SEC Filing | Lake City Bank

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lkfn-20230630

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, 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 26, 2023: 25,433,215

Table of Contents

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets — June 30, 2023 and December 31, 2022	1
	Consolidated Statements of Income — three and six months ended June 30, 2023 and 2022	2
	Consolidated Statements of Comprehensive Income (Loss) — three and six months ended June 30, 2023 and 2022	3
	Consolidated Statements of Changes in Stockholders’ Equity — three and six months ended June 30, 2023 and 2022	4
	Consolidated Statements of Cash Flows — six months ended June 30, 2023 and 2022	6
	Notes to the Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	52
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	54
SIGNATURES		55

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ITEM 1. FINANCIAL STATEMENTS

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


	June 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
Cash and due from banks	$	75,081	$	80,992
Short-term investments	98,056		49,290
Total cash and cash equivalents	173,137		130,282

Securities available-for-sale, at fair value	1,062,069		1,185,528
Securities held-to-maturity, at amortized cost (fair value of $114,264 and $111,029, respectively)	129,070		128,242
Real estate mortgage loans held-for-sale	1,298		357
Loans, net of allowance for credit losses of $72,058 and $72,606	4,790,202		4,637,790
Land, premises and equipment, net	58,839		58,097
Bank owned life insurance	107,738		108,407
Federal Reserve and Federal Home Loan Bank stock	21,420		15,795
Accrued interest receivable	27,398		27,994
Goodwill	4,970		4,970
Other assets	133,405		134,909
Total assets	$	6,509,546	$	6,432,371


LIABILITIES
Noninterest bearing deposits	$	1,438,030	$	1,736,761
Interest bearing deposits	3,985,029		3,723,859
Total deposits	5,423,059		5,460,620

Federal Funds purchased	0		22,000
Federal Home Loan Bank advances	400,000		275,000
Total borrowings	400,000		297,000

Accrued interest payable	9,833		3,186
Other liabilities	84,659		102,678
Total liabilities	5,917,551		5,863,484

STOCKHOLDERS’ EQUITY
Common stock: 90,000,000 shares authorized, no par value
25,896,764 shares issued and 25,429,216 outstanding as of June 30, 2023
25,825,127 shares issued and 25,349,225 outstanding as of December 31, 2022	123,367		127,004
Retained earnings	661,447		646,100
Accumulated other comprehensive income (loss)	(177,645)		(188,923)
Treasury stock at cost (467,548 shares as of June 30, 2023, 475,902 shares as of December 31, 2022)	(15,263)		(15,383)
Total stockholders’ equity	591,906		568,798
Noncontrolling interest	89		89
Total equity	591,995		568,887
Total liabilities and equity	$	6,509,546	$	6,432,371

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
NET INTEREST INCOME
Interest and fees on loans
Taxable	$	75,047	$	44,138	$	144,589	$	83,873
Tax exempt	960		280		1,861		449
Interest and dividends on securities
Taxable	3,376		3,727		6,889		7,005
Tax exempt	4,064		4,994		8,364		9,600
Other interest income	1,035		483		1,999		729
Total interest income	84,482		53,622		163,702		101,656

Interest on deposits	33,611		4,890		58,529		7,971
Interest on borrowings
Short-term	2,347		0		5,130		0
Long-term	0		54		0		127
Total interest expense	35,958		4,944		63,659		8,098

NET INTEREST INCOME	48,524		48,678		100,043		93,558

Provision for credit losses	800		0		5,150		417

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	47,724		48,678		94,893		93,141

NONINTEREST INCOME
Wealth advisory fees	2,271		2,204		4,471		4,491
Investment brokerage fees	428		541		962		1,060
Service charges on deposit accounts	2,726		2,882		5,356		5,691
Loan and service fees	3,002		3,195		5,848		6,084
Merchant card fee income	929		904		1,806		1,719
Bank owned life insurance income (loss)	693		(183)		1,384		(266)
Interest rate swap fee income	794		354		794		404
Mortgage banking income (loss)	(35)		351		(134)		860
Net securities gains	3		0		19		0
Other income	690		244		1,309		1,136
Total noninterest income	11,501		10,492		21,815		21,179

NONINTEREST EXPENSE
Salaries and employee benefits	11,374		14,798		27,437		29,190
Net occupancy expense	1,681		1,688		3,253		3,317
Equipment costs	1,426		1,459		2,864		2,870
Data processing fees and supplies	3,474		3,203		6,926		6,284
Corporate and business development	1,298		1,433		2,729		2,652
FDIC insurance and other regulatory fees	803		619		1,598		1,058
Professional fees	2,049		1,414		4,170		2,973
Wire fraud loss	18,058		0		18,058		0
Other expense	2,571		3,299		5,133		6,538
Total noninterest expense	42,734		27,913		72,168		54,882

INCOME BEFORE INCOME TAX EXPENSE	16,491		31,257		44,540		59,438
Income tax expense	1,880		5,584		5,651		10,123
NET INCOME	$	14,611	$	25,673	$	38,889	$	49,315

BASIC WEIGHTED AVERAGE COMMON SHARES	25,607,663		25,527,896		25,595,412		25,521,618

BASIC EARNINGS PER COMMON SHARE	$	0.57	$	1.00	$	1.52	$	1.93

DILUTED WEIGHTED AVERAGE COMMON SHARES	25,686,354		25,697,577		25,696,370		25,699,908

DILUTED EARNINGS PER COMMON SHARE	$	0.57	$	1.00	$	1.51	$	1.92

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	14,611	$	25,673	$	38,889	$	49,315
Other comprehensive income (loss)
Change in available-for-sale and transferred securities:
Unrealized holding gain (loss) on securities available-for-sale arising during the period	(13,511)		(82,609)		13,282		(221,605)
Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity	494		386		985		386
Reclassification adjustment for gains included in net income	(3)		0		(19)		0
Net securities gain (loss) activity during the period	(13,020)		(82,223)		14,248		(221,219)
Tax effect	2,734		17,349		(2,992)		46,538
Net of tax amount	(10,286)		(64,874)		11,256		(174,681)
Defined benefit pension plans:
Amortization of net actuarial loss	15		36		30		72
Net gain activity during the period	15		36		30		72
Tax effect	(4)		(9)		(8)		(18)
Net of tax amount	11		27		22		54
Total other comprehensive income (loss), net of tax	(10,275)		(64,847)		11,278		(174,627)
Comprehensive income (loss)	$	4,336	$	(39,174)	$	50,167	$	(125,312)

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

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


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

Balance at April 1, 2022	25,346,149	$	121,138	$	596,578	$	(93,687)	$	(15,016)	$	609,013	$	89	$	609,102
Comprehensive loss:
Net income				25,673						25,673				25,673
Other comprehensive income (loss), net of tax						(64,847)				(64,847)				(64,847)
Cash dividends declared and paid, $0.40 per share				(10,225)						(10,225)				(10,225)
Treasury shares purchased under deferred directors' plan	(987)	73						(73)		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		2,360								2,360				2,360
Balance at June 30, 2022	25,345,162	$	123,571	$	612,026	$	(158,534)	$	(15,089)	$	561,974	$	89	$	562,063

Balance at April 1, 2023	25,430,917	$	125,840	$	658,629	$	(167,370)	$	(15,182)	$	601,917	$	89	$	602,006
Comprehensive income:
Net income				14,611						14,611				14,611
Other comprehensive income (loss), net of tax						(10,275)				(10,275)				(10,275)
Cash dividends declared and paid, $0.46 per share				(11,793)						(11,793)				(11,793)
Treasury shares purchased under deferred directors' plan	(1,701)	81						(81)		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		(2,554)								(2,554)				(2,554)
Balance at June 30, 2023	25,429,216	$	123,367	$	661,447	$	(177,645)	$	(15,263)	$	591,906	$	89	$	591,995

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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, 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

Balance at January 1, 2023	25,349,225	$	127,004	$	646,100	$	(188,923)	$	(15,383)	$	568,798	$	89	$	568,887
Comprehensive income:
Net income				38,889						38,889				38,889
Other comprehensive income (loss), net of tax						11,278				11,278				11,278
Cash dividends declared and paid, $0.92 per share				(23,542)						(23,542)				(23,542)
Treasury shares purchased under deferred directors' plan	(4,501)	285						(285)		0				0
Treasury shares sold and distributed under deferred directors' plan	12,855	(405)						405		0				0
Stock activity under equity compensation plans	71,637	(3,124)								(3,124)				(3,124)
Stock based compensation expense		(393)								(393)				(393)
Balance at June 30, 2023	25,429,216	$	123,367	$	661,447	$	(177,645)	$	(15,263)	$	591,906	$	89	$	591,995

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)


Six Months Ended June 30,	2023		2022
Cash flows from operating activities:
Net income	$	38,889	$	49,315
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	3,069		3,020
Provision for credit losses	5,150		417

Amortization of loan servicing rights	286		385
Net change in loan servicing rights valuation allowance	0		(701)
Loans originated for sale, including participations	(4,266)		(23,082)
Net gain on sales of loans	(127)		(777)
Proceeds from sale of loans, including participations	3,421		28,430
Net (gain) loss on sales of premises and equipment	(1)		1
Net gain on sales and calls of securities available-for-sale	(19)		0
Net securities amortization	2,369		3,245
Stock based compensation expense	(393)		4,620
Losses (earnings) on life insurance	(1,384)		266

Tax benefit of stock award issuances	(720)		(500)
Net change:
Interest receivable and other assets	(1,411)		165
Interest payable and other liabilities	(7,958)		26,355
Total adjustments	(1,984)		41,844
Net cash from operating activities	36,905		91,159

Cash flows from investing activities:
Proceeds from sale of securities available-for-sale	99,951		0
Proceeds from maturities, calls and principal paydowns of securities available-for-sale	38,886		59,617
Proceeds from maturities, calls and principal paydowns of securities held-to-maturity	6		5
Purchases of securities available-for-sale	(4,314)		(313,905)
Purchase of life insurance	(191)		(657)
Net (increase) decrease in total loans	(157,846)		(137,525)
Proceeds from sales of land, premises and equipment	13		1
Purchases of land, premises and equipment	(3,823)		(2,314)
Purchase of Federal Home Loan Bank stock	(5,625)		0
Proceeds from redemption of Federal Home Loan Bank stock	0		932


Net cash from investing activities	(32,943)		(393,846)

Cash flows from financing activities:
Net increase (decrease) in total deposits	(37,561)		(113,823)
Net increase (decrease) in short-term borrowings	(22,000)		0
Payments on long-term FHLB borrowings	0		(75,000)
Proceeds from short-term FHLB borrowings	125,000		0

Common dividends paid	(23,529)		(20,410)
Preferred dividends paid	(13)		(13)
Payments related to equity incentive plans	(3,124)		(1,728)
Purchase of treasury stock	(285)		(285)
Sale of treasury stock	405		221
Net cash from financing activities	38,893		(211,038)
Net change in cash and cash equivalents	42,855		(513,725)
Cash and cash equivalents at beginning of the period	130,282		683,240
Cash and cash equivalents at end of the period	173,137		169,515
Cash paid during the period for:
Interest	$	57,011	$	8,768
Income taxes	7,125		7,065
Supplemental non-cash disclosures:
Loans transferred to other real estate owned	284		0

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.

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NOTE 1. BASIS OF PRESENTATION

This report is filed for Lakeland Financial Corporation (the "Company"), which has two 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, 2023 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2023. The Company’s 2022 Annual Report on Form 10-K should be read in conjunction with these statements.

