What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-23 compared with 2023-02-24 · 221 added, 236 removed, 551 unchanged (45% of the section changed)

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Over the past several years, we have grown organically and through a series of acquisitions, with an over-arching focus on enhancing shareholder value and building a platform for scalability.

Most recently, on June 17, 2022, the Company completed its acquisition of the deposits and certain loans and other assets associated with FNBC's branches in

Mokena and Yorkville, Illinois.

The Company acquired $79.8 million in assets, including $60.3 million in cash and $16.6 million in loans, and assumed $79.8 million in deposits.

On June 1, 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust, a trust company based in Chicago, Illinois.

Additional information on recent acquisitions is presented in Note 2 to the consolidated financial statements in Item 8 of this Form 10-K.

Our principal lines of business include traditional community banking and wealth management.

Our traditional community banking business primarily consists of commercial and retail lending and deposit taking.

Our wealth management group provides a comprehensive suite of trust and wealth management products and services, and has $3.51 billion of assets under administration as of December 31, 2022.

Our wealth management group provides a comprehensive suite of trust and wealth management products and services, and had $3.73 billion of assets under administration as of December 31, 2023.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities.

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Each factor listed below affects the comparability of our results of operations and financial condition in 2023 and 2022, and may affect the comparability of financial information we report in future fiscal periods.

Balance Sheet Repositioning.

In 2023, the Company took advantage of certain market conditions to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations.

These transactions resulted in losses of $9.4 million.

In addition, in the third quarter of 2023, the Company surrendered certain low-yielding life insurance policies and purchased additional policies.

The Company recognized a $4.5 million tax charge related to the surrender of the policies.

Redemption of Subordinated Notes.

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

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

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

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

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

Preferred Stock Issuance.

On August 24, 2022, the Company issued and sold 4,600,000 depositary shares, each representing a 1/40th ownership interest in a share of the Company’s 7.75% fixed rate reset non-cumulative, non-convertible, perpetual preferred stock, Series A.

A total of 115,000 shares of Series A preferred stock was issued.

The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations.

The gross proceeds were $115.0 million while net proceeds from the issuance of the Series A preferred stock, after deducting $4.5 million of offering costs including the underwriting discount and other expenses, were $110.5 million.

Termination of hedged interest rate swaps.

On October 24, 2022, the Company terminated the $140.0 million notional amount of future starting pay-fixed, receive-variable interest rate swaps on certain Federal Home Loan Bank ("FHLB") or other fixed-rate advances.

The Company realized a $17.5 million net gain upon termination.

The net proceeds were $110.5 million.

Commercial FHA Mortgage Loan Servicing Rights.

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

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

Impairment expense of $1.3 million and losses on mortgage servicing rights held for sale of $3.3 million was recognized in 2022.

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.

Termination of Hedged Interest Rate Swaps.

On October 24, 2022, the Company terminated the $140.0 million notional amount of future starting pay-fixed, receive-variable interest rate swaps on certain FHLB or other fixed-rate advances.

The Company realized a $17.5 million net gain upon termination.

Recent Acquisitions.

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The Company acquired $79.8 million in assets, including $60.3 million in cash and $16.6 million in loans, and assumed $79.8 million in deposits.

On June 1, 2021, the Company completed its acquisition of substantially all of the trust assets of ATG Trust, a trust company based in Chicago, Illinois, with $399.7 million in assets under management.

Redemption of Subordinated Notes.

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

The interest rate on the subordinated notes was 6.25%.

On June 18, 2021 , the Company redeemed all of its outstanding fixed-to-floating rate subordinated notes due June 18, 2025 , having an aggregate principal amount of $31.1 million, in accordance with the terms of the notes.

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

The interest rate on the subordinated notes was 4.54%.

FHLB Advance Prepayments.

During 2021, the Company pre-paid FHLB advances of $50.0 million in the first quarter, $85.0 million in the second quarter and $130.0 million in the fourth quarter.

As a result, we paid prepayment fees of $8.5 million in 2021.

Tax Settlement.

On June 29, 2021, the Company announced the settlement of a prior tax issue related to the treatment of gains recognized on FDIC-assisted transactions that resulted in a $6.8 million tax benefit that was recognized in the second quarter of 2021 .

The Company also recognized approximately $3.6 million in consulting and legal expenses related to the settlement of the tax issue, resulting in an after-tax gain of approximately $2.9 million .

Purchased Loans.

Our net interest margin benefits from accretion income associated with purchase accounting discounts established on the purchased loans included in our acquisitions.

Our reported net interest margins for 2022 and 2021 were 3.57% and 3.33%, respectively.

Accretion income associated with accounting discounts established on loans acquired totaled $2.0 million and $4.3 million in 2022 and 2021, respectively, increasing the reported net interest margins by 3 and 7 basis points for each respective period.

Results of Operations

For discussion of the results of operations for the year ended December 31, 2021 compared with the year ended December 31, 2020, refer to Item 7 of the Company’s 2021 Annual Report on Form 10-K, filed with the SEC on February 25, 2022.

The following table sets forth condensed income statement information of the Company for the years ended December 31, 2022, 2021 and 2020:

For the Years Ended December 31,

The following table sets forth condensed income statement information of the Company for the years ended 2023, 2022, and 2021:

Years Ended December 31,

(dollars in thousands, except per share data) 2023 2022 2021

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Return on average shareholders' equity 9.80 % 14.40 % 12.65 %

In 2022, we generated net income available to common shareholders of $95.9 million, or $4.23 per diluted share, compared to net income of $81.3 million, or $3.57 per diluted share in 2021.

Earnings in 2022 increased primarily due to a $38.1 million increase in net interest income and a $10.0 million increase in noninterest income.

These results were partially offset by a $16.7 million increase in provision for credit losses, a $0.6 million increase in noninterest expense and a $13.0 million increase in income tax expense.

These are discussed in further detail below.

