale: Unrealized losses that occurred during the period ( 8,020 ) ( 32,659 ) ( 2,656 ) ( 83,435 ) Recapture of credit loss expense — — — ( 221 ) Reclassification adjustment for realized net losses on sales of investment securities included in net income 869 101 1,517 101 Income tax effect 1,930 8,953 308 22,977 Change in investment securities available for sale, net of tax ( 5,221 ) ( 23,605 ) ( 831 ) ( 60,578 ) Cash flow hedges: Net unrealized derivative (losses) gains on cash flow hedges ( 2,331 ) ( 2,010 ) ( 125 ) 3,095 Income tax effect 630 553 34 ( 851 ) Change in cash flow hedges, net of tax ( 1,701 ) ( 1,457 ) ( 91 ) 2,244 Other comprehensive loss, net of tax ( 6,922 ) ( 25,062 ) ( 922 ) ( 58,334 ) Total comprehensive income (loss) $ 14,653 $ ( 3,179 ) $ 42,425 $ ( 15,702 ) The accompanying notes are an integral part of the consolidated financial statements . 5 Table o f 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, March 31, 2023 $ 110,548 $ 221 $ 447,471 $ 295,200 $ ( 77,797 ) $ 775,643 Net income — — — 21,575 — 21,575 Other comprehensive loss — — — — ( 6,922 ) ( 6,922 ) Common dividends declared ($ 0.30 per share) — — — ( 6,659 ) — ( 6,659 ) Preferred dividends declared ($ 19.375 per share) — — — ( 2,228 ) — ( 2,228 ) Common stock repurchased — ( 3 ) ( 6,163 ) — — ( 6,166 ) Share-based compensation expense — — 567 — — 567 Issuance of common stock under employee benefit plans — 1,011 — — 1,011 Balances, June 30, 2023 $ 110,548 $ 218 $ 442,886 $ 307,888 $ ( 84,719 ) $ 776,821 Balances, December 31, 2022 $ 110,548 $ 222 $ 449,196 $ 282,405 $ ( 83,797 ) $ 758,574 Net income — — — 43,347 — 43,347 Other comprehensive loss — — — — ( 922 ) ( 922 ) Common dividends declared ($ 0.60 per share) — — — ( 13,408 ) — ( 13,408 ) Preferred dividends declared ($ 38.750 per share) — — — ( 4,456 ) — ( 4,456 ) Common stock repurchased — ( 4 ) ( 8,963 ) — — ( 8,967 ) Share-based compensation expense — — 1,192 — — 1,192 Issuance of common stock under employee benefit plans — — 1,461 — — 1,461 Balances, June 30, 2023 $ 110,548 $ 218 $ 442,886 $ 307,888 $ ( 84,719 ) $ 776,821 Balances, March 31, 2022 $ — $ 220 $ 446,044 $ 226,757 $ ( 28,035 ) $ 644,986 Net income — — — 21,883 — 21,883 Other comprehensive loss — — — — ( 25,062 ) ( 25,062 ) Common dividends declared ($ 0.29 per share) — — — ( 6,470 ) — ( 6,470 ) Share-based compensation expense — — 519 — — 519 Issuance of common stock under employee benefit plans — 1 331 — — 332 Balances, June 30, 2022 $ — $ 221 $ 446,894 $ 242,170 $ ( 53,097 ) $ 636,188 Balances, December 31, 2021 $ — $ 221 $ 445,907 $ 212,472 $ 5,237 $ 663,837 Net income — — — 42,632 — 42,632 Other comprehensive loss — — — — ( 58,334 ) ( 58,334 ) Common dividends declared ($ 0.58 per share) — — — ( 12,934 ) — ( 12,934 ) Common stock repurchased — ( 1 ) ( 1,108 ) — — ( 1,109 ) Share-based compensation expense — — 1,046 — — 1,046 Issuance of common stock under employee benefit plans — 1 1,049 — — 1,050 Balances, June 30, 2022 $ — $ 221 $ 446,894 $ 242,170 $ ( 53,097 ) $ 636,188 The accompanying notes are an integral part of the consolidated financial statements. 6 Table o f Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED) (dollars in thousands) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net income $ 43,347 $ 42,632 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 9,014 9,608 Depreciation on premises and equipment 2,419 2,445 Amortization of intangible assets 2,499 2,716 Amortization of operating lease right-of-use asset 844 904 Amortization of loan servicing rights 172 1,507 Share-based compensation expense 1,192 1,046 Increase in cash surrender value of life insurance ( 1,767 ) ( 1,671 ) Gain on proceeds from company-owned life insurance — ( 188 ) Investment securities (accretion) amortization, net ( 808 ) 1,440 Loss on sales of investment securities, net 1,517 101 Gain on repurchase of subordinated debt ( 676 ) — Gain on sales of other real estate owned ( 819 ) 120 Impairment on other real estate owned — 404 Origination of loans held for sale ( 27,259 ) ( 100,806 ) Proceeds from sales of loans held for sale 34,344 203,545 Gain on sale of loans held for sale ( 1,144 ) ( 799 ) Impairment on commercial mortgage servicing rights — 1,263 Net change in operating assets and liabilities: Accrued interest receivable ( 687 ) 2,954 Other assets ( 11,430 ) ( 17,039 ) Accrued expenses and other liabilities 9,995 4,295 Net cash provided by operating activities 60,753 154,477 Cash flows from investing activities: Purchases of investment securities available for sale ( 245,744 ) ( 99,882 ) Proceeds from sales of investment securities available for sale 99,960 107,740 Maturities and payments on investment securities available for sale 29,455 53,329 Purchases of equity securities ( 192 ) ( 379 ) Proceeds from sales of equity securities 5,148 — Net increase in loans ( 76,502 ) ( 634,229 ) Purchases of premises and equipment ( 4,688 ) ( 928 ) Proceeds from sale of premises and equipment 50 143 Purchases of nonmarketable equity securities ( 66,572 ) ( 1,860 ) Proceeds from redemptions