Adoption of New Accounting Standards

On March 31, 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures." The update 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 update is available for entities that have adopted the amendments in update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company elected to early adopt the provisions of the ASU related to the discontinuance of TDR reporting, with retrospective application of modification reporting effective starting January 1, 2022. The Company adopted the provisions related to reporting of current-period gross write-offs within the vintage disclosures effective January 1, 2023. The adoption of the 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 update 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 transitioned LIBOR-based loans to an alternative reference rate before June 30, 2023. On December 22, 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (ASC 848): Deferral of 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 was effective immediately upon issuance. The Company adopted the LIBOR transition relief allowed under this standard, and does not expect final adoption 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 certain 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, the provisions shall be adopted 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)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
June 30, 2023
U.S. Treasury securities	$	3,251	$	0	$	(19)	$	0	$	3,232
U.S. government sponsored agencies	151,029		0		(28,943)		0		122,086
Mortgage-backed securities: residential	545,616		34		(83,617)		0		462,033

State and municipal securities	564,165		10		(89,457)		0		474,718
Total	$	1,264,061	$	44	$	(202,036)	$	0	$	1,062,069

December 31, 2022
U.S. Treasury securities	$	3,057	$	0	$	(23)	$	0	$	3,034
U.S. government sponsored agencies	156,184		0		(29,223)		0		126,961
Mortgage-backed securities: residential	578,175		67		(85,934)		0		492,308

State and municipal securities	663,367		157		(100,299)		0		563,225
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)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
June 30, 2023
State and municipal securities	$	129,070	$	0	$	(14,806)	$	0	$	114,264

December 31, 2022
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 as an overall balance sheet management 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) based on the fair value of the securities on the transfer date and was $21.9 million ($17.3 million, net of tax) at June 30, 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 have been no subsequent transfers of securities from available-for-sale to held-to-maturity.

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Information regarding the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by maturity as of June 30, 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
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	4,331	$	4,312	$	0	$	0
Due after one year through five years	8,799		8,052		0		0
Due after five years through ten years	30,996		29,763		0		0
Due after ten years	674,319		557,909		129,070		114,264
	718,445		600,036		129,070		114,264
Mortgage-backed securities	545,616		462,033		0		0
Total debt securities	$	1,264,061	$	1,062,069	$	129,070	$	114,264

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


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2023		2022		2023		2022
Sales of securities available-for-sale
Proceeds	$	12,480	$	0	$	99,951	$	0
Gross gains	28		0		439		0
Gross losses	(25)		0		(420)		0
Number of securities	22		0		103		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 $811.1 million and $298.2 million were pledged as of June 30, 2023 and December 31, 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, 2023 and December 31, 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.

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	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2023
U.S. Treasury securities	$	2,836	$	17	$	396	$	2	$	3,232	$	19
U.S. government sponsored agencies	0		0		122,086		28,943		122,086		28,943
Mortgage-backed securities: residential	23,595		1,374		436,450		82,243		460,045		83,617

State and municipal securities	41,561		1,543		421,684		87,914		463,245		89,457
Total available-for-sale	$	67,992	$	2,934	$	980,616	$	199,102	$	1,048,608	$	202,036

December 31, 2022
U.S. Treasury securities	$	3,034	$	23	$	0	$	0	$	3,034	$	23
U.S. government sponsored agencies	8,420		1,350		118,541		27,873		126,961		29,223
Mortgage-backed securities: residential	165,897		18,637		323,727		67,297		489,624		85,934

State and municipal securities	277,967		33,405		244,436		66,894		522,403		100,299
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, 2023 and December 31, 2022 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.


	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2023
State and municipal securities	$	0	$	0	$	114,264	$	14,806	$	114,264	$	14,806

December 31, 2022
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, 2023 and December 31, 2022 is presented below.


	Available-for-sale			Held-to-maturity
	Less than 12 months	12 months or more	Total	Less than 12 months	12 months or more	Total
June 30, 2023
U.S. Treasury securities	8	1	9	0	0	0
U.S. government sponsored agencies	0	17	17	0	0	0
Mortgage-backed securities: residential	29	102	131	0	0	0

State and municipal securities	56	367	423	0	41	41
Total temporarily impaired	93	487	580	0	41	41

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

State and municipal securities	269	223	492	0	41	41
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 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 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 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.

No allowance for credit losses for available-for-sale or held-to-maturity debt securities was recorded at June 30, 2023 or December 31, 2022. Accrued interest receivable on securities totaled $7.9 million and $8.9 million at June 30, 2023 and December 31, 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)	June 30, 2023				December 31, 2022
Commercial and industrial loans:
Working capital lines of credit loans	$	618,655	12.7	%	$	650,948	13.8	%
Non-working capital loans	851,232		17.5		842,101		17.9
Total commercial and industrial loans	1,469,887		30.2		1,493,049		31.7

Commercial real estate and multi-family residential loans:
Construction and land development loans	590,860		12.1		517,664		11.0
Owner occupied loans	806,072		16.6		758,091		16.0
Nonowner occupied loans	724,799		14.9		706,107		15.0
Multifamily loans	254,662		5.2		197,232		4.2
Total commercial real estate and multi-family residential loans	2,376,393		48.8		2,179,094		46.2

Agri-business and agricultural loans:
Loans secured by farmland	176,807		3.6		201,200		4.3
Loans for agricultural production	198,155		4.1		230,888		4.9
Total agri-business and agricultural loans	374,962		7.7		432,088		9.2

Other commercial loans:	120,958		2.5		113,593		2.4
Total commercial loans	4,342,200		89.2		4,217,824		89.5

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	229,078		4.7		212,742		4.5
Open end and junior lien loans	183,738		3.8		175,575		3.7
Residential construction and land development loans	18,569		0.4		19,249		0.4
Total consumer 1-4 family mortgage loans	431,385		8.9		407,566		8.6

Other consumer loans	92,139		1.9		88,075		1.9
Total consumer loans	523,524		10.8		495,641		10.5
Subtotal	4,865,724		100.0	%	4,713,465		100.0	%
Less: Allowance for credit losses	(72,058)				(72,606)
Net deferred loan fees	(3,464)				(3,069)
Loans, net	$	4,790,202			$	4,637,790

The recorded investment in loans does not include accrued interest, which totaled $18.5 million and $18.4 million as of June 30, 2023 and December 31, 2022, respectively.

The Company had $471,000 and $306,000 in residential real estate loans in the process of foreclosure as of June 30, 2023 and December 31, 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. 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)	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, 2023
Beginning balance, April 1	$	31,190	$	29,036	$	4,621	$	1,034	$	3,398	$	1,096	$	840	$	71,215
Provision for credit losses	(272)		1,593		(219)		86		51		50		(489)		800
Loans charged-off	(7)		0		0		0		(14)		(369)		0		(390)
Recoveries	67		284		0		0		13		69		0		433
Net loans (charged-off) recovered	60		284		0		0		(1)		(300)		0		43
Ending balance	$	30,978	$	30,913	$	4,402	$	1,120	$	3,448	$	846	$	351	$	72,058


(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
Provision for credit losses	(139)		191		(8)		(345)		34		102		165		0
Loans charged-off	(13)		0		0		0		0		(85)		0		(98)
Recoveries	25		0		0		0		34		36		0		95
Net loans (charged-off) recovered	12		0		0		0		34		(49)		0		(3)
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, 2023
Beginning balance, January 1	$	35,290	$	27,394	$	4,429	$	917	$	3,001	$	1,021	$	554	$	72,606
Provision for credit losses	1,232		3,235		(27)		203		445		265		(203)		5,150
Loans charged-off	(5,651)		0		0		0		(14)		(621)		0		(6,286)
Recoveries	107		284		0		0		16		181		0		588
Net loans (charged-off) recovered	(5,544)		284		0		0		2		(440)		0		(5,698)
Ending balance	$	30,978	$	30,913	$	4,402	$	1,120	$	3,448	$	846	$	351	$	72,058


(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

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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.

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


(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Term Total		Revolving		Total
Commercial and industrial loans:
Working capital lines of credit loans:
Pass	$	231	$	2,042	$	2,468	$	1,366	$	0	$	0	$	6,107	$	535,802	$	541,909
Special Mention	0		0		0		0		0		0		0		69,844		69,844
Substandard	0		200		75		0		250		0		525		6,448		6,973


Total	231		2,242		2,543		1,366		250		0		6,632		612,094		618,726
Working capital lines of credit loans:
Current period gross write offs	0		0		0		0		0		0		0		115		115
Non-working capital loans:
Pass	106,680		267,890		107,070		73,313		38,285		17,517		610,755		203,682		814,437
Special Mention	0		429		1,356		2,696		2,818		6,333		13,632		5,679		19,311
Substandard	226		4,525		1,120		4,064		11		657		10,603		398		11,001

Not Rated	1,012		2,505		1,179		1,051		268		67		6,082		0		6,082
Total	107,918		275,349		110,725		81,124		41,382		24,574		641,072		209,759		850,831
Non-working capital loans:
Current period gross write offs	0		5,400		0		0		118		0		5,518		18		5,536
Commercial real estate and multi-family residential loans:
Construction and land development loans:
Pass	23,520		15,289		10,218		13,306		179		0		62,512		511,070		573,582
Special Mention	0		0		0		0		0		0		0		14,521		14,521



Total	23,520		15,289		10,218		13,306		179		0		62,512		525,591		588,103
Construction and land development loans:
Current period gross write offs	0		0		0		0		0		0		0		0		0
Owner occupied loans:
Pass	88,769		131,307		161,898		135,249		66,660		136,902		720,785		57,223		778,008
Special Mention	0		702		9,148		0		2,257		11,890		23,997		0		23,997
Substandard	225		279		0		1,483		359		1,161		3,507		0		3,507

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Total	88,994	132,288	171,046	136,732	69,276	149,953	748,289	57,223	805,512
Owner occupied loans:
Current period gross write offs	0	0	0	0	0	0	0	0	0
Nonowner occupied loans:
Pass	61,069	165,517	122,798	131,928	89,591	62,994	633,897	79,639	713,536
Special Mention	4,264	0	6,446	0	0	0	10,710	0	10,710



Total	65,333	165,517	129,244	131,928	89,591	62,994	644,607	79,639	724,246
Nonowner occupied loans:
Current period gross write offs	0	0	0	0	0	0	0	0	0
Multifamily loans:
Pass	78,926	38,445	9,134	36,289	33,831	30,441	227,066	7,444	234,510
Special Mention	19,794	0	0	0	0	0	19,794	0	19,794



Total	98,720	38,445	9,134	36,289	33,831	30,441	246,860	7,444	254,304
Multifamily loans:
Current period gross write offs	0	0	0	0	0	0	0	0	0
Agri-business and agricultural loans:
Loans secured by farmland:
Pass	15,727	33,900	26,271	29,075	10,112	23,210	138,295	38,369	176,664
Special Mention	0	0	0	0	12	0	12	0	12
Substandard	0	0	0	0	0	115	115	0	115


Total	15,727	33,900	26,271	29,075	10,124	23,325	138,422	38,369	176,791
Loans secured by farmland:
Current period gross write offs	0	0	0	0	0	0	0	0	0
Loans for agricultural production:
Pass	25,929	8,801	28,747	26,880	4,111	11,513	105,981	91,211	197,192
Special Mention	0	0	211	352	0	0	563	500	1,063



Total	25,929	8,801	28,958	27,232	4,111	11,513	106,544	91,711	198,255
Loans for agricultural production:
Current period gross write offs	0	0	0	0	0	0	0	0	0
Other commercial loans:
Pass	6,213	26,450	39,302	15,524	111	8,059	95,659	21,202	116,861
Special Mention	0	0	0	1,103	0	2,793	3,896	0	3,896



Total	6,213	26,450	39,302	16,627	111	10,852	99,555	21,202	120,757
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	5,795	10,782	12,147	10,249	4,647	6,286	49,906	4,607	54,513
Special Mention	0	0	0	535	0	0	535	0	535
Substandard	0	0	96	131	0	263	490	0	490

Not Rated	29,953	53,199	40,652	17,810	4,440	27,166	173,220	0	173,220
Total	35,748	63,981	52,895	28,725	9,087	33,715	224,151	4,607	228,758
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	318	136	516	345	0	26	1,341	8,803	10,144

Substandard	0	0	0	0	28	48	76	133	209

Not Rated	13,104	36,410	10,690	2,105	2,824	2,483	67,616	107,610	175,226
Total	13,422	36,546	11,206	2,450	2,852	2,557	69,033	116,546	185,579
Open end and junior lien loans:
Current period gross write offs	0	0	14	0	0	0	14	0	14
Residential construction loans:




Not Rated	1,041	13,374	1,604	871	276	1,321	18,487	0	18,487
Total	1,041	13,374	1,604	871	276	1,321	18,487	0	18,487
Residential construction loans:
Current period gross write offs	0	0	0	0	0	0	0	0	0
Other consumer loans:
Pass	1,955	827	1,586	383	0	0	4,751	16,589	21,340

Substandard	0	0	0	0	5	0	5	0	5

Not Rated	14,116	20,994	12,049	7,402	2,411	2,762	59,734	10,832	70,566
Total	16,071	21,821	13,635	7,785	2,416	2,762	64,490	27,421	91,911
Other consumer loans:

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Current period gross write offs	0		191		91		6		212		1		501		120		621

Total period gross write offs	0		5,591		105		6		330		1		6,033		253		6,286

Total Loans	$	498,867	$	834,003	$	606,781	$	513,510	$	263,486	$	354,007	$	3,070,654	$	1,791,606	$	4,862,260

As of June 30, 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 Small Business Administration ("SBA").