During the year ended December 31, 2023, we generated net income of $75.5 million, or diluted earnings per common share of $2.97, compared to net income of $99.0 million, or diluted earnings per common share of $4.23, in the year ended December 31, 2022.

Earnings for 2023 compared to 2022 decreased primarily due to a $9.7 million decrease in net interest income, a $1.0 million increase in provision for credit losses, a $13.3 million decrease in noninterest income, and a $1.3 million increase in income tax expense.

These results were partially offset by a $1.8 million decrease in noninterest expense.

Net Interest Income and Margin.

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

On December 14, 2022, the Federal Reserve announced an increase to its benchmark federal-funds rate by 0.50% to a range between 4.25% and 4.50%.

Along with the increase came an indication that the Federal Reserve expects to keep rates higher through next year, with no reductions until 2024.

This was the seventh rate increase announced in 2022.

The year began with a federal-funds rate range of 0.00%-0.25%.

In 2022, net interest income, on a tax-equivalent basis, increased to $247.0 million with a tax-equivalent net interest margin of 3.57% compared to net interest income, on a tax-equivalent basis, of $209.2 million and a tax-equivalent net interest margin of 3.33% in 2021.

The Federal Reserve left interest rates unchanged at its meeting in December 2023 but signaled that it was no longer expecting further interest rate increases in its historic inflation fight, and that it could also cut interest rates three times in 2024.

In 2023, the Federal Reserve increased the federal funds rate 100 basis points to a target range of 5.25%-5.50%, the highest since August 2007.

This compares to rate increases totaling 425 basis points in 2022.

The benchmark federal funds rate remains at a target range between 5.25%-5.50%, compared to a target range of 0.00%-0.25% at the beginning of 2022.

In 2023, net interest income, on a tax-equivalent basis, decreased to $236.8 million with a tax-equivalent net interest margin of 3.26% compared to net interest income, on a tax-equivalent basis, of $247.0 million and a tax-equivalent net interest margin of 3.57% in 2022.

Average Balance Sheet, Interest and Yield/Rate Analysis.

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Time deposits 814,727 21,840 2.68 625,307 4,161 0.67 690,558 7,373 1.07

Brokered deposits 16,592 204 1.23 32,419 400 1.23 24,387 614 2.52

Brokered time deposits 75,935 3,644 4.80 16,592 204 1.23 32,419 400 1.23

Total interest-bearing deposits 5,241,723 136,947 2.61 4,802,130 36,061 0.75 3,846,000 10,957 0.28

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$ 236,845 3.26 % $ 247,018 3.57 % $ 209,218 3.33 %

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

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

Tax-equivalent adjustments totaled $0.8 million, $1.3 million and $1.5 million for the years ended December 31, 2023 , 2022 and 2021, respectively.

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Time deposits 3,169 14,510 17,679 (565) (2,647) (3,212)

Brokered deposits (196) — (196) 151 (365) (214)

Brokered time deposits 1,790 1,650 3,440 (196) — (196)

Total interest-bearing deposits 10,215 90,671 100,886 1,734 23,370 25,104

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Interest Income.

Interest income, on a tax-equivalent basis, increased $63.7 million to $303.0 million in 2022 as compared to 2021 primarily due to the growth in our average loan balances.

The yield on earning assets increased 57 basis points to 4.38% from 3.81%, due to the impact of both the growth in earning assets and the increase in market interest rates.

For the year ended December 31, 2023, interest income, on a tax-equivalent basis, increased $102.1 million to $405.1 million as compared to the prior year, due to both improved yields on earning assets and growth in earning assets.

The yield on earning assets increased 119 points to 5.57% from 4.38%, primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.27 billion in 2023 from $6.92 billion in 2022.

An increase in average loans of $908.0 million was partially offset by a decrease of $262.6 million in federal funds sold and cash investments.

Average commercial loans decreased $24.6 million for the twelve months ended December 31, 2022 compared to the same period of 2021.

Commercial FHA warehouse lines and Paycheck Protection Program ("PPP") loans accounted for $95.9 million and $127.1 million, respectively, of this decrease.

Excluding the changes in the commercial FHA warehouse line and PPP loan portfolios, average commercial loans increased $198.4 million in 2022 compared to 2021.

Average commercial real estate loans increased in 2022 by $707.5 million, compared to 2021.

Average balances in our consumer loans, construction loans and lease portfolios also increased by $198.4 million, $21.1 million and $35.7 million, respectively, compared to the prior year.

These increases were partially offset by payoffs and repayments in the residential real

estate portfolio.

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

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

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

An increase in average loans and investment securities of $480.9 million and $55.4 million, respectively, were partially offset by a $179.2 million decrease in federal funds sold and cash investments.

Average loans increased $480.9 million in 2023 compared to 2022 across all loan categories.

Average commercial loans increased $71.2 million.

Included in this category are commercial FHA warehouse lines, which decreased $44.3 million to $18.4 million in 2023.

Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $115.5 million in 2023 compared to the prior year.

Average commercial real estate loans, construction loans, and leases also increased $173.3 million, $155.7 million and $50.5 million, respectively, in 2023 compared to 2022.

The increase in average construction loans was primarily due to funding draws on existing multifamily project lines.

Average balances in our consumer loan portfolio remained flat year over year.

During the fourth quarter of 2023, the Company ceased originating consumer loans through both Greensky and LendingPoint.

Interest Expense.

Interest expense increased $112.3 million to $168.3 million in 2023 compared to 2022.

The cost of interest-bearing liabilities increased to 1.16% in 2022 compared to 0.66% for the prior year due to the increase in deposit costs as a result of the rate increases enacted by the Federal Reserve.

Interest expense on deposits increased to $36.1 million in 2022 from $11.0 million in 2021.

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

Average balances of interest-bearing deposit accounts increased $376.6 million , or 9.8%, to $4.22 billion for the year ended December 31, 2022 compared to 2021.

The increase in volume was attributable to increases of retail deposits, commercial deposits and brokered deposits of $97.2 million, $107.8 million and $65.1 million, respectively.