of nonmarketable equity securities 65,897 2,500 Proceeds from sales of other real estate owned 7,346 505 Proceeds from settlements of company-owned life insurance — 1,337 Net cash acquired in acquisitions — 60,275 Net cash used in investing activities ( 185,842 ) ( 511,449 ) Cash flows from financing activities: Net increase (decrease) in deposits 61,896 ( 6,004 ) Net decrease in short-term borrowings ( 20,528 ) ( 9,114 ) Proceeds from FHLB borrowings 11,246,000 700,000 Payments made on FHLB borrowings and other borrowings ( 11,131,000 ) ( 725,000 ) Payments made on subordinated debt ( 5,845 ) — Cash dividends paid on preferred stock ( 4,456 ) — Cash dividends paid on common stock ( 13,408 ) ( 12,934 ) Redemption of Series G preferred stock — ( 171 ) Common stock repurchased ( 8,967 ) ( 1,109 ) Proceeds from issuance of common stock under employee benefit plans 1,461 1,050 Net cash provided by (used in) financing activities 125,153 ( 53,282 ) Net increase (decrease) in cash and cash equivalents 64 ( 410,254 ) Cash and cash equivalents: Beginning of period 160,631 680,371 End of period $ 160,695 $ 270,117 Supplemental disclosures of cash flow information: Cash payments for: Interest paid on deposits and borrowed funds $ 69,828 $ 13,746 Income tax paid (net of refunds) 11,024 16,606 Supplemental disclosures of noncash investing and financing activities: Transfer of loans to loans held for sale — 74,997 Transfer of loans to other real estate owned — 102 Right of use assets obtained in exchange for lease obligations 1,348 121 Transfer of loan servicing rights held for sale to loan servicing rights, at lower of cost or market 20,745 — The accompanying notes are an integral part of the consolidated financial statements . 7 Table o f 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 o f 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 June 30, 2023 and December 31, 2022 were as follows: June 30, 2023 (dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value Investment securities available for sale U.S. Treasury securities $ 46,636 $ — $ 3,890 $ 42,746 U.S. government sponsored entities and U.S. agency securities 77,510 — 4,052 73,458 Mortgage-backed securities - agency 612,214 640 74,220 538,634 Mortgage-backed securities - non-agency 69,921 — 4,010 65,911 State and municipal securities 64,481 8 6,995 57,494 Collateralized loan obligations 22,709 — — 22,709 Corporate securities 95,172 — 13,409 81,763 Total available for sale securities $ 988,643 $ 648 $ 106,576 $ 882,715 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 June 30, 2023. Expected maturities may differ from contractual maturities in mortgage-backed securities because 9 Table o f Contents 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 $ 23,829 $ 23,763 After one year through five years 144,513 136,304 After five years through ten years 48,352 42,895 After ten years 89,814 75,208 Mortgage-backed securities 682,135 604,545 Total available for sale securities $ 988,643 $ 882,715 Proceeds and gross realized gains and losses on sales of investment securities available for sale for the three and six months ended June 30, 2023 and 2022 are summarized as follows: Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2023 2022 2023 2022 Investment securities available for sale Proceeds from sales $ 15,467 $ 107,740 $ 99,960 $ 107,740 Gross realized gains on sales — 716 338 716 Gross realized losses on sales ( 869 ) ( 817 ) ( 1,855 ) ( 817 ) Unrealized losses and fair values for investment securities available for sale as of June 30, 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: June 30, 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 $ 970 $ 11 $ 41,776 $ 3,879 $ 42,746 $ 3,890 U.S. government sponsored entities and U.S. agency securities 49,365 171 24,093 3,881 73,458 4,052 Mortgage-backed securities - agency 124,341 2,251 363,472 71,969 487,813 74,220 Mortgage-backed securities - non-agency 21,926 141 20,147 3,869 42,073 4,010 State and municipal securities 8,905 201 46,959 6,794 55,864 6,995 Corporate securities 3,164 336 78,599 13,073 81,763 13,409 Total available for sale securities $ 208,671 $ 3,111 $ 575,046 $ 103,465 $ 783,717 $ 106,576 10 Table o f 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 June 30, 2023, 320 investment securities available for sale had unrealized losses with aggregate depreciation of 11.93 % 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 June 30, 2023 and December 31, 2022: (dollars in thousands) June 30, 2023 December 31, 2022 Commercial: Commercial $ 875,295 $ 786,877 Commercial other 732,616 727,697 Commercial real estate: Commercial real estate non-owner occupied 1,647,680 1,591,399 Commercial real estate owner occupied 453,514 496,786 Multi-family 273,939 277,889 Farmland 68,862 67,085 Construction and land development 366,631 320,882 Total commercial loans 4,418,537 4,268,615 Residential real estate: Residential first lien 311,796 304,243 Other residential 59,690 61,851 Consumer: Consumer 108,619 105,880 Consumer other 968,217 1,074,134 Lease financing 500,485 491,744 Total loans $ 6,367,344 $ 6,306,467 Total loans include net deferred loan costs of $ 5.7 million and $ 4.4 million at June 30, 2023 and December 31, 2022, respectively, and unearned discounts of $ 67.5 million and $ 62.6 million within the lease financing portfolio at June 30, 2023 and December 31, 2022, respectively. At June 30, 2023, the Company had residential real estate loans held for sale totaling $ 5.6 million, compared to $ 1.3 million at December 31, 2022. The Company sold loans and leases with proceeds totaling $ 28.0 million and $ 34.3 million during the three and six months ended June 30, 2023, respectively, and $ 100.4 million and $ 203.5 million during the three and six months ended June 30, 2022, respectively. 