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


(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Term Total		Revolving		Total
Commercial and industrial loans:
Working capital lines of credit loans:
Pass	$	2,207	$	2,718	$	1,601	$	0	$	0	$	0	$	6,526	$	597,108	$	603,634
Special Mention	0		0		0		0		0		0		0		36,410		36,410
Substandard	200		0		0		300		0		0		500		10,495		10,995


Total	2,407		2,718		1,601		300		0		0		7,026		644,013		651,039
Non-working capital loans:
Pass	272,273		124,600		91,850		47,711		9,981		13,670		560,085		240,490		800,575
Special Mention	448		1,620		0		109		159		2,961		5,297		2,153		7,450
Substandard	11,831		872		5,021		194		1,351		3,979		23,248		4,171		27,419

Not Rated	2,891		1,550		1,254		413		120		23		6,251		0		6,251
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:
Construction and land development loans:
Pass	26,889		19,944		14,026		356		0		0		61,215		453,953		515,168




Total	26,889		19,944		14,026		356		0		0		61,215		453,953		515,168
Owner occupied loans:
Pass	113,656		179,014		139,880		97,353		65,519		97,335		692,757		40,533		733,290
Special Mention	2,960		7,608		0		446		1,491		8,054		20,559		0		20,559
Substandard	308		105		1,491		373		1,161		229		3,667		0		3,667


Total	116,924		186,727		141,371		98,172		68,171		105,618		716,983		40,533		757,516
Nonowner occupied loans:
Pass	194,294		125,190		134,661		91,907		15,109		64,874		626,035		68,603		694,638
Special Mention	0		11,024		0		0		0		0		11,024		0		11,024



Total	194,294		136,214		134,661		91,907		15,109		64,874		637,059		68,603		705,662
Multifamily loans:
Pass	38,460		25,741		36,929		35,695		2,046		28,866		167,737		7,349		175,086
Special Mention	21,855		0		0		0		0		0		21,855		0		21,855



Total	60,315		25,741		36,929		35,695		2,046		28,866		189,592		7,349		196,941
Agri-business and agricultural loans:
Loans secured by farmland:
Pass	38,344		28,684		29,741		9,656		8,145		19,638		134,208		63,094		197,302
Special Mention	260		0		1,676		1,780		0		15		3,731		0		3,731
Substandard	0		0		0		0		0		145		145		0		145


Total	38,604		28,684		31,417		11,436		8,145		19,798		138,084		63,094		201,178
Loans for agricultural production:
Pass	6,040		30,262		22,167		3,625		9,248		4,539		75,881		143,599		219,480
Special Mention	947		243		7,262		928		0		0		9,380		2,129		11,509



Total	6,987		30,505		29,429		4,553		9,248		4,539		85,261		145,728		230,989
Other commercial loans:
Pass	27,097		4,815		17,911		147		931		10,985		61,886		48,295		110,181
Special Mention	0		0		0		0		0		3,160		3,160		0		3,160



Total	27,097		4,815		17,911		147		931		14,145		65,046		48,295		113,341
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans:
Pass	8,768		12,809		12,289		4,805		4,045		3,860		46,576		5,634		52,210

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Special Mention	0		0		552		0		0		0		552		0		552
Substandard	0		0		0		0		83		1,944		2,027		0		2,027

Not Rated	57,404		44,331		20,023		5,936		2,970		27,004		157,668		0		157,668
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:
Pass	137		541		357		63		75		0		1,173		5,841		7,014

Substandard	0		0		0		31		49		0		80		111		191

Not Rated	44,472		13,597		3,014		3,616		1,476		2,252		68,427		101,750		170,177
Total	44,609		14,138		3,371		3,710		1,600		2,252		69,680		107,702		177,382
Residential construction loans:




Not Rated	14,463		2,167		897		291		129		1,223		19,170		0		19,170
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, 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.

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.

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


(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:
Working capital lines of credit loans	$	612,932	$	373	$	0	$	607,884	$	5,421	$	75	$	618,726
Non-working capital loans	841,990		0		0		833,149		8,841		695		850,831
Commercial real estate and multi-family residential loans:
Construction and land development loans	588,103		0		0		588,103		0		0		588,103
Owner occupied loans	802,589		0		0		799,666		2,923		1,440		805,512
Nonowner occupied loans	724,246		0		0		724,246		0		0		724,246
Multifamily loans	254,304		0		0		254,304		0		0		254,304
Agri-business and agricultural loans:
Loans secured by farmland	176,635		41		0		176,561		115		0		176,791
Loans for agricultural production	198,255		0		0		198,255		0		0		198,255
Other commercial loans	120,757		0		0		120,757		0		0		120,757
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans	227,988		268		8		227,770		494		343		228,758
Open end and junior lien loans	185,060		312		0		185,165		207		207		185,579
Residential construction loans	18,487		0		0		18,487		0		0		18,487
Other consumer loans	91,694		213		0		91,903		4		4		91,911
Total	$	4,843,040	$	1,207	$	8	$	4,826,250	$	18,005	$	2,764	$	4,862,260

As of June 30, 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 three and six month periods ended June 30, 2023.

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


(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:
Working capital lines of credit loans	$	649,529	$	68	$	0	$	649,597	$	1,442	$	0	$	651,039
Non-working capital loans	830,033		39		1		830,073		11,622		727		841,695
Commercial real estate and multi-family residential loans:
Construction and land development loans	515,168		0		0		515,168		0		0		515,168
Owner occupied loans	754,451		0		0		754,451		3,065		1,469		757,516
Nonowner occupied loans	705,662		0		0		705,662		0		0		705,662
Multifamily loans	196,941		0		0		196,941		0		0		196,941
Agri-business and agricultural loans:
Loans secured by farmland	201,033		0		0		201,033		145		0		201,178
Loans for agricultural production	230,989		0		0		230,989		0		0		230,989
Other commercial loans	113,341		0		0		113,341		0		0		113,341
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans	211,736		306		122		212,164		293		225		212,457
Open end and junior lien loans	176,758		436		0		177,194		188		188		177,382
Residential construction loans	19,170		0		0		19,170		0		0		19,170
Other consumer loans	87,333		316		0		87,649		209		6		87,858
Total	$	4,692,144	$	1,165	$	123	$	4,693,432	$	16,964	$	2,615	$	4,710,396

As of December 31, 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, 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, 2023
(dollars in thousands)	Real Estate		General Business Assets		Other		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	50	$	5,221	$	0	$	5,271
Non-working capital loans	474		8,043		229		8,746
Commercial real estate and multi-family residential loans:
Owner occupied loans	638		1,483		1,161		3,282

Agri-business and agricultural loans:
Loans secured by farmland	0		115		0		115
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	494		0		0		494
Open end and junior lien loans	207		0		0		207
Other consumer loans	0		0		4		4
Total	$	1,863	$	14,862	$	1,394	$	18,119


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

Agri-business and agricultural loans:
Loans secured by farmland	0		145		0		145
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	2,030		0		0		2,030
Open end and junior lien loans	188		0		0		188
Other consumer loans	0		0		7		7
Total	$	3,225	$	25,147	$	1,397	$	29,769

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 to determine estimate such credit losses is historical loss information. The Company uses a probability of default/loss given default model to determine the allowance for credit losses recorded at origination. Occasionally, the Company subsequently modifies loans for borrowers experiencing financial distress by providing the following forms of relief: forgiveness of loan principal, extension of repayment terms, or an interest rate reduction, among other possible concessions. In some instances, the Company provides multiple types of concessions for such modifications. Because the effect of most modifications to borrowers experiencing financial difficulty is already included in the allowance for credit losses, no change to the allowance for credit losses is generally recorded for these modifications.

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The following tables present the amortized cost basis of loans that were experiencing financial difficulty and received a modification of terms during the three and six months ended June 30, 2023, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivables is also presented below:


(dollars in thousands)	Combination Principal Forgiveness, Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Three Months Ended June 30, 2023
Commercial and industrial loans:

Non-working capital loans	$	1,600	0.20	%


(dollars in thousands)	Combination Principal Forgiveness, Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Six Months Ended June 30, 2023
Commercial and industrial loans:

Non-working capital loans	$	1,600	0.20	%

The Company has no material commitments to lend additional funds to borrowers included in the previous tables.

The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three and six months ended June 30, 2023:

(dollars in thousands)

Principal Forgiveness

Weighted-Average Interest Rate Reduction

Weighted-Average Term Extension

Total Class of Financing Receivable

Three Months Ended June 30, 2023

Commercial and industrial loans:

Non-working capital loans

9,380

Prime+0.75%

reduced to

1.00% Fixed

260 months

0.20

(dollars in thousands)

Principal Forgiveness

Weighted-Average Interest Rate Reduction

Weighted-Average Term Extension

Total Class of Financing Receivable

Six Months Ended June 30, 2023

Commercial and industrial loans:

Non-working capital loans

9,380

Prime+0.75%

reduced to

1.00% Fixed

260 months

0.20

During the three and six months ended June 30, 2022, no modifications were made to loans for borrowers experiencing financial difficulty.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. At June 30, 2023, no loans receiving such a modification within the last twelve months were 30 days or greater past due.

At June 30, 2023, no loans receiving a modification due to borrower financial difficulty within the last twelve months experienced a payment default.

Upon the Company's determination that a modified loan (or portion thereof) has subsequently been deemed uncollectible, the loan (or a portion thereof) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

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NOTE 5. BORROWINGS

For the period ended June 30, 2023, the Company had an advance outstanding from the Federal Home Loan Bank ("FHLB") in the amount of $400.0 million. The outstanding advance was a fixed rate bullet advance with an interest rate of 5.17% and matured July 13, 2023. For the period ended December 31, 2022, the Company had a fixed rate bullet advance from the FHLB with an interest rate of 4.21% in the amount of $275.0 million that matured on 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 29, 2023 for $12.5 million. 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 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, 2023 and December 31, 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.

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 are valued primarily by a third party pricing service. The fair values of securities available-for-sale 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 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 40-60%, depending on the marketability of the goods (b) finished goods are generally discounted by 40-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 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 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, 2023, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $2.4 million, carried at amortized cost and no valuation reserve. These residential mortgage loans have a weighted average interest rate of 3.5%, a weighted average maturity of 20 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, 2023, the constant prepayment speed (“PSA”) used was 150 and used a discount rate range of 9.50%-11.50%. At December 31, 2022, the PSA used was 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.

