Midland States Bancorp, Inc. 10-Q

ITEM 1 – FINANCIAL STATEMENTS MIDLAND STATES BANCORP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) September 30, 2023 December 31, 2022 (unaudited) Assets Cash and due from banks $ 131,179 $ 153,345 Federal funds sold 953 7,286 Cash and cash equivalents 132,132 160,631 Investment securities available for sale, at fair value 835,009 768,234 Equity securities, at fair value 4,335 8,626 Loans 6,280,883 6,306,467 Allowance for credit losses on loans ( 66,669 ) ( 61,051 ) Total loans, net 6,214,214 6,245,416 Loans held for sale 6,089 1,286 Premises and equipment, net 82,741 78,293 Other real estate owned 480 6,729 Nonmarketable equity securities 45,211 46,201 Accrued interest receivable 24,283 20,313 Loan servicing rights, at lower of cost or fair value 20,933 1,205 Commercial FHA mortgage loan servicing rights held for sale — 20,745 Goodwill 161,904 161,904 Other intangible assets, net 17,238 20,866 Company-owned life insurance 208,390 150,443 Other assets 222,966 164,609 Total assets $ 7,975,925 $ 7,855,501 Liabilities and Shareholders’ Equity Liabilities: Deposits: Noninterest-bearing demand deposits $ 1,154,515 $ 1,362,158 Interest-bearing deposits 5,250,487 5,002,494 Total deposits 6,405,002 6,364,652 Short-term borrowings 17,998 42,311 Federal Home Loan Bank advances and other borrowings 538,000 460,000 Subordinated debt 93,475 99,772 Trust preferred debentures 50,457 49,975 Accrued interest payable and other liabilities 106,743 80,217 Total liabilities 7,211,675 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 September 30, 2023 and December 31, 2022, respectively 110,548 110,548 Common stock, $ 0.01 par value; 40,000,000 shares authorized; 21,594,546 and 22,214,913 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively 216 222 Capital surplus 437,566 449,196 Retained earnings 317,101 282,405 Accumulated other comprehensive loss, net of tax ( 101,181 ) ( 83,797 ) Total shareholders’ equity 764,250 758,574 Total liabilities and shareholders’ equity $ 7,975,925 $ 7,855,501 The accompanying notes are an integral part of the consolidated financial statements. 2 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME — (UNAUDITED) (dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Interest income: Loans including fees: Taxable $ 93,488 $ 72,901 $ 272,297 $ 192,430 Tax exempt 497 527 1,349 1,589 Loans held for sale 104 60 179 357 Investment securities: Taxable 7,475 3,765 19,744 11,717 Tax exempt 275 628 1,074 2,162 Nonmarketable equity securities 710 550 2,104 1,521 Federal funds sold and cash investments 1,036 1,125 2,868 1,764 Total interest income 103,585 79,556 299,615 211,540 Interest expense: Deposits 37,769 10,249 97,791 16,220 Short-term borrowings 14 28 53 73 Federal Home Loan Bank advances and other borrowings 4,557 2,424 15,959 5,071 Subordinated debt 1,280 2,010 3,985 6,032 Trust preferred debentures 1,369 821 3,887 1,959 Total interest expense 44,989 15,532 121,675 29,355 Net interest income 58,596 64,024 177,940 182,185 Provision for credit losses: Provision for credit losses on loans 5,168 6,974 14,182 15,847 Provision for credit losses on unfunded commitments — — — 956 Recapture of other credit losses — — — ( 221 ) Total provision for credit losses 5,168 6,974 14,182 16,582 Net interest income after provision for credit losses 53,428 57,050 163,758 165,603 Noninterest income: Wealth management revenue 6,288 6,199 18,968 19,481 Residential mortgage banking revenue 507 210 1,452 1,193 Service charges on deposit accounts 3,149 2,783 8,744 7,544 Interchange revenue 3,609 3,531 10,717 10,401 Loss on sales of investment securities, net ( 4,961 ) ( 129 ) ( 6,478 ) ( 230 ) Impairment on commercial mortgage servicing rights — — — ( 1,263 ) Company-owned life insurance 7,558 929 9,325 2,788 Other income 2,035 2,303 9,989 6,138 Total noninterest income 18,185 15,826 52,717 46,052 Noninterest expense: Salaries and employee benefits 22,307 22,889 69,407 67,404 Occupancy and equipment 3,730 3,850 12,052 11,094 Data processing 6,468 6,093 19,323 18,048 FDIC insurance 1,107 977 3,632 2,633 Professional 1,554 1,693 4,977 5,181 Marketing 950 1,026 2,323 2,447 Communications 507 587 1,514 1,934 Loan expense 866 1,137 3,104 3,379 Amortization of intangible assets 1,129 1,361 3,628 4,077 Other expense 3,420 3,883 9,454 9,522 Total noninterest expense 42,038 43,496 129,414 125,719 Income before income taxes 29,575 29,380 87,061 85,936 Income taxes 11,533 5,859 25,672 19,783 Net income 18,042 23,521 61,389 66,153 Preferred dividends 2,229 — 6,685 — Net income available to common shareholders $ 15,813 $ 23,521 $ 54,704 $ 66,153 Per common share data: Basic earnings per common share $ 0.71 $ 1.04 $ 2.43 $ 2.93 Diluted earnings per common share $ 0.71 $ 1.04 $ 2.43 $ 2.92 Weighted average common shares outstanding 21,970,372 22,338,828 22,214,862 22,306,323 Weighted average diluted common shares outstanding 21,977,196 22,390,438 22,223,986 22,367,095 The accompanying notes are an integral part of the consolidated financial statements. 3 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — (UNAUDITED) (dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income $ 18,042 $ 23,521 $ 61,389 $ 66,153 Other comprehensive loss: Investment securities available for sale: Unrealized losses that occurred during the period ( 27,305 ) ( 31,764 ) ( 29,961 ) ( 115,199 ) Recapture of credit loss expense — — — ( 221 ) Reclassification adjustment for realized net losses on sales of investment securities included in net income 4,961 129 6,478 230 Income tax effect 6,032 8,134 6,340 31,111 Change in investment securities available for sale, net of tax ( 16,312 ) ( 23,501 ) ( 17,143 ) ( 84,079 ) Cash flow hedges: Net unrealized derivative (losses) gains on cash flow hedges ( 205 ) ( 2,501 ) ( 330 ) 594 Income tax effect 55 716 89 ( 135 ) Change in cash flow hedges, net of tax ( 150 ) ( 1,785 ) ( 241 ) 459 Other comprehensive loss, net of tax ( 16,462 ) ( 25,286 ) ( 17,384 ) ( 83,620 ) Total comprehensive income (loss) $ 1,580 $ ( 1,765 ) $ 44,005 $ ( 17,467 ) The accompanying notes are an integral part of the consolidated financial statements . 