11 Table o f 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 $ 30.5 million and $ 25.0 million as of June 30, 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 $ 21.6 million and $ 19.8 million at June 30, 2023 and December 31, 2022, respectively. The new loans, other additions, repayments and other reductions for the three and six months ended June 30, 2023 and 2022, are summarized as follows: Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2023 2022 2023 2022 Beginning balance $ 19,519 $ 23,374 $ 19,776 $ 13,869 New loans and other additions 2,367 — 2,367 9,805 Repayments and other reductions ( 317 ) ( 277 ) ( 574 ) ( 577 ) Ending balance $ 21,569 $ 23,097 $ 21,569 $ 23,097 12 Table o f Contents The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three and six months ended June 30, 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 June 30, 2023: Balance, beginning of period $ 15,762 $ 28,216 $ 2,442 $ 4,350 $ 4,129 $ 7,168 $ 62,067 Provision for credit losses on loans 196 2,427 1,049 1,207 4 996 5,879 Charge-offs ( 1,071 ) ( 1,544 ) ( 334 ) ( 54 ) ( 260 ) ( 771 ) ( 4,034 ) Recoveries 403 326 32 48 80 149 1,038 Balance, end of period $ 15,290 $ 29,425 $ 3,189 $ 5,551 $ 3,953 $ 7,542 $ 64,950 Changes in allowance for credit losses on loans for the six months ended June 30, 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 2,194 2,097 1,056 1,270 704 1,693 9,014 Charge-offs ( 2,040 ) ( 2,290 ) ( 334 ) ( 85 ) ( 523 ) ( 1,161 ) ( 6,433 ) Recoveries 497 328 32 65 173 223 1,318 Balance, end of period $ 15,290 $ 29,425 $ 3,189 $ 5,551 $ 3,953 $ 7,542 $ 64,950 Changes in allowance for credit losses on loans for the three months ended June 30, 2022: Balance, beginning of period $ 12,621 $ 26,277 $ 816 $ 3,288 $ 2,672 $ 7,264 $ 52,938 Provision for credit losses on loans ( 111 ) 4,284 279 133 415 ( 259 ) 4,741 Charge-offs ( 60 ) ( 2,625 ) — ( 46 ) ( 191 ) ( 499 ) ( 3,421 ) Recoveries 298 ( 62 ) 6 41 98 259 640 Balance, end of period $ 12,748 $ 27,874 $ 1,101 $ 3,416 $ 2,994 $ 6,765 $ 54,898 Changes in allowance for credit losses on loans for the six months ended June 30, 2022: Balance, beginning of period $ 14,375 $ 22,993 $ 972 $ 2,695 $ 2,558 $ 7,469 $ 51,062 Provision for credit losses on loans 278 7,728 123 717 672 ( 645 ) 8,873 Charge-offs ( 2,214 ) ( 2,852 ) ( 6 ) ( 150 ) ( 496 ) ( 705 ) ( 6,423 ) Recoveries 309 5 12 154 260 646 1,386 Balance, end of period $ 12,748 $ 27,874 $ 1,101 $ 3,416 $ 2,994 $ 6,765 $ 54,898 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 13 Table o f Contents 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. 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 14 Table o f Contents with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of June 30, 2023 and December 31, 2022: June 30, 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 $ 1,604 $ 969 $ 2,573 $ 1,910 $ 1,111 $ 3,021 Commercial other 3,537 — 3,537 3,169 — 3,169 Commercial real estate: Commercial real estate non-owner occupied 12,016 9,092 21,108 1,345 11,899 13,244 Commercial real estate owner occupied 2,741 11,647 14,388 7,118 — 7,118 Multi-family 269 2,673 2,942 154 8,949 9,103 Farmland 172 — 172 25 — 25 Construction and land development 2,234 — 2,234 202 — 202 Total commercial loans 22,573 24,381 46,954 13,923 21,959 35,882 Residential real estate: Residential first lien 2,865 559 3,424 2,925 572 3,497 Other residential 495 — 495 871 — 871 Consumer: Consumer 97 — 97 120 — 120 Lease financing 3,413 — 3,413 1,606 — 1,606 Total loans $ 29,443 $ 24,940 $ 54,383 $ 19,445 $ 22,531 $ 41,976 There was no interest income recognized on nonaccrual loans during the three and six months ended June 30, 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 and $ 1.6 million for the three and six months ended June 30, 2023 and $ 0.5 million and $ 1.3 million for the three and six months ended June 30, 2022, respectively. 