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


	June 30, 2023
	Fair Value Measurements Using						Assets at Fair Value
(dollars in thousands)	Level 1		Level 2		Level 3
Assets:
U.S. Treasury securities	$	3,232	$	0	$	0	$	3,232
U.S. government sponsored agency securities	0		122,086		0		122,086
Mortgage-backed securities: residential	0		462,033		0		462,033

State and municipal securities	0		471,701		3,017		474,718
Total securities available-for-sale	3,232		1,055,820		3,017		1,062,069
Mortgage banking derivative	0		68		0		68
Interest rate swap derivative	0		35,660		0		35,660
Total assets	$	3,232	$	1,091,548	$	3,017	$	1,097,797

Liabilities:

Interest rate swap derivative	0		35,661		0		35,661
Total liabilities	$	0	$	35,661	$	0	$	35,661


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

State and municipal securities	0		561,150		2,075		563,225
Total securities available-for-sale	3,034		1,180,419		2,075		1,185,528
Mortgage banking derivative	0		43		0		43
Interest rate swap derivative	0		36,920		0		36,920
Total assets	$	3,034	$	1,217,382	$	2,075	$	1,222,491

Liabilities:

Interest rate swap derivative	0		36,921		0		36,921
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 present the balances of assets measured at fair value on a nonrecurring basis:


	June 30, 2023
	Fair Value Measurements Using						Assets at Fair Value
(dollars in thousands)	Level 1		Level 2		Level 3
Assets
Collateral dependent loans:
Commercial and industrial loans:
Working capital lines of credit loans	$	0	$	0	$	2,644	$	2,644
Non-working capital loans	0		0		3,139		3,139
Commercial real estate and multi-family residential loans:
Owner occupied loans	0		0		326		326

Agri-business and agricultural loans:
Loans secured by farmland	0		0		25		25


Total collateral dependent loans	0		0		6,134		6,134
Other real estate owned	0		0		384		384
Total assets	$	0	$	0	$	6,518	$	6,518


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


Total collateral dependent loans	0		0		11,992		11,992
Other real estate owned	0		0		100		100
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, 2023:


(dollars in thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Average		Range of Inputs
Collateral dependent loans:
Commercial and industrial	$	5,783	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	62	%	25%-99%

Collateral dependent loans:
Commercial real estate and multi-family residential loans	326		Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	78	%

Collateral dependent loans:
Agri-business and agricultural	25		Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	78	%
Other real estate owned	384		Appraisals	Discount to reflect current market conditions and ultimate collectability	36	%

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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, 2022:


(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 that are not financial instruments are not included.


	June 30, 2023
	Carrying Value		Estimated Fair Value
(dollars in thousands)			Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	173,137	$	172,892	$	245	$	0	$	173,137
Securities available-for-sale	1,062,069		3,232		1,055,820		3,017		1,062,069
Securities held-to-maturity	129,070		0		114,264		0		114,264
Real estate mortgages held-for-sale	1,298		0		1,342		0		1,342
Loans, net	4,790,202		0		0		4,606,769		4,606,769
Mortgage banking derivative	68		0		68		0		68
Interest rate swap derivative	35,660		0		35,660		0		35,660
Federal Reserve and Federal Home Loan Bank Stock	21,420		N/A		N/A		N/A		N/A
Accrued interest receivable	27,398		0		8,859		18,539		27,398
Financial Liabilities:
Certificates of deposit	822,797		0		824,292		0		824,292
All other deposits	4,600,262		4,600,262		0		0		4,600,262
Federal Home Loan Bank advances	400,000		400,003		0		0		400,003

Interest rate swap derivative	35,661		0		35,661		0		35,661
Standby letters of credit	133		0		0		133		133
Accrued interest payable	9,833		441		9,392		0		9,833

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	December 31, 2022
	Carrying Value		Estimated Fair Value
(dollars in thousands)			Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	130,282	$	129,069	$	1,213	$	0	$	130,282
Securities available-for-sale	1,185,528		3,034		1,180,419		2,075		1,185,528
Securities held-to-maturity	128,242		0		111,029		0		111,029
Real estate mortgages held-for-sale	357		0		372		0		372
Loans, net	4,637,790		0		0		4,454,678		4,454,678
Mortgage banking derivative	43		0		43		0		43
Interest rate swap derivative	36,920		0		36,920		0		36,920
Federal Reserve and Federal Home Loan Bank Stock	15,795		N/A		N/A		N/A		N/A
Accrued interest receivable	27,994		0		9,598		18,396		27,994
Financial Liabilities:
Certificates of deposit	626,186		0		621,206		0		621,206
All other deposits	4,834,434		4,834,434		0		0		4,834,434
Federal Funds purchased	22,000		22,000		0		0		22,000
Federal Home Loan Bank advances	275,000		275,000		0		0		275,000

Interest rate swap derivative	36,921		0		36,921		0		36,921
Standby letters of credit	249		0		0		249		249
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, 2023 and December 31, 2022.


	June 30, 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
(dollars in thousands)							Financial Instruments		Cash Collateral Position
Assets
Interest Rate Swap Derivatives	$	35,660	$	0	$	35,660	$	0	$	(27,965)	$	7,695
Total Assets	$	35,660	$	0	$	35,660	$	0	$	(27,965)	$	7,695
Liabilities
Interest Rate Swap Derivatives	$	35,661	$	0	$	35,661	$	0	$	(90)	$	35,571
Total Liabilities	$	35,661	$	0	$	35,661	$	0	$	(90)	$	35,571

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	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
(dollars in thousands)							Financial Instruments		Cash Collateral Position
Assets
Interest Rate Swap Derivatives	$	36,920	$	0	$	36,920	$	0	$	(34,185)	$	2,735
Total Assets	$	36,920	$	0	$	36,920	$	0	$	(34,185)	$	2,735
Liabilities
Interest Rate Swap Derivatives	$	36,921	$	0	$	36,921	$	0	$	(90)	$	36,831
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,
	2023		2022		2023		2022
Weighted average shares outstanding for basic earnings per common share	25,607,663		25,527,896		25,595,412		25,521,618
Dilutive effect of stock based awards	78,691		169,681		100,958		178,290
Weighted average shares outstanding for diluted earnings per common share	25,686,354		25,697,577		25,696,370		25,699,908

Basic earnings per common share	$	0.57	$	1.00	$	1.52	$	1.93
Diluted earnings per common share	$	0.57	$	1.00	$	1.51	$	1.92

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, 2023 and 2022, all shown net of tax:


(dollars in thousands)	Unrealized Gains and Losses on Available- for-Sales Securities		Defined Benefit Pension Items		Total
Balance at April 1, 2023	$	(166,612)	$	(758)	$	(167,370)
Other comprehensive income (loss) before reclassification	(10,674)		0		(10,674)
Amounts reclassified from accumulated other comprehensive income (loss)	388		11		399
Net current period other comprehensive income (loss)	(10,286)		11		(10,275)
Balance at June 30, 2023	$	(176,898)	$	(747)	$	(177,645)

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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, 2022	$	(92,751)	$	(936)	$	(93,687)
Other comprehensive income (loss) before reclassification	(65,179)		0		(65,179)
Amounts reclassified from accumulated other comprehensive income (loss)	305		27		332
Net current period other comprehensive income (loss)	(64,874)		27		(64,847)
Balance at June 30, 2022	$	(157,625)	$	(909)	$	(158,534)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, 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, 2023	$	(188,154)	$	(769)	$	(188,923)
Other comprehensive income (loss) before reclassification	10,493		0		10,493
Amounts reclassified from accumulated other comprehensive income (loss)	763		22		785
Net current period other comprehensive income (loss)	11,256		22		11,278
Balance at June 30, 2023	$	(176,898)	$	(747)	$	(177,645)


(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)

Reclassifications out of other accumulated other comprehensive income (loss) for the three months ended June 30, 2023 are as follows:

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)

Affected Line Item
in the Statement Where Net Income is Presented

(dollars in thousands)

Amortization of unrealized losses on held-to-maturity securities

(494)

Interest income

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

Net securities gains

Tax effect

103

Income tax expense

(388)

Net of tax

Amortization of defined benefit pension items

(15)

Other expense

Tax effect

Income tax expense

(11)

Net of tax

Total reclassifications for the period

(399)

Net income

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Reclassifications out of other accumulated comprehensive income (loss) for the three months ended June 30, 2022 are as follows:

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)

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

(36)

Other expense

Tax effect

Income tax expense

(27)

Net of tax

Total reclassifications for the period

(332)

Net income

Reclassifications out of accumulated comprehensive loss for the six months ended June 30, 2023 are as follows:

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)

Affected Line Item
in the Statement Where Net Income is Presented

(dollars in thousands)

Amortization of unrealized losses on held-to-maturity securities

(985)

Interest income

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

Net securities gains

Tax effect

203

Income tax expense

(763)

Net of tax

Amortization of defined benefit pension items

(30)

Other expense

Tax effect

Income tax expense

(22)

Net of tax

Total reclassifications for the period

(785)

Net income

Reclassifications out of accumulated other comprehensive income (loss) for the six months ended June 30, 2022 are as follows:

Details about
Accumulated Other
Comprehensive
Income (Loss) Components

Amount
Reclassified From Accumulated Other Comprehensive Income (Loss)

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)

Other expense

Tax effect

Income tax expense

(54)

Net of tax

Total reclassifications for the period

(359)

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, 2023:


Years ending December 31, (in thousands)	Operating Lease Obligation
2023	$	365
2024	744
2025	756
2026	730
2027	753
2028 and thereafter	2,185
Total undiscounted lease payments	5,533
Less imputed interest	(534)
Lease liability	$	4,999
Right-of-use asset	$	4,999


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2023			2022			2023			2022
Lease cost
Operating lease cost	$	300		$	163		$	478		$	333
Short-term lease cost	4			8			8			14
Total lease cost	$	304		$	171		$	486		$	347

Other information
Operating cash outflows from operating leases	$	300		$	163		$	478		$	333
Weighted-average remaining lease term - operating leases	6.8 years			8.5 years			6.8 years			8.5 years
Weighted average discount rate - operating leases	2.5		%	2.5		%	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 alleged that the former client engaged in a check kiting scheme involving multiple banks. The amended complaint alleged 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 alleged 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. On May 30, 2023, the court issued its decision granting the defendants’ motion to dismiss in part and denying it in part. The court dismissed all claims against the Company and the Bank’s independent director. The court dismissed several of the claims against the defendants but granted the trustee the right to file an amended complaint. On June 20, 2023, the trustee filed his third amended complaint. The trustee alleges many of the same claims that were alleged in his second amended complaint. The defendants will file a motion to dismiss the third amended complaint on July 25, 2023. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank, and the four individual Bank representatives who are named as defendants in the third amended complaint intend to vigorously defend themselves against all allegations asserted in the third amended complaint.

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

OVERVIEW

Net income in the first six months of 2023 was $38.9 million, which decreased $10.4 million, or 21.1%, from $49.3 million for the comparable period of 2022. Diluted income per common share was $1.51 in the first six months of 2023, a decrease of 21.4% from $1.92 in the comparable period of 2022. The decrease in net income for 2023 was primarily due to an increase in noninterest expense of $17.3 million, or 31.5%, and an increase in provision for credit losses expense of $4.7 million. Offsetting these items was an increase to net interest income of $6.5 million, or 6.9%, and an increase to noninterest income of $636,000, or 3.0%. Pretax pre-provision earnings in the first six months of 2023 were $49.7 million, a decrease of $10.2 million, or 17.0%, compared to $59.9 million for the comparable 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 13.18% in the first six months of 2023 versus 15.72% in the comparable period of 2022. Annualized return on average total assets was 1.22% in the first six months of 2023 versus 1.52% for the comparable period of 2022. The Company's average equity to average assets ratio was 9.26% in the first six months of 2023 versus 9.65% in the comparable period of 2022. 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 (loss).

Net income in second quarter of 2023 was $14.6 million, down 43.1% from $25.7 million for the comparable period of 2022. Diluted earnings per common share was $0.57 in the second quarter of 2023, down 43.0% from $1.00 in the comparable period of 2022. The decrease was driven primarily by an increase in noninterest expense of $14.8 million, or 53.1%, partially offset by an increase in noninterest income of $1.0 million, or 9.6%. Pretax pre-provision earnings in the second quarter of 2023 were $17.3 million, a decrease of $14.0 million, or 44.7%, compared to $31.3 million for the comparable period of 2022.

Annualized return on average total equity was 9.70% in the second quarter of 2023 versus 17.65% in the comparable period of 2022. Annualized return on average total assets was 0.91% in the second quarter of 2023 versus 1.59% in the comparable period of 2022. The average equity to average assets ratio was 9.39% in the second quarter of 2023 versus 9.03% the comparable period of 2022.

On June 30, 2023, the Company discovered that it had been the victim of international wire fraud resulting in an estimated loss of $18.1 million, which is net of estimated insurance coverage of $4.1 million. The loss net of tax amounts to $13.6 million, or $0.53 diluted earnings per share for the three and six month periods ended June 30, 2023.

As a result, the Company’s core operational profitability, which is a non‐GAAP measure that excludes the estimated

effect of this one‐time loss, was $26.8 million for the quarter ended June 30, 2023, compared to $25.7 million for the three months ended June 30, 2022 and $24.3 million for the linked quarter ended March 31, 2023. Core profitability improved 10% on a linked quarter basis and 4% on an annual basis. The fraudulent wire activity resulted from a highly sophisticated business email compromise directed by a foreign threat actor that targeted a specific general ledger account at the Bank. To facilitate the fraud, the threat actor compromised a single employee email account outside the Company's network and used a forged wire transfer form.

A third‐party forensic investigation determined that no client accounts were threatened by this activity, nor was

there any attempt to access any client information or funds. Additionally, the investigation concluded that the Company's network was never penetrated and that the foreign threat actor made no attempt to penetrate the network.

On June 30, 2023, the Company notified its insurance carriers about the fraudulent wire activity and engaged a

forensic technology investigation firm to conduct a thorough investigation. The Company also notified the United

States Secret Service, the FBI and the Financial Crimes Enforcement Network, or FinCEN. In addition, the Company

has communicated actively with its primary regulators.

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 9.04% at June 30, 2023, compared to 8.92% at June 30, 2022 and 8.79% at December 31, 2022. Tangible equity and tangible assets have been impacted by declines in the market value of the Company’s available-for-sale investment securities portfolio as a result of the rising interest rate environment. These declines have generated unrealized losses in 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 $202.0 million at June 30, 2023, compared to $175.6 million at June 30, 2022 and $215.3 million at December 31, 2022. When excluding the impact of investment securities market

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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 11.37% at June 30, 2023, compared to 11.08% at June 30, 2022 and 11.30% at December 31, 2022.

Total assets were $6.510 billion as of June 30, 2023 versus $6.432 billion as of December 31, 2022, an increase of $77.2 million, or 1.2%. Balance sheet expansion was driven primarily by loan portfolio growth. Total loans, net of the allowance for credit losses, increased $152.4 million, or 3.3%, between June 30, 2023 and December 31, 2022. Contributing further to the increase in total assets was an increase in cash and cash equivalents of $42.9 million, or 32.9%. Offsetting these increases was a decrease in available-for-sale securities of $123.5 million, or 10.4%. To fund the balance sheet expansion, total borrowings increased $103.0 million, or 34.7%, and was offset by a decrease in total deposits of $37.6 million, or less than 1%. The deposit mix saw a shift from noninterest bearing deposits, which decreased $298.7 million, or 17.2%, to interest bearing deposits which increased $261.2 million, or 7.0%. Total equity increased $23.1 million, or 4.1%, from $568.9 million at December 31, 2022 to $592.0 million at June 30, 2023. Retained earnings increased $15.3 million, or 2.4%, as a result of net income of $38.9 million, offset by dividends declared and paid of $23.5 million. Accumulated other comprehensive income (loss), increased $11.3 million, or 6.0%, due primarily to an improvement in available-for-sale securities fair market values during the six months ended June 30, 2023.

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, 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.

RESULTS OF OPERATIONS

Overview

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


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2023			2022			2023			2022
Income Statement Summary:
Net interest income	$	48,524		48,678			$	100,043		$	93,558
Provision for credit losses	800			0			5,150			417
Noninterest income	11,501			10,492			21,815			21,179
Noninterest expense	42,734			27,913			72,168			54,882
Other Data:
Efficiency ratio (1)	71.19		%	47.17		%	59.22		%	47.83		%
Diluted EPS	$	0.57		$	1.00		$	1.51		$	1.92
Average Equity/Average Assets	9.39		%	9.03		%	9.26		%	9.65		%
Tangible capital ratio (2)	9.04			8.92			9.04			8.92
Adjusted tangible capital ratio (3)	11.37			11.08			11.37			11.08
Net charge-offs to average loans	0.00			0.00			0.24			0.03
Net interest margin	3.28			3.26			3.41			3.09

Noninterest income to total revenue	19.16			17.73			17.90			18.46
Pretax pre-provision earnings (4)	$	17,291		$	31,257		$	49,690		$	59,855

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(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,” which is “total equity” excluding intangible assets, net of deferred tax, and “tangible 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. Calculated by removing the fair market value adjustment impact of the investment securities portfolio from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to prior periods. See reconciliation on the next page.

(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 below.

Reconciliations of non-GAAP measures are provided below (in thousands, except for per share data).


	As of and For The						As of and For The
	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2023			2022			2023			2022
Total Equity	$	591,995		$	562,063		$	591,995		$	562,063
Less: Goodwill	(4,970)			(4,970)			(4,970)			(4,970)
Plus: Deferred Tax Assets Related to Goodwill	1,167			1,167			1,167			1,167
Tangible Common Equity (A)	588,192			558,260			588,192			558,260
AOCI Market Value Adjustment	176,898			157,625			176,898			157,625
Adjusted Tangible Common Equity (C)	765,090			715,885			765,090			715,885

Total Assets	$	6,509,546		$	6,265,087		$	6,509,546		$	6,265,087
Less: Goodwill	(4,970)			(4,970)			(4,970)			(4,970)
Plus: Deferred Tax Assets Related to Goodwill	1,167			1,167			1,167			1,167
Tangible Assets (B)	6,505,743			6,261,284			6,505,743			6,261,284
Securities Market Value Adjustment	223,922			199,525			223,922			199,525
Adjusted Tangible Assets (D)	6,729,665			6,460,809			6,729,665			6,460,809

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

Tangible Book Value per Common Share (A/E)	$	22.97		$	21.87		$	22.97		$	21.87

Tangible Capital Ratio (A/B)	9.04		%	8.92		%	9.04		%	8.92		%
Adjusted Tangible Capital Ratio (C/D)	11.37			11.08			11.37			11.08

Net Interest Income	$	48,524		$	48,678		100,043			93,558
Noninterest Income	11,501			10,492			21,815			21,179
Noninterest Expense	(42,734)			(27,913)			(72,168)			(54,882)
Pretax Pre-Provision Earnings	$	17,291		$	31,257		$	49,690		$	59,855

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	Three Months Ended			Six Months Ended
	Jun. 30, 2023			Jun. 30, 2023
Noninterest Expense	$	42,734		$	72,168
Less: Wire Fraud Loss	(18,058)			(18,058)
Plus: Salaries and Employee Benefits (5)	1,850			1,850
Adjusted Core Noninterest Expense	$	26,526		$	55,960

Earnings Before Income Taxes	$	16,491		$	44,540
Adjusted Core Noninterest Expense Impact	16,208			16,208
Adjusted Earnings Before Income Taxes	32,699			60,748
Tax Effect	(5,873)			(9,644)
Core Operational Profitability	$	26,826		$	51,104

Core Operational Diluted Earnings Per Common Share	$	1.05		$	1.99

Adjusted Core Efficiency Ratio	44.19		%	45.92		%

(5) Long-term, incentive-based compensation accruals were reduced as a result of the wire fraud loss.

Adjusted core noninterest expense, adjusted earnings before income taxes, core operational profitability, core operational diluted earnings per common share and adjusted core efficiency ratio are non‐GAAP financial measures calculated using GAAP amounts. These adjusted amounts are calculated by excluding the impact of the wire fraud loss and corresponding reduction to salaries and employee benefits for the three‐ and six‐month periods ended June 30, 2023. Management considers these measures of financial performance to be meaningful to understanding the company’s core business performance for these periods.

Net Income

Net income was $38.9 million in the first six months of 2023, which decreased $10.4 million, or 21.1%, from $49.3 million for the comparable period of 2022. The decrease in net income for the first six months of 2023 was primarily due to an increase in noninterest expense of $17.3 million, or 31.5%, and an increase in provision for credit losses expense of $4.7 million. Offsetting these items was an increase to net interest income of $6.5 million, or 6.9%, and an increase to noninterest income of $636,000, or 3.0%.

On June 30, 2023, the Company discovered that it had been the victim of international wire fraud resulting in an estimated loss of $18.1 million. The loss net of tax amounts to $13.6 million, or $0.53 diluted earnings per share for the three and six month periods ended June 30, 2023.

As a result, the Company’s core operational profitability, which is a non‐GAAP measure that excludes the estimated

effect of this one‐time loss, was $26.8 million for the quarter ended June 30, 2023, compared to $25.7 million for the three months ended June 30, 2022 and $24.3 million for the linked quarter ended March 31, 2023. Core profitability improved 10% on a linked quarter basis and 4% on an annual basis. The fraudulent wire activity resulted from a highly sophisticated business email compromise directed by a foreign threat actor that targeted a specific general ledger account at the bank. To facilitate the fraud, the threat actor compromised a single employee email account outside the company's network and used a forged wire transfer form.

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Net Interest Income

The following tables set forth consolidated information regarding average balances and rates:


	Six Months Ended June 30,
	2023						2022
(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)	$	4,704,075	$	144,589	6.20	%	$	4,337,938	$	83,873	3.90	%
Tax exempt (1)	57,709		2,322		8.11		25,726		566		4.44
Investments:
Securities (1)	1,230,421		17,476		2.86		1,494,979		19,157		2.58
Short-term investments	2,275		48		4.25		2,223		3		0.27
Interest bearing deposits	87,529		1,951		4.49		413,048		726		0.35
Total earning assets	$	6,082,009	$	166,386	5.52	%	$	6,273,914	$	104,325	3.35	%
Less: Allowance for credit losses	(72,366)						(67,787)
Nonearning Assets
Cash and due from banks	72,797						73,037
Premises and equipment	58,657						59,143
Other nonearning assets	281,465						217,581
Total assets	$	6,422,562					$	6,555,888

Interest Bearing Liabilities
Savings deposits	$	376,281	$	137	0.07	%	$	416,755	$	156	0.08	%
Interest bearing checking accounts	2,844,181		48,627		3.45		2,676,528		5,646		0.43
Time deposits:
In denominations under $100,000	189,734		1,789		1.90		193,873		653		0.68
In denominations over $100,000	553,472		7,976		2.91		617,824		1,516		0.49
Miscellaneous short-term borrowings	213,990		5,130		4.83		13		0		0.00
Long-term borrowings and subordinated debentures	0		0		0.00		64,641		127		0.40
Total interest bearing liabilities	$	4,177,658	$	63,659	3.07	%	$	3,969,634	$	8,098	0.41	%

Noninterest Bearing Liabilities
Demand deposits	1,555,877						1,895,333
Other liabilities	94,175						58,188
Stockholders' Equity	594,852						632,733
Total liabilities and stockholders' equity	$	6,422,562					$	6,555,888

Interest Margin Recap
Interest income/average earning assets			166,386		5.52	%			104,325		3.35	%
Interest expense/average earning assets			63,659		2.11				8,098		0.26
Net interest income and margin			$	102,727	3.41	%			$	96,227	3.09	%

(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 million for both the six-month periods ended June 30, 2023 and June 30, 2022.

(2)Loan fees, which are immaterial in relation to total taxable loan interest income for the six months ended June 30, 2023 and 2022, are included as taxable loan interest income.

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

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	Three Months Ended June 30,
	2023						2022
(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)	$	4,739,885	$	75,047	6.35	%	$	4,396,333	$	44,138	4.03	%
Tax exempt (1)	57,857		1,198		8.31		29,380		353		4.82
Investments:
Securities (1)	1,210,870		8,520		2.82		1,476,144		10,049		2.73
Short-term investments	2,308		26		4.52		2,301		2		0.35
Interest bearing deposits	85,364		1,009		4.74		252,893		481		0.76
Total earning assets	$	6,096,284	$	85,800	5.65	%	$	6,157,051	$	55,023	3.58	%
Less: Allowance for credit losses	(71,477)						(67,527)
Nonearning Assets
Cash and due from banks	69,057						74,158
Premises and equipment	58,992						58,978
Other nonearning assets	280,073						238,228
Total assets	$	6,432,929					$	6,460,888

Interest Bearing Liabilities
Savings deposits	$	360,173	$	65	0.07	%	$	425,102	$	81	0.08	%
Interest bearing checking accounts	2,930,285		27,226		3.73		2,710,674		3,784		0.56
Time deposits:
In denominations under $100,000	198,864		1,147		2.31		189,538		307		0.65
In denominations over $100,000	611,427		5,173		3.39		601,877		718		0.48
Miscellaneous short-term borrowings	186,418		2,347		5.05		0		0		0.00
Long-term borrowings and subordinated debentures	0		0		0.00		54,396		54		0.40
Total interest bearing liabilities	$	4,287,167	$	35,958	3.36	%	$	3,981,587	$	4,944	0.50	%

Noninterest Bearing Liabilities
Demand deposits	1,450,396						1,825,327
Other liabilities	91,367						70,650
Stockholders' Equity	603,999						583,324
Total liabilities and stockholders' equity	$	6,432,929					$	6,460,888

Interest Margin Recap
Interest income/average earning assets			85,800		5.65	%			55,023		3.58	%
Interest expense/average earning assets			35,958		2.37				4,944		0.32
Net interest income and margin			$	49,842	3.28	%			$	50,079	3.26	%

(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 $1.3 million and $1.4 million in the three-month periods ended June 30, 2023 and June 30, 2022, respectively.

(2)Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended June 30, 2023 and 2022, are included as taxable loan interest income.

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

Net interest income, on a fully tax equivalent basis, increased $6.5 million, or 6.8%, to $102.7 million for the six months ended June 30, 2023, compared to $96.2 million for the first six months of 2022. Growth in average loans and an improvement in earning assets yields were the primary drivers behind the $62.1 million, or 59.5%. increase in tax equivalent interest income between the two periods. Offsetting these increases was a decrease in the average balance of investment securities. Interest expense, which partially offset the positive impact of the increase to tax equivalent interest income, increased by $55.6 million, or 686.1%. and was driven by increased funding costs from increased average interest bearing liabilities and decreased average noninterest bearing liabilities.

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Total average earning assets were $6.082 billion for the six months ended June 30, 2023, a decrease of $191.9 million, or 3.1%, compared to $6.274 billion for the six months ended June 30, 2022. A decrease to average investment securities of $264.6 million, or 17.7%, from $1.495 billion for the six months ended June 30, 2022 to $1.230 billion for the six months ended June 30, 2023, and a decrease to interest bearing deposits of $325.5 million, or 78.8%, from $413.0 million for the six months ended June 30, 2022 to $87.5 million for the six months ended June 30, 2023, drove the contraction in average earning assets between the two periods. Offsetting these decreases was an increase in average loans outstanding, which increased $398.1 million, or 9.1%, to $4.762 billion during the six months ended June 30, 2023, compared to $4.364 billion during the same period of 2022. Total average interest bearing liabilities were $4.178 billion for the six months ended June 30, 2023, an increase of $208.0 million, or 5.2%, from $3.970 billion for the six months ended June 30, 2022. This increase was driven by increased interest bearing deposits of $58.7 million, or 1.5%, from $3.905 billion for the six months ended June 30, 2022 to $3.964 billion for the six months ended June 30, 2023, and an increase in total average borrowings of $149.3 million, or 231.0%, from $64.6 million for the six months ended June 30, 2022 to $214.0 million for the six month ended June 30, 2023. Noninterest bearing demand deposits decreased $339.5 million, or 17.9%, from $1.895 billion for the six months ended June 30, 2022 to $1.556 billion for the six months ended June 30, 2023.

The tax equivalent net interest margin was 3.41% for the six months ended June 30, 2023, compared to 3.09% during the first six months of 2022, representing a 32 basis point, or 10.4%, expansion between the two periods. The net interest margin expansion was driven by a 500 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 5.00%-5.25% at June 30, 2023. The impact of the higher interest rate environment has increased earning asset yields by 217 basis points, or 64.8%, to 5.52% for the six months ended June 30, 2023, up from 3.35% for the comparable period of 2022. This increase was offset by an increase in the Company's funding costs, as excess customer liquidity in the form of deposits was utilized and the competition for deposits increased throughout the industry. Interest expense as a percentage of average earning assets increased to 2.11% for the six months ended June 30, 2023, up from 0.26% for the comparable period of 2022, an increase of 185 basis points, or 711.5%. The Company anticipates the cost of funds may continue to rise throughout 2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and increased utilization of FHLB borrowings.

Net interest income, on a fully tax equivalent basis, decreased by $237,000, or less than 1%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Tax equivalent net interest income benefited from increased average loan balances and yields between the two periods. Offsetting this benefit were increased interest bearing liabilities and an increased funding costs.

Total average earning assets were $6.096 billion for the second quarter of 2023, a decrease of $60.8 million, or 1.0%, compared to $6.157 billion for the second quarter of 2022. The decrease in average earning assets was driven by a decrease in average in average interest bearing deposits, which decreased $167.5 million, or 66.2%, from $252.9 million for the second quarter of 2022 to $85.4 million for the second quarter of 2023, and a decrease in average investment securities, which decreased $265.3 million, or 18.0%, from $1.476 billion for the second quarter of 2022 to $1.211 billion for the second quarter of 2023. Offsetting these decreases was an increase in average loans of $372.0 million, or 8.4%, from $4.426 billion for the second quarter of 2022 to $4.798 billion for the second quarter of 2023. Total average interest bearing liabilities were $4.287 billion for the second quarter of 2023, an increase of $305.6 million, or 7.7%, from $3.982 billion for the second quarter of 2022. This increase was driven by increased interest bearing deposits of $173.6 million, or 4.4%, from $3.927 billion for the second quarter of 2022 to $4.101 billion for the second quarter of 2023 and increased total borrowings by $132.0 million, or 242.7%, from $54.4 million for the second quarter of 2022 to $186.4 million for the second quarter of 2023. Noninterest bearing demand deposits decreased $374.9 million, or 20.5%, from $1.825 billion for the second quarter of 2022 to $1.450 billion for the second quarter of 2023.

The tax equivalent net interest margin expanded by 2 basis points, or less than 1%, to 3.28% for the second quarter of 2023, compared to 3.26% for the second quarter of 2022. Earning asset yields expanded 207 basis points, or 57.8%, from 3.58% for the second quarter of 2022 to 5.65% for the second quarter of 2023. This increase was offset by an increase in the Company's funding costs as interest expense as a percentage of average earning assets increased 205 basis points, or 640.6%, from 0.32% for the second quarter of 2022 to 2.37% for the second quarter of 2023. Increases to the Company's earning asset yields and interest expense as a percentage of average earning assets between the two periods were driven by the Federal Reserve's action to increase the target Federal Funds rate to 5.25% from 0.25%. The target Federal Funds rate was increased 350 basis points between June 30, 2022 and June 30, 2023, increasing the target Federal Funds rate range from 1.50%-1.75% to 5.00%-5.25%. While the rate increases have positively affected the Company's yields on earning assets, the Company has experienced a corresponding increase to funding costs as excess customer liquidity was utilized and the competition for deposits has increased throughout the industry. The Company anticipates the cost of funds may continue to rise throughout

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2023 as a result of increased market competition for deposits, shifts from noninterest bearing deposits into interest bearing deposits, and increased utilization of FHLB borrowings.

Provision for Credit Losses

The Company recorded provision for credit losses expense of $5.2 million for the six months ended June 30, 2023, compared to provision expense of $417,000 during the comparable period of 2022, an increase of $4.7 million, or 1135.0%. The increase in provision during the six months ended June 30, 2023, compared to the comparable period in 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 $5.7 million during the six month period ended June 30, 2023, compared to net charge-offs of $667,000 during the comparable period of 2022, an increase of $5.0 million. The increase in charge-offs during the six months ended June 30, 2023, compared to the comparable period in 2022 was the result of a charge-off of $5.5 million attributable to a single commercial borrower during the first quarter of 2023.

The Company recorded provision expense of $800,000 during the second quarter of 2023, compared to no provision expense recorded during the second quarter of 2022. Provision expense during the quarter was primarily driven by growth in the loan portfolio. Net charge-offs (recoveries) were ($43,000) during the second quarter of 2023, compared to $3,000 during the second quarter of 2022.

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.

Noninterest Income

Noninterest income categories for the six-month and three-month period ended June 30, 2023 and 2022 are shown in the following tables:


	Six Months Ended June 30,
(dollars in thousands)	2023			2022			Dollar Change		Percent Change
Wealth advisory fees	$	4,471		$	4,491		$	(20)	(0.4)	%
Investment brokerage fees	962			1,060			(98)		(9.2)
Service charges on deposit accounts	5,356			5,691			(335)		(5.9)
Loan and service fees	5,848			6,084			(236)		(3.9)
Merchant card fee income	1,806			1,719			87		5.1
Bank owned life insurance income (loss)	1,384			(266)			1,650		(620.3)
Interest rate swap fee income	794			404			390		96.5
Mortgage banking income (loss)	(134)			860			(994)		(115.6)
Net securities gains	19			0			19		100.0
Other income	1,309			1,136			173		15.2
Total noninterest income	$	21,815		$	21,179		$	636	3.0	%
Noninterest income to total revenue	17.90		%	18.46		%

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	Three Months Ended June 30,
(dollars in thousands)	2023			2022			Dollar Change		Percent Change
Wealth advisory fees	$	2,271		$	2,204		$	67	3.0	%
Investment brokerage fees	428			541			(113)		(20.9)
Service charges on deposit accounts	2,726			2,882			(156)		(5.4)
Loan and service fees	3,002			3,195			(193)		(6.0)
Merchant card fee income	929			904			25		2.8
Bank owned life insurance income (loss)	693			(183)			876		(478.7)
Interest rate swap fee income	794			354			440		124.3
Mortgage banking income (loss)	(35)			351			(386)		(110.0)
Net securities gains	3			0			3		100.0
Other income	690			244			446		182.8
Total noninterest income	$	11,501		$	10,492		$	1,009	9.6	%
Noninterest income to total revenue	19.16		%	17.73		%

Noninterest income increased by $636,000, or 3.0%, to $21.8 million for the six months ended June 30, 2023, compared to $21.2 million for the prior year six month period. The increase was driven by increases to bank owned life insurance income of $1.7 million, or 620.3%, interest rate swap fee income of $390,000, or 96.5%, and other income of $173,000, or 15.2%. Bank owned life insurance income benefited from improved market performance of the Company's variable life insurance policies which track to the overall performance of the equity markets, and from the purchase of general life insurance policies during the fourth quarter of 2022. Interest rate swap fee income increased due to increased demand for fixed rate loan arrangements among certain commercial borrowers and the Bank's utilization of back-to-back swaps to convert the fixed rate exposure to a floating rate. Other income increased due to increased dividends from the the Company's Federal Home Loan Bank stock and activity from the Company's low income housing tax credit investment holdings. These increases were offset by decreases to mortgage banking income of $994,000, or 115.6%, due to a decrease in mortgage volume, service charges on deposit accounts of $335,000, or 5.9%, and loan and service fees of $236,000, or 3.9%.

The Company’s noninterest income increased $1.0 million, or 9.6%, to $11.5 million for the second quarter of 2023, compared to $10.5 million for the second quarter of 2022. The increase in noninterest income was primarily driven by an increase in bank owned life insurance income of $876,000, or 478.7%, an increase in other income of $446,000, or 182.8%, and an increase in interest rate swap fee income of $440,000, or 124.3%. Offsetting these increases was a decrease to mortgage banking income of $386,000, or 110.0%, a decrease to loan and service fees of $193,000, or 6.0%, a decrease to service charges on deposit accounts of $156,000, or 5.4%, and a decrease to investment brokerage income of $113,000, or 20.9%. These decreases were primarily volume driven.

Noninterest Expense

Noninterest expense categories for the six-month and three-month period ended June 30, 2023 and 2022 are shown in the following tables:


	Six Months Ended June 30,
(dollars in thousands)	2023			2022			Dollar Change		Percent Change
Salaries and employee benefits	$	27,437		$	29,190		$	(1,753)	(6.0)	%
Net occupancy expense	3,253			3,317			(64)		(1.9)
Equipment costs	2,864			2,870			(6)		(0.2)
Data processing fees and supplies	6,926			6,284			642		10.2
Corporate and business development	2,729			2,652			77		2.9
FDIC insurance and other regulatory fees	1,598			1,058			540		51.0
Professional fees	4,170			2,973			1,197		40.3
Wire fraud loss	18,058			0			18,058		100.0
Other expense	5,133			6,538			(1,405)		(21.5)
Total noninterest expense	$	72,168		$	54,882		$	17,286	31.5	%
Efficiency ratio	59.22		%	47.8		%

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	Three Months Ended June 30,
(dollars in thousands)	2023			2022			Dollar Change		Percent Change
Salaries and employee benefits	$	11,374		$	14,798		$	(3,424)	(23.1)	%
Net occupancy expense	1,681			1,688			(7)		(0.4)
Equipment costs	1,426			1,459			(33)		(2.3)
Data processing fees and supplies	3,474			3,203			271		8.5
Corporate and business development	1,298			1,433			(135)		(9.4)
FDIC insurance and other regulatory fees	803			619			184		29.7
Professional fees	2,049			1,414			635		44.9
Wire fraud loss	18,058			0			18,058		100.0
Other expense	2,571			3,299			(728)		(22.1)
Total noninterest expense	$	42,734		$	27,913		$	14,821	53.1	%
Efficiency ratio	71.19		%	47.2		%

Noninterest expense increased by $17.3 million, or 31.5%, for the six months ended June 30, 2023, from $54.9 million to $72.2 million. The increase to noninterest expense during the year was driven primarily by the previously described wire fraud loss recorded as a component of noninterest expense in the amount of $18.1 million in June 2023. Adjusted core noninterest expense, which is a non-GAAP financial measure, declined by $1.1 million, or 2.0%, as compared to the prior six months ended June 30, 2022, excluding the impact of the wire fraud loss on recurring operating expense, and the related reduction of performance-based, long-term incentive compensation The primary driver of the decline in noninterest expense was a decline in other expense which included settlement accruals in 2022 offset by increase of $1.2 million, or 40.3%, an increase of $642,000, or 10.2%, in data processing fees and supplies and an increase of $540,000, or 51.0%, in FDIC insurance and other regulatory fees.

Noninterest expense increased $14.8 million, or 53.1%, to $42.7 million for the second quarter of 2023, compared to $27.9 million during the second quarter of 2022. The increase to noninterest expense during the quarter was driven primarily by the previously described wire fraud loss recorded as a component of noninterest expense in the amount of $18.1 million. Adjusted core noninterest expense, which is a non-GAAP financial measure, declined by $1.4 million, or 5.0%, as compared to the prior year quarter ended June 30, 2022, excluding the impact of the wire fraud loss and the related reduction of performance-based, long-term incentive compensation. Salaries and benefits decreased by 23.1%, or $3.4 million as compared to the prior year quarter due primarily to reduced performance-based accruals, offset partially by higher salary expense. Other expense decreased $728,000, or 22.1%, driven by a decrease in accruals pertaining to ongoing legal matters. Noninterest expense increases during the second quarter of 2023 compared to the prior year quarter included professional fees of $635,000, or 44.9%, data processing fees and supplies of $271,000, or 8.5%, and FDIC insurance and other regulatory fees of $184,000, or 29.7%.

The Company's income tax expense decreased $4.5 million, or 44.2%, in the six months ended June 30, 2023, compared to the same period in 2022. The effective tax rate was 12.7% in the six months ended June 30, 2023, compared to 17.0% for the comparable period of 2022. The year-to-date effective tax rate is reduced by the wire fraud loss, 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 $6.510 billion as of June 30, 2023 versus $6.432 billion as of December 31, 2022, an increase of $77.2 million, or 1.2%. Balance sheet expansion was driven primarily by increases to loans net of the allowance for credit losses of $152.4 million, or 3.3%, and an increase in cash and cash equivalents of $42.9 million, or 32.9%. These increases were offset by a decrease in available-for-sale securities of $123.5 million, or 10.4%. To fund the balance sheet expansion, total borrowings increased $103.0 million, or 34.7%. Total deposits decreased $37.6 million, or less than 1%, with a shift in the deposit mix from noninterest bearing deposits, which decreased $298.7 million, or 17.2%, to interest bearing deposits, which increased $261.2 million, or 7.0%. Total equity increased $23.1 million, or 4.1%, from $568.9 million at December 31, 2022 to $592.0 million at June 30, 2023. Retained earnings increased $15.3 million, or 2.4%, as a result of net income of $38.9 million, offset by dividends declared and paid of $23.5 million. Accumulated other comprehensive income (loss), increased $11.3 million, or 6.0%, due primarily to an improvement in available-for-sale securities fair market values during the six months ended June 30, 2023.

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Uses of Funds

Total Cash and Cash Equivalents

Total cash and cash equivalents increased by $42.9 million, or 32.9%, to $173.1 million at June 30, 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 June 30, 2023 was driven by an increase in interest bearing short-term investment accounts of $48.8 million, or 98.9%, offset by a decrease in cash and due from banks of $5.9 million, or 7.3%. 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, loan growth in 2023 and utilization of excess cash balances by deposit customers.

Investment Portfolio

The amortized cost and the fair value of securities as of June 30, 2023 and December 31, 2022 were as follows:


	June 30, 2023				December 31, 2022
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-Sale
U.S Treasury securities	$	3,251	$	3,232	$	3,057	$	3,034
U.S government sponsored agencies	151,029		122,086		156,184		126,961
Mortgage-backed securities: residential	545,616		462,033		578,175		492,308

State and municipal securities	564,165		474,718		663,367		563,225
Total available-for-sale	$	1,264,061	$	1,062,069	$	1,400,783	$	1,185,528

Held-to-Maturity
State and municipal securities	$	129,070	$	114,264	$	128,242	$	111,029

Total Investment Portfolio	$	1,393,131	$	1,176,333	$	1,529,025	$	1,296,557

At June 30, 2023 and December 31, 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 $4.3 million in the first six months of 2023. The purchases consisted of U.S. Treasury securities and mortgage-backed securities issued by government sponsored entities for CRA purposes. Investment securities represented 18.3% of total assets on June 30, 2023, compared to 20.4% of total assets on December 31, 2022. Effective duration for the investment portfolio was 6.6 years at June 30, 2023, compared to 4.0 years at December 31, 2019 before the pandemic, and 6.5 years at December 31, 2022. Duration of the portfolio extended following the deployment of excess liquidity to the portfolio and the dramatic rise in interest rates during 2022 and into 2023. The ratio of investment securities as a percentage of total assets remains elevated over historical levels of approximately 12-14% during 2014 to 2020. The increase in this ratio resulted from the deployment of excess liquidity during 2021 and 2022 to the investment securities portfolio as an earning asset alternative for excess balance sheet liquidity stemming from increased levels of core deposits from government stimulus programs. The Company expects the investment securities portfolio as a percentage of assets to decrease over time as the 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 $28.9 million were received in the first six months of 2023, and the amortization of premiums, net of the accretion of discounts, was $2.4 million. Maturities and calls of securities totaled $10.0 million in the first six months of 2023. Sales of available-for-sale investment securities totaled $100.0 million in the first six months of 2023 and resulted in net gains of $19,000. No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of June 30, 2023 and December 31, 2022.

The fair value of the available-for-sale investment securities portfolio as of June 30, 2023 included net unrealized losses of $202.0 million, compared to net unrealized losses of $215.3 million as of December 31, 2022. Unrealized losses in the

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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 rate environment as a result of the Federal Reserve's monetary tightening policy to combat elevated levels of 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. 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.

Real Estate Mortgage Loans Held-for-Sale

Real estate mortgage loans held-for-sale increased by $941,000, or 263.6%, to $1.3 million at June 30, 2023, from $357,000 at December 31, 2022. The balance of this asset category is subject to a high degree of variability depending on, among other factors, 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 $3.4 million in the first six months of 2023, compared to $28.4 million in the first six months of 2022. Management expects the volume of loans originated for sale in the secondary market to remain at reduced levels due to elevated mortgage rates, limited inventory, and existing homeowners being locked in at historically low rates. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $348.4 million and $364.3 million, as of June 30, 2023 and December 31, 2022, respectively.

Loan Portfolio

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


(dollars in thousands)	June 30, 2023				December 31, 2022				Current Period Change
Commercial and industrial loans	$	1,469,887	30.2	%	$	1,493,049	31.7	%	$	(23,162)
Commercial real estate and multi-family residential loans	2,376,393		48.8		2,179,094		46.2		197,299
Agri-business and agricultural loans	374,962		7.7		432,088		9.2		(57,126)
Other commercial loans	120,958		2.5		113,593		2.4		7,365
Consumer 1-4 family mortgage loans	431,385		8.9		407,566		8.6		23,819
Other consumer loans	92,139		1.9		88,075		1.9		4,064
Subtotal, gross loans	4,865,724		100.0	%	4,713,465		100.0	%	152,259
Less: Allowance for credit losses	(72,058)				(72,606)				548
Net deferred loan fees	(3,464)				(3,069)				(395)
Loans, net	$	4,790,202			$	4,637,790			$	152,412

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $152.4 million, or 3.2%, to $4.866 billion at June 30, 2023 from $4.713 billion at December 31, 2022. The increase was primarily driven by originations of loans concentrated in the commercial real estate and multi-famly residential, other commercial, and consumer 1-4 family mortgage loans categories and was offset by paydowns in commercial and industrial loans and the agri-business and agricultural loans segments, the latter of which traditionally experiences seasonal fluctuations in activity.

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The following table summarizes the Company’s non-performing assets as of June 30, 2023 and December 31, 2022:


(dollars in thousands)	June 30, 2023			December 31, 2022
Nonaccrual loans	$	18,004		$	16,964
Loans past due over 90 days and still accruing	8			123
Total nonperforming loans	18,012			17,087
Other real estate owned	384			100
Repossessions	20			37
Total nonperforming assets	$	18,416		$	17,224

Individually analyzed loans	$	18,465		$	31,327

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

Total nonperforming assets increased by $1.2 million, or 6.9%, to $18.4 million during the six month period ended June 30, 2023. The ratio of nonperforming assets to total assets increased from 0.27% at December 31, 2022 to 0.28% at June 30, 2023.

