UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2022~~March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 0-11487

LAKELAND FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Indiana			35-1559596
(State or Other Jurisdiction			(IRS Employer
of Incorporation or Organization)			Identification No.)

202 East Center Street,
Warsaw	,	Indiana	46580
(Address of principal executive offices)			(Zip Code)

(574) 267‑6144

(Registrant’s Telephone Number, Including Area Code)

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, No par value

LKFN

The NASDAQ Stock Market LLC

(Nasdaq Global Select Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock outstanding at ~~July 28, 2022: 25,351,662~~April 20, 2023: 25,430,917

Table of Contents

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets — ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	1
	Consolidated Statements of Income — three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	2
	Consolidated Statements of Comprehensive Income (Loss) — three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	3
	Consolidated Statements of Changes in Stockholders’ Equity — three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	4
	Consolidated Statements of Cash Flows — ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	65
	Notes to the Consolidated Financial Statements	76
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3231
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4945
Item 4.	Controls and Procedures	5046
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	5147
Item 1A.	Risk Factors	5147
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5147
Item 3.	Defaults Upon Senior Securities	5147
Item 4.	Mine Safety Disclosures	5147
Item 5.	Other Information	5148
Item 6.	Exhibits	5248
SIGNATURES		5349

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	72,386	$	51,830	Cash and due from banks	$	67,342	$	80,992
Short-term investments	Short-term investments	97,129		631,410		Short-term investments	86,179		49,290
Total cash and cash equivalents	Total cash and cash equivalents	169,515		683,240		Total cash and cash equivalents	153,521		130,282

Securities available-for-sale, at fair value	Securities available-for-sale, at fair value	1,300,580		1,398,558		Securities available-for-sale, at fair value	1,108,281		1,185,528
Securities held-to-maturity, at amortized cost (fair value of $113,350 and $0, respectively)		127,411		0
Securities held-to-maturity, at amortized cost (fair value of $115,533 and $111,029, respectively)						Securities held-to-maturity, at amortized cost (fair value of $115,533 and $111,029, respectively)	128,651		128,242
Real estate mortgage loans held-for-sale	Real estate mortgage loans held-for-sale	2,646		7,470		Real estate mortgage loans held-for-sale	508		357
Loans, net of allowance for credit losses of $67,523 and $67,773		4,357,176		4,220,068
Loans, net of allowance for credit losses of $71,215 and $72,606						Loans, net of allowance for credit losses of $71,215 and $72,606	4,683,713		4,637,790
Land, premises and equipment, net	Land, premises and equipment, net	58,601		59,309		Land, premises and equipment, net	58,707		58,097
Bank owned life insurance	Bank owned life insurance	97,599		97,652		Bank owned life insurance	107,026		108,407
Federal Reserve and Federal Home Loan Bank stock	Federal Reserve and Federal Home Loan Bank stock	12,840		13,772		Federal Reserve and Federal Home Loan Bank stock	15,795		15,795
Accrued interest receivable	Accrued interest receivable	20,733		17,674		Accrued interest receivable	26,883		27,994
Goodwill	Goodwill	4,970		4,970		Goodwill	4,970		4,970
Other assets	Other assets	113,016		54,610		Other assets	123,474		134,909
Total assets	Total assets	$	6,265,087	$	6,557,323	Total assets	$	6,411,529	$	6,432,371

LIABILITIES	LIABILITIES					LIABILITIES
Noninterest bearing deposits	Noninterest bearing deposits	$	1,797,614	$	1,895,481	Noninterest bearing deposits	$	1,548,066	$	1,736,761
Interest bearing deposits	Interest bearing deposits	3,823,970		3,839,926		Interest bearing deposits	3,969,662		3,723,859
Total deposits	Total deposits	5,621,584		5,735,407		Total deposits	5,517,728		5,460,620

Borrowings - Federal Home Loan Bank advances		0		75,000
Federal Funds purchased						Federal Funds purchased	0		22,000
Federal Home Loan Bank advances						Federal Home Loan Bank advances	200,000		275,000
Total borrowings						Total borrowings	200,000		297,000

Accrued interest payable	Accrued interest payable	1,948		2,619		Accrued interest payable	5,425		3,186
Other liabilities	Other liabilities	79,492		39,391		Other liabilities	86,370		102,678
Total liabilities	Total liabilities	5,703,024		5,852,417		Total liabilities	5,809,523		5,863,484

STOCKHOLDERS’ EQUITY	STOCKHOLDERS’ EQUITY					STOCKHOLDERS’ EQUITY
Common stock: 90,000,000 shares authorized, no par value	Common stock: 90,000,000 shares authorized, no par value					Common stock: 90,000,000 shares authorized, no par value
25,816,997 shares issued and 25,345,162 outstanding as of June 30, 2022
25,777,609 shares issued and 25,300,793 outstanding as of December 31, 2021		123,571		120,615
25,896,764 shares issued and 25,430,917 outstanding as of March 31, 2023						25,896,764 shares issued and 25,430,917 outstanding as of March 31, 2023
25,825,127 shares issued and 25,349,225 outstanding as of December 31, 2022						25,825,127 shares issued and 25,349,225 outstanding as of December 31, 2022	125,840		127,004
Retained earnings	Retained earnings	612,026		583,134		Retained earnings	658,629		646,100
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	(158,534)		16,093		Accumulated other comprehensive income (loss)	(167,370)		(188,923)
Treasury stock at cost (471,835 shares as of June 30, 2022, 476,816 shares as of December 31, 2021)		(15,089)		(15,025)
Treasury stock at cost (465,847 shares as of March 31, 2023, 475,902 shares as of December 31, 2022)						Treasury stock at cost (465,847 shares as of March 31, 2023, 475,902 shares as of December 31, 2022)	(15,182)		(15,383)
Total stockholders’ equity	Total stockholders’ equity	561,974		704,817		Total stockholders’ equity	601,917		568,798
Noncontrolling interest	Noncontrolling interest	89		89		Noncontrolling interest	89		89
Total equity	Total equity	562,063		704,906		Total equity	602,006		568,887
Total liabilities and equity	Total liabilities and equity	$	6,265,087	$	6,557,323	Total liabilities and equity	$	6,411,529	$	6,432,371

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited - dollars in thousands, except share and per share data)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
NET INTEREST INCOME	NET INTEREST INCOME									NET INTEREST INCOME
Interest and fees on loans	Interest and fees on loans									Interest and fees on loans
Taxable	Taxable	$	44,138	$	42,342	$	83,873	$	85,803	Taxable	$	69,542	$	39,735
Tax exempt	Tax exempt	280		101		449		205		Tax exempt	901		169
Interest and dividends on securities	Interest and dividends on securities									Interest and dividends on securities
Taxable	Taxable	3,727		2,177		7,005		4,012		Taxable	3,513		3,278
Tax exempt	Tax exempt	4,994		2,870		9,600		5,359		Tax exempt	4,300		4,606
Other interest income	Other interest income	483		135		729		223		Other interest income	964		246
Total interest income	Total interest income	53,622		47,625		101,656		95,602		Total interest income	79,220		48,034

Interest on deposits	Interest on deposits	4,890		3,890		7,971		8,108		Interest on deposits	24,918		3,081
Interest on borrowings	Interest on borrowings									Interest on borrowings
Short-term	Short-term	0		0		0		7		Short-term	2,783		0
Long-term	Long-term	54		74		127		147		Long-term	0		73
Total interest expense	Total interest expense	4,944		3,964		8,098		8,262		Total interest expense	27,701		3,154

NET INTEREST INCOME	NET INTEREST INCOME	48,678		43,661		93,558		87,340		NET INTEREST INCOME	51,519		44,880

Provision (Reversal) for credit losses		0		(1,700)		417		(223)
Provision for credit losses										Provision for credit losses	4,350		417

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	48,678		45,361		93,141		87,563		NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	47,169		44,463

NONINTEREST INCOME	NONINTEREST INCOME									NONINTEREST INCOME
Wealth advisory fees	Wealth advisory fees	2,204		2,078		4,491		4,256		Wealth advisory fees	2,200		2,287
Investment brokerage fees	Investment brokerage fees	541		575		1,060		1,039		Investment brokerage fees	534		519
Service charges on deposit accounts	Service charges on deposit accounts	2,882		2,521		5,691		5,012		Service charges on deposit accounts	2,630		2,809
Loan and service fees	Loan and service fees	3,195		3,042		6,084		5,818		Loan and service fees	2,846		2,889
Merchant card fee income	Merchant card fee income	904		766		1,719		1,388		Merchant card fee income	877		815
Bank owned life insurance income (loss)	Bank owned life insurance income (loss)	(183)		705		(266)		1,461		Bank owned life insurance income (loss)	691		(83)
Interest rate swap fee income	Interest rate swap fee income	354		505		404		754		Interest rate swap fee income	0		50
Mortgage banking income		351		415		860		1,788
Mortgage banking income (loss)										Mortgage banking income (loss)	(99)		509
Net securities gains	Net securities gains	0		44		0		797		Net securities gains	16		0
Other income	Other income	244		689		1,136		1,584		Other income	619		892
Total noninterest income	Total noninterest income	10,492		11,340		21,179		23,897		Total noninterest income	10,314		10,687

NONINTEREST EXPENSE	NONINTEREST EXPENSE									NONINTEREST EXPENSE
Salaries and employee benefits	Salaries and employee benefits	14,798		15,762		29,190		30,147		Salaries and employee benefits	16,063		14,392
Net occupancy expense	Net occupancy expense	1,688		1,427		3,317		2,930		Net occupancy expense	1,572		1,629
Equipment costs	Equipment costs	1,459		1,318		2,870		2,763		Equipment costs	1,438		1,411
Data processing fees and supplies	Data processing fees and supplies	3,203		3,204		6,284		6,523		Data processing fees and supplies	3,452		3,081
Corporate and business development	Corporate and business development	1,433		699		2,652		2,208		Corporate and business development	1,431		1,219
FDIC insurance and other regulatory fees	FDIC insurance and other regulatory fees	619		495		1,058		959		FDIC insurance and other regulatory fees	795		439
Professional fees	Professional fees	1,414		1,839		2,973		3,716		Professional fees	2,121		1,559
Other expense	Other expense	3,299		1,904		6,538		4,148		Other expense	2,562		3,239
Total noninterest expense	Total noninterest expense	27,913		26,648		54,882		53,394		Total noninterest expense	29,434		26,969

INCOME BEFORE INCOME TAX EXPENSE	INCOME BEFORE INCOME TAX EXPENSE	31,257		30,053		59,438		58,066		INCOME BEFORE INCOME TAX EXPENSE	28,049		28,181
Income tax expense	Income tax expense	5,584		5,705		10,123		10,735		Income tax expense	3,771		4,539
NET INCOME	NET INCOME	$	25,673	$	24,348	$	49,315	$	47,331	NET INCOME	$	24,278	$	23,642

BASIC WEIGHTED AVERAGE COMMON SHARES	BASIC WEIGHTED AVERAGE COMMON SHARES	25,527,896		25,473,497		25,521,618		25,465,621		BASIC WEIGHTED AVERAGE COMMON SHARES	25,583,026		25,515,271

BASIC EARNINGS PER COMMON SHARE	BASIC EARNINGS PER COMMON SHARE	$	1.00	$	0.96	$	1.93	$	1.86	BASIC EARNINGS PER COMMON SHARE	$	0.95	$	0.93

DILUTED WEIGHTED AVERAGE COMMON SHARES	DILUTED WEIGHTED AVERAGE COMMON SHARES	25,697,577		25,602,063		25,699,908		25,596,843		DILUTED WEIGHTED AVERAGE COMMON SHARES	25,742,885		25,690,372

DILUTED EARNINGS PER COMMON SHARE	DILUTED EARNINGS PER COMMON SHARE	$	1.00	$	0.95	$	1.92	$	1.85	DILUTED EARNINGS PER COMMON SHARE	$	0.94	$	0.92

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited - dollars in thousands)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Net income	Net income	$	25,673	$	24,348	$	49,315	$	47,331	Net income		$	24,278	$	23,642
Other comprehensive income (loss)	Other comprehensive income (loss)									Other comprehensive income (loss)
Change in available-for-sale and transferred securities:	Change in available-for-sale and transferred securities:									Change in available-for-sale and transferred securities:
Unrealized holding gain (loss) on securities available-for-sale arising during the period	Unrealized holding gain (loss) on securities available-for-sale arising during the period	(82,609)		9,052		(221,605)		(6,245)		Unrealized holding gain (loss) on securities available-for-sale arising during the period		26,793		(138,995)
Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity	Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity	386		0		386		0		Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity		491		0
Reclassification adjustment for gains included in net income	Reclassification adjustment for gains included in net income	0		(44)		0		(797)		Reclassification adjustment for gains included in net income		(16)		0
Net securities gain (loss) activity during the period	Net securities gain (loss) activity during the period	(82,223)		9,008		(221,219)		(7,042)		Net securities gain (loss) activity during the period		27,268		(138,995)
Tax effect	Tax effect	17,349		(1,892)		46,538		1,479		Tax effect		(5,726)		29,188
Net of tax amount	Net of tax amount	(64,874)		7,116		(174,681)		(5,563)		Net of tax amount		21,542		(109,807)
Defined benefit pension plans:	Defined benefit pension plans:									Defined benefit pension plans:
Amortization of net actuarial loss	Amortization of net actuarial loss	36		60		72		120		Amortization of net actuarial loss		15		36
Net gain activity during the period	Net gain activity during the period	36		60		72		120		Net gain activity during the period		15		36
Tax effect	Tax effect	(9)		(15)		(18)		(30)		Tax effect		(4)		(9)
Net of tax amount	Net of tax amount	27		45		54		90		Net of tax amount		11		27
Total other comprehensive income (loss), net of tax	Total other comprehensive income (loss), net of tax	(64,847)		7,161		(174,627)		(5,473)		Total other comprehensive income (loss), net of tax		21,553		(109,780)
Comprehensive income (loss)	Comprehensive income (loss)	$	(39,174)	$	31,509	$	(125,312)	$	41,858	Comprehensive income (loss)		$	45,831	$	(86,138)

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - dollars in thousands, except share and per share data)


		Three Months Ended																								Three Months Ended
		Common Stock			Retained Earnings				Accumulated Other Comprehensive Income (Loss)		Treasury Stock					Total Stockholders’ Equity			Noncontrolling Interest				Total Equity			Common Stock				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total Stockholders’ Equity				Noncontrolling Interest				Total Equity
		Shares	Stock												Shares						Stock

Balance at April 1, 2021		25,290,908	$	114,764			$	536,390					$	15,110				$	(14,685)			$	651,579			$	89	$	651,668
Balance at January 1, 2022																									Balance at January 1, 2022	25,300,793		$	120,615			$	583,134			$	16,093			$	(15,025)			$	704,817			$	89			$	704,906

Comprehensive income:
Net income					24,348											24,348							24,348
Other comprehensive income (loss), net of tax									7,161							7,161							7,161
Cash dividends declared and paid, $0.34 per share					(8,675)											(8,675)							(8,675)
Treasury shares purchased under deferred directors' plan		(942)	63								(63)					0							0
Treasury shares sold and distributed under deferred directors' plan																0							0
Stock activity under equity compensation plans																0							0
Stock based compensation expense			2,969													2,969							2,969
Balance at June 30, 2021		25,289,966	$	117,796	$	552,063			$	22,271	$	(14,748)				$	677,382		$	89			$	677,471

Balance at April 1, 2022		25,346,149	$	121,138	$	596,578			$	(93,687)	$	(15,016)				$	609,013		$	89			$	609,102
Comprehensive loss:	Comprehensive loss:																								Comprehensive loss:
Net income	Net income				25,673											25,673							25,673		Net income					23,642												23,642								23,642
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax								(64,847)							(64,847)							(64,847)		Other comprehensive income (loss), net of tax									(109,780)								(109,780)								(109,780)
Cash dividends declared and paid, $0.40 per share	Cash dividends declared and paid, $0.40 per share				(10,225)											(10,225)							(10,225)		Cash dividends declared and paid, $0.40 per share					(10,198)												(10,198)								(10,198)
Treasury shares purchased under deferred directors' plan	Treasury shares purchased under deferred directors' plan	(987)	73								(73)					0							0		Treasury shares purchased under deferred directors' plan	(2,587)		212										(212)				0								0
Treasury shares sold and distributed under deferred directors' plan	Treasury shares sold and distributed under deferred directors' plan															0							0		Treasury shares sold and distributed under deferred directors' plan	8,555		(221)										221				0								0
Stock activity under equity compensation plans	Stock activity under equity compensation plans															0							0		Stock activity under equity compensation plans	39,388		(1,728)														(1,728)								(1,728)
Stock based compensation expense	Stock based compensation expense		2,360													2,360							2,360		Stock based compensation expense			2,260														2,260								2,260
Balance at June 30, 2022		25,345,162	$	123,571	$	612,026			$	(158,534)	$	(15,089)				$	561,974		$	89			$	562,063
Balance at March 31, 2022																									Balance at March 31, 2022	25,346,149		$	121,138	$	596,578			$	(93,687)			$	(15,016)			$	609,013			$	89			$	609,102

Balance at January 1, 2023																									Balance at January 1, 2023	25,349,225		$	127,004	$	646,100			$	(188,923)			$	(15,383)			$	568,798			$	89			$	568,887
Comprehensive income:																									Comprehensive income:
Net income																									Net income					24,278												24,278								24,278
Other comprehensive income (loss), net of tax																									Other comprehensive income (loss), net of tax									21,553								21,553								21,553
Cash dividends declared and paid, $0.46 per share																									Cash dividends declared and paid, $0.46 per share					(11,749)												(11,749)								(11,749)
Treasury shares purchased under deferred directors' plan																									Treasury shares purchased under deferred directors' plan	(2,800)		204										(204)				0								0
Treasury shares sold and distributed under deferred directors' plan																									Treasury shares sold and distributed under deferred directors' plan	12,855		(405)										405				0								0
Stock activity under equity compensation plans																									Stock activity under equity compensation plans	71,637		(3,124)														(3,124)								(3,124)
Stock based compensation expense																									Stock based compensation expense			2,161														2,161								2,161
Balance at March 31, 2023																									Balance at March 31, 2023	25,430,917		$	125,840	$	658,629			$	(167,370)			$	(15,182)			$	601,917			$	89			$	602,006

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Six Months Ended
Common Stock Retained
Earnings Accumulated Other Comprehensive
Income (Loss) Treasury
Stock Total Stockholders’
Equity Noncontrolling
Interest Total
Equity
Shares Stock
Balance at January 1, 2021 25,239,748 $ 114,927 $ 529,005 $ 27,744 $ (14,581) $ 657,095 $ 89 $ 657,184
Adoption of ASU 2016-13 (6,951) (6,951) (6,951)
Comprehensive income:
Net income 47,331 47,331 47,331
Other comprehensive income (loss), net of tax (5,473) (5,473) (5,473)
Cash dividends declared and paid, $0.68 per share (17,322) (17,322) (17,322)
Treasury shares purchased under deferred directors' plan (4,576) 282 (282) 0 0
Treasury shares sold and distributed under deferred directors' plan 5,664 (115) 115 0 0
Stock activity under equity compensation plans 49,130 (1,648) (1,648) (1,648)
Stock based compensation expense 4,350 4,350 4,350
Balance at June 30, 2021 25,289,966 $ 117,796 $ 552,063 $ 22,271 $ (14,748) $ 677,382 $ 89 $ 677,471
Balance at January 1, 2022 25,300,793 120,615 583,134 16,093 (15,025) $ 704,817 $ 89 $ 704,906
Comprehensive loss:
Net income 49,315 49,315 49,315
Other comprehensive income (loss), net of tax (174,627) (174,627) (174,627)
Cash dividends declared and paid, $0.80 per share (20,423) (20,423) (20,423)
Treasury shares purchased under deferred directors' plan (3,574) 285 (285) 0 0
Treasury shares sold and distributed under deferred directors' plan 8,555 (221) 221 0 0
Stock activity under equity compensation plans 39,388 (1,728) (1,728) (1,728)
Stock based compensation expense 4,620 4,620 4,620
Balance at June 30, 2022 25,345,162 $ 123,571 $ 612,026 $ (158,534) $ (15,089) $ 561,974 $ 89 $ 562,063
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)


Three Months Ended March 31,	2023		2022
Cash flows from operating activities:
Net income	$	24,278	$	23,642
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	1,538		1,516
Provision for credit losses	4,350		417

Amortization of loan servicing rights	133		223
Net change in loan servicing rights valuation allowance	0		(360)
Loans originated for sale, including participations	(795)		(12,468)
Net gain on sales of loans	(34)		(513)
Proceeds from sale of loans, including participations	672		18,058
Net (gain) loss on sales of premises and equipment	(4)		1
Net gain on sales and calls of securities available-for-sale	(16)		0
Net securities amortization	1,192		1,654
Stock based compensation expense	2,161		2,260
Losses (earnings) on life insurance	(691)		83

Tax benefit of stock award issuances	(720)		(500)
Net change:
Interest receivable and other assets	501		(2,822)
Interest payable and other liabilities	(5,122)		16,513
Total adjustments	3,165		24,062
Net cash from operating activities	27,443		47,704

Cash flows from investing activities:
Proceeds from sale of securities available-for-sale	87,471		0
Proceeds from maturities, calls and principal paydowns of securities available-for-sale	19,500		29,647
Proceeds from maturities, calls and principal paydowns of securities held-to-maturity	5		0
Purchases of securities available-for-sale	(4,046)		(292,127)
Purchase of life insurance	(153)		(43)
Net (increase) decrease in total loans	(50,273)		(66,537)
Proceeds from sales of land, premises and equipment	11		0
Purchases of land, premises and equipment	(2,155)		(1,091)
Proceeds from redemption of Federal Home Loan Bank stock	0		932


Net cash from investing activities	50,360		(329,219)

Cash flows from financing activities:
Net increase (decrease) in total deposits	57,108		85,216
Net increase (decrease) in short-term borrowings	(22,000)		0

Proceeds from short-term FHLB borrowings	(75,000)		0

Common dividends paid	(11,749)		(10,198)

Payments related to equity incentive plans	(3,124)		(1,728)
Purchase of treasury stock	(204)		(212)
Sale of treasury stock	405		221
Net cash from financing activities	(54,564)		73,299
Net change in cash and cash equivalents	23,239		(208,216)
Cash and cash equivalents at beginning of the period	130,282		683,240
Cash and cash equivalents at end of the period	153,521		475,024
Cash paid during the period for:
Interest	$	25,462	$	3,470

Supplemental non-cash disclosures:

Securities purchases payable	0		2,146
Right-of-use assets obtained in exchange for lease liabilities	0		1,612

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)~~

Six Months Ended June 30, 2022 2021
Cash flows from operating activities:
Net income $ 49,315 $ 47,331
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 3,020 3,053
Provision (Reversal) for credit losses 417 (223)
Gain on sale and write down of other real estate owned 0 (37)
Amortization of loan servicing rights 385 705
Net change in loan servicing rights valuation allowance (701) (197)
Loans originated for sale, including participations (23,082) (64,706)
Net gain on sales of loans (777) (2,770)
Proceeds from sale of loans, including participations 28,430 70,988
Net (gain) loss on sales of premises and equipment 1 (1)
Net gain on sales and calls of securities available-for-sale 0 (797)
Net securities amortization 3,245 2,109
Stock based compensation expense 4,620 4,350
Losses (earnings) on life insurance 266 (1,461)
Gain on life insurance 0 (202)
Tax benefit of stock award issuances (500) (266)
Net change:
Interest receivable and other assets 165 1,788
Interest payable and other liabilities 26,355 (714)
Total adjustments 41,844 11,619
Net cash from operating activities 91,159 58,950
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale 0 13,964
Proceeds from maturities, calls and principal paydowns of securities available-for-sale 59,617 66,576
Proceeds from maturities, calls and principal paydowns of securities held-to-maturity 5 0
Purchases of securities available-for-sale (313,905) (437,680)
Purchase of life insurance (657) (586)
Net (increase) decrease in total loans (137,525) 296,032
Proceeds from sales of land, premises and equipment 1 2
Purchases of land, premises and equipment (2,314) (3,295)
Proceeds from redemption of Federal Home Loan Bank stock 932 0
Proceeds from sales of other real estate 0 167
Proceeds from life insurance 0 531
Net cash from investing activities (393,846) (64,289)
Cash flows from financing activities:
Net increase in total deposits (113,823) 357,859
Net increase (decrease) in short-term borrowings 0 (10,500)
Payments on long-term FHLB borrowings (75,000) 0
Common dividends paid (20,410) (17,309)
Preferred dividends paid (13) (13)
Payments related to equity incentive plans (1,728) (1,648)
Purchase of treasury stock (285) (282)
Sale of treasury stock 221 115
Net cash from financing activities (211,038) 328,222
Net change in cash and cash equivalents (513,725) 322,883
Cash and cash equivalents at beginning of the period 683,240 249,927
Cash and cash equivalents at end of the period 169,515 572,810
Cash paid during the period for:
Interest $ 8,768 $ 10,350
Income taxes 7,065 14,262
Supplemental non-cash disclosures:
Loans transferred to other real estate owned 0 893
Securities purchases payable 0 40,605
Right-of-use assets obtained in exchange for lease liabilities 1,612 0

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~Table of Contents~~

NOTE 1. BASIS OF PRESENTATION

This report is filed for Lakeland Financial Corporation (the "Company"), which has 2two wholly owned subsidiaries, Lake City Bank (the "Bank") and LCB Risk Management, a captive insurance company. Also included in this report are results for the Bank’s wholly owned subsidiary, LCB Investments II, Inc. ("LCB Investments"), which manages the Bank’s investment securities portfolio. LCB Investments owns LCB Funding, Inc. ("LCB Funding"), a real estate investment trust. All significant inter-company balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, ~~2022.~~2023. The Company’s ~~2021~~2022 Annual Report on Form 10-K should be read in conjunction with these statements.