In addition, our Insured Cash Sweep product balances increased $78.1 million.

Interest expense on FHLB advances and other borrowings increased $0.9 million for the year ended December 31, 2022 , from the comparable period in 2021.

While average balances decreased $118.1 million in 2022 compared to 2021, this was offset by interest rate increases throughout 2022.

Interest expense on subordinated debt decreased $1.2 million in 2022 from 2021 primarily due to the redemption of $40.0 million of subordinated debt on October 15, 2022.

The interest rate on the subordinated notes was 6.25%.

In addition, the Company redeemed $31.1 million of subordinated debt on June 18, 2021.

The interest rate on these redeemed notes was 4.54%.

The cost of interest-bearing liabilities increased to 2.87% compared to 1.04% for the prior year due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

I nterest expense on deposits increased to $136.9 million in 2023 from $36.1 million in 2022, primarily due to increases in interest rates on deposits.

Average balances of interest-bearing deposit accounts increased $439.6 million, or 9.15%, to $5.24 billion for 2023 compared to the same period one year earlier.

The increase in volume was attributable to increases in retail deposits and brokered deposits of $98.7 million and $96.6 million, respectively.

In addition, our Insured Cash Sweep product average balances increased $352.6 million.

Interest expense on FHLB advances and other borrowings increased $11.4 million for the year ended December 31, 2023 , from the prior year, due to increases in both average balances and interest rates.

The average balances increased $105.5 million in 2023 compared to 2022, while interest rate increases in 2023 pushed the average cost to 4.49% in 2023 compared to 2.63% in 2022.

Interest expense on subordinated debt decreased $2.2 million in 2023 from 2022.

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

Interest expense on trust preferred debentures increased $2.3 million in 2023 compared to 2022 due to interest rate increases, as these debt instruments reprice quarterly.

Provision for Credit Losses.

The Company's provision for credit losses was $20.1 million in 2022.

The provision for credit losses on loans and unfunded commitments was $18.8 million and $1.6 million, respectively, partially offset by the recognition of expense reversal of $0.2 million related to investment securities.

Provision expense recognized in 2021 totaled $3.4 million, with $4.0 million attributable to loans and expense reversals of $0.4 million related to unfunded loan commitments and $0.1 million related to investment securities.

The increase in the provision for credit losses on loans in 2022 compared to prior year was primarily due to the growth of and mix in our loan portfolio coupled with a declining economic forecast.

The Company's provision for credit losses on loans and unfunded commitments was $21.1 million and $0 in 2023, respectively .

In 2022, the provision for credit losses on loans and unfunded commitments was $18.8 million and $1.6 million, respectively, partially offset by the recognition of expense reversal of $0.2 million related to investment securities.

The increase in the provision for credit losses on loans was primarily a result of an increase in net charge-offs in 2023 compared to the prior year.

The provision for credit losses on loans recognized during 2023 and 2022 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

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The following table sets forth the major components of our noninterest income for the years ended December 31, 2023, 2022 and 2021:

For the years ended December 31, 2022 Compared to 2021 2021 Compared to 2020

Years Ended December 31, 2023 Compared to 2022 2022 Compared to 2021

(dollars in thousands) 2023 2022 2021 Increase (decrease) Increase (decrease)

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Wealth management revenue $ 25,572 $ 25,708 $ 26,811 $ (136) (0.5) % $ (1,103) (4.1) %

Commercial FHA revenue 1,663 1,414 6,007 249 17.6 (4,593) (76.5)

Residential mortgage banking revenue 1,903 1,509 5,526 394 26.1 (4,017) (72.7)

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Impairment on commercial mortgage servicing rights — (1,263) (7,532) 1,263 (100.0) 6,269 (83.2)

Company-owned life insurance 3,584 4,496 3,581 (912) (20.3) 915 25.6

Income on company-owned life insurance 4,439 3,584 4,496 855 23.9 (912) (20.3)

Other income 17,756 8,936 14,160 8,820 98.7 (5,224) (36.9)

Total noninterest income $ 66,590 $ 79,891 $ 69,899 $ (13,301) (16.6) % $ 9,992 14.3 %

Wealth management revenue .

Income from our wealth management business for 2022 totaled $25.7 million as compared to $26.8 million in the same period of 2021 .

Assets under administration decreased to $3.51 billion at December 31, 2022 from $4.10 billion at December 31, 2021, primarily due to a decline in market performance in 2022 and a resulting decrease in revenue.

Residential mortgage banking revenue.

Residential mortgage banking revenue for 2022 totaled $1.5 million, compared to $5.5 million in 2021 , primarily attributable to a decrease in production.

Loans originated for sale into the secondary market in 2022 totaled $77.0 million, with 19% representing refinance transactions versus purchase transactions.

Similar loans originated during the prior year totaled $211.6 million with 48% representing refinance transactions.

Impairment of commercial mortgage servicing rights.

Impairment of commercial mortgage servicing rights was $1.3 million for 2022 compared to $7.5 million for 2021 .

The impairment resulted from loan prepayments as borrowers refinanced their loans in the then current low interest rate environment.

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

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

Loans serviced for others totaled $2.26 billion and $2.65 billion at December 31, 2022 and 2021 , respectively.

Company owned life insurance.

In the fourth quarter of 2021, the Company recognized $1.1 million of death benefits due to the passing of its former CEO and President.

Service charges on deposit accounts.

Service charges on deposit accounts increased $1.8 million, or 17.1%, in 2023 compared to 2022, due to increases in business account analysis fees and overdraft-related fees.

Loss on sale of investment securities .

The Company took advantage of certain market conditions during the year ended December 31, 2023 to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations.

These transactions resulted in losses of $9.4 million.

Gain on termination of hedged interest rate swaps.

As previously stated, on October 24, 2022, the Company terminated $140.0 million notional amount of future starting pay-fixed, receive-variable interest rate swaps on certain FHLB or other fixed-rate advances.

The Company realized a $17.5 million net gain upon termination.

Other noninterest income.