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 $12.9 million, or 41.1%, to $18.5 million at June 30, 2023 from $31.3 million at December 31, 2022, due primarily to a charge off of a single commercial credit during the first quarter of 2023.

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, 2023, the allowance for credit losses was 1.48% of total loans outstanding, versus 1.54% of total loans outstanding at December 31, 2022. At June 30, 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.

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

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office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $68.8 million for this sector represented only 1.4% of total loans at June 30, 2023.

As of June 30, 2023, based on management’s review of the loan portfolio, the Company had 59 credit relationships totaling $186.0 million on the classified loan list versus 58 credit relationships totaling $161.0 million as of December 31, 2022. The increase in classified loans for the first six months of 2023 resulted primarily from borrower risk rating downgrades of pass rated loans to the non-individually analyzed portion of the watch list. As of June 30, 2023, the Company had $163.7 million of assets classified as Special Mention, $21.5 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $115.7 million, $45.3 million, $0 and $0, respectively, at December 31, 2022. Watch list loans as a percentage of total loans increased to 3.83% as of June 30, 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 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") section of this Item 2.

The allowance for credit losses decreased $548,000, or less than 1%, from $72.6 million at December 31, 2022 to $72.1 million at June 30, 2023. The decrease was a result of net charge-offs recorded during the period of $5.7 million, offset by provision expense of $5.2 million. Of the $5.7 million in net charge-offs, $5.5 million was attributable to a single deteriorated commercial relationship which was reserved for in the allowance for credit losses. The increased provision expense recorded during the six months ended June 30, 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 well as portfolio loan growth. As the bulk of the Company’s 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 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 a stable mix of 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 June 30, 2023, the Company had access to $2.89 billion in unused liquidity available from these aggregate sources, compared to $2.99 billion at December 31, 2022.

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


	Six months ended June 30,
	2023				2022
(dollars in thousands)	Balance		Rate		Balance		Rate
Noninterest bearing demand deposits	$	1,555,877	0.00	%	$	1,895,333	0.00	%
Savings and transaction accounts:
Savings deposits	376,281		0.07		416,755		0.08
Interest bearing demand deposits	2,844,181		3.45		2,676,528		0.43
Time deposits:			.
Deposits of $100,000 or more	553,472		1.90		617,824		0.49
Other time deposits	189,734		2.91		193,873		0.68
Total deposits	$	5,519,545	2.14	%	$	5,800,313	0.28	%
FHLB advances and other borrowings	213,990		4.83		64,654		0.40
Total funding sources	$	5,733,535	2.24	%	$	5,864,967	0.28	%

Average total deposits were $5.520 billion for the six months ended June 30, 2023, a decrease of $280.8 million, or 4.8%, from the comparable period in 2022. Average total borrowings were $214.0 million for the six months ended June 30, 2023, an increase of $149.3 million, or 231.0%, from the comparable period in 2022. Total average deposit costs increased 186 basis points from 0.28% for the six months ended June 30, 2022, compared to 2.14% for the six months ended June 30, 2023. Total average borrowing costs increased 443 basis points from 0.40% for the six months ended June 302, 2022 to 4.83% for the six months ended June 30, 2023. In aggregate, these increases raised total funding costs from these sources by 196 basis points from 0.28% for the six months ended June 30, 2022, to 2.24% for the six months ended June 30, 2023.

Deposits and Borrowings

As of June 30, 2023, total deposits decreased by $37.6 million, or less than 1%, from December 31, 2022. Core deposits, which excludes brokered deposits, decreased by $95.9 million, or 1.8%, to $5.355 billion as of June 30, 2023 from $5.451 billion as of December 31, 2022. Total brokered deposits were $68.4 million at June 30, 2023, compared to $10.0 million at December 31, 2022.

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


(dollars in thousands)	June 30, 2023		Percentage of Total		December 31, 2022		Percentage of Total		Current Period Change
Retail	$	1,821,607	33.6	%	$	1,934,787	35.4	%	$	(113,180)
Commercial	2,082,564		38.4		2,085,934		38.2		(3,370)
Public funds	1,450,527		26.7		1,429,872		26.2		20,655
Core deposits	$	5,354,698	98.7	%	$	5,450,593	99.8	%	$	(95,895)
Brokered deposits	68,361		1.3		10,027		0.2		58,334
Total deposits	$	5,423,059	100.0	%	$	5,460,620	100.0	%	$	(37,561)

Commercial, retail and public funds deposit composition remained stable between June 30, 2023 and December 31, 2022. On June 30, 2023 and December 31, 2022, commercial deposits represented 38% of total deposits. Retail deposits represented 34% at June 30, 2023 versus 35% at December 31, 2022. Public Funds deposits represented 27% at June 30, 2023 versus 26% at December 31, 2022. Commercial deposits contracted $3.4 million, or less than 1%, from $2.086 billion at December 31, 2022 to $2.083 billion at June 30, 2023; retail deposits contracted $113.2 million, or 5.8%, from $1.935 billion at December 31, 2022 to $1.822 billion at June 30, 2023; and public funds deposits grew $20.7 million, or 1.4%, from $1.430 billion at December 31, 2022 to $1.451 billion at June 30, 2023.

Uninsured deposits, not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (PDIF), were 28% of total deposits as of June 30, 2023, versus 30% as of December 31, 2022. Deposits not insured by FDIC Insurance coverage (including those public fund deposits that are covered by the PDIF) were 54% as of June 30, 2023, versus 56% at

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December 31, 2022. As of June 30, 2023 and December 31, 2022, 98% of deposit accounts had deposit balances less than $250,000 and 2% of deposit accounts had deposit balances greater than $250,000.

Capital

As of June 30, 2023, total stockholders’ equity was $592.0 million, an increase of $23.1 million, or 4.1%, from $568.9 million at December 31, 2022. Net income of $38.9 million increased equity. In addition, an increase of $11.3 million in accumulated other comprehensive income (loss), primarily driven by a net increase in the fair value of available-for-sale securities, contributed to the increase. Dividends declared and paid of $0.92 per share, or $23.5 million, offset the increase to total 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, 2023, the Company's capital levels remained characterized as “well-capitalized”.

The actual capital amounts and ratios of the Company and the Bank as of June 30, 2023 and December 31, 2022, are presented in the table below. Capital ratios for June 30, 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
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2023:
Total Capital (to Risk Weighted Assets)
Consolidated	$	834,541	14.94	%	$	447,004	8.00	%	$	586,602	N/A		N/A		N/A
Bank	$	814,283	14.58	%	$	446,819	8.00	%	$	586,450	10.50	%	$	558,524	10.00	%
Tier I Capital (to Risk Weighted Assets)
Consolidated	$	764,580	13.68	%	$	335,253	6.00	%	$	474,942	N/A		N/A		N/A
Bank	$	744,351	13.33	%	$	335,114	6.00	%	$	474,745	8.50	%	$	446,819	8.00	%
Common Equity Tier 1 (CET1)
Consolidated	$	764,580	13.68	%	$	251,440	4.50	%	$	391,128	N/A		N/A		N/A
Bank	$	744,351	13.33	%	$	251,336	4.50	%	$	390,967	7.00	%	$	363,041	6.50	%
Tier I Capital (to Average Assets)
Consolidated	$	764,580	11.54	%	$	264,931	4.00	%	$	264,931	N/A		N/A		N/A
Bank	$	744,351	11.27	%	$	264,263	4.00	%	$	264,263	4.00	%	$	330,328	5.00	%

As of December 31, 2022:
Total Capital (to Risk Weighted Assets)
Consolidated	$	821,008	15.07	%	$	435,786	8.00	%	$	571,969	N/A		N/A		N/A
Bank	$	801,044	14.74	%	$	434,758	8.00	%	$	570,620	10.50	%	$	543,448	10.00	%
Tier I Capital (to Risk Weighted Assets)
Consolidated	$	752,751	13.82	%	$	326,840	6.00	%	$	463,023	N/A		N/A		N/A
Bank	$	732,966	13.49	%	$	326,069	6.00	%	$	461,930	8.50	%	$	434,758	8.00	%
Common Equity Tier 1 (CET1)
Consolidated	$	752,751	13.82	%	$	245,130	4.50	%	$	381,313	N/A		N/A		N/A
Bank	$	732,966	13.49	%	$	244,551	4.50	%	$	380,413	7.00	%	$	353,241	6.50	%
Tier I Capital (to Average Assets)
Consolidated	$	752,751	11.50	%	$	261,859	4.00	%	$	261,859	N/A		N/A		N/A
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;

•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;

•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;

•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;

•the risks related to the recent failures of First Republic Bank, 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 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 phase out of most LIBOR tenors by mid-2023 and establishment of a new reference rate or rates;

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

•the effects of fraud by or affecting employees, customers or third parties;

•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;

•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

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demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; and

•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, 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 2023. 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 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 and rising 300 basis points are listed below based upon the Company’s rate sensitive assets and liabilities at June 30, 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)	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	$	205,656	$	186,099		$	193,536		$	200,092		$	203,008		$	204,371		$	206,655		$	207,652		$	209,644		$	213,665		$	217,768
Variance from Base			$	(19,557)		$	(12,120)		$	(5,564)		$	(2,648)		$	(1,285)		$	999		$	1,996		$	3,988		$	8,009		$	12,112
Percent of change from Base			(9.51)		%	(5.89)		%	(2.71)		%	(1.29)		%	(0.62)		%	0.49		%	0.97		%	1.94		%	3.89		%	5.89		%

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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, 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, 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

Lakeland Financial Corporation and its subsidiaries are 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 matters will be material to the 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 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, 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

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PARTIES

On April 11, 2023, the Company's board of directors reauthorized and extended a share repurchase program through April 30, 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, 2023.

During the quarter ended June 30, 2023, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement, in each case as defined in Item 408 of Regulation S-K.

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


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)
April 1 - 30	0	$	0.00	0	$	30,000,000
May 1 - 31	1,701	47.85		0	30,000,000
June 1 - 30	0	0.00		0	30,000,000
Total	1,701	$	47.85	0	$	30,000,000

(a)The shares purchased during May 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. The share repurchase program terminates April 30, 2025.

Item 3. Defaults Upon Senior Securities

None

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Item 4. Mine Safety Disclosures

N/A

Item 5. Other Information

During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation

S-K.

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, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2023 and June 30, 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and June 30, 2022; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2023 and June 30, 2022; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and June 30, 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 2, 2023			/s/ David M. Findlay
			David M. Findlay – Chief Executive Officer

Date: August 2, 2023			/s/ Lisa M. O’Neill
			Lisa M. O’Neill – Executive Vice President and
			Chief Financial Officer
			(principal financial officer)

Date: August 2, 2023			/s/ Brok A. Lahrman
			Brok A. Lahrman – Senior Vice President and Chief Accounting Officer
			(principal accounting officer)

Document

Exhibit 31.1

I, David M. Findlay, Chief Executive Officer of Lakeland Financial Corporation, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Lakeland Financial Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and;

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 2, 2023			/s/ David M. Findlay
			David M. Findlay
			Chief Executive Officer

Document

Exhibit 31.2

I, Lisa M. O’Neill, Chief Financial Officer of Lakeland Financial Corporation, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Lakeland Financial Corporation;

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and;

a.All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 2, 2023			/s/ Lisa M. O’Neill
			Lisa M. O’Neill
			Chief Financial Officer

Document

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lakeland Financial Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David M. Findlay, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.


/s/ David M. Findlay
David M. Findlay
Chief Executive Officer
August 2, 2023

A signed original of this written statement required by Section 906 has been provided to Lakeland Financial Corporation and will be retained by Lakeland Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Document

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lakeland Financial Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lisa M. O’Neill, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Lisa M. O’Neill
Lisa M. O’Neill
Chief Financial Officer
August 2, 2023