Midland States Bancorp, Inc. - Quarter Report: 2023 June (Form 10-Q)

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 001-35272

MIDLAND STATES BANCORP, INC.

(Exact name of registrant as specified in its charter)

Illinois

37-1233196

(State of other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1201 Network Centre Drive

62401

Effingham, IL

(Zip Code)

(Address of principal executive offices)

(217) 342-7321

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	MSBI	The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/40th interest in a share of 7.75% fixed rate reset non-cumulative perpetual preferred stock, Series A	MSBIP	The Nasdaq Stock Market LLC

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, a 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 Act). ☐ Yes ☒ No

As of July 21, 2023, the Registrant had 21,796,334 shares of outstanding common stock, $0.01 par value.

Table o f Contents

MIDLAND STATES BANCORP, INC.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets at June 30, 2023 (Unaudited) and December 31, 2022	3

	Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2023 and 2022	4

	Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2023 and 2022	5

	Consolidated Statements of Shareholders’ Equity (Unaudited) for the three and six months ended June 30, 2023 and 2022	6

	Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2023 and 2022	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	61

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 5.	Other Information	62

Item 6.	Exhibits	63

SIGNATURES		64

Table o f Contents

PART I – FINANCIAL INFORMATION


Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Comprehensive Income			5
Consolidated Statements of Shareholders' Equity			6
Consolidated Statements of Cash Flows			7
Note 1: Business Description			8
Note 2: Basis of Presentation and Summary of Significant Accounting Policies			8
Note 3: Investment Securities			9
Note 4: Loans			11
Note 5: Premises, Equipment and Leases			25
Note 6: Loan Servicing Rights			26

Note 7: Derivative Instruments			26
Note 8: Deposits			27
Note 9: Short-Term Borrowings			28
Note 10: FHLB Advances and Other Borrowings			28
Note 11: Subordinated Debt			29
Note 12: Earnings Per Common Share			29
Note 13: Fair Value of Financial Instruments			30
Note 14: Commitments, Contingencies and Credit Risk			35
Note 15: Segment Information			36
Note 16: Revenue From Contracts with Customers			38

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ITEM 1 – FINANCIAL STATEMENTS

MIDLAND STATES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)


	June 30, 2023		December 31, 2022
	(unaudited)
Assets
Cash and due from banks	$	159,637	$	153,345
Federal funds sold	1,058		7,286
Cash and cash equivalents	160,695		160,631
Investment securities available for sale, at fair value	882,715		768,234
Equity securities, at fair value	4,288		8,626
Loans	6,367,344		6,306,467
Allowance for credit losses on loans	(64,950)		(61,051)
Total loans, net	6,302,394		6,245,416
Loans held for sale	5,632		1,286
Premises and equipment, net	81,006		78,293

Other real estate owned	202		6,729
Nonmarketable equity securities	46,876		46,201
Accrued interest receivable	21,000		20,313
Loan servicing rights, at lower of cost or fair value	21,611		1,205
Commercial FHA mortgage loan servicing rights held for sale	—		20,745
Goodwill	161,904		161,904
Other intangible assets, net	18,367		20,866
Company-owned life insurance	152,210		150,443
Other assets	175,821		164,609
Total assets	$	8,034,721	$	7,855,501

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	1,162,909	$	1,362,158
Interest-bearing deposits	5,263,639		5,002,494
Total deposits	6,426,548		6,364,652
Short-term borrowings	21,783		42,311
Federal Home Loan Bank advances and other borrowings	575,000		460,000
Subordinated debt	93,404		99,772
Trust preferred debentures	50,296		49,975

Accrued interest payable and other liabilities	90,869		80,217
Total liabilities	7,257,900		7,096,927

Shareholders’ Equity:
Preferred stock, $2.00 par value; 4,000,000 shares authorized; 115,000 Series A shares, $1,000 per share liquidation preference, issued and outstanding at June 30, 2023 and December 31, 2022, respectively	110,548		110,548
Common stock, $0.01 par value; 40,000,000 shares authorized; 21,854,800 and 22,214,913 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively	218		222
Capital surplus	442,886		449,196
Retained earnings	307,888		282,405
Accumulated other comprehensive loss, net of tax	(84,719)		(83,797)
Total shareholders’ equity	776,821		758,574
Total liabilities and shareholders’ equity	$	8,034,721	$	7,855,501

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

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME — (UNAUDITED)

(dollars in thousands, except per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Interest income:
Loans including fees:
Taxable	$	91,350	$	62,943	$	178,809	$	119,529
Tax exempt	427		514		852		1,062
Loans held for sale	59		77		75		297
Investment securities:
Taxable	6,899		4,055		12,269		7,952
Tax exempt	305		692		799		1,534
Nonmarketable equity securities	599		487		1,394		971
Federal funds sold and cash investments	852		468		1,832		639
Total interest income	100,491		69,236		196,030		131,984
Interest expense:
Deposits	33,617		3,810		60,022		5,971
Short-term borrowings	14		22		39		45
Federal Home Loan Bank advances and other borrowings	5,396		1,435		11,402		2,647
Subordinated debt	1,335		2,011		2,705		4,022
Trust preferred debentures	1,289		624		2,518		1,138
Total interest expense	41,651		7,902		76,686		13,823
Net interest income	58,840		61,334		119,344		118,161
Provision for credit losses:
Provision for credit losses on loans	5,879		4,741		9,014		8,873
Provision for credit losses on unfunded commitments	—		700		—		956
Recapture of other credit losses	—		—		—		(221)
Total provision for credit losses	5,879		5,441		9,014		9,608
Net interest income after provision for credit losses	52,961		55,893		110,330		108,553
Noninterest income:
Wealth management revenue	6,269		6,143		12,680		13,282

Residential mortgage banking revenue	540		384		945		983
Service charges on deposit accounts	2,677		2,304		5,245		4,372
Interchange revenue	3,696		3,590		7,108		6,870
Loss on sales of investment securities, net	(869)		(101)		(1,517)		(101)


Impairment on commercial mortgage servicing rights	—		(869)		—		(1,263)
Company-owned life insurance	891		840		1,767		1,859
Other income	5,549		2,322		8,304		4,224
Total noninterest income	18,753		14,613		34,532		30,226
Noninterest expense:
Salaries and employee benefits	22,857		22,645		47,100		44,515
Occupancy and equipment	3,879		3,489		8,322		7,244
Data processing	6,544		6,082		12,855		11,955
FDIC insurance	1,196		826		2,525		1,656
Professional	1,663		1,516		3,423		3,488
Marketing	670		733		1,373		1,421
Communications	496		635		1,007		1,347
Loan expense	1,420		1,137		2,238		2,080
Amortization of intangible assets	1,208		1,318		2,499		2,716




Other expense	2,961		2,958		6,034		5,801
Total noninterest expense	42,894		41,339		87,376		82,223
Income before income taxes	28,820		29,167		57,486		56,556
Income taxes	7,245		7,284		14,139		13,924
Net income	21,575		21,883		43,347		42,632
Preferred dividends	2,228		—		4,456		—
Net income available to common shareholders	$	19,347	$	21,883	$	38,891	$	42,632
Per common share data:
Basic earnings per common share	$	0.86	$	0.97	$	1.72	$	1.89
Diluted earnings per common share	$	0.86	$	0.97	$	1.72	$	1.89
Weighted average common shares outstanding	22,200,917		22,305,590		22,338,627		22,290,486
Weighted average diluted common shares outstanding	22,205,079		22,360,819		22,348,981		22,355,936

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

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — (UNAUDITED)

(dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	21,575	$	21,883	$	43,347	$	42,632
Other comprehensive loss:
Investment securities available for sale:
Unrealized losses that occurred during the period	(8,020)		(32,659)		(2,656)		(83,435)
Recapture of credit loss expense	—		—		—		(221)
Reclassification adjustment for realized net losses on sales of investment securities included in net income	869		101		1,517		101
Income tax effect	1,930		8,953		308		22,977
Change in investment securities available for sale, net of tax	(5,221)		(23,605)		(831)		(60,578)
Cash flow hedges:
Net unrealized derivative (losses) gains on cash flow hedges	(2,331)		(2,010)		(125)		3,095

Income tax effect	630		553		34		(851)
Change in cash flow hedges, net of tax	(1,701)		(1,457)		(91)		2,244
Other comprehensive loss, net of tax	(6,922)		(25,062)		(922)		(58,334)
Total comprehensive income (loss)	$	14,653	$	(3,179)	$	42,425	$	(15,702)

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

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY — (UNAUDITED)

(dollars in thousands, except per share data)


	Preferred stock		Common stock		Capital surplus		Retained earnings		Accumulated other comprehensive (loss) income		Total shareholders' equity
Balances, March 31, 2023	$	110,548	$	221	$	447,471	$	295,200	$	(77,797)	$	775,643
Net income	—		—		—		21,575		—		21,575
Other comprehensive loss	—		—		—		—		(6,922)		(6,922)

Common dividends declared ($0.30 per share)	—		—		—		(6,659)		—		(6,659)
Preferred dividends declared ($19.375 per share)	—		—		—		(2,228)		—		(2,228)
Common stock repurchased	—		(3)		(6,163)		—		—		(6,166)
Share-based compensation expense	—		—		567		—		—		567
Issuance of common stock under employee benefit plans	—				1,011		—		—		1,011
Balances, June 30, 2023	$	110,548	$	218	$	442,886	$	307,888	$	(84,719)	$	776,821

Balances, December 31, 2022	$	110,548	$	222	$	449,196	$	282,405	$	(83,797)	$	758,574
Net income	—		—		—		43,347		—		43,347
Other comprehensive loss	—		—		—		—		(922)		(922)

Common dividends declared ($0.60 per share)	—		—		—		(13,408)		—		(13,408)
Preferred dividends declared ($38.750 per share)	—		—		—		(4,456)		—		(4,456)
Common stock repurchased	—		(4)		(8,963)		—		—		(8,967)
Share-based compensation expense	—		—		1,192		—		—		1,192
Issuance of common stock under employee benefit plans	—		—		1,461		—		—		1,461
Balances, June 30, 2023	$	110,548	$	218	$	442,886	$	307,888	$	(84,719)	$	776,821

Balances, March 31, 2022	$	—	$	220	$	446,044	$	226,757	$	(28,035)	$	644,986
Net income	—		—		—		21,883		—		21,883
Other comprehensive loss	—		—		—		—		(25,062)		(25,062)
Common dividends declared ($0.29 per share)	—		—		—		(6,470)		—		(6,470)

Share-based compensation expense	—		—		519		—		—		519
Issuance of common stock under employee benefit plans	—		1		331		—		—		332
Balances, June 30, 2022	$	—	$	221	$	446,894	$	242,170	$	(53,097)	$	636,188

Balances, December 31, 2021	$	—	$	221	$	445,907	$	212,472	$	5,237	$	663,837


Net income	—		—		—		42,632		—		42,632
Other comprehensive loss	—		—		—		—		(58,334)		(58,334)
Common dividends declared ($0.58 per share)	—		—		—		(12,934)		—		(12,934)
Common stock repurchased	—		(1)		(1,108)		—		—		(1,109)
Share-based compensation expense	—		—		1,046		—		—		1,046
Issuance of common stock under employee benefit plans	—		1		1,049		—		—		1,050
Balances, June 30, 2022	$	—	$	221	$	446,894	$	242,170	$	(53,097)	$	636,188

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

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MIDLAND STATES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED)

(dollars in thousands)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net income	$	43,347	$	42,632
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	9,014		9,608
Depreciation on premises and equipment	2,419		2,445
Amortization of intangible assets	2,499		2,716
Amortization of operating lease right-of-use asset	844		904
Amortization of loan servicing rights	172		1,507
Share-based compensation expense	1,192		1,046
Increase in cash surrender value of life insurance	(1,767)		(1,671)
Gain on proceeds from company-owned life insurance	—		(188)
Investment securities (accretion) amortization, net	(808)		1,440

Loss on sales of investment securities, net	1,517		101
Gain on repurchase of subordinated debt	(676)		—
Gain on sales of other real estate owned	(819)		120
Impairment on other real estate owned	—		404
Origination of loans held for sale	(27,259)		(100,806)
Proceeds from sales of loans held for sale	34,344		203,545
Gain on sale of loans held for sale	(1,144)		(799)
Impairment on commercial mortgage servicing rights	—		1,263


Net change in operating assets and liabilities:
Accrued interest receivable	(687)		2,954
Other assets	(11,430)		(17,039)
Accrued expenses and other liabilities	9,995		4,295
Net cash provided by operating activities	60,753		154,477
Cash flows from investing activities:
Purchases of investment securities available for sale	(245,744)		(99,882)
Proceeds from sales of investment securities available for sale	99,960		107,740
Maturities and payments on investment securities available for sale	29,455		53,329
Purchases of equity securities	(192)		(379)
Proceeds from sales of equity securities	5,148		—
Net increase in loans	(76,502)		(634,229)

Purchases of premises and equipment	(4,688)		(928)
Proceeds from sale of premises and equipment	50		143
Purchases of nonmarketable equity securities	(66,572)		(1,860)
Proceeds from redemptions of nonmarketable equity securities	65,897		2,500

Proceeds from sales of other real estate owned	7,346		505

Proceeds from settlements of company-owned life insurance	—		1,337
Net cash acquired in acquisitions	—		60,275
Net cash used in investing activities	(185,842)		(511,449)
Cash flows from financing activities:
Net increase (decrease) in deposits	61,896		(6,004)
Net decrease in short-term borrowings	(20,528)		(9,114)
Proceeds from FHLB borrowings	11,246,000		700,000
Payments made on FHLB borrowings and other borrowings	(11,131,000)		(725,000)

Payments made on subordinated debt	(5,845)		—


Cash dividends paid on preferred stock	(4,456)		—
Cash dividends paid on common stock	(13,408)		(12,934)
Redemption of Series G preferred stock	—		(171)
Common stock repurchased	(8,967)		(1,109)
Proceeds from issuance of common stock under employee benefit plans	1,461		1,050
Net cash provided by (used in) financing activities	125,153		(53,282)
Net increase (decrease) in cash and cash equivalents	64		(410,254)
Cash and cash equivalents:
Beginning of period	160,631		680,371
End of period	$	160,695	$	270,117
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowed funds	$	69,828	$	13,746
Income tax paid (net of refunds)	11,024		16,606
Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	—		74,997
Transfer of loans to other real estate owned	—		102
Right of use assets obtained in exchange for lease obligations	1,348		121

Transfer of loan servicing rights held for sale to loan servicing rights, at lower of cost or market	20,745		—

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

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MIDLAND STATES BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED)

NOTE 1 – BUSINESS DESCRIPTION

Midland States Bancorp, Inc. (the “Company,” “we,” “our,” or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Our wholly owned banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri, and provides a full range of commercial and consumer banking products and services, business equipment financing, merchant credit card services, trust and investment management services, and insurance and financial planning services.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; commercial Federal Housing Administration ("FHA") mortgage loan servicing; residential mortgage loan originations, sales and servicing; and, from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for credit losses and income tax expense.

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for annual periods presented herein, have been included. Certain reclassifications of 2022 amounts have been made to conform to the 2023 presentation but do not have an effect on net income or shareholders’ equity.

Principles of Consolidation

The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.

Accounting Guidance Adopted in 2023

FASB ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures – In March 2022, the FASB issued ASU No. 2022-02, which 1) eliminates the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty; and 2) requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022 and the amendments should be applied prospectively, although the entity has the option to apply a modified retrospective transition method for the recognition and measurement of TDRs, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted this guidance on January 1, 2023 and elected to apply on a prospective basis. The adoption of this accounting pronouncement did not have an impact on the consolidated financial statements aside from additional and revised disclosures.

Accounting Guidance Issued But Not Yet Adopted

FASB ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting – In March 2020, the FASB issued ASU No. 2020-04, allowing for optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision based on the expectations of when LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023.