Other income totaled $8.0 million for 2022 , a decrease of $5.6 million, as compared to 2021 .

In 2021 , the Company recognized $4.2 million of unrealized income on equity investments in FinTech-related venture capital funds and SBIC limited partnerships.

Other income increased $8.8 million for 2023, as compared to 2022.

Other noninterest income in 2023 included incremental servicing revenues of $2.2 million and $1.6 million related to our commercial FHA servicing portfolio and the Greensky portfolio, respectively.

In addition, the Company recognized a $1.1 million one-time gain from the sale of Visa B stock, a gain of $0.7 million on the redemption of subordinated debt and a gain of $0.8 million on the sale of OREO.

During the third quarter of 2023, the Company recognized an enhancement fee of $6.6 million related to the surrender and purchase of company-owned life insurance policies.

In the fourth quarter of 2023, the Company revised its accounting for the one-time enhancement fee and reversed the fee.

The financial reporting periods affected by this revision include the Company’s previously reported interim unaudited consolidated financial statements as of and for the three months and nine months ended September 30, 2023.

The Company concluded this revision was not material to the Company’s previously reported interim financial statements and would not be material to the current period financial statements;

however the Company has elected to voluntarily revise its previously reported consolidated financial statements as of and for the three and nine month period ended September 30, 2023.

The revision affects the Company’s quarter-to-date and year-to-date income on company-owned life insurance.

Additionally, the revision impacts the company-owned life insurance asset for the applicable period.

The Company expects to present the corrected interim 2023 amounts in its 2024 consolidated interim financial statements upon the filing of its Quarterly Report on Form 10-Q and Quarterly Earnings Release on Form 8-K as of and for the period ended September 30, 2024 as a voluntary immaterial revision to all applicable 2023 periods.

The following tables present the impact of the revision to the Company’s previously reported financial statements.

Consolidated Income Statement

(dollars in thousands, except per share data)

Period Ended September 30, 2023 (Unaudited)

As Reported Immaterial

Revision Three Months

Revised Nine Months

As Reported Immaterial

Revision Nine Months

Income on company owned life insurance $ 7,558 $ (6,640) $ 918 $ 9,325 $ (6,640) $ 2,685

Net income 18,042 (6,640) 11,402 64,389 (6,640) 57,749

Net income available to common shareholders 15,813 (6,640) 9,173 54,704 (6,640) 48,064

Diluted earnings per common share 0.71 (0.30) 0.41 2.43 (0.29) 2.14

Consolidated Balance Sheet

(dollars in thousands)

Period Ended September 30, 2023 (Unaudited)

As Reported Immaterial

Revision Period End

Company owned life insurance $ 208,390 $ (6,640) $ 201,750

Total assets 7,975,925 (6,640) 7,969,285

Shareholders' equity 764,250 (6,640) 757,610

Noninterest Expense.

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Data processing 26,286 24,350 24,595 1,936 8.0 (245) (1.0)

FDIC insurance 4,779 3,336 3,346 1,443 43.3 (10) (0.3)

Professional 7,049 6,907 10,971 142 2.1 (4,064) (37.0)

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Loss on mortgage servicing rights held for sale — 3,250 222 (3,250) (100.0) 3,028 1364.0

Impairment related to facilities optimization — — 12,847 — — (12,847) (100.0)

Federal Home Loan Bank advances prepayment fees — — 8,536 — — (8,536) (100.0)

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Salaries and employee benefits.

For the year ended December 31, 2022, salaries and employee benefits expense increased $3.4 million as compared to 2021, primarily due to a modest increase in staffing levels in 2022.

For the year ended December 31, 2023, salaries and employee benefits expense increased $3.1 million as compared to 2022.

The decline in loan production in 2023 resulted in a decline in the deferral of loan origination costs compared to the prior year, resulting in an increase in expense.

The Company employed 914 employees at December 31, 2023 compared to 935 employees at December 31, 2022.

Professional fees.

For the year ended December 31, 2022, professional fees decreased $4.1 million as compared to the same period in 2021.

In 2021, the Company incurred $3.6 million of consulting and legal expenses related to the settlement of a tax issue, as previously discussed.

Occupancy and Equipment Expense.

For the year ended December 31, 2023, occupancy and equipment expense increased $1.1 million as compared to the same period in 2022.

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

The Company operated 53 full-service banking centers at December 31, 2023 and 2022.

Data processing fees.

The $1.9 million increase in data processing fees for the year ended December 31, 2023, was primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes.

FDIC Insurance Expense.

For the year ended December 31, 2023, FDIC insurance expense increased $1.4 million, as compared to the prior year, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

Other Real Estate Owned.

For the year ended December 31, 2022, the Company recorded impairment charges on two properties totaling $4.3 million compared to impairment expense of $0.5 million in 2021.

The Company recorded impairment charges on two properties totaling $4.3 million in 2022.

Loss on mortgage servicing rights held for sale.

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

During the fourth quarter, we recognized a loss of $3.3 million on this asset.

Other expense.

For the year ended December 31, 2022, other expense increased $1.5 million as compared to 2021, primarily as a result of increased business activities.

We recognized a loss of $3.3 million on this asset at that time.

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.

Income Tax Expense .

Income tax expense was $30.8 million for the year ended December 31, 2022, as compared to $17.8 million for the year ended December 31, 2021.

The resulting effective tax rates were 23.7% and 18.0% for the years ended December 31, 2022 and 2021, respectively.

The Company's income tax expense and related effective tax rate for the year ended December 31, 2021 benefited from the $6.8 million in settlements related to the treatment of gains recognized on FDIC-assisted transactions discussed earlier.

Income tax expense was $32.1 million in 2023 compared to $30.8 million in 2022.

Effective tax rates for 2023 and 2022 were 29.9% and 23.7% respectively.

The Company's income tax expense and related effective tax rate for 2023 included tax charges of $4.5 million associated with the surrender of certain company-owned life insurance policies, as previously discussed.