4 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY — (UNAUDITED) (dollars in thousands, except per share data) Preferred stock Common stock Capital surplus Retained earnings Accumulated other comprehensive (loss) income Total shareholders' equity Balances, June 30, 2023 $ 110,548 $ 218 $ 442,886 $ 307,888 $ ( 84,719 ) $ 776,821 Net income — — — 18,042 — 18,042 Other comprehensive loss — — — — ( 16,462 ) ( 16,462 ) Common dividends declared ($ 0.30 per share) — — — ( 6,600 ) — ( 6,600 ) Preferred dividends declared ($ 19.375 per share) — — — ( 2,229 ) — ( 2,229 ) Common stock repurchased — ( 3 ) ( 6,055 ) — — ( 6,058 ) Share-based compensation expense — — 604 — — 604 Issuance of common stock under employee benefit plans — 1 131 — — 132 Balances, September 30, 2023 $ 110,548 $ 216 $ 437,566 $ 317,101 $ ( 101,181 ) $ 764,250 Balances, December 31, 2022 $ 110,548 $ 222 $ 449,196 $ 282,405 $ ( 83,797 ) $ 758,574 Net income — — — 61,389 — 61,389 Other comprehensive loss — — — — ( 17,384 ) ( 17,384 ) Common dividends declared ($ 0.90 per share) — — — ( 20,008 ) — ( 20,008 ) Preferred dividends declared ($ 58.125 per share) — — — ( 6,685 ) — ( 6,685 ) Common stock repurchased — ( 7 ) ( 15,018 ) — — ( 15,025 ) Share-based compensation expense — — 1,796 — — 1,796 Issuance of common stock under employee benefit plans — 1 1,592 — — 1,593 Balances, September 30, 2023 $ 110,548 $ 216 $ 437,566 $ 317,101 $ ( 101,181 ) $ 764,250 Balances, June 30, 2022 $ — $ 221 $ 446,894 $ 242,170 $ ( 53,097 ) $ 636,188 Net income — — — 23,521 — 23,521 Other comprehensive loss — — — — ( 25,286 ) ( 25,286 ) Issuance of preferred stock, net of offering costs 110,548 — — — — 110,548 Common dividends declared ($ 0.29 per share) — — — ( 6,470 ) — ( 6,470 ) Share-based compensation expense — — 501 — — 501 Issuance of common stock under employee benefit plans — — 277 — — 277 Balances, September 30, 2022 $ 110,548 $ 221 $ 447,672 $ 259,221 $ ( 78,383 ) $ 739,279 Balances, December 31, 2021 $ — $ 221 $ 445,907 $ 212,472 $ 5,237 $ 663,837 Net income — — — 66,153 — 66,153 Other comprehensive loss — — — — ( 83,620 ) ( 83,620 ) Issuance of preferred stock, net of offering costs 110,548 — — — — 110,548 Common dividends declared ($ 0.87 per share) — — — ( 19,404 ) — ( 19,404 ) Common stock repurchased — ( 1 ) ( 1,108 ) — — ( 1,109 ) Share-based compensation expense — — 1,547 — — 1,547 Issuance of common stock under employee benefit plans — 1 1,326 — — 1,327 Balances, September 30, 2022 $ 110,548 $ 221 $ 447,672 $ 259,221 $ ( 78,383 ) $ 739,279 The accompanying notes are an integral part of the consolidated financial statements. 5 Table of Contents MIDLAND STATES BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED) (dollars in thousands) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net income $ 61,389 $ 66,153 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 14,182 16,582 Depreciation on premises and equipment 3,567 3,665 Amortization of intangible assets 3,628 4,077 Amortization of operating lease right-of-use asset 1,241 1,373 Amortization of loan servicing rights 861 2,202 Share-based compensation expense 1,796 1,547 Increase in cash surrender value of life insurance ( 9,325 ) ( 2,524 ) Gain on proceeds from company-owned life insurance — ( 264 ) Investment securities (accretion) amortization, net ( 1,424 ) 1,923 Loss on sales of investment securities, net 6,478 230 Gain on repurchase of subordinated debt ( 676 ) — (Loss) gain on sales of other real estate owned ( 819 ) 131 Impairment on other real estate owned — 743 Origination of loans held for sale ( 45,690 ) ( 123,602 ) Proceeds from sales of loans held for sale 65,291 252,078 Gain on sale of loans held for sale ( 1,712 ) ( 1,035 ) Impairment on commercial mortgage servicing rights — 1,263 Net change in operating assets and liabilities: Accrued interest receivable ( 3,970 ) 1,969 Other assets ( 58,408 ) ( 37,032 ) Accrued expenses and other liabilities 30,874 16,593 Net cash provided by operating activities 67,283 206,072 Cash flows from investing activities: Purchases of investment securities available for sale ( 305,021 ) ( 100,115 ) Proceeds from sales of investment securities available for sale 165,871 136,403 Maturities and payments on investment securities available for sale 43,838 71,305 Purchases of equity securities ( 244 ) ( 441 ) Proceeds from sales of equity securities 5,148 — Net increase in loans ( 6,195 ) ( 1,065,192 ) Purchases of premises and equipment ( 7,064 ) ( 2,088 ) Proceeds from sale of premises and equipment 104 158 Purchases of nonmarketable equity securities ( 157,382 ) ( 6,360 ) Proceeds from redemptions of nonmarketable equity securities 158,372 3,005 Proceeds from sales of other real estate owned 7,346 561 (Purchases of) proceeds from company-owned life insurance, net ( 48,622 ) 1,518 Net cash acquired in acquisitions — 60,275 Net cash used in investing activities ( 143,849 ) ( 900,971 ) Cash flows from financing activities: Net increase in deposits 40,350 204,810 Net decrease in short-term borrowings ( 24,313 ) ( 18,285 ) Proceeds from FHLB borrowings 15,996,000 1,900,000 Payments made on FHLB borrowings and other borrowings ( 15,918,000 ) ( 1,850,000 ) Payments made on subordinated debt ( 5,845 ) — Proceeds from issuance of preferred stock — 110,548 Cash dividends paid on preferred stock ( 6,685 ) — Cash dividends paid on common stock ( 20,008 ) ( 19,404 ) Redemption of Series G preferred stock — ( 171 ) Common stock repurchased ( 15,025 ) ( 1,109 ) Proceeds from issuance of common stock under employee benefit plans 1,593 1,327 Net cash provided by financing activities 48,067 327,716 Net decrease in cash and cash equivalents ( 28,499 ) ( 367,183 ) Cash and cash equivalents: Beginning of period 160,631 680,371 End of period $ 132,132 $ 313,188 Supplemental disclosures of cash flow information: Cash payments for: Interest paid on deposits and borrowed funds $ 114,011 $ 29,449 Income tax paid (net of refunds) 17,762 22,014 Supplemental disclosures of noncash investing and financing activities: Transfer of loans to loans held for sale — 99,505 Transfer of loans to other real estate owned 278 517 Right of use assets obtained in exchange for lease obligations 2,459 502 Transfer of loan servicing rights, at lower of cost or market to loan servicing rights held for sale — 23,995 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 . 6 Table of Contents MIDLAND STATES BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED) Note 1: Business Description 7 Note 2: Basis of Presentation and Summary of Significant Accounting Policies 7 Note 3: Investment Securities 8 Note 4: Loans 11 Note 5: Premises, Equipment and Leases 25 Note 6: Loan Servicing Rights 26 Note 7: Derivative Instruments 26 Note 8: Deposits 27 Note 9: Short-Term Borrowings 28 Note 10: FHLB Advances and Other Borrowings 28 Note 11: Subordinated Debt 29 Note 12: Earnings Per Common Share 29 Note 13: Fair Value of Financial Instruments 30 Note 14: Commitments, Contingencies and Credit Risk 35 Note 15: Segment Information 36 Note 16: Revenue From Contracts with Customers 38 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. 