~~Newly Issued But Not Yet Effective~~Adoption of New Accounting Standards

On March ~~12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.~~" ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate (“SOFR”), amongst others. The Company has identified certain loans that renewed prior to 2021 and obtained updated reference rate language at the time of renewal. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. The Company's policy is to adhere to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020.

~~The Company discontinued the use of new LIBOR-based loans by December~~ 31, 2021, according to regulatory guidelines. The Company plans to transition LIBOR-based loans to an alternative reference rate on or before June 30, 2023. The guidance under ASC 848 will be available for a limited time, generally through December 31, 2022. The Company expects to adopt the LIBOR transition relief allowed under this standard, and does not expect such adoption to have a material impact on the consolidated financial statements.

~~In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method.~~" ASC 815 currently permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in this Update allow nonprepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and nonpreapayble financial assets, thereby allowing consistent accounting for similar hedges. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.

~~In March~~ 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage ~~Disclosures.~~Disclosures." The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in ~~Update~~update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. ~~Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year, is permitted.~~ The Company elected to early adopt the provisions of the ASU related to ~~modifications during~~ the ~~second quarter~~discontinuance of ~~2022,~~TDR reporting, with retrospective application toof modification reporting effective starting January 1, 2022. ~~Adoption~~The Company adopted the provisions related to reporting of ~~this portion~~current-period gross write-offs within the vintage disclosures effective January 1, 2023. The adoption of the ~~standard~~provisions contained within ASU 2022-02 did not have

a material impact on the consolidated financial statements.

On March 28, 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method." ASC 815 previously permitted only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendment in this update allows nonrepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope allows an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance became effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU 2022-01 on January 1, 2023, which did not have a material impact on the consolidated financial statements.

Newly Issued But Not Yet Effective Accounting Standards

On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate ("SOFR"), amongst others. The Company has identified certain loans that renewed prior to 2021 and obtained updated reference rate language at the time of the renewal. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. The Company's policy is to adhere to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020.

The Company discontinued the use of new LIBOR-based loans by December 31, 2021, according to regulatory guidelines. The Company is ~~currently assessing~~working to transition LIBOR-based loans to an alternative reference rate before June 30, 2023. On December 22, 2022, the ~~impact~~FASB issued ASU 2022-06, "Reference Rate Reform (ASC 848): Deferral of ~~vintage disclosure provisions~~the Sunset Date of Topic 848", which definitively provided a sunset date of December 31, 2024 for the relief guidance allowed under Topic 848. The ASU ~~2022-02 on its disclosures; however,~~was effective immediately upon issuance. The Company adopted the ~~Company~~LIBOR transition relief allowed under this standard, and does not expect ~~the~~final adoption ~~of this portion of the standard~~ to have a material impact on the consolidated financial statements.

On March 28, 2023, the FASB issued ASU 2023-02, "Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." ASU 2014-01, "Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Qualified Affordable Housing Projects", previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items.

The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax benefits in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, all of the following conditions must be met: (1) It is probable that the income tax credits allocated to the tax equity investor will be available; (2) The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project; (3) Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits included income tax credits, other income tax benefits, and other non-income tax -related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project; (4) The tax equity investor's projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive; and (5) The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor's liability is limited to its capital investment. An accounting policy election is allowed to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The amendments in this update require specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The amendments require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understanding the following information about its investments that generate income tax credits and other income tax benefits from a tax credit program including: (1) The nature of its tax equity investments; and (2) The effect of its tax equity investments and related income tax credits and other income tax benefits on its financial position and results of operations.

For public business entities, the amendments in this update are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, it shall adopt them as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is currently evaluating the impact of this standard for its LIHTC investments and the impact to noninterest income and income tax expense within the consolidated financial statements.

Reclassification

Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders' equity as previously reported.

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NOTE 2. SECURITIES

Debt securities purchased with the intent and ability to hold to their maturity are classified as held-to-maturity securities. All other investment securities are classified as available-for-sale securities.

Available-for-Sale Securities

Information related to the amortized cost, fair value and allowance for credit losses of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the table below.


(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value		(dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
June 30, 2022
March 31, 2023												March 31, 2023
U.S. Treasury securities	U.S. Treasury securities	$	2,249	$	0	$	(15)	$	0	$	2,234	U.S. Treasury securities	$	3,363	$	2	$	(13)	$	0	$	3,352
U.S. government sponsored agencies	U.S. government sponsored agencies	161,587		0		(19,326)		0		142,261		U.S. government sponsored agencies	153,928		0		(25,933)		0		127,995
Mortgage-backed securities: residential	Mortgage-backed securities: residential	619,651		261		(61,790)		0		558,122		Mortgage-backed securities: residential	561,865		81		(77,484)		0		484,462

State and municipal securities	State and municipal securities	692,698		622		(95,357)		0		597,963		State and municipal securities	577,603		93		(85,224)		0		492,472
Total	Total	$	1,476,185	$	883	$	(176,488)	$	0	$	1,300,580	Total	$	1,296,759	$	176	$	(188,654)	$	0	$	1,108,281

December 31, 2021
December 31, 2022												December 31, 2022
U.S. Treasury securities	U.S. Treasury securities	$	900	$	0	$	0	$	0	$	900	U.S. Treasury securities	$	3,057	$	0	$	(23)	$	0	$	3,034
U.S. government sponsored agencies	U.S. government sponsored agencies	145,858		39		(2,445)		0		143,452		U.S. government sponsored agencies	156,184		0		(29,223)		0		126,961
Mortgage-backed securities: residential	Mortgage-backed securities: residential	487,157		4,455		(4,936)		0		486,676		Mortgage-backed securities: residential	578,175		67		(85,934)		0		492,308
Mortgage-backed securities: commercial		522		1		0		0		523

State and municipal securities	State and municipal securities	742,532		25,749		(1,274)		0		767,007		State and municipal securities	663,367		157		(100,299)		0		563,225
Total	Total	$	1,376,969	$	30,244	$	(8,655)	$	0	$	1,398,558	Total	$	1,400,783	$	224	$	(215,479)	$	0	$	1,185,528

Held-to-Maturity Securities

Information related to the amortized cost, fair value and allowance for credit losses of securities held-to-maturity and the related gross unrealized gains and losses is presented in the table below.


(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value		(dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
June 30, 2022
March 31, 2023												March 31, 2023
State and municipal securities	State and municipal securities	$	127,411	$	0	$	(14,061)	$	0	$	113,350	State and municipal securities	$	128,651	$	0	$	(13,118)	$	0	$	115,533

December 31, 2022												December 31, 2022
State and municipal securities												State and municipal securities	$	128,242	$	0	$	(17,213)	$	0	$	111,029

On April 1, 2022, the Company elected to transfer securities from available-for-sale to held-to-maturity ~~due to~~as an overall balance sheet management ~~strategies.~~strategy. The fair value of securities transferred was $127.0 million from available-for-sale to held-to-maturity. The unrealized loss on the securities transferred from available-for-sale to held-to-maturity was $24.4 million ($19.3 million, net of tax) ~~at the date of the transfer~~ based on the fair value of the securities on the transfer ~~date.~~date and was $22.4 million ($17.7 million, net of tax) at March 31, 2023. The Company has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or loss on the transferred securities included in accumulated other comprehensive income (loss) at the time of the transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. There were no securities transferred from available-for-sale to held-to-maturity during the ~~six~~three months ended ~~June 30, 2021 and there were no securities classified as held-to-maturity at December~~March 31, ~~2021.~~2023 or March 31, 2022.

Table of Contents

Information regarding the amortized cost and fair value ~~and amortized cost~~ of available-for-sale and held-to-maturity debt securities by maturity as of ~~June 30, 2022~~March 31, 2023 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.


		Available-for-Sale				Held-to-Maturity					Available-for-Sale				Held-to-Maturity
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	3,403	$	3,394	$	0	$	0	Due in one year or less	$	3,275	$	3,265	$	0	$	0
Due after one year through five years	Due after one year through five years	8,802		8,866		0		0		Due after one year through five years	4,727		4,729		0		0
Due after five years through ten years	Due after five years through ten years	57,634		56,380		0		0		Due after five years through ten years	35,349		33,808		0		0
Due after ten years	Due after ten years	786,695		673,818		127,411		113,350		Due after ten years	691,543		582,017		128,651		115,533
		856,534		742,458		127,411		113,350			734,894		623,819		128,651		115,533
Mortgage-backed securities	Mortgage-backed securities	619,651		558,122		0		0		Mortgage-backed securities	561,865		484,462		0		0
Total debt securities	Total debt securities	$	1,476,185	$	1,300,580	$	127,411	$	113,350	Total debt securities	$	1,296,759	$	1,108,281	$	128,651	$	115,533

Available-for-sale securities proceeds, gross gains and gross losses are presented below.


		Three months ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,		Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2022		2021		2022		2021		(dollars in thousands)	2023			2022
Sales of securities available-for-sale	Sales of securities available-for-sale									Sales of securities available-for-sale
Proceeds	Proceeds	$	0	$	458	$	0	$	13,964	Proceeds	$	87,471		$	0
Gross gains	Gross gains	0		44		0		797		Gross gains	411			0
Gross losses	Gross losses	0		0		0		0		Gross losses	(395)			0
Number of securities	Number of securities	0		1		0		8		Number of securities	81			0

In accordance with ASU No. 2017-8, purchase premiums for callable securities are amortized to the earliest call date and premiums on non-callable securities as well as discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.

Securities with fair values of ~~$253.3~~$855.0 million and ~~$300.8~~$298.2 million were pledged as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, as collateral for borrowings from the Federal Home Loan Bank ("FHLB") and Federal Reserve Bank and for other purposes as permitted or required by law.

Unrealized Loss Analysis on Available-for-Sale and Held-to-Maturity Securities

Information regarding available-for-sale securities with unrealized losses as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is presented on the following page. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.

Table of Contents


		Less than 12 months				12 months or more				Total					Less than 12 months				12 months or more				Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2022
March 31, 2023														March 31, 2023
U.S. Treasury securities	U.S. Treasury securities	$	2,234	$	15	$	0	$	0	$	2,234	$	15	U.S. Treasury securities	$	1,373	$	6	$	791	$	7	$	2,164	$	13
U.S. government sponsored agencies	U.S. government sponsored agencies	106,954		13,796		35,307		5,530		142,261		19,326		U.S. government sponsored agencies	0		0		127,995		25,933		127,995		25,933
Mortgage-backed securities: residential	Mortgage-backed securities: residential	447,418		43,772		100,785		18,018		548,203		61,790		Mortgage-backed securities: residential	29,080		1,120		452,186		76,364		481,266		77,484

State and municipal securities	State and municipal securities	510,360		91,660		10,848		3,697		521,208		95,357		State and municipal securities	48,383		1,431		421,798		83,793		470,181		85,224
Total available-for-sale	Total available-for-sale	$	1,066,966	$	149,243	$	146,940	$	27,245	$	1,213,906	$	176,488	Total available-for-sale	$	78,836	$	2,557	$	1,002,770	$	186,097	$	1,081,606	$	188,654

December 31, 2021
December 31, 2022														December 31, 2022
U.S. Treasury securities														U.S. Treasury securities	$	3,034	$	23	$	0	$	0	$	3,034	$	23
U.S. government sponsored agencies	U.S. government sponsored agencies	$	85,968	$	1,364	$	28,676	$	1,081	$	114,644	$	2,445	U.S. government sponsored agencies	8,420		1,350		118,541		27,873		126,961		29,223
Mortgage-backed securities: residential	Mortgage-backed securities: residential	272,264		4,076		22,792		860		295,056		4,936		Mortgage-backed securities: residential	165,897		18,637		323,727		67,297		489,624		85,934

State and municipal securities	State and municipal securities	138,659		1,274		0		0		138,659		1,274		State and municipal securities	277,967		33,405		244,436		66,894		522,403		100,299
Total available-for-sale	Total available-for-sale	$	496,891	$	6,714	$	51,468	$	1,941	$	548,359	$	8,655	Total available-for-sale	$	455,318	$	53,415	$	686,704	$	162,064	$	1,142,022	$	215,479

Information regarding held-to-maturity securities with unrealized losses as of ~~June 30, 2022~~March 31, 2023 is presented below. The table divides the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more. ~~No investment securities were designated as held-to-maturity at December 31, 2021.~~


		Less than 12 months				12 months or more				Total					Less than 12 months				12 months or more				Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2022
March 31, 2023														March 31, 2023
State and municipal securities	State and municipal securities	$	113,350	$	14,061	$	0	$	0	$	113,350	$	14,061	State and municipal securities	$	0	$	0	$	115,533	$	13,118	$	115,533	$	13,118

December 31, 2022														December 31, 2022
State and municipal securities														State and municipal securities	$	0	$	0	$	111,029	$	17,213	$	111,029	$	17,213

The total number of securities with unrealized losses as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is presented below.


		Available-for-sale			Held-to-maturity				Available-for-sale			Held-to-maturity
		Less than 12 months	12 months or more	Total	Less than 12 months	12 months or more	Total		Less than 12 months	12 months or more	Total	Less than 12 months	12 months or more	Total
June 30, 2022
March 31, 2023								March 31, 2023
U.S. Treasury securities	U.S. Treasury securities	6	0	6	0	0	0	U.S. Treasury securities	3	2	5	0	0	0
U.S. government sponsored agencies		11	6	17	0	0	0
Mortgage-backed securities: residential		114	15	129	0	0	0
Mortgage-backed securities: commercial		0	0	0	0	0	0
State and municipal securities		468	11	479	41	0	41
Total temporarily impaired		599	32	631	41	0	41

December 31, 2021
U.S. government sponsored agencies	U.S. government sponsored agencies	8	5	13	0	0	0	U.S. government sponsored agencies	0	17	17	0	0	0
Mortgage-backed securities: residential	Mortgage-backed securities: residential	29	3	32	0	0	0	Mortgage-backed securities: residential	32	98	130	0	0	0

State and municipal securities	State and municipal securities	80	0	80	0	0	0	State and municipal securities	57	363	420	0	41	41
Total temporarily impaired	Total temporarily impaired	117	8	125	0	0	0	Total temporarily impaired	92	480	572	0	41	41

December 31, 2022								December 31, 2022
U.S. Treasury securities								U.S. Treasury securities	7	0	7	0	0	0
U.S. government sponsored agencies								U.S. government sponsored agencies	1	16	17	0	0	0
Mortgage-backed securities: residential								Mortgage-backed securities: residential	95	41	136	0	0	0

State and municipal securities								State and municipal securities	269	223	492	0	41	41
Total temporarily impaired								Total temporarily impaired	372	280	652	0	41	41

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Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For ~~available-for sale~~available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the consolidated income statement. For ~~available-for sale~~available-for-sale debt securities that do not meet the above criteria and for held-to-maturity securities, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically

~~Table of Contents~~

related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For available-for-sale debt securities, any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of applicable taxes.

~~NaN~~No allowance for credit losses for available-for-sale ~~debt securities was recorded at June 30, 2022~~ or ~~December 31, 2021. No allowance for credit losses for~~ held-to-maturity debt securities was recorded at ~~June 30,~~March 31, 2023 or December 31, 2022. Accrued interest receivable on securities totaled ~~$9.5~~$7.6 million and ~~$7.4~~$8.9 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, and is excluded from the estimate of credit losses.

The U.S. government sponsored agencies and mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. State and municipal securities credit losses are benchmarked against highly rated municipal securities of similar duration, as published by Moody's, resulting in an immaterial allowance for credit losses.

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NOTE 3. LOANS


(dollars in thousands)	(dollars in thousands)	June 30, 2022				December 31, 2021				(dollars in thousands)	March 31, 2023				December 31, 2022
Commercial and industrial loans:	Commercial and industrial loans:									Commercial and industrial loans:
Working capital lines of credit loans	Working capital lines of credit loans	$	726,798	16.4	%	$	652,861	15.2	%	Working capital lines of credit loans	$	636,171	13.4	%	$	650,948	13.8	%
Non-working capital loans	Non-working capital loans	802,994		18.2		736,608		17.2		Non-working capital loans	823,447		17.3		842,101		17.9
Total commercial and industrial loans	Total commercial and industrial loans	1,529,792		34.6		1,389,469		32.4		Total commercial and industrial loans	1,459,618		30.7		1,493,049		31.7

Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:									Commercial real estate and multi-family residential loans:
Construction and land development loans	Construction and land development loans	418,284		9.4		379,813		8.9		Construction and land development loans	591,812		12.4		517,664		11.0
Owner occupied loans	Owner occupied loans	726,531		16.4		739,371		17.2		Owner occupied loans	750,840		15.8		758,091		16.0
Nonowner occupied loans	Nonowner occupied loans	635,477		14.4		588,458		13.7		Nonowner occupied loans	705,830		14.8		706,107		15.0
Multifamily loans	Multifamily loans	173,875		3.9		247,204		5.8		Multifamily loans	217,274		4.5		197,232		4.2
Total commercial real estate and multi-family residential loans	Total commercial real estate and multi-family residential loans	1,954,167		44.1		1,954,846		45.6		Total commercial real estate and multi-family residential loans	2,265,756		47.5		2,179,094		46.2

Agri-business and agricultural loans:	Agri-business and agricultural loans:									Agri-business and agricultural loans:
Loans secured by farmland	Loans secured by farmland	194,248		4.4		206,331		4.8		Loans secured by farmland	178,683		3.8		201,200		4.3
Loans for agricultural production	Loans for agricultural production	193,654		4.4		239,494		5.6		Loans for agricultural production	214,299		4.5		230,888		4.9
Total agri-business and agricultural loans	Total agri-business and agricultural loans	387,902		8.8		445,825		10.4		Total agri-business and agricultural loans	392,982		8.3		432,088		9.2

Other commercial loans:	Other commercial loans:	93,157		2.1		73,490		1.7		Other commercial loans:	132,284		2.8		113,593		2.4
Total commercial loans	Total commercial loans	3,965,018		89.6		3,863,630		90.1		Total commercial loans	4,250,640		89.3		4,217,824		89.5

Consumer 1-4 family mortgage loans:	Consumer 1-4 family mortgage loans:									Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	Closed end first mortgage loans	190,988		4.3		176,561		4.1		Closed end first mortgage loans	221,616		4.7		212,742		4.5
Open end and junior lien loans	Open end and junior lien loans	172,449		3.9		156,238		3.6		Open end and junior lien loans	175,907		3.7		175,575		3.7
Residential construction and land development loans	Residential construction and land development loans	10,075		0.2		11,921		0.3		Residential construction and land development loans	20,393		0.4		19,249		0.4
Total consumer 1-4 family mortgage loans	Total consumer 1-4 family mortgage loans	373,512		8.4		344,720		8.0		Total consumer 1-4 family mortgage loans	417,916		8.8		407,566		8.6

Other consumer loans	Other consumer loans	88,683		2.0		82,755		1.9		Other consumer loans	89,734		1.9		88,075		1.9
Total consumer loans	Total consumer loans	462,195		10.4		427,475		9.9		Total consumer loans	507,650		10.7		495,641		10.5
Subtotal	Subtotal	4,427,213		100.0	%	4,291,105		100.0	%	Subtotal	4,758,290		100.0	%	4,713,465		100.0	%
Less: Allowance for credit losses	Less: Allowance for credit losses	(67,523)				(67,773)				Less: Allowance for credit losses	(71,215)				(72,606)
Net deferred loan fees	Net deferred loan fees	(2,514)				(3,264)				Net deferred loan fees	(3,362)				(3,069)
Loans, net	Loans, net	$	4,357,176			$	4,220,068			Loans, net	$	4,683,713			$	4,637,790

The recorded investment in loans does not include accrued interest, which totaled ~~$11.0 million and $10.0~~$18.4 million at ~~June 30, 2022~~both March 31, 2023 and December 31, ~~2021, respectively.~~2022.

The Company had ~~$320,000~~$558,000 and $~~350,000~~306,000 in residential real estate loans in the process of foreclosure as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

NOTE 4. ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.

The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the facts and circumstances

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of watch list credits, which includes the security position of the borrower, in determining the appropriate level of the credit loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision.

The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for credit losses that generally includes consideration of changes in the nature and volume of the loan portfolio and overall portfolio quality, along with current and forecasted economic conditions that may affect borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. To determine the specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, an appropriate level of general allowance is determined by portfolio segment using a probability of default-loss given default (“PD/LGD”) model, subject to a floor. A default can be triggered by one of several different asset quality factors, including past due status, nonaccrual status, material modification status or if the loan has had a charge-off. This PD is then combined with a LGD derived from historical charge-off data to construct a default rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee’s Summary of Economic Projections, and other environmental factors based on the risks present for each portfolio segment. These environmental factors include consideration of the following: levels of, and trends in, delinquencies and nonperforming loans; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover probable losses inherent in the loan portfolio.

Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate it should be evaluated on an individual basis. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) the sufficiency of the customer’s cash flow or net worth to repay the loan; (b) the adequacy of the discounted value of collateral relative to the loan balance; (c) whether the loan has been criticized in a regulatory examination; (d) whether the loan is nonperforming; (e) any other reasons the ultimate collectability of the loan may be in question; or (f) any unique loan characteristics that require special monitoring.

Allocations are also applied to categories of loans considered not to be individually analyzed, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. These general pooled loan allocations are performed for portfolio segments of commercial and industrial; commercial real estate, multi-family, and construction; agri-business and agricultural; other commercial loans; and consumer 1-4 family mortgage and other consumer loans. General allocations of the allowance are determined by a historical loss rate based on the calculation of each pool’s probability of default-loss given default, subject to a floor. The length of the historical period for each pool is based on the average life of the pool. The historical loss rates are supplemented with consideration of economic conditions and portfolio trends.

Due to the imprecise nature of estimating the allowance for credit losses, the Company’s allowance for credit losses includes an immaterial unallocated component. The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of potential expected losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends, and trends in the composition of the Company’s large commercial loan portfolio and related large dollar exposures to individual borrowers.allocations. As a practical expedient, the Company has elected to disclose accrued interest separately from loan principal balances on the consolidated balance sheet. Additionally, when a loan is placed on non-accrual, interest payments are reversed through interest income.

For off balance sheet credit exposures outlined in the ASU at 326-20-30-11, it is the Company’s position that nearly all of the unfunded amounts on lines of credit are unconditionally cancellable, and therefore not subject to having a liability recorded.

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The following tables present the activity in the allowance for credit losses by portfolio segment for the periods ended:


(dollars in thousands)	(dollars in thousands)	Commercial and Industrial		Commercial Real Estate and Multifamily Residential		Agri-business and Agricultural		Other Commercial		Consumer 1-4 Family Mortgage		Other Consumer		Unallocated		Total		(dollars in thousands)	Commercial and Industrial		Commercial Real Estate and Multifamily Residential		Agri-business and Agricultural		Other Commercial		Consumer 1-4 Family Mortgage		Other Consumer		Unallocated		Total
Three Months Ended June 30, 2022
Beginning balance, April 1		$	31,322	$	26,257	$	4,761	$	1,058	$	2,606	$	1,040	$	482	$	67,526
Three Months Ended March 31, 2023																		Three Months Ended March 31, 2023
Beginning balance, January 1																		Beginning balance, January 1	$	35,290	$	27,394	$	4,429	$	917	$	3,001	$	1,021	$	554	$	72,606

Provision for credit losses	Provision for credit losses	(139)		191		(8)		(345)		34		102		165		0		Provision for credit losses	1,504		1,642		192		117		394		215		286		4,350
Loans charged-off	Loans charged-off	(13)		0		0		0		0		(85)		0		(98)		Loans charged-off	(5,644)		0		0		0		0		(252)		0		(5,896)
Recoveries	Recoveries	25		0		0		0		34		36		0		95		Recoveries	40		0		0		0		3		112		0		155
Net loans (charged-off) recovered	Net loans (charged-off) recovered	12		0		0		0		34		(49)		0		(3)		Net loans (charged-off) recovered	(5,604)		0		0		0		3		(140)		0		(5,741)
Ending balance	Ending balance	$	31,195	$	26,448	$	4,753	$	713	$	2,674	$	1,093	$	647	$	67,523	Ending balance	$	31,190	$	29,036	$	4,621	$	1,034	$	3,398	$	1,096	$	840	$	71,215

(dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total
Three Months Ended June 30, 2021
Beginning balance, April 1 $ 32,052 $ 29,445 $ 3,901 $ 1,172 $ 3,384 $ 1,293 $ 597 $ 71,844
Provision for credit losses (187) (1,160) (291) 126 (221) 124 (91) (1,700)
Loans charged-off (162) 0 0 0 (32) (73) 0 (267)
Recoveries 1,427 6 320 0 34 49 0 1,836
Net loans (charged-off) recovered 1,265 6 320 0 2 (24) 0 1,569
Ending balance $ 33,130 $ 28,291 $ 3,930 $ 1,298 $ 3,165 $ 1,393 $ 506 $ 71,713

(dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total
Six Months Ended June 30, 2022
Beginning balance, January 1 $ 30,595 $ 26,535 $ 5,034 $ 1,146 $ 2,866 $ 1,147 $ 450 $ 67,773
Provision for credit losses 591 510 (281) (433) (214) 47 197 417
Loans charged-off (32) (597) 0 0 (22) (187) 0 (838)
Recoveries 41 0 0 0 44 86 0 171
Net loans (charged-off) recovered 9 (597) 0 0 22 (101) 0 (667)
Ending balance $ 31,195 $ 26,448 $ 4,753 $ 713 $ 2,674 $ 1,093 $ 647 $ 67,523

(dollars in thousands) Commercial and Industrial Commercial Real Estate and Multifamily Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Unallocated Total
Six Months Ended June 30, 2021
Beginning balance, January 1 $ 28,333 $ 22,907 $ 3,043 $ 416 $ 2,619 $ 951 $ 3,139 $ 61,408
Impact of adopting ASC 326 4,312 4,316 1,060 941 953 349 (2,881) 9,050
Provision for credit losses (727) 1,125 (493) (59) (454) 137 248 (223)
Loans charged-off (249) (71) 0 0 (38) (145) 0 (503)
Recoveries 1,461 14 320 0 85 101 0 1,981
Net loans (charged-off) recovered 1,212 (57) 320 0 47 (44) 0 1,478
Ending balance $ 33,130 $ 28,291 $ 3,930 $ 1,298 $ 3,165 $ 1,393 $ 506 $ 71,713

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(dollars in thousands)	Commercial and Industrial		Commercial Real Estate and Multifamily Residential		Agri-business and Agricultural		Other Commercial		Consumer 1-4 Family Mortgage		Other Consumer		Unallocated		Total
Three Months Ended March 31, 2022
Beginning balance, January 1	$	30,595	$	26,535	$	5,034	$	1,146	$	2,866	$	1,147	$	450	$	67,773

Provision for credit losses	730		319		(273)		(88)		(248)		(55)		32		417
Loans charged-off	(19)		(597)		0		0		(22)		(102)		0		(740)
Recoveries	16		0		0		0		10		50		0		76
Net loans (charged-off) recovered	(3)		(597)		0		0		(12)		(52)		0		(664)
Ending balance	$	31,322	$	26,257	$	4,761	$	1,058	$	2,606	$	1,040	$	482	$	67,526

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.