Financial Condition

Total assets increased to $7.86 billion at December 31, 2022, as compared to $7.44 billion at December 31, 2021.

Total assets were $7.87 billion at December 31, 2023, as compared to $7.86 billion at December 31, 2022.

The loan portfolio is the largest category of our assets.

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2023 2022 2021

(dollars in thousands) Book Value % Book Value % Book Value %

(dollars in thousands) Balance Percent Balance Percent Balance Percent

Equipment finance loans $ 531,143 8.7 % $ 616,751 9.8 % $ 521,973 10.0 %

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Total loans, net $ 6,062,577 $ 6,245,416 $ 5,173,739

Total loans increased $1.08 billion to $6.31 billion at December 31, 2022, as compared to December 31, 2021.

The loan growth was primarily reflected in our commercial loans and leases, commercial real estate and consumer portfolios, which increased $132.9 million, $616.3 million and $177.4 million, respectively.

These increases were offset in part by payoffs and repayments in the residential real estate portfolio.

Commercial loans and leases, which includes commercial FHA warehouse lines and PPP loans, increased $132.9 million to $2.01 billion at December 31, 2022, as compared to December 31, 2021.

Advances on commercial FHA warehouse lines decreased $66.9 million to $25.0 million at December 31, 2022.

PPP loans at December 31, 2022, totaled $1.9 million, a decrease of $50.6 million from December 31, 2021.

Excluding the decreases in PPP loans and commercial FHA warehouse lines, commercial loans and leases increased $250.3 million, primarily from our equipment financing business.

Consumer loans increased $177.4 million primarily as a result of our new relationship with an additional consumer loan origination firm and our continuing relationship with GreenSky.

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

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

Total loans decreased $175.4 million to $6.13 billion at December 31, 2023, as compared to December 31, 2022, as the Company originated loans in a more selective and deliberate approach to balance liquidity and funding costs.

Increases in construction and land development loans, and residential real estate loans of $131.7 million and $14.5 million, respectively, were offset by decreases in all other loan categories.

The increase in our construction and land development portfolio was primarily driven by draws on existing lines.

Consumer loans decreased $244.8 million at December 31, 2023 compared to December 31, 2022, due to loan payoffs and a cessation in loans originated through GreenSky.

Our Greensky-originated loan balances decreased $251.1 million during 2023 to $683.5 million at December 31, 2023.

In addition, during the fourth quarter, the Company ceased originating loans through LendingPoint.

At December 31, 2023, the Company had $121.0 million in loans outstanding that were originated through LendingPoint, which will continue to be serviced by LendingPoint.

The principal segments of our loan portfolio are discussed below:

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Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors.

Loans secured by office space totaled $153.8 million and $155.7 million at December 31, 2023 and 2022, respectively, primarily located in Illinois and Missouri.

Construction and land development loans.

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Interest reserves are generally established on real estate construction loans.

The following table presents the balance and associated percentage of the major property types within our commercial real estate and construction and land development loan portfolios at December 31, 2023 and 2022:

(dollars in thousands) Balance % Balance %

Multi-Family $ 516,295 18.1 % $ 395,164 14.3 %

Skilled Nursing 469,096 16.4 485,456 17.6

Retail 454,589 15.9 452,806 16.4

Industrial/Warehouse 217,956 7.6 228,177 8.3

Hotel/Motel 159,707 5.6 164,597 6.0

Office 153,756 5.4 155,703 5.7

All other 888,039 31.0 872,138 31.7

Total commercial real estate and construction and land development loans $ 2,859,438 100.0 % $ 2,754,041 100.0 %

Residential real estate loans.

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We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

In addition to our allowance for credit losses on loans, our purchase discounts on acquired loans provide additional protections against credit losses.

Analysis of the Allowance for Credit Losses on Loans.

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2023 2022 2021

(dollars in thousands) Allowance % (1)

Allowance % (1)

(dollars in thousands) Allowance Percent (1)

Allowance Percent (1)

Commercial $ 21,847 1.47 % $ 14,639 0.97 % $ 14,375 0.99 %

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We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things.

The measurement of expected credit losses is impacted by

loan and borrower attributes and certain macroeconomic variables.

The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables.

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

The allowance allocated to commercial loans totaled $14.6 million, or 0.97% of total commercial loans, at December 31, 2022, compared to $14.4 million, or 0.99%, at December 31, 2021.

Modeled expected credit losses increased $1.1 million and qualitative factor ("Q-Factor") adjustments related to commercial loans increased $2.1 million.

Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis decreased from $2.9 million at December 31, 2021 to $0 at December 31, 2022.

The allowance allocated to commercial real estate loans totaled $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022 compared to $23.0 million, or 1.27% of total commercial real estate loans, at December 31, 2021.

Modeled expected credit losses related to commercial real estate loans decreased $0.3 million and Q-Factor adjustments related to commercial real estate loans increased $5.2 million.

Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis increased from $0.1 million at December 31, 2021 to $1.5 million at December 31, 2022.

The allowance allocated to construction and land development loans totaled $2.4 million, or 0.76% of total construction and land development loans, at December 31, 2022, compared to $1.0 million, or 0.50%, at December 31, 2021.

Modeled expected credit losses increased $0.6 million and Q-Factor adjustments related to construction and land development loans increased $0.9 million.

The allowance allocated to residential real estate loans totaled $4.3 million, or 1.17% of total residential real estate loans, at December 31, 2022, compared to $2.7 million, or 0.80%, at December 31, 2021.

Modeled expected credit losses increased $1.1 million and Q-Factor adjustments related to residential real estate loans increased $0.5 million.

As previously stated, the overall loan portfolio increased $1.08 billion, or 20.7%, which included a $616.3 million, or 33.9%, increase in commercial real estate loans and a $250.3 million, or 14.5%, increase in commercial loans, excluding commercial FHA warehouse lines and PPP loans.

The weighted average risk grade for commercial and industrial loans of 4.36 at December 31, 2022, improved from 4.53 at December 31, 2021.