7 Table of Contents 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. 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 September 30, 2023 and December 31, 2022 were as follows: September 30, 2023 (dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value Investment securities available for sale U.S. Treasury securities $ 1,582 $ — $ 19 $ 1,563 U.S. government sponsored entities and U.S. agency securities 93,291 171 4,424 89,038 Mortgage-backed securities - agency 613,484 13 96,106 517,391 Mortgage-backed securities - non-agency 77,617 13 4,965 72,665 State and municipal securities 59,521 3 9,787 49,737 Collateralized loan obligations 22,662 — 277 22,385 Corporate securities 95,124 — 12,894 82,230 Total available for sale securities $ 963,281 $ 200 $ 128,472 $ 835,009 8 Table of Contents 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 September 30, 2023. Expected maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity. (dollars in thousands) Amortized cost Fair value Investment securities available for sale Within one year $ 23,769 $ 23,543 After one year through five years 108,735 103,973 After five years through ten years 118,486 99,614 After ten years 21,190 17,823 Mortgage-backed securities 691,101 590,056 Total available for sale securities $ 963,281 $ 835,009 Proceeds and gross realized gains and losses on sales of investment securities available for sale for the three and nine months ended September 30, 2023 and 2022 are summarized as follows: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Investment securities available for sale Proceeds from sales $ 65,911 $ 28,663 $ 165,871 $ 136,403 Gross realized gains on sales — 113 338 829 Gross realized losses on sales ( 4,961 ) ( 242 ) ( 6,816 ) ( 1,059 ) 9 Table of Contents Unrealized losses and fair values for investment securities available for sale as of September 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows: September 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 $ 828 $ 9 $ 735 $ 10 $ 1,563 $ 19 U.S. government sponsored entities and U.S. agency securities 56,835 251 23,787 4,173 80,622 4,424 Mortgage-backed securities - agency 175,194 10,090 337,263 86,016 512,457 96,106 Mortgage-backed securities - non-agency 49,181 359 18,736 4,606 67,917 4,965 State and municipal securities 48,303 9,787 — — 48,303 9,787 Collateralized loan obligations 22,385 277 — — 22,385 277 Corporate securities — — 82,230 12,894 82,230 12,894 Total available for sale securities $ 352,726 $ 20,773 $ 462,751 $ 107,699 $ 815,477 $ 128,472 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 September 30, 2023, 321 investment securities available for sale had unrealized losses with aggregate depreciation of 13.50 % 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. 10 Table of Contents NOTE 4 – LOANS The following table presents total loans outstanding by portfolio class, as of September 30, 2023 and December 31, 2022: (dollars in thousands) September 30, 2023 December 31, 2022 Commercial: Commercial $ 874,004 $ 786,877 Commercial other 697,235 727,697 Commercial real estate: Commercial real estate non-owner occupied 1,636,168 1,591,399 Commercial real estate owner occupied 439,642 496,786 Multi-family 269,708 277,889 Farmland 66,646 67,085 Construction and land development 416,801 320,882 Total commercial loans 4,400,204 4,268,615 Residential real estate: Residential first lien 313,638 304,243 Other residential 61,573 61,851 Consumer: Consumer 111,432 105,880 Consumer other 908,576 1,074,134 Lease financing 485,460 491,744 Total loans $ 6,280,883 $ 6,306,467 Total loans include net deferred loan costs of $ 5.1 million and $ 4.4 million at September 30, 2023 and December 31, 2022, respectively, and unearned discounts of $ 67.1 million and $ 62.6 million within the lease financing portfolio at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the Company had residential real estate loans held for sale totaling $ 6.1 million, compared to $ 1.3 million at December 31, 2022. The Company sold loans and leases with proceeds totaling $ 28.0 million and $ 65.3 million during the three and nine months ended September 30, 2023, respectively, and $ 48.5 million and $ 252.1 million during the three and nine months ended September 30, 2022, respectively. 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 $ 48.5 million and $ 25.0 million as of September 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 11 Table of Contents 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 $ 21.3 million and $ 19.8 million at September 30, 2023 and December 31, 2022, respectively. The new loans, other additions, repayments and other reductions for the three and nine months ended September 30, 2023 and 2022, are summarized as follows: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Beginning balance $ 21,569 $ 23,097 $ 19,776 $ 13,869 New loans and other additions — — 2,368 9,804 Repayments and other reductions ( 287 ) ( 3,081 ) ( 862 ) ( 3,657 ) Ending balance $ 21,282 $ 20,016 $ 21,282 $ 20,016 12 Table of Contents The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three and nine months ended September 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 September 30, 2023: Balance, beginning of period $ 15,290 $ 29,425 $ 3,189 $ 5,551 $ 3,953 $ 7,542 $ 64,950 Provision for credit losses on loans 7,289 ( 6,176 ) 385 209 228 3,233 5,168 Charge-offs ( 3,249 ) ( 2,316 ) ( 44 ) ( 95 ) ( 250 ) ( 1,394 ) ( 7,348 ) Recoveries 80 3,678 — 33 53 55 3,899 Balance, end of period $ 19,410 $ 24,611 $ 3,530 $ 5,698 $ 3,984 $ 9,436 $ 66,669 Changes in allowance for credit losses on loans for the nine months ended September 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 9,483 ( 4,079 ) 1,441 1,479 932 4,926 14,182 Charge-offs ( 5,289 ) ( 4,606 ) ( 378 ) ( 180 ) ( 773 ) ( 2,555 ) ( 13,781 ) Recoveries 577 4,006 32 98 226 278 5,217 Balance, end of period $ 19,410 $ 24,611 $ 3,530 $ 5,698 $ 3,984 $ 9,436 $ 66,669 Changes in allowance for credit losses on loans for the three months ended September 30, 2022: Balance, beginning of period $ 12,748 $ 27,874 $ 1,101 $ 3,416 $ 2,994 $ 6,765 $ 54,898 Provision for credit losses on loans 3,226 1,787 472 852 606 31 6,974 Charge-offs ( 1,655 ) ( 1,232 ) — ( 166 ) ( 316 ) ( 485 ) ( 3,854 ) Recoveries 45 1 18 69 121 367 621 Balance, end of period $ 14,364 $ 28,430 $ 1,591 $ 4,171 $ 3,405 $ 6,678 $ 58,639 Changes in allowance for credit losses on loans for the nine months ended September 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 3,504 9,515 595 1,569 1,278 ( 614 ) 15,847 Charge-offs ( 3,869 ) ( 4,084 ) ( 6 ) ( 315 ) ( 812 ) ( 1,190 ) ( 10,276 ) Recoveries 354 6 30 222 381 1,013 2,006 Balance, end of period $ 14,364 $ 28,430 $ 1,591 $ 4,171 $ 3,405 $ 6,678 $ 58,639 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 of 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 of Contents with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of September 30, 2023 and December 31, 2022: September 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 $ 2,877 $ 979 $ 3,856 $ 1,910 $ 1,111 $ 3,021 Commercial other 4,180 — 4,180 3,169 — 3,169 Commercial real estate: Commercial real estate non-owner occupied 1,427 17,658 19,085 1,345 11,899 13,244 Commercial real estate owner occupied 2,168 9,285 11,453 7,118 — 7,118 Multi-family 252 2,641 2,893 154 8,949 9,103 Farmland 172 — 172 25 — 25 Construction and land development 2,025 — 2,025 202 — 202 Total commercial loans 13,101 30,563 43,664 13,923 21,959 35,882 Residential real estate: Residential first lien 2,659 495 3,154 2,925 572 3,497 Other residential 702 — 702 871 — 871 Consumer: Consumer 103 — 103 120 — 120 Lease financing 7,558 — 7,558 1,606 — 1,606 Total loans $ 24,123 $ 31,058 $ 55,181 $ 19,445 $ 22,531 $ 41,976 There was no interest income recognized on nonaccrual loans during the three and nine months ended September 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 $ 2.5 million for the three and nine months ended September 30, 2023, respectively, and $ 0.8 million and $ 1.9 million for the three and nine months ended September 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 of 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 September 30, 2023 and December 31, 2022: Type of Collateral (dollars in thousands) Real Estate Blanket Lien Equipment Total September 30, 2023 Commercial: Commercial $ — $ — $ 1,973 $ 1,973 Commercial other — — 344 344 Commercial real estate: Non-owner occupied 17,515 — — 17,515 Owner occupied 9,275 — — 9,275 Multi-family 2,642 — — 2,642 Construction and land development 2,021 — — 2,021 Total collateral dependent loans $ 31,453 $ — $ 2,317 $ 33,770 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 of Contents The aging status of the recorded investment in loans by portfolio as of September 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 $ 188 $ — $ — $ 188 $ 3,856 $ 869,960 $ 874,004 Commercial other 11,615 5,630 800 18,045 4,180 675,010 697,235 Commercial real estate: Commercial real estate non-owner occupied 263 5,715 — 5,978 19,085 1,611,105 1,636,168 Commercial real estate owner occupied 373 — — 373 11,453 427,816 439,642 Multi-family — — — — 2,893 266,815 269,708 Farmland 86 122 — 208 172 66,266 66,646 Construction and land development — — — — 2,025 414,776 416,801 Total commercial loans 12,525 11,467 800 24,792 43,664 4,331,748 4,400,204 Residential real estate: Residential first lien 314 — — 314 3,154 310,170 313,638 Other residential 120 — — 120 702 60,751 61,573 Consumer: Consumer 272 84 — 356 103 110,973 111,432 Consumer other 7,264 4,128 — 11,392 — 897,184 908,576 Lease financing 7,065 3,369 — 10,434 7,558 467,468 485,460 Total loans $ 27,560 $ 19,048 $ 800 $ 47,408 $ 55,181 $ 6,178,294 $ 6,280,883 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 of Contents Loan Restructurings The Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminated 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 September 30, 2023 the Company restructured two loans and one lease for borrowers experiencing financial difficulties with principal balances totaling $ 0.5 million. The restructured loans were provided term extensions and the restructured lease was provided a term extension with an increased interest rate. During the nine months ended September 30, 2023 the Company restructured seven loans and one lease for borrowers experiencing financial difficulties with principal balances totaling $ 1.2 million. Five of the restructured loans were provided a term extension with the other two receiving an interest rate reduction and a term extension. The lease was provided a term extension with an increased interest rate. 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 18 Table of Contents abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly. 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 of Contents The following tables present the recorded investment of the commercial loan portfolio by risk category as of September 30, 2023 and December 31, 2022: September 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 $ 143,718 $ 103,740 $ 87,777 $ 45,059 $ 15,507 $ 44,549 $ 391,270 $ 831,620 Special mention — 450 8,022 — 193 46 325 9,036 Substandard 4,056 13,131 970 — 258 5,028 6,049 29,492 Substandard – nonaccrual 1,238 — 1,331 4 80 526 677 3,856 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 149,012 117,321 98,100 45,063 16,038 50,149 398,321 874,004 Commercial other Acceptable credit quality 139,732 212,686 113,154 70,132 39,647 33,582 80,837 689,770 Special mention 440 — 121 122 118 10 1,183 1,994 Substandard 39 370 — — — — 808 1,217 Substandard – nonaccrual 928 865 1,159 633 492 103 — 4,180 Doubtful — — — — — — — — Not graded 74 — — — — — — 74 Subtotal 141,213 213,921 114,434 70,887 40,257 33,695 82,828 697,235 Commercial real estate Non-owner occupied Acceptable credit quality 165,208 661,014 347,744 128,655 83,459 138,837 6,830 1,531,747 Special mention 10,284 — 183 462 159 229 — 11,317 Substandard 30,358 1,874 — — 22,764 19,023 — 74,019 Substandard – nonaccrual — — 359 999 7,599 10,128 — 19,085 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 205,850 662,888 348,286 130,116 113,981 168,217 6,830 1,636,168 Owner occupied Acceptable credit quality 33,707 99,078 115,574 51,245 24,094 80,766 2,313 406,777 Special mention — — 130 — 76 181 11 398 Substandard — 7,729 267 43 723 12,252 — 21,014 Substandard – nonaccrual 142 9,443 338 183 142 901 304 11,453 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 33,849 116,250 116,309 51,471 25,035 94,100 2,628 439,642 Multi-family Acceptable credit quality 3,705 159,152 26,037 28,296 10,251 12,828 334 240,603 Special mention — — — — — 14,552 — 14,552 Substandard 8,187 — — — — 3,473 — 11,660 Substandard – nonaccrual — — 899 — 104 1,890 — 2,893 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 11,892 159,152 26,936 28,296 10,355 32,743 334 269,708 Farmland Acceptable credit quality 9,256 4,780 13,878 12,449 3,758 18,932 1,483 64,536 Special mention — — 1,451 — — 96 — 1,547 Substandard — — 14 — 22 355 — 391 Substandard – nonaccrual — — — — — 124 48 172 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 9,256 4,780 15,343 12,449 3,780 19,507 1,531 66,646 Construction and land development Acceptable credit quality 59,680 201,253 109,569 — 678 1,145 33,660 405,985 Special mention — — — — — 40 — 40 Substandard — — 6,000 — — — — 6,000 Substandard – nonaccrual — — — — — 2,025 — 2,025 Doubtful — — — — — — — — Not graded 1,012 1,350 357 6 — 26 — 2,751 Subtotal 60,692 202,603 115,926 6 678 3,236 33,660 416,801 Total Acceptable credit quality 555,006 1,441,703 813,733 335,836 177,394 330,639 516,727 4,171,038 Special mention 10,724 450 9,907 584 546 15,154 1,519 38,884 Substandard 42,640 23,104 7,251 43 23,767 40,131 6,857 143,793 Substandard – nonaccrual 2,308 10,308 4,086 1,819 8,417 15,697 1,029 43,664 Doubtful — — — — — — — — Not graded 1,086 1,350 357 6 — 26 — 2,825 Total commercial loans $ 611,764 $ 1,476,915 $ 835,334 $ 338,288 $ 210,124 $ 401,647 $ 526,132 $ 4,400,204 20 Table of Contents December 31, 2022 Term Loans Amortized Cost Basis by Origination Year (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving loans Total Commercial Commercial Acceptable credit quality $ 111,087 $ 102,966 $ 61,751 $ 28,063 $ 12,547 $ 45,168 $ 404,100 $ 765,682 Special mention 3,559 2,106 — 227 551 3,154 159 9,756 Substandard — — — 206 1,722 3,915 2,575 8,418 Substandard – nonaccrual — 340 — 132 83 246 2,220 3,021 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 114,646 105,412 61,751 28,628 14,903 52,483 409,054 786,877 Commercial other Acceptable credit quality 283,465 153,788 105,980 64,218 15,459 163 96,509 719,582 Special mention — — 754 2,331 455 — 55 3,595 Substandard 250 — — 12 80 — 848 1,190 Substandard – nonaccrual 524 1,247 444 463 491 — — 3,169 Doubtful — — — — — — — — Not graded 161 — — — — — — 161 Subtotal 284,400 155,035 107,178 67,024 16,485 163 97,412 727,697 Commercial real estate Non-owner occupied Acceptable credit quality 679,040 403,952 145,235 72,504 18,249 160,992 4,833 1,484,805 Special mention 1,407 186 477 10,633 195 8,452 — 21,350 Substandard 569 — 7,458 32,731 1,587 29,655 — 72,000 Substandard – nonaccrual — 701 — 48 10,246 2,249 — 13,244 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 681,016 404,839 153,170 115,916 30,277 201,348 4,833 1,591,399 Owner occupied Acceptable credit quality 120,141 122,321 64,720 31,916 29,454 88,928 4,305 461,785 Special mention — 1,161 — 7,917 — 12,161 22 21,261 Substandard 141 272 79 1,984 — 3,771 375 6,622 Substandard – nonaccrual 155 4,165 225 146 333 1,790 304 7,118 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 120,437 127,919 65,024 41,963 29,787 106,650 5,006 496,786 Multi-family Acceptable credit quality 163,647 31,605 29,458 208 24,490 14,574 1,101 265,083 Special mention — — — — — — — — Substandard — — — — — 3,703 — 3,703 Substandard – nonaccrual — 927 — 113 — 8,063 — 9,103 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 163,647 32,532 29,458 321 24,490 26,340 1,101 277,889 Farmland Acceptable credit quality 8,659 16,138 13,467 4,117 3,129 19,102 1,593 66,205 Special mention — — — — — 159 — 159 Substandard — 14 — 23 113 347 199 696 Substandard – nonaccrual — — — — — 25 — 25 Doubtful — — — — — — — — Not graded — — — — — — — — Subtotal 8,659 16,152 13,467 4,140 3,242 19,633 1,792 67,085 Construction and land development Acceptable credit quality 171,243 79,747 10,676 8,388 98 1,420 37,997 309,569 Special mention — — — — — 210 — 210 Substandard — 6,000 — — 2,415 — — 8,415 Substandard – nonaccrual — — — 202 — — — 202 Doubtful — — — — — — — — Not graded 2,112 337 8 — — 29 — 2,486 Subtotal 173,355 86,084 10,684 8,590 2,513 1,659 37,997 320,882 Total Acceptable credit quality 1,537,282 910,517 431,287 209,414 103,426 330,347 550,438 4,072,711 Special mention 4,966 3,453 1,231 21,108 1,201 24,136 236 56,331 Substandard 960 6,286 7,537 34,956 5,917 41,391 3,997 101,044 Substandard – nonaccrual 679 7,380 669 1,104 11,153 12,373 2,524 35,882 Doubtful — — — — — — — — Not graded 2,273 337 8 — — 29 — 2,647 Total commercial loans $ 1,546,160 $ 927,973 $ 440,732 $ 266,582 $ 121,697 $ 408,276 $ 557,195 $ 4,268,615 21 Table of Contents The following table presents the gross charge-offs by class of loan and year of origination on the commercial loan portfolio for the three and nine months ended September 30, 2023: Term Loans by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total For the three months ended September 30, 2023 Commercial Commercial $ — $ — $ — $ 28 $ 49 $ — $ 2,122 $ 2,199 Commercial Other 1 728 106 75 121 19 — 1,050 Commercial Real Estate Non-owner occupied — — — — — 2,292 — 2,292 Owner occupied — — — — — 21 — 21 Multi-family — — — — — 3 — 3 Farmland — — — — — — — — Construction and land development — — — — 42 2 — 44 Total gross commercial charge-offs $ 1 $ 728 $ 106 $ 103 $ 212 $ 2,337 $ 2,122 $ 5,609 For the nine months ended September 30, 2023 Commercial Commercial $ — $ — $ — $ 49 $ 78 $ 21 $ 2,122 $ 2,270 Commercial Other 47 1,936 272 180 190 394 — 3,019 Commercial Real Estate Non-owner occupied — — — — — 2,292 — 2,292 Owner occupied — — — — — 1,502 — 1,502 Multi-family — — — — — 812 — 812 Farmland — — — — — — — — Construction and land development — — — — 42 336 — 378 Total gross commercial charge-offs $ 47 $ 1,936 $ 272 $ 229 $ 310 $ 5,357 $ 2,122 $ 10,273 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 of 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 September 30, 2023 and December 31, 2022: September 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 $ 33,360 $ 74,199 $ 37,744 $ 30,017 $ 19,931 $ 115,228 $ 5 $ 310,484 Nonperforming 185 50 — — 140 2,779 — 3,154 Subtotal 33,545 74,249 37,744 30,017 20,071 118,007 5 313,638 Other residential Performing 1,992 1,212 428 441 897 2,182 53,719 60,871 Nonperforming — — — — — 181 521 702 Subtotal 1,992 1,212 428 441 897 2,363 54,240 61,573 Consumer Consumer Performing 29,362 25,959 33,375 6,950 2,523 11,714 1,446 111,329 Nonperforming — 18 13 — 3 67 2 103 Subtotal 29,362 25,977 33,388 6,950 2,526 11,781 1,448 111,432 Consumer other Performing 241,712 407,370 162,400 62,840 23,906 8,284 2,064 908,576 Nonperforming — — — — — — — — Subtotal 241,712 407,370 162,400 62,840 23,906 8,284 2,064 908,576 Leases financing Performing 119,863 170,289 82,538 58,436 35,734 11,042 — 477,902 Nonperforming 311 3,757 1,969 454 864 203 — 7,558 Subtotal 120,174 174,046 84,507 58,890 36,598 11,245 — 485,460 Total Performing 426,289 679,029 316,485 158,684 82,991 148,450 57,234 1,869,162 Nonperforming 496 3,825 1,982 454 1,007 3,230 523 11,517 Total other loans $ 426,785 $ 682,854 $ 318,467 $ 159,138 $ 83,998 $ 151,680 $ 57,757 $ 1,880,679 23 Table of Contents December 31, 2022 Term Loans Amortized Cost Basis by Origination Year (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving loans Total Residential real estate Residential first lien Performing $ 75,449 $ 38,774 $ 31,566 $ 20,780 $ 21,691 $ 109,067 $ 336 $ 297,663 Nonperforming 101 — 104 414 987 4,974 — 6,580 Subtotal 75,550 38,774 31,670 21,194 22,678 114,041 336 304,243 Other residential Performing 1,722 496 534 1,060 1,496 1,515 53,159 59,982 Nonperforming 17 — — 7 18 208 1,619 1,869 Subtotal 1,739 496 534 1,067 1,514 1,723 54,778 61,851 Consumer Consumer Performing 32,561 40,374 9,411 3,476 2,768 14,756 2,346 105,692 Nonperforming 33 50 7 1 13 79 5 188 Subtotal 32,594 40,424 9,418 3,477 2,781 14,835 2,351 105,880 Consumer other Performing 669,015 260,360 92,148 34,501 6,637 5,430 5,310 1,073,401 Nonperforming 733 — — — — — — 733 Subtotal 669,748 260,360 92,148 34,501 6,637 5,430 5,310 1,074,134 Leases financing Performing 215,084 110,294 84,458 54,684 21,767 3,088 — 489,375 Nonperforming — 522 736 818 254 39 — 2,369 Subtotal 215,084 110,816 85,194 55,502 22,021 3,127 — 491,744 Total Performing 993,831 450,298 218,117 114,501 54,359 133,856 61,151 2,026,113 Nonperforming 884 572 847 1,240 1,272 5,300 1,624 11,739 Total other loans $ 994,715 $ 450,870 $ 218,964 $ 115,741 $ 55,631 $ 139,156 $ 62,775 $ 2,037,852 The following table presents the gross charge-offs by class of loan and year of origination on the other loan portfolio for the three and nine months ended September 30, 2023: Term Loans by Origination Year (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Total For the three months ended September 30, 2023 Residential real estate Residential first lien $ — $ — $ — $ 33 $ 10 $ 52 $ — $ 95 Other residential — — — — — — — — Consumer Consumer — 25 8 7 — 1 — 41 Consumer other 14 13 2 3 3 174 — 209 Lease financing 228 708 14 5 324 115 — 1,394 Total gross other charge-offs $ 242 $ 746 $ 24 $ 48 $ 337 $ 342 $ — $ 1,739 For the nine months ended September 30, 2023 Residential real estate Residential first lien $ — $ — $ 9 $ 36 $ 17 $ 52 $ — $ 114 Other residential — — — — — 9 57 66 Consumer Consumer — 27 17 18 31 34 — 127 Consumer other 32 96 41 18 35 424 — 646 Lease financing 228 1,101 549 140 346 191 — 2,555 Total gross other charge-offs $ 260 $ 1,224 $ 616 $ 212 $ 429 $ 710 $ 57 $ 3,508 24 Table of Contents NOTE 5 – PREMISES, EQUIPMENT AND LEASES A summary of premises and equipment at September 30, 2023 and December 31, 2022 is as follows: September 30, December 31, (dollars in thousands) 2023 2022 Land $ 15,968 $ 16,004 Buildings and improvements 77,270 71,837 Furniture and equipment 34,967 34,081 Lease right-of-use assets 8,057 7,001 Total 136,262 128,923 Accumulated depreciation ( 53,521 ) ( 50,630 ) Premises and equipment, net $ 82,741 $ 78,293 Depreciation expense for the three and nine months ended September 30, 2023 was $ 1.1 million and $ 3.6 million, respectively, and $ 1.2 million and $ 3.7 million for the three and nine months ended September 30, 2022, respectively. The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 5 months to 14 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 $ 8.1 million and $ 7.0 million as of September 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 $ 9.8 million and $ 8.9 million as of September 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 nine months ended September 30, 2023 and 2022 was as follows: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Operating lease cost $ 472 $ 533 $ 1,449 $ 1,576 Operating cash flows from leases 529 638 1,709 1,874 Right-of-use assets obtained in exchange for lease obligations 1,112 80 2,459 502 Weighted average remaining lease term 7.8 years 7.3 years 7.8 years 7.3 years Weighted average discount rate 3.39 % 2.88 % 3.39 % 2.88 % The projected minimum rental payments under the terms of the leases as of September 30, 2023 were as follows: (dollars in thousands) Amount Year ending December 31: 2023 remaining $ 365 2024 2,175 2025 1,322 2026 1,197 2027 1,101 Thereafter 5,051 Total future minimum lease payments 11,211 Less imputed interest ( 1,436 ) Total operating lease liabilities $ 9,775 25 Table of Contents NOTE 6 – LOAN SERVICING RIGHTS A summary of loan servicing rights at September 30, 2023 and December 31, 2022 is as follows: September 30, 2023 December 31, 2022 (dollars in thousands) Serviced Loans Carrying Value Serviced Loans Carrying Value Commercial FHA $ 2,131,126 $ 19,873 $ — $ — SBA $ 45,192 $ 600 $ 46,081 $ 656 Residential 232,064 460 255,298 549 Commercial FHA held for sale — — 2,255,617 20,745 Total $ 2,408,382 $ 20,933 $ 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 interest rate risk management, 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. The notional amount does not represent amounts exchanged by the parties, rather the amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. 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 September 30, 2023 and December 31, 2022: Notional amount Fair value gain (dollars in thousands) September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 Derivative instruments (included in other assets): Interest rate lock commitments $ 3,712 $ 2,078 $ 60 $ 49 Forward commitments to sell mortgage-backed securities 8,299 — 91 — Total $ 12,011 $ 2,078 $ 151 $ 49 Notional amount Fair value loss (dollars in thousands) September 30, 2023 December 31, 2022 September 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 of Contents During the nine months ended September 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 nine months ended September 30, 2022, the Company recognized net losses of $ 0.2 million and $ 0.6 million, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income. Cash Flow Hedges The Company periodically enters 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 September 30, 2023 and December 31, 2022: (dollars in thousands) September 30, 2023 December 31, 2022 Notional Amount $ 225,000 $ 200,000 Fair value loss included in other liabilities ( 10,330 ) ( 9,999 ) Tax effected amount included in accumulated other comprehensive (loss) income ( 7,541 ) ( 7,300 ) Average remaining life 2.84 3.37 Weighted average pay rate 7.93 % 7.23 % Weighted average receive rate 5.46 % 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 $ 7.0 million and $ 7.4 million at September 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 September 