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In December 2022, to ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the FASB issued ASU No. 2022-06, which defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

The Company has been monitoring its volume of commercial loans tied to LIBOR. In 2021, the Company began prioritizing SOFR as the preferred alternative reference rate with plans to cease booking LIBOR based commitments after the end of 2021. Loans with a maturity after June 2023 are being reviewed and monitored to ensure there is appropriate fallback language in place when LIBOR is no longer published. Loans with a maturity date before that time should naturally mature and be re-underwritten with the alternative index rate.

The Company believes the adoption of this guidance will not have a material impact on the consolidated financial statements.

NOTE 3 – INVESTMENT SECURITIES

Investment Securities Available for Sale

Investment securities available for sale at June 30, 2023 and December 31, 2022 were as follows:


	June 30, 2023
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury securities	$	46,636	$	—	$	3,890	$	42,746
U.S. government sponsored entities and U.S. agency securities	77,510		—		4,052		73,458
Mortgage-backed securities - agency	612,214		640		74,220		538,634
Mortgage-backed securities - non-agency	69,921		—		4,010		65,911
State and municipal securities	64,481		8		6,995		57,494
Collateralized loan obligations	22,709		—		—		22,709
Corporate securities	95,172		—		13,409		81,763
Total available for sale securities	$	988,643	$	648	$	106,576	$	882,715


	December 31, 2022
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Investment securities available for sale
U.S. Treasury securities	$	86,313	$	113	$	5,196	$	81,230
U.S. government sponsored entities and U.S. agency securities	41,775		71		4,337		37,509
Mortgage-backed securities - agency	522,028		268		74,146		448,150
Mortgage-backed securities - non-agency	24,922		—		4,168		20,754
State and municipal securities	102,719		149		8,232		94,636
Corporate securities	95,266		—		9,311		85,955
Total available for sale securities	$	873,023	$	601	$	105,390	$	768,234

The following is a summary of the amortized cost and fair value of the investment securities available for sale, by maturity, at June 30, 2023. Expected maturities may differ from contractual maturities in mortgage-backed securities because

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the mortgages underlying the securities may be prepaid without penalties. The maturities of all other investment securities available for sale are based on final contractual maturity.


(dollars in thousands)	Amortized cost		Fair value
Investment securities available for sale
Within one year	$	23,829	$	23,763
After one year through five years	144,513		136,304
After five years through ten years	48,352		42,895
After ten years	89,814		75,208
Mortgage-backed securities	682,135		604,545
Total available for sale securities	$	988,643	$	882,715

Proceeds and gross realized gains and losses on sales of investment securities available for sale for the three and six months ended June 30, 2023 and 2022 are summarized as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2023		2022		2023		2022
Investment securities available for sale
Proceeds from sales	$	15,467	$	107,740	$	99,960	$	107,740
Gross realized gains on sales	—		716		338		716
Gross realized losses on sales	(869)		(817)		(1,855)		(817)

Unrealized losses and fair values for investment securities available for sale as of June 30, 2023 and December 31, 2022, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:


	June 30, 2023
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Investment securities available for sale
U.S. Treasury securities	$	970	$	11	$	41,776	$	3,879	$	42,746	$	3,890
U.S. government sponsored entities and U.S. agency securities	49,365		171		24,093		3,881		73,458		4,052
Mortgage-backed securities - agency	124,341		2,251		363,472		71,969		487,813		74,220
Mortgage-backed securities - non-agency	21,926		141		20,147		3,869		42,073		4,010
State and municipal securities	8,905		201		46,959		6,794		55,864		6,995
Corporate securities	3,164		336		78,599		13,073		81,763		13,409
Total available for sale securities	$	208,671	$	3,111	$	575,046	$	103,465	$	783,717	$	106,576

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	December 31, 2022
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Investment securities available for sale
U.S. Treasury securities	$	1,839	$	24	$	59,865	$	5,172	$	61,704	$	5,196
U.S. government sponsored entities and U.S. agency securities	10,288		40		23,453		4,297		33,741		4,337
Mortgage-backed securities - agency	152,657		9,736		273,353		64,410		426,010		74,146
Mortgage-backed securities - non-agency	1,924		270		18,830		3,898		20,754		4,168
State and municipal securities	35,603		1,662		41,538		6,570		77,141		8,232
Corporate securities	39,595		3,400		46,360		5,911		85,955		9,311
Total available for sale securities	$	241,906	$	15,132	$	463,399	$	90,258	$	705,305	$	105,390

At June 30, 2023, 320 investment securities available for sale had unrealized losses with aggregate depreciation of 11.93% from their amortized cost basis. For all of the above investment securities, the unrealized losses were generally due to changes in interest rates, and unrealized losses were considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity dates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The Company does not intend to sell and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery.

NOTE 4 – LOANS

The following table presents total loans outstanding by portfolio class, as of June 30, 2023 and December 31, 2022:


(dollars in thousands)	June 30, 2023		December 31, 2022
Commercial:
Commercial	$	875,295	$	786,877
Commercial other	732,616		727,697
Commercial real estate:
Commercial real estate non-owner occupied	1,647,680		1,591,399
Commercial real estate owner occupied	453,514		496,786
Multi-family	273,939		277,889
Farmland	68,862		67,085
Construction and land development	366,631		320,882
Total commercial loans	4,418,537		4,268,615
Residential real estate:
Residential first lien	311,796		304,243
Other residential	59,690		61,851
Consumer:
Consumer	108,619		105,880
Consumer other	968,217		1,074,134
Lease financing	500,485		491,744
Total loans	$	6,367,344	$	6,306,467

Total loans include net deferred loan costs of $5.7 million and $4.4 million at June 30, 2023 and December 31, 2022, respectively, and unearned discounts of $67.5 million and $62.6 million within the lease financing portfolio at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the Company had residential real estate loans held for sale totaling $5.6 million, compared to $1.3 million at December 31, 2022. The Company sold loans and leases with proceeds totaling $28.0 million and $34.3 million during the three and six months ended June 30, 2023, respectively, and $100.4 million and $203.5 million during the three and six months ended June 30, 2022, respectively.

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Classifications of Loan Portfolio

The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Company monitors the performance of its loan portfolio and estimates its allowance for credit losses on loans.

Commercial—Loans to varying types of businesses, including municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital, operational needs and term financing of equipment. Repayment of such loans is generally provided through operating cash flows of the business. Commercial loans are predominately secured by equipment, inventory, accounts receivable, and other sources of repayment. Commercial FHA warehouse lines of $30.5 million and $25.0 million as of June 30, 2023 and December 31, 2022, respectively, were included in this classification.

Commercial real estate—Loans secured by real estate occupied by the borrower for ongoing operations, including loans to borrowers engaged in agricultural production, and non-owner occupied real estate leased to one or more tenants, including commercial office, industrial, special purpose, retail and multi-family residential real estate loans.

Construction and land development—Secured loans for the construction of business and residential properties. Real estate construction loans often convert to a real estate commercial loan at the completion of the construction period. Secured development loans are made to borrowers for the purpose of infrastructure improvements to vacant land to create finished marketable residential and commercial lots/land. Most land development loans are originated with the intention that the loans will be paid through the sale of developed lots/land by the developers within twelve months of the completion date. Interest reserves may be established on real estate construction loans.

Residential real estate—Loans secured by residential properties that generally do not qualify for secondary market sale; however, the risk to return and/or overall relationship are considered acceptable to the Company. This category also includes loans whereby consumers utilize equity in their personal residence, generally through a second mortgage, as collateral to secure the loan.

Consumer—Loans to consumers primarily for the purpose of home improvements or acquiring automobiles, recreational vehicles and boats. Consumer loans consist of relatively small amounts that are spread across many individual borrowers.

Lease financing—Our equipment leasing business provides financing leases to varying types of businesses, nationwide, for purchases of business equipment and software. The financing is secured by a first priority interest in the financed assets and generally requires monthly payments.

Commercial, commercial real estate, and construction and land development loans are collectively referred to as the Company’s commercial loan portfolio, while residential real estate, consumer loans and lease financing receivables are collectively referred to as the Company’s other loan portfolio.

We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. These loans were made in the ordinary course of business upon substantially the same terms, including collateralization and interest rates prevailing at the time. The aggregate loans outstanding to the Company's directors, executive officers, principal shareholders and their affiliates totaled $21.6 million and $19.8 million at June 30, 2023 and December 31, 2022, respectively. The new loans, other additions, repayments and other reductions for the three and six months ended June 30, 2023 and 2022, are summarized as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2023		2022		2023		2022
Beginning balance	$	19,519	$	23,374	$	19,776	$	13,869
New loans and other additions	2,367		—		2,367		9,805
Repayments and other reductions	(317)		(277)		(574)		(577)
Ending balance	$	21,569	$	23,097	$	21,569	$	23,097

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The following table represents, by loan portfolio segment, a summary of changes in the allowance for credit losses on loans for the three and six months ended June 30, 2023 and 2022:


	Commercial Loan Portfolio						Other Loan Portfolio
(dollars in thousands)	Commercial		Commercial real estate		Construction and land development		Residential real estate		Consumer		Lease financing		Total
Changes in allowance for credit losses on loans for the three months ended June 30, 2023:
Balance, beginning of period	$	15,762	$	28,216	$	2,442	$	4,350	$	4,129	$	7,168	$	62,067
Provision for credit losses on loans	196		2,427		1,049		1,207		4		996		5,879
Charge-offs	(1,071)		(1,544)		(334)		(54)		(260)		(771)		(4,034)
Recoveries	403		326		32		48		80		149		1,038
Balance, end of period	$	15,290	$	29,425	$	3,189	$	5,551	$	3,953	$	7,542	$	64,950

Changes in allowance for credit losses on loans for the six months ended June 30, 2023:
Balance, beginning of period	$	14,639	$	29,290	$	2,435	$	4,301	$	3,599	$	6,787	$	61,051
Provision for credit losses on loans	2,194		2,097		1,056		1,270		704		1,693		9,014
Charge-offs	(2,040)		(2,290)		(334)		(85)		(523)		(1,161)		(6,433)
Recoveries	497		328		32		65		173		223		1,318
Balance, end of period	$	15,290	$	29,425	$	3,189	$	5,551	$	3,953	$	7,542	$	64,950

Changes in allowance for credit losses on loans for the three months ended June 30, 2022:
Balance, beginning of period	$	12,621	$	26,277	$	816	$	3,288	$	2,672	$	7,264	$	52,938
Provision for credit losses on loans	(111)		4,284		279		133		415		(259)		4,741
Charge-offs	(60)		(2,625)		—		(46)		(191)		(499)		(3,421)
Recoveries	298		(62)		6		41		98		259		640
Balance, end of period	$	12,748	$	27,874	$	1,101	$	3,416	$	2,994	$	6,765	$	54,898

Changes in allowance for credit losses on loans for the six months ended June 30, 2022:
Balance, beginning of period	$	14,375	$	22,993	$	972	$	2,695	$	2,558	$	7,469	$	51,062
Provision for credit losses on loans	278		7,728		123		717		672		(645)		8,873
Charge-offs	(2,214)		(2,852)		(6)		(150)		(496)		(705)		(6,423)
Recoveries	309		5		12		154		260		646		1,386
Balance, end of period	$	12,748	$	27,874	$	1,101	$	3,416	$	2,994	$	6,765	$	54,898

The Company utilizes a combination of models which measure probability of default and loss given default methodology in determining expected future credit losses.

The probability of default is the risk that the borrower will be unable or unwilling to repay its debt in full or on time. The risk of default is derived by analyzing the obligor’s capacity to repay the debt in accordance with contractual terms. Probability of default is generally associated with financial characteristics such as inadequate cash flow to service debt, declining revenues or operating margins, high leverage, declining or marginal liquidity, and the inability to successfully implement a business plan. In addition to these quantifiable factors, the borrower’s willingness to repay also must be evaluated.

The probability of default is forecasted, for most commercial and retail loans, using a regression model that determines the likelihood of default within the twelve month time horizon. The regression model uses forward-looking economic forecasts including variables such as gross domestic product, housing price index, and real disposable income to predict default rates. The forecasting method for the equipment financing portfolio assumes a rolling twelve-month average of the through-the-cycle default rate, to predict default rates for the twelve month time horizon.

The loss given default component is the percentage of defaulted loan balance that is ultimately charged off. As a method for estimating the allowance, a form of migration analysis is used that combines the estimated probability of loans experiencing default events and the losses ultimately associated with the loans experiencing those defaults. Multiplying one by

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the other gives the Company its loss rate, which is then applied to the loan portfolio balance to determine expected future losses.

Within the model, the loss given default approach produces segmented loss given default estimates using a loss curve methodology, which is based on historical net losses from charge-off and recovery information. The main principle of a loss curve model is that the loss follows a steady timing schedule based on how long the defaulted loan has been on the books.

The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2012 through the current period on a monthly basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.

Historical data is evaluated in multiple components of the expected credit loss, including the reasonable and supportable forecast and the post-reversion period of each loan segment. The historical experience is used to infer probability of default and loss given default in the reasonable and supportable forecast period. In the post-reversion period, long-term average loss rates are segmented by loan pool.

Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.

The Company segments the loan portfolio into pools based on the following risk characteristics: financial asset type, collateral type, loan characteristics, credit characteristics, outstanding loan balances, contractual terms and prepayment assumptions, industry of borrower and concentrations, historical or expected credit loss patterns, and reasonable and supportable forecast periods.

Within the probability of default segmentation, credit metrics are identified to further segment the financial assets. The Company utilizes risk ratings for the commercial portfolios and days past due for the consumer and the lease financing portfolios.

The Company has defined five transitioning risk states for each asset pool within the expected credit loss model. The below table illustrates the transition matrix:


Risk state	Commercial loans risk rating	Consumer loans and equipment finance loans and leases days past due
1	0-5	0-14
2	6	15-29
3	7	30-59
4	8	60-89
Default	9+ and nonaccrual	90+ and nonaccrual

Expected Credit Losses

In calculating expected credit losses, the Company individually evaluates loans on nonaccrual status with a balance greater than $500,000, loans past due 90 days or more and still accruing interest, and loans that do not share risk characteristics

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with other loans in the pool. The following table presents amortized cost basis of individually evaluated loans on nonaccrual status as of June 30, 2023 and December 31, 2022:


	June 30, 2023						December 31, 2022
(dollars in thousands)	Nonaccrual with allowance		Nonaccrual with no allowance		Total nonaccrual		Nonaccrual with allowance		Nonaccrual with no allowance		Total nonaccrual
Commercial:
Commercial	$	1,604	$	969	$	2,573	$	1,910	$	1,111	$	3,021
Commercial other	3,537		—		3,537		3,169		—		3,169
Commercial real estate:
Commercial real estate non-owner occupied	12,016		9,092		21,108		1,345		11,899		13,244
Commercial real estate owner occupied	2,741		11,647		14,388		7,118		—		7,118
Multi-family	269		2,673		2,942		154		8,949		9,103
Farmland	172		—		172		25		—		25
Construction and land development	2,234		—		2,234		202		—		202
Total commercial loans	22,573		24,381		46,954		13,923		21,959		35,882
Residential real estate:
Residential first lien	2,865		559		3,424		2,925		572		3,497
Other residential	495		—		495		871		—		871
Consumer:
Consumer	97		—		97		120		—		120

Lease financing	3,413		—		3,413		1,606		—		1,606
Total loans	$	29,443	$	24,940	$	54,383	$	19,445	$	22,531	$	41,976

There was no interest income recognized on nonaccrual loans during the three and six months ended June 30, 2023 and 2022 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $0.8 million and $1.6 million for the three and six months ended June 30, 2023 and $0.5 million and $1.3 million for the three and six months ended June 30, 2022, respectively.

Collateral Dependent Financial Assets

A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of

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protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral’s value increases and the loan may become collateral dependent.