The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans are considered to be "Pass" rated when they are reviewed as part of the previously described process and do not meet the criteria above, which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with “Not Rated” loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status.

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The following table summarizes the risk category of loans by loan segment and origination date as of ~~June 30, 2022:~~March 31, 2023:


(dollars in thousands)	(dollars in thousands)	2022		2021		2020		2019			2018		Prior		Term Total		Revolving		Total		(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Term Total		Revolving		Total
Commercial and industrial loans:	Commercial and industrial loans:																				Commercial and industrial loans:
Working capital lines of credit loans:	Working capital lines of credit loans:																				Working capital lines of credit loans:
Pass	Pass	$	0	$	2,962	$	1,922	$	2,730		$	0	$	0	$	7,614	$	646,517	$	654,131	Pass	$	0	$	2,124	$	2,593	$	1,481	$	0	$	0	$	6,198	$	556,280	$	562,478
Special Mention	Special Mention	0		0		0		0			0		0		0		57,015		57,015		Special Mention	0		0		0		0		0		0		0		60,734		60,734
Substandard	Substandard	0		0		0		0			0		0		0		15,732		15,732		Substandard	0		200		75		0		294		0		569		12,481		13,050

Total	Total	0		2,962		1,922		2,730			0		0		7,614		719,264		726,878		Total	0		2,324		2,668		1,481		294		0		6,767		629,495		636,262
Working capital lines of credit loans:																					Working capital lines of credit loans:
Current period gross write offs																					Current period gross write offs	0		0		0		0		0		0		0		115		115
Non-working capital loans:	Non-working capital loans:																				Non-working capital loans:
Pass	Pass	138,644		149,019		111,258		62,632			20,117		24,563		506,233		249,976		756,209		Pass	43,158		281,527		114,682		80,677		43,048		19,298		582,390		207,400		789,790
Special Mention	Special Mention	121		16,041		0		188			602		3,510		20,462		146		20,608		Special Mention	228		438		2,710		182		1,516		4,197		9,271		3,774		13,045
Substandard	Substandard	681		2,501		6,291		744			2,103		4,823		17,143		2,932		20,075		Substandard	0		4,657		847		5,005		63		3,517		14,089		0		14,089

Not Rated	Not Rated	1,478		1,906		1,474		581			292		56		5,787		0		5,787		Not Rated	481		2,689		1,362		1,149		347		100		6,128		0		6,128
Total	Total	140,924		169,467		119,023		64,145			23,114		32,952		549,625		253,054		802,679		Total	43,867		289,311		119,601		87,013		44,974		27,112		611,878		211,174		823,052
Non-working capital loans:																					Non-working capital loans:
Current period gross write offs																					Current period gross write offs	0		5,400		0		0		118		0		5,518		11		5,529
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:																				Commercial real estate and multi-family residential loans:
Construction and land development loans:	Construction and land development loans:																				Construction and land development loans:
Pass	Pass	16,284		34,046		20,426		489			554		0		71,799		344,051		415,850		Pass	11,178		21,680		10,108		13,394		307		0		56,667		532,319		588,986
Special Mention		360		0		0		0			0		0		360		0		360

Total	Total	16,644		34,046		20,426		489			554		0		72,159		344,051		416,210		Total	11,178		21,680		10,108		13,394		307		0		56,667		532,319		588,986
Construction and land development loans:																					Construction and land development loans:
Current period gross write offs																					Current period gross write offs	0		0		0		0		0		0		0		0		0
Owner occupied loans:	Owner occupied loans:																				Owner occupied loans:
Pass	Pass	50,037		161,126		170,041		103,797			74,503		116,093		675,597		30,153		705,750		Pass	41,335		133,261		161,199		133,597		71,267		148,460		689,119		37,815		726,934
Special Mention	Special Mention	117		6,221		0		850			89		8,927		16,204		0		16,204		Special Mention	0		709		9,240		0		340		9,400		19,689		0		19,689
Substandard	Substandard	0		455		1,496		629			1,161		234		3,975		0		3,975		Substandard	228		293		105		1,484		367		1,161		3,638		0		3,638

Total	Total	50,154		167,802		171,537		105,276			75,753		125,254		695,776		30,153		725,929		Total	41,563		134,263		170,544		135,081		71,974		159,021		712,446		37,815		750,261
Owner occupied loans:																					Owner occupied loans:
Current period gross write offs																					Current period gross write offs	0		0		0		0		0		0		0		0		0
Nonowner occupied loans:	Nonowner occupied loans:																				Nonowner occupied loans:
Pass	Pass	81,440		136,381		142,092		107,374			20,484		79,173		566,944		56,731		623,675		Pass	14,636		183,211		122,667		135,383		90,727		77,127		623,751		70,798		694,549
Special Mention	Special Mention	0		11,436		0		0			0		0		11,436		0		11,436		Special Mention	4,311		0		6,538		0		0		0		10,849		0		10,849

Total	Total	81,440		147,817		142,092		107,374			20,484		79,173		578,380		56,731		635,111		Total	18,947		183,211		129,205		135,383		90,727		77,127		634,600		70,798		705,398
Nonowner occupied loans:																					Nonowner occupied loans:
Current period gross write offs																					Current period gross write offs	0		0		0		0		0		0		0		0		0
Multifamily loans:	Multifamily loans:																				Multifamily loans:
Pass	Pass	1,915		25,916		37,559		36,109		17,105	11,805		16,742		130,046		21,528		151,574		Pass	24,397		38,336		25,633		36,606		34,018		30,589		189,579		7,484		197,063
Special Mention	Special Mention	22,077		0		0		0			0		0		22,077		0		22,077		Special Mention	0		19,935		0		0		0		0		19,935		0		19,935

Total	Total	23,992		25,916		37,559		36,109			11,805		16,742		152,123		21,528		173,651		Total	24,397		58,271		25,633		36,606		34,018		30,589		209,514		7,484		216,998
Multifamily loans:																					Multifamily loans:
Current period gross write offs																					Current period gross write offs	0		0		0		0		0		0		0		0		0
Agri-business and agricultural loans:	Agri-business and agricultural loans:																				Agri-business and agricultural loans:
Loans secured by farmland:	Loans secured by farmland:																				Loans secured by farmland:
Pass	Pass	22,371		45,319		31,514		11,720			8,832		21,224		140,980		48,216		189,196		Pass	10,479		36,609		26,692		28,470		9,103		24,951		136,304		38,774		175,078
Special Mention	Special Mention	260		0		1,676		1,868			0		200		4,004		882		4,886		Special Mention	0		0		0		1,676		1,760		15		3,451		0		3,451
Substandard	Substandard	0		0		0		0			0		144		144		0		144		Substandard	0		0		0		0		0		135		135		0		135

Total	Total	22,631		45,319		33,190		13,588			8,832		21,568		145,128		49,098		194,226		Total	10,479		36,609		26,692		30,146		10,863		25,101		139,890		38,774		178,664
Loans secured by farmland:																					Loans secured by farmland:
Current period gross write offs																					Current period gross write offs	0		0		0		0		0		0		0		0		0
Loans for agricultural production:	Loans for agricultural production:																				Loans for agricultural production:
Pass	Pass	1,599		30,747		23,772		4,025			9,790		4,998		74,931		105,093		180,024		Pass	4,692		6,438		29,344		21,411		3,305		12,161		77,351		125,107		202,458
Special Mention	Special Mention	0		415		7,266		996			0		0		8,677		5,042		13,719		Special Mention	0		946		224		7,248		928		0		9,346		2,594		11,940

Total	Total	1,599		31,162		31,038		5,021			9,790		4,998		83,608		110,135		193,743		Total	4,692		7,384		29,568		28,659		4,233		12,161		86,697		127,701		214,398
Loans for agricultural production:																					Loans for agricultural production:
Current period gross write offs																					Current period gross write offs	0		0		0		0		0		0		0		0		0
Other commercial loans:	Other commercial loans:																				Other commercial loans:
Pass	Pass	14,457		6,016		19,786		702			1,136		13,741		55,838		33,533		89,371		Pass	14,621		26,709		39,515		17,279		133		11,139		109,396		19,727		129,123
Special Mention	Special Mention	0		0		0		0			0		3,500		3,500		0		3,500		Special Mention	0		0		0		0		0		2,916		2,916		0		2,916

Total		14,457		6,016		19,786		702			1,136		17,241		59,338		33,533		92,871
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans
Pass		5,661		13,358		13,878		5,111			5,344		4,204		47,556		3,964		51,520

Substandard		0		0		0		0			87		1,893		1,980		0		1,980

Not Rated		28,136		46,425		21,645		6,921			3,023		31,073		137,223		0		137,223
Total		33,797		59,783		35,523		12,032			8,454		37,170		186,759		3,964		190,723
Open end and junior lien loans
Pass		0		646		368		80			102		0		1,196		4,767		5,963

Substandard		0		0		0		0			48		2		50		61		111

Not Rated		34,616		16,577		3,968		4,501			2,285		2,787		64,734		103,371		168,105
Total		34,616		17,223		4,336		4,581			2,435		2,789		65,980		108,199		174,179
Residential construction loans

Not Rated		3,332		3,972		1,018		307			134		1,255		10,018		0		10,018
Total		3,332		3,972		1,018		307			134		1,255		10,018		0		10,018
Other consumer loans
Pass		616		2,192		513		1,111			0		1,036		5,468		20,011		25,479

Substandard		0		0		0		215			0		0		215		41		256

Not Rated		12,364		17,487		11,424		5,280			4,087		1,991		52,633		10,113		62,746
Total		12,980		19,679		11,937		6,606			4,087		3,027		58,316		30,165		88,481
TOTAL		$	436,566	$	731,164	$	629,387	$	358,960		$	166,578	$	342,169	$	2,664,824	$	1,759,875	$	4,424,699

Table of Contents


Total	14,621		26,709		39,515		17,279		133		14,055		112,312		19,727		132,039
Other commercial loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans:
Pass	1,845		10,792		12,589		11,867		4,727		6,621		48,441		4,404		52,845
Special Mention	0		0		0		544		0		0		544		0		544
Substandard	0		0		96		0		0		305		401		0		401

Not Rated	16,117		56,666		42,402		18,380		5,104		28,844		167,513		0		167,513
Total	17,962		67,458		55,087		30,791		9,831		35,770		216,899		4,404		221,303
Closed end first mortgage loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Open end and junior lien loans:
Pass	0		137		529		351		0		74		1,091		6,903		7,994

Substandard	0		0		0		0		29		48		77		138		215

Not Rated	4,234		40,983		12,227		2,560		3,303		3,183		66,490		103,040		169,530
Total	4,234		41,120		12,756		2,911		3,332		3,305		67,658		110,081		177,739
Open end and junior lien loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Residential construction loans:




Not Rated	965		15,099		1,739		884		283		1,337		20,307		0		20,307
Total	965		15,099		1,739		884		283		1,337		20,307		0		20,307
Residential construction loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Other consumer loans:
Pass	2,006		846		1,699		408		0		0		4,959		16,793		21,752

Substandard	0		0		0		0		209		0		209		0		209

Not Rated	6,118		22,920		13,291		8,145		2,950		3,326		56,750		10,810		67,560
Total	8,124		23,766		14,990		8,553		3,159		3,326		61,918		27,603		89,521
Other consumer loans:
Current period gross write offs	0		106		62		6		7		1		182		70		252

Total period gross write offs	0		5,506		62		6		125		1		5,700		196		5,896

Total Loans	$	201,029	$	907,205	$	638,106	$	528,181	$	274,128	$	388,904	$	2,937,553	$	1,817,375	$	4,754,928

As of ~~June 30, 2022, $5.2~~March 31, 2023, $1.5 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the ~~SBA.~~Small Business Administration ("SBA").

Table of Contents

The following table summarizes the risk category of loans by loan segment and origination date as of December 31, ~~2021:~~2022:


(dollars in thousands)	(dollars in thousands)	2021		2020		2019		2018			2017		Prior		Term Total		Revolving		Total		(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Term Total		Revolving		Total
Commercial and industrial loans:	Commercial and industrial loans:																				Commercial and industrial loans:
Working capital lines of credit loans:	Working capital lines of credit loans:																				Working capital lines of credit loans:
Pass	Pass	$	3,699	$	830	$	3,360	$	0		$	0	$	0	$	7,889	$	558,634	$	566,523	Pass	$	2,207	$	2,718	$	1,601	$	0	$	0	$	0	$	6,526	$	597,108	$	603,634
Special Mention	Special Mention	0		0		0		0			0		0		0		60,441		60,441		Special Mention	0		0		0		0		0		0		0		36,410		36,410
Substandard	Substandard	0		0		35		0			0		0		35		25,928		25,963		Substandard	200		0		0		300		0		0		500		10,495		10,995

Total	Total	3,699		830		3,395		0			0		0		7,924		645,003		652,927		Total	2,407		2,718		1,601		300		0		0		7,026		644,013		651,039
Non-working capital loans:	Non-working capital loans:																				Non-working capital loans:
Pass	Pass	185,374		139,157		79,477		38,899			19,415		18,489		480,811		203,794		684,605		Pass	272,273		124,600		91,850		47,711		9,981		13,670		560,085		240,490		800,575
Special Mention	Special Mention	17,728		0		225		979			2,350		1,426		22,708		0		22,708		Special Mention	448		1,620		0		109		159		2,961		5,297		2,153		7,450
Substandard	Substandard	2,996		6,948		1,091		2,534			5,465		426		19,460		3,321		22,781		Substandard	11,831		872		5,021		194		1,351		3,979		23,248		4,171		27,419

Not Rated	Not Rated	2,265		1,758		837		563			128		14		5,565		0		5,565		Not Rated	2,891		1,550		1,254		413		120		23		6,251		0		6,251
Total	Total	208,363		147,863		81,630		42,975			27,358		20,355		528,544		207,115		735,659		Total	287,443		128,642		98,125		48,427		11,611		20,633		594,881		246,814		841,695
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:																				Commercial real estate and multi-family residential loans:
Construction and land development loans:	Construction and land development loans:																				Construction and land development loans:
Pass	Pass	35,136		30,224		1,276		998			0		0		67,634		310,396		378,030		Pass	26,889		19,944		14,026		356		0		0		61,215		453,953		515,168

Total	Total	35,136		30,224		1,276		998			0		0		67,634		310,396		378,030		Total	26,889		19,944		14,026		356		0		0		61,215		453,953		515,168
Owner occupied loans:	Owner occupied loans:																				Owner occupied loans:
Pass	Pass	135,861		169,404		124,117		85,070			78,155		93,925		686,532		29,611		716,143		Pass	113,656		179,014		139,880		97,353		65,519		97,335		692,757		40,533		733,290
Special Mention	Special Mention	6,555		0		880		933			7,387		1,235		16,990		0		16,990		Special Mention	2,960		7,608		0		446		1,491		8,054		20,559		0		20,559
Substandard	Substandard	489		1,570		909		1,758			694		238		5,658		0		5,658		Substandard	308		105		1,491		373		1,161		229		3,667		0		3,667

Total	Total	142,905		170,974		125,906		87,761			86,236		95,398		709,180		29,611		738,791		Total	116,924		186,727		141,371		98,172		68,171		105,618		716,983		40,533		757,516
Nonowner occupied loans:	Nonowner occupied loans:																				Nonowner occupied loans:
Pass	Pass	146,342		154,433		107,262		19,054			31,023		59,154		517,268		44,362		561,630		Pass	194,294		125,190		134,661		91,907		15,109		64,874		626,035		68,603		694,638
Special Mention	Special Mention	11,825		331		0		0			0		14,253		26,409		0		26,409		Special Mention	0		11,024		0		0		0		0		11,024		0		11,024

Total	Total	158,167		154,764		107,262		19,054			31,023		73,407		543,677		44,362		588,039		Total	194,294		136,214		134,661		91,907		15,109		64,874		637,059		68,603		705,662
Multifamily loans:	Multifamily loans:																				Multifamily loans:
Pass	Pass	84,678		53,195		36,575		12,286		17,105	14,574		9,793		211,101		13,434		224,535		Pass	38,460		25,741		36,929		35,695		2,046		28,866		167,737		7,349		175,086
Special Mention	Special Mention	0		0		0		0			22,252		0		22,252		0		22,252		Special Mention	21,855		0		0		0		0		0		21,855		0		21,855

Total	Total	84,678		53,195		36,575		12,286			36,826		9,793		233,353		13,434		246,787		Total	60,315		25,741		36,929		35,695		2,046		28,866		189,592		7,349		196,941
Agri-business and agricultural loans:	Agri-business and agricultural loans:																				Agri-business and agricultural loans:
Loans secured by farmland:	Loans secured by farmland:																				Loans secured by farmland:
Pass	Pass	47,532		37,035		16,249		10,469			10,454		17,021		138,760		61,774		200,534		Pass	38,344		28,684		29,741		9,656		8,145		19,638		134,208		63,094		197,302
Special Mention	Special Mention	0		1,985		2,303		0			180		30		4,498		918		5,416		Special Mention	260		0		1,676		1,780		0		15		3,731		0		3,731
Substandard	Substandard	207		0		0		0			0		145		352		0		352		Substandard	0		0		0		0		0		145		145		0		145

Total	Total	47,739		39,020		18,552		10,469			10,634		17,196		143,610		62,692		206,302		Total	38,604		28,684		31,417		11,436		8,145		19,798		138,084		63,094		201,178
Loans for agricultural production:	Loans for agricultural production:																				Loans for agricultural production:
Pass	Pass	36,238		25,855		4,224		11,072			1,331		4,178		82,898		138,142		221,040		Pass	6,040		30,262		22,167		3,625		9,248		4,539		75,881		143,599		219,480
Special Mention	Special Mention	448		8,642		1,171		0			0		0		10,261		8,272		18,533		Special Mention	947		243		7,262		928		0		0		9,380		2,129		11,509

Total	Total	36,686		34,497		5,395		11,072			1,331		4,178		93,159		146,414		239,573		Total	6,987		30,505		29,429		4,553		9,248		4,539		85,261		145,728		230,989
Other commercial loans:	Other commercial loans:																				Other commercial loans:
Pass	Pass	6,556		21,111		3,243		1,273			8,592		7,460		48,235		21,145		69,380		Pass	27,097		4,815		17,911		147		931		10,985		61,886		48,295		110,181
Special Mention	Special Mention	0		0		0		0			0		3,798		3,798		0		3,798		Special Mention	0		0		0		0		0		3,160		3,160		0		3,160

Total	Total	6,556		21,111		3,243		1,273			8,592		11,258		52,033		21,145		73,178		Total	27,097		4,815		17,911		147		931		14,145		65,046		48,295		113,341
Consumer 1-4 family mortgage loans:	Consumer 1-4 family mortgage loans:																				Consumer 1-4 family mortgage loans:
Closed end first mortgage loans
Closed end first mortgage loans:																					Closed end first mortgage loans:
Pass	Pass	14,635		16,173		5,312		5,903			3,049		3,221		48,293		5,005		53,298		Pass	8,768		12,809		12,289		4,805		4,045		3,860		46,576		5,634		52,210
Special Mention	Special Mention	0		0		0		0			0		1,274		1,274		0		1,274		Special Mention	0		0		552		0		0		0		552		0		552

Substandard																					Substandard	0		0		0		0		83		1,944		2,027		0		2,027

Not Rated	Not Rated	45,089		27,738		9,248		5,217			7,628		26,321		121,241		482		121,723		Not Rated	57,404		44,331		20,023		5,936		2,970		27,004		157,668		0		157,668
Total	Total	59,724		43,911		14,560		11,120			10,677		30,816		170,808		5,487		176,295		Total	66,172		57,140		32,864		10,741		7,098		32,808		206,823		5,634		212,457
Open end and junior lien loans
Open end and junior lien loans:																					Open end and junior lien loans:
Pass	Pass	679		379		159		313			0		0		1,530		5,074		6,604		Pass	137		541		357		63		75		0		1,173		5,841		7,014

Substandard	Substandard	0		0		0		0			0		0		0		98		98		Substandard	0		0		0		31		49		0		80		111		191

Not Rated	Not Rated	21,945		5,624		5,987		3,899			1,653		1,526		40,634		110,523		151,157		Not Rated	44,472		13,597		3,014		3,616		1,476		2,252		68,427		101,750		170,177
Total	Total	22,624		6,003		6,146		4,212			1,653		1,526		42,164		115,695		157,859		Total	44,609		14,138		3,371		3,710		1,600		2,252		69,680		107,702		177,382
Residential construction loans
Residential construction loans:																					Residential construction loans:

Not Rated	Not Rated	7,926		1,537		960		138			171		1,125		11,857		0		11,857		Not Rated	14,463		2,167		897		291		129		1,223		19,170		0		19,170
Total		7,926		1,537		960		138			171		1,125		11,857		0		11,857
Other consumer loans
Pass		3,401		957		1,523		0			1,155		0		7,036		12,998		20,034

Substandard		36		23		230		0			0		0		289		0		289

Not Rated		21,652		14,931		7,474		5,844			1,890		1,203		52,994		9,227		62,221
Total		25,089		15,911		9,227		5,844			3,045		1,203		60,319		22,225		82,544
TOTAL		$	839,292	$	719,840	$	414,127	$	207,202		$	217,546	$	266,255	$	2,664,262	$	1,623,579	$	4,287,841

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Total	14,463		2,167		897		291		129		1,223		19,170		0		19,170
Other consumer loans:
Pass	1,344		1,841		432		600		0		948		5,165		16,152		21,317

Substandard	0		0		0		210		0		0		210		0		210

Not Rated	24,395		14,563		9,168		3,606		2,755		1,352		55,839		10,492		66,331
Total	25,739		16,404		9,600		4,416		2,755		2,300		61,214		26,644		87,858
TOTAL	$	911,943	$	653,839	$	552,202	$	310,151	$	126,843	$	297,056	$	2,852,034	$	1,858,362	$	4,710,396

As of December 31, ~~2021, $26.2~~2022, $1.5 million in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA.

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Nonaccrual and Past Due Loans:

The Company does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured.

The following table presents the aging of the amortized cost basis in past due loans as of ~~June 30, 2022~~March 31, 2023 by class of loans and loans past due 90 days or more and still accruing by class of loan:


(dollars in thousands)	(dollars in thousands)	Loans Not Past Due		30-89 Days Past Due		Greater than 89 Days Past Due and Accruing		Total Accruing		Total Nonaccrual		Nonaccrual With No Allowance For Credit Loss		Total		(dollars in thousands)	Loans Not Past Due		30-89 Days Past Due		Greater than 89 Days Past Due and Accruing		Total Accruing		Total Nonaccrual		Nonaccrual With No Allowance For Credit Loss		Total
Commercial and industrial loans:	Commercial and industrial loans:															Commercial and industrial loans:
Working capital lines of credit loans	Working capital lines of credit loans	$	726,862	$	16	$	0	$	722,396	$	4,482	$	3,511	$	726,878	Working capital lines of credit loans	$	628,672	$	1,750	$	0	$	624,582	$	5,840	$	75	$	636,262
Non-working capital loans	Non-working capital loans	802,679		0		0		798,382		4,297		234		802,679		Non-working capital loans	815,150		31		0		807,310		7,871		747		823,052
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:															Commercial real estate and multi-family residential loans:
Construction and land development loans	Construction and land development loans	416,210		0		0		416,210		0		0		416,210		Construction and land development loans	588,986		0		0		588,986		0		0		588,986
Owner occupied loans	Owner occupied loans	725,929		0		0		722,936		2,993		1,498		725,929		Owner occupied loans	747,217		0		0		744,173		3,044		1,454		750,261
Nonowner occupied loans	Nonowner occupied loans	635,111		0		0		635,111		0		0		635,111		Nonowner occupied loans	705,398		0		0		705,398		0		0		705,398
Multifamily loans	Multifamily loans	173,651		0		0		173,651		0		0		173,651		Multifamily loans	216,998		0		0		216,998		0		0		216,998
Agri-business and agricultural loans:	Agri-business and agricultural loans:															Agri-business and agricultural loans:
Loans secured by farmland	Loans secured by farmland	194,226		0		0		194,081		145		0		194,226		Loans secured by farmland	178,529		0		0		178,394		135		0		178,664
Loans for agricultural production	Loans for agricultural production	193,743		0		0		193,743		0		0		193,743		Loans for agricultural production	214,398		0		0		214,398		0		0		214,398
Other commercial loans	Other commercial loans	92,545		326		0		92,871		0		0		92,871		Other commercial loans	132,039		0		0		132,039		0		0		132,039
Consumer 1‑4 family mortgage loans:	Consumer 1‑4 family mortgage loans:															Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans	Closed end first mortgage loans	190,408		248		67		190,513		210		140		190,723		Closed end first mortgage loans	220,501		373		25		220,495		404		252		221,303
Open end and junior lien loans	Open end and junior lien loans	174,036		106		37		174,069		110		110		174,179		Open end and junior lien loans	177,388		138		0		177,313		213		213		177,739
Residential construction loans	Residential construction loans	10,018		0		0		10,018		0		0		10,018		Residential construction loans	20,307		0		0		20,307		0		0		20,307
Other consumer loans	Other consumer loans	88,395		86		0		88,225		256		0		88,481		Other consumer loans	89,203		111		0		89,107		207		5		89,521
Total	Total	$	4,423,813	$	782	$	104	$	4,412,206	$	12,493	$	5,493	$	4,424,699	Total	$	4,734,786	$	2,403	$	25	$	4,719,500	$	17,714	$	2,746	$	4,754,928

As of ~~June 30, 2022~~March 31, 2023 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the ~~six~~three month period ended ~~June 30, 2022.~~March 31, 2023.