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 September 30, 2023 and December 31, 2022: (dollars in thousands) September 30, 2023 December 31, 2022 Noninterest-bearing demand $ 1,154,515 $ 1,362,158 Interest-bearing: Checking 2,572,224 2,494,073 Money market 1,090,962 1,184,101 Savings 582,359 661,932 Time 1,004,942 662,388 Total deposits $ 6,405,002 $ 6,364,652 27 Table of Contents NOTE 9 – SHORT-TERM BORROWINGS The following table presents the distribution of short-term borrowings and related weighted average interest rates as of September 30, 2023 and December 31, 2022: Repurchase agreements (dollars in thousands) As of and for the nine months ended September 30, 2023 As of and for the year ended December 31,2022 Outstanding at period-end $ 17,998 $ 42,311 Average amount outstanding 26,865 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 0.26 % 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 $ 27.8 million and $ 46.1 million at September 30, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase. The Company had available lines of credit of $ 759.8 million and $ 12.2 million at September 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 $ 914.5 million and $ 14.3 million at September 30, 2023 and December 31, 2022, respectively. There were no outstanding borrowings under these lines at September 30, 2023 and December 31, 2022. At September 30, 2023, the Company had available federal funds lines of credit totaling $ 364.0 million. These lines of credit were unused at September 30, 2023. NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS The following table summarizes our FHLB advances and other borrowings as of September 30, 2023 and December 31, 2022: (dollars in thousands) September 30, 2023 December 31, 2022 FHLB advances – fixed rate, fixed term at rates averaging 4.18 % at September 30, 2023 - maturing through February 2028 $ 55,000 $ — FHLB advances – putable fixed rate at rates averaging 2.76 % and 2.35 % at September 30, 2023 and December 31, 2022, respectively – maturing through August 2028 with call provisions through February 2024 160,000 110,000 FHLB advances –SOFR floater at rates averaging 6.94 % and 5.92 % at September 30, 2023 and December 31, 2022, respectively – maturing in October 2023 100,000 100,000 FHLB advances – Short term fixed rate at rates averaging 5.46 % and 4.31 % at September 30, 2023 and December 31, 2022, respectively– maturing in October 2023 223,000 250,000 Total FHLB advances and other borrowings $ 538,000 $ 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 September 30, 2023 and December 31, 2022, respectively. 28 Table of Contents NOTE 11 – SUBORDINATED DEBT The following table summarizes the Company’s subordinated debt at September 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 September 30, 2023 Outstanding amount $ 66,750 $ 27,250 $ — $ 94,000 Carrying amount 66,514 26,961 — 93,475 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. Presented 29 Table of Contents below are the calculations for basic and diluted earnings per common share for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands, except per share data) 2023 2022 2023 2022 Net income $ 18,042 $ 23,521 $ 61,389 $ 66,153 Preferred dividends declared ( 2,229 ) — ( 6,685 ) — Net income available to common shareholders 15,813 23,521 54,704 66,153 Common shareholder dividends ( 6,524 ) ( 6,400 ) ( 19,772 ) ( 19,186 ) Unvested restricted stock award dividends ( 76 ) ( 70 ) ( 236 ) ( 218 ) Undistributed earnings to unvested restricted stock awards ( 105 ) ( 185 ) ( 405 ) ( 519 ) Undistributed earnings to common shareholders $ 9,108 $ 16,866 $ 34,291 $ 46,230 Basic Distributed earnings to common shareholders $ 6,524 $ 6,400 $ 19,772 $ 19,186 Undistributed earnings to common shareholders 9,108 16,866 34,291 46,230 Total common shareholders earnings, basic $ 15,632 $ 23,266 $ 54,063 $ 65,416 Diluted Distributed earnings to common shareholders $ 6,524 $ 6,400 $ 19,772 $ 19,186 Undistributed earnings to common shareholders 9,108 16,866 34,291 46,230 Total common shareholders earnings 15,632 23,266 54,063 65,416 Add back: Undistributed earnings reallocated from unvested restricted stock awards — — — 1 Total common shareholders earnings, diluted $ 15,632 $ 23,266 $ 54,063 $ 65,417 Weighted average common shares outstanding, basic 21,970,372 22,338,828 22,214,862 22,306,323 Options 6,824 51,610 9,124 60,772 Weighted average common shares outstanding, diluted 21,977,196 22,390,438 22,223,986 22,367,095 Basic earnings per common share $ 0.71 $ 1.04 $ 2.43 $ 2.93 Diluted earnings per common share 0.71 1.04 2.43 2.92 Antidilutive stock options (1) 305,051 45,698 305,051 45,698 (1) The diluted earnings per common share computation excludes antidilutive stock options because the exercise prices of these stock options exceeded the average market prices of the Company's common shares for those respective periods. 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 30 Table of Contents 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 period presented 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 of Contents Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis at September 30, 2023 and December 31, 2022, are summarized below: September 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 $ 1,563 $ 1,563 $ — $ — U.S. government sponsored entities and U.S. agency securities 89,038 — 89,038 — Mortgage-backed securities - agency 517,391 — 517,391 — Mortgage-backed securities - non-agency 72,665 — 72,665 — State and municipal securities 49,737 — 49,737 — Collateralized loan obligations 22,385 — 22,385 — Corporate securities 82,230 — 82,230 — Equity securities 4,335 4,335 — — Loans held for sale 6,089 — 6,089 — Derivative assets 646 — 646 — Total $ 846,079 $ 5,898 $ 840,181 $ — Liabilities Derivative liabilities $ 10,825 $ — $ 10,825 $ — Total $ 10,825 $ — $ 10,825 $ — Assets measured at fair value on a non-recurring basis: Loan servicing rights $ 20,933 $ — $ — $ 20,933 Nonperforming loans 55,981 — 39,485 16,496 Other real estate owned 480 201 279 — Assets held for sale 182 — 182 — 32 Table of Contents December 31, 2022 (dollars in thousands) Carrying amount Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets and liabilities measured at fair value on a recurring basis: Assets Investment securities available for sale: U.S. Treasury securities $ 81,230 $ 81,230 $ — $ — U.S. government sponsored entities and U.S. agency securities 37,509 — 37,509 — Mortgage-backed securities - agency 448,150 — 448,150 — Mortgage-backed securities - non-agency 20,754 — 20,754 — State and municipal securities 94,636 — 94,636 — Corporate securities 85,955 — 85,955 — Equity securities 8,626 8,626 — — Loans held for sale 1,286 — 1,286 — Derivative assets 481 — 481 — Total $ 778,627 $ 89,856 $ 688,771 $ — Liabilities Derivative liabilities $ 10,446 $ — $ 10,446 $ — Total $ 10,446 $ — $ 10,446 $ — Assets measured at fair value on a non-recurring basis: Loan servicing rights $ 1,205 $ — $ — $ 1,205 Mortgage servicing rights held for sale 20,745 — 20,745 — Nonperforming loans 49,423 5,478 34,406 9,539 Other real estate owned 6,729 — 6,729 — Assets held for sale 356 — 356 — There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023 and 2022. The following table presents losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Commercial mortgage servicing rights $ — $ — $ — $ 1,263 Nonperforming loans 10,085 1,423 14,761 6,381 Other real estate owned — 339 — 743 Total losses on assets measured on a nonrecurring basis $ 10,085 $ 1,762 $ 14,761 $ 8,387 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 September 30, 2023 and December 31, 2022: 33 Table of Contents (dollars in thousands) Fair value Valuation technique Unobservable input / assumptions Range (weighted average) (1) September 30, 2023 Loan servicing rights: Commercial FHA servicing rights 30,914 Discounted cash flow Prepayment speed 4.00 % - 100.00 % ( 8.26 %) Discount rate 8.00 % - 15.00 % ( 8.19 %) SBA servicing rights $ 818 Discounted cash flow Prepayment speed 15.62 % - 16.02 % ( 15.87 %) Discount rate No range ( 14.25 %) Residential servicing rights 2,488 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 September 30, 2023 and December 31, 2022: September 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 $ 6,089 $ 142 $ 5,947 $ 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 nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Residential loans held for sale ( 37 ) ( 280 ) 112 ( 557 ) Total loans held for sale $ ( 37 ) $ ( 280 ) $ 112 $ ( 557 ) 34 Table of Contents The carrying values and estimated fair value of certain financial instruments not carried at fair value at September 30, 2023 and December 31, 2022 were as follows: September 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 $ 131,179 $ 131,179 $ 131,179 $ — $ — Federal funds sold 953 953 953 — — Loans 6,280,883 6,176,092 — — 6,176,092 Accrued interest receivable 24,283 24,283 — 24,283 — Liabilities Deposits $ 6,405,002 $ 6,392,040 $ — $ 6,392,040 $ — Short-term borrowings 17,998 17,998 — 17,998 — FHLB and other borrowings 538,000 533,614 — 533,614 — Subordinated debt 93,475 87,263 — 87,263 — Trust preferred debentures 50,457 50,717 — 50,717 — 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 September 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 of 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 September 30, 2023 and December 31, 2022 were as follows: (dollars in thousands) September 30, 2023 December 31, 2022 Commitments to extend credit $ 1,001,228 $ 1,276,263 Financial guarantees – standby letters of credit 27,302 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 nine months ended September 30, 2023 and 2022. The liability for unresolved repurchase demands totaled $ 0.2 million at September 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 of Contents Selected business segment financial information for the three and nine months ended September 30, 2023 and 2022 were as follows: (dollars in thousands) Banking Wealth Management Other Total Three Months Ended September 30, 2023 Net interest income (expense) $ 60,817 $ ( 3 ) $ ( 2,218 ) $ 58,596 Provision for credit losses 5,168 — — 5,168 Noninterest income 12,007 6,288 ( 110 ) 18,185 Noninterest expense 37,272 5,023 ( 257 ) 42,038 Income (loss) before income taxes (benefit) 30,384 1,262 ( 2,071 ) 29,575 Income taxes (benefit) 11,475 913 ( 855 ) 11,533 Net income (loss) $ 18,909 $ 349 $ ( 1,216 ) $ 18,042 Total assets $ 7,964,147 $ 30,860 $ ( 19,082 ) $ 7,975,925 Nine Months Ended September 30, 2023 Net interest income (expense) $ 184,460 $ ( 3 ) $ ( 6,517 ) $ 177,940 Provision for credit losses 14,182 — — 14,182 Noninterest income 33,502 18,968 247 52,717 Noninterest expense 115,669 14,539 ( 794 ) 129,414 Income (loss) before income taxes (benefit) 88,111 4,426 ( 5,476 ) 87,061 Income taxes (benefit) 26,007 1,797 ( 2,132 ) 25,672 Net income (loss) $ 62,104 $ 2,629 $ ( 3,344 ) $ 61,389 Total assets $ 7,964,147 $ 30,860 $ ( 19,082 ) $ 7,975,925 Three Months Ended September 30, 2022 Net interest income (expense) $ 66,846 $ — $ ( 2,822 ) $ 64,024 Provision for credit losses 6,974 — — 6,974 Noninterest income 9,646 6,199 ( 19 ) 15,826 Noninterest expense 39,338 4,364 ( 206 ) 43,496 Income (loss) before income taxes (benefit) 30,180 1,835 ( 2,635 ) 29,380 Income taxes (benefit) 9,238 498 ( 3,877 ) 5,859 Net income (loss) $ 20,942 $ 1,337 $ 1,242 $ 23,521 Total assets $ 7,809,280 $ 29,166 $ ( 16,569 ) $ 7,821,877 Nine Months Ended September 30, 2022 Net interest income (expense) $ 190,162 $ — $ ( 7,977 ) $ 182,185 Provision for credit losses 16,582 — — 16,582 Noninterest income 26,547 19,481 24 46,052 Noninterest expense 112,947 13,130 ( 358 ) 125,719 Income (loss) before income taxes (benefit) 87,180 6,351 ( 7,595 ) 85,936 Income taxes (benefit) 23,498 1,761 ( 5,476 ) 19,783 Net income (loss) $ 63,682 $ 4,590 $ ( 2,119 ) $ 66,153 Total assets $ 7,809,280 $ 29,166 $ ( 16,569 ) $ 7,821,877 37 Table of Contents NOTE 16 – REVENUE FROM CONTRACTS WITH CUSTOMERS The Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income in the consolidated statements of income. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2023 and 2022. Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2023 2022 2023 2022 Noninterest income - in-scope of Topic 606 Wealth management revenue: Trust management/administration fees $ 5,470 $ 5,241 $ 16,462 $ 16,362 Investment brokerage fees 420 482 1,281 1,623 Other 398 476 1,225 1,496 Service charges on deposit accounts: Nonsufficient fund fees 1,950 1,775 5,389 4,631 Other 1,199 1,008 3,355 2,913 Interchange revenues 3,609 3,531 10,717 10,401 Other income: Merchant services revenue 409 448 1,165 1,203 Other ( 66 ) 661 1,618 1,711 Noninterest income - out-of-scope of Topic 606 4,796 2,204 11,505 5,712 Total noninterest income $ 18,185 $ 15,826 $ 52,717 $ 46,052 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 of Contents Interchange Revenue Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed. Other Noninterest Income The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction. 39 Table of Contents