The table below presents the value of individually evaluated, collateral dependent loans by loan class, for borrowers experiencing financial difficulty, as of June 30, 2023 and December 31, 2022:


	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Equipment		Total
June 30, 2023
Commercial:
Commercial	$	2,053	$	969	$	—	$	3,022

Commercial real estate:
Non-owner occupied	19,401		—		—		19,401
Owner occupied	11,637		—		—		11,637
Multi-family	2,674		—		—		2,674



Lease financing	—		—		955		955
Total collateral dependent loans	$	35,765	$	969	$	955	$	37,689

December 31, 2022
Commercial:
Commercial	$	—	$	1,604	$	—	$	1,604

Commercial real estate:
Non-owner occupied	13,033		—		—		13,033
Owner occupied	3,874		—		—		3,874
Multi-family	8,950		—		—		8,950

Residential real estate
Residential first lien	220		—		—		220

Total collateral dependent loans	$	26,077	$	1,604	$	—	$	27,681

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The aging status of the recorded investment in loans by portfolio as of June 30, 2023 was as follows:


	Accruing loans
(dollars in thousands)	30-59 days past due		60-89 days past due		Past due 90 days or more		Total past due		Nonaccrual		Current		Total
Commercial:
Commercial	$	5,880	$	5,554	$	—	$	11,434	$	2,573	$	861,288	$	875,295
Commercial other	8,921		3,503		71		12,495		3,537		716,584		732,616
Commercial real estate:
Commercial real estate non-owner occupied	5		23		—		28		21,108		1,626,544		1,647,680
Commercial real estate owner occupied	107		—		—		107		14,388		439,019		453,514
Multi-family	—		—		—		—		2,942		270,997		273,939
Farmland	152		—		—		152		172		68,538		68,862
Construction and land development	200		—		—		200		2,234		364,197		366,631
Total commercial loans	15,265		9,080		71		24,416		46,954		4,347,167		4,418,537
Residential real estate:
Residential first lien	6		115		36		157		3,424		308,215		311,796
Other residential	39		33		—		72		495		59,123		59,690
Consumer:
Consumer	405		31		—		436		97		108,086		108,619
Consumer other	5,717		3,844		—		9,561		—		958,656		968,217
Lease financing	5,161		4,465		354		9,980		3,413		487,092		500,485
Total loans	$	26,593	$	17,568	$	461	$	44,622	$	54,383	$	6,268,339	$	6,367,344

The aging status of the recorded investment in loans by portfolio as of December 31, 2022 was as follows:


	Accruing loans
(dollars in thousands)	30-59 days past due		60-89 days past due		Past due 90 days or more		Total past due		Nonaccrual		Current		Total
Commercial:
Commercial	$	7	$	112	$	—	$	119	$	3,021	$	783,737	$	786,877
Commercial other	6,035		2,365		—		8,400		3,169		716,128		727,697
Commercial real estate:
Commercial real estate non-owner occupied	1,008		999		—		2,007		13,244		1,576,148		1,591,399
Commercial real estate owner occupied	73		—		—		73		7,118		489,595		496,786
Multi-family	—		—		—		—		9,103		268,786		277,889
Farmland	—		—		—		—		25		67,060		67,085
Construction and land development	—		6,000		—		6,000		202		314,680		320,882
Total commercial loans	7,123		9,476		—		16,599		35,882		4,216,134		4,268,615
Residential real estate:
Residential first lien	82		456		428		966		3,497		299,780		304,243
Other residential	188		13		—		201		871		60,779		61,851
Consumer:
Consumer	139		18		12		169		120		105,591		105,880
Consumer other	5,381		3,559		733		9,673		—		1,064,461		1,074,134
Lease financing	4,415		1,522		—		5,937		1,606		484,201		491,744
Total loans	$	17,328	$	15,044	$	1,173	$	33,545	$	41,976	$	6,230,946	$	6,306,467

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Loan Restructurings

The Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of a troubled debt restructuring ("TDR"). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows.

The Company may offer various types of concessions when modifying a loan. Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested.

Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for loans that have been modified in a loan restructuring is measured based on the probability of default and loss given default model, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

In some cases, the Company will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession such as an interest rate reduction or principal forgiveness, may be granted. During the three months ended June 30, 2023 the Company restructured three loans for borrowers experiencing financial difficulties with principal balances totaling $0.5 million. Two of the restructured loans were provided a term extension with the other receiving an interest rate reduction and a term extension. During the six months ended June 30, 2023 the Company restructured five loans for borrowers experiencing financial difficulties with principal balances totaling $0.6 million. Three of the restructured loans were provided a term extension with the other two receiving an interest rate reduction and a term extension.

Credit Quality Monitoring

The Company maintains loan policies and credit underwriting standards as part of the process of managing credit risk. These standards include making loans generally within the Company’s four main regions, which include eastern, northern and southern Illinois and the St. Louis metropolitan area. In addition, our specialty finance division does nationwide bridge lending for FHA and HUD developments and originates loans for multifamily, assisted and senior living and multi-use properties. Our equipment leasing business provides financing to business customers across the country.

The Company has a loan approval process involving underwriting and individual and group loan approval authorities to consider credit quality and loss exposure at loan origination. The loans in the Company’s commercial loan portfolio are risk rated at origination based on the grading system set forth below. All loan authority is based on the aggregate credit to a borrower and its related entities.

The Company’s consumer loan portfolio is primarily comprised of both secured and unsecured loans that are relatively small and are evaluated at origination on a centralized basis against standardized underwriting criteria. The ongoing measurement of credit quality of the consumer loan portfolio is largely done on an exception basis. If payments are made on schedule, as agreed, then no further monitoring is performed. However, if delinquency occurs, the delinquent loans are turned over to the Company’s Consumer Collections Group for resolution. Credit quality for the entire consumer loan portfolio is measured by the periodic delinquency rate, nonaccrual amounts and actual losses incurred.

Loans in the commercial loan portfolio tend to be larger and more complex than those in the other loan portfolio, and therefore, are subject to more intensive monitoring. All loans in the commercial loan portfolio have an assigned relationship manager, and most borrowers provide periodic financial and operating information that allows the relationship managers to stay abreast of credit quality during the life of the loans. The risk ratings of loans in the commercial loan portfolio are reassessed at

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least annually, with loans below an acceptable risk rating reassessed more frequently and reviewed by various individuals within the Company at least quarterly.

The Company maintains a centralized independent loan review function that monitors the approval process and ongoing asset quality of the loan portfolio, including the accuracy of loan grades. The Company also maintains an independent appraisal review function that participates in the review of all appraisals obtained by the Company.

Credit Quality Indicators

The Company uses a ten grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan grades rank the credit quality of a borrower by measuring liquidity, debt capacity, and coverage and payment behavior as shown in the borrower’s financial statements. The risk grades also measure the quality of the borrower’s management and the repayment support offered by any guarantors.

The Company considers all loans with Risk Grades 1 - 6 as acceptable credit risks and structures and manages such relationships accordingly. Periodic financial and operating data combined with regular loan officer interactions are deemed adequate to monitor borrower performance. Loans with Risk Grades of 7 are considered "watch credits" categorized as special mention and the frequency of loan officer contact and receipt of financial data is increased to stay abreast of borrower performance. Loans with Risk Grades of 8 - 10 are considered problematic and require special care. Risk Grade 8 is categorized as substandard, 9 as substandard - nonaccrual and 10 as doubtful. Further, loans with Risk Grades of 7 - 10 are managed regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive and senior management of the Company, which includes highly structured reporting of financial and operating data, intensive loan officer intervention and strategies to exit, as well as potential management by the Company's Special Assets Group. Loans not graded in the commercial loan portfolio are monitored by aging status and payment activity.

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The following tables present the recorded investment of the commercial loan portfolio by risk category as of June 30, 2023 and December 31, 2022:


			June 30, 2023
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2023		2022		2021		2020		2019		Prior		Revolving loans		Total
Commercial	Commercial	Acceptable credit quality	$	123,578	$	115,893	$	92,140	$	51,929	$	17,118	$	51,141	$	383,336	$	835,135
		Special mention	—		500		8,030		—		296		176		332		9,334
		Substandard	4,063		13,294		999		—		171		5,238		4,488		28,253
		Substandard – nonaccrual	—		—		332		—		84		457		1,700		2,573
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	127,641		129,687		101,501		51,929		17,669		57,012		389,856		875,295

	Commercial other	Acceptable credit quality	157,807		227,700		125,632		81,135		47,722		9,229		76,954		726,179
		Special mention	—		543		135		278		192		13		50		1,211
		Substandard	40		250		—		—		—		—		893		1,183
		Substandard – nonaccrual	326		977		837		710		579		108		—		3,537
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		506		—		—		—		—		—		506
		Subtotal	158,173		229,976		126,604		82,123		48,493		9,350		77,897		732,616

Commercial real estate	Non-owner occupied	Acceptable credit quality	103,887		681,398		382,913		138,251		84,869		144,947		7,196		1,543,461
		Special mention	—		—		183		467		162		12,408		—		13,220
		Substandard	—		2,272		—		—		35,314		32,305		—		69,891
		Substandard – nonaccrual	—		—		676		999		7,602		11,831		—		21,108
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	103,887		683,670		383,772		139,717		127,947		201,491		7,196		1,647,680

	Owner occupied	Acceptable credit quality	27,962		104,832		115,917		53,849		24,524		89,082		1,108		417,274
		Special mention	—		—		131		—		81		276		15		503
		Substandard	—		7,729		268		72		740		12,540		—		21,349
		Substandard – nonaccrual	159		9,663		2,436		197		143		1,486		304		14,388
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	28,121		122,224		118,752		54,118		25,488		103,384		1,427		453,514

	Multi-family	Acceptable credit quality	663		165,156		26,223		28,464		10,318		21,882		171		252,877
		Special mention	—		—		—		—		—		14,621		—		14,621
		Substandard	—		—		—		—		—		3,499		—		3,499
		Substandard – nonaccrual	—		—		899		—		107		1,936		—		2,942
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	663		165,156		27,122		28,464		10,425		41,938		171		273,939

	Farmland	Acceptable credit quality	8,743		6,042		15,432		12,891		3,888		19,614		1,452		68,062
		Special mention	—		—		—		—		—		96		—		96
		Substandard	—		—		14		—		22		344		152		532
		Substandard – nonaccrual	—		—		—		—		—		124		48		172
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	8,743		6,042		15,446		12,891		3,910		20,178		1,652		68,862

Construction and land development		Acceptable credit quality	28,311		189,923		100,265		1,236		674		1,232		34,325		355,966
		Special mention	—		—		—		—		—		60		—		60
		Substandard	—		—		6,000		—		—		—		—		6,000
		Substandard – nonaccrual	—		—		—		—		176		2,058		—		2,234
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	453		1,512		372		7		—		27		—		2,371
		Subtotal	28,764		191,435		106,637		1,243		850		3,377		34,325		366,631

Total		Acceptable credit quality	450,951		1,490,944		858,522		367,755		189,113		337,127		504,542		4,198,954
		Special mention	—		1,043		8,479		745		731		27,650		397		39,045
		Substandard	4,103		23,545		7,281		72		36,247		53,926		5,533		130,707
		Substandard – nonaccrual	485		10,640		5,180		1,906		8,691		18,000		2,052		46,954
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	453		2,018		372		7		—		27		—		2,877
Total commercial loans			$	455,992	$	1,528,190	$	879,834	$	370,485	$	234,782	$	436,730	$	512,524	$	4,418,537

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			December 31, 2022
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2022		2021		2020		2019		2018		Prior		Revolving loans		Total
Commercial	Commercial	Acceptable credit quality	$	111,087	$	102,966	$	61,751	$	28,063	$	12,547	$	45,168	$	404,100	$	765,682
		Special mention	3,559		2,106		—		227		551		3,154		159		9,756
		Substandard	—		—		—		206		1,722		3,915		2,575		8,418
		Substandard – nonaccrual	—		340		—		132		83		246		2,220		3,021
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	114,646		105,412		61,751		28,628		14,903		52,483		409,054		786,877

	Commercial other	Acceptable credit quality	283,465		153,788		105,980		64,218		15,459		163		96,509		719,582
		Special mention	—		—		754		2,331		455		—		55		3,595
		Substandard	250		—		—		12		80		—		848		1,190
		Substandard – nonaccrual	524		1,247		444		463		491		—		—		3,169
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	161		—		—		—		—		—		—		161
		Subtotal	284,400		155,035		107,178		67,024		16,485		163		97,412		727,697

Commercial real estate	Non-owner occupied	Acceptable credit quality	679,040		403,952		145,235		72,504		18,249		160,992		4,833		1,484,805
		Special mention	1,407		186		477		10,633		195		8,452		—		21,350
		Substandard	569		—		7,458		32,731		1,587		29,655		—		72,000
		Substandard – nonaccrual	—		701		—		48		10,246		2,249		—		13,244
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	681,016		404,839		153,170		115,916		30,277		201,348		4,833		1,591,399

	Owner occupied	Acceptable credit quality	120,141		122,321		64,720		31,916		29,454		88,928		4,305		461,785
		Special mention	—		1,161		—		7,917		—		12,161		22		21,261
		Substandard	141		272		79		1,984		—		3,771		375		6,622
		Substandard – nonaccrual	155		4,165		225		146		333		1,790		304		7,118
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	120,437		127,919		65,024		41,963		29,787		106,650		5,006		496,786

	Multi-family	Acceptable credit quality	163,647		31,605		29,458		208		24,490		14,574		1,101		265,083
		Special mention	—		—		—		—		—		—		—		—
		Substandard	—		—		—		—		—		3,703		—		3,703
		Substandard – nonaccrual	—		927		—		113		—		8,063		—		9,103
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	163,647		32,532		29,458		321		24,490		26,340		1,101		277,889

	Farmland	Acceptable credit quality	8,659		16,138		13,467		4,117		3,129		19,102		1,593		66,205
		Special mention	—		—		—		—		—		159		—		159
		Substandard	—		14		—		23		113		347		199		696
		Substandard – nonaccrual	—		—		—		—		—		25		—		25
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	—		—		—		—		—		—		—		—
		Subtotal	8,659		16,152		13,467		4,140		3,242		19,633		1,792		67,085

Construction and land development		Acceptable credit quality	171,243		79,747		10,676		8,388		98		1,420		37,997		309,569
		Special mention	—		—		—		—		—		210		—		210
		Substandard	—		6,000		—		—		2,415		—		—		8,415
		Substandard – nonaccrual	—		—		—		202		—		—		—		202
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	2,112		337		8		—		—		29		—		2,486
		Subtotal	173,355		86,084		10,684		8,590		2,513		1,659		37,997		320,882

Total		Acceptable credit quality	1,537,282		910,517		431,287		209,414		103,426		330,347		550,438		4,072,711
		Special mention	4,966		3,453		1,231		21,108		1,201		24,136		236		56,331
		Substandard	960		6,286		7,537		34,956		5,917		41,391		3,997		101,044
		Substandard – nonaccrual	679		7,380		669		1,104		11,153		12,373		2,524		35,882
		Doubtful	—		—		—		—		—		—		—		—
		Not graded	2,273		337		8		—		—		29		—		2,647
Total commercial loans			$	1,546,160	$	927,973	$	440,732	$	266,582	$	121,697	$	408,276	$	557,195	$	4,268,615

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The following table presents the gross charge-offs by class of loan and year of origination on the commercial loan portfolio for the three and six months ended June 30, 2023:


		Term Loans by Origination Year
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
For the three months ended June 30, 2023
Commercial	Commercial	$	10	$	—	$	—	$	22	$	18	$	60	$	—	$	110
	Commercial Other	36		649		102		105		69		—		—		961
Commercial Real Estate	Non-owner occupied	—		—		—		—		—		—		—		—
	Owner occupied	—		—		—		—		—		1,481		—		1,481
	Multi-family	—		—		—		—		—		63		—		63
	Farmland	—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		334		—		334
Total gross commercial charge-offs		$	46	$	649	$	102	$	127	$	87	$	1,938	$	—	$	2,949

For the six months ended June 30, 2023
Commercial	Commercial	$	10	$	—	$	—	$	22	$	27	$	71	$	—	$	130
	Commercial Other	36		1,208		166		105		69		326		—		1,910
Commercial Real Estate	Non-owner occupied	—		—		—		—		—		—		—		—
	Owner occupied	—		—		—		—		—		1,481		—		1,481
	Multi-family	—		—		—		—		—		809		—		809
	Farmland	—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		334		—		334
Total gross commercial charge-offs		$	46	$	1,208	$	166	$	127	$	96	$	3,021	$	—	$	4,664