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The following table presents the aging of the amortized cost basis in past due loans as of December 31, ~~2021~~2022 by class of loans and loans past due 90 days or more and still accruing by class of loan:


(dollars in thousands)	(dollars in thousands)	Loans Not Past Due		30-89 Days Past Due		Greater than 89 Days Past Due and Accruing		Total Accruing		Total Nonaccrual		Nonaccrual With No Allowance For Credit Loss		Total		(dollars in thousands)	Loans Not Past Due		30-89 Days Past Due		Greater than 89 Days Past Due and Accruing		Total Accruing		Total Nonaccrual		Nonaccrual With No Allowance For Credit Loss		Total
Commercial and industrial loans:	Commercial and industrial loans:															Commercial and industrial loans:
Working capital lines of credit loans	Working capital lines of credit loans	$	652,903	$	24	$	0	$	646,961	$	5,966	$	5,200	$	652,927	Working capital lines of credit loans	$	649,529	$	68	$	0	$	649,597	$	1,442	$	0	$	651,039
Non-working capital loans	Non-working capital loans	735,658		1		0		731,063		4,596		229		735,659		Non-working capital loans	830,033		39		1		830,073		11,622		727		841,695
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:															Commercial real estate and multi-family residential loans:
Construction and land development loans	Construction and land development loans	378,030		0		0		378,030		0		0		378,030		Construction and land development loans	515,168		0		0		515,168		0		0		515,168
Owner occupied loans	Owner occupied loans	738,791		0		0		735,157		3,634		2,129		738,791		Owner occupied loans	754,451		0		0		754,451		3,065		1,469		757,516
Nonowner occupied loans	Nonowner occupied loans	588,039		0		0		588,039		0		0		588,039		Nonowner occupied loans	705,662		0		0		705,662		0		0		705,662
Multifamily loans	Multifamily loans	246,787		0		0		246,787		0		0		246,787		Multifamily loans	196,941		0		0		196,941		0		0		196,941
Agri-business and agricultural loans:	Agri-business and agricultural loans:															Agri-business and agricultural loans:
Loans secured by farmland	Loans secured by farmland	206,302		0		0		205,967		335		0		206,302		Loans secured by farmland	201,033		0		0		201,033		145		0		201,178
Loans for agricultural production	Loans for agricultural production	239,573		0		0		239,573		0		0		239,573		Loans for agricultural production	230,989		0		0		230,989		0		0		230,989
Other commercial loans	Other commercial loans	73,178		0		0		73,178		0		0		73,178		Other commercial loans	113,341		0		0		113,341		0		0		113,341
Consumer 1‑4 family mortgage loans:	Consumer 1‑4 family mortgage loans:															Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans	Closed end first mortgage loans	175,678		500		117		176,240		55		55		176,295		Closed end first mortgage loans	211,736		306		122		212,164		293		225		212,457
Open end and junior lien loans	Open end and junior lien loans	157,729		130		0		157,761		98		98		157,859		Open end and junior lien loans	176,758		436		0		177,194		188		188		177,382
Residential construction loans	Residential construction loans	11,857		0		0		11,857		0		0		11,857		Residential construction loans	19,170		0		0		19,170		0		0		19,170
Other consumer loans	Other consumer loans	82,472		72		0		82,255		289		0		82,544		Other consumer loans	87,333		316		0		87,649		209		6		87,858
Total	Total	$	4,286,997	$	727	$	117	$	4,272,868	$	14,973	$	7,711	$	4,287,841	Total	$	4,692,144	$	1,165	$	123	$	4,693,432	$	16,964	$	2,615	$	4,710,396

As of December 31, ~~2021~~2022 there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the year ended December 31, ~~2021.~~2022.

When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.

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The following tables present the amortized cost basis of collateral dependent loans by class of loan as of:


		June 30, 2022									March 31, 2023
(dollars in thousands)	(dollars in thousands)	Real Estate		General Business Assets		Other		Total		(dollars in thousands)	Real Estate		General Business Assets		Other		Total
Commercial and industrial loans:	Commercial and industrial loans:									Commercial and industrial loans:
Working capital lines of credit loans	Working capital lines of credit loans	$	0	$	4,693	$	0	$	4,693	Working capital lines of credit loans	$	50	$	5,640	$	0	$	5,690
Non-working capital loans	Non-working capital loans	478		8,865		229		9,572		Non-working capital loans	527		7,017		229		7,773
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:									Commercial real estate and multi-family residential loans:
Owner occupied loans	Owner occupied loans	336		1,495		1,161		2,992		Owner occupied loans	765		1,484		0		2,249

Agri-business and agricultural loans:	Agri-business and agricultural loans:									Agri-business and agricultural loans:
Loans secured by farmland	Loans secured by farmland	0		145		0		145		Loans secured by farmland	0		135		1,161		1,296
Consumer 1-4 family mortgage loans:	Consumer 1-4 family mortgage loans:									Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	Closed end first mortgage loans	1,981		0		0		1,981		Closed end first mortgage loans	404		0		0		404
Open end and junior lien loans	Open end and junior lien loans	111		0		0		111		Open end and junior lien loans	213		0		0		213
Other consumer loans	Other consumer loans	0		0		41		41		Other consumer loans	0		0		5		5
Total	Total	$	2,906	$	15,198	$	1,431	$	19,535	Total	$	1,959	$	14,276	$	1,395	$	17,630


		December 31, 2021									December 31, 2022
(dollars in thousands)	(dollars in thousands)	Real Estate		General Business Assets		Other		Total		(dollars in thousands)	Real Estate		General Business Assets		Other		Total
Commercial and industrial loans:	Commercial and industrial loans:									Commercial and industrial loans:
Working capital lines of credit loans	Working capital lines of credit loans	$	0	$	5,966	$	0	$	5,966	Working capital lines of credit loans	$	50	$	5,402	$	0	$	5,452
Non-working capital loans	Non-working capital loans	1,606		9,475		229		11,310		Non-working capital loans	544		18,109		229		18,882
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:									Commercial real estate and multi-family residential loans:
Owner occupied loans	Owner occupied loans	1,435		1,505		1,161		4,101		Owner occupied loans	413		1,491		1,161		3,065

Agri-business and agricultural loans:	Agri-business and agricultural loans:									Agri-business and agricultural loans:
Loans secured by farmland	Loans secured by farmland	190		145		0		335		Loans secured by farmland	0		145		0		145
Consumer 1-4 family mortgage loans:	Consumer 1-4 family mortgage loans:									Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	Closed end first mortgage loans	3,081		0		0		3,081		Closed end first mortgage loans	2,030		0		0		2,030
Open end and junior lien loans	Open end and junior lien loans	98		0		0		98		Open end and junior lien loans	188		0		0		188
Other consumer loans	Other consumer loans	0		0		59		59		Other consumer loans	0		0		7		7
Total	Total	$	6,312	$	17,091	$	1,449	$	24,950	Total	$	3,225	$	25,147	$	1,397	$	29,769

~~Modifications:~~Loan Modifications Made to Borrowers Experiencing Financial Difficulty:

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes ~~loses~~losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made at the time of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time.

During the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and March 31, 2022, no loans received a material modification based on borrower financial difficulty.

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~~Troubled Debt Restructurings (Prior to January 1, 2022):~~

Prior to the partial adoption of ASU 2022-02 on January 1, 2022, which had an immaterial impact on the Company's allowance for credit losses, troubled debt restructured loans were included in the totals for individually analyzed loans. The following are disclosures related to troubled debt restructured loans in prior periods.

Troubled debt restructured loans are included in the totals for individually analyzed loans. The Company has allocated $5.8 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2021. The Company is not committed to lend additional funds to debtors whose loans have been modified in a trouble debt restructuring.

~~(dollars in thousands)~~

December 31,
2021

~~Accruing troubled debt restructured loans~~

~~5,121~~

~~Nonaccrual troubled debt restructured loans~~

~~6,218~~

~~Total troubled debt restructured loans~~

~~11,339~~

~~During the three and six months ended June 30, 2021, no loans were modified as troubled debt restructurings.~~

NOTE 5. BORROWINGS

~~No advances were outstanding with the Federal Home Loan Bank ("FHLB") as of June 30, 2022.~~ For the period ended ~~December~~March 31, ~~2021,~~2023, the Company had an advance outstanding from the Federal Home Loan Bank ~~(“FHLB”~~("FHLB") in the amount of ~~$75.0~~$200.0 million. The outstanding advance was a ~~ten-year fixed-rate putable~~fixed rate bullet advance with an interest rate of ~~0.39%~~4.86% and matured April 4, 2023. For the period ended December 31, 2022, the Company had a ~~maturity date~~fixed rate bullet advance from the FHLB with an interest rate of ~~March 4, 2030. The note required monthly interest payments and was secured by residential real estate loans and securities. The FHLB exercised the putable option~~4.21% of $275.0 million that matured on ~~the advance during the second quarter of 2022 and the note was repaid by the Company.~~January 5, 2023.

On August 2, 2019 the Company entered into an unsecured revolving credit agreement with another financial institution allowing the Company to borrow up to $30.0 million; this credit agreement was subsequently amended and renewed on July 30, 2022. Funds provided under the agreement may be used to repurchase shares of the Company’s common stock under the share repurchase program, which was reauthorized by the Company’s board of directors on April ~~13, 2021,~~11, 2023 and expires on April 30, 2025, and for general operations. The credit agreement includes a negative pledge agreement whereby the Company agrees not to pledge or otherwise encumber the stock of the Bank. The credit agreement has a one year term which may be amended, extended, modified or renewed. There were no outstanding borrowings on the credit agreement at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

NOTE 6. FAIR VALUE DISCLOSURES

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or 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.

~~Table of Contents~~

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities: Securities available-for-sale ~~and held-to-maturity~~ are valued primarily by a third party pricing service. The fair values of securities available-for-sale ~~and held-to-maturity~~ are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).

The Company’s Finance Department, which is responsible for all accounting and SEC disclosure compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are new assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board are made aware of such assets at their next scheduled meeting.

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Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/-5%, government MBS/CMO +/-3% and U.S. treasuries +/-1%. If any securities fall outside the tolerance threshold and have a variance of $100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material changes are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.

Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2).

Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).

Collateral dependent loans: Collateral dependent loans with specific allocations of the allowance for credit losses are generally based on the fair value of the underlying collateral when repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of collateral dependent loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by ~~0-50%~~30-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by ~~35-65%~~40-60%, depending on the marketability of the goods (b) finished goods are generally discounted by ~~30-60%~~40-60%, depending on the ease of marketability, cost of transportation or

~~Table of Contents~~

scope of use of the finished good (c) work in process inventory is typically discounted by ~~50%~~60%-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at ~~30-70%~~20-50% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10%-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.

Mortgage servicing rights: As of ~~June 30, 2022,~~March 31, 2023, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was ~~$3.0~~$2.5 million, carried at amortized cost ~~of $3.0 million less a $14,000~~and no valuation reserve. These residential mortgage loans have a weighted average interest rate of ~~3.40%~~3.5%, a weighted average maturity of 2120 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A third-party valuation is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At ~~June 30, 2022,~~March 31, 2023, the constant prepayment speed (“PSA”) used was ~~178~~157 and discount rate used was ~~9.0%~~9.5%. At December 31, ~~2021,~~2022, the PSA used was ~~249~~159 and the discount rate used was 9.5%.

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Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Real estate mortgage loans held-for-sale: Real estate mortgage loans held-for-sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.

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The tables below ~~presents~~present the balances of assets measured at fair value on a recurring basis:


		June 30, 2022									March 31, 2023
		Fair Value Measurements Using						Assets at Fair Value			Fair Value Measurements Using						Assets at Fair Value
(dollars in thousands)	(dollars in thousands)	Level 1		Level 2		Level 3				(dollars in thousands)	Level 1		Level 2		Level 3
Assets:	Assets:									Assets:
U.S. Treasury securities	U.S. Treasury securities	$	2,234	$	0	$	0	$	2,234	U.S. Treasury securities	$	3,352	$	0	$	0	$	3,352
U.S. government sponsored agency securities	U.S. government sponsored agency securities	0		142,261		0		142,261		U.S. government sponsored agency securities	0		127,995		0		127,995
Mortgage-backed securities: residential	Mortgage-backed securities: residential	0		558,122		0		558,122		Mortgage-backed securities: residential	0		484,462		0		484,462

State and municipal securities	State and municipal securities	0		594,363		3,600		597,963		State and municipal securities	0		490,437		2,035		492,472
Total securities available-for-sale	Total securities available-for-sale	2,234		1,294,746		3,600		1,300,580		Total securities available-for-sale	3,352		1,102,894		2,035		1,108,281
Mortgage banking derivative	Mortgage banking derivative	0		168		0		168		Mortgage banking derivative	0		47		0		47
Interest rate swap derivative	Interest rate swap derivative	0		26,370		0		26,370		Interest rate swap derivative	0		30,011		0		30,011
Total assets	Total assets	$	2,234	$	1,321,284	$	3,600	$	1,327,118	Total assets	$	3,352	$	1,132,952	$	2,035	$	1,138,339

Liabilities:	Liabilities:									Liabilities:
Mortgage banking derivative	Mortgage banking derivative	$	0	$	5	$	0	$	5	Mortgage banking derivative	$	0	$	4	$	0	$	4
Interest rate swap derivative	Interest rate swap derivative	0		26,372		0		26,372		Interest rate swap derivative	0		30,013		0		30,013
Total liabilities	Total liabilities	$	0	$	26,377	$	0	$	26,377	Total liabilities	$	0	$	30,017	$	0	$	30,017


		December 31, 2021									December 31, 2022
		Fair Value Measurements Using						Assets at Fair Value			Fair Value Measurements Using						Assets at Fair Value
(dollars in thousands)	(dollars in thousands)	Level 1		Level 2		Level 3				(dollars in thousands)	Level 1		Level 2		Level 3
Assets:	Assets:									Assets:
U.S. Treasury securities	U.S. Treasury securities	$	900	$	0	$	0	$	900	U.S. Treasury securities	$	3,034	$	0	$	0	$	3,034
U.S. government sponsored agency securities	U.S. government sponsored agency securities	0		143,452		0		143,452		U.S. government sponsored agency securities	0		126,961		0		126,961
Mortgage-backed securities: residential	Mortgage-backed securities: residential	0		486,676		0		486,676		Mortgage-backed securities: residential	0		492,308		0		492,308
Mortgage-backed securities: commercial		0		523		0		523

State and municipal securities	State and municipal securities	0		764,964		2,043		767,007		State and municipal securities	0		561,150		2,075		563,225
Total securities available-for-sale	Total securities available-for-sale	900		1,395,615		2,043		1,398,558		Total securities available-for-sale	3,034		1,180,419		2,075		1,185,528
Mortgage banking derivative	Mortgage banking derivative	0		398		0		398		Mortgage banking derivative	0		43		0		43
Interest rate swap derivative	Interest rate swap derivative	0		14,309		0		14,309		Interest rate swap derivative	0		36,920		0		36,920
Total assets	Total assets	$	900	$	1,410,322	$	2,043	$	1,413,265	Total assets	$	3,034	$	1,217,382	$	2,075	$	1,222,491

Liabilities:	Liabilities:									Liabilities:
Mortgage banking derivative	Mortgage banking derivative	$	0	$	2	$	0	$	2	Mortgage banking derivative	$	0	$	0	$	0	$	0
Interest rate swap derivative	Interest rate swap derivative	0		14,329		0		14,329		Interest rate swap derivative	0		36,921		0		36,921
Total liabilities	Total liabilities	$	0	$	14,331	$	0	$	14,331	Total liabilities	$	0	$	36,921	$	0	$	36,921

The fair value of Level 3 available-for-sale securities was immaterial and thus did not require additional recurring fair value disclosure.

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The tables below ~~presents~~present the balances of assets measured at fair value on a nonrecurring basis:


		June 30, 2022									March 31, 2023
		Fair Value Measurements Using						Assets at Fair Value			Fair Value Measurements Using						Assets at Fair Value
(dollars in thousands)	(dollars in thousands)	Level 1		Level 2		Level 3				(dollars in thousands)	Level 1		Level 2		Level 3
Assets	Assets									Assets
Collateral dependent loans:	Collateral dependent loans:									Collateral dependent loans:
Commercial and industrial loans:	Commercial and industrial loans:									Commercial and industrial loans:
Working capital lines of credit loans	Working capital lines of credit loans	$	0	$	0	$	303	$	303	Working capital lines of credit loans	$	0	$	0	$	2,858	$	2,858
Non-working capital loans	Non-working capital loans	0		0		3,614		3,614		Non-working capital loans	0		0		2,559		2,559
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:									Commercial real estate and multi-family residential loans:
Owner occupied loans	Owner occupied loans	0		0		466		466		Owner occupied loans	0		0		429		429

Agri-business and agricultural loans:	Agri-business and agricultural loans:									Agri-business and agricultural loans:
Loans secured by farmland	Loans secured by farmland	0		0		45		45		Loans secured by farmland	0		0		33		33

Total collateral dependent loans	Total collateral dependent loans	0		0		4,428		4,428		Total collateral dependent loans	0		0		5,879		5,879
Other real estate owned	Other real estate owned	0		0		196		196		Other real estate owned	0		0		100		100
Total assets	Total assets	$	0	$	0	$	4,624	$	4,624	Total assets	$	0	$	0	$	5,979	$	5,979


		December 31, 2021									December 31, 2022
		Fair Value Measurements Using						Assets at Fair Value			Fair Value Measurements Using						Assets at Fair Value
(dollars in thousands)	(dollars in thousands)	Level 1		Level 2		Level 3				(dollars in thousands)	Level 1		Level 2		Level 3
Assets	Assets									Assets
Collateral dependent loans:	Collateral dependent loans:									Collateral dependent loans:
Commercial and industrial loans:	Commercial and industrial loans:									Commercial and industrial loans:
Working capital lines of credit loans	Working capital lines of credit loans	$	0	$	0	$	247	$	247	Working capital lines of credit loans	$	0	$	0	$	3,178	$	3,178
Non-working capital loans	Non-working capital loans	0		0		5,095		5,095		Non-working capital loans	0		0		8,354		8,354
Commercial real estate and multi-family residential loans:	Commercial real estate and multi-family residential loans:									Commercial real estate and multi-family residential loans:
Owner occupied loans	Owner occupied loans	0		0		791		791		Owner occupied loans	0		0		425		425
Agri-business and agricultural loans:	Agri-business and agricultural loans:									Agri-business and agricultural loans:
Loans secured by farmland	Loans secured by farmland	0		0		231		231		Loans secured by farmland	0		0		35		35

Total collateral dependent loans	Total collateral dependent loans	0		0		6,364		6,364		Total collateral dependent loans	0		0		11,992		11,992
Other real estate owned	Other real estate owned	0		0		196		196		Other real estate owned	0		0		100		100
Total assets	Total assets	$	0	$	0	$	6,560	$	6,560	Total assets	$	0	$	0	$	12,092	$	12,092

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at ~~June 30, 2022:~~March 31, 2023:

(dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs
Collateral dependent loans:
Commercial and industrial $ 3,917 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 70 % 31%-99%
Collateral dependent loans:
Commercial real estate and multi-family residential loans 466 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 69 % 69%
Collateral dependent loans:
Agribusiness and agricultural 45 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 69 % 69%
Other real estate owned 196 Appraisals Discount to reflect current market conditions and ultimate collectability 38 %

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(dollars in thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Average		Range of Inputs
Collateral dependent loans:
Commercial and industrial	$	5,417	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	66	%	40%-99%

Collateral dependent loans:
Commercial real estate and multi-family residential loans	429		Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	56	%	37%-76%

Collateral dependent loans:
Agri-business and agricultural	33		Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	76	%
Other real estate owned	100		Appraisals	Discount to reflect current market conditions and ultimate collectability	68	%

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, ~~2021:~~2022:

(dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs
Collateral dependent loans:
Commercial and industrial $ 5,342 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 65 % 22%-99%
Collateral dependent loans:
Commercial real estate and multi-family residential loans 791 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 51 % 34%-68%
Collateral dependent loans:
Agribusiness and agricultural 231 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 35 % 3%-68%
Other real estate owned 196 Appraisals Discount to reflect current market conditions and ultimate collectability 38 %

Table of Contents


(dollars in thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Average		Range of Inputs
Collateral dependent loans:
Commercial and industrial	$	11,532	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	62	%	29%-99%

Collateral dependent loans:
Commercial real estate and multi-family residential loans	425		Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	57	%	37%-76%

Collateral dependent loans:
Agri-business and agricultural	35		Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	76	%
Other real estate owned	100		Appraisals	Discount to reflect current market conditions and ultimate collectability	68	%

The following tables contain the estimated fair values and the related carrying values of the Company’s financial instruments. Items ~~which~~that are not financial instruments are not included.


		June 30, 2022																March 31, 2023
		Carrying Value			Estimated Fair Value													Carrying Value			Estimated Fair Value
(dollars in thousands)	(dollars in thousands)			Level 1			Level 2			Level 3			Total	(dollars in thousands)						Level 1			Level 2			Level 3			Total
Financial Assets:	Financial Assets:																Financial Assets:
Cash and cash equivalents	Cash and cash equivalents	$	169,515		$	168,054		$	1,461		$	0		$	169,515	Cash and cash equivalents		$	153,521		$	152,800		$	721		$	0		$	153,521
Securities available-for-sale	Securities available-for-sale	1,300,580			2,234			1,294,746			3,600			1,300,580		Securities available-for-sale		1,108,281			3,352			1,102,894			2,035			1,108,281
Securities held-to-maturity	Securities held-to-maturity	127,411			0			113,350			0			113,350		Securities held-to-maturity		128,651			0			115,533			0			115,533
Real estate mortgages held-for-sale	Real estate mortgages held-for-sale	2,646			0			2,704			0			2,704		Real estate mortgages held-for-sale		508			0			518			0			518
Loans, net	Loans, net	4,357,176			0			0			4,219,490			4,219,490		Loans, net		4,683,713			0			0			4,505,890			4,505,890
Mortgage banking derivative	Mortgage banking derivative	168			0			168			0			168		Mortgage banking derivative		47			0			47			0			47
Interest rate swap derivative	Interest rate swap derivative	26,370			0			26,370			0			26,370		Interest rate swap derivative		30,011			0			30,011			0			30,011
Federal Reserve and Federal Home Loan Bank Stock	Federal Reserve and Federal Home Loan Bank Stock	12,840			N/A			N/A			N/A			N/A		Federal Reserve and Federal Home Loan Bank Stock		15,795			N/A			N/A			N/A			N/A
Accrued interest receivable	Accrued interest receivable	20,733			0			9,692			11,041			20,733		Accrued interest receivable		26,883			0			8,532			18,351			26,883
Financial Liabilities:	Financial Liabilities:															Financial Liabilities:
Certificates of deposit	Certificates of deposit	761,914			0			764,731			0			764,731		Certificates of deposit		764,163			0			762,852			0			762,852
All other deposits	All other deposits	4,859,670			4,859,670			0			0			4,859,670		All other deposits		4,753,565			4,753,565			0			0			4,753,565

Mortgage banking derivative	Mortgage banking derivative	5			0			5			0			5		Mortgage banking derivative		4			0			4			0			4
Interest rate swap derivative	Interest rate swap derivative	26,372			0			26,372			0			26,372		Interest rate swap derivative		30,013			0			30,013			0			30,013
Standby letters of credit	Standby letters of credit	144			0			0			144			144		Standby letters of credit		216			0			0			216			216
Accrued interest payable	Accrued interest payable	1,948			80			1,868			0			1,948		Accrued interest payable		5,425			420			5,005			0			5,425

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		December 31, 2021																December 31, 2022
		Carrying Value			Estimated Fair Value													Carrying Value			Estimated Fair Value
(dollars in thousands)	(dollars in thousands)			Level 1			Level 2			Level 3			Total	(dollars in thousands)						Level 1			Level 2			Level 3			Total
Financial Assets:	Financial Assets:																Financial Assets:
Cash and cash equivalents	Cash and cash equivalents	$	683,240		$	681,286		$	1,954		$	0		$	683,240	Cash and cash equivalents		$	130,282		$	129,069		$	1,213		$	0		$	130,282
Securities available-for-sale	Securities available-for-sale	1,398,558			900			1,395,615			2,043			1,398,558		Securities available-for-sale		1,185,528			3,034			1,180,419			2,075			1,185,528
Securities held-to-maturity																Securities held-to-maturity		128,242			0			111,029			0			111,029
Real estate mortgages held-for-sale	Real estate mortgages held-for-sale	7,470			0			7,634			0			7,634		Real estate mortgages held-for-sale		357			0			372			0			372
Loans, net	Loans, net	4,220,068			0			0			4,144,000			4,144,000		Loans, net		4,637,790			0			0			4,454,678			4,454,678
Mortgage banking derivative	Mortgage banking derivative	398			0			398			0			398		Mortgage banking derivative		43			0			43			0			43
Interest rate swap derivative	Interest rate swap derivative	14,309			0			14,309			0			14,309		Interest rate swap derivative		36,920			0			36,920			0			36,920
Federal Reserve and Federal Home Loan Bank Stock	Federal Reserve and Federal Home Loan Bank Stock	13,772			N/A			N/A			N/A			N/A		Federal Reserve and Federal Home Loan Bank Stock		15,795			N/A			N/A			N/A			N/A
Accrued interest receivable	Accrued interest receivable	17,674			0			7,689			9,985			17,674		Accrued interest receivable		27,994			0			9,598			18,396			27,994
Financial Liabilities:	Financial Liabilities:															Financial Liabilities:
Certificates of deposit	Certificates of deposit	829,518			0			833,617			0			833,617		Certificates of deposit		626,186			0			621,206			0			621,206
All other deposits	All other deposits	4,905,889			4,905,889			0			0			4,905,889		All other deposits		4,834,434			4,834,434			0			0			4,834,434
Federal Funds purchased																Federal Funds purchased		22,000			22,000			0			0			22,000
Federal Home Loan Bank advances																Federal Home Loan Bank advances		275,000			275,000			0			0			275,000