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 15 Table o f Contents 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 June 30, 2023 and December 31, 2022: Type of Collateral (dollars in thousands) Real Estate Blanket Lien Equipment Total June 30, 2023 Commercial: Commercial $ 2,053 $ 969 $ — $ 3,022 Commercial real estate: Non-owner occupied 19,401 — — 19,401 Owner occupied 11,637 — — 11,637 Multi-family 2,674 — — 2,674 Lease financing — — 955 955 Total collateral dependent loans $ 35,765 $ 969 $ 955 $ 37,689 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 16 Table o f Contents The aging status of the recorded investment in loans by portfolio as of June 30, 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 $ 5,880 $ 5,554 $ — $ 11,434 $ 2,573 $ 861,288 $ 875,295 Commercial other 8,921 3,503 71 12,495 3,537 716,584 732,616 Commercial real estate: Commercial real estate non-owner occupied 5 23 — 28 21,108 1,626,544 1,647,680 Commercial real estate owner occupied 107 — — 107 14,388 439,019 453,514 Multi-family — — — — 2,942 270,997 273,939 Farmland 152 — — 152 172 68,538 68,862 Construction and land development 200 — — 200 2,234 364,197 366,631 Total commercial loans 15,265 9,080 71 24,416 46,954 4,347,167 4,418,537 Residential real estate: Residential first lien 6 115 36 157 3,424 308,215 311,796 Other residential 39 33 — 72 495 59,123 59,690 Consumer: Consumer 405 31 — 436 97 108,086 108,619 Consumer other 5,717 3,844 — 9,561 — 958,656 968,217 Lease financing 5,161 4,465 354 9,980 3,413 487,092 500,485 Total loans $ 26,593 $ 17,568 $ 461 $ 44,622 $ 54,383 $ 6,268,339 $ 6,367,344 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 17 Table o f Contents Loan Restructurings 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 June 30, 2023 the Company restructured three loans for borrowers experiencing financial difficulties with principal balances totaling $ 0.5 million. Two of the restructured loans were provided a term extension with the other receiving an interest rate reduction and a term extension. During the six months ended June 30, 2023 the Company restructured five loans for borrowers experiencing financial difficulties with principal balances totaling $ 0.6 million. Three of the restructured loans were provided a term extension with the other two 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 18 Table o f Contents least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly. 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. 19 Table o f Contents The following tables present the recorded investment of the commercial loan portfolio by risk category as of June 30, 2023 and December 31, 2022: June 30, 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 $ 123,578 $ 115,893 $ 92,140 $ 51,929 $ 17,118 $ 51,141 $ 383,336 $ 835,135 Special mention — 500 8,030 — 296 176 332 9,334 Substandard 4,063 13,294 999 — 171 5,238 4,488 28,253 Substandard – nonaccrual — — 332 — 84 457 1,700 2,573 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 127,641 129,687 101,501 51,929 17,669 57,012 389,856 875,295 Commercial other Acceptable credit quality 157,807 227,700 125,632 81,135 47,722 9,229 76,954 726,179 Special mention — 543 135 278 192 13 50 1,211 Substandard 40 250 — — — — 893 1,183 Substandard – nonaccrual 326 977 837 710 579 108 — 3,537 Doubtful — — — — — — — — Not graded — 506 — — — — — 506 Subtotal 158,173 229,976 126,604 82,123 48,493 9,350 77,897 732,616 Commercial real estate Non-owner occupied Acceptable credit quality 103,887 681,398 382,913 138,251 84,869 144,947 7,196 1,543,461 Special mention — — 183 467 162 12,408 — 13,220 Substandard — 2,272 — — 35,314 32,305 — 69,891 Substandard – nonaccrual — — 676 999 7,602 11,831 — 21,108 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 103,887 683,670 383,772 139,717 127,947 201,491 7,196 1,647,680 Owner occupied Acceptable credit quality 27,962 104,832 115,917 53,849 24,524 89,082 1,108 417,274 Special mention — — 131 — 81 276 15 503 Substandard — 7,729 268 72 740 12,540 — 21,349 Substandard – nonaccrual 159 9,663 2,436 197 143 1,486 304 14,388 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 28,121 122,224 118,752 54,118 25,488 103,384 1,427 453,514 Multi-family Acceptable credit quality 663 165,156 26,223 28,464 10,318 21,882 171 252,877 Special mention — — — — — 14,621 — 14,621 Substandard — — — — — 3,499 — 3,499 Substandard – nonaccrual — — 899 — 107 1,936 — 2,942 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 663 165,156 27,122 28,464 10,425 41,938 171 273,939 Farmland Acceptable credit quality 8,743 6,042 15,432 12,891 3,888 19,614 1,452 68,062 Special mention — — — — — 96 — 96 Substandard — — 14 — 22 344 152 532 Substandard – nonaccrual — — — — — 124 48 172 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 8,743 6,042 15,446 12,891 3,910 20,178 1,652 68,862 Construction and land development Acceptable credit quality 28,311 189,923 100,265 1,236 674 1,232 34,325 355,966 Special mention — — — — — 60 — 60 Substandard — — 6,000 — — — — 6,000 Substandard – nonaccrual — — — — 176 2,058 — 2,234 Doubtful — — — — — — — — Not graded 453 1,512 372 7 — 27 — 2,371 Subtotal 28,764 191,435 106,637 1,243 850 3,377 34,325 366,631 Total Acceptable credit quality 450,951 1,490,944 858,522 367,755 189,113 337,127 504,542 4,198,954 Special mention — 1,043 8,479 745 731 27,650 397 39,045 Substandard 4,103 23,545 7,281 72 36,247 53,926 5,533 130,707 Substandard – nonaccrual 485 10,640 5,180 1,906 8,691 18,000 2,052 46,954 Doubtful — — — — — — — — Not graded 453 2,018 372 7 — 27 — 2,877 Total commercial loans $ 455,992 $ 1,528,190 $ 879,834 $ 370,485 $ 234,782 $ 436,730 $ 512,524 $ 4,418,537 20 Table o f 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 21 Table o f 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 and six months ended June 30, 2023: Term Loans by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total For the three months ended June 30, 2023 Commercial Commercial $ 10 $ — $ — $ 22 $ 18 $ 60 $ — $ 110 Commercial Other 36 649 102 105 69 — — 961 Commercial Real Estate Non-owner occupied — — — — — — — — Owner occupied — — — — — 1,481 — 1,481 Multi-family — — — — — 63 — 63 Farmland — — — — — — — — Construction and land development — — — — — 334 — 334 Total gross commercial charge-offs $ 46 $ 649 $ 102 $ 127 $ 87 $ 1,938 $ — $ 2,949 For the six months ended June 30, 2023 Commercial Commercial $ 10 $ — $ — $ 22 $ 27 $ 71 $ — $ 130 Commercial Other 36 1,208 166 105 69 326 — 1,910 Commercial Real Estate Non-owner occupied — — — — — — — — Owner occupied — — — — — 1,481 — 1,481 Multi-family — — — — — 809 — 809 Farmland — — — — — — — — Construction and land development — — — — — 334 — 334 Total gross commercial charge-offs $ 46 $ 1,208 $ 166 $ 127 $ 96 $ 3,021 $ — $ 4,664 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 and loans past due 90 days or more and still accruing interest are considered to be nonperforming for purposes 22 Table o f Contents 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 June 30, 2023 and December 31, 2022: June 30, 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 $ 22,642 $ 75,091 $ 38,105 $ 30,465 $ 20,236 $ 121,760 $ 36 $ 308,335 Nonperforming 35 50 — 33 356 2,987 — 3,461 Subtotal 22,677 75,141 38,105 30,498 20,592 124,747 36 311,796 Other residential Performing 1,241 1,269 443 481 962 2,422 52,378 59,196 Nonperforming — — — — — 184 310 494 Subtotal 1,241 1,269 443 481 962 2,606 52,688 59,690 Consumer Consumer Performing 17,417 28,154 36,165 7,561 2,813 13,851 2,561 108,522 Nonperforming — 25 3 7 — 59 3 97 Subtotal 17,417 28,179 36,168 7,568 2,813 13,910 2,564 108,619 Consumer other Performing 206,635 468,600 185,590 70,858 26,877 6,846 2,811 968,217 Nonperforming — — — — — — — — Subtotal 206,635 468,600 185,590 70,858 26,877 6,846 2,811 968,217 Leases financing Performing 96,561 184,332 92,293 67,347 41,983 14,202 — 496,718 Nonperforming 214 1,723 387 313 633 497 — 3,767 Subtotal 96,775 186,055 92,680 67,660 42,616 14,699 — 500,485 Total Performing 344,496 757,446 352,596 176,712 92,871 159,081 57,786 1,940,988 Nonperforming 249 1,798 390 353 989 3,727 313 7,819 Total other loans $ 344,745 $ 759,244 $ 352,986 $ 177,065 $ 93,860 $ 162,808 $ 58,099 $ 1,948,807 23 Table o f 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 and six months ended June 30, 2023: Term Loans by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total For the three months ended June 30, 2023 Residential real estate Residential first lien $ — $ — $ — $ 3 $ 7 $ — $ — $ 10 Other residential — — — — — — 44 44 Consumer Consumer — — 4 11 26 13 — 54 Consumer other 18 30 7 2 1 148 — 206 Lease financing — 336 343 52 — 40 — 771 Total gross other charge-offs $ 18 $ 366 $ 354 $ 68 $ 34 $ 201 $ 44 $ 1,085 For the six months ended June 30, 2023 Residential real estate Residential first lien $ — $ — $ 9 $ 3 $ 7 $ — $ — $ 19 Other residential — — — — — 9 57 66 Consumer Consumer — 1 9 11 31 33 — 85 Consumer other 18 83 39 16 32 250 — 438 Lease financing — 393 535 135 22 76 — 1,161 Total gross other charge-offs $ 18 $ 477 $ 592 $ 165 $ 92 $ 368 $ 57 $ 1,769 24 Table o f Contents NOTE 5 – PREMISES, EQUIPMENT AND LEASES A summary of premises and equipment at June 30, 2023 and December 31, 2022 is as follows: June 30, December 31, (dollars in thousands) 2023 2022 Land $ 16,004 $ 16,004 Buildings and improvements 75,469 71,837 Furniture and equipment 34,629 34,081 Lease right-of-use assets 7,505 7,001 Total 133,607 128,923 Accumulated depreciation ( 52,601 ) ( 50,630 ) Premises and equipment, net $ 81,006 $ 78,293 Depreciation expense for the three and six months ended June 30, 2023 was $ 1.2 million and $ 2.4 million, respectively, and $ 1.2 million and $ 2.4 million for the three and six months ended June 30, 2022, respectively. The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 8 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 $ 7.5 million and $ 7.0 million as of June 30, 2023 and December 31, 2022, respectively, included in premises and equipment on our consolidated balance sheets. The operating lease liabilities of the Company were $ 9.3 million and $ 8.9 million as of June 30, 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 and six months ended June 30, 2023 and 2022 was as follows: Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2023 2022 2023 2022 Operating lease cost $ 493 $ 532 $ 977 $ 1,040 Operating cash flows from leases 590 630 1,180 1,236 Right-of-use assets obtained in exchange for lease obligations 218 — 1,348 121 Weighted average remaining lease term 8.0 years 7.4 years 