The Company evaluates the credit quality of its other loan portfolios, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on nonaccrual status and loans past due 90 days or more and still accruing interest are considered to be nonperforming for purposes

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of credit quality evaluation. The following tables present the recorded investment of our other loan portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming as of June 30, 2023 and December 31, 2022:


			June 30, 2023
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Residential real estate	Residential first lien	Performing	$	22,642	$	75,091	$	38,105	$	30,465	$	20,236	$	121,760	$	36	$	308,335
		Nonperforming	35		50		—		33		356		2,987		—		3,461
		Subtotal	22,677		75,141		38,105		30,498		20,592		124,747		36		311,796

	Other residential	Performing	1,241		1,269		443		481		962		2,422		52,378		59,196
		Nonperforming	—		—		—		—		—		184		310		494
		Subtotal	1,241		1,269		443		481		962		2,606		52,688		59,690

Consumer	Consumer	Performing	17,417		28,154		36,165		7,561		2,813		13,851		2,561		108,522
		Nonperforming	—		25		3		7		—		59		3		97
		Subtotal	17,417		28,179		36,168		7,568		2,813		13,910		2,564		108,619

	Consumer other	Performing	206,635		468,600		185,590		70,858		26,877		6,846		2,811		968,217
		Nonperforming	—		—		—		—		—		—		—		—
		Subtotal	206,635		468,600		185,590		70,858		26,877		6,846		2,811		968,217

Leases financing		Performing	96,561		184,332		92,293		67,347		41,983		14,202		—		496,718
		Nonperforming	214		1,723		387		313		633		497		—		3,767
		Subtotal	96,775		186,055		92,680		67,660		42,616		14,699		—		500,485

Total		Performing	344,496		757,446		352,596		176,712		92,871		159,081		57,786		1,940,988
		Nonperforming	249		1,798		390		353		989		3,727		313		7,819
Total other loans			$	344,745	$	759,244	$	352,986	$	177,065	$	93,860	$	162,808	$	58,099	$	1,948,807

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			December 31, 2022
			Term Loans Amortized Cost Basis by Origination Year
(dollars in thousands)			2022		2021		2020		2019		2018		Prior		Revolving loans		Total
Residential real estate	Residential first lien	Performing	$	75,449	$	38,774	$	31,566	$	20,780	$	21,691	$	109,067	$	336	$	297,663
		Nonperforming	101		—		104		414		987		4,974		—		6,580
		Subtotal	75,550		38,774		31,670		21,194		22,678		114,041		336		304,243

	Other residential	Performing	1,722		496		534		1,060		1,496		1,515		53,159		59,982
		Nonperforming	17		—		—		7		18		208		1,619		1,869
		Subtotal	1,739		496		534		1,067		1,514		1,723		54,778		61,851

Consumer	Consumer	Performing	32,561		40,374		9,411		3,476		2,768		14,756		2,346		105,692
		Nonperforming	33		50		7		1		13		79		5		188
		Subtotal	32,594		40,424		9,418		3,477		2,781		14,835		2,351		105,880

	Consumer other	Performing	669,015		260,360		92,148		34,501		6,637		5,430		5,310		1,073,401
		Nonperforming	733		—		—		—		—		—		—		733
		Subtotal	669,748		260,360		92,148		34,501		6,637		5,430		5,310		1,074,134

Leases financing		Performing	215,084		110,294		84,458		54,684		21,767		3,088		—		489,375
		Nonperforming	—		522		736		818		254		39		—		2,369
		Subtotal	215,084		110,816		85,194		55,502		22,021		3,127		—		491,744

Total
		Performing	993,831		450,298		218,117		114,501		54,359		133,856		61,151		2,026,113
		Nonperforming	884		572		847		1,240		1,272		5,300		1,624		11,739
Total other loans			$	994,715	$	450,870	$	218,964	$	115,741	$	55,631	$	139,156	$	62,775	$	2,037,852

The following table presents the gross charge-offs by class of loan and year of origination on the other loan portfolio for the three and six months ended June 30, 2023:


		Term Loans by Origination Year
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
For the three months ended June 30, 2023
Residential real estate	Residential first lien	$	—	$	—	$	—	$	3	$	7	$	—	$	—	$	10
	Other residential	—		—		—		—		—		—		44		44
Consumer	Consumer	—		—		4		11		26		13		—		54
	Consumer other	18		30		7		2		1		148		—		206
Lease financing		—		336		343		52		—		40		—		771
Total gross other charge-offs		$	18	$	366	$	354	$	68	$	34	$	201	$	44	$	1,085

For the six months ended June 30, 2023
Residential real estate	Residential first lien	$	—	$	—	$	9	$	3	$	7	$	—	$	—	$	19
	Other residential	—		—		—		—		—		9		57		66
Consumer	Consumer	—		1		9		11		31		33		—		85
	Consumer other	18		83		39		16		32		250		—		438
Lease financing		—		393		535		135		22		76		—		1,161
Total gross other charge-offs		$	18	$	477	$	592	$	165	$	92	$	368	$	57	$	1,769

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NOTE 5 – PREMISES, EQUIPMENT AND LEASES

A summary of premises and equipment at June 30, 2023 and December 31, 2022 is as follows:


	June 30,		December 31,
(dollars in thousands)	2023		2022
Land	$	16,004	$	16,004
Buildings and improvements	75,469		71,837
Furniture and equipment	34,629		34,081
Lease right-of-use assets	7,505		7,001
Total	133,607		128,923
Accumulated depreciation	(52,601)		(50,630)
Premises and equipment, net	$	81,006	$	78,293

Depreciation expense for the three and six months ended June 30, 2023 was $1.2 million and $2.4 million, respectively, and $1.2 million and $2.4 million for the three and six months ended June 30, 2022, respectively.

The Company has entered into operating leases, primarily for banking offices and operating facilities, which have remaining lease terms of 8 months to 15 years, some of which may include options to extend the lease terms for up to an additional 10 years. The options to extend are included if they are reasonably certain to be exercised. The Company had operating lease right-of-use assets of $7.5 million and $7.0 million as of June 30, 2023 and December 31, 2022, respectively, included in premises and equipment on our consolidated balance sheets. The operating lease liabilities of the Company were $9.3 million and $8.9 million as of June 30, 2023 and December 31, 2022, respectively, and are included in accrued interest payable and other liabilities on our consolidated balance sheets.

Information related to operating leases for the three and six months ended June 30, 2023 and 2022 was as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2023			2022			2023			2022
Operating lease cost	$	493		$	532		$	977		$	1,040
Operating cash flows from leases	590			630			1,180			1,236
Right-of-use assets obtained in exchange for lease obligations	218			—			1,348			121

Weighted average remaining lease term	8.0 years			7.4 years			8.0 years			7.4 years
Weighted average discount rate	3.29		%	2.89		%	3.29		%	2.89		%

The projected minimum rental payments under the terms of the leases as of June 30, 2023 were as follows:


(dollars in thousands)	Amount
Year ending December 31:
2023 remaining	$	947
2024	2,020
2025	1,103
2026	975
2027	875
Thereafter	4,704
Total future minimum lease payments	10,624
Less imputed interest	(1,357)
Total operating lease liabilities	$	9,267

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NOTE 6 – LOAN SERVICING RIGHTS

A summary of loan servicing rights at June 30, 2023 and December 31, 2022 is as follows:


	June 30, 2023				December 31, 2022
(dollars in thousands)	Serviced Loans		Carrying Value		Serviced Loans		Carrying Value
Commercial FHA	$	2,165,150	$	20,473	$	—	$	—
SBA	$	46,279	$	649	$	46,081	$	656
Residential	240,230		489		255,298		549
Commercial FHA held for sale	—		—		2,255,617		20,745
Total	$	2,451,659	$	21,611	$	2,556,996	$	21,950

Commercial FHA Mortgage Loan Servicing

During the third quarter of 2022, the Company committed to a plan to sell our commercial FHA servicing portfolio and, therefore, transferred $24.0 million to commercial FHA servicing rights held for sale. At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

NOTE 7 – DERIVATIVE INSTRUMENTS

As part of the Company’s overall management of interest rate sensitivity, the Company utilizes derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility, including interest rate lock commitments, forward commitments to sell mortgage-backed securities, cash flow hedges and interest rate swap contracts.

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities

The Company issues interest rate lock commitments on originated fixed-rate commercial and residential real estate loans to be sold. The interest rate lock commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The fair value of the interest rate lock commitments and forward contracts to sell mortgage-backed securities are included in other assets or other liabilities in the consolidated balance sheets. Changes in the fair value of derivative financial instruments are recognized in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

The following table summarizes the interest rate lock commitments and forward commitments to sell mortgage-backed securities held by the Company, their notional amount and estimated fair values at June 30, 2023 and December 31, 2022:


	Notional amount				Fair value gain
(dollars in thousands)	June 30, 2023		December 31, 2022		June 30, 2023		December 31, 2022
Derivative instruments (included in other assets):
Interest rate lock commitments	$	6,127	$	2,078	$	119	$	49
Forward commitments to sell mortgage-backed securities	8,831		—		55		—
Total	$	14,958	$	2,078	$	174	$	49


	Notional amount				Fair value loss
(dollars in thousands)	June 30, 2023		December 31, 2022		June 30, 2023		December 31, 2022
Derivative instruments (included in other liabilities):
Interest rate lock commitments	$	—	$	4,419	$	—	$	15
Forward commitments to sell mortgage-backed securities	—		6,669		—		—
Total	$	—	$	11,088	$	—	$	15

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During both the three and six months ended June 30, 2023, the Company recognized net gains of $0.1 million on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

During the three and six months ended June 30, 2022, the Company recognized net losses of $0.4 million and $0.3 million, respectively, on derivative instruments in commercial FHA revenue and residential mortgage banking revenue in the consolidated statements of income.

Cash Flow Hedges

In the first quarter of 2022, the Company entered into interest rate swap agreements, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. The following table summarizes the Company's receive-fixed, pay-variable interest rate swaps on certain pools of loans indexed to prime at June 30, 2023 and December 31, 2022:


(dollars in thousands)	June 30, 2023			December 31, 2022
Notional Amount	$	225,000		$	200,000
Fair value loss included in other liabilities	(10,124)			(9,999)
Tax effected amount included in accumulated other comprehensive (loss) income	(7,391)			(7,300)
Average remaining life	3.09			3.37
Weighted average pay rate	7.71		%	7.23		%
Weighted average receive rate	5.43		%	5.48		%

Interest Rate Swap Contracts Not Designated as Hedges

The Company entered into interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by contracts simultaneously purchased by the Company from other financial dealer institutions with mirror-image terms. Because of the mirror-image terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in the fair value subsequent to initial recognition have a minimal effect on earnings. These derivative contracts do not qualify for hedge accounting.

The notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $7.2 million and $7.4 million at June 30, 2023 and December 31, 2022, respectively. The fair value of the customer derivative instruments and the offsetting counterparty derivative instruments was $0.5 million at both June 30, 2023 and December 31, 2022, which are included in other assets and other liabilities, respectively, on the consolidated balance sheets.

NOTE 8 – DEPOSITS

The following table summarizes the classification of deposits as of June 30, 2023 and December 31, 2022:


(dollars in thousands)	June 30, 2023		December 31, 2022
Noninterest-bearing demand	$	1,162,909	$	1,362,158
Interest-bearing:
Checking	2,499,693		2,494,073
Money market	1,226,470		1,184,101
Savings	624,005		661,932
Time	913,471		662,388
Total deposits	$	6,426,548	$	6,364,652

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NOTE 9 – SHORT-TERM BORROWINGS

The following table presents the distribution of short-term borrowings and related weighted average interest rates as of June 30, 2023 and December 31, 2022:


	Repurchase agreements
(dollars in thousands)	As of and for the six months ended June 30, 2023			As of and for the Year Ended December 31,2022
Outstanding at period-end	$	21,783		$	42,311
Average amount outstanding	30,291			58,688
Maximum amount outstanding at any month end	43,718			76,807
Weighted average interest rate:
During period	0.26		%	0.18		%
End of period	0.25		%	0.26		%

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank’s obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $28.8 million and $46.1 million at June 30, 2023 and December 31, 2022, respectively, were pledged for securities sold under agreements to repurchase.

The Company had available lines of credit of $184.1 million and $12.2 million at June 30, 2023 and December 31, 2022, respectively, from the Federal Reserve Discount Window. The lines are collateralized by a collateral agreement with respect to a pool of commercial loans and investment securities totaling $211.2 million and $14.3 million at June 30, 2023 and December 31, 2022, respectively. There were no outstanding borrowings under these lines at June 30, 2023 and 2022.

At June 30, 2023, the Company had available federal funds lines of credit totaling $339.0 million. These lines of credit were unused at June 30, 2023.

NOTE 10 – FHLB ADVANCES AND OTHER BORROWINGS

The following table summarizes our FHLB advances and other borrowings as of June 30, 2023 and December 31, 2022:


(dollars in thousands)	June 30, 2023		December 31, 2022


FHLB advances – fixed rate, fixed term at rates averaging 4.18% at June 30, 2023 - maturing in February 2028	$	55,000	$	—
FHLB advances – putable fixed rate at rates averaging 2.70% and 2.35% at June 30, 2023 and December 31, 2022, respectively – maturing through February 2028 with call provisions through February 2024	160,000		110,000
FHLB advances –SOFR floater at rates averaging 6.68% and 5.92% at June 30, 2023 and December 31, 2022, respectively – maturing in October 2023	100,000		100,000
FHLB advances – Short term fixed rate at rates averaging 5.18% and 4.31% at June 30, 2023 and December 31, 2022, respectively– maturing in July 2023	260,000		250,000
Total FHLB advances and other borrowings	$	575,000	$	460,000

The Company’s advances from the FHLB are collateralized by a blanket collateral agreement of qualifying mortgage and home equity line of credit loans and certain commercial real estate loans totaling approximately $2.97 billion and $2.90 billion at June 30, 2023 and December 31, 2022, respectively.

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NOTE 11 – SUBORDINATED DEBT

The following table summarizes the Company’s subordinated debt at June 30, 2023 and December 31, 2022:


	Subordinated debt
	Fixed to Float						Fixed
(dollars in thousands)	Issued September 2019			Issued September 2019			Issued June 2015			Total
At June 30, 2023
Outstanding amount	$	66,750		$	27,250		$	—		$	94,000
Carrying amount	66,455			26,949			—			93,404
Current rate	5.00		%	5.50		%	N/A
At December 31, 2022
Outstanding amount	$	72,750		$	27,250		$	550		$	100,550
Carrying amount	72,300			26,925			547			99,772
Current rate	5.00		%	5.50		%	6.50		%
Maturity date	9/30/2029			9/30/2034			6/18/2025
Optional redemption date	9/30/2024			9/30/2029			N/A
Fixed to variable conversion date	9/30/2024			9/30/2029			N/A
Variable rate	3-month SOFR plus 3.61%			3-month SOFR plus 4.05%			N/A
Interest payment terms	Semiannually			Semiannually			Semiannually

During the second quarter of 2023, the Company repurchased $6.0 million of the outstanding Fixed to Float Subordinated Notes due September 30, 2029. The Company recognized a gain of $0.7 million which included the discount realized on the repurchase, offset by the remaining unamortized debt issuance costs on the repurchase.

The Company also repurchased the outstanding Fixed Rate Subordinated Notes due June 18, 2025, having an aggregate principal amount of $0.6 million, during the second quarter of 2023. The aggregate repurchase price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.