The weighted-average risk grade for commercial real estate loans also decreased slightly to 4.87 at December 31, 2022 from 5.02 at December 31, 2021.

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

The forecasted projections included, among other things, (i) year over year change in U.S.

gross domestic product ranging from -0.5% to 1.3% over the next three quarters;

unemployment rate increasing to 4.7% by the fourth quarter of 2023 with Illinois unemployment rates higher at 6.0%;

and (iii) an average 10 year Treasury rate forecasted at 3.10% in the fourth quarter of 2023.

These economic metrics forecast a slowing economy in 2023.

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

gross domestic product ranging from 0.5% to 2.1% over the next four quarters;

(ii) the 10-year treasury rate decreasing from 4.5% in the fourth quarter of 2023 to 4.0% by the fourth quarter of 2024;

and (iii) Illinois unemployment rate averaging 5.4% through the fourth quarter of 2024.

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

Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures;

These Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures;

economic and business conditions;

loan portfolio attributes and credit concentrations;

and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes.

and external factors, among other things, that are not already fully captured within the modeling inputs, assumptions and other processes.

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

As a result of this assessment as of December 31, 2022, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 50 basis points of total loans, increasing from 43 basis points at December 31, 2021.

The Q-Factor adjustment at December 31, 2022 was based primarily on declining economic conditions, including rising inflation fears and an increasing risk of recession and the impact of rising fuel prices on businesses and consumers.

As a result of this assessment as of December 31, 2023, modeled expected credit losses were positively adjusted with a qualitative factor adjustment of approximately 41 basis points of total loans, decreasing from 50 basis points at December 31, 2022.

The Q-Factor adjustment at December 31, 2023 was based primarily on declining credit quality conditions within the equipment financing segment.

The allowance allocated to commercial loans totaled $21.8 million, or 1.47% of total commercial loans, at December 31, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022.

Modeled expected credit losses increased $7.0 million and qualitative factor adjustments related to commercial loans decreased $1.6 million.

Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased $1.8 million.

There were no specific allocation reserves for commercial loans in the prior period.

The weighted average risk grade for commercial and industrial loans at December 31, 2023, weakened to 4.62 from 4.42 at December 31, 2022.

The allowance allocated to commercial real estate loans totaled $20.2 million, or 0.84% to total commercial real estate loans, at December 31, 2023, decreasing $9.1 million, from $29.3 million, or 1.20% of total commercial real estate loans, at December 31, 2022.

Modeled expected credit losses decreased $2.7 million, due to an improvement in our LDG, primarily as a result of a $3.4 million recovery on a loan previously charged off.

The qualitative factor adjustments decreased $5.5 million as a result of improving economic forecasts, as the Federal Reserve signaled an expectation of rate decreases beginning in 2024.

In addition, the qualitative factor for collateral values decreased based upon our mix of collateral-based loans, which does not include significant exposure to urban office properties.

Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.5 million at December 31, 2022, to $0.7 million at

December 31, 2023.

The weighted average risk grade for commercial real estate loans remained relatively unchanged at 4.83 at December 31, 2023, from 4.84 at December 31, 2022.

The allowance allocated to construction and land development loans totaled $4.2 million, or 0.92% to total construction loans, at December 31, 2023, increasing $1.7 million, from $2.4 million, or 0.76% of total constructions loans, at December 31, 2022.

Modeled expected credit losses increased $1.4 million and qualitative factor adjustments related to construction loans increased $0.3 million.

There were no specific allocation reserves for construction loans in either period.

The allowance allocated to the lease portfolio totaled $12.9 million, or 2.73% of total commercial leases, at December 31, 2023, increasing $6.2 million, from $6.8 million, or 1.38% of total commercial leases at December 31, 2022.

Modeled expected credit losses related to commercial leases increased $6.8 million and qualitative factor adjustments decreased $0.6 million.

There were no specific allocation reserves for commercial leases in either period.

The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the years ended 2023, 2022, and 2021:

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Provision for credit losses on loans 21,132 18,797 3,950

Impact of adopting ASC 326 — — 8,546

Impact of adopting ASC 326 - PCD loans — — 4,237

Balance, end of period $ 68,502 $ 61,051 $ 51,062

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

Net charge-offs for 2022 totaled $8.8 million, compared to $13.3 million for 2021.

Net charge-offs to average loans were 0.15% and 0.27% for 2022 and 2021, respectively.

Charge-offs in 2023 increased to $20.3 million from $11.1 million in 2022.

Our equipment finance business saw charge-offs increase to $9.6 million in 2023 from $2.0 million in 2022, due primarily to weakness within the trucking and transportation sector.

The Company recognized a $3.4 million recovery on a commercial real estate loan, which was charged-off in 2017.

Nonperforming Loans .

The following table sets forth our nonperforming assets by asset categories as of the dates indicated.

Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings.

Deferrals related to COVID-19 are not included as TDRs as of December 31, 2022

and December 31, 2021.

Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest.

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

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We did not recognize interest income on nonaccrual loans during the years ended December 31, 2023 or 2022 while the loans were in nonaccrual status.

Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $2.8 million and $2.7 million for the year ended December 31, 2022 and 2021 respectively.

We recognized interest income on commercial and commercial real estate loans modified under troubled debt restructurings of $0.1 million during each of the years ended December 31, 2022 and 2021.

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

In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them.

There are three classifications for problem assets:

“substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.

Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.

An asset classified as loss is not considered collectable and is of such little value that continuance of booking the asset is not warranted.

We use a ten grade risk rating system to categorize and determine the credit risk of our loans.

Potential problem loans include loans with a risk grade of 7, which are "special mention," and loans with a risk grade of 8, which are "substandard" loans that are not considered to be nonperforming.

These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance.

Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management team.

The following table presents the recorded investment of potential problem commercial loans by loan category at the dates indicated:

Commercial Commercial

real estate Construction &

land development

Risk category Risk category Risk category

(dollars in thousands) 7 8 (1)

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

December 31, 2021 28,248 20,413 46,295 108,634 5,235 1,336 210,161

Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $3.4 million and $2.8 million for the years ended December 31, 2023 and 2022, respectively.