8.0 years 7.4 years Weighted average discount rate 3.29 % 2.89 % 3.29 % 2.89 % The projected minimum rental payments under the terms of the leases as of June 30, 2023 were as follows: (dollars in thousands) Amount Year ending December 31: 2023 remaining $ 947 2024 2,020 2025 1,103 2026 975 2027 875 Thereafter 4,704 Total future minimum lease payments 10,624 Less imputed interest ( 1,357 ) Total operating lease liabilities $ 9,267 25 Table o f Contents NOTE 6 – LOAN SERVICING RIGHTS A summary of loan servicing rights at June 30, 2023 and December 31, 2022 is as follows: June 30, 2023 December 31, 2022 (dollars in thousands) Serviced Loans Carrying Value Serviced Loans Carrying Value Commercial FHA $ 2,165,150 $ 20,473 $ — $ — SBA $ 46,279 $ 649 $ 46,081 $ 656 Residential 240,230 489 255,298 549 Commercial FHA held for sale — — 2,255,617 20,745 Total $ 2,451,659 $ 21,611 $ 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. 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. 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 June 30, 2023 and December 31, 2022: Notional amount Fair value gain (dollars in thousands) June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Derivative instruments (included in other assets): Interest rate lock commitments $ 6,127 $ 2,078 $ 119 $ 49 Forward commitments to sell mortgage-backed securities 8,831 — 55 — Total $ 14,958 $ 2,078 $ 174 $ 49 Notional amount Fair value loss (dollars in thousands) June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Derivative instruments (included in other liabilities): Interest rate lock commitments $ — $ 4,419 $ — $ 15 Forward commitments to sell mortgage-backed securities — 6,669 — — Total $ — $ 11,088 $ — $ 15 26 Table o f Contents During both the three and six months ended June 30, 2023, the Company recognized net gains of $ 0.1 million on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income. During the three and six months ended June 30, 2022, the Company recognized net losses of $ 0.4 million and $ 0.3 million, respectively, on derivative instruments in commercial FHA revenue and 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 June 30, 2023 and December 31, 2022: (dollars in thousands) June 30, 2023 December 31, 2022 Notional Amount $ 225,000 $ 200,000 Fair value loss included in other liabilities ( 10,124 ) ( 9,999 ) Tax effected amount included in accumulated other comprehensive (loss) income ( 7,391 ) ( 7,300 ) Average remaining life 3.09 3.37 Weighted average pay rate 7.71 % 7.23 % Weighted average receive rate 5.43 % 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 $ 7.2 million and $ 7.4 million at June 30, 2023 and December 31, 2022, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $ 0.5 million at both June 30, 2023 and December 31, 2022, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets. NOTE 8 – DEPOSITS The following table summarizes the classification of deposits as of June 30, 2023 and December 31, 2022: (dollars in thousands) June 30, 2023 December 31, 2022 Noninterest-bearing demand $ 1,162,909 $ 1,362,158 Interest-bearing: Checking 2,499,693 2,494,073 Money market 1,226,470 1,184,101 Savings 624,005 661,932 Time 913,471 662,388 Total deposits $ 6,426,548 $ 6,364,652 27 Table o f Contents NOTE 9 – SHORT-TERM BORROWINGS The following table presents the distribution of short-term borrowings and related weighted average interest rates as of June 30, 2023 and December 31, 2022: Repurchase agreements (dollars in thousands) As of and for the six months ended June 30, 2023 As of and for the Year Ended December 31,2022 Outstanding at period-end $ 21,783 $ 42,311 Average amount outstanding 30,291 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 $ 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 Company had available lines of credit of $ 184.1 million and $ 12.2 million at June 30, 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 loans and investment securities totaling $ 211.2 million and $ 14.3 million at June 30, 2023 and December 31, 2022, respectively. There were no outstanding borrowings under these lines at June 30, 2023 and 2022. At June 30, 2023, the Company had available federal funds lines of credit totaling $ 339.0 million. These lines of credit were unused at June 30, 2023. NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS The following table summarizes our FHLB advances and other borrowings as of June 30, 2023 and December 31, 2022: (dollars in thousands) June 30, 2023 December 31, 2022 FHLB advances – fixed rate, fixed term at rates averaging 4.18 % at June 30, 2023 - maturing in February 2028 $ 55,000 $ — FHLB advances – putable fixed rate at rates averaging 2.70 % and 2.35 % at June 30, 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 6.68 % and 5.92 % at June 30, 2023 and December 31, 2022, respectively – maturing in October 2023 100,000 100,000 FHLB advances – Short term fixed rate at rates averaging 5.18 % and 4.31 % at June 30, 2023 and December 31, 2022, respectively– maturing in July 2023 260,000 250,000 Total FHLB advances and other borrowings $ 575,000 $ 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 $ 2.97 billion and $ 2.90 billion at June 30, 2023 and December 31, 2022, respectively. 28 Table o f Contents NOTE 11 – SUBORDINATED DEBT The following table summarizes the Company’s subordinated debt at June 30, 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 June 30, 2023 Outstanding amount $ 66,750 $ 27,250 $ — $ 94,000 Carrying amount 66,455 26,949 — 93,404 Current rate 5.00 % 5.50 % N/A 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 During the second quarter of 2023, the Company repurchased $ 6.0 million of the outstanding Fixed to Float Subordinated Notes due September 30, 2029. The Company recognized a gain of $ 0.7 million which included the discount realized on the repurchase, offset by the remaining unamortized debt issuance costs on the repurchase. The Company also repurchased the outstanding Fixed Rate Subordinated Notes due June 18, 2025, having an aggregate principal amount of $ 0.6 million, during the second quarter of 2023. The aggregate repurchase price was 100 % of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest. 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 and six months ended June 30, 2023 and 2022 excluded antidilutive stock options of 375,912 and 60,698 , respectively, because the exercise prices of these stock options exceeded the average market 29 Table o f 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 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 Net income $ 21,575 $ 21,883 $ 43,347 $ 42,632 Preferred dividends declared ( 2,228 ) — ( 4,456 ) — Net income available to common shareholders 19,347 21,883 38,891 42,632 Common shareholder dividends ( 6,579 ) ( 6,397 ) ( 13,248 ) ( 12,786 ) Unvested restricted stock award dividends ( 80 ) ( 73 ) ( 160 ) ( 148 ) Undistributed earnings to unvested restricted stock awards ( 149 ) ( 171 ) ( 300 ) ( 334 ) Undistributed earnings to common shareholders $ 12,539 $ 15,242 $ 25,183 $ 29,364 Basic Distributed earnings to common shareholders $ 6,579 $ 6,397 $ 13,248 $ 12,786 Undistributed earnings to common shareholders 12,539 15,242 25,183 29,364 Total common shareholders earnings, basic $ 19,118 $ 21,639 $ 38,431 $ 42,150 Diluted Distributed earnings to common shareholders $ 6,579 $ 6,397 $ 13,248 $ 12,786 Undistributed earnings to common shareholders 12,539 15,242 25,183 29,364 Total common shareholders earnings 19,118 21,639 38,431 42,150 Add back: Undistributed earnings reallocated from unvested restricted stock awards — 1 — 1 Total common shareholders earnings, diluted $ 19,118 $ 21,640 $ 38,431 $ 42,151 Weighted average common shares outstanding, basic 22,200,917 22,305,590 22,338,627 22,290,486 Options 4,162 55,229 10,354 65,450 Weighted average common shares outstanding, diluted 22,205,079 22,360,819 22,348,981 22,355,936 Basic earnings per common share $ 0.86 $ 0.97 $ 1.72 $ 1.89 Diluted earnings per common share 0.86 0.97 1.72 1.89 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 30 Table o f Contents three and six months ended June 30, 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). 31 Table o f 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 June 30, 2023 and December 31, 2022, are summarized below: June 30, 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 $ 42,746 $ 42,746 $ — $ — U.S. government sponsored entities and U.S. agency securities 73,458 — 73,458 — Mortgage-backed securities - agency 538,634 — 538,634 — Mortgage-backed securities - non-agency 65,911 — 65,911 — State and municipal securities 57,494 — 57,494 — Collateralized loan obligations 22,709 — 22,709 — Corporate securities 81,763 — 81,763 — Equity securities 4,288 4,288 — — Loans held for sale 5,632 — 5,632 — Derivative assets 630 — 630 — Total $ 893,265 $ 47,034 $ 846,231 $ — Liabilities Derivative liabilities $ 10,580 $ — $ 10,580 $ — Total $ 10,580 $ — $ 10,580 $ — Assets measured at fair value on a non-recurring basis: Loan servicing rights $ 21,611 $ — $ — $ 21,611 Nonperforming loans 54,844 3,116 42,652 9,076 Other real estate owned 202 — 202 — Assets held for sale 187 — 187 — 32 Table o f 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 and six months ended June 30, 2023 and 2022. The following table presents losses recognized on assets measured on a nonrecurring basis 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 Commercial mortgage servicing rights $ — $ 869 $ — $ 1,263 Nonperforming loans 3,573 10,779 4,676 11,366 Other real estate owned — 67 — 404 Total losses on assets measured on a nonrecurring basis $ 3,573 $ 11,715 $ 4,676 $ 13,033 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 June 30, 2023 and December 31, 2022: 33 Table o f Contents (dollars in thousands) Fair value Valuation technique Unobservable input / assumptions Range (weighted average) (1) June 30, 2023 Loan servicing rights: SBA servicing rights $ 838 Discounted cash flow Prepayment speed 15.62 % - 16.02 % ( 15.87 %) Discount rate No range ( 14.25 %) Residential servicing rights 2,575 Discounted cash flow Prepayment speed 7.20 % - 26.28 % ( 7.50 %) Discount rate 9.25 % - 11.75 % ( 10.38 %) 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 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 June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 (dollars in thousands) Aggregate fair value Difference Contractual principal Aggregate fair value Difference Contractual principal Residential loans held for sale $ 5,632 $ 212 $ 5,421 $ 1,286 $ 42 $ 1,244 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 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 Commercial loans held for sale $ — $ ( 18 ) $ — $ — Residential loans held for sale 50 104 149 ( 277 ) Total loans held for sale $ 50 $ 86 $ 149 $ ( 277 ) 34 Table o f Contents The carrying values and estimated fair value of certain financial instruments not carried at fair value at June 30, 2023 and December 31, 2022 were as follows: June 30, 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 $ 159,637 $ 159,637 $ 159,637 $ — $ — Federal funds sold 1,058 1,058 1,058 — — Loans 6,367,344 6,153,641 — — 6,153,641 Accrued interest receivable 21,000 21,000 — 21,000 — Liabilities Deposits $ 6,426,548 $ 6,413,857 $ — $ 6,413,857 $ — Short-term borrowings 21,783 21,783 — 21,783 — FHLB and other borrowings 575,000 571,334 — 571,334 — Subordinated debt 93,404 89,232 — 89,232 — Trust preferred debentures 50,296 51,700 — 51,700 — 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 6,306,467 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 June 30, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ. 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 35 Table o f Contents 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 June 30, 2023 and December 31, 2022 were as follows: (dollars in thousands) June 30, 2023 December 31, 2022 Commitments to extend credit $ 1,083,981 $ 1,276,263 Financial guarantees – standby letters of credit 22,884 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 and six months ended June 30, 2023 and 2022. The liability for unresolved repurchase demands totaled $ 0.2 million at June 30, 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. 36 Table o f Contents Selected business segment financial information for the three and six months ended June 30, 2023 and 2022 were as follows: (dollars in thousands) Banking Wealth Management Other Total Three Months Ended June 30, 2023 Net interest income (expense) $ 61,035 $ — $ ( 2,195 ) $ 58,840 Provision for credit losses 5,879 — — 5,879 Noninterest income 11,874 6,269 610 18,753 Noninterest expense 38,550 4,675 ( 331 ) 42,894 Income (loss) before income taxes (benefit) 28,480 1,594 ( 1,254 ) 28,820 Income taxes (benefit) 7,326 445 ( 526 ) 7,245 Net income (loss) $ 21,154 $ 1,149 $ ( 728 ) $ 21,575 Total assets $ 8,025,617 $ 30,249 $ ( 21,145 ) $ 8,034,721 Six Months Ended June 30, 2023 Net interest income (expense) $ 123,643 $ — $ ( 4,299 ) $ 119,344 Provision for credit losses 9,014 — — 9,014 Noninterest income 21,495 12,680 357 34,532 Noninterest expense 78,397 9,516 ( 537 ) 87,376 Income (loss) before income taxes (benefit) 57,727 3,164 ( 3,405 ) 57,486 Income taxes (benefit) 14,532 884 ( 1,277 ) 14,139 Net income (loss) $ 43,195 $ 2,280 $ ( 2,128 ) $ 43,347 Total assets $ 8,025,617 $ 30,249 $ ( 21,145 ) $ 8,034,721 Three Months Ended June 30, 2022 Net interest income (expense) $ 63,963 $ — $ ( 2,629 ) $ 61,334 Provision for credit losses 5,441 — — 5,441 Noninterest income 8,495 6,143 ( 25 ) 14,613 Noninterest expense 37,362 4,091 ( 114 ) 41,339 Income (loss) before income taxes (benefit) 29,655 2,052 ( 2,540 ) 29,167 Income taxes (benefit) 7,545 573 ( 834 ) 7,284 Net income (loss) $ 22,110 $ 1,479 $ ( 1,706 ) $ 21,883 Total assets $ 7,422,518 $ 29,042 $ ( 15,748 ) $ 7,435,812 Six Months Ended June 30, 2022 Net interest income (expense) $ 123,316 $ — $ ( 5,155 ) $ 118,161 Provision for credit losses 9,608 — — 9,608 Noninterest income 16,901 13,282 43 30,226 Noninterest expense 73,609 8,766 ( 152 ) 82,223 Income (loss) before income taxes (benefit) 57,000 4,516 ( 4,960 ) 56,556 Income taxes (benefit) 14,260 1,263 ( 1,599 ) 13,924 Net income (loss) $ 42,740 $ 3,253 $ ( 3,361 ) $ 42,632 Total assets $ 7,422,518 $ 29,042 $ ( 15,748 ) $ 7,435,812 37 Table o f 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 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 Noninterest income - in-scope of Topic 606 Wealth management revenue: Trust management/administration fees $ 5,356 $ 5,139 $ 10,992 $ 11,121 Investment brokerage fees 430 543 861 1,141 Other 483 461 827 1,020 Service charges on deposit accounts: Nonsufficient fund fees 1,741 1,524 3,439 2,856 Other 936 780 1,806 1,516 Interchange revenues 3,696 3,590 7,108 6,870 Other income: Merchant services revenue 398 399 756 755 Other 1,403 671 2,033 1,439 Noninterest income - out-of-scope of Topic 606 4,310 1,506 6,710 3,508 Total noninterest income $ 18,753 $ 14,613 $ 34,532 $ 30,226 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. 38 Table o f 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. 39 Table o f Contents