The value of subordinated debentures have been reduced by the debt issuance costs, which are being amortized on a straight line basis through the earlier of the redemption option or maturity date. All of the subordinated debentures above may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

NOTE 12 – EARNINGS PER COMMON SHARE

Earnings per common share is calculated utilizing the two-class method. Basic earnings per common share is calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards. The diluted earnings per common share computation for the three and six months ended June 30, 2023 and 2022 excluded antidilutive stock options of 375,912 and 60,698, respectively, because the exercise prices of these stock options exceeded the average market

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prices of the Company’s common shares for those respective periods. Presented below are the calculations for basic and diluted earnings per common share for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands, except per share data)	2023		2022		2023		2022
Net income	$	21,575	$	21,883	$	43,347	$	42,632
Preferred dividends declared	(2,228)		—		(4,456)		—

Net income available to common shareholders	19,347		21,883		38,891		42,632
Common shareholder dividends	(6,579)		(6,397)		(13,248)		(12,786)
Unvested restricted stock award dividends	(80)		(73)		(160)		(148)
Undistributed earnings to unvested restricted stock awards	(149)		(171)		(300)		(334)
Undistributed earnings to common shareholders	$	12,539	$	15,242	$	25,183	$	29,364
Basic
Distributed earnings to common shareholders	$	6,579	$	6,397	$	13,248	$	12,786
Undistributed earnings to common shareholders	12,539		15,242		25,183		29,364
Total common shareholders earnings, basic	$	19,118	$	21,639	$	38,431	$	42,150
Diluted
Distributed earnings to common shareholders	$	6,579	$	6,397	$	13,248	$	12,786
Undistributed earnings to common shareholders	12,539		15,242		25,183		29,364
Total common shareholders earnings	19,118		21,639		38,431		42,150
Add back:
Undistributed earnings reallocated from unvested restricted stock awards	—		1		—		1
Total common shareholders earnings, diluted	$	19,118	$	21,640	$	38,431	$	42,151
Weighted average common shares outstanding, basic	22,200,917		22,305,590		22,338,627		22,290,486
Options	4,162		55,229		10,354		65,450
Weighted average common shares outstanding, diluted	22,205,079		22,360,819		22,348,981		22,355,936
Basic earnings per common share	$	0.86	$	0.97	$	1.72	$	1.89
Diluted earnings per common share	0.86		0.97		1.72		1.89

NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

•Level 1: Unadjusted quoted prices for identical assets or liabilities traded in active markets.

•Level 2: Significant other observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

•Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Investment securities. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For investment securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the

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three and six months ended June 30, 2023 or December 31, 2022 for assets measured at fair value on a recurring basis. The fair value of equity securities is determined using quoted prices or market prices for similar securities (Level 2).

Loans held for sale. The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative instruments. The fair value of derivative instruments are determined based on derivative valuation models using observable market data as of the measurement date (Level 2).

Loan servicing rights. In accordance with GAAP, the Company records impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions (Level 3).

Mortgage servicing rights held for sale. Mortgage servicing rights held for sale consist of commercial FHA mortgage servicing rights that management has committed to a plan to sell and has the ability to sell them to a buyer in their present condition. Mortgage servicing rights held for sale are carried at the lower of their carrying value or fair value less estimated costs to sell (Level 2).

Nonperforming loans. Nonperforming loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure nonperforming loans based on the estimated fair value of such collateral. In cases where the Company has an agreed upon selling price for the collateral, the fair value is set at the selling price (Level 1). The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral (Level 2). When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable (Level 3). The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.

Other Real Estate Owned. OREO is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost basis. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Fair value for OREO is based on an appraisal performed upon foreclosure. Property is evaluated regularly to ensure the recorded amount is supported by its fair value less estimated costs to dispose. After the initial foreclosure appraisal, fair value is generally determined by an annual appraisal unless known events warrant adjustments to the recorded value.

Assets held for sale. Assets held for sale represent the fair value of the banking facilities that are expected to be sold. The fair value of the assets held for sale was based on estimated market prices from independently prepared current appraisals (Level 2).

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Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis at June 30, 2023 and December 31, 2022, are summarized below:


	June 30, 2023
(dollars in thousands)	Carrying amount		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	42,746	$	42,746	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	73,458		—		73,458		—
Mortgage-backed securities - agency	538,634		—		538,634		—
Mortgage-backed securities - non-agency	65,911		—		65,911		—
State and municipal securities	57,494		—		57,494		—
Collateralized loan obligations	22,709		—		22,709		—
Corporate securities	81,763		—		81,763		—
Equity securities	4,288		4,288		—		—
Loans held for sale	5,632		—		5,632		—
Derivative assets	630		—		630		—

Total	$	893,265	$	47,034	$	846,231	$	—
Liabilities
Derivative liabilities	$	10,580	$	—	$	10,580	$	—

Total	$	10,580	$	—	$	10,580	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	21,611	$	—	$	—	$	21,611

Nonperforming loans	54,844		3,116		42,652		9,076
Other real estate owned	202		—		202		—
Assets held for sale	187		—		187		—

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	December 31, 2022
(dollars in thousands)	Carrying amount		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. Treasury securities	$	81,230	$	81,230	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	37,509		—		37,509		—
Mortgage-backed securities - agency	448,150		—		448,150		—
Mortgage-backed securities - non-agency	20,754		—		20,754		—
State and municipal securities	94,636		—		94,636		—
Corporate securities	85,955		—		85,955		—
Equity securities	8,626		8,626		—		—
Loans held for sale	1,286		—		1,286		—
Derivative assets	481		—		481		—

Total	$	778,627	$	89,856	$	688,771	$	—
Liabilities
Derivative liabilities	$	10,446	$	—	$	10,446	$	—

Total	$	10,446	$	—	$	10,446	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	1,205	$	—	$	—	$	1,205
Mortgage servicing rights held for sale	20,745		—		20,745		—
Nonperforming loans	49,423		5,478		34,406		9,539
Other real estate owned	6,729		—		6,729		—
Assets held for sale	356		—		356		—

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2023 and 2022.

The following table presents losses recognized on assets measured on a nonrecurring basis for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2023		2022		2023		2022
Commercial mortgage servicing rights	$	—	$	869	$	—	$	1,263

Nonperforming loans	3,573		10,779		4,676		11,366
Other real estate owned	—		67		—		404

Total losses on assets measured on a nonrecurring basis	$	3,573	$	11,715	$	4,676	$	13,033

The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at June 30, 2023 and December 31, 2022:

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(dollars in thousands)

Fair value

Valuation
technique

Unobservable
input / assumptions

Range (weighted average)(1)

June 30, 2023

Loan servicing rights:

SBA servicing rights

838

Discounted cash flow

Prepayment speed

15.62% - 16.02% (15.87%)

Discount rate

No range (14.25%)

Residential servicing rights

2,575

Discounted cash flow

Prepayment speed

7.20% -26.28% (7.50%)

Discount rate

9.25% - 11.75% (10.38%)

December 31, 2022

Loan servicing rights:

SBA servicing rights

876

Discounted cash flow

Prepayment speed

14.49% - 15.44% (15.00%)

Discount rate

No range (13.00%)

Residential servicing rights

2,770

Discounted cash flow

Prepayment speed

7.56% - 26.28% (7.92%)

Discount rate

9.00% - 11.50% (10.13%)

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

The Company has elected the fair value option for newly originated residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option

to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of June 30, 2023 and December 31, 2022:


	June 30, 2023						December 31, 2022
(dollars in thousands)	Aggregate fair value		Difference		Contractual principal		Aggregate fair value		Difference		Contractual principal

Residential loans held for sale	$	5,632	$	212	$	5,421	$	1,286	$	42	$	1,244

The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2023		2022		2023		2022
Commercial loans held for sale	$	—	$	(18)	$	—	$	—
Residential loans held for sale	50		104		149		(277)
Total loans held for sale	$	50	$	86	$	149	$	(277)

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The carrying values and estimated fair value of certain financial instruments not carried at fair value at June 30, 2023 and December 31, 2022 were as follows:


	June 30, 2023
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	159,637	$	159,637	$	159,637	$	—	$	—
Federal funds sold	1,058		1,058		1,058		—		—

Loans	6,367,344		6,153,641		—		—		6,153,641
Accrued interest receivable	21,000		21,000		—		21,000		—

Liabilities
Deposits	$	6,426,548	$	6,413,857	$	—	$	6,413,857	$	—
Short-term borrowings	21,783		21,783		—		21,783		—
FHLB and other borrowings	575,000		571,334		—		571,334		—
Subordinated debt	93,404		89,232		—		89,232		—
Trust preferred debentures	50,296		51,700		—		51,700		—


	December 31, 2022
(dollars in thousands)	Carrying amount		Fair value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and due from banks	$	143,035	$	143,035	$	143,035	$	—	$	—
Federal funds sold	7,286		7,286		7,286		—		—

Loans	6,306,467		6,121,026		—		—		6,121,026
Accrued interest receivable	20,313		20,313		—		20,313		—

Liabilities
Deposits	$	6,364,652	$	6,344,534	$	—	$	6,344,534	$	—
Short-term borrowings	42,311		42,311		—		42,311		—
FHLB and other borrowings	460,000		457,998		—		457,998		—
Subordinated debt	99,772		95,301		—		95,301		—
Trust preferred debentures	49,975		54,668		—		54,668		—

The methods utilized to measure fair value of financial instruments at June 30, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ.

NOTE 14 – COMMITMENTS, CONTINGENCIES AND CREDIT RISK

In the normal course of business, there are outstanding various contingent liabilities such as claims and legal actions, which are not reflected in the consolidated financial statements. No material losses are anticipated as a result of these actions or claims.

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance

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sheet. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank used the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments are principally tied to variable rates. Loan commitments as of June 30, 2023 and December 31, 2022 were as follows:


(dollars in thousands)	June 30, 2023		December 31, 2022
Commitments to extend credit	$	1,083,981	$	1,276,263
Financial guarantees – standby letters of credit	22,884		23,748

The Company establishes a mortgage repurchase liability to reflect management’s estimate of losses on loans for which the Company could have a repurchase obligation based on the volume of loans sold in 2023 and years prior, borrower default expectations, historical investor repurchase demand and appeals success rates, and estimated loss severity. Loans repurchased from investors are initially recorded at fair value, which becomes the Company’s new accounting basis. Any difference between the loan’s fair value and the outstanding principal amount is charged or credited to the mortgage repurchase liability, as appropriate. Subsequent to repurchase, such loans are carried in loans receivable. There were no losses as a result of make-whole requests and loan repurchases for the three and six months ended June 30, 2023 and 2022. The liability for unresolved repurchase demands totaled $0.2 million at June 30, 2023 and December 31, 2022.

NOTE 15 – SEGMENT INFORMATION

Our business segments are defined as Banking, Wealth Management, and Other. The reportable business segments are consistent with the internal reporting and evaluation of the principle lines of business of the Company. The Banking segment provides a wide range of financial products and services to consumers and businesses, including commercial, commercial real estate, mortgage and other consumer loan products; commercial equipment financing; mortgage loan sales and servicing; letters of credit; various types of deposit products, including checking, savings and time deposit accounts; merchant services; and corporate treasury management services. The Wealth Management segment consists of trust and fiduciary services, brokerage and retirement planning services. The Other segment includes the operating results of the parent company, our captive insurance business unit, and the elimination of intercompany transactions.

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Selected business segment financial information for the three and six months ended June 30, 2023 and 2022 were as follows:


(dollars in thousands)	Banking		Wealth Management		Other		Total
Three Months Ended June 30, 2023
Net interest income (expense)	$	61,035	$	—	$	(2,195)	$	58,840
Provision for credit losses	5,879		—		—		5,879
Noninterest income	11,874		6,269		610		18,753
Noninterest expense	38,550		4,675		(331)		42,894
Income (loss) before income taxes (benefit)	28,480		1,594		(1,254)		28,820
Income taxes (benefit)	7,326		445		(526)		7,245
Net income (loss)	$	21,154	$	1,149	$	(728)	$	21,575
Total assets	$	8,025,617	$	30,249	$	(21,145)	$	8,034,721

Six Months Ended June 30, 2023
Net interest income (expense)	$	123,643	$	—	$	(4,299)	$	119,344
Provision for credit losses	9,014		—		—		9,014
Noninterest income	21,495		12,680		357		34,532
Noninterest expense	78,397		9,516		(537)		87,376
Income (loss) before income taxes (benefit)	57,727		3,164		(3,405)		57,486
Income taxes (benefit)	14,532		884		(1,277)		14,139
Net income (loss)	$	43,195	$	2,280	$	(2,128)	$	43,347
Total assets	$	8,025,617	$	30,249	$	(21,145)	$	8,034,721

Three Months Ended June 30, 2022
Net interest income (expense)	$	63,963	$	—	$	(2,629)	$	61,334
Provision for credit losses	5,441		—		—		5,441
Noninterest income	8,495		6,143		(25)		14,613
Noninterest expense	37,362		4,091		(114)		41,339
Income (loss) before income taxes (benefit)	29,655		2,052		(2,540)		29,167
Income taxes (benefit)	7,545		573		(834)		7,284
Net income (loss)	$	22,110	$	1,479	$	(1,706)	$	21,883
Total assets	$	7,422,518	$	29,042	$	(15,748)	$	7,435,812

Six Months Ended June 30, 2022
Net interest income (expense)	$	123,316	$	—	$	(5,155)	$	118,161
Provision for credit losses	9,608		—		—		9,608
Noninterest income	16,901		13,282		43		30,226
Noninterest expense	73,609		8,766		(152)		82,223
Income (loss) before income taxes (benefit)	57,000		4,516		(4,960)		56,556
Income taxes (benefit)	14,260		1,263		(1,599)		13,924
Net income (loss)	$	42,740	$	3,253	$	(3,361)	$	42,632
Total assets	$	7,422,518	$	29,042	$	(15,748)	$	7,435,812

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NOTE 16 – REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income in the consolidated statements of income. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2023 and 2022.


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2023		2022		2023		2022
Noninterest income - in-scope of Topic 606
Wealth management revenue:
Trust management/administration fees	$	5,356	$	5,139	$	10,992	$	11,121

Investment brokerage fees	430		543		861		1,141
Other	483		461		827		1,020
Service charges on deposit accounts:
Nonsufficient fund fees	1,741		1,524		3,439		2,856
Other	936		780		1,806		1,516
Interchange revenues	3,696		3,590		7,108		6,870
Other income:
Merchant services revenue	398		399		756		755
Other	1,403		671		2,033		1,439
Noninterest income - out-of-scope of Topic 606	4,310		1,506		6,710		3,508
Total noninterest income	$	18,753	$	14,613	$	34,532	$	30,226

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investment securities. In addition, certain noninterest income streams such as commercial FHA revenue, residential mortgage banking revenue and gain on sales of investment securities, net, are also not in scope of Topic 606. Topic 606 is applicable to noninterest income streams such as wealth management revenue, service charges on deposit accounts, interchange revenue, gain on sales of other real estate owned, and certain other noninterest income streams. The noninterest income streams considered in-scope by Topic 606 are discussed below.

Wealth Management Revenue

Wealth management revenue is primarily comprised of fees earned from the management and administration of trusts and other customer assets. Previously, the Company also earned investment advisory fees through its SEC registered investment advisory subsidiary. The Company’s performance obligation in both of these instances is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and contractually determined fee schedules. Payment is generally received a few days after month end through a direct charge to each customer’s account. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Fees generated from transactions executed by the Company’s third party broker dealer are remitted to the Company on a monthly basis for that month’s transactional activity.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of fees received under depository agreements with customers to provide access to deposited funds, serve as custodian of deposited funds, and when applicable, pay interest on deposits. These service charges primarily include non-sufficient fund fees and other account related service charges. Non-sufficient fund fees are earned when a depositor presents an item for payment in excess of available funds, and the Company, at its discretion, provides the necessary funds to complete the transaction. The Company generates other account related service charge revenue by providing depositors proper safeguard and remittance of funds as well as by delivering optional services for depositors, such as check imaging or treasury management, that are performed upon the depositor’s request. The Company’s performance obligation for the proper safeguard and remittance of funds, monthly account analysis and any other monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is typically received immediately or in the following month through a direct charge to a customer’s account.