The following table presents the change in our non-performing loans for the year ended December 31, 2023:

(dollars in thousands) Year Ended

December 31, 2023

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

Commercial loans with a risk rating of 7 or 8 decreased $26.4 million to $22.3 million as of December 31, 2022, compared to $48.7 million as of December 31, 2021.

Commercial real estate loans with a risk rating of 7 or 8 decreased $29.2

million to $125.7 million as of December 31, 2022, compared to $154.9 million as of December 31, 2021, primarily due to risk rating upgrades within the portfolio.

Balance, beginning of period $ 49,423

New nonperforming loans 46,615

Return to performing status (6,085)

Payments received (26,048)

Charge-offs (7,554)

Balance, end of period $ 56,351

Investment Securities.

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

The following table sets forth the book value and percentage of each category of investment securities at December 31, 2022, 2021 and 2020.

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

In the periods presented, all investment securities of the Company are classified as available for sale and, therefore, the book value of investment securities is equal to the fair market value.

The following table sets forth the book value and associated percentage of each category of investment securities at December 31, 2023, 2022 and 2021.

2023 2022 2021

(dollars in thousands) Book

(dollars in thousands) Balance Percent Balance Percent Balance Percent

Investment securities available for sale:

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State and municipal securities 57,460 6.3 94,636 12.3 143,099 15.8

Collateralized loan obligations 27,565 3.0 — — — —

Corporate securities 99,172 10.9 85,955 11.2 195,794 21.6

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

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

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

(dollars in thousands) Balance Percent Weighted average yield

Investment securities available for sale:

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Total state and municipal securities $ 57,460 6.3 % 2.80 %

Collateralized loan obligations:

Maturing within one year $ 1,450 0.2 % 7.16 %

Maturing in one to five years 21,115 2.3 6.99

Maturing in five to ten years 5,000 0.5 7.90

Maturing after ten years — — —

Total collateralized loan obligations $ 27,565 3.0 % 7.17 %

Corporate securities:

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

Amortized Estimated Average credit rating

(dollars in thousands) cost fair value AAA AA+/- A+/- BBB+/- <BBB- Not Rated

Amortized Fair Average credit rating

(dollars in thousands) cost Value AAA AA+/- A+/- BBB+/- <BBB- Not Rated

Investment securities available for sale:

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State and municipal securities 62,952 57,460 2,927 54,533 — — — —

Collateralized loan obligations 27,646 27,565 20,216 7,349 — — — —

Corporate securities 109,598 99,172 — 50,465 21,831 20,062 6,814 —

Total investment securities, available for sale $ 1,012,592 $ 915,895 $ 112,771 $ 754,417 $ 21,831 $ 20,062 $ 6,814 $ —

Cash and Cash Equivalents.

Cash and cash equivalents decreased $530.1 million to $150.3 million at December 31, 2022 compared to December 31, 2021, as the excess liquidity was used to fund loan growth during the year.

Loans Held for Sale.

Loans held for sale totaled $1.3 million at December 31, 2022, comprised entirely of residential real estate loans, compared to $32.0 million at December 31, 2021, comprised of $19.2 million of commercial real estate and $12.8 million of residential real estate loans.

At December 31, 2023, liabilities totaled $7.08 billion compared to $7.10 billion at December 31, 2022.

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

Total deposits increased $254.0 million to $6.36 billion at December 31, 2022, as compared to December 31, 2021.

Deposits acquired in the second quarter of 2022 from FNBC totaled $79.8 million.

Increases in interest-bearing checking and money market accounts of $257.4 million and $315.0 million, respectively, during this period, were partially offset by a decrease in noninterest-bearing demand account balances.

Noninterest-bearing demand accounts decreased $309.9 million to $1.94 billion at December 31, 2022, compared to December 31, 2021, as servicing deposits decreased $374.7 million.

Interest-bearing checking accounts and money market accounts increased $257.4 million and $315.0 million, respectively, from December 31, 2021 to December 31, 2022.

These increases were the result of strategic relationships with non-bank financial services companies, consumers' flight to safety from the equities markets and increasing deposit rates in response to the rate increases announced by the Federal Reserve.

Total deposits decreased $55.1 million to $6.31 billion at December 31, 2023, as compared to December 31, 2022.

Increases in interest-bearing checking and time deposits of $17.8 million and $295.0 million, respectively, during this period, were partially offset by decreases in noninterest-bearing demand, money market and savings account balances.

Noninterest-bearing demand accounts decreased $216.8 million to $1.15 billion at December 31, 2023, compared to December 31, 2022, as a result of increasing deposit rates in response to the rate increases announced by the Federal Reserve.

Interest rate promotions offered in 2023 on time deposit products resulted in an increase in balances of non-brokered time deposits of $213.3 million over the same period.

Brokered time deposits increased to $94.5 million at December 31, 2023 from $12.8 million at December 31, 2022.

Our noninterest-bearing deposits decreased to 18.1% of total deposits at December 31, 2023 compared to 21.4% at December 31, 2022.

(dollars in thousands) 2023 2022 2021

Book Value % of Total Book Value % of Total Book Value % of Total

Balance Percent Balance Percent Balance Percent

Noninterest-bearing demand $ 1,145,395 18.1 % $ 1,362,158 21.4 % $ 2,245,701 36.8 %

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Total deposits $ 6,309,529 100.0 % $ 6,364,652 100.0 % $ 6,110,648 100.0 %

The following table summarizes our average deposit balances and weighted average rates for the years ended December 31, 2022, 2021 and 2020:

2022 2021 2020

(dollars in thousands) Average

Balance Weighted Average Rate Average

Balance Weighted Average Rate

Noninterest-bearing demand $ 1,965,749 — $ 1,568,005 — $ 1,255,031 —

Interest-bearing:

Checking 1,828,886 1.23 % 1,645,880 0.14 % 1,499,199 0.27 %

Money market 1,048,506 0.82 821,408 0.09 831,458 0.46

Savings 703,341 0.08 655,735 0.02 567,398 0.04

Time, insured 493,751 0.62 551,748 1.12 611,570 1.78

Time, uninsured 131,556 0.83 138,810 0.88 100,774 1.88

Time, brokered 16,592 1.23 32,419 1.23 24,387 2.52

Total interest-bearing 4,222,632 0.85 3,846,000 0.28 3,634,786 0.59

Total deposits $ 6,188,381 0.58 % $ 5,414,005 0.20 % $ 4,889,817 0.44 %

The Company estimates that uninsured deposits (1) totaled $1.22 billion, or 19% of total deposits, at December 31, 2023 compared to $1.55 billion, or 24%, at December 31, 2022.