Federal Home Loan Bank advances		75,000			0			66,118			0			66,118
Mortgage banking derivative		2			0			2			0			2
Interest rate swap derivative	Interest rate swap derivative	14,329			0			14,329			0			14,329		Interest rate swap derivative		36,921			0			36,921			0			36,921
Standby letters of credit	Standby letters of credit	272			0			0			272			272		Standby letters of credit		249			0			0			249			249
Accrued interest payable	Accrued interest payable	2,619			84			2,535			0			2,619		Accrued interest payable		3,186			486			2,700			0			3,186

NOTE 7. OFFSETTING ASSETS AND LIABILITIES

The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


		June 30, 2022														March 31, 2023
		Gross Amounts of Recognized Assets/Liabilities		Gross Amounts Offset in the Statement of Financial Position			Net Amounts presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position				Net Amount			Gross Amounts of Recognized Assets/Liabilities				Gross Amounts Offset in the Statement of Financial Position		Net Amounts presented in the Statement of Financial Position			Gross Amounts Not Offset in the Statement of Financial Position				Net Amount
(dollars in thousands)	(dollars in thousands)					Financial Instruments			Cash Collateral Position		(dollars in thousands)							Financial Instruments						Cash Collateral Position
Assets	Assets																		Assets
Interest Rate Swap Derivatives	Interest Rate Swap Derivatives	$	26,370	$	0		$	26,370	$	0	$	(27,085)	$	(715)	Interest Rate Swap Derivatives	$	30,011			$	0	$	30,011		$	0	$	(27,385)	$	2,626
Total Assets	Total Assets	$	26,370	$	0		$	26,370	$	0	$	(27,085)	$	(715)	Total Assets	$	30,011			$	0	$	30,011		$	0	$	(27,385)	$	2,626
Liabilities	Liabilities														Liabilities
Interest Rate Swap Derivatives	Interest Rate Swap Derivatives	$	26,372	$	0		$	26,372	$	0	$	(90)	$	26,282	Interest Rate Swap Derivatives	$	30,013			$	0	$	30,013		$	0	$	(90)	$	29,923
Total Liabilities	Total Liabilities	$	26,372	$	0		$	26,372	$	0	$	(90)	$	26,282	Total Liabilities	$	30,013			$	0	$	30,013		$	0	$	(90)	$	29,923

Table of Contents


		December 31, 2021																									December 31, 2022
		Gross Amounts of Recognized Assets/Liabilities				Gross Amounts Offset in the Statement of Financial Position				Net Amounts presented in the Statement of Financial Position				Gross Amounts Not Offset in the Statement of Financial Position								Net Amount					Gross Amounts of Recognized Assets/Liabilities				Gross Amounts Offset in the Statement of Financial Position				Net Amounts presented in the Statement of Financial Position				Gross Amounts Not Offset in the Statement of Financial Position								Net Amount
(dollars in thousands)	(dollars in thousands)							Financial Instruments						Cash Collateral Position				(dollars in thousands)											Financial Instruments								Cash Collateral Position
Assets	Assets																											Assets
Interest Rate Swap Derivatives	Interest Rate Swap Derivatives			$	14,309			$	0			$	14,309			$	0			$	(2,255)			$	12,054	Interest Rate Swap Derivatives			$	36,920			$	0			$	36,920			$	0			$	(34,185)			$	2,735
Total Assets	Total Assets	$	14,309			$	0			$	14,309			$	0			$	(2,255)			$	12,054	Total Assets			$	36,920			$	0			$	36,920			$	0			$	(34,185)			$	2,735
Liabilities	Liabilities																							Liabilities
Interest Rate Swap Derivatives	Interest Rate Swap Derivatives	$	14,329			$	0			$	14,329			$	0			$	(7,995)			$	6,334	Interest Rate Swap Derivatives			$	36,921			$	0			$	36,921			$	0			$	(90)			$	36,831
Total Liabilities	Total Liabilities	$	14,329			$	0			$	14,329			$	0			$	(7,995)			$	6,334	Total Liabilities			$	36,921			$	0			$	36,921			$	0			$	(90)			$	36,831

If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.

NOTE 8. EARNINGS PER SHARE

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period, which includes shares held in treasury on behalf of participants in the Company’s Directors Fee Deferral Plan, and share repurchases. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based awards and warrants, none of which were antidilutive.


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Weighted average shares outstanding for basic earnings per common share	Weighted average shares outstanding for basic earnings per common share	25,527,896		25,473,497		25,521,618		25,465,621		Weighted average shares outstanding for basic earnings per common share	25,583,026		25,515,271
Dilutive effect of stock based awards	Dilutive effect of stock based awards	169,681		128,566		178,290		131,222		Dilutive effect of stock based awards	159,859		175,101
Weighted average shares outstanding for diluted earnings per common share	Weighted average shares outstanding for diluted earnings per common share	25,697,577		25,602,063		25,699,908		25,596,843		Weighted average shares outstanding for diluted earnings per common share	25,742,885		25,690,372

Basic earnings per common share	Basic earnings per common share	$	1.00	$	0.96	$	1.93	$	1.86	Basic earnings per common share	$	0.95	$	0.93
Diluted earnings per common share	Diluted earnings per common share	$	1.00	$	0.95	$	1.92	$	1.85	Diluted earnings per common share	$	0.94	$	0.92

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ all shown net of tax:


(dollars in thousands)	(dollars in thousands)	Unrealized Gains and Losses on Available- for-Sales Securities		Defined Benefit Pension Items		Total		(dollars in thousands)	Unrealized Gains and Losses on Available- for-Sales Securities		Defined Benefit Pension Items		Total
Balance at April 1, 2022		$	(92,751)	$	(936)	$	(93,687)
Balance at January 1, 2023								Balance at January 1, 2023	$	(188,154)	$	(769)	$	(188,923)
Other comprehensive income (loss) before reclassification	Other comprehensive income (loss) before reclassification	(65,179)		0		(65,179)		Other comprehensive income (loss) before reclassification	21,167		0		21,167
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	305		27		332		Amounts reclassified from accumulated other comprehensive income (loss)	375		11		386
Net current period other comprehensive income (loss)	Net current period other comprehensive income (loss)	(64,874)		27		(64,847)		Net current period other comprehensive income (loss)	21,542		11		21,553
Balance at June 30, 2022		$	(157,625)	$	(909)	$	(158,534)
Balance at March 31, 2023								Balance at March 31, 2023	$	(166,612)	$	(758)	$	(167,370)

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(dollars in thousands) Unrealized Gains and Losses on Available-
for-Sales Securities Defined Benefit Pension Items Total
Balance at April 1, 2021 $ 16,503 $ (1,393) $ 15,110
Other comprehensive income (loss) before reclassification 7,151 0 7,151
Amounts reclassified from accumulated other comprehensive income (loss) (35) 45 10
Net current period other comprehensive income (loss) 7,116 45 7,161
Balance at June 30, 2021 $ 23,619 $ (1,348) $ 22,271

~~The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the six months ended June 30, 2022 and 2021, all shown net of tax:~~

(dollars in thousands) Unrealized Gains and Losses on Available-
for-Sales Securities Defined Benefit Pension Items Total
Balance at January 1, 2022 $ 17,056 $ (963) $ 16,093
Other comprehensive income (loss) before reclassification (174,986) 0 (174,986)
Amounts reclassified from accumulated other comprehensive income (loss) 305 54 359
Net current period other comprehensive income (loss) (174,681) 54 (174,627)
Balance at June 30, 2022 $ (157,625) $ (909) $ (158,534)

(dollars in thousands) Unrealized Gains and Losses on Available-
for-Sales Securities Defined Benefit Pension Items Total
Balance at January 1, 2021 $ 29,182 $ (1,438) $ 27,744
Other comprehensive income (loss) before reclassification (4,933) 0 (4,933)
Amounts reclassified from accumulated other comprehensive income (loss) (630) 90 (540)
Net current period other comprehensive income (loss) (5,563) 90 (5,473)
Balance at June 30, 2021 $ 23,619 $ (1,348) $ 22,271


(dollars in thousands)	Unrealized Gains and Losses on Available- for-Sales Securities		Defined Benefit Pension Items		Total
Balance at January 1, 2022	$	17,056	$	(963)	$	16,093
Other comprehensive income (loss) before reclassification	(109,807)		0		(109,807)
Amounts reclassified from accumulated other comprehensive income (loss)	0		27		27
Net current period other comprehensive income (loss)	(109,807)		27		(109,780)
Balance at March 31, 2022	$	(92,751)	$	(936)	$	(93,687)

Reclassifications out of other accumulated comprehensive loss for the three months ended ~~June 30, 2022~~March 31, 2023 are as follows:

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income

Affected Line Item
in the Statement Where Net Income is Presented

(dollars in thousands)

Amortization of unrealized losses on held-to-maturity securities

~~(386)~~$

(491)

Interest income

Realized gains and (losses) on available-for-sale securities

Net securities gains

Tax effect

81100

Income tax expense

~~(305)~~(375)

Net of tax

Amortization of defined benefit pension items

~~(36)~~(15)

Other expense

Tax effect

Income tax expense

~~(27)~~(11)

Net of tax

Total reclassifications for the period

~~(332)~~(386)

Net income

~~Table of Contents~~

Reclassifications out of other accumulated comprehensive income for the three months ended ~~June 30, 2021 are as follows:~~

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income

Affected Line Item
in the Statement Where Net Income is Presented

~~(dollars in thousands)~~

~~Realized gains and losses on available-for-sale securities~~

~~Net securities gains~~

~~Tax effect~~

~~(9)~~

~~Income tax expense~~

~~Net of tax~~

~~Amortization of defined benefit pension items~~

~~(60)~~

~~Other expense~~

~~Tax effect~~

~~Income tax expense~~

~~(45)~~

~~Net of tax~~

~~Total reclassifications for the period~~

~~(10)~~

~~Net income~~

~~Reclassifications out of other accumulated comprehensive loss for the six months ended June 30,~~March 31, 2022 are as follows:

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income

Affected Line Item
in the Statement Where Net Income is Presented

(dollars in thousands)

Amortization of ~~unrealized losses on held-to-maturity securities~~

~~(386)~~

~~Interest income~~

~~Tax effect~~

~~Income tax expense~~

~~(305)~~

~~Net of tax~~

~~Amortization of~~ defined benefit pension items

~~(72)~~$

(36)

Other expense

Tax effect

189

Income tax expense

~~(54)~~(27)

Net of tax

Total reclassifications for the period

~~(359)~~

~~Net income~~

~~Reclassifications out of other accumulated comprehensive income for the six months ended June 30, 2021 are as follows:~~

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income

Affected Line Item
in the Statement Where Net Income is Presented

~~(dollars in thousands)~~

~~Realized gains and losses on available-for-sale securities~~

~~797~~

~~Net securities gains~~

~~Tax effect~~

~~(167)~~

~~Income tax expense~~

~~630~~

~~Net of tax~~

~~Amortization of defined benefit pension items~~

~~(120)~~

~~Other expense~~

~~Tax effect~~

~~Income tax expense~~

~~(90)~~

~~Net of tax~~

~~Total reclassifications for the period~~

~~540~~ (27)

Net income

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NOTE 10. LEASES

The Company leases certain office facilities under long-term operating lease agreements. The leases expire at various dates through 2037 and some include renewal options. Many of these leases require the payment of property taxes, insurance premiums, maintenance, utilities and other costs. In many cases, rentals are subject to increase in relation to a cost-of-living index. The Company accounts for lease and non-lease components together as a single lease component. The Company determines if an arrangement is a lease at inception. Operating leases are recorded as a right-of-use ("ROU") lease assets and are included in other assets on the consolidated balance sheet. The Company's corresponding lease obligations are included in other liabilities on the consolidated balance sheet. ROU lease assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as a practical expedient of the standard.

The following is a maturity analysis of the operating lease liabilities as of ~~June 30, 2022:~~March 31, 2023:


Years ending December 31, (in thousands)	Years ending December 31, (in thousands)	Operating Lease Obligation		Years ending December 31, (in thousands)	Operating Lease Obligation
2022		$	354
2023	2023	717		2023	$	547
2024	2024	734		2024	744
2025	2025	752		2025	756
2026	2026	731		2026	730
2027 and thereafter		2,938
2027				2027	753
2028 and thereafter				2028 and thereafter	2,185
Total undiscounted lease payments	Total undiscounted lease payments	6,226		Total undiscounted lease payments	5,715
Less imputed interest	Less imputed interest	(667)		Less imputed interest	(566)
Lease liability	Lease liability	$	5,559	Lease liability	$	5,149
Right-of-use asset	Right-of-use asset	$	5,559	Right-of-use asset	$	5,149


		Three months ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2022			2021			2022			2021			(dollars in thousands)		2023			2022
Lease cost	Lease cost													Lease cost
Operating lease cost	Operating lease cost	$	163		$	135		$	333		$	270		Operating lease cost		$	178		$	170
Short-term lease cost	Short-term lease cost	8			6			14			12			Short-term lease cost		4			6
Total lease cost	Total lease cost	$	171		$	141		$	347		$	282		Total lease cost		$	182		$	176

Other information	Other information													Other information
Operating cash outflows from operating leases	Operating cash outflows from operating leases	$	163		$	135		$	333		$	270		Operating cash outflows from operating leases		$	178		$	170
Weighted-average remaining lease term - operating leases	Weighted-average remaining lease term - operating leases	8.5 years			8.3 years			8.5 years			8.3 years			Weighted-average remaining lease term - operating leases		7.0 years			8.9 years
Weighted average discount rate - operating leases	Weighted average discount rate - operating leases	2.5		%	2.8		%	2.5		%	2.8		%	Weighted average discount rate - operating leases		2.5		%	2.5		%

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NOTE 11. LOSS CONTINGENCIES

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

The Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al., which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and agreed to stay prosecution of the action through August 31, 2022. The original complaint focused on a series of business transactions among the client, related entities and the Bank, which the liquidating trustee alleged are voidable under applicable federal bankruptcy and state law. The complaint also addressed treatment of the Bank's claims filed in the bankruptcy cases.

On August 31, 2022, the trustee filed his amended complaint against the former client, the Bank, the Company, four officers of the Bank and one independent director of the Bank. The amended complaint alleges that the former client engaged in a check kiting scheme involving multiple banks. The amended complaint alleges that a series of business transactions among the client, his related entities and the Bank are voidable under applicable bankruptcy and state laws. The amended complaint also alleges that the Bank, the Company and the five individual bank representatives who are named as defendants violated various federal and state laws in assisting the former client in his check kiting scheme. On October 26, 2022, the trustee filed his second amended complaint which was virtually identical to his amended complaint. On January 5, 2023, the Bank, the Company and the five individual bank representatives filed motions to dismiss the second amended complaint. The motions are being briefed and will then be considered by the court. The hearing for the parties to argue the Company's motion to dismiss the Trustee's second amended complaint was held on April 17, 2023. The judge took the matter under advisement and a ruling is expected within 30 days of the hearing. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank, the Company and the five individual Bank representatives who are named as defendants intend to vigorously defend themselves against all allegations asserted in this amended complaint.

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~~NOTE 11. CONTINGENCIES~~

Lakeland Financial Corporation and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based on present information including advice of legal counsel, the ultimate resolution of these proceedings is not expected to have a material effect on the Company's consolidated financial position or results of operations.

~~Table of Contents~~

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

OVERVIEW

Net income in the first ~~six~~three months of ~~2022~~2023 was ~~$49.3~~$24.3 million, which increased $~~2.0 million,~~636,000, or ~~4.2%~~2.7%, from ~~$47.3~~$23.6 million for the comparable period of ~~2021~~2022. Diluted income per common share was ~~$1.92~~$0.94 in the first ~~six~~three months of ~~2022~~2023, up ~~3.8%~~2.2% from ~~$1.85~~$0.92 in the comparable period of ~~2021~~2022. The increase in net income for ~~2022~~2023 was primarily due to growth in net interest income of ~~$6.2~~$6.6 million, offset by an increase to the provision for credit losses of $3.9 million, a decrease in noninterest income of ~~$2.7 million~~$373,000 and an increase in noninterest expense of ~~$1.5~~$2.5 million. Pretax pre-provision earnings in the first ~~six~~three months of ~~2022~~2023 were ~~$59.9~~$32.4 million, an increase of $~~2.0~~3.8 million, or ~~3.5%~~13.3%, compared to ~~$57.8~~$28.6 million for the comparable ~~period.~~period of 2022. Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense.

Annualized return on average total equity was ~~15.72%~~16.81% in the first ~~six~~three months of ~~2022~~2023 versus ~~14.49%~~14.04% in the comparable period of ~~2021~~2022. Annualized return on average total assets was ~~1.52%~~1.54% in the first ~~six~~three months of ~~2022~~2023 versus ~~1.58%~~1.44% for the comparable period of ~~2021~~2022. The Company's average equity to average assets ratio was ~~9.65%~~9.13% in the first ~~six~~three months of ~~2022~~2023 versus ~~10.92%~~10.26% in the comparable period of ~~2021~~2022.

~~Net~~ Equity has been negatively impacted by unrealized losses from the available-for-sale investment securities portfolio, which are reported as a component of accumulated other comprehensive income in second quarter of 2022 was $25.7 million, up 5.4% from $24.3 million for the comparable period of 2021. Diluted earnings per common share was $1.00 in the second quarter of 2022, up 5.3% from $0.95 in the comparable period of 2021. The increase was driven primarily by growth in net interest income of $5.0 million, offset by a decrease in noninterest income of $848,000 and an increase in noninterest expense of $1.3 million. Additionally, the Company recorded a reversal to the provision for credit losses of $1.7 million for the second quarter of 2021, compared to no provision for credit losses recorded for the second quarter of 2022. Pretax pre-provision earnings in the second quarter of 2022 were $31.3 million, an increase of $2.9 million, or 10.2%, compared to $28.4 million for the comparable period of 2021.

Annualized return on average total equity was 17.65% in the second quarter of 2022 versus 14.71% in the comparable period of 2021. Annualized return on average total assets was 1.59% in the second quarter of 2022 versus 1.58% in the comparable period of 2021. The average equity to average assets ratio was 9.03% in the second quarter of 2022 versus 10.76% the comparable period of 2021.

(loss).

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was ~~8.92%~~9.34% at ~~June 30, 2022,~~March 31, 2023, compared to ~~10.81%~~9.22% at ~~June 30, 2021~~March 31, 2022 and ~~10.70%~~8.79% at December 31, ~~2021.~~2022. Tangible equity and tangible assets have been ~~negatively~~ impacted by declines in the ~~decline in~~ market value of the ~~Company's~~company's available-for-sale investment securities portfolio. The market value decline ~~was~~is a result of ~~the yield curve steepening during the first half of 2022. The increase in market~~rising interest rates ~~led~~caused by the tightening of monetary policy by the Federal Reserve beginning in March of 2022 to ancombat elevated levels of inflation affecting the U.S. economy. The rising interest rate environment has generated unrealized ~~loss~~losses in ~~market value of $175.6~~the available-for-sale investment securities portfolio which are reflected in the company's reported accumulated other comprehensive income (loss). Unrealized losses from available-for-sale investment securities were $188.5 million as of ~~June 30, 2022,~~March 31, 2023, compared to an unrealized ~~gain in market value~~losses of ~~$29.9~~$117.4 million at ~~June 30, 2021~~March 31, 2022 and improved from unrealized losses of ~~$21.6~~$215.3 million at December 31, ~~2021.~~2022. When excluding the impact of ~~accumulated other comprehensive income~~securities market value adjustments on tangible common equity and tangible assets, the Company's adjusted tangible common equity to adjusted tangible assets ratio, which is a non-GAAP financial measure, was ~~11.08%~~11.56% at ~~June 30, 2022~~March 31, 2023 compared to ~~10.49%~~10.44% at ~~June 30, 2021~~March 31, 2022 and ~~10.47%~~11.30% at December 31, ~~2021.~~

The Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity designation on April 1, 2022 as a balance sheet management strategy.2022.

Total assets were ~~$6.265~~$6.412 billion as of ~~June 30, 2022~~March 31, 2023 versus ~~$6.557~~$6.432 billion as of December 31, ~~2021,~~2022, a decrease of ~~$292.2~~$20.8 million. Balance sheet contraction was driven primarily ~~through~~by decreases in ~~cash and cash equivalents,~~available-for-sale securities, noninterest bearing deposits and borrowings during the first ~~six~~three months of ~~2022. Cash and cash equivalents~~2023. Available-for-sale securities decreased ~~$513.7~~$77.2 million, noninterest bearing deposits decreased ~~$113.8~~$188.7 million and total borrowings decreased ~~$75.0~~$97.0 million. Offsetting these decreases were increases to short-term investments of $36.9 million, loans, net of the allowance for credit losses, of ~~$137.1 million, other assets of $58.4~~$45.9 million and ~~total investment securities~~interest bearing deposits of ~~$29.4~~$245.8 million. Total equity ~~decreased~~increased by ~~$142.8~~$33.1 million, or 5.8%, due primarily to ~~a reduction~~an increase to accumulated other comprehensive income (loss) of ~~$174.6~~$21.6 million. The ~~reduction~~increase in accumulated other comprehensive income (loss) was ~~caused by a decrease~~due to an improvement in ~~the fair value of~~ available-for-sale securities ~~due to the steepening of the yield curve~~fair market values during the first ~~six months~~quarter of ~~2022~~2023. The change in total equity was also impacted by net income of ~~$49.3~~$24.3 million and dividends declared and paid of ~~$0.80~~$0.46 per share, totaling ~~$20.4~~$11.7 million.

~~Table of Contents~~

CRITICAL ACCOUNTING POLICIES

The Company’s accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for credit losses. See “Note 4 – Allowance for Credit Losses and Credit Quality” for more information on this critical accounting policy.

Table of Contents

RESULTS OF OPERATIONS

Overview

Selected income statement information for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ is presented in the following table:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2022			2021			2022			2021			(dollars in thousands)	2023			2022
Income Statement Summary:	Income Statement Summary:													Income Statement Summary:
Net interest income	Net interest income	$	48,678		$	43,661		$	93,558		$	87,340		Net interest income	$	51,519		$	44,880
Provision for credit losses	Provision for credit losses	0			(1,700)			417			(223)			Provision for credit losses	4,350			417
Noninterest income	Noninterest income	10,492			11,340			21,179			23,897			Noninterest income	10,314			10,687
Noninterest expense	Noninterest expense	27,913			26,648			54,882			53,394			Noninterest expense	29,434			26,969
Other Data:	Other Data:													Other Data:
Efficiency ratio (1)	Efficiency ratio (1)	47.17		%	48.45		%	47.83		%	48.00		%	Efficiency ratio (1)	47.60		%	48.53		%
Diluted EPS	Diluted EPS	$	1.00		$	0.95		$	1.92		$	1.85		Diluted EPS	$	0.94		$	0.92
Average Equity/Average Assets														Average Equity/Average Assets	9.13		%	10.26		%
Tangible capital ratio (2)	Tangible capital ratio (2)	8.92		%	10.81		%	8.92		%	10.81		%	Tangible capital ratio (2)	9.34		%	9.22		%
Adjusted tangible capital ratio (3)	Adjusted tangible capital ratio (3)	11.08		%	10.49		%	11.08		%	10.49		%	Adjusted tangible capital ratio (3)	11.56		%	10.44		%
Net charge offs (recoveries) to average loans		0.00		%	(0.14)		%	0.03		%	(0.07)		%
Net charge offs to average loans														Net charge offs to average loans	0.49		%	0.06		%
Net interest margin	Net interest margin	3.26		%	3.01		%	3.09		%	3.10		%	Net interest margin	3.54		%	2.93		%
Net interest margin excluding PPP loans (4)		3.26		%	2.95		%	3.08		%	3.00		%

Noninterest income to total revenue	Noninterest income to total revenue	17.73		%	20.62		%	18.46		%	21.48		%	Noninterest income to total revenue	16.68		%	19.23		%
Pretax Pre-Provision Earnings (5)		$	31,257		$	28,353		$	59,855		$	57,843
Pretax pre-provision earnings (4)														Pretax pre-provision earnings (4)	$	32,399		$	28,598

(1)Noninterest expense/net interest income plus noninterest income.

(2)Non-GAAP financial measure. The Company believes that disclosing non-GAAP financial measures provides investors with information useful to understanding the Company’s financial performance. Additionally, these non-GAAP measures are used by management for planning and forecasting purposes, including measures based on “tangible common ~~equity”~~equity,” which is “total equity” excluding intangible assets, net of deferred tax, and “tangible ~~assets”~~assets,” which is “total assets” excluding intangible assets, net of deferred tax. The tangible capital ratio is calculated by excluding the balance of goodwill, net of deferred taxes. See reconciliation on the next page.

(3)Non-GAAP financial measure. ~~Adjusted tangible capital ratio excludes~~Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities onportfolio from tangible ~~common~~ equity and tangible assets. ~~See reconciliation on the next page.~~

~~(4)Non-GAAP financial measure. Calculated by subtracting the impact PPP loans had on average earnings assets, loan interest income, average interest bearing liabilities, and interest expense.~~ Management believes this is an important measure because it provides ~~for~~ better comparability to prior periods, given the low fixed interest rate of 1.0% applicable to PPP loans, and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA. Management is actively monitoring net interest margin on a fully tax equivalent basis with and without PPP loan impact for the duration of this program.periods. See reconciliation on the next page.

~~(5)~~(4)Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period. See reconciliation on the next page.

Table of Contents

A reconciliation of non-GAAP measures is provided below (in thousands, except for per share data).


															As of and For The
		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2022			2021			2022			2021			(dollars in thousands)	2023			2022
Total Equity	Total Equity	$	562,063		$	677,471		$	562,063		$	677,471		Total Equity	$	602,006		$	609,102
Less: Goodwill	Less: Goodwill	(4,970)			(4,970)			(4,970)			(4,970)			Less: Goodwill	(4,970)			(4,970)
Plus: Deferred Tax Assets Related to Goodwill	Plus: Deferred Tax Assets Related to Goodwill	1,167			1,176			1,167			1,176			Plus: Deferred Tax Assets Related to Goodwill	1,167			1,167
Tangible Common Equity (A)	Tangible Common Equity (A)	558,260			673,677			558,260			673,677			Tangible Common Equity (A)	598,203			605,299
AOCI Market Value Adjustment	AOCI Market Value Adjustment	157,625			(23,618)			157,625			(23,618)			AOCI Market Value Adjustment	166,612			92,751
Adjusted Tangible Common Equity (C)	Adjusted Tangible Common Equity (C)	715,885			650,059			715,885			650,059			Adjusted Tangible Common Equity (C)	764,815			698,050

Total Assets	Total Assets	$	6,265,087		$	6,232,914		$	6,265,087		$	6,232,914		Total Assets	$	6,411,529		$	6,572,259
Less: Goodwill	Less: Goodwill	(4,970)			(4,970)			(4,970)			(4,970)			Less: Goodwill	(4,970)			(4,970)
Plus: Deferred Tax Assets Related to Goodwill	Plus: Deferred Tax Assets Related to Goodwill	1,167			1,176			1,167			1,176			Plus: Deferred Tax Assets Related to Goodwill	1,167			1,167
Tangible Assets (B)	Tangible Assets (B)	6,261,284			6,229,120			6,261,284			6,229,120			Tangible Assets (B)	6,407,726			6,568,456
Market Value Adjustment	Market Value Adjustment	199,525			(29,896)			199,525			(29,896)			Market Value Adjustment	210,901			117,406
Adjusted Tangible Assets (D)	Adjusted Tangible Assets (D)	6,460,809			6,199,224			6,460,809			6,199,224			Adjusted Tangible Assets (D)	6,618,627			6,685,862

Ending Common Shares Issued (E)														Ending Common Shares Issued (E)	25,607,663			25,527,896

Tangible Book Value per Common Share (A/E)														Tangible Book Value per Common Share (A/E)	$	23.36		$	23.71

Tangible Capital Ratio (A/B)	Tangible Capital Ratio (A/B)	8.92		%	10.81		%	8.92		%	10.81		%	Tangible Capital Ratio (A/B)	9.34		%	9.22		%
Adjusted Tangible Capital Ratio (C/D)	Adjusted Tangible Capital Ratio (C/D)	11.08		%	10.49		%	11.08		%	10.49		%	Adjusted Tangible Capital Ratio (C/D)	11.56		%	10.44		%

Net Interest Income	Net Interest Income	$	48,678		$	43,661		$	93,558		$	87,340		Net Interest Income	$	51,519		$	44,880
Noninterest Income	Noninterest Income	10,492			11,340			21,179			23,897			Noninterest Income	10,314			10,687
Noninterest Expense	Noninterest Expense	(27,913)			(26,648)			(54,882)			(53,394)			Noninterest Expense	(29,434)			(26,969)
Pretax Pre-Provision Earnings	Pretax Pre-Provision Earnings	$	31,257		$	28,353		$	59,855		$	57,843		Pretax Pre-Provision Earnings	$	32,399		$	28,598

~~Impact~~Net Income

Net income was $24.3 million in the first three months of ~~Paycheck Protection Program on Net Interest Margin FTE.~~2023, an increase of $636,000, or 2.7%, versus net income of $23.6 million in the first three months of 2022. The increase in net income for 2023 was primarily due to growth in net interest income of $6.6 million, or 14.8%, offset by a decrease to the provision for credit losses of $3.9 million, a decrease to noninterest income of $373,000, or 3.5%, and an increase to noninterest expense of $2.5 million, or 9.1%.

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Total Average Earnings Assets $ 6,157,051 $ 5,924,801 $ 6,273,914 $ 5,782,293
Less: Average Balance of PPP Loans (9,665) (348,026) (13,588) (375,226)
Total Adjusted Earning Assets 6,147,386 5,576,775 6,260,326 5,407,067
Total Interest Income FTE $ 55,023 $ 48,416 $ 104,325 $ 97,080
Less: PPP Loan Income (204) (3,652) (710) (8,818)
Total Adjusted Interest Income FTE 54,819 44,764 103,615 88,262
Adjusted Earning Asset Yield, net of PPP Impact 3.58 % 3.22 % 3.34 % 3.29 %
Total Average Interest Bearing Liabilities $ 3,981,587 $ 3,828,499 $ 3,969,634 $ 3,723,580
Less: Average Balance of PPP Loans (9,665) (348,026) (13,588) (375,226)
Total Adjusted Interest Bearing Liabilities 3,971,922 3,480,473 3,956,046 3,348,354
Total Interest Expense FTE $ 4,944 $ 3,964 $ 8,098 $ 8,262
Less: PPP Cost of Funds (6) (162) (17) (465)
Total Adjusted Interest Expense FTE 4,938 3,802 8,081 7,797
Adjusted Cost of Funds, net of PPP Impact 0.32 % 0.27 % 0.26 % 0.29 %
Net Interest Margin Excluding PPP Loans FTE 3.26 % 2.95 % 3.08 % 3.00 %

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N~~Net Income~~

~~Net income was $49.3 million in the first six months of~~ ~~2022, an increase of $2.0 million, or 4.2%, versus net income of $47.3 million in the first six months of~~ ~~2021. The increase in net income for~~ ~~2022~~ was primarily due to growth in net interest income of $6.2 million, or 7.1%, offset by a a decrease to noninterest income of $2.7 million, or 11.4% and an increase to noninterest expense of $1.5 million, or 2.8%. Additionally, the change in provision for credit losses recorded during the period impacted net income, as $417,000 provision for credit losses was recorded during the first six months of ~~2022, compared to a reversal for provision expense of $223,000 during the first six months of~~ ~~2021~~.

Net income was $25.7 million for the three months ended June 30, 2022, an increase of $1.3 million, or 5.4%, versus net income of $24.3 million for the three months ended June 30, 2021. The increase was primarily due to growth in net interest income which increased $5.0 million, or 11.5%, offset by a decrease to noninterest income of $848,000, or 7.5%, and an increase to noninterest expense of $1.3 million, or 4.7%. Additionally, the provision for credit losses recorded during the period impacted net income as no provision for credit losses was recorded during the three months ended June 30, 2022, compared to a reversal for credit losses of $1.7 million during the three months ended June 30, 2021.

~~Table of Contents~~

~~Net~~et Interest Income

The following table sets forth consolidated information regarding average balances and rates:


		Six Months Ended June 30,													Three Months Ended March 31,
		2022						2021							2023						2022
(fully tax equivalent basis, dollars in thousands)	(fully tax equivalent basis, dollars in thousands)	Average Balance		Interest		Yield (1)/ Rate		Average Balance		Interest		Yield (1)/ Rate		(fully tax equivalent basis, dollars in thousands)	Average Balance		Interest		Yield (1)/ Rate		Average Balance		Interest		Yield (1)/ Rate
Earning Assets	Earning Assets													Earning Assets
Loans:	Loans:													Loans:
Taxable (2)(3)	Taxable (2)(3)	$	4,337,938	$	83,873	3.90	%	$	4,514,294	$	85,803	3.83	%	Taxable (2)(3)	$	4,667,867	$	69,542	6.04	%	$	4,278,894	$	39,735	3.77	%
Tax exempt (1)	Tax exempt (1)	25,726		566		4.44		12,940		259		4.04		Tax exempt (1)	57,560		1,126		7.93		22,032		213		3.92
Investments:	Investments:													Investments:
Securities (1)	Securities (1)	1,494,979		19,157		2.58		864,250		10,795		2.52		Securities (1)	1,250,189		8,956		2.91		1,514,024		9,108		2.44
Short-term investments	Short-term investments	2,223		3		0.27		2,256		1		0.09		Short-term investments	2,242		22		3.98		2,143		1		0.11
Interest bearing deposits	Interest bearing deposits	413,048		726		0.35		388,553		222		0.12		Interest bearing deposits	89,718		942		4.26		574,982		245		0.17
Total earning assets	Total earning assets	$	6,273,914	$	104,325	3.35	%	$	5,782,293	$	97,080	3.39	%	Total earning assets	$	6,067,576	$	80,588	5.39	%	$	6,392,075	$	49,302	3.13	%
Less: Allowance for credit losses	Less: Allowance for credit losses	(67,787)						(71,593)						Less: Allowance for credit losses	(73,266)						(68,051)
Nonearning Assets	Nonearning Assets													Nonearning Assets
Cash and due from banks	Cash and due from banks	73,037						69,753						Cash and due from banks	76,578						71,905
Premises and equipment	Premises and equipment	59,143						59,565						Premises and equipment	58,319						59,309
Other nonearning assets	Other nonearning assets	217,581						190,160						Other nonearning assets	282,873						196,705
Total assets	Total assets	$	6,555,888					$	6,030,178					Total assets	$	6,412,080					$	6,651,943

Interest Bearing Liabilities	Interest Bearing Liabilities													Interest Bearing Liabilities
Savings deposits	Savings deposits	$	416,755	$	156	0.08	%	$	344,859	$	133	0.08	%	Savings deposits	$	392,567	$	71	0.07	%	$	408,314	$	75	0.07	%
Interest bearing checking accounts	Interest bearing checking accounts	2,676,528		5,646		0.43		2,306,026		3,194		0.28		Interest bearing checking accounts	2,757,120		21,402		3.15		2,642,003		1,862		0.29
Time deposits:	Time deposits:													Time deposits:
In denominations under $100,000	In denominations under $100,000	193,873		653		0.68		229,617		1,192		1.05		In denominations under $100,000	180,502		642		1.44		198,257		346		0.71
In denominations over $100,000	In denominations over $100,000	617,824		1,516		0.49		767,324		3,589		0.94		In denominations over $100,000	494,873		2,803		2.30		633,947		798		0.51
Miscellaneous short-term borrowings	Miscellaneous short-term borrowings	13		0		0.00		754		7		1.87		Miscellaneous short-term borrowings	241,870		2,783		4.67		26		0		0.00
Long-term borrowings and subordinated debentures	Long-term borrowings and subordinated debentures	64,641		127		0.40		75,000		147		0.40		Long-term borrowings and subordinated debentures	0		0		0.00		75,000		73		0.40
Total interest bearing liabilities	Total interest bearing liabilities	$	3,969,634	$	8,098	0.41	%	$	3,723,580	$	8,262	0.45	%	Total interest bearing liabilities	$	4,066,932	$	27,701	2.76	%	$	3,957,547	$	3,154	0.32	%

Noninterest Bearing Liabilities	Noninterest Bearing Liabilities													Noninterest Bearing Liabilities
Demand deposits	Demand deposits	1,895,333						1,600,052						Demand deposits	1,662,530						1,966,117
Other liabilities	Other liabilities	58,188						47,857						Other liabilities	97,014						45,587
Stockholders' Equity	Stockholders' Equity	632,733						658,689						Stockholders' Equity	585,604						682,692
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	6,555,888					$	6,030,178					Total liabilities and stockholders' equity	$	6,412,080					$	6,651,943

Interest Margin Recap	Interest Margin Recap													Interest Margin Recap
Interest income/average earning assets	Interest income/average earning assets			104,325		3.35				97,080		3.39	%	Interest income/average earning assets			80,588		5.39				49,302		3.13	%
Interest expense/average earning assets	Interest expense/average earning assets			8,098		0.26				8,262		0.29	%	Interest expense/average earning assets			27,701		1.85				3,154		0.20	%
Net interest income and margin	Net interest income and margin			$	96,227	3.09	%			$	88,818	3.10	%	Net interest income and margin			$	52,887	3.54	%			$	46,148	2.93	%

(1)Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were ~~$2.7~~$1.37 million and ~~$1.5~~$1.27 million in the ~~six-month~~three-month periods ended ~~June 30,~~March 31, 2023 and March 31, 2022, ~~and June 30,~~ ~~2021~~, respectively.

(2)Loan fees, which are ~~included as taxable loan interest income. Net loan fees attributable to PPP loans were $641,000 and $6.9 million for the six months ended June 30, 2022 and June 30,~~ ~~2021, respectively. All other loan fees were~~ immaterial in relation to total taxable loan interest income for the ~~periods presented.~~three months ended March 31, 2023 and 2022, are included as taxable loan interest income.

(3)Nonaccrual loans are included in the average balance of taxable loans.

~~Table of Contents~~

~~The following table sets forth consolidated information regarding average balances and rates:~~

Three Months Ended June 30,
2022 2021
(fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/
Rate Average Balance Interest Yield (1)/
Rate
Earning Assets
Loans:
Taxable (2)(3) $ 4,396,333 $ 44,138 4.03 % $ 4,474,844 $ 42,342 3.80 %
Tax exempt (1) 29,380 353 4.82 12,839 128 4.00
Investments:
Securities(1) 1,476,144 10,049 2.73 955,242 5,811 2.44
Short-term investments 2,301 2 0.35 2,305 0 0.00
Interest bearing deposits 252,893 481 0.76 479,571 135 0.11
Total earning assets $ 6,157,051 $ 55,023 3.58 % $ 5,924,801 $ 48,416 3.28 %
Less: Allowance for credit losses (67,527) (72,222)
Nonearning Assets
Cash and due from banks 74,158 68,798
Premises and equipment 58,978 59,848
Other nonearning assets 238,228 190,202
Total assets $ 6,460,888 $ 6,171,427
Interest Bearing Liabilities
Savings deposits $ 425,102 $ 81 0.08 % $ 359,484 $ 71 0.08 %
Interest bearing checking accounts 2,710,674 3,784 0.56 2,428,524 1,700 0.28
Time deposits:
In denominations under $100,000 189,538 307 0.65 224,025 545 0.98
In denominations over $100,000 601,877 718 0.48 741,466 1,574 0.85
Miscellaneous short-term borrowings 0 0 0.00 0 0 0.00
Long-term borrowings and subordinated debentures 54,396 54 0.40 75,000 74 0.40
Total interest bearing liabilities $ 3,981,587 $ 4,944 0.50 % $ 3,828,499 $ 3,964 0.42 %
Noninterest Bearing Liabilities
Demand deposits 1,825,327 1,633,686
Other liabilities 70,650 45,249
Stockholders' Equity 583,324 663,993
Total liabilities and stockholders' equity $ 6,460,888 $ 6,171,427
Interest Margin Recap
Interest income/average earning assets 55,023 3.58 48,416 3.28 %
Interest expense/average earning assets 4,944 0.32 3,964 0.27 %
Net interest income and margin $ 50,079 3.26 % $ 44,452 3.01 %

~~(1)~~Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.4 million and $791,000 in the three-month periods ended June 30, 2022 and June 30, ~~2021, respectively.~~

~~(2)Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $180,000 and $2.8 million for the three-months ended June 30, 2022 and June 30,~~ ~~2021, respectively. All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented.~~

~~(3)Nonaccrual loans are included in the average balance of taxable loans.~~

~~Net interest income increased $6.2 million, or 7.1%, to $93.6 million for the six months ended June 30, 2022, compared with $87.3 million for the first six months of~~ ~~2021~~. Growth in core loans and investment security balances coupled with rising interest rates positively impacted investment security and loan income and offset the decline in PPP loan income of $8.8 million during the period. In addition, interest expense declined by $164,000, further benefiting the increase in net interest income. Average earning assets increased by $491.6 million, due primarily to growth in investment securities of $630.7 million. Average loans outstanding decreased $163.6 million to $4.364 billion during the six months ended June 30, 2022, compared to $4.527 billion during the same period of 2021. Average PPP loans decreased by $361.6 million to $13.6 million ~~for the first six months of~~ ~~2022~~ ~~compared to $375.2 million for the first six months of~~ ~~2021~~.~~Excluding PPP loans, average core loans increased $198.1 million to $4.350 billion during the six months ended June 30, 2022, compared to $4.152 billion during the~~

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Net interest income increased $6.6 million, or 14.8%, to $51.5 million for the three months ended March 31, 2023, compared with $44.9 million for the first three months of 2022. Growth in average loans and an improvement in loan yields were the primary drivers behind the $31.3 million increase in tax-equivalent interest income between the two quarters. An improvement in yields in securities and cash and cash equivalents also contributed to the increase in net interest income. Interest expense, which increased by $24.5 million, partially offset the positive impact of increased loan and securities interest income, driven by increased funding costs from deposits and borrowings. Average earning assets declined by $324.5 million, due primarily to a reduction in investment securities of $263.8 million and a decrease in demand deposits of $303.6 million. Offsetting the contraction in average deposits was an increase in average short-term borrowings of $241.8 million, offset by a decrease in average long-term borrowings of $75.0 million.

Average loans outstanding increased $424.5 million to $4.725 billion during the three months ended March 31, 2023, compared to $4.301 billion during the same period of ~~2021.~~2022. The earning asset ~~growth~~contraction was ~~funded through an increase~~offset by a decrease in deposits. Average total deposits ~~increased $552.4~~decreased $361.0 million to ~~$5.800~~$5.488 billion during the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, compared to ~~$5.248~~$5.849 billion for the same period of ~~2021~~2022. The decrease in average deposits was driven by a decrease in average noninterest bearing deposits, which decreased $303.6 million, or 15.4%, from $1.967 billion for the three months ended March 31, 2022, to $1.663 billion for the same period of 2023. Offsetting the contraction in average deposits was an increase in average short-term borrowings of $241.8 million, offset by a decrease in average long-term borrowings of $75.0 million.

The tax equivalent net interest margin was ~~3.09~~3.54% for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023, compared to ~~3.10%~~2.93% during the first ~~six~~three months of ~~2021~~.2022, representing a 61 basis point expansion between the two quarters. The ~~yield on~~net interest margin expansion was driven by a 475 basis point increase to the target Federal Funds rate implemented by the Federal Reserve through a series of rate increases beginning in March of 2022. The target Federal Funds rate increased from a zero-bound range of 0.00%-0.25% in March 2022 to a range of 4.75%-5.00% at March 31, 2023. The impact of the higher interest rate increased earning ~~assets totaled 3.35% during~~asset yields by 226 basis points to 5.39% for the ~~six months ended June 30, 2022 compared to 3.39%~~first quarter of 2023, up from 3.13% for the first quarter of 2022. However, this increase was offset by an increase in the ~~same period of~~ ~~2021. Cost of funds (expressed~~company's funding costs as excess customer liquidity was utilized and the competition for deposits increased throughout the industry. Interest expense as a percentage of average earning ~~assets) totaled 0.26% during~~assets increased to 1.85% for the first ~~six~~ ~~months~~quarter of ~~2022,~~ ~~compared to 0.29% in the same period~~2023 from a historical low of ~~2021~~. The lower margin was caused by reduced levels of PPP income recognition and changes in the earning asset mix during 2021 and 2022 to reflect increased investment securities and interest bearing deposits, which are lower yielding assets. ~~Net interest margin excluding PPP~~ ~~loans was 3.08%~~0.20% for the ~~six months ended June 30, 2022 compared to 3.00% for the same period of~~ ~~2021~~.

Net interest income increased by $5.0 million, or 11.5%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increased level of net interest income during the secondfirst quarter of 2022, ~~was largely driven by~~ an increase ~~in average earning assets~~ of $232.3 million, due primarily to growth in securities of $520.9 million. This earning asset growth was funded through an increase in deposits. Average deposits increased $365.3 million to $5.753 billion for the second quarter of 2022, compared to $5.387 billion for the comparable period of 2021. During this same period, average core deposits increased $365.4 million. The Company defines "core deposits" as total deposits (including all deposits by municipalities and other government agencies), excluding brokered deposits. Long-term borrowings have decreased by $20.6 million during these comparable periods due to repayment of a putable $75.0 million advance with the FHLB during the three months ended June 30, 2022.

~~The company’s net interest margin increased 25~~165 basis points to 3.26% for the second quarter of 2022 compared to 3.01% for the second quarter of 2021. The increased margin in the second quarter of 2022 compared to the prior year period was due to higher yields on loans, partially offset by a higher cost of funds. The higher yields were driven by three Federal Reserve Bank increases to the target Federal Funds rate in March, May, and June of 2022. The overall effect of these rate increases raised the Federal Funds rate by a cumulative 150 basis points and increased the target Federal Funds rate range from a zero-bound range of 0.00% - 0.25% prior to the first rate increase in March of 2022 to a range of 1.50 - 1.75% at June 30, 2022.

~~Total PPP loan income recognized for the second quarter of 2022 was $204,000 compared to $3.7 million for the second quarter of 2021, a decrease of 94%~~. PPP interest and fees had a nominal impact on the second quarter 2022 net interest margin compared to net interest margin compression of 6 basis points for the second quarter 2021. Despite the decrease in PPP loan fee income, earning asset yields increased 30 basis points from 3.28% for the second quarter of 2021 to 3.58% for the second quarter of 2022. Offsetting the increased yield on earning assets was an increase to the company's costCost of funds ~~of 5 basis points. Interest expense~~may continue to rise throughout 2023 as a ~~percentage~~result of ~~earning assets increased to 0.32%~~market competition for ~~the three-month period ended June 30, 2022, from 0.27% for the three-month period ended June 30, 2021.~~deposits.

Provision for Credit Losses

~~The Company recorded no provision for credit losses expense for the three months ended June 30, 2022 compared to a reversal for provision expense of $1.7 million during the comparable period of~~ ~~2021. Net charge offs were $3,000 during the three month period ended June 30, 2022 compared to net recoveries of $1.6 million during the comparable period of~~ ~~2021~~. The Company recorded provision for credit losses expense of ~~$417,000~~$4.4 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~a reversal for~~ provision expense of ~~$223,000~~$417,000 during the comparable period of ~~2021.~~2022. The increase in provision during the first quarter of 2023 compared to the first quarter of 2022 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets. Net charge-offs were ~~$667,000~~$5.7 million during the ~~six~~three month period ended ~~June 30, 2022~~March 31, 2023 compared to net recoveries of ~~$1.5 million~~$664,000 during the comparable period of ~~2021.~~2022. The increase in charge offs in the first quarter of 2023 compared to the first quarter of 2022 was the result of a further charge off of $5.5 million attributable to a single commercial customer. The $10.7 million credit was downgraded in late December 2022, and a partial charge off of $3.7 million was recognized at that time. The remaining $7.0 million was placed on nonaccrual status pending additional due diligence and financial analysis related to the borrower's debt service capacity. During the first quarter of 2023, the outlook for repayment of the loan weakened significantly and resulted in the additional charge off of $5.5 million. The charge off amount was fully allocated in the allowance for credit losses.

Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower. Management’s overall view on current credit quality was also a factor in the determination of the provision for credit losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans.

Table of Contents

Noninterest Income

Noninterest income categories for the ~~six-month~~three-month period ended March 31, 2023 and ~~three-month periods ended June 30,~~ 2022 ~~and 2021~~ are shown in the following table:

Six Months Ended
June 30,
(dollars in thousands) 2022 2021 Dollar Change Percent Change
Wealth advisory fees $ 4,491 $ 4,256 $ 235 5.5 %
Investment brokerage fees 1,060 1,039 21 2.0
Service charges on deposit accounts 5,691 5,012 679 13.5
Loan and service fees 6,084 5,818 266 4.6
Merchant card fee income 1,719 1,388 331 23.8
Bank owned life insurance income (loss) (266) 1,461 (1,727) (118.2)
Interest rate swap fee income 404 754 (350) (46.4)
Mortgage banking income 860 1,788 (928) (51.9)
Net securities gains 0 797 (797) (100.0)
Other income 1,136 1,584 (448) (28.3)
Total noninterest income $ 21,179 $ 23,897 $ (2,718) (11.4) %
Noninterest income to total revenue 18.5 % 21.5 %

Three Months Ended
June 30,
(dollars in thousands) 2022 2021 Dollar Change Percent Change
Wealth advisory fees $ 2,204 $ 2,078 $ 126 6.1 %
Investment brokerage fees 541 575 (34) (5.9)
Service charges on deposit accounts 2,882 2,521 361 14.3
Loan and service fees 3,195 3,042 153 5.0
Merchant card fee income 904 766 138 18.0
Bank owned life insurance income (loss) (183) 705 (888) (126.0)
Interest rate swap fee income 354 505 (151) (29.9)
Mortgage banking income 351 415 (64) (15.4)
Net securities gains 0 44 (44) (100.0)
Other income 244 689 (445) (64.6)
Total noninterest income $ 10,492 $ 11,340 $ (848) (7.5) %
Noninterest income to total revenue 17.7 % 20.6 %


	Three Months Ended March 31,
(dollars in thousands)	2023			2022			Dollar Change		Percent Change
Wealth advisory fees	$	2,200		$	2,287		$	(87)	(3.8)	%
Investment brokerage fees	534			519			15		2.9
Service charges on deposit accounts	2,630			2,809			(179)		(6.4)
Loan and service fees	2,846			2,889			(43)		(1.5)
Merchant card fee income	877			815			62		7.6
Bank owned life insurance income (loss)	691			(83)			774		(932.5)
Interest rate swap fee income	0			50			(50)		(100.0)
Mortgage banking income (loss)	(99)			509			(608)		(119.4)
Net securities gains	16			0			16		100.0
Other income	619			892			(273)		(30.6)
Total noninterest income	$	10,314		$	10,687		$	(373)	(3.5)	%
Noninterest income to total revenue	16.7		%	19.2		%

The Company's noninterest income decreased ~~$2.7 million,~~$373,000, or ~~11.4%~~3.5%, to ~~$21.2~~$10.3 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~$23.9~~$10.7 million in the prior year period. ~~Notably,~~The decrease in noninterest income was primarily driven by a decline in mortgage banking income of $608,000, from reduced levels of mortgage financing activity because of the ~~fee-based businesses~~increased rate environment. Additionally, a decrease in other income of ~~wealth advisory fees improved by 5.5%~~$273,000, or 30.6%, and decreased service charges on deposit accounts ~~improved by 13.5%~~of $179,000, or 6.4%, ~~loan and service fees improved by 4.6% and merchant card fee income improved by 23.8%.~~contributed to the decrease in noninterest income. The decrease in ~~noninterest~~other income ~~resulted~~was the result of less income from partnership investments during the comparable quarters and the decrease in service charges on deposit accounts was primarily ~~from reduced~~the result of increased earning credit rating for commercial depositors related to commercial treasury management fees. Offsetting these decreases was an increase in bank owned life insurance income of ~~$1.7 million due~~$774,000. Bank owned life insurance income benefited by improved market performance of the company's variable life insurance policies, which track to ~~decline~~the overall performance of the equity markets. In addition, increased general account bank owned life insurance income resulted from the purchase of insurance policies during the fourth quarter of 2022.

Noninterest Expense

Noninterest expense categories for the three-month period ended March 31, 2023 and 2022 are shown in the ~~equity markets as well as $928,000 decline in mortgage banking income due to the impact of rising interest rates on reduced mortgage loan origination volumes.~~following tables:


	Three Months Ended March 31, 2023
(dollars in thousands)	2023			2022			Dollar Change		Percent Change
Salaries and employee benefits	$	16,063		$	14,392		$	1,671	11.6	%
Net occupancy expense	1,572			1,629			(57)		(3.5)
Equipment costs	1,438			1,411			27		1.9
Data processing fees and supplies	3,452			3,081			371		12.0
Corporate and business development	1,431			1,219			212		17.4
FDIC insurance and other regulatory fees	795			439			356		81.1
Professional fees	2,121			1,559			562		36.0
Other expense	2,562			3,239			(677)		(20.9)
Total noninterest expense	$	29,434		$	26,969		$	2,465	9.1	%
Efficiency ratio	47.6		%	48.5		%

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The Company's noninterest income decreased by $848,000, or 7.5%, to $10.5 million for the second quarter of 2022, compared to $11.3 million for the second quarter of 2021. Noninterest income was positively impacted by elevated service charges on deposit accounts which increased by $361,000, or 14.3%, as a result of increased economic activity in the Company's operating footprint. In addition, loan and service fee income increased by $153,000, or 5.0%, merchant card fee income increased by $138,000, or 18.0% and wealth advisory fees increased by $126,000, or 6.1%. Driving the decrease was a reduction of $888,000 in bank owned life insurance income related to the company's variable life insurance policies. These policies are tied to the equity markets and can be subject to volatility based on market performance. In addition, other income decreased $445,000 which was caused by a reduction in income recognized during the quarter related to various limited partnership investment holdings and other non-recurring items.

~~Noninterest Expense~~

~~Noninterest expense categories for the six-month and three-month periods ended June 30, 2022 and 2021 are shown in the following tables:~~

Six Months Ended
June 30, 2022
(dollars in thousands) 2022 2021 Dollar Change Percent Change
Salaries and employee benefits $ 29,190 $ 30,147 $ (957) (3.2) %
Net occupancy expense 3,317 2,930 387 13.2
Equipment costs 2,870 2,763 107 3.9
Data processing fees and supplies 6,284 6,523 (239) (3.7)
Corporate and business development 2,652 2,208 444 20.1
FDIC insurance and other regulatory fees 1,058 959 99 10.3
Professional fees 2,973 3,716 (743) (20.0)
Other expense 6,538 4,148 2,390 57.6
Total noninterest expense $ 54,882 $ 53,394 $ 1,488 2.8 %
Efficiency ratio 47.8 % 48.0 %

~~(dollars in thousands)~~
Three Months Ended
June 30, 2022
(dollars in thousands) 2022 2021 Dollar Change Percent Change
Salaries and employee benefits $ 14,798 $ 15,762 $ (964) (6.1) %
Net occupancy expense 1,688 1,427 261 18.3
Equipment costs 1,459 1,318 141 10.7
Data processing fees and supplies 3,203 3,204 (1) 0.0
Corporate and business development 1,433 699 734 105.0
FDIC insurance and other regulatory fees 619 495 124 25.1
Professional fees 1,414 1,839 (425) (23.1)
Other expense 3,299 1,904 1,395 73.3
Total noninterest expense $ 27,913 $ 26,648 $ 1,265 4.7 %
Efficiency ratio 47.2 % 48.5 %

The Company's noninterest expense increased $1.5 million, or 2.8%, to $54.9 million for the six months ended June 30, 2022, from $53.4 million for the six months ended June 30, 2021. The increase was due primarily due to an increase in other expense of $2.4 million, or 57.6%, driven by accruals for ongoing legal matters, offset by decreases in salaries and benefits of $957,000 and reduced professional fees of $743,000, or 20.0%.

The Company's noninterest expense increased by ~~$1.3~~$2.5 million, or ~~4.7%~~9.1%, to ~~$27.9~~$29.4 million infor the ~~second quarter~~three months ended March 31, 2023, from $27.0 million for the three months ended March 31, 2022. Salaries and employee benefits expense contributed $1.7 million, or 11.6%, of ~~2022, compared to $26.6 million in~~ the second quarter of 2021. Other expense increased $1.4 million driven by accruals for ongoing legal matters. In addition, corporate and business development expenses increased $734,000, or 105.0%, and net occupancy expense increased $261,000, or 18.3%. The increase in ~~corporate and business development expenses was~~noninterest expense primarily as a result of increased ~~sponsorships~~salaries and ~~contributions, including $150,000 given in $10,000 increments~~wages and health insurance expense. Variable compensation expense, which is tied to market performance of the company's variable bank owned life insurance policies, increased due to improved market performance and also contributed to the ~~fifteen community foundations~~increase in ~~our market footprint in recognition of Lake City Bank's 150th anniversary. In addition,~~salaries and employee benefits expense. Additionally, professional fees increased $562,000, or 36.0%, data processing fees and supplies increased $371,000, or 12.0%, FDIC insurance and other regulatory fees increased $356,000, or 81.1%, and corporate and business development expense ~~reflects higher advertising costs~~increased $212,000, or 17.4%. The increase in professional fees was a result of increased interest charges associated with the bank's swap collateral positions as well as continued investment in technology solutions for our retail and commercial digital applications. This increased ~~client development~~investment in technology was also primarily responsible for the increase in data processing fees and supplies expense. The increase to FDIC insurance and other regulatory fees was caused by a blanket increase to the assessment rate used by the FDIC to calculate insurance premiums, effective during the first quarter of 2023. Corporate and business development expense was impacted by increased spending for advertising and other corporate and business development activities. These increases were offset by a decrease to other expense of $677,000, or 20.9%, driven by a decrease in accruals pertaining to ongoing legal matters between the two periods. See "Note 11 – Loss Contingencies" for additional details. The Company's efficiency ratio was 47.6% for the three months ended March 31, 2023 compared to 48.5% for the first three months of 2021.

The Company's income tax expense decreased $768,000, or 16.9%, in the three months ended March 31, 2023 compared to the same period in 2022. The effective tax rate was 13.4% in the three months ended March 31, 2023, compared to 16.1% for the comparable period of 2022. The year-to-date effective tax rate is reduced by income from tax-advantaged sources such as federally tax exempt municipal bond interest income as well as a tax benefit from stock-based compensation vesting of shares for plan participants.

FINANCIAL CONDITION

Overview

Total assets were $6.412 billion as of March 31, 2023 versus $6.432 billion as of December 31, 2022, a decrease of $20.8 million. Balance sheet contraction was driven primarily by decreases in available-for-sale securities, noninterest bearing deposits and borrowings during the first three months of 2023. Available-for-sale securities decreased $77.2 million, noninterest bearing deposits decreased $188.7 million and total borrowings decreased $97.0 million. Offsetting these decreases were increases to short-term investments of $36.9 million, loans, net ~~occupancy~~of the allowance for credit losses, of $45.9 million and interest bearing deposits of $245.8 million.

Uses of Funds

Total Cash and Cash Equivalents

Total cash and cash equivalents increased by $23.2 million, or 17.8%, to $153.5 million at March 31, 2023, from $130.3 million at December 31, 2022. Cash and cash equivalents include short-term investments. The increase in cash and cash equivalents at March 31, 2023 was driven by an increase in interest bearing short-term investment accounts of $36.9 million, or 74.8%, offset by a decrease in cash and due from banks of $13.7 million, or 16.9%. These fluctuations are reflective of a normalization of activity as excess levels of liquidity experienced throughout 2021 and 2022 have decreased through deployments of cash to the investment securities portfolio and utilization of excess cash balances by deposit customers.

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expense was caused by budgeted repairs to company facilities. Salaries and employee benefits decreased by $964,000, or 6.1%, and professional fees decreased $425,000, or 23.1%. The decrease to salary and benefits was driven by reduced deferred compensation expense, which is tied to equity market performance of the underlying funds which are directed by the plan participants, and the reduction in professional fees was a result of reduced legal expenses during the second quarter of 2022.

The Company's efficiency ratio was 47.8% for the six months ended June 30, 2022 compared to 48.0% for the first six months of 2021. The Company's efficiency ratio was 47.2% for the second quarter of 2022 and 48.5% for the second quarter of 2021.

~~As previously disclosed, in the third quarter of 2019, the Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned~~ ~~In re Interlogic Outsourcing, Inc., et al~~., which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and has agreed to stay prosecution of the action through August 31, 2022. The action is focused on a series of business transactions among the client, related entities, and the Bank, which the liquidating trustee alleges are voidable under applicable federal bankruptcy and state law. The complaint also addresses treatment of the Bank’s claims filed in the bankruptcy cases. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank and the Company intend to vigorously defend themselves against all allegations asserted in the complaint.

The Company's income tax expense decreased $612,000, or 5.7%, in the six months ended June 30, 2022 compared to the same period in 2021. The effective tax rate was 17.0% in the six months ended June 30, 2022, compared to 18.5% for the comparable period of 2021. The year-to-date effective tax rate for 2022 decreased as compared to the prior year primarily due to a higher percentage of income being derived from tax-advantaged sources as well as a larger tax benefit from stock-based compensation payments.

~~FINANCIAL CONDITION~~

~~Overview~~

Total assets of the Company were $6.265 billion as of June 30, 2022, a decrease of $292.2 million, when compared to $6.557 billion as of December 31, 2021. This decrease was primarily due to a $513.7 million decrease in cash and cash equivalents, offset by increases in loans net of the allowance for credit losses of $137.1 million, other assets of $58.4 million and secruities of $29.4 million. Loans excluding PPP loans increased by $157.8 million, or 3.7%, from $4.262 billion at December 31, 2021 to $4.419 billion at June 30, 2022. Total deposits decreased $113.8 million, or 2.0%. The decrease in deposits was primarily driven by contraction in retail and commercial deposits, which declined $117.5 million and $169.9 million, respectively. Public funds deposits increased by $173.5 million since year end. Core deposits were $5.612 billion as of June 30, 2022 compared to $5.725 billion as of December 31, 2021.

~~Uses of Funds~~

~~Total Cash and Cash Equivalents~~

Total cash and cash equivalents decreased by $513.7 million, or 75.2%, to $169.5 million at June 30, 2022, from $683.2 million at December 31, 2021. The decrease in cash and cash equivalents at June 30, 2022 reflects an additional deployment of $250 million in funds to the available-for-sale investment securities portfolio, funding of loan growth of $157.8 million, and repayment of an FHLB advance of $75.0 million. Cash and cash equivalents include short-term investments. Short-term investments include cash on deposit that earns interest such as excess liquidity maintained at the Federal Reserve Bank. Cash and cash equivalents balances will vary depending on the cyclical nature of the bank’s liquidity position.

~~Table of Contents~~

Investment Portfolio

The Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity on April 1, 2022 as an overall balance sheet management strategy. The fair value of securities transferred was $127.0 million. The amortized cost and the fair value of securities as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were as follows:


		June 30, 2022				December 31, 2021					March 31, 2023				December 31, 2022
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-Sale	Available-for-Sale									Available-for-Sale
U.S Treasury securities	U.S Treasury securities	$	2,249	$	2,234	$	900	$	900	U.S Treasury securities	$	3,363	$	3,352	$	3,057	$	3,034
U.S government sponsored agencies	U.S government sponsored agencies	161,587		142,261		145,858		143,452		U.S government sponsored agencies	153,928		127,995		156,184		126,961
Mortgage-backed securities: residential	Mortgage-backed securities: residential	619,651		558,122		487,157		486,676		Mortgage-backed securities: residential	561,865		484,462		578,175		492,308
Mortgage-backed securities: commercial		0		0		522		523

State and municipal securities	State and municipal securities	692,698		597,963		742,532		767,007		State and municipal securities	577,603		492,472		663,367		563,225
Total Available-for-Sale		$	1,476,185	$	1,300,580	$	1,376,969	$	1,398,558
Total available-for-sale										Total available-for-sale	$	1,296,759	$	1,108,281	$	1,400,783	$	1,185,528

Held-to-maturity
Held-to-Maturity										Held-to-Maturity
State and municipal securities	State and municipal securities	$	127,411	$	113,350	$	0	$	0	State and municipal securities	$	128,651	$	115,533	$	128,242	$	111,029
Total Held-to-Maturity		$	127,411	$	113,350	$	0	$	0

Total Investment Portfolio	Total Investment Portfolio	$	1,603,596	$	1,413,930	$	1,376,969	$	1,398,558	Total Investment Portfolio	$	1,425,410	$	1,223,814	$	1,529,025	$	1,296,557

At ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, there were no holdings of securities of any one issuer, other than the U.S. government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity. Management is aware that, as interest rates rise, any unrealized loss in the available-for-sale investment securities portfolio will increase, and as interest rates fall the unrealized gain in the investment portfolio will rise. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses.

Purchases of securities available-for-sale totaled ~~$313.9~~$4.0 million in the first ~~six~~three months of ~~2022.~~2023. The purchases consisted of U.S. Treasury securities ~~securities issued by government sponsored entities,~~and mortgage-backed securities issued by government sponsored ~~entities and state and municipal securities. The investment security purchases reflect the deployment of excess liquidity to the available-for-sale investment securities portfolio.~~entities. Investment securities represented ~~22.8%~~19.3% of total assets on ~~June 30, 2022~~March 31, 2023, compared to ~~21.3%~~20.4% of total assets on December 31, ~~2021.~~2022. The ~~Company paused additions~~ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 14%. The increase in this ratio resulted from the deployment of excess liquidity during 2021 and 2022 to the investment securities portfolio ~~at the end~~as an earning asset alternative of ~~the second quarter as~~ excess ~~liquidity on the~~ balance sheet ~~was reduced by loan growth and deposit outflows during the quarter. Management~~liquidity stemming from increased levels of core deposits from government stimulus programs. The Company expects ~~to use cash flows from the investment securities portfolio to help fund loan growth and for~~ the investment securities portfolio to represent a lower ~~percent~~percentage of total assets over ~~time.~~time as proceeds from pay downs, sales and maturities of these investment securities are used to fund loan portfolio growth and for other general liquidity purposes. Paydowns from prepayments and scheduled payments of ~~$53.9~~$13.0 million were received in the first ~~six~~three months of ~~2022,~~2023, and the amortization of premiums, net of the accretion of discounts, was ~~$3.2~~$1.2 million. Maturities and calls of securities totaled ~~$5.7~~$6.1 million in the first ~~six~~three months of ~~2022. There were no sales~~2023. Sales of available-for-sale investment securities totaled $87.5 million in the first ~~six~~three months of ~~2022.~~2023 and resulted in net gains of $16,000. No allowance for credit losses was recognized for available-for-sale or held-to-maturity ~~securites in the first six months~~securities as of March 31, 2023 and December 31, 2022.

The fair value of the available-for-sale investment securities portfolio as of ~~June 30, 2022~~March 31, 2023 included annet unrealized losses of ~~$175.6~~$188.5 million compared to net unrealized ~~gains~~losses of ~~$21.6~~$215.3 million as of December 31, ~~2021.~~2022. Unrealized losses in the available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities. These declines were driven by the rising interest ~~rates during~~rate environment as a result of the ~~first six months~~Federal Reserve's monetary tightening policy to combat elevated levels of ~~2022.~~inflation affecting the U.S. economy.

The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities ~~portfolio to a minimal level.~~portfolio. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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Real Estate Mortgage Loans Held-for-Sale

Real estate mortgage loans held-for-sale ~~decreased~~increased by ~~$4.8 million,~~$151,000, or ~~64.6%~~42.3%, to ~~$2.6 million~~$508,000 at ~~June 30, 2022,~~March 31, 2023, from ~~$7.5 million~~$357,000 at December 31, ~~2021.~~2022. The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled ~~$28.4~~$672,000 in the first three months of 2023 compared to $18.1 million in the first ~~six~~three months of ~~2022 compared to $71.0 million in the first six months of 2021.~~2022. Management expects the volume of loans originated for sale in the secondary market to ~~decline as compared to volumes originated in 2021~~remain at reduced levels due to the rise in mortgage ~~interest rates that have occurred during the first half of 2022.~~rates. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of ~~these~~ loans serviced for others were ~~$379.8~~$355.9 million and ~~$375.4~~$364.3 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Loan Portfolio

The loan portfolio by portfolio segment as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is summarized as follows:


(dollars in thousands)	(dollars in thousands)	June 30, 2022				December 31, 2021				Current Period Change		(dollars in thousands)	March 31, 2023				December 31, 2022				Current Period Change
Commercial and industrial loans	Commercial and industrial loans	$	1,529,792	34.6	%	$	1,389,469	32.4	%	$	140,323	Commercial and industrial loans	$	1,459,618	30.7	%	$	1,493,049	31.7	%	$	(33,431)
Commercial real estate and multi-family residential loans	Commercial real estate and multi-family residential loans	1,954,167		44.1		1,954,846		45.6		(679)		Commercial real estate and multi-family residential loans	2,265,756		47.5		2,179,094		46.2		86,662
Agri-business and agricultural loans	Agri-business and agricultural loans	387,902		8.8		445,825		10.4		(57,923)		Agri-business and agricultural loans	392,982		8.3		432,088		9.2		(39,106)
Other commercial loans	Other commercial loans	93,157		2.1		73,490		1.7		19,667		Other commercial loans	132,284		2.8		113,593		2.4		18,691
Consumer 1-4 family mortgage loans	Consumer 1-4 family mortgage loans	373,512		8.4		344,720		8.0		28,792		Consumer 1-4 family mortgage loans	417,916		8.8		407,566		8.6		10,350
Other consumer loans	Other consumer loans	88,683		2.0		82,755		1.9		5,928		Other consumer loans	89,734		1.9		88,075		1.9		1,659
Subtotal, gross loans	Subtotal, gross loans	4,427,213		100.0	%	4,291,105		100.0	%	136,108		Subtotal, gross loans	4,758,290		100.0	%	4,713,465		100.0	%	44,825
Less: Allowance for credit losses	Less: Allowance for credit losses	(67,523)				(67,773)				250		Less: Allowance for credit losses	(71,215)				(72,606)				1,391
Net deferred loan fees	Net deferred loan fees	(2,514)				(3,264)				750		Net deferred loan fees	(3,362)				(3,069)				(293)
Loans, net	Loans, net	$	4,357,176			$	4,220,068			$	137,108	Loans, net	$	4,683,713			$	4,637,790			$	45,923

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by ~~$136.1~~$44.8 million to ~~$4.427~~$4.758 billion at ~~June 30, 2022~~March 31, 2023 from ~~$4.291~~$4.713 billion at December 31, ~~2021.~~2022. The increase was primarily driven by originations of loans concentrated in the commercial real estate and ~~industrial~~multi-famly residential, other commercial, and consumer 1-4 family mortgage loans categories and was offset by ~~seasonal~~ paydowns in commercial and industrial loans and the agri-business and agricultural loans segments, the latter of which traditionally experiences seasonal fluctuations in activity.

The following table summarizes the Company’s non-performing assets as of March 31, 2023 and ~~forgiveness of outstanding PPP loans.~~ December 31, 2022:


(dollars in thousands)	March 31, 2023			December 31, 2022
Nonaccrual loans	$	17,715		$	16,964
Loans past due over 90 days and still accruing	25			123
Total nonperforming loans	17,740			17,087
Other real estate owned	100			100
Repossessions	82			37
Total nonperforming assets	$	17,922		$	17,224

Individually analyzed loans	$	18,188		$	31,327

Nonperforming loans to total loans	0.37		%	0.36		%
Nonperforming assets to total assets	0.28		%	0.27		%

Total ~~loans excluding PPP loans~~nonperforming assets increased by ~~$157.8~~$698,000, or 4.1%, to $17.9 million asduring the three month period ended March 31, 2023. The ratio of ~~June 30, 2022 as compared~~nonperforming assets to total assets increased from 0.27% at December 31, ~~2021.~~2022 to 0.28% at March 31, 2023.

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~~The following table summarizes the Company’s non-performing assets as of June 30, 2022 and December 31, 2021:~~

(dollars in thousands) June 30,
2022 December 31,
2021
Nonaccrual loans including nonaccrual troubled debt restructured loans (1) $ 12,494 $ 14,973
Loans past due over 90 days and still accruing 105 117
Total nonperforming loans 12,599 15,090
Other real estate owned 196 196
Repossessions 0 0
Total nonperforming assets $ 12,795 $ 15,286
Individually analyzed loans including troubled debt restructurings (1) $ 19,986 $ 25,581
Nonperforming loans to total loans 0.28 % 0.35 %
Nonperforming assets to total assets 0.20 % 0.23 %
Performing troubled debt restructured loans (1) $ 0 $ 5,121
Nonperforming troubled debt restructured loans (included in nonaccrual loans) (1) 0 6,218
Total troubled debt restructured loans (1) $ 0 $ 11,339

~~(1) On April 1, 2022, the Company adopted certain aspects of ASU 2022-02, whereby the Company no longer recognizes or accounts for TDRs. Adoption of this standard was retrospective to January 1, 2022.~~

Total nonperforming assets decreased by $2.5 million, or 16.3%, to $12.8 million during the six month period ended June 30, 2022. The ratio of nonperforming assets to total assets at June 30, 2022 decreased from 0.23% at December 31, 2021 to 0.20% at June 30, 2022.

A loan is individually analyzed when full payment under the original loan terms is not expected. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral. Total individually analyzed loans decreased by ~~$5.6~~$13.1 million, or 41.9%, to ~~$20.0~~$18.2 million at ~~June 30, 2022~~March 31, 2023 from ~~$25.6~~$31.3 million at December 31, ~~2021.~~2022.

Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb current expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other current expected losses in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. General allowance is determined after considering the following factors: application of loss percentages using a probability of default/loss given default approach subject to a floor, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention applies to loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for credit losses for any assets where management has identified conditions or circumstances that indicate an asset is nonperforming. If an asset or portion, thereof is classified as a loss, the Company’s policy is to either establish specified allowances for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.

At ~~June 30, 2022,~~March 31, 2023, the allowance for credit losses was ~~1.53%~~1.50% of total loans outstanding, versus ~~1.58%~~1.54% of total loans outstanding at December 31, ~~2021.~~2022. At ~~June 30, 2022,~~March 31, 2023, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge offs and delinquencies could rise and require increases in the allowance for credit losses. The process of identifying credit losses is a subjective process.

~~Table of Contents~~

The Company has a relatively high percentage of commercial and commercial real estate loans, which are extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area. The Company has limited exposure to commercial office space borrowers. Loans totaling $33.6 million for this sector represent 0.71% of total loans at March 31, 2023.

As of ~~June 30, 2022,~~March 31, 2023, based on management’s review of the loan portfolio, the Company had 5759 credit relationships totaling ~~$192.1~~$174.9 million on the classified loan list versus 8158 credit relationships totaling ~~$234.5~~$161.0 million onas of December 31, ~~2021.~~2022. The ~~decrease~~increase in classified loans for the first ~~six~~three months of ~~2022~~2023 resulted primarily from ~~paydowns and~~ borrower risk rating ~~upgrades~~downgrades of pass rated loans to ~~previously classified loans on~~ the non-individually analyzed portion of the ~~watchlist.~~watch list. As of ~~June 30, 2022,~~March 31, 2023, the Company had ~~$149.8~~$142.6 million of assets classified as Special Mention, ~~$42.3~~$32.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to ~~$176.6~~$115.7 million, ~~$57.9~~$45.3 million, $0 and $0, respectively, at December 31, ~~2021.~~2022. Watch list loans as a percentage of total loans increased to 3.68% as of March 31, 2023, up from a historical low at 3.42% as of December 31, 2022.

Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions and a reasonably supportable forecast period. The Company has annual discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio based upon loan segment. In accordance with ~~CECL~~applicable accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. For a more thorough discussion of the allowance for credit losses methodology see the ("Critical Accounting ~~Policies~~Policies") section of this Item 2.

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The allowance for credit losses decreased ~~$250,000,~~$1.4 million, from ~~$67.8~~$72.6 million at December 31, ~~2021~~2022 to ~~$67.5~~$71.2 million at ~~June 30, 2022. Most~~March 31, 2023. The decrease was a result of net charge offs recorded during the quarter of $5.7 million, offset by provision expense of $4.4 million. Of the $5.7 million in net charge offs, $5.5 million was attributable to the previously described deteriorated commercial relationship which was reserved for in the allowance for credit losses. The increased provision expense recorded during the first quarter of 2023 was primarily attributable to increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and the potential economic weakness in the Company's markets. As the bulk of the Company’s ~~recent loan growth has been~~lending activity is concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of ~~credits. Management~~credits, management has historically considered growth and portfolio composition when determining credit loss allocations.

Sources of Funds

The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes approximately 130,000 commercial, retail and public funds deposit accounts. While the traditional base of core deposits represents the primary source of funding for the Company, the Company has access to a robust array of other liquidity sources, including secured borrowings available from the Federal Home Loan Bank, the Federal Reserve Bank Discount Window and the Federal Reserve Bank Term Funding Program. In addition, the Company has access to unsecured borrowing capacity through long established relationships within the brokered deposit markets, Federal Funds lines from correspondent bank partners and Insured Cash Sweep (ICS) one-way buy funds available from the Intrafi network. As of March 31, 2023, the Company had access to $3.03 billion in unused liquidity available from these aggregate sources compared to $2.99 billion at December 31, 2022.

The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ are summarized in the following table:


		Six months ended June 30,									Three months ended March 31,
		2022				2021					2023				2022
(dollars in thousands)	(dollars in thousands)	Balance		Rate		Balance		Rate		(dollars in thousands)	Balance		Rate		Balance		Rate
Noninterest bearing demand deposits	Noninterest bearing demand deposits	$	1,895,333	0.00	%	$	1,600,052	0.00	%	Noninterest bearing demand deposits	$	1,662,530	0.00	%	$	1,966,117	0.00	%
Savings and transaction accounts:	Savings and transaction accounts:									Savings and transaction accounts:
Savings deposits	Savings deposits	416,755		0.08		344,859		0.08		Savings deposits	392,567		0.07		408,314		0.07
Interest bearing demand deposits	Interest bearing demand deposits	2,676,528		0.43		2,306,026		0.28		Interest bearing demand deposits	2,757,120		3.15		2,642,003		0.29
Time deposits:	Time deposits:			.						Time deposits:			.
Deposits of $100,000 or more	Deposits of $100,000 or more	617,824		0.49		767,324		0.94		Deposits of $100,000 or more	494,873		2.30		633,947		0.51
Other time deposits	Other time deposits	193,873		0.68		229,617		1.05		Other time deposits	180,502		1.44		198,257		0.71
Total deposits	Total deposits	$	5,800,313	0.28	%	$	5,247,878	0.31	%	Total deposits	$	5,487,592	1.84	%	$	5,848,638	0.21	%
FHLB advances and other borrowings	FHLB advances and other borrowings	64,654		0.40		75,754		0.41		FHLB advances and other borrowings	241,870		4.67		75,026		0.39
Total funding sources	Total funding sources	$	5,864,967	0.28	%	$	5,323,632	0.31	%	Total funding sources	$	5,729,462	1.96	%	$	5,923,664	0.22	%

Average total deposits were $5.488 billion for the first quarter of 2023, a decrease of $361.0 million, or 6.2%, from the first quarter of 2022. Average total borrowings were $241.9 million for the first quarter of 2023, an increase of $166.8 million from the first quarter of 2023.

Deposits and Borrowings

As of ~~June 30, 2022,~~March 31, 2023, total deposits ~~decreased~~increased by ~~$113.8~~$57.1 million, or ~~2.0%~~1.0%, from December 31, ~~2021.~~2022. Core deposits, which excludes brokered deposits, decreased by ~~$113.8~~$93.5 million, or 1.7%, to ~~$5.612~~$5.357 billion as of ~~June 30, 2022~~March 31, 2023 from ~~$5.725~~$5.451 billion as of December 31, ~~2021.~~2022. Total brokered deposits were ~~$10.0~~$160.7 million at ~~June 30, 2022~~March 31, 2023 compared to $10.0 million at December 31, ~~2021 reflecting a $5,000 increase during the first six months of~~ 2022.

Since December 31, 2021, the change in core deposits was comprised of increases in public funds deposits of $173.5 million, and decreases of commercial deposits of $169.9 million, and retail deposits of $117.5 million. Total public

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~~funds deposits, including public funds transaction accounts, were $1.458 billion at June 30, 2022 and $1.285 billion at December 31, 2021.~~

The following table summarizes deposit composition at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


(dollars in thousands)	(dollars in thousands)	June 30, 2022		December 31, 2021		Current Period Change		(dollars in thousands)	March 31, 2023		Percentage of Total		December 31, 2022		Percentage of Total		Current Period Change
Retail	Retail	$	2,061,051	$	2,178,534	$	(117,483)	Retail	$	1,894,707	34.3	%	$	1,934,787	35.4	%	$	(40,080)
Commercial	Commercial	2,092,346		2,262,229		(169,883)		Commercial	2,105,512		38.2		2,085,934		38.2		19,578
Public funds	Public funds	1,458,179		1,284,641		173,538		Public funds	1,356,851		24.6		1,429,872		26.2		(73,021)
Core deposits	Core deposits	$	5,611,576	$	5,725,404	$	(113,828)	Core deposits	$	5,357,070	97.1	%	$	5,450,593	99.8	%	$	(93,523)
Brokered deposits	Brokered deposits	10,008		10,003		5		Brokered deposits	160,658		2.9		10,027		0.2		150,631
Total deposits	Total deposits	$	5,621,584	$	5,735,407	$	(113,823)	Total deposits	$	5,517,728	100.0	%	$	5,460,620	100.0	%	$	57,108

~~During~~Commercial, retail and public funds deposit composition remained stable between March 31, 2023 and December 31, 2022. On March 31, 2023 and December 31, 2022, commercial deposits represented 38% of total deposits. Retail deposits represented 34% at March 31, 2023 versus 35% at December 31, 2022. Public Funds deposits represented 25% at March 31, 2023 versus 26% at December 31, 2022. Commercial deposits grew $19.6 million, or 0.9%, from $2.086 billion at December 31, 2022; retail deposits contracted $40.1 million, or 2.1%, from $1.935 billion at December 31, 2022; and public funds deposits contracted $73.0 million, or 5.1%, from $1.430 billion at December 31, 2022. Commercial checking accounts increased in number of accounts and balances since year end and average balances per account remain elevated above pre-pandemic levels. Retail checking accounts have increased, but balances have declined. Average retail checking account balances per account have declined modestly but remain elevated above pre-pandemic levels. Public Fund accounts are unchanged, but balances have decreased. Average public fund checking account balances are lower on a linked quarter basis but remain elevated as compared to pre-pandemic levels.

Uninsured deposits, not covered by FDIC deposit insurance or the ~~three months ended June 30,~~Indiana Public Deposit Insurance Fund (PDIF), were 29% of total deposits as of March 31, 2023, versus 30% as of December 31, 2022. Deposits not insured by FDIC Insurance coverage (including the public fund deposits that are covered by the PDIF) were 54% as of March 31, 2023, versus 56% at December 31, 2022. As of March 31, 2023, and December 31, 2022, 98% of deposit accounts have deposit balances less than $250,000 and 2% of accounts have deposit balances greater than $250,000.

Utilization of other sources of liquidity totaled $360.7 million at March 31, 2023, compared to $307.0 million at December 31, 2022, an increase of $53.7 million, or 17.5%. Brokered deposits of $160.7 million at March 31, 2023 drove the ~~Company repaid~~increase up $150.6 million from $10.0 million at December 31, 2022. Total borrowings decreased $97.0 million, or 32.7%, from $297.0 million at December 31, 2022 to $200.0 million at March 31, 2023, driven by a decrease in Federal Funds purchased of $22.0 million, and a decrease in FHLB advances of $75.0 million, putable advance with the FHLB. The Company utilizes wholesale funding, including brokered deposits and Federal Home Loan Bank advances, to supplement funding of assets, which is primarily used for loan and investment securities growth.or 27.3%.

Capital

As of ~~June 30, 2022,~~March 31, 2023, total stockholders’ equity was ~~$562.1~~$602.0 million, ~~a decrease~~an increase of ~~$142.8~~$33.1 million, or ~~20.3%~~5.8%, from ~~$704.9~~$568.9 million at December 31, ~~2021.~~2022. Net income of ~~$49.3~~$24.3 million increased equity. ~~Offsetting the~~In addition, an increase ~~to stockholders’ equity was a decrease~~ of ~~$174.6~~$21.6 million in accumulated other comprehensive income (loss), ~~which was~~ primarily driven by a net ~~decrease~~increase in the fair value of available-for-sale ~~securities.~~securities, contributed to the increase. Dividends declared and paid of ~~$0.80~~$0.46 per share, or ~~$20.4~~$11.7 million, ~~also contributed~~offset the ~~decrease~~increase to total ~~stockholders~~stockholders' equity.

The impact on equity for other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of ~~June 30, 2022,~~March 31, 2023, the Company's capital levels remained characterized as “well-capitalized”.

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The actual capital amounts and ratios of the Company and the Bank as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, are presented in the table below. Capital ratios for ~~June 30, 2022~~March 31, 2023 are preliminary until the Call Report and FR Y-9C are filed.


		Actual				Minimum Required For Capital Adequacy Purposes				For Capital Adequacy Purposes Plus Capital Conservation Buffer				Minimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations					Actual				Minimum Required For Capital Adequacy Purposes				For Capital Adequacy Purposes Plus Capital Conservation Buffer				Minimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations
(dollars in thousands)	(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2022:
As of March 31, 2023:																		As of March 31, 2023:
Total Capital (to Risk Weighted Assets)	Total Capital (to Risk Weighted Assets)																	Total Capital (to Risk Weighted Assets)
Consolidated	Consolidated	$	780,031	15.15	%	$	411,935	8.00	%	$	540,664	N/A		N/A		N/A		Consolidated	$	832,907	15.21	%	$	438,191	8.00	%	$	575,126	N/A		N/A		N/A
Bank	Bank	$	759,555	14.88	%	$	408,286	8.00	%	$	535,876	10.50	%	$	510,358	10.00	%	Bank	$	810,361	14.83	%	$	437,037	8.00	%	$	573,611	10.50	%	$	546,296	10.00	%
Tier I Capital (to Risk Weighted Assets)	Tier I Capital (to Risk Weighted Assets)																	Tier I Capital (to Risk Weighted Assets)
Consolidated	Consolidated	$	715,537	13.90	%	$	308,951	6.00	%	$	437,680	N/A		N/A		N/A		Consolidated	$	764,316	13.95	%	$	328,643	6.00	%	$	465,578	N/A		N/A		N/A
Bank	Bank	$	695,625	13.63	%	$	306,215	6.00	%	$	433,804	8.50	%	$	408,286	8.00	%	Bank	$	741,948	13.58	%	$	327,778	6.00	%	$	464,352	8.50	%	$	437,037	8.00	%
Common Equity Tier 1 (CET1)	Common Equity Tier 1 (CET1)																	Common Equity Tier 1 (CET1)
Consolidated	Consolidated	$	715,537	13.90	%	$	231,713	4.50	%	$	360,443	N/A		N/A		N/A		Consolidated	$	764,316	13.95	%	$	246,483	4.50	%	$	383,417	N/A		N/A		N/A
Bank	Bank	$	695,625	13.63	%	$	229,661	4.50	%	$	357,251	7.00	%	$	331,733	6.50	%	Bank	$	741,948	13.58	%	$	245,833	4.50	%	$	382,407	7.00	%	$	355,092	6.50	%
Tier I Capital (to Average Assets)	Tier I Capital (to Average Assets)																	Tier I Capital (to Average Assets)
Consolidated	Consolidated	$	715,537	10.83	%	$	264,382	4.00	%	$	264,382	N/A		N/A		N/A		Consolidated	$	764,316	11.56	%	$	264,374	4.00	%	$	264,374	N/A		N/A		N/A
Bank	Bank	$	695,625	10.58	%	$	263,088	4.00	%	$	263,088	4.00	%	$	328,860	5.00	%	Bank	$	741,948	11.25	%	$	263,730	4.00	%	$	263,730	4.00	%	$	329,663	5.00	%

As of December 31, 2021:
As of December 31, 2022:																		As of December 31, 2022:
Total Capital (to Risk Weighted Assets)	Total Capital (to Risk Weighted Assets)																	Total Capital (to Risk Weighted Assets)
Consolidated	Consolidated	$	744,421	15.35	%	$	388,020	8.00	%	$	509,276	N/A		N/A		N/A		Consolidated	$	821,008	15.07	%	$	435,786	8.00	%	$	571,969	N/A		N/A		N/A
Bank	Bank	$	726,091	15.01	%	$	387,118	8.00	%	$	508,093	10.50	%	$	483,898	10.00	%	Bank	$	801,044	14.74	%	$	434,758	8.00	%	$	570,620	10.50	%	$	543,448	10.00	%
Tier I Capital (to Risk Weighted Assets)	Tier I Capital (to Risk Weighted Assets)																	Tier I Capital (to Risk Weighted Assets)
Consolidated	Consolidated	$	683,754	14.10	%	$	291,015	6.00	%	$	412,271	N/A		N/A		N/A		Consolidated	$	752,751	13.82	%	$	326,840	6.00	%	$	463,023	N/A		N/A		N/A
Bank	Bank	$	665,424	13.75	%	$	290,339	6.00	%	$	411,313	8.50	%	$	387,118	8.00	%	Bank	$	732,966	13.49	%	$	326,069	6.00	%	$	461,930	8.50	%	$	434,758	8.00	%
Common Equity Tier 1 (CET1)	Common Equity Tier 1 (CET1)																	Common Equity Tier 1 (CET1)
Consolidated	Consolidated	$	683,754	14.10	%	$	218,261	4.50	%	$	339,518	N/A		N/A		N/A		Consolidated	$	752,751	13.82	%	$	245,130	4.50	%	$	381,313	N/A		N/A		N/A
Bank	Bank	$	665,424	13.75	%	$	217,754	4.50	%	$	338,729	7.00	%	$	314,534	6.50	%	Bank	$	732,966	13.49	%	$	244,551	4.50	%	$	380,413	7.00	%	$	353,241	6.50	%
Tier I Capital (to Average Assets)	Tier I Capital (to Average Assets)																	Tier I Capital (to Average Assets)
Consolidated	Consolidated	$	683,754	10.73	%	$	254,898	4.00	%	$	254,898	N/A		N/A		N/A		Consolidated	$	752,751	11.50	%	$	261,859	4.00	%	$	261,859	N/A		N/A		N/A
Bank	Bank	$	665,424	10.46	%	$	254,425	4.00	%	$	254,425	4.00	%	$	318,030	5.00	%	Bank	$	732,966	11.22	%	$	261,222	4.00	%	$	261,222	4.00	%	$	326,527	5.00	%

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FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:

•the effects of future economic, business and market conditions and changes, including prevailing interest rates and the rate of ~~inflation and the effects of the COVID-19 pandemic;~~inflation;

•governmental monetary and fiscal policies and the impact the current economic environment will have on these;

•the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;

•changes in borrowers’ credit risks and payment behaviors;

•the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates;

•~~changes in the prices, values and sales volumes of residential and commercial real estate;~~

•the effects of disruption and volatility in capital markets on the value of our investment portfolio;

•the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

•the risks related to the recent failures of Silicon Valley Bank and Signature Bank, including the effects on FDIC premiums, increased regulation, and increased deposit volatility;

•the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;

•changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages;

•changes in the prices, values and sales volumes of residential and commercial real estate;

•the risk of labor availability, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector;

•changes in the ~~scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages;~~

•~~changes in the~~ availability and cost of credit and capital in the financial markets;

•the outcome of pending litigation and other claims we may be subject to from time to time;

•the anticipated phase out of most LIBOR tenors by mid-2023 and establishment of a new reference rate or rates;

•~~the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;~~

•~~the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;~~

•risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company;

•changes in technology or products that may be more difficult or costly, or less effective than anticipated;

•the effects of any employee or customer fraud;

•the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

•changes in accounting policies, rules and practices;

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•the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; and

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•the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk represents the Company’s primary market risk exposure. The Company does not have a material exposure to foreign currency exchange risk, does not have any material amount of derivative financial instruments and does not maintain a trading portfolio. The Corporate Risk Committee of the Board of Directors annually reviews and approves the policy used to manage interest rate risk. The policy was last reviewed and approved in July 2022. The policy sets guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income but do not necessarily indicate the effect on future net interest income. The Company, through the Bank's Asset and Liability Committee, manages interest rate risk by monitoring the computer simulated earnings impact of various rate scenarios and general market conditions. The Company then modifies its long-term risk parameters by attempting to generate the types of loans, investments, and deposits that currently fit the Company’s needs, as determined by the Asset and Liability Committee. This computer simulation analysis measures the net interest income impact of various interest rate scenario changes during the next twelve months. The Company continually evaluates the assumptions used in the model. The current balance sheet structure is considered to be within acceptable risk levels.

Interest rate scenarios for the base, falling 400 basis points, falling 300 basis points, falling 200 basis points, falling 100 basis points, falling 50 basis points, falling 25 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points, rising 300 basis points and rising ~~300~~400 basis points are listed below based upon the Company’s rate sensitive assets and liabilities at ~~June 30, 2022.~~March 31, 2023. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.

The base scenario is an annual calculation that is highly dependent on numerous assumptions embedded in the model. While the base sensitivity analysis incorporates management’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity core deposit products, such as savings, money market, NOW and demand deposits reflect management’s best estimate of expected future behavior.


(dollars in thousands)	(dollars in thousands)	Base		Falling (100 Basis Points)			Falling (50 Basis Points)			Falling (25 Basis Points)			Rising (25 Basis Points)			Rising (50 Basis Points)			Rising (100 Basis Points)			Rising (200 Basis Points)			Rising (300 Basis Points)			(dollars in thousands)	Base		Falling (300 Basis Points)			Falling (200 Basis Points)			Falling (100 Basis Points)			Falling (50 Basis Points)			Falling (25 Basis Points)			Rising (25 Basis Points)			Rising (50 Basis Points)			Rising (100 Basis Points)			Rising (200 Basis Points)			Rising (300 Basis Points)
Net interest income	Net interest income	$	214,633	$	200,921		$	208,102		$	211,682		$	216,600		$	218,562		$	222,418		$	230,036		$	237,695		Net interest income	$	214,182	$	186,075		$	196,844		$	206,171		$	210,302		$	212,288		$	215,708		$	217,218		$	220,226		$	226,224		$	232,332
Variance from Base	Variance from Base			$	(13,712)		$	(6,531)		$	(2,951)		$	1,967		$	3,929		$	7,785		$	15,403		$	23,062		Variance from Base			$	(28,107)		$	(17,338)		$	(8,011)		$	(3,880)		$	(1,894)		$	1,526		$	3,036		$	6,044		$	12,042		$	18,150
Percent of change from Base	Percent of change from Base			(6.39)		%	(3.04)		%	(1.37)		%	0.92		%	1.83		%	3.63		%	7.18		%	10.74		%	Percent of change from Base			(13.12)		%	(8.09)		%	(3.74)		%	(1.81)		%	(0.88)		%	0.71		%	1.42		%	2.82		%	5.62		%	8.47		%

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ITEM 4 – CONTROLS AND PROCEDURES

As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of ~~June 30, 2022.~~March 31, 2023. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended ~~June 30, 2022,~~March 31, 2023, there were no changes to the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

~~There~~Lakeland Financial Corporation and its subsidiaries are ~~no material~~subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an ongoing basis management, after consultation with legal counsel, assesses the Company's liabilities and contingencies in connection with such proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although the Company does not believe that the outcome of pending legal ~~proceedings~~matters will be material to ~~which~~ the ~~Company or its subsidiaries is~~Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a ~~party other than ordinary routine litigation incidental to their respective businesses.~~particular reporting period in the future.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. of Part I of the Company’s Form 10-K for the year ended December 31, ~~2021.~~2022. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

ISSUER PURCHASES OF EQUITY SECURITIES

On April ~~13, 2021,~~11, 2023, the Company's board of directors reauthorized and extended a share repurchase program through April 30, ~~2023,~~2025, under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company's common stock with an aggregate purchase price of up to $30 million. Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended or discontinued at any time. There were no repurchases under this plan during the three months ended ~~June 30, 2022.~~March 31, 2023.

The following table provides information as of ~~June 30, 2022~~March 31, 2023 with respect to shares of common stock repurchased by the Company during the quarter then ended:

Period Total Number of
Shares Purchased Average Price
Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 - 30 0 $ 0 0 $ 19,998,273
May 1 - 31 987 73.75 0 19,998,273
June 1 - 30 0 0 0 19,998,273
Total 987 $ 73.75 0 $ 19,998,273


Period	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (b)
January 1 - 31	1,685	$	72.70	0	$	19,998,273
February 1 - 28	1,115	72.58		0	19,998,273
March 1 - 31	0	0		0	19,998,273
Total	2,800	$	72.65	0	$	19,998,273

(a)The shares purchased during ~~May~~January and February were credited to the deferred share accounts of non-employee directors under the Company’s directors’ deferred compensation plan. These shares are held in treasury stock of the Company and were purchased in the ordinary course of business and consistent with past practice.

(b)Following the renewal and extension of the Company's share repurchase program on April 11, 2023, the maximum dollar value of shares that may bet be repurchased under the program is $30 million.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

N/A

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Item 5. Other Information

None

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Item 6. Exhibits


31.1			Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2			Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1			Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2			Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101			Interactive Data File
			Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021;~~2022; (ii) Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~June 30, 2021;~~March 31, 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~June 30, 2021;~~March 31, 2022; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~June 30, 2021;~~March 31, 2022; (v) Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~June 30, 2021;~~March 31, 2022; and (vi) Notes to Unaudited Consolidated Financial Statements.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LAKELAND FINANCIAL CORPORATION

(Registrant)


Date: ~~August 3, 2022~~April 26, 2023			/s/ David M. Findlay
			David M. Findlay – President and
			Chief Executive Officer

Date: ~~August 3, 2022~~April 26, 2023			/s/ Lisa M. O’Neill
			Lisa M. O’Neill – Executive Vice President and
			Chief Financial Officer
			(principal financial officer)

Date: ~~August 3, 2022~~April 26, 2023			/s/ Brok A. Lahrman
			Brok A. Lahrman – Senior Vice President and Chief Accounting Officer
			(principal accounting officer)

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	Six Months Ended
	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders’ Equity		Noncontrolling Interest		Total Equity
	Shares	Stock

Balance at January 1, 2021	25,239,748	$	114,927	$	529,005	$	27,744	$	(14,581)	$	657,095	$	89	$	657,184
Adoption of ASU 2016-13				(6,951)						(6,951)				(6,951)
Comprehensive income:
Net income				47,331						47,331				47,331
Other comprehensive income (loss), net of tax						(5,473)				(5,473)				(5,473)
Cash dividends declared and paid, $0.68 per share				(17,322)						(17,322)				(17,322)
Treasury shares purchased under deferred directors' plan	(4,576)	282						(282)		0				0
Treasury shares sold and distributed under deferred directors' plan	5,664	(115)						115		0				0
Stock activity under equity compensation plans	49,130	(1,648)								(1,648)				(1,648)
Stock based compensation expense		4,350								4,350				4,350
Balance at June 30, 2021	25,289,966	$	117,796	$	552,063	$	22,271	$	(14,748)	$	677,382	$	89	$	677,471

Balance at January 1, 2022	25,300,793	120,615		583,134		16,093		(15,025)		$	704,817	$	89	$	704,906
Comprehensive loss:
Net income				49,315						49,315				49,315
Other comprehensive income (loss), net of tax						(174,627)				(174,627)				(174,627)
Cash dividends declared and paid, $0.80 per share				(20,423)						(20,423)				(20,423)
Treasury shares purchased under deferred directors' plan	(3,574)	285						(285)		0				0
Treasury shares sold and distributed under deferred directors' plan	8,555	(221)						221		0				0
Stock activity under equity compensation plans	39,388	(1,728)								(1,728)				(1,728)
Stock based compensation expense		4,620								4,620				4,620
Balance at June 30, 2022	25,345,162	$	123,571	$	612,026	$	(158,534)	$	(15,089)	$	561,974	$	89	$	562,063


	Six Months Ended June 30, 2022
(dollars in thousands)	2022			2021			Dollar Change		Percent Change
Salaries and employee benefits	$	29,190		$	30,147		$	(957)	(3.2)	%
Net occupancy expense	3,317			2,930			387		13.2
Equipment costs	2,870			2,763			107		3.9
Data processing fees and supplies	6,284			6,523			(239)		(3.7)
Corporate and business development	2,652			2,208			444		20.1
FDIC insurance and other regulatory fees	1,058			959			99		10.3
Professional fees	2,973			3,716			(743)		(20.0)
Other expense	6,538			4,148			2,390		57.6
Total noninterest expense	$	54,882		$	53,394		$	1,488	2.8	%
Efficiency ratio	47.8		%	48.0		%


	Three Months Ended June 30, 2022
(dollars in thousands)	2022			2021			Dollar Change		Percent Change
Salaries and employee benefits	$	14,798		$	15,762		$	(964)	(6.1)	%
Net occupancy expense	1,688			1,427			261		18.3
Equipment costs	1,459			1,318			141		10.7
Data processing fees and supplies	3,203			3,204			(1)		0.0
Corporate and business development	1,433			699			734		105.0
FDIC insurance and other regulatory fees	619			495			124		25.1
Professional fees	1,414			1,839			(425)		(23.1)
Other expense	3,299			1,904			1,395		73.3
Total noninterest expense	$	27,913		$	26,648		$	1,265	4.7	%
Efficiency ratio	47.2		%	48.5		%


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 - 30	0	$	0	0	$	19,998,273
May 1 - 31	987	73.75		0	19,998,273
June 1 - 30	0	0		0	19,998,273
Total	987	$	73.75	0	$	19,998,273