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Interchange Revenue

Interchange revenue includes debit / credit card income and ATM user fees. Card income is primarily comprised of interchange fees earned for standing ready to authorize and providing settlement on card transactions processed through the MasterCard interchange network. The levels and structure of interchange rates are set by MasterCard and can vary based on cardholder purchase volumes. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with completion of the Company’s performance obligation, the transaction processing services provided to the cardholder. Payment is typically received immediately or in the following month. ATM fees are primarily generated when a Company cardholder withdraws funds from a non-Company ATM or a non-Company cardholder withdraws funds from a Company ATM. The Company satisfies its performance obligation for each transaction at the point in time when the ATM withdrawal is processed.

Other Noninterest Income

The other noninterest income revenue streams within the scope of Topic 606 consist of merchant services revenue, safe deposit box rentals, wire transfer fees, paper statement fees, check printing commissions, gain on sales of other real estate owned, and other noninterest related fees. Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts. Account management fees are considered earned at the time the merchant’s transactions are processed or other services are performed. Fees related to the other components of other noninterest income within the scope of Topic 606 are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at the point in time the customer uses the selected service to execute a transaction.

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

The following is management's discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of June 30, 2023, as compared to December 31, 2022, and operating results for the three and six months ended June 30, 2023 and 2022. These comments should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes appearing elsewhere herein and our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

In addition to the historical information contained herein, this Form 10-Q includes “forward-looking statements” within the meaning of such term under the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including prevailing interest rates and the rate of inflation; the continuing effects of the recent failures of Silicon Valley Bank and Signature Bank, including anticipated effects on FDIC premiums, increased deposit volatility and potential regulatory developments; changes in the financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions and the integration of acquired businesses; changes to U.S. tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “will,” “propose,” “may,” “plan,” “seek,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” or “continue,” or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Critical Accounting Policies

The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on the Company’s reported financial position and results of operations are set forth in “Note 2 – Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2022.

Significant Developments and Transactions

Each item listed below affects the comparability of our results of operations for the three and six months ended June 30, 2023 and 2022, and our financial condition as of June 30, 2023 and December 31, 2022, and may affect the comparability of financial information we report in future fiscal periods.

Redemption of Subordinated Notes. In the second quarter of 2023, the Company redeemed $6.6 million of outstanding subordinated notes. The weighted average redemption price was 89.2% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest. The Company recorded gains totaling $0.7 million on these redemptions.

On October 15, 2022, the Company redeemed the outstanding Fixed-to-Floating Rate Subordinated Notes due October 15, 2027, having an aggregate principal amount of $40.0 million, in accordance with the terms of the notes. The aggregate redemption price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.

Preferred Stock Issuance. On August 24, 2022, the Company issued and sold 4,600,000 depositary shares, each representing a 1/40th ownership interest in a share of the Company’s 7.75% fixed rate reset non-cumulative, non-convertible, perpetual preferred stock, Series A. The net proceeds were $110.5 million.

Commercial FHA Mortgage Loan Servicing Rights. During the third quarter of 2022, we committed to a plan to sell the commercial servicing rights asset and transferred $24.0 million of commercial FHA loan servicing rights to held for sale. At June 30, 2023, the Company abandoned its plans to sell this servicing asset and removed this asset from held for sale at lower of cost or fair value with no gain or loss recognized.

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Recent Acquisitions. On June 17, 2022, the Company completed its acquisition of the deposits and certain loans and other assets associated with FNBC's branches in Mokena and Yorkville, Illinois. The Company acquired $79.8 million in assets, including $60.3 million in cash and $16.6 million in loans, and assumed $79.8 million in deposits.

Results of Operations

Overview. The following table sets forth condensed income statement information of the Company for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands, except per share data)	2023			2022			2023			2022
Income Statement Data:
Interest income	$	100,491		$	69,236		$	196,030		$	131,984
Interest expense	41,651			7,902			76,686			13,823
Net interest income	58,840			61,334			119,344			118,161
Provision for credit losses	5,879			5,441			9,014			9,608
Noninterest income	18,753			14,613			34,532			30,226
Noninterest expense	42,894			41,339			87,376			82,223
Income before income taxes	28,820			29,167			57,486			56,556
Income taxes	7,245			7,284			14,139			13,924
Net income	21,575			21,883			43,347			42,632
Preferred dividends	2,228			—			4,456			—
Net income available to common shareholders	$	19,347		$	21,883		$	38,891		$	42,632
Per Share Data:
Basic earnings per common share	$	0.86		$	0.97		$	1.72		$	1.89
Diluted earnings per common share	$	0.86		$	0.97		1.72			1.89
Performance Metrics:
Return on average assets	1.09		%	1.19		%	1.10		%	1.17		%
Return on average shareholders' equity	11.14		%	13.65		%	11.32		%	13.22		%

During the three months ended June 30, 2023, we generated net income of $21.6 million, or diluted earnings per common share of $0.86, compared to net income of $21.9 million, or diluted earnings per common share of $0.97, in the three months ended June 30, 2022. Earnings for the second quarter of 2023 compared to the second quarter of 2022 decreased slightly primarily due to a $2.5 million decrease in net interest income, a $0.4 million increase in provision for credit losses and a $1.6 million increase in noninterest expense. These results were partially offset by a $4.1 million increase in noninterest income.

During the six months ended June 30, 2023, we generated net income of $43.3 million, or diluted earnings per common share of $1.72, compared to net income of $42.6 million, or diluted earnings per common share of $1.89, in the six months ended June 30, 2022. Earnings for the six months ended June 30, 2023 compared to six months ended June 30, 2022 increased primarily due to a $1.2 million increase in net interest income, a $0.6 million decrease in provision for credit losses, and a $4.3 million increase in noninterest income. These results were partially offset by a $5.2 million increase in noninterest expense and a $0.2 million increase in income tax expense.

Net Interest Income and Margin. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Net interest income is influenced by many factors, primarily the volume and mix of interest-earning assets, funding sources, and interest rate fluctuations. Noninterest-bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. Net interest margin is calculated as net interest income divided by average interest-earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for three and six months ended June 30, 2023 and 2022.

On May 3, 2023, the Federal Reserve approved its 10th interest rate increase in just a little over a year. The increase takes the federal funds rate to a target range of 5.00%-5.25%, the highest since August 2007. At its June meeting, the Federal

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Reserve decided to leave interest rates unchanged. The Federal Reserve indicated they will take another six weeks to see the impacts of policy moves as they continue to fight an inflation battle. The benchmark federal funds rate remains at a target range between 5.00%-5.25%, compared to a target rate of 0.00%-0.25% at the beginning of 2022.

During the three months ended June 30, 2023, net interest income, on a tax-equivalent basis, decreased to $59.0 million compared to $61.7 million for the three months ended June 30, 2022. The tax-equivalent net interest margin decreased to 3.23% for the second quarter of 2023 compared to 3.65% in the second quarter of 2022.

During the six months ended June 30, 2023, net interest income, on a tax-equivalent basis, increased to $119.8 million with a tax-equivalent net interest margin of 3.31% compared to net interest income, on a tax-equivalent basis, of $118.9 million and a tax-equivalent net interest margin of 3.58% for the six months ended June 30, 2022.

Average Balance Sheet, Interest and Yield/Rate Analysis. The following tables present the average balance sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the three and six months ended June 30, 2023 and 2022. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

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	Three Months Ended June 30,
	2023						2022
(tax-equivalent basis, dollars in thousands)	Average balance		Interest & fees		Yield/ Rate		Average balance		Interest & fees		Yield/ Rate
Interest-earning assets:
Federal funds sold and cash investments	$	67,377	$	852	5.07	%	$	226,517	$	468	0.83	%
Investment securities:
Taxable investment securities	809,299		6,899		3.42		714,611		4,055		2.27
Investment securities exempt from federal income tax (1)	52,110		387		2.98		104,316		876		3.36
Total securities	861,409		7,286		3.39		818,927		4,931		2.41
Loans:
Loans (2)	6,301,723		91,350		5.81		5,609,232		62,943		4.50
Loans exempt from federal income tax (1)	54,289		540		3.99		68,559		651		3.81
Total loans	6,356,012		91,890		5.80		5,677,791		63,594		4.49
Loans held for sale	4,067		59		5.79		9,865		77		3.15
Nonmarketable equity securities	45,028		599		5.33		36,338		487		5.38
Total interest-earning assets	7,333,893		100,686		5.51		6,769,438		69,557		4.12
Noninterest-earning assets	612,238						615,348
Total assets	$	7,946,131					$	7,384,786
Interest-bearing liabilities:
Deposits:
Checking and money market deposits	$	3,771,823	$	27,502	2.92	%	$	3,366,774	$	2,903	0.35	%
Savings deposits	626,818		396		0.25		719,204		87		0.05
Time deposits	804,580		5,132		2.56		615,614		770		0.50
Brokered time deposits	55,967		587		4.21		17,167		50		1.16
Total interest-bearing deposits	5,259,188		33,617		2.56		4,718,759		3,810		0.32
Short-term borrowings	22,018		14		0.26		59,301		22		0.15
FHLB advances and other borrowings	471,989		5,396		4.59		307,611		1,435		1.87
Subordinated debt	97,278		1,335		5.51		139,232		2,011		5.78
Trust preferred debentures	50,218		1,289		10.29		49,602		624		5.05
Total interest-bearing liabilities	5,900,691		41,651		2.83		5,274,505		7,902		0.60
Noninterest-bearing liabilities:
Noninterest-bearing deposits	1,187,584						1,401,268
Other noninterest-bearing liabilities	81,065						66,009
Total noninterest-bearing liabilities	1,268,649						1,467,277
Shareholders’ equity	776,791						643,004
Total liabilities and shareholders’ equity	$	7,946,131					$	7,384,786
Net interest income / net interest margin (3)			$	59,035	3.23	%			$	61,655	3.65	%

(1)Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%. Tax-equivalent adjustments totaled $0.2 million and $0.3 million for the three months ended June 30, 2023 and 2022, respectively.

(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

(3)Net interest margin during the periods presented represents: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

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	Six Months Ended June 30,
	2023						2022
(tax-equivalent basis, dollars in thousands)	Average balance		Interest & fees		Yield/ Rate		Average balance		Interest & fees		Yield/ Rate
Interest-earning assets:
Federal funds sold and cash investments	$	76,201	$	1,832	4.85	%	$	304,938	$	639	0.42	%
Investment securities:
Taxable investment securities	770,403		12,269		3.19		737,569		7,952		2.16
Investment securities exempt from federal income tax (1)	65,368		1,012		3.10		119,002		1,942		3.26
Total securities	835,771		13,281		3.18		856,571		9,894		2.31
Loans:
Loans (2)	6,283,259		178,809		5.74		5,406,467		119,529		4.46
Loans exempt from federal income tax (1)	55,046		1,078		3.95		70,570		1,344		3.84
Total loans	6,338,305		179,887		5.72		5,477,037		120,873		4.45
Loans held for sale	2,794		75		5.42		20,501		297		2.93
Nonmarketable equity securities	46,416		1,394		6.05		36,358		971		5.39
Total interest-earning assets	7,299,487		196,469		5.43		6,695,405		132,674		4.00
Noninterest-earning assets	611,528						623,224
Total assets	$	7,911,015					$	7,318,629
Interest-bearing liabilities:
Deposits:
Checking and money market deposits	$	3,729,261	$	50,457	2.73	%	$	3,266,076	$	4,156	0.26	%
Savings deposits	638,413		639		0.20		707,111		137		0.04
Time deposits	754,090		8,253		2.21		621,274		1,570		0.51
Brokered time deposits	35,384		673		3.84		19,290		108		1.13
Total interest-bearing deposits	5,157,148		60,022		2.35		4,613,751		5,971		0.26
Short-term borrowings	30,291		39		0.26		64,642		45		0.14
FHLB advances and other borrowings	505,945		11,402		4.54		309,436		2,647		1.72
Subordinated debt	98,538		2,705		5.54		139,186		4,022		5.78
Trust preferred debentures	50,133		2,518		10.13		49,527		1,138		4.64
Total interest-bearing liabilities	5,842,055		76,686		2.65		5,176,542		13,823		0.54
Noninterest-bearing liabilities:
Noninterest-bearing deposits	1,219,050						1,418,083
Other noninterest-bearing liabilities	77,895						73,878
Total noninterest-bearing liabilities	1,296,945						1,491,961
Shareholders’ equity	772,015						650,126
Total liabilities and shareholders’ equity	$	7,911,015					$	7,318,629
Net interest income / net interest margin (3)			$	119,783	3.31	%			$	118,851	3.58	%

(1)Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%. Tax-equivalent adjustments totaled $0.4 million and $0.7 million for the six months ended June 30, 2023 and 2022, respectively.

(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.


	Three Months Ended June 30, 2023 compared with Three Months Ended June 30, 2022						Six Months Ended June 30, 2023 compared with Six Months Ended June 30, 2022
	Change due to:				Interest Variance		Change due to:				Interest Variance
(tax-equivalent basis, dollars in thousands)	Volume		Rate				Volume		Rate
EARNING ASSETS:
Federal funds sold and cash investments	$	(1,171)	$	1,555	$	384	$	(2,989)	$	4,182	$	1,193
Investment securities:
Taxable investment securities	670		2,174		2,844		438		3,879		4,317
Investment securities exempt from federal income tax	(414)		(75)		(489)		(853)		(77)		(930)
Total securities	256		2,099		2,355		(415)		3,802		3,387
Loans:
Loans	8,904		19,503		28,407		22,168		37,112		59,280
Loans exempt from federal income tax	(139)		28		(111)		(300)		34		(266)
Total loans	8,765		19,531		28,296		21,868		37,146		59,014
Loans held for sale	(64)		46		(18)		(366)		144		(222)
Nonmarketable equity securities	116		(4)		112		286		137		423
Total earning assets	$	7,902	$	23,227	$	31,129	$	18,384	$	45,411	$	63,795
INTEREST-BEARING LIABILITIES:
Checking and money market deposits	$	1,651	$	22,948	$	24,599	$	3,428	$	42,873	$	46,301
Savings deposits	(35)		344		309		(41)		543		502
Time deposits	721		3,641		4,362		894		5,789		6,683
Brokered deposits	260		277		537		198		367		565
Total interest-bearing deposits	2,597		27,210		29,807		4,479		49,572		54,051
Short-term borrowings	(19)		11		(8)		(34)		28		(6)
FHLB advances and other borrowings	1,323		2,638		3,961		3,055		5,700		8,755
Subordinated debt	(594)		(82)		(676)		(1,141)		(176)		(1,317)
Trust preferred debentures	12		653		665		22		1,358		1,380
Total interest-bearing liabilities	$	3,319	$	30,430	$	33,749	6,381		56,482		62,863
Net interest income	$	4,583	$	(7,203)	$	(2,620)	$	12,003	$	(11,071)	$	932

Interest Income. Interest income, on a tax-equivalent basis, increased $31.1 million to $100.7 million in the three months ended June 30, 2023 as compared to the same quarter in 2022, primarily due to improved yields on earning assets. The yield on earning assets increased 139 basis points to 5.51% from 4.12% primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.33 billion in the second quarter of 2023 from $6.77 billion in the same quarter in 2022. Increases in average loans and investment securities of $678.2 million and $42.5 million, respectively, were partially offset by a decrease in federal funds sold and cash investments of $159.1 million.

Average loans increased $678.2 million in the second quarter of 2023 compared to the same quarter of 2022. Average commercial loans increased $115.5 million. Included in this category are commercial FHA warehouse lines. Average commercial FHA warehouse lines decreased $93.2 million to $13.4 million in the second quarter of 2023. Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $208.7 million in the second quarter of 2023 compared to the same period one year prior.

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Average commercial real estate loans increased this quarter by $229.7 million, compared to the prior year's second quarter. Average balances in our construction loans, consumer loans and lease portfolios also increased this quarter by $154.0 million, $68.0 million and $70.6 million, respectively, compared to the prior year second quarter.

For the six months ended June 30, 2023, interest income, on a tax-equivalent basis, increased $63.8 million to $196.5 million as compared to the same period in 2022, primarily due to improved yields on earning assets. The yield on earning assets increased 143 points to 5.43% from 4.00%, primarily due to the impact of increasing market interest rates.

Average earning assets increased to $7.30 billion in the first six months of 2023 from $6.70 billion in the same period in 2022. An increase in average loans of $861.3 million was partially offset by a $228.7 million decrease in federal funds sold and cash investments.

Average commercial loans increased $129.9 million for the six months ended June 30, 2023 compared to the same period of 2022. Commercial FHA warehouse lines decreased $63.4 million to $13.4 million in the first half of 2023. Excluding the changes in the commercial FHA warehouse line portfolio, average commercial loans increased $193.3 million for the six months ended June 30, 2023 compared to the same period one year prior.

Average balances in our commercial real estate loan portfolio increased by $369.7 million for the six months ended June 30, 2023 compared to the same period of 2022. Average construction loans, consumer loans and lease portfolios also increased $141.8 million, $108.8 million and $73.3 million, respectively, for the six months ended June 30, 2023 compared to the same period of 2022.

Interest Expense. Interest expense increased $33.7 million to $41.7 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The cost of interest-bearing liabilities increased to 2.83% for the second quarter of 2023 compared to 0.60% for the second quarter of 2022 due to the increase in deposit costs as a result of the rate increases announced by the Federal Reserve.

Interest expense on deposits increased $29.8 million to $33.6 million for the three months ended June 30, 2023 from the comparable period in 2022. The increase was primarily due to an increase in rates paid on deposits. Average balances of interest-bearing deposit accounts increased $540.4 million, or 11.45%, to $5.26 billion for the three months ended June 30, 2023 compared to the same period one year earlier. The increase in volume was attributable to increases of retail deposits, servicing deposits and brokered deposits of $148.5 million, $41.3 million, and $58.4 million, respectively. In addition, our Insured Cash Sweep product average balances increased $351.7 million.

For the six month period ended June 30, 2023, interest expense increased $62.9 million to $76.7 million compared to the six months ended June 30, 2022. The cost of interest-bearing liabilities increased to 2.65% for the first six months of 2023 compared to 0.54% for the same period of 2022. Interest expense on deposits increased to $60.0 million from $6.0 million for the comparable period in 2022, primarily due to increases in interest rates on deposits.

Interest expense on FHLB advances and other borrowings increased $4.0 million and $8.8 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022. Average balances increased $164.4 million and $196.5 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022.

Interest expense on subordinated debt decreased $0.7 million and $1.3 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022. The Company redeemed $6.6 million of subordinated debt in the second quarter of 2023 and $40.0 million of subordinated debt on October 15, 2022.

Interest expense on trust preferred debentures increased $0.7 million and $1.4 million for the three and six months ended June 30, 2023, respectively, from the comparable periods in 2022, due to interest rate increases, as these debt instruments reprice quarterly.

Provision for Credit Losses. The Company's provision for credit losses totaled $5.9 million for the three months ended June 30, 2023, all of which was attributable to loans. Provision for credit losses for the three months ended June 30, 2022 was $5.4 million, with $4.7 million expense attributable to loans and $0.7 million expense related to unfunded loan commitments. For the six months ended June 30, 2023 and 2022, the Company recorded provision expense of $9.0 million and $9.6 million, respectively.

The provision for credit losses on loans recognized during the three and six months ended June 30, 2023 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy

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of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.

Noninterest Income. Noninterest income increased 28.33% for the three months ended June 30, 2023, compared to the same period one year prior, and increased 14.25% for the six months ended June 30, 2023, compared to the same period one year prior. The following table sets forth the major components of our noninterest income for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Increase (decrease)		Six Months Ended June 30,				Increase (decrease)
(dollars in thousands)	2023		2022				2023		2022
Noninterest income:
Wealth management revenue	$	6,269	$	6,143	$	126	$	12,680	$	13,282	$	(602)

Residential mortgage banking revenue	540		384		156		945		983		(38)
Service charges on deposit accounts	2,677		2,304		373		5,245		4,372		873
Interchange revenue	3,696		3,590		106		7,108		6,870		238
Loss on sales of investment securities, net	(869)		(101)		(768)		(1,517)		(101)		(1,416)
Impairment on commercial mortgage servicing rights	—		(869)		869		—		(1,263)		1,263
Company-owned life insurance	891		840		51		1,767		1,859		(92)
Other income	5,549		2,322		3,227		8,304		4,224		4,080
Total noninterest income	$	18,753	$	14,613	$	4,140	$	34,532	$	30,226	$	4,306

Wealth management revenue. Wealth management revenue decreased $0.6 million for the six months ended June 30, 2023, as compared to the same period in 2022. Assets under administration increased to $3.59 billion at June 30, 2023 from $3.50 billion at June 30, 2022, primarily due to an increase in market performance in 2023.

Loss on sale of investment securities. The Company took advantage of certain market conditions during the three and six months ended June 30, 2023 to reposition out of lower yielding securities into other structures, which are expected to result in improved overall margin, liquidity and capital allocations. These transactions resulted in losses of $0.9 million and $1.5 million in the three and six months ended June 30, 2023, with expected paybacks to occur within a one year period.

Other noninterest income. Other income increased $3.2 million and $4.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022. As mentioned previously, the Company recognized a gain of $0.7 million on the redemption of subordinated debt in the second quarter of 2023. Also in the second quarter of 2023, we recognized a gain of $0.8 million on the sale of OREO. Net unrealized gains on our equity securities increased $0.6 million and $1.3 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022. As a result of designating our commercial FHA loan servicing rights as held for sale, we did not amortize the servicing asset nor record impairment in 2023. In the three and six months ended June 30, 2022, amortization expense totaled $0.6 million and $1.3 million, respectively.

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Noninterest Expense. The following table sets forth the major components of noninterest expense for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,				Increase (decrease)		Six Months Ended June 30,				Increase (decrease)
(dollars in thousands)	2023		2022				2023		2022
Noninterest expense:
Salaries and employee benefits	$	22,857	$	22,645	$	212	$	47,100	$	44,515	$	2,585
Occupancy and equipment	3,879		3,489		390		8,322		7,244		1,078
Data processing	6,544		6,082		462		12,855		11,955		900
FDIC insurance	1,196		826		370		2,525		1,656		869
Professional	1,663		1,516		147		3,423		3,488		(65)
Marketing	670		733		(63)		1,373		1,421		(48)
Communications	496		635		(139)		1,007		1,347		(340)
Loan expense	1,420		1,137		283		2,238		2,080		158
Amortization of intangible assets	1,208		1,318		(110)		2,499		2,716		(217)




Other expense	2,961		2,958		3		6,034		5,801		233
Total noninterest expense	$	42,894	$	41,339	$	1,555	$	87,376	$	82,223	$	5,153

Salaries and employee benefits. For the six months ended June 30, 2023, salaries and employee benefits expense increased $2.6 million as compared to the same period in 2022, primarily due to annual salary increases and increased medical insurance expense. The Company employed 915 employees at June 30, 2023 compared to 932 employees at June 30, 2022.

Occupancy and Equipment Expense. For the six months ended June 30, 2023, occupancy and equipment expense increased $1.1 million as compared to the same period in 2022 primarily as a result of the non-controllable seasonal expenses in the first quarter of 2023, including snow removal. In addition, the Company transitioned to an outsourced facilities management program and incurred increased repair expenses as a result of deferred maintenance.

Data processing fees. The $0.5 million and $0.9 million increases in data processing fees for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 were primarily the result of our continuing investments in technology to better serve our growing customer base and increased transaction volumes.

FDIC Insurance Expense. For the three and six months ended June 30, 2023, FDIC insurance expense increased $0.4 million and $0.9 million, respectively, as compared to the same periods in 2022, primarily as a result of the FDIC increasing the base assessment rate by 2 basis points, effective January 1, 2023.

Income Tax Expense. Income tax expense was $7.2 million for the three months ended June 30, 2023, as compared to $7.3 million for the three months ended June 30, 2022. The resulting effective tax rates were 25.1% and 25.0% for the three months ended June 30, 2023 and 2022, respectively.

Income tax expense was $14.1 million for the six months ended June 30, 2023, as compared to $13.9 million for the six months ended June 30, 2022. The resulting effective tax rates were 24.6% for each of the six months ended June 30, 2023 and 2022.

Financial Condition

Assets. Total assets increased to $8.03 billion at June 30, 2023, as compared to $7.86 billion at December 31, 2022.

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Loans. The loan portfolio is the largest category of our assets. At June 30, 2023, total loans were $6.37 billion as compared to $6.31 billion at December 31, 2022. The following table shows loans by category as of June 30, 2023 and December 31, 2022:


	June 30, 2023				December 31, 2022
(dollars in thousands)	Book Value		%		Book Value		%
Loans:
Commercial:
Equipment finance loans	$	614,633	9.7	%	$	616,751	9.8	%
Equipment finance leases	500,485		7.9		491,744		7.8
Commercial FHA lines	30,522		0.5		25,029		0.4

Other commercial loans	962,756		15.1		872,794		13.8
Total commercial loans and leases	2,108,396		33.2		2,006,318		31.8
Commercial real estate	2,443,995		38.4		2,433,159		38.6
Construction and land development	366,631		5.7		320,882		5.1
Residential real estate	371,486		5.8		366,094		5.8
Consumer	1,076,836		16.9		1,180,014		18.7
Total loans, gross	6,367,344		100.0	%	6,306,467		100.0	%
Allowance for credit losses on loans	(64,950)				(61,051)
Total loans, net	$	6,302,394			$	6,245,416

Total loans increased $60.9 million to $6.37 billion at June 30, 2023, as compared to December 31, 2022. The loan growth was primarily reflected in our commercial loans and leases, and construction and land development portfolios, which increased $102.1 million and $45.7 million, respectively.

Commercial loans and leases, which includes commercial FHA warehouse lines, increased $102.1 million to $2.11 billion at June 30, 2023, as compared to December 31, 2022. Advances on commercial FHA warehouse lines increased $5.5 million to $30.5 million at June 30, 2023. Excluding the increase in commercial FHA warehouse lines, commercial loans and leases increased $96.6 million.

Consumer loans decreased $103.2 million at June 30, 2023 primarily due to a decrease in loans originated through the program with GreenSky. On January 24, 2023, the Company notified GreenSky that, effective October 21, 2023, the Company would terminate its participation in GreenSky’s loan origination program. Following the termination, GreenSky is expected to continue servicing all loans originated through the program.

The principal segments of our loan portfolio are discussed below:

Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and farm operations. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees. The commercial loan category also includes loans originated by the equipment financing business that are secured by the underlying equipment.

Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties and assisted living facilities. Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors.

Construction and land development loans. Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development loans. Interest reserves are generally established on real estate construction loans.

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Residential real estate loans. Our residential real estate loans consist of residential properties that generally do not qualify for secondary market sale.

Consumer loans. Our consumer loans include direct personal loans, indirect automobile loans, lines of credit and installment loans originated through home improvement specialty retailers and contractors. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis.

Lease financing. Our equipment leasing business provides financing leases to varying types of businesses nationwide for purchases of business equipment and software. The financing is secured by a first priority interest in the financed asset and generally requires monthly payments.

The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at June 30, 2023:


	June 30, 2023
	Within One Year				One Year to Five Years				Five Years to 15 Years				After 15 Years
(dollars in thousands)	Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Total
Commercial	$	103,361	$	413,526	$	667,884	$	104,191	$	188,877	$	93,196	$	—	$	36,876	$	1,607,911
Commercial real estate	164,963		308,711		978,946		398,809		377,862		190,462		5,718		18,524		2,443,995
Construction and land development	6,307		69,536		107,084		128,630		20,211		32,063		1,015		1,785		366,631
Total commercial loans	274,631		791,773		1,753,914		631,630		586,950		315,721		6,733		57,185		4,418,537
Residential real estate	1,194		3,385		8,345		18,556		28,221		38,652		155,488		117,645		371,486
Consumer	1,623		3,043		1,042,478		536		29,156		—		—		—		1,076,836
Lease financing	14,899		—		370,336		—		115,250		—		—		—		500,485
Total loans	$	292,347	$	798,201	$	3,175,073	$	650,722	$	759,577	$	354,373	$	162,221	$	174,830	$	6,367,344

Loan Quality

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile, credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $65.0 million, or 1.02% of total loans, at June 30, 2023 compared to $61.1 million, or 0.97% of total loans, at December 31, 2022. The following table allocates the allowance for credit losses on loans by loan category:




	June 30, 2023				December 31, 2022
(dollars in thousands)	Allowance		% (1)		Allowance		% (1)
Commercial	$	15,290	0.95	%	$	14,639	0.97	%
Commercial real estate	29,425		1.20		29,290		1.20
Construction and land development	3,189		0.87		2,435		0.76
Total commercial loans	47,904		1.08		46,364		1.09
Residential real estate	5,551		1.49		4,301		1.17
Consumer	3,953		0.37		3,599		0.30
Lease financing	7,542		1.51		6,787		1.38
Total allowance for credit losses on loans	$	64,950	1.02	%	$	61,051	0.97	%

(1)Represents the percentage of the allowance to total loans in the respective category.

We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

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The allowance allocated to commercial loans totaled $15.3 million, or 0.95% of total commercial loans, at June 30, 2023, compared to $14.6 million, or 0.97%, at December 31, 2022. Modeled expected credit losses increased $0.2 million and qualitative factor ("Q-Factor") adjustments related to commercial loans increased $0.5 million.

The allowance allocated to residential real estate loans totaled $5.6 million, or 1.49% of total residential real estate loans at June 30, 2023, compared to $4.3 million, or 1.17%, at December 31, 2022. Modeled expected credit losses increased $0.9 million and Q-Factor adjustments increased $0.3 million.

The allowance allocated to consumer loans totaled $4.0 million, or 0.37% of total consumer loans at June 30, 2023, compared to $3.6 million, or 0.30%, at December 31, 2022. The allowance allocated to the GreenSky portfolio increased to 30 basis points as of June 30, 2023 compared to 25 basis points as of December 31, 2022, due to residual risk as the portfolio starts paying down and credit enhancements shrink. In addition, specific allocations for consumer loans that were evaluated for expected credit losses on an individual basis increased $0.2 million.

The allowance allocated to the lease portfolio totaled $7.5 million, or 1.51% of total commercial leases, at June 30, 2023, increasing $0.7 million from $6.8 million, or 1.38% of total commercial leases at December 31, 2022. Modeled expected credit losses increased $0.5 million and specific allocations for leases that were evaluated for expected credit losses on an individual basis increased $0.2 million.

In estimating expected credit losses as of June 30, 2023, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) expectations of a recession to occur in second half of 2023 because of past rate hikes by the Fed and the lagged effect of recent tightening in lending standards; U.S. gross domestic product growth of 1.3% for 2023 and 0.4% for 2024; (ii) Federal Reserve holding the policy rate through year end with a gradual decrease in 2024; and (iii) unemployment rate averaging 3.9% for 2023, increasing to an average of 5.2% for 2024. While these economic metrics indicate an improvement from the prior quarter, they still point to a slowing economy.

We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of June 30, 2023, modeled expected credit losses were adjusted upwards with a Q-Factor adjustment of approximately 52 basis points of total loans, increasing from 50 basis points at December 31, 2022. The Q-Factor adjustment at June 30, 2023 was based primarily on declining economic conditions, including rising inflation fears.

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The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2023			2022			2023			2022
Balance, beginning of period	$	62,067		$	52,938		$	61,051		$	51,062
Charge-offs:
Commercial	1,071			60			2,040			2,214
Commercial real estate	1,544			2,625			2,290			2,852
Construction and land development	334			—			334			6
Residential real estate	54			46			85			150
Consumer	260			191			523			496
Lease financing	771			499			1,161			705
Total charge-offs	4,034			3,421			6,433			6,423
Recoveries:
Commercial	403			298			497			309
Commercial real estate	326			(62)			328			5
Construction and land development	32			6			32			12
Residential real estate	48			41			65			154
Consumer	80			98			173			260
Lease financing	149			259			223			646
Total recoveries	1,038			640			1,318			1,386
Net charge-offs	2,996			2,781			5,115			5,037
Provision for credit losses on loans	5,879			4,741			9,014			8,873


Balance, end of period	$	64,950		$	54,898		$	64,950		$	54,898
Gross loans, end of period	$	6,367,344		$	5,795,544		$	6,367,344		$	5,795,544
Average total loans	$	6,356,012		$	5,677,791		$	6,338,305		$	5,477,037
Net charge-offs to average loans	0.19		%	0.20		%	0.16		%	0.19		%
Allowance for credit losses to total loans	1.02		%	0.95		%	1.02		%	0.95		%

Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance. Net charge-offs for the three months ended June 30, 2023 totaled $3.0 million, compared to $2.8 million for the same period one year ago. For the six months ended June 30, 2023, net charge-offs totaled $5.1 million, compared to $5.0 million for the same period one year ago.

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Nonperforming Loans. The following table sets forth our nonperforming assets by asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.




(dollars in thousands)	June 30, 2023			December 31, 2022
Nonperforming loans:
Commercial	$	6,181		$	7,853
Commercial real estate	38,610			29,602
Construction and land development	2,234			229
Residential real estate	3,955			8,449
Consumer	97			921
Lease financing	3,767			2,369
Total nonperforming loans	54,844			49,423
Other real estate owned and other repossessed assets	2,844			8,401
Nonperforming assets	$	57,688		$	57,824
Nonperforming loans to total loans	0.86		%	0.78		%
Nonperforming assets to total assets	0.72		%	0.74		%
Allowance for credit losses to nonperforming loans	118.43		%	123.53		%

We did not recognize interest income on nonaccrual loans during the three months ended June 30, 2023 or 2022 while the loans were in nonaccrual status. Additional interest income that would have been recorded on nonaccrual loans had they been current in accordance with their original terms was $0.8 million and $1.6 million for the three and six months ended June 30, 2023, respectively, and $0.5 million and $1.3 million for the three and six months ended June 30, 2022, respectively.

We utilize an asset risk classification system in compliance with guidelines established by the Federal Reserve as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance of booking the asset is not warranted.

We use a ten grade risk rating system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 7, which are "special mention," and loans with a risk grade of 8, which are "substandard" loans that are not considered to be nonperforming. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management team.

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


	Commercial				Commercial real estate				Construction & land development
	Risk category				Risk category				Risk category
(dollars in thousands)	7		8 (1)		7		8 (1)		7		8 (1)		Total
June 30, 2023	$	10,545	$	29,183	$	28,440	$	95,203	$	60	$	6,000	$	169,431
December 31, 2022	12,693		9,579		42,770		82,949		210		8,415		156,616

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

Commercial loans with a risk rating of 7 or 8 increased $17.5 million to $39.7 million as of June 30, 2023, compared to $22.3 million as of December 31, 2022. The increase was due to a single commercial loan that was down graded in the second quarter of 2023. Commercial real estate loans with a risk rating of 7 or 8 decreased $2.1 million to $123.6 million as of June 30, 2023, compared to $125.7 million as of December 31, 2022, primarily due to risk rating upgrades within the portfolio.

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Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.

The following table sets forth the book value and percentage of each category of investment securities at June 30, 2023 and December 31, 2022. The book value for investment securities classified as available for sale is equal to fair market value.




	June 30, 2023				December 31, 2022
(dollars in thousands)	Book Value		% of Total		Book Value		% of Total
Investment securities available for sale:
U.S. Treasury securities	$	42,746	4.8	%	$	81,230	10.6	%
U.S. government sponsored entities and U.S. agency securities	73,458		8.3		37,509		4.9
Mortgage-backed securities - agency	538,634		61.0		448,150		58.3
Mortgage-backed securities - non-agency	65,911		7.5		20,754		2.7
State and municipal securities	57,494		6.5		94,636		12.3
Collateralized loan obligations	22,709		2.6		—		—
Corporate securities	81,763		9.3		85,955		11.2
Total investment securities, available for sale, at fair value	$	882,715	100.0	%	$	768,234	100.0	%

The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at June 30, 2023. The book value for investment securities classified as available for sale is equal to fair market value.

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(dollars in thousands)	Book value		% of total		Weighted average yield
Investment securities available for sale:
U.S. Treasury securities:
Maturing within one year	$	1,263	0.1	%	3.26	%
Maturing in one to five years	41,483		4.8		1.01
Maturing in five to ten years	—		—		—
Maturing after ten years	—		—		—
Total U.S. Treasury securities	$	42,746	4.9	%	1.07	%

U.S. government sponsored entities and U.S. agency securities:
Maturing within one year	$	9,970	1.1	%	4.89	%
Maturing in one to five years	55,358		6.3		4.13
Maturing in five to ten years	8,130		0.9		1.00
Maturing after ten years	—		—		—
Total U.S. government sponsored entities and U.S. agency securities	$	73,458	8.3	%	3.82	%

Mortgage-backed securities - agency:
Maturing within one year	$	6,927	0.8	%	2.44	%
Maturing in one to five years	241,929		27.4		3.60
Maturing in five to ten years	104,984		11.9		3.27
Maturing after ten years	184,794		20.9		2.17
Total mortgage-backed securities - agency	$	538,634	61.0	%	3.00	%

Mortgage-backed securities - non-agency:
Maturing within one year	$	14,532	1.6	%	5.95	%
Maturing in one to five years	31,231		3.5		6.01
Maturing in five to ten years	274		—		3.58
Maturing after ten years	19,874		2.3		2.52
Total mortgage-backed securities - non-agency	$	65,911	7.4	%	4.80	%

State and municipal securities (1):
Maturing within one year	$	1,385	0.2	%	3.32	%
Maturing in one to five years	9,243		1.0		2.92
Maturing in five to ten years	7,788		0.9		2.51
Maturing after ten years	39,078		4.4		2.53
Total state and municipal securities	$	57,494	6.5	%	2.61	%

Collateralized loan obligations:
Maturing within one year	$	11,145	1.3	%	8.86	%
Maturing in one to five years	11,564		1.3		6.47
Maturing in five to ten years	—		—		—
Maturing after ten years	—		—		—
Total collateralized loan obligations	$	22,709	2.6	%	7.64	%

Corporate securities:
Maturing within one year	$	—	—	%	—	%
Maturing in one to five years	18,656		2.1		3.07
Maturing in five to ten years	26,977		3.1		4.15
Maturing after ten years	36,130		4.1		3.31
Total corporate securities	$	81,763	9.3	%	3.52	%
Total investment securities, available for sale	$	882,715	100.0	%	3.23	%

(1)Weighted average yield for tax-exempt securities are presented on a tax-equivalent basis assuming a federal income tax rate of 21%.

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The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at June 30, 2023.


	Amortized		Estimated		Average credit rating
(dollars in thousands)	cost		fair value		AAA		AA+/-		A+/-		BBB+/-		<BBB-		Not Rated
Investment securities available for sale:
U.S. Treasury securities	$	46,636	$	42,746	$	41,195	$	1,551	$	—	$	—	$	—	$	—
U.S. government sponsored entities and U.S. agency securities	77,510		73,458		63,736		9,722		—		—		—		—
Mortgage-backed securities - agency	612,214		538,634		7		538,627		—		—		—		—
Mortgage-backed securities - non-agency	69,921		65,911		14,604		51,307		—		—		—		—
State and municipal securities	64,481		57,494		649		56,588		—		257		—		—
Collateralized loan obligations	22,709		22,709		14,362		8,347		—		—		—		—
Corporate securities	95,172		81,763		—		43,961		16,722		21,080		—		—
Total investment securities, available for sale	$	988,643	$	882,715	$	134,553	$	710,103	$	16,722	$	21,337	$	—	$	—

Liabilities. At June 30, 2023, liabilities totaled $7.26 billion compared to $7.10 billion at December 31, 2022.

Deposits. We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources. Our deposits consist of noninterest-bearing and interest-bearing demand, savings and time deposit accounts.

Total deposits increased $61.9 million to $6.43 billion at June 30, 2023, as compared to December 31, 2022. Interest rate promotions offered in 2023 on money market and time deposit products resulted in increases in balances of $42.4 million and $251.1 million, respectively, at June 30, 2023, compared to December 31, 2022. These increases were partially offset by a decrease in noninterest-bearing demand account balances of $199.3 million, as a result of increasing deposit rates in response to the rate increases announced by the Federal Reserve.



(dollars in thousands)	June 30, 2023				December 31, 2022
	Book Value		% of Total		Book Value		% of Total
Noninterest-bearing demand	$	1,162,909	18.1	%	$	1,362,158	21.4	%
Interest-bearing:
Checking	2,499,693		38.9		2,494,073		39.2
Money market	1,226,470		19.1		1,184,101		18.6
Savings	624,005		9.7		661,932		10.4
Time	913,471		14.2		662,388		10.4
Total deposits	$	6,426,548	100.0	%	$	6,364,652	100.0	%

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The following table summarizes our average deposit balances and weighted average rates for the three months ended June 30, 2023 and 2022:




	Three months ended June 30, 2023				Three months ended June 30, 2022
(dollars in thousands)	Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate
Deposits:
Noninterest-bearing demand	$	1,187,584	—		$	1,401,268	—
Interest-bearing:
Checking	2,529,185		2.92	%	2,336,630		0.36	%
Money market	1,242,638		2.94		1,030,144		0.32
Savings	626,818		0.25		719,204		0.05
Time, insured	651,203		2.42		476,233		0.47
Time, uninsured	153,377		3.14		139,381		0.59
Time, brokered	55,967		4.21		17,167		1.16
Total interest-bearing	5,259,188		2.56		4,718,759		0.32
Total deposits	$	6,446,772	2.09	%	$	6,120,027	0.25	%

The Company estimates that uninsured deposits(1) totaled $1.21 billion, or 19% of total deposits, at June 30, 2023 compared to $1.55 billion, or 24%, at December 31, 2022. The following table sets forth the maturity of uninsured time deposits as of June 30, 2023:


(dollars in thousands)	Amount
Three months or less	$	11,124
Three to six months	68,088
Six to 12 months	70,017
After 12 months	25,387
Total	$	174,616

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

Capital Resources and Liquidity Management

Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, issuances and redemptions of common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available-for-sale investment securities and cash flow hedges.

Shareholders’ equity increased $18.2 million to $776.8 million at June 30, 2023 as compared to December 31, 2022. The Company generated net income of $43.3 million during 2023. Offsetting this increase to shareholders’ equity were dividends to common shareholders of $13.4 million, dividends to preferred shareholders of $4.5 million, repurchases of common stock of $9.0 million and an increase in accumulated other comprehensive losses of $1.0 million.

The Company has a share repurchase program, whereby the Board of Directors authorized the Company to repurchase up to $25.0 million of its common stock. This program terminates December 31, 2023. As of June 30, 2023, $8.9 million, or 432,809 shares of the Company’s common stock, had been repurchased under the program, with approximately $16.1 million of remaining repurchase authority.

Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

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Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.

The table below presents our sources of liquidity as of June 30, 2023 and December 31, 2022:


(dollars in thousands)	June 30, 2023		December 31, 2022
Cash and cash equivalents	$	160,695	$	160,631
Unpledged securities	343,501		209,184
FHLB committed liquidity	857,207		997,388
FRB discount window availability	184,107		12,201
Total Estimated Liquidity	$	1,545,510	$	1,379,404

Conditional Funding Based on Market Conditions
Additional credit facility	$	330,000	$	250,000
Brokered CDs (additional capacity)	$	400,000	$	500,000

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it by the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company. Management believed at June 30, 2023, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.

In December 2018, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the CECL accounting standard. In March 2020, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company is adopting the capital transition relief over the permissible five-year period.

At June 30, 2023, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

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The following table presents the Company's and the Bank’s capital ratios and the minimum requirements at June 30, 2023:


Ratio	Actual		Minimum Regulatory Requirements (1)		Well Capitalized
Total risk-based capital ratio
Midland States Bancorp, Inc.	12.65	%	10.50	%	N/A
Midland States Bank	11.89		10.50		10.00	%
Tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	10.47		8.50		N/A
Midland States Bank	11.01		8.50		8.00
Common equity tier 1 risk-based capital ratio
Midland States Bancorp, Inc.	8.03		7.00		N/A
Midland States Bank	11.01		7.00		6.50
Tier 1 leverage ratio
Midland States Bancorp, Inc.	9.57		4.00		N/A
Midland States Bank	10.07		4.00		5.00

(1)Total risk-based capital ratio, Tier 1 risk-based capital ratio and Common equity tier 1 risk-based capital ratio include the capital conservation buffer of 2.5%.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from investments in securities backed by mortgage loans.

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

We actively manage interest rate risk, as changes in market interest rates may have a significant impact on reported earnings. Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve consistent growth in net interest income while managing volatility arising from shifts in market interest rates. Our Board of Directors’ Risk Policy and Compliance Committee oversees interest rate risk, as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income. The Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the Risk Policy and Compliance Committee at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

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We use Net Interest Income at Risk (“NII at Risk”) to model interest rate risk utilizing various assumptions for assets, liabilities, and derivatives. NII at Risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. We use a data warehouse to study interest rate risk at a transactional level and use various ad-hoc reports to continuously refine assumptions. Assumptions and methodologies regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed periodically.

The following table shows NII at Risk at the dates indicated:


	Net interest income sensitivity (Shocks)
	Immediate change in rates
(dollars in thousands)	-100			+100			+200
June 30, 2023:
Dollar change	$	(9,439)		$	10,748		$	20,948
Percent change	(3.4)		%	3.9		%	7.5		%
December 31, 2022:
Dollar change	$	(12,560)		$	10,814		$	21,357
Percent change	(4.2)		%	3.6		%	7.2		%

We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next twelve months. We were within board policy limits for the -100, +100 and +200 basis point scenarios at June 30, 2023.

Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at June 30, 2023 projects that our earnings exhibit increasing sensitivity to changes in interest rates for both rising rate scenarios compared to December 31, 2022.

Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from mortgage-backed securities, derivative instruments, and equity investments.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are included under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk”.

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ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. The Company’s management, including our President and

Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, anti-money laundering and anti-terrorism), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

ITEM 1A– RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2022.

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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the second quarter of 2023.


Period	Total number of shares purchased(1)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (2)
April 1 - 30, 2023	97,089	$	20.60	97,089	$	20,198,578
May 1 - 31, 2023	208,150	19.39		206,366	16,196,525
June 1 - 30, 2023	5,088	19.76		5,088	16,096,010
Total	310,327	$	19.78	308,543	$	16,096,010

(1)Represents shares of the Company’s common stock repurchased under the employee stock purchase program and shares withheld to satisfy tax withholding obligations upon the vesting of awards of restricted stock.

(2)As previously disclosed, the board of directors of the Company approved a stock repurchase program on December 6, 2022, pursuant to which the Company is authorized to repurchase up to $25.0 million of common stock through December 31, 2023. Stock repurchases under this programs may be made from time to time on the open market, in privately negotiated transactions, or in any manner that complies with applicable securities laws, at the discretion of the Company. The timing of purchases and the number of shares repurchased under the programs are dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market condition. The repurchase program may be suspended or discontinued at any time without notice. As of June 30, 2023, 432,809 shares of the Company’s common stock have been repurchased under the program for an aggregate purchase price of $8.9 million.

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.

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ITEM 6 – EXHIBITS


Exhibit No.						Description

31.1						Chief Executive Officer’s Certification required by Rule 13(a)-14(a) – filed herewith.

31.2						Chief Financial Officer’s Certification required by Rule 13(a)-14(a) – filed herewith.

32.1						Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

32.2						Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

101						Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements – filed herewith.

104						The cover page from Midland States Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended June 30, 2023 formatted in inline XBRL and contained in Exhibit 101.

Table o f Contents

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.


	Midland States Bancorp, Inc.


Date: August 3, 2023	By:	/s/	Jeffrey G. Ludwig
			Jeffrey G. Ludwig
			President and Chief Executive Officer
			(Principal Executive Officer)


Date: August 3, 2023	By:	/s/	Eric T. Lemke
			Eric T. Lemke
			Chief Financial Officer
			(Principal Financial Officer)