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

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Total $ 95,694

Short-Term Borrowings.

In addition to deposits, we use short-term borrowings, such as federal funds purchased and securities sold under agreements to repurchase, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets.

Short-term borrowings were $42.3 million at December 31, 2022 compared to $76.8 million at December 31, 2021.

The weighted average interest rate on our short-term borrowings was 0.26% and 0.13% at December 31, 2022 and 2021, respectively.

Subordinated Debt.

Subordinated debt totaled $99.8 million and $139.1 million as of December 31, 2022 and 2021, respectively.

On October 15, 2022, the Company redeemed the outstanding fixed-to-floating rate subordinated notes due October 15, 2027, having an aggregate principal amount of $40.0 million, in accordance with the terms of the notes.

The interest rate on the subordinated notes was 6.25%.

(1) Uninsured deposits include the Call Report estimate of uninsured deposits less affiliate deposits, estimated insured portion of servicing deposits, additional structured FDIC coverage and collateralized deposits.

Capital Resources and Liquidity Management

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Shareholders’ equity increased $33.3 million to $791.9 million at December 31, 2023 as compared to December 31, 2022.

The Company generated net income of $99.0 million during 2022.

Offsetting this increase to shareholders’ equity were dividends to common shareholders of $25.9 million, dividends to preferred shareholders of $3.2 million, stock repurchases of $1.1 million and a decrease in accumulated other comprehensive loss of $89.0 million.

In addition, the Company completed its preferred stock offering in August 2022, generating net proceeds of $110.5 million as described in Note 17.

The Company intends to use the net proceeds from the offering for general corporate purposes, which may include providing capital to support its organic growth or growth through strategic acquisitions, repaying or redeeming outstanding indebtedness, financing investments, capital expenditures, repurchasing shares of its common stock and for further investments in the Bank as regulatory capital.

The Company had a share repurchase program, whereby the Board of Directors authorized the Company to repurchase up to $75.0 million of its common stock.

This program terminated December 31, 2022.

As of December 31, 2022, $56.4 million, or 2,996,778 shares of the Company’s common stock, had been repurchased under the program.

The increase in shareholders’ equity was due primarily to the generation of net income of $75.5 million, and an increase in accumulated other comprehensive income of $7.0 million.

Offsetting these increases to shareholders’ equity were dividends to common shareholders of $26.6 million, dividends to preferred shareholders of $8.9 million and repurchases of common stock of $17.9 million.

On December 5, 2023, the Company’s board of directors authorized a new share repurchase program, pursuant to which the Company is authorized to repurchase up to $25.0 million of common stock through December 31, 2024.

The new stock repurchase program became effective on January 1, 2024.

The Company’s previous stock repurchase program expired on December 31, 2023.

As of December 31, 2023, $74.2 million, or 3,836,331 shares of the Company’s common stock, had been repurchased under prior programs.

Liquidity Management.

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Investment securities with a carrying amount of $20.9 million and $46.1 million at December 31, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $12.2 million and $55.9 million at December 31, 2022 and December 31, 2021, respectively, from the Federal Reserve Discount Window.

The lines are collateralized by a collateral agreement with respect to a pool of commercial real estate loans totaling $14.3 million and $64.8 million at December 31, 2022 and December 31, 2021, respectively.

There were no outstanding borrowings under these lines at December 31, 2022 and December 31, 2021.

At December 31, 2022, the Company had available federal funds lines of credit totaling $394.0 million, which were unused.

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

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

Cash and cash equivalents $ 135,061 $ 160,631

Unpledged securities 346,843 209,184

FHLB committed liquidity 935,977 997,388

FRB discount window availability 699,896 12,201

Total Estimated Liquidity $ 2,117,777 $ 1,379,404

Conditional Funding Based on Market Conditions

Additional credit facility $ 419,000 $ 250,000

Brokered CDs (additional capacity) $ 500,000 $ 500,000

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity.

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Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S.

Treasuries and LIBOR (basis risk).

Treasuries and SOFR (basis risk).

We actively manage interest rate risk, as changes in market interest rates may have a significant impact on reported earnings.

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

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

We use NII at Risk to model interest rate risk utilizing various assumptions for assets, liabilities, and derivatives.

NII at Risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates.

20 unchanged sentences

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

We were within board policy limits for the -100, +100 and +200 basis point scenarios at December 31, 2022.

In 2023, we added a -200 basis point scenario as the Federal Reserve has indicated the rate increases may have run their course.

We were within board policy limits for all scenarios at December 31, 2023.

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

NII at Risk reported at December 31, 2022 projects that our earnings exhibit reduced sensitivity to changes in interest rates for all three scenarios compared to December 31, 2021.

NII at Risk reported at December 31, 2023 projects that our earnings exhibit increasing profitability in a declining rate environment, compared to December 31, 2022.

Throughout the course of 2023, the bank exhibited similar trends to the industry concerning its beta assumptions related to its non-maturity deposit portfolio.

Coupled with a market shift to slowing rate increases or even rate cuts into 2024, the bank did start to position its investment strategy to protect against lower rates in the future.

These two aspects are the primary drivers of moving to a virtually neutral position as measured in the +/- 100 basis point rate shocks.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis