National Bank Holdings Corp - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐ 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: 001-35654

NATIONAL BANK HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		27-0563799
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7800 East Orchard Road, Suite 300, Greenwood Village, Colorado 80111

(Address of principal executive offices) (Zip Code)

Registrant’s telephone, including area code: (303) 892-8715

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


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Class A Common Stock	NBHC	NYSE

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 Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 29, 2022, the registrant had outstanding 30,078,203 shares of Class A voting common stock, each with $0.01 par value per share, excluding 158,459 shares of restricted Class A common stock issued but not yet vested.

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Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	6

	Consolidated Statements of Financial Condition as of June 30, 2022 and December 31, 2021	6

	Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021	7

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021	8

	Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2022 and 2021	9

	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	10

	Notes to Consolidated Financial Statements	11

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69

Item 4.	Controls and Procedures	69

Part II. Other Information

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 5.	Other Information	71

Item 6.	Exhibits	71

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,” “target,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, liquidity, results of operations, business strategy and growth prospects.

Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements and, therefore, you are cautioned not to place undue reliance on such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

● difficulties and delays in integrating the mergers of NBHC, Community Bancorporation, and Bancshares of Jackson Hole Incorporated (the “mergers”) businesses or fully realizing cost savings and other benefits;

● our ability to obtain regulatory approval for Bancshares of Jackson Hole Incorporated and meet other closing conditions for the mergers on the expected terms and schedule;

● a delay in closing the mergers;

● business disruption following the proposed transactions;

● our ability to execute our business strategy, including our digital strategy, as well as changes in our business strategy or development plans;

● business and economic conditions generally and in the financial services industry;

● effects of any potential government shutdowns;

● economic, market, operational, liquidity, credit and interest rate risks associated with our business;

● effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;

● changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions;

● effects of inflation, including its associated impact on labor costs, as well as, interest rate, securities market and monetary supply fluctuations;

● changes in the economy or supply-demand imbalances affecting local real estate values;

● changes in consumer spending, borrowings and savings habits;

● with respect to our mortgage business, our inability to negotiate our fees with Fannie Mae, Freddie Mac, Ginnie Mae or other investors for the purchase of our loans, our obligation to indemnify purchasers or to repurchase the related loans if the loans fail to meet certain criteria, or higher rate of delinquencies and defaults as a result of the geographic concentration of our servicing portfolio;

● our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions, consolidations or other expansion opportunities on attractive terms, or at all;

● our ability to integrate acquisitions or consolidations and to achieve synergies, operating efficiencies and/or other expected benefits within expected time-frames, or at all, or within expected cost projections, and to preserve the goodwill of acquired financial institutions;

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● our ability to realize the anticipated benefits from enhancements or updates to our core operating systems from time to time without significant change in our client service or risk to our control environment;

● our dependence on information technology and telecommunications systems of third-party service providers and the risk of system failures, interruptions or breaches of security, including those that could result in disclosure or misuse of confidential or proprietary client or other information;

● our ability to achieve organic loan and deposit growth and the composition of such growth;

● changes in sources and uses of funds, including loans, deposits and borrowings;

● increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other things, lower returns;

● continued consolidation in the financial services industry;

● our ability to maintain or increase market share and control expenses;

● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters;

● the trading price of shares of the Company's stock;

● the effects of tax legislation, including the potential of future increases to prevailing tax rates, or challenges to our

positions;

● our ability to realize deferred tax assets or the need for a valuation allowance, or the effects of changes in tax laws on our deferred tax assets;

● costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, changes in regulation that affect the fees that we charge, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquiries; and changes in regulations that apply to us as a Colorado state-chartered bank;

● technological changes;

● the timely development and acceptance of new products and services, including in the digital technology space and our digital solution 2UniFi^SM, and perceived overall value of these products and services by our clients;

● changes in our management personnel and our continued ability to attract, hire and retain qualified personnel;

● ability to implement and/or improve operational management and other internal risk controls and processes and our reporting system and procedures;

● regulatory limitations on dividends from our bank subsidiary;

● changes in estimates of future credit reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

● widespread natural and other disasters, dislocations, political instability, pandemics, acts of war or terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically;

● a cyber-security incident, data breach or a failure of a key information technology system;

● adverse effects due to the novel Coronavirus Disease 2019 (“COVID-19”) on the Company and its clients, counterparties, employees and third-party service providers, and the adverse impacts on our business, financial position, results of operations and prospects;

● impact of reputational risk on such matters as business generation and retention;

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● other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission; and

● our success at managing the risks involved in the foregoing items.

Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.

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PART I: FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS

NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

(In thousands, except share and per share data)


	June 30, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	447,875	$	845,195
Interest bearing bank deposits		500		500
Cash and cash equivalents		448,375		845,695
Investment securities available-for-sale (at fair value)		805,858		691,847
Investment securities held-to-maturity (fair value of $516,685 and $599,260 at June 30, 2022 and December 31, 2021, respectively)		582,650		609,012
Non-marketable securities		59,754		50,740
Loans		4,817,070		4,513,383
Allowance for credit losses		(50,860)		(49,694)
Loans, net		4,766,210		4,463,689
Loans held for sale		48,816		139,142
Other real estate owned		4,992		7,005
Premises and equipment, net		103,690		96,747
Goodwill		115,027		115,027
Intangible assets, net		14,568		12,322
Other assets		218,059		182,785
Total assets	$	7,167,999	$	7,214,011
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits	$	2,454,740	$	2,506,265
Interest bearing demand deposits		597,000		555,401
Savings and money market		2,364,681		2,332,591
Time deposits		777,977		833,916
Total deposits		6,194,398		6,228,173
Securities sold under agreements to repurchase		24,396		22,768
Long-term debt, net		39,532		39,478
Other liabilities		94,122		83,486
Total liabilities		6,352,448		6,373,905
Shareholders’ equity:
Common stock, par value $0.01 per share: 400,000,000 shares authorized; 51,487,907 and 51,487,907 shares issued; 30,075,175 and 29,958,764 shares outstanding at June 30, 2022 and December 31, 2021, respectively		515		515
Additional paid-in capital		1,014,330		1,014,294
Retained earnings		314,616		289,876
Treasury stock of 21,251,530 and 21,384,676 shares at June 30, 2022 and December 31, 2021, respectively, at cost		(455,909)		(457,616)
Accumulated other comprehensive loss, net of tax		(58,001)		(6,963)
Total shareholders’ equity		815,551		840,106
Total liabilities and shareholders’ equity	$	7,167,999	$	7,214,011

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)


	For the three months ended				For the six months ended
	June 30,				June 30,
	2022		2021		2022		2021
Interest and dividend income:
Interest and fees on loans	$	51,737	$	43,892	$	95,832	$	88,830
Interest and dividends on investment securities		5,873		4,121		10,735		8,021
Dividends on non-marketable securities		211		209		420		419
Interest on interest-bearing bank deposits		1,015		228		1,374		393
Total interest and dividend income		58,836		48,450		108,361		97,663
Interest expense:
Interest on deposits		2,485		3,576		5,016		7,563
Interest on borrowings		334		6		667		11
Total interest expense		2,819		3,582		5,683		7,574
Net interest income before provision for loan losses		56,017		44,868		102,678		90,089
Provision expense (release) for loan losses		2,504		(5,850)		2,182		(9,425)
Net interest income after provision for loan losses		53,513		50,718		100,496		99,514
Non-interest income:
Service charges		3,956		3,568		7,666		7,042
Bank card fees		4,541		4,614		8,664		8,687
Mortgage banking income		6,948		13,979		16,614		36,358
Bank-owned life insurance income		540		553		1,072		1,101
Other non-interest income		777		2,552		1,800		5,439
Total non-interest income		16,762		25,266		35,816		58,627
Non-interest expense:
Salaries and benefits		28,776		31,439		58,112		64,962
Occupancy and equipment		6,665		6,131		13,061		12,681
Telecommunications and data processing		2,453		2,315		4,834		4,652
Marketing and business development		674		570		1,347		1,022
FDIC deposit insurance		486		456		968		900
Bank card expenses		1,398		1,330		2,666		2,474
Professional fees		1,486		649		2,300		1,391
Other non-interest expense		3,169		2,348		5,717		4,824
Problem asset workout		144		294		307		732
Loss (gain) on OREO sales, net		5		221		(270)		192
Core deposit intangible asset amortization		296		296		592		592
Banking center consolidation-related expense		—		294		—		1,589
Total non-interest expense		45,552		46,343		89,634		96,011
Income before income taxes		24,723		29,641		46,678		62,130
Income tax expense		4,361		5,441		7,964		11,118
Net income	$	20,362	$	24,200	$	38,714	$	51,012
Earnings per share—basic	$	0.67	$	0.78	$	1.28	$	1.65
Earnings per share—diluted		0.67		0.77		1.27		1.63
Weighted average number of common shares outstanding:
Basic		30,225,898		30,947,206		30,173,338		30,888,062
Diluted		30,493,265		31,226,351		30,492,613		31,182,584

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	For the three months ended				For the six months ended
	June 30,				June 30,
	2022		2021		2022		2021
Net income	$	20,362	$	24,200	$	38,714	$	51,012
Other comprehensive (loss) income, net of tax:
Securities available-for-sale:
Net unrealized (losses) gains arising during the period, net of tax benefit (expense) of $6,009 and ($423) for the three months ended June 30, 2022 and 2021, respectively; and net of tax benefit of $15,846 and $2,409 for the six months ended June 30, 2022 and 2021, respectively		(19,288)		1,361		(50,866)		(7,757)
Less: amortization of net unrealized holding gains to income, net of tax benefit of $25 and $47 for the three months ended June 30, 2022 and 2021, respectively; and net of tax benefit of $53 and $98 for the six months ended June 30, 2022 and 2021, respectively		(80)		(151)		(172)		(314)
Other comprehensive (loss) income		(19,368)		1,210		(51,038)		(8,071)
Comprehensive income (loss)	$	994	$	25,410	$	(12,324)	$	42,941

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(In thousands, except share and per share data)


	For the three months ended June 30,
									Accumulated
			Additional						other
	Common		paid-in		Retained		Treasury		comprehensive
	stock		capital		earnings		stock		income (loss), net		Total
Balance, March 31, 2021	$	515	$	1,010,798	$	243,446	$	(423,254)	$	485	$	831,990
Net income		—		—		24,200		—		—		24,200
Stock-based compensation		—		1,353		—		—		—		1,353
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,654, net		—		(951)		—		889		—		(62)
Cash dividends declared ($0.22 per share)		—		—		(6,825)		—		—		(6,825)
Other comprehensive income		—		—		—		—		1,210		1,210
Balance, June 30, 2021	$	515	$	1,011,200	$	260,821	$	(422,365)	$	1,695	$	851,866
Balance, March 31, 2022	$	515	$	1,014,332	$	301,220	$	(457,219)	$	(38,633)	$	820,215
Net income		—		—		20,362		—		—		20,362
Stock-based compensation		—		1,697		—		—		—		1,697
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,782, net		—		(1,699)		—		1,310		—		(389)
Cash dividends declared ($0.23 per share)		—		—		(6,966)		—		—		(6,966)
Other comprehensive loss		—		—		—		—		(19,368)		(19,368)
Balance, June 30, 2022	$	515	$	1,014,330	$	314,616	$	(455,909)	$	(58,001)	$	815,551


	For the six months ended June 30,
									Accumulated
			Additional						other
	Common		paid-in		Retained		Treasury		comprehensive
	stock		capital		earnings		stock		income (loss), net		Total
Balance, December 31, 2020	$	515	$	1,011,362	$	223,175	$	(424,127)	$	9,766	$	820,691
Net income		—		—		51,012		—		—		51,012
Stock-based compensation		—		2,483		—		—		—		2,483
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $3,187, net		—		(2,645)		—		1,762		—		(883)
Cash dividends declared ($0.43 per share)		—		—		(13,366)		—		—		(13,366)
Other comprehensive loss		—		—		—		—		(8,071)		(8,071)
Balance, June 30, 2021	$	515	$	1,011,200	$	260,821	$	(422,365)	$	1,695	$	851,866
Balance, December 31, 2021	$	515	$	1,014,294	$	289,876	$	(457,616)	$	(6,963)	$	840,106
Net income		—		—		38,714		—		—		38,714
Stock-based compensation		—		2,848		—		—		—		2,848
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $2,849, net		—		(2,812)		—		1,707		—		(1,105)
Cash dividends declared ($0.46 per share)		—		—		(13,974)		—		—		(13,974)
Other comprehensive loss		—		—		—		—		(51,038)		(51,038)
Balance, June 30, 2022	$	515	$	1,014,330	$	314,616	$	(455,909)	$	(58,001)	$	815,551

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	For the six months ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	38,714	$	51,012
Adjustments to reconcile net income to net cash provided by operating activities:
Provision expense (release) for loan losses		2,182		(9,425)
Depreciation and amortization		6,887		7,692
Change in current income tax receivable		2,001		(3,563)
Change in deferred income taxes		(13,309)		2,710
Net excess tax benefit from stock-based compensation		(206)		(392)
Discount accretion, net of premium amortization on securities		1,132		2,570
Gain on sale of mortgages, net		(14,304)		(33,326)
Origination of loans held for sale, net of repayments		(531,523)		(1,064,145)
Proceeds from sales of loans held for sale		639,614		1,213,796
Originations of mortgage serving rights		(3,325)		(5,949)
Impairment on other real estate owned		188		—
Impairment on fixed assets related to banking center consolidations		—		1,552
Gain on sale of fixed assets		(718)		(2,315)
Stock-based compensation		2,848		2,483
Operating lease payments		(2,339)		(2,620)
Change in other assets		(7,317)		10,535
Change in other liabilities		6,678		(36,626)
Net cash provided by operating activities		127,203		133,989
Cash flows from investing activities:
Proceeds from non-marketable securities		62		1,765
Proceeds from maturities of investment securities available-for-sale		79,103		131,113
Proceeds from maturities of investment securities held-to-maturity		69,734		64,762
Proceeds from sales of other real estate owned		2,134		936
Purchase of non-marketable securities		(9,379)		(3,840)
Purchase of investment securities available-for-sale		(260,246)		(86,199)
Purchase of investment securities held-to-maturity		(44,309)		(377,687)
(Purchases) sales of premises and equipment, net		(10,007)		9,102
Net (increase) decrease in loans		(306,728)		52,462
Proceeds from the sale of loans		933		—
Net cash used in investing activities		(478,703)		(207,586)
Cash flows from financing activities:
Net (decrease) increase in deposits		(33,775)		481,821
Net increase in repurchase agreements and other short-term borrowings		1,628		60
Issuance of stock under purchase and equity compensation plans		(1,623)		(2,424)
Proceeds from exercise of stock options		482		1,506
Payment of dividends		(14,043)		(13,438)
Net cash (used in) provided by financing activities		(47,331)		467,525
(Decrease) increase in cash, cash equivalents and restricted cash⁽¹⁾		(398,831)		393,928
Cash, cash equivalents and restricted cash at beginning of the year⁽¹⁾		850,220		615,565
Cash, cash equivalents and restricted cash at end of period⁽¹⁾	$	451,389	$	1,009,493
Supplemental disclosure of cash flow information during the period:
Cash paid for interest	$	6,282	$	9,581
Net tax payments		3,373		9,464
Supplemental schedule of non-cash activities:
Loans transferred to other real estate owned at fair value	$	39	$	1,522
Increase in loans purchased but not settled		—		2,000
Loans transferred from loans held for sale to loans		3,461		3,317


(1)		Included in restricted cash at June 30, 2022 and 2021 is $3.0 million and $5.0 million, respectively, placed in escrow for certain potential liabilities, for which the Company is indemnified, resulting from a previous acquisition. The restricted cash is included in other assets in the Company’s consolidated statements of financial condition.

See accompanying notes to the consolidated interim financial statements.

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NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2022

Note 1 Basis of Presentation

National Bank Holdings Corporation ("NBHC" or the "Company") is a bank holding company that was incorporated in the State of Delaware in 2009. The Company is headquartered in Greenwood Village, Colorado, and its primary operations are conducted through its wholly owned subsidiary, NBH Bank (the "Bank"), a Colorado state-chartered bank and a member of the Federal Reserve System. The Company provides a variety of banking products to both commercial and consumer clients through a network of 81 banking centers, as of June 30, 2022, located primarily in Colorado, the greater Kansas City region, Texas, Utah and New Mexico, as well as through online and mobile banking products and services.

The accompanying interim unaudited consolidated financial statements serve to update the National Bank Holdings Corporation Annual Report on Form 10-K for the year ended December 31, 2021 and include the accounts of the Company and its wholly owned subsidiary, NBH Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and, where applicable, with general practices in the banking industry or guidelines prescribed by bank regulatory agencies. However, they may not include all information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods and accordingly should be read in conjunction with the financial information contained in the Company's most recent Form 10-K. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results presented. All such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years' amounts are made whenever necessary to conform to current period presentation. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the full year or any other interim period. All amounts are in thousands, except share data, or as otherwise noted.

GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment and available information. Management has made significant estimates in certain areas, such as the fair values of financial instruments, contingent liabilities and the allowance for credit losses (“ACL”). Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.

The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in note 2 of the audited financial statements and notes for the year ended December 31, 2021 and are contained in the Company's Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2021.

Note 2 Recent Accounting Pronouncements

The Company has not adopted any recent accounting pronouncements in addition to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Note 3 Investment Securities

The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities. These investment securities totaled $1.4 billion at June 30, 2022 and included $0.8 billion of available-for-sale securities and $0.6 billion of held-to-maturity securities. At December 31, 2021, investment securities totaled $1.3 billion and included $0.7 billion of available-for-sale securities and $0.6 billion of held-to-maturity securities.

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Available-for-sale

Available-for-sale securities are summarized as follows as of the dates indicated:


	June 30, 2022
	Amortized		Gross		Gross
	cost		unrealized gains		unrealized losses		Fair value
U.S. Treasury securities	$	73,793	$	—	$	(739)	$	73,054
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises		282,052		59		(29,333)		252,778
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		523,891		3		(46,593)		477,301
Municipal securities		230		—		—		230
Corporate debt		2,000		26		—		2,026
Other securities		469		—		—		469
Total investment securities available-for-sale	$	882,435	$	88	$	(76,665)	$	805,858


	December 31, 2021
	Amortized		Gross		Gross
	cost		unrealized gains		unrealized losses		Fair value
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	231,523	$	1,436	$	(5,263)	$	227,696
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		467,490		1,889		(8,045)		461,334
Municipal securities		230		7		—		237
Corporate debt		2,000		111		—		2,111
Other securities		469		—		—		469
Total investment securities available-for-sale	$	701,712	$	3,443	$	(13,308)	$	691,847

During the six months ended June 30, 2022 and 2021, purchases of available-for-sale securities totaled $260.2 million and $86.2 million, respectively. Maturities and paydowns of available-for-sale securities during the six months ended June 30, 2022 and 2021 totaled $79.1 million and $131.1 million, respectively. There were no sales of available-for-sale securities during the six months ended June 30, 2022 or 2021.

At June 30, 2022 and December 31, 2021, the Company’s available-for-sale investment portfolio was primarily comprised of mortgage-backed securities, and all mortgage-backed securities were backed by government sponsored enterprises (“GSE”) collateral such as Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) and the government owned agency Government National Mortgage Association (“GNMA”).

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The tables below summarize the available-for-sale securities with unrealized losses as of the dates shown, along with the length of the impairment period:


	June 30, 2022
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
U.S. Treasury securities	$	73,054	$	(739)	$	—	$	—	$	73,054	$	(739)
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises		134,678		(7,765)		112,143		(21,568)		246,821		(29,333)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		388,472		(30,013)		88,281		(16,580)		476,753		(46,593)
Total	$	596,204	$	(38,517)	$	200,424	$	(38,148)	$	796,628	$	(76,665)


	December 31, 2021
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	163,579	$	(4,404)	$	22,852	$	(859)	$	186,431	$	(5,263)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		237,759		(5,593)		48,750		(2,452)		286,509		(8,045)
Total	$	401,338	$	(9,997)	$	71,602	$	(3,311)	$	472,940	$	(13,308)

Management evaluated all of the available-for-sale securities in an unrealized loss position at June 30, 2022 and December 31, 2021. The portfolio included 223 securities, which were in an unrealized loss position at June 30, 2022, compared to 49 securities at December 31, 2021. The unrealized losses in the Company's investment portfolio at June 30, 2022 were caused by changes in interest rates. The Company has no intention to sell these securities and believes it will not be required to sell the securities before the recovery of their amortized cost. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities and U.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the Federal Reserve Bank (“FRB”), if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $418.2 million and $363.4 million at June 30, 2022 and at December 31, 2021, respectively. The Bank may also pledge available-for-sale investment securities as collateral for Federal Home Loan Bank (“FHLB”) advances. No securities were pledged for this purpose at June 30, 2022 or December 31, 2021.

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A summary of the available-for-sale securities by maturity is shown in the following table as of June 30, 2022. Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. Additionally, the Company holds other available-for-sale securities with an amortized cost and fair value of $0.5 million that have no stated contractual maturity date.


	June 30, 2022
					Weighted
	Amortized Cost		Fair Value		Average Yield
U.S. Treasury securities
After one but within five years	$	73,793	$	73,054	2.54%
Total U.S. Treasury securities		73,793		73,054
Municipal securities
After one but within five years		230		230	3.17%
Total municipal securities		230		230
Corporate debt
After five but within ten years		2,000		2,026	5.87%
Total corporate debt		2,000		2,026
Total	$	76,023	$	75,310

As of June 30, 2022 and December 31, 2021, accrued interest receivable (“AIR”) from available-for-sale investment securities totaled $1.5 million and $1.0 million, respectively, and was included within other assets in the statements of financial condition.

Held-to-maturity

Held-to-maturity investment securities are summarized as follows as of the dates indicated:


	June 30, 2022
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses		Fair value
U.S. Treasury securities	$	24,794	$	124	$	—	$	24,918
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises		303,370		—		(32,354)		271,016
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		254,486		—		(33,735)		220,751
Total investment securities held-to-maturity	$	582,650	$	124	$	(66,089)	$	516,685


	December 31, 2021
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses		Fair value
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	312,916	$	2,061	$	(5,363)	$	309,614
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		296,096		122		(6,572)		289,646
Total investment securities held-to-maturity	$	609,012	$	2,183	$	(11,935)	$	599,260

During the six months ended June 30, 2022 and 2021, purchases of held-to-maturity securities totaled $44.3 million and $377.7 million, respectively. Maturities and paydowns of held-to-maturity securities totaled $69.7 million and $64.8 million during the six months ended June 30, 2022 and 2021, respectively.

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The held-to-maturity portfolio included 99 securities, which were in an unrealized loss position as of June 30, 2022, compared to 48 securities at December 31, 2021. The tables below summarize the held-to-maturity securities with unrealized losses as of the dates shown, along with the length of the impairment period:


	June 30, 2022
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	133,297	$	(10,258)	$	137,689	$	(22,096)	$	270,986	$	(32,354)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		184,788		(26,395)		35,963		(7,340)		220,751		(33,735)
Total	$	318,085	$	(36,653)	$	173,652	$	(29,436)	$	491,737	$	(66,089)


	December 31, 2021
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	197,095	$	(3,499)	$	45,353	$	(1,864)	$	242,448	$	(5,363)
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		276,098		(6,572)		—		—		276,098		(6,572)
Total	$	473,193	$	(10,071)	$	45,353	$	(1,864)	$	518,546	$	(11,935)

The Company does not measure expected credit losses on a financial asset, or group of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell any held-to-maturity securities and believes it will not be required to sell any held-to-maturity securities before the recovery of their amortized cost.

Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the FRB, if needed. The carrying value of held-to-maturity investment securities pledged as collateral totaled $244.7 million and $147.3 million at June 30, 2022 and December 31, 2021, respectively. The Bank may also pledge held-to-maturity investment securities as collateral for FHLB advances. No held-to-maturity investment securities were pledged for this purpose at June 30, 2022 or December 31, 2021.

A summary of the held-to-maturity securities by maturity is shown in the following table as of June 30, 2022. Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments.


	June 30, 2022
					Weighted
	Amortized Cost		Fair Value		Average Yield
U.S. Treasury securities
After one but within five years	$	24,794	$	24,918	3.18%
Total	$	24,794	$	24,918

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As of June 30, 2022 and December 31, 2021, AIR from held-to-maturity investment securities totaled $0.9 million and $0.9 million, respectively, and was included within other assets in the statements of financial condition.

Note 4 Non-marketable Securities

Non-marketable securities totaled $59.8 million and $50.7 million at June 30, 2022 and December 31, 2021, respectively, and included FRB stock, FHLB stock and other non-marketable securities. At June 30, 2022, other non-marketable securities totaled $45.2 million and consisted of equity method investments totaling $19.2 million and convertible preferred stock without a readily determinable fair value totaling $26.0 million. At December 31, 2021, other non-marketable securities totaled $36.2 million and consisted of equity method investments totaling $14.2 million and convertible preferred stock without a readily determinable fair value totaling $22.0 million. During the six months ended June 30, 2022 and 2021, purchases of non-marketable securities totaled $9.4 million and $3.8 million, respectively.

At June 30, 2022, the Company held $13.9 million of FRB stock and $0.7 million of FHLB stock for regulatory or debt facility purposes. At December 31, 2021, the Company held $13.9 million of FRB stock and $0.7 million of FHLB stock. These are restricted securities which, lacking a market, are carried at cost. There have been no identified events or changes in circumstances that may have an adverse effect on the investments carried at cost.

Note 5 Loans

The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. The tables below show the loan portfolio composition including carrying value by segment as of the dates shown. The carrying value of loans is net of discounts, fees, costs and fair value marks of $8.2 million and $9.4 million as of June 30, 2022 and December 31, 2021, respectively.


	June 30, 2022
	Total loans		% of total
Commercial	$	3,410,711	70.8%
Commercial real estate non-owner occupied		662,904	13.8%
Residential real estate		725,758	15.0%
Consumer		17,697	0.4%
Total	$	4,817,070	100.0%


	December 31, 2021
	Total loans		% of total
Commercial	$	3,162,417	70.1%
Commercial real estate non-owner occupied		664,729	14.7%
Residential real estate		668,656	14.8%
Consumer		17,581	0.4%
Total	$	4,513,383	100.0%

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Information about delinquent and non-accrual loans is shown in the following tables at June 30, 2022 and December 31, 2021:


	June 30, 2022
			Greater
	30-89 days		than 90 days				Total past
	past due and		past due and		Non-accrual		due and
	accruing		accruing		loans		non-accrual		Current		Total loans
Commercial:
Commercial and industrial	$	544	$	—	$	1,021	$	1,565	$	1,601,732	$	1,603,297
Municipal and non-profit		—		—		—		—		996,553		996,553
Owner occupied commercial real estate		—		—		2,487		2,487		608,696		611,183
Food and agribusiness		84		—		56		140		199,538		199,678
Total commercial		628		—		3,564		4,192		3,406,519		3,410,711
Commercial real estate non-owner occupied:
Construction		—		—		—		—		146,569		146,569
Acquisition/development		—		—		—		—		11,162		11,162
Multifamily		—		—		—		—		69,913		69,913
Non-owner occupied		652		191		754		1,597		433,663		435,260
Total commercial real estate		652		191		754		1,597		661,307		662,904
Residential real estate:
Senior lien		228		—		5,160		5,388		667,731		673,119
Junior lien		126		—		372		498		52,141		52,639
Total residential real estate		354		—		5,532		5,886		719,872		725,758
Consumer		147		3		12		162		17,535		17,697
Total loans	$	1,781	$	194	$	9,862	$	11,837	$	4,805,233	$	4,817,070


	June 30, 2022
	Non-accrual loans		Non-accrual loans
	with a related		with no related
	allowance for		allowance for		Non-accrual
	credit loss		credit loss		loans
Commercial:
Commercial and industrial	$	224	$	797	$	1,021
Municipal and non-profit		—		—		—
Owner occupied commercial real estate		2,317		170		2,487
Food and agribusiness		56		—		56
Total commercial		2,597		967		3,564
Commercial real estate non-owner occupied:
Construction		—		—		—
Acquisition/development		—		—		—
Multifamily		—		—		—
Non-owner occupied		754		—		754
Total commercial real estate		754		—		754
Residential real estate:
Senior lien		3,609		1,551		5,160
Junior lien		372		—		372
Total residential real estate		3,981		1,551		5,532
Consumer		12		—		12
Total loans	$	7,344	$	2,518	$	9,862

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	December 31, 2021
			Greater
	30-89 days		than 90 days				Total past
	past due and		past due and		Non-accrual		due and
	accruing		accruing		loans		non-accrual		Current		Total loans
Commercial:
Commercial and industrial	$	481	$	—	$	1,490	$	1,971	$	1,494,176	$	1,496,147
Municipal and non-profit		202		—		—		202		928,843		929,045
Owner occupied commercial real estate		207		—		4,525		4,732		528,904		533,636
Food and agribusiness		89		—		64		153		203,436		203,589
Total commercial		979		—		6,079		7,058		3,155,359		3,162,417
Commercial real estate non-owner occupied:
Construction		—		—		—		—		86,126		86,126
Acquisition/development		—		—		—		—		9,609		9,609
Multifamily		—		—		—		—		92,174		92,174
Non-owner occupied		94		217		121		432		476,388		476,820
Total commercial real estate		94		217		121		432		664,297		664,729
Residential real estate:
Senior lien		399		198		4,251		4,848		609,780		614,628
Junior lien		179		—		374		553		53,475		54,028
Total residential real estate		578		198		4,625		5,401		663,255		668,656
Consumer		36		5		7		48		17,533		17,581
Total loans	$	1,687	$	420	$	10,832	$	12,939	$	4,500,444	$	4,513,383


	December 31, 2021
	Non-accrual loans		Non-accrual loans
	with a related		with no related
	allowance for		allowance for		Non-accrual
	credit loss		credit loss		loans
Commercial:
Commercial and industrial	$	1,490	$	—	$	1,490
Municipal and non-profit		—		—		—
Owner occupied commercial real estate		4,525		—		4,525
Food and agribusiness		64		—		64
Total commercial		6,079		—		6,079
Commercial real estate non-owner occupied:
Construction		—		—		—
Acquisition/development		—		—		—
Multifamily		—		—		—
Non-owner occupied		121		—		121
Total commercial real estate		121		—		121
Residential real estate:
Senior lien		3,274		977		4,251
Junior lien		374		—		374
Total residential real estate		3,648		977		4,625
Consumer		7		—		7
Total loans	$	9,855	$	977	$	10,832

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include non-accrual loans and troubled debt restructurings (“TDRs”) on non-accrual status. There was no interest income recognized from non-accrual loans during the three or six months ended June 30, 2022 or 2021.

The Company’s internal risk rating system uses a series of grades, which reflect our assessment of the credit quality of loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”. For a description of the general characteristics of the risk grades, refer to note 2 Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2021 Annual Report on Form 10-K.

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The amortized cost basis for all loans as determined by the Company’s internal risk rating system and year of origination is shown in the following tables as of June 30, 2022 and December 31, 2021:


	June 30, 2022
													Revolving		Revolving
													loans		loans
	Origination year												amortized		converted
	2022		2021		2020		2019		2018		Prior		cost basis		to term		Total
Commercial:
Commercial and industrial:
Pass	$	242,060	$	345,996	$	120,916	$	116,400	$	116,898	$	65,106	$	543,613	$	18,173	$	1,569,162
Special mention		—		—		2,528		1,818		646		16,562		1,173		—		22,727
Substandard		38		—		—		104		209		10,883		150		24		11,408
Total commercial and industrial		242,098		345,996		123,444		118,322		117,753		92,551		544,936		18,197		1,603,297
Municipal and non-profit:
Pass		85,811		238,344		94,037		63,194		77,055		436,512		1,600		—		996,553
Total municipal and non-profit		85,811		238,344		94,037		63,194		77,055		436,512		1,600		—		996,553
Owner occupied commercial real estate:
Pass		122,872		118,103		63,379		78,870		68,105		110,319		15,979		14		577,641
Special mention		—		—		—		10,651		4,350		14,694		—		—		29,695
Substandard		—		—		1,192		263		—		1,992		—		—		3,447
Doubtful		—		—		385		15		—		—		—		—		400
Total owner occupied commercial real estate		122,872		118,103		64,956		89,799		72,455		127,005		15,979		14		611,183
Food and agribusiness:
Pass		10,309		11,940		15,103		6,758		14,405		22,858		103,854		13		185,240
Special mention		—		—		4,669		1,233		—		199		7,388		—		13,489
Substandard		—		—		—		—		—		949		—		—		949
Total food and agribusiness		10,309		11,940		19,772		7,991		14,405		24,006		111,242		13		199,678
Total commercial		461,090		714,383		302,209		279,306		281,668		680,074		673,757		18,224		3,410,711
Commercial real estate non-owner occupied:
Construction:
Pass		16,737		69,351		19,069		32,366		—		217		8,829		—		146,569
Total construction		16,737		69,351		19,069		32,366		—		217		8,829		—		146,569
Acquisition/development:
Pass		2,975		867		375		711		1,830		4,404		—		—		11,162
Total acquisition/development		2,975		867		375		711		1,830		4,404		—		—		11,162
Multifamily:
Pass		23,684		2,999		25,851		—		15,820		1,559		—		—		69,913
Total multifamily		23,684		2,999		25,851		—		15,820		1,559		—		—		69,913
Non-owner occupied
Pass		29,537		61,499		58,341		76,444		17,522		158,061		300		—		401,704
Special mention		—		—		—		9,840		5,484		13,050		—		—		28,374
Substandard		—		—		—		—		653		4,425		—		—		5,078
Doubtful		—		—		—		—		—		104		—		—		104
Total non-owner occupied		29,537		61,499		58,341		86,284		23,659		175,640		300		—		435,260
Total commercial real estate non-owner occupied		72,933		134,716		103,636		119,361		41,309		181,820		9,129		—		662,904
Residential real estate:
Senior lien
Pass		112,424		221,697		86,468		31,290		19,223		177,110		18,148		471		666,831
Special mention		—		—		—		—		—		320		—		—		320
Substandard		—		235		477		1,175		111		3,970		—		—		5,968
Total senior lien		112,424		221,932		86,945		32,465		19,334		181,400		18,148		471		673,119
Junior lien
Pass		1,444		1,149		1,748		2,236		1,486		3,319		40,190		290		51,862
Special mention		—		—		—		—		—		322		—		27		349
Substandard		—		—		112		—		58		258		—		—		428
Total junior lien		1,444		1,149		1,860		2,236		1,544		3,899		40,190		317		52,639
Total residential real estate		113,868		223,081		88,805		34,701		20,878		185,299		58,338		788		725,758
Consumer
Pass		4,522		6,059		2,288		891		388		528		2,973		35		17,684
Substandard		—		—		—		4		—		6		3		—		13
Total consumer		4,522		6,059		2,288		895		388		534		2,976		35		17,697
Total loans	$	652,413	$	1,078,239	$	496,938	$	434,263	$	344,243	$	1,047,727	$	744,200	$	19,047	$	4,817,070

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	December 31, 2021
													Revolving		Revolving
													loans		loans
	Origination year												amortized		converted
	2021		2020		2019		2018		2017		Prior		cost basis		to term		Total
Commercial:
Commercial and industrial:
Pass	$	424,813	$	155,268	$	146,420	$	128,002	$	49,408	$	18,529	$	519,678	$	5,975	$	1,448,093
Special mention		—		1,122		2,000		3,446		22,654		4,440		1,824		250		35,736
Substandard		—		99		89		744		10,399		303		105		—		11,739
Doubtful		—		375		—		54		49		101		—		—		579
Total commercial and industrial		424,813		156,864		148,509		132,246		82,510		23,373		521,607		6,225		1,496,147
Municipal and non-profit:
Pass		234,827		93,310		69,509		81,175		147,115		302,574		535		—		929,045
Total municipal and non-profit		234,827		93,310		69,509		81,175		147,115		302,574		535		—		929,045
Owner occupied commercial real estate:
Pass		122,641		81,072		84,359		71,183		48,086		77,100		13,666		1,688		499,795
Special mention		—		—		9,155		3,864		1,429		13,443		—		—		27,891
Substandard		—		1,192		1,527		—		220		2,028		—		—		4,967
Doubtful		—		389		550		—		—		44		—		—		983
Total owner occupied commercial real estate		122,641		82,653		95,591		75,047		49,735		92,615		13,666		1,688		533,636
Food and agribusiness:
Pass		11,245		20,606		6,966		21,427		2,443		24,047		107,978		24		194,736
Special mention		—		4,670		1,234		—		—		215		1,897		—		8,016
Substandard		—		—		—		—		259		578		—		—		837
Total food and agribusiness		11,245		25,276		8,200		21,427		2,702		24,840		109,875		24		203,589
Total commercial		793,526		358,103		321,809		309,895		282,062		443,402		645,683		7,937		3,162,417
Commercial real estate non-owner occupied:
Construction:
Pass		39,584		10,047		29,496		—		222		—		6,777		—		86,126
Total construction		39,584		10,047		29,496		—		222		—		6,777		—		86,126
Acquisition/development:
Pass		1,691		385		766		1,830		30		4,907		—		—		9,609
Total acquisition/development		1,691		385		766		1,830		30		4,907		—		—		9,609
Multifamily:
Pass		3,101		32,619		2,184		15,977		193		37,713		—		—		91,787
Special mention		—		—		—		—		—		387		—		—		387
Total multifamily		3,101		32,619		2,184		15,977		193		38,100		—		—		92,174
Non-owner occupied
Pass		59,060		58,964		122,452		18,425		92,349		95,265		557		—		447,072
Special mention		—		—		5,747		5,584		9,745		3,898		—		—		24,974
Substandard		—		—		—		729		—		4,045		—		—		4,774
Total non-owner occupied		59,060		58,964		128,199		24,738		102,094		103,208		557		—		476,820
Total commercial real estate non-owner occupied		103,436		102,015		160,645		42,545		102,539		146,215		7,334		—		664,729
Residential real estate:
Senior lien
Pass		223,120		100,476		38,696		21,889		29,554		177,051		18,278		188		609,252
Special mention		—		—		—		—		—		290		—		—		290
Substandard		44		325		684		318		299		3,416		—		—		5,086
Total senior lien		223,164		100,801		39,380		22,207		29,853		180,757		18,278		188		614,628
Junior lien
Pass		1,320		2,150		2,731		1,639		951		3,209		40,921		328		53,249
Special mention		—		—		—		—		—		—		24		322		346
Substandard		—		19		—		62		131		221		—		—		433
Total junior lien		1,320		2,169		2,731		1,701		1,082		3,430		40,945		650		54,028
Total residential real estate		224,484		102,970		42,111		23,908		30,935		184,187		59,223		838		668,656
Consumer:
Pass		8,815		3,528		1,241		631		131		557		2,653		19		17,575
Substandard		—		—		—		—		—		6		—		—		6
Total consumer		8,815		3,528		1,241		631		131		563		2,653		19		17,581
Total loans	$	1,130,261	$	566,616	$	525,806	$	376,979	$	415,667	$	774,367	$	714,893	$	8,794	$	4,513,383

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Loans evaluated individually

We evaluate loans individually when they no longer share risk characteristics with pooled loans. These loans include loans on non-accrual status, loans in bankruptcy, and TDRs as described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted expected cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral-dependent loans.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Management individually evaluates collateral-dependent loans with an amortized cost basis of $250 thousand or more and includes collateral-dependent loans less than $250 thousand within the general allowance population. The amortized cost basis of collateral-dependent loans over $250 thousand was as follows at June 30, 2022 and December 31, 2021:


	June 30, 2022
					Total amortized
	Real property		Business assets		cost basis
Commercial
Commercial and industrial	$	241	$	1,490	$	1,731
Owner-occupied commercial real estate		2,431		—		2,431
Total Commercial		2,672		1,490		4,162
Commercial real estate non owner-occupied
Non-owner occupied		574		—		574
Total commercial real estate		574		—		574
Residential real estate
Senior lien		3,476		1,606		5,082
Total residential real estate		3,476		1,606		5,082
Total loans	$	6,722	$	3,096	$	9,818


	December 31, 2021
					Total amortized
	Real property		Business assets		cost basis
Commercial
Commercial and industrial	$	3,270	$	1,261	$	4,531
Owner-occupied commercial real estate		4,012		255		4,267
Total Commercial		7,282		1,516		8,798
Residential real estate
Senior lien		2,212		—		2,212
Total residential real estate		2,212		—		2,212
Total loans	$	9,494	$	1,516	$	11,010

Loan modifications and troubled debt restructurings

The Company’s policy is to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include restructuring a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Additionally, if a borrower’s repayment obligation has been discharged by a court, and that debt has not been reaffirmed by the borrower, regardless of past due status, the loan is considered to be a TDR.

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During the three months ended June 30, 2022, the Company restructured two loans with an amortized cost basis of $2.4 million to facilitate repayment that are considered TDRs. During the six months ended June 30, 2022, the Company restructured six loans with an amortized cost basis of $3.0 million to facilitate repayment that are considered TDRs. Loan modifications were a reduction of the principal payment, a reduction in interest rate, or an extension of term. The tables below provide additional information related to accruing TDRs at June 30, 2022 and December 31, 2021:


	June 30, 2022
	Amortized		Average year-to-date		Unpaid		Unfunded commitments
	cost basis		amortized cost basis		principal balance		to fund TDRs
Commercial	$	4,621	$	4,655	$	4,729	$	317
Commercial real estate non-owner occupied		739		761		913		—
Residential real estate		1,848		1,876		2,242		—
Consumer		—		—		—		—
Total	$	7,208	$	7,292	$	7,884	$	317


	December 31, 2021
	Amortized		Average year-to-date		Unpaid		Unfunded commitments
	cost basis		amortized cost basis		principal balance		to fund TDRs
Commercial	$	4,066	$	4,472	$	4,417	$	—
Commercial real estate non-owner occupied		725		767		892		—
Residential real estate		2,395		2,468		2,781		—
Consumer		—		—		—		—
Total	$	7,186	$	7,707	$	8,090	$	—

The following table summarizes the Company’s carrying value of non-accrual TDRs as of June 30, 2022 and December 31, 2021:


	June 30, 2022		December 31, 2021
Commercial	$	439	$	644
Commercial real estate non-owner occupied		94		117
Residential real estate		1,378		1,605
Consumer		—		—
Total non-accruing TDRs	$	1,911	$	2,366

Accrual of interest is resumed on loans that were previously on non-accrual only after the loan has performed sufficiently for a period of time. The Company had no TDRs that were modified within the past 12 months and had defaulted on their restructured terms during the six months ended June 30, 2022. During the six months ended June 30, 2021, the Company had two TDRs totaling $49 thousand that were modified within the past 12 months and had defaulted on their restructured terms. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on principal or interest. The allowance for credit losses related to TDRs on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status, which are not classified as TDRs.

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Note 6 Allowance for Credit Losses

The tables below detail the Company’s allowance for credit losses as of the dates shown:


	Three months ended June 30, 2022
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	31,845	$	8,495	$	8,136	$	334	$	48,810
Charge-offs		(291)		—		—		(160)		(451)
Recoveries		27		21		44		23		115
Provision expense (release) for loan losses		430		(90)		1,892		154		2,386
Ending balance	$	32,011	$	8,426	$	10,072	$	351	$	50,860


	Six months ended June 30, 2022
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	31,256	$	10,033	$	8,056	$	349	$	49,694
Charge-offs		(754)		—		(2)		(329)		(1,085)
Recoveries		74		21		46		49		190
Provision expense (release) for loan losses		1,435		(1,628)		1,972		282		2,061
Ending balance	$	32,011	$	8,426	$	10,072	$	351	$	50,860


	Three months ended June 30, 2021
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	28,085	$	15,054	$	11,546	$	372	$	55,057
Charge-offs		(781)		—		—		(144)		(925)
Recoveries		128		—		37		33		198
Provision expense (release) for loan losses		1,208		(3,867)		(2,732)		91		(5,300)
Ending balance	$	28,640	$	11,187	$	8,851	$	352	$	49,030


	Six months ended June 30, 2021
			Non-owner
			occupied
			commercial		Residential
	Commercial		real estate		real estate		Consumer		Total
Beginning balance	$	30,376	$	17,448	$	11,492	$	461	$	59,777
Charge-offs		(942)		—		(22)		(263)		(1,227)
Recoveries		257		6		44		73		380
Provision (release) expense for loan losses		(1,051)		(6,267)		(2,663)		81		(9,900)
Ending balance	$	28,640	$	11,187	$	8,851	$	352	$	49,030

In evaluating the loan portfolio for an appropriate ACL level, excluding loans evaluated individually, loans were grouped into segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio was further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of developing the underlying data used within the discounted cash flow model including, but not limited to, prepayment and recovery rates as well as loss rates tied to macro-economic conditions within management’s reasonable and supportable forecast. The ACL also includes subjective adjustments based upon qualitative risk factors including asset quality, loss trends, lending management, portfolio growth and loan review/internal audit results.

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which included a provision expense of $2.4 million for funded loans and a provision expense of $0.1 million for unfunded loan commitments. During the six months ended June 30, 2022, the Company recorded an allowance for loan losses provision expense of $2.2 million, which included a provision expense of $2.1 million for funded loans and a provision expense of $0.1 million for unfunded loan commitments. The provision expense was driven by loan growth and higher reserve requirements from changes in the CECL model’s underlying economic forecast.

Net charge-offs on loans during the three and six months ended June 30, 2021 were $0.7 million and $0.8 million, respectively. The Company recorded an allowance for loan losses provision release of $5.9 million for the three months ended June 30, 2021, which included a provision release of $5.3 million for funded loans and a provision release of $0.6 million for unfunded loan commitments. During the six months ended June 30, 2021, the Company recorded an allowance for loan losses provision release of $9.4 million, which included a provision release of $9.9 million for funded loans, partially offset by a provision expense of $0.5 million for unfunded loan commitments. Provision release was driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast.

The Company has elected to exclude AIR from the allowance for credit losses calculation. As of June 30, 2022 and December 31, 2021, AIR from loans totaled $17.2 million and $15.7 million, respectively.

Note 7 Other Real Estate Owned

A summary of the activity in other real estate owned (“OREO”) during the six months ended June 30, 2022 and 2021 is as follows:


	For the six months ended June 30,
	2022		2021
Beginning balance	$	7,005	$	4,730
Transfers from loan portfolio, at fair value		39		1,522
Impairments		(188)		—
Sales		(1,864)		(1,128)
Ending balance	$	4,992	$	5,124

During the three months ended June 30, 2022 and 2021, the Company sold OREO properties with net book balances of $0.1 million and $0.5 million, respectively. During the six months ended June 30, 2022 and 2021, the Company sold OREO properties with net book balances of $1.9 million and $1.1 million, respectively. Sales of OREO properties resulted in net OREO losses of $5 thousand and net OREO gains of $270 thousand, which were included within gain on OREO sales, net in the consolidated statements of operations for the three and six months ended June 30, 2022, respectively. Net OREO losses of $0.2 million and $0.2 million were included in the consolidated statements of operations for the three and six months ended June 30, 2021, respectively.

Note 8 Goodwill and Intangible Assets

Goodwill and core deposit intangible

In connection with our acquisitions, the Company recorded goodwill of $115.0 million. Goodwill is measured as the excess of the fair value of consideration paid over the fair value of net assets acquired. No goodwill impairment was recorded during the three or six months ended June 30, 2022 or the year ended December 31, 2021.

The gross carrying amount of the core deposit intangibles (“CDI”) and the associated accumulated amortization at June 30, 2022 and December 31, 2021, are presented as follows:

June 30, 2022

December 31, 2021

Gross

Net

Gross

Net

carrying

Accumulated

carrying

Accumulated

carrying

amount

amortization

amount

amortization

amount

Core deposit intangible

48,834

(43,060)

5,774

48,834

(42,469)

6,365

The Company is amortizing the CDI from acquisitions on a straight-line basis over 7-10 years from the date of the respective acquisition, which represents the expected useful life of the assets. The Company recognized CDI amortization expense of $0.3

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million and $0.6 million during the three and six months ended June 30, 2022, respectively. During the three and six months ended June 30, 2021, the Company recognized CDI amortization expense of $0.3 million and $0.6 million, respectively.

The following table shows the estimated future amortization expense for the CDI as of June 30, 2022:


Years ending December 31,		Amount
For the six months ending December 31, 2022	$	563
For the year ending December 31, 2023		1,048
For the year ending December 31, 2024		1,048
For the year ending December 31, 2025		1,048
For the year ending December 31, 2026		1,048

Mortgage servicing rights

Mortgage servicing rights (“MSRs”) represent rights to service loans originated by the Company and sold to government-sponsored enterprises including FHLMC, FNMA, GNMA and FHLB and are included in other assets in the consolidated statements of financial condition. Mortgage loans serviced for others were $1.0 billion and $1.9 billion at June 30, 2022 and 2021, respectively.

Below are the changes in the MSRs for the periods presented:


	For the six months ended June 30,
	2022		2021
Beginning balance	$	5,957	$	10,380
Originations		3,325		5,949
(Impairment) recovery		(39)		707
Amortization		(448)		(1,632)
Ending balance		8,795		15,404
Fair value of mortgage servicing rights	$	12,728	$	18,685

The fair value of MSRs was determined based upon a discounted cash flow analysis. The cash flow analysis included assumptions for discount rates and prepayment speeds. The discount rate was 9.5%, and the constant prepayment speed ranged from 7.8% to 8.2% for the June 30, 2022 valuation. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from 11.4% to 18.7% for the June 30, 2021 valuation. Included in mortgage banking income in the consolidated statements of operations was servicing income of $0.6 million and $1.1 million for the three and six months ended June 30, 2022, respectively, and $1.1 million and $2.1 million for the three and six months ended June 30, 2021, respectively.

MSRs are evaluated and impairment is recognized to the extent fair value is less than the carrying amount. The Company evaluates impairment by stratifying MSRs based on the predominant risk characteristics of the underlying loans, including loan type and loan term. The Company is amortizing the MSRs in proportion to and over the period of the estimated net servicing income of the underlying loans.

The following table shows the estimated future amortization expense for the MSRs as of June 30, 2022:


Years ending December 31,		Amount
For the six months ending December 31, 2022	$	537
For the year ending December 31, 2023		1,010
For the year ending December 31, 2024		887
For the year ending December 31, 2025		779
For the year ending December 31, 2026		684

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Note 9 Borrowings

Borrowings consist of securities sold under agreements to repurchase, long-term debt and FHLB advances.

Securities sold under agreements to repurchase

The Company enters into repurchase agreements to facilitate the needs of its clients. As of June 30, 2022 and December 31, 2021, the Company sold securities under agreements to repurchase totaling $24.4 million and $22.8 million, respectively. The Company pledged mortgage-backed securities with a fair value of approximately $32.4 million and $28.8 million as of June 30, 2022 and December 31, 2021, respectively, for these agreements. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. As of June 30, 2022 and December 31, 2021, the Company had $8.0 million and $6.1 million, respectively, of excess collateral pledged for repurchase agreements.

Long-term debt

On November 5, 2021, the Company entered into a subordinated note purchase agreement to issue and sell a fixed-to-floating rate note totaling $40.0 million. The balance on the note at June 30, 2022, net of long-term debt issuance costs totaling $0.5 million, totaled $39.5 million. Interest expense totaling $0.3 million and $0.6 million was recorded in the consolidated statements of operations during the three and six months ended June 30, 2022, respectively.

The note is subordinated, unsecured and matures on November 15, 2031. Payments consist of interest only. Interest expense on the note is payable semi-annually in arrears and will bear interest at 3.00% per annum until November 15, 2026 (or any earlier redemption date). From November 15, 2026 until November 15, 2031 (or any earlier redemption date) payments will be made quarterly in arrears, and the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month term secured overnight financing rate (“SOFR”) plus 203 basis points. The Company intends to use the net proceeds from the sale of the note for general corporate purposes. Prior to November 5, 2026, the Company may redeem the note only under certain limited circumstances. Beginning on November 5, 2026 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the note being redeemed, together with any accrued and unpaid interest on the note being redeemed up to but excluding the date of redemption. The note is not subject to redemption at the option of the holder.

FHLB advances

As a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $1.0 billion at June 30, 2022. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At June 30, 2022 and December 31, 2021, the Bank had no outstanding borrowings from the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at June 30, 2022 or December 31, 2021. Loans pledged were $1.4 billion and $1.3 billion at June 30, 2022 and December 31, 2021, respectively. There was no interest expense related to FHLB advances and other short-term borrowings for the three and six months ended June 30, 2022 or 2021.

Note 10 Regulatory Capital

As a bank holding company that has elected to be treated as a financial holding company, the Company and NBH Bank is subject to regulatory capital adequacy requirements implemented by the Federal Reserve, including maintaining capital positions at the “well-capitalized” level. The federal banking agencies have risk based capital adequacy regulations intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations. Under these regulations, assets are assigned to one of several risk categories, and nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by a risk adjustment percentage for the category.

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Under the Basel III requirements, at June 30, 2022 and December 31, 2021, the Company and the Bank met all capital requirements, including the capital conservation buffer of 2.5%. The Company and Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as detailed in the tables below:


	June 30, 2022
				Required to be			Required to be
				well capitalized under			considered
				prompt corrective			adequately
	Actual			action provisions			capitalized⁽¹⁾
	Ratio	Amount		Ratio	Amount		Ratio	Amount
Tier 1 leverage ratio:
Consolidated	10.5%	$	756,805	N/A		N/A	4.0%	$	287,215
NBH Bank	9.1%		648,767	5.0%	$	357,493	4.0%		285,994
Common equity tier 1 risk based capital:
Consolidated	13.8%	$	756,805	N/A		N/A	7.0%	$	385,243
NBH Bank	11.9%		648,767	6.5%	$	355,490	7.0%		382,835
Tier 1 risk based capital ratio:
Consolidated	13.8%	$	756,805	N/A		N/A	8.5%	$	467,795
NBH Bank	11.9%		648,767	8.0%	$	437,526	8.5%		464,871
Total risk based capital ratio:
Consolidated	15.4%	$	844,697	N/A		N/A	10.5%	$	577,864
NBH Bank	12.7%		696,659	10.0%	$	546,907	10.5%		574,252


	December 31, 2021
				Required to be			Required to be
				well capitalized under			considered
				prompt corrective			adequately
	Actual			action provisions			capitalized⁽¹⁾
	Ratio	Amount		Ratio	Amount		Ratio	Amount
Tier 1 leverage ratio:
Consolidated	10.4%	$	731,087	N/A		N/A	4.0%	$	281,463
NBH Bank	9.1%		637,115	5.0%	$	350,584	4.0%		280,467
Common equity tier 1 risk based capital:
Consolidated	14.3%	$	731,087	N/A		N/A	7.0%	$	358,813
NBH Bank	12.5%		637,115	6.5%	$	331,427	7.0%		356,921
Tier 1 risk based capital ratio:
Consolidated	14.3%	$	731,087	N/A		N/A	8.5%	$	435,701
NBH Bank	12.5%		637,115	8.0%	$	407,910	8.5%		433,404
Total risk based capital ratio:
Consolidated	15.9%	$	816,117	N/A		N/A	10.5%	$	538,219
NBH Bank	13.4%		682,145	10.0%	$	509,888	10.5%		535,382


(1)		Includes the capital conservation buffer of 2.5%.

Note 11 Revenue from Contracts with Clients

Revenue is recognized when obligations under the terms of a contract with clients are satisfied. Below is the detail of the Company’s revenue from contracts with clients.

Service charges and other fees

Service charge fees are primarily comprised of monthly service fees, check orders and other deposit account related fees. Other fees include revenue from processing wire transfers, bill pay service, cashier’s checks and other services. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account-related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to clients’ accounts.

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Bank card fees

Bank card fees are primarily comprised of debit card income, ATM fees, merchant services income and other fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Merchant services income mainly represents fees charged to merchants to process their debit card transactions. The Company’s performance obligation for bank card fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Gain on OREO sales, net

Gain on OREO sales, net is recognized when the Company meets its performance obligation to transfer title to the buyer. The gain or loss is measured as the excess of the proceeds received compared to the OREO carrying value. Sales proceeds are received in cash at the time of transfer.

The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, and non-interest expense in-scope of Topic 606 for the three and six months ended June 30, 2022 and 2021:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021
Non-interest income
In-scope of Topic 606:
Service charges and other fees	$	3,956	$	4,415	$	7,666	$	8,367
Bank card fees		4,541		4,614		8,664		8,687
Non-interest income (in-scope of Topic 606)		8,497		9,029		16,330		17,054
Non-interest income (out-of-scope of Topic 606)		8,265		16,237		19,486		41,573
Total non-interest income	$	16,762	$	25,266	$	35,816	$	58,627
Non-interest expense
In-scope of Topic 606:
(Loss) gain on OREO sales, net	$	(5)	$	(221)	$	270	$	(192)
Total revenue in-scope of Topic 606	$	8,492	$	8,808	$	16,600	$	16,862

Contract acquisition costs

The Company utilizes the practical expedient which allows entities to expense immediately contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company has not capitalized any contract acquisition costs.

Note 12 Stock-based Compensation and Benefits

The Company provides stock-based compensation in accordance with shareholder-approved plans and is authorized to issue awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, other stock-based awards, or any combination thereof to eligible persons.

Stock options

The Company issues stock options, which are primarily time-vesting with 1/3 vesting on each of the first, second and third anniversary of the date of grant or date of hire.

The expense associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing model. The outstanding option awards vest or have vested on a graded basis over 1-4 years of continuous service and have 10-year contractual terms.

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The following table summarizes stock option activity for the six months ended June 30, 2022:


				Weighted
				average
		Weighted		remaining
		average		contractual	Aggregate
		exercise		term in	intrinsic
	Options	price		years	value
Outstanding at December 31, 2021	695,960	$	28.19	6.57	$	10,964
Granted	74,715		40.79
Exercised	(21,794)		23.96
Forfeited	(12,432)		31.38
Outstanding at June 30, 2022	736,449		29.54	6.43		6,770
Options exercisable at June 30, 2022	544,103		27.73	5.58		5,785
Options vested and expected to vest	716,705		29.32	6.35		6,715

Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $0.4 million and $0.5 million for the three and six months ended June 30, 2022, respectively, and $0.5 million and $0.6 million for the three and six months ended June 30, 2021, respectively. At June 30, 2022, there was $0.6 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted average period of 2.5 years.

Restricted stock awards

The Company issues primarily time-based restricted stock awards that vest over a range of a 1-3 year period. Restricted stock with time-based vesting was valued at the fair value of the shares on the date of grant as they are assumed to be held beyond the vesting period.

Performance stock units

The Company grants performance stock units which represent initial target awards and do not reflect potential increases or decreases resulting from the final performance results, which are to be determined at the end of the three-year performance period (vesting date). The actual number of shares to be awarded at the end of the performance period will range from 0% - 150% of the initial target awards. For awards granted in years other than 2020 and 2021, 60% of the award is based on the Company’s cumulative earnings per share (EPS target) during the performance period, and 40% of the award is based on the Company’s cumulative total shareholder return (TSR target), or TSR, during the performance period. On the vesting date, the Company’s TSR will be compared to the respective TSRs of the companies comprising the KBW Regional Index at the grant date to determine the shares awarded. The fair value of the EPS target portion of the award was determined based on the closing stock price of the Company’s common stock on the grant date. The fair value of the TSR target portion of the award was determined using a Monte Carlo Simulation at the grant date.

In establishing PSU components during 2021 and 2020, the Compensation Committee determined the EPS target portion of the award would not be an effective metric in light of economic uncertainty surrounding COVID-19. Consequently, the Compensation Committee granted an award based upon a relative return on tangible assets (“ROTA”). Annually, the Company’s ROTA is compared to the respective ROTA of companies comprising the KBW Regional Index. At the end of the measurement period, the Company’s ranking will be averaged to determine the shares awarded. The fair value of the ROTA award was determined based on the closing stock price of the Company’s common stock on the grant date.

The weighted-average grant date fair value per unit for the awards granted during the six months ended June 30, 2022 of the EPS target portion and the TSR target portion was $40.83 and $35.25, respectively. The initial weighted-average performance price for the TSR target portion granted during 2022 was $43.51. During the six months ended June 30, 2022, the Company awarded an additional 17,741 units due to final performance results related to performance stock units granted in 2019.

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The following table summarizes restricted stock and performance stock unit activity during the six months ended June 30, 2022:


		Weighted				Weighted
	Restricted	average grant-		Performance		average grant-
	stock shares	date fair value		stock units		date fair value
Unvested at December 31, 2021	144,467	$	33.40	160,394	$	31.36
Granted	94,155		39.87	51,931		38.40
Adjustment due to performance	—		—	17,741		32.44
Vested	(69,183)		32.99	(67,875)		31.27
Forfeited	(8,237)		36.13	(6,334)		32.70
Unvested at June 30, 2022	161,202	$	37.22	155,857	$	33.81

As of June 30, 2022, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance stock units totaled $4.3 million and $3.4 million, respectively, and is expected to be recognized over a weighted average period of approximately 2.0 years and 2.1 years, respectively. Expense related to non-vested restricted stock awards totaled $0.9 million and $1.5 million during the three and six months ended June 30, 2022, respectively, and $0.6 million and $1.2 million during the three and six months ended June 30, 2021, respectively. Expense related to non-vested performance stock units totaled $0.4 million and $0.8 million during the three and six months ended June 30, 2022, respectively, and $0.2 million and $0.7 million during the three and six months ended June 30, 2021, respectively. Expense related to non-vested restricted stock awards and units is a component of salaries and benefits in the Company’s consolidated statements of operations.

Employee stock purchase plan

The 2014 Employee Stock Purchase Plan (“ESPP”) is intended to be a qualified plan within the meaning of Section 423 of the Internal Revenue Code of 1986 and allows eligible employees to purchase shares of common stock through payroll deductions up to a limit of $25,000 per calendar year and 2,000 shares per offering period. The price an employee pays for shares is 90.0% of the fair market value of Company common stock on the last day of the offering period. The offering periods are the six-month periods commencing on March 1 and September 1 of each year and ending on August 31 and February 28 (or February 29 in the case of a leap year) of each year. There are no vesting or other restrictions on the stock purchased by employees under the ESPP. Under the ESPP, the total number of shares of common stock reserved for issuance totaled 400,000 shares, of which 273,868 was available for issuance at June 30, 2022.

Under the ESPP, employees purchased 8,028 shares and 8,971 shares during the six months ended June 30, 2022 and 2021, respectively.

Note 13 Common Stock

The Company had 30,075,175 and 29,958,764 shares of Class A common stock outstanding at June 30, 2022 and December 31, 2021, respectively. Additionally, the Company had 161,202 and 144,467 shares outstanding at June 30, 2022 and December 31, 2021, respectively, of restricted Class A common stock issued but not yet vested under the 2014 Omnibus Incentive Plan that are not included in shares outstanding until such time that they are vested; however, these shares do have voting and certain dividend rights during the vesting period.

On February 24, 2021, the Company’s Board of Directors authorized a program to repurchase up to $75.0 million of the Company’s stock from time to time in either the open market or through privately negotiated transactions. The remaining authorization under the current program as of June 30, 2022 was $38.6 million.

Note 14 Earnings Per Share

The Company calculates earnings per share under the two-class method, as certain non-vested share awards contain non-forfeitable rights to dividends. As such, these awards are considered securities that participate in the earnings of the Company. Non-vested shares are discussed further in note 12.

The Company had 30,075,175 and 30,800,985 shares of Class A common stock outstanding as of June 30, 2022 and 2021, respectively, exclusive of issued non-vested restricted shares. Certain stock options and non-vested restricted shares are potentially

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dilutive securities, but are not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive for the three and six months ended June 30, 2022 and 2021.

The following table illustrates the computation of basic and diluted earnings per share for the three and six months ended June 30, 2022 and 2021:


	For the three months ended				For the six months ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Net income	$	20,362	$	24,200	$	38,714	$	51,012
Less: income allocated to participating securities		(37)		(33)		(72)		(67)
Income allocated to common shareholders	$	20,325	$	24,167	$	38,642	$	50,945
Weighted average shares outstanding for basic earnings per common share		30,225,898		30,947,206		30,173,338		30,888,062
Dilutive effect of equity awards		267,367		279,145		319,275		294,522
Weighted average shares outstanding for diluted earnings per common share		30,493,265		31,226,351		30,492,613		31,182,584
Basic earnings per share	$	0.67	$	0.78	$	1.28	$	1.65
Diluted earnings per share		0.67		0.77		1.27		1.63

The Company had 736,449 and 751,394 outstanding stock options to purchase common stock at weighted average exercise prices of $29.54 and $27.68 per share at June 30, 2022 and 2021, respectively, which have time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those stock options is dilutive. The Company had 317,059 and 311,744 unvested restricted shares and performance stock units issued as of June 30, 2022 and 2021, respectively, which have performance, market and/or time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those restricted shares and units is dilutive.

Note 15 Derivatives

Risk management objective of using derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company has established policies stipulating that neither carrying value nor fair value at risk should exceed established guidelines. The Company has designed strategies to confine these risks within the established limits and identify appropriate trade-offs in the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its clients. Currently, the Company employs certain interest rate swaps that are designated as fair value hedges as well as economic hedges. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

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Fair values of derivative instruments on the balance sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated statements of financial condition as of June 30, 2022 and December 31, 2021. Information about the valuation methods used to measure fair value is provided in note 17.


		Asset derivatives fair value					Liability derivatives fair value
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	location	2022		2021		Location	2022		2021
Derivatives designated as hedging instruments:
Interest rate products	Other assets	$	21,213	$	477	Other liabilities	$	127	$	12,221
Total derivatives designated as hedging instruments		$	21,213	$	477		$	127	$	12,221

Derivatives not designated as hedging instruments:
Interest rate products	Other assets	$	4,883	$	8,321	Other liabilities	$	4,935	$	8,329
Interest rate lock commitments	Other assets		1,361		1,792	Other liabilities		525		197
Forward contracts	Other assets		175		91	Other liabilities		434		266
Total derivatives not designated as hedging instruments		$	6,419	$	10,204		$	5,894	$	8,792

Fair value hedges

Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2022, the Company had interest rate swaps with a notional amount of $344.6 million, which were designated as fair value hedges of interest rate risk. As of December 31, 2021, the Company had interest rate swaps with a notional amount of $343.1 million that were designated as fair value hedges. These interest rate swaps were associated with $346.8 million and $345.2 million of the Company’s fixed-rate loans as of June 30, 2022 and December 31, 2021, respectively, before a loss of $17.0 million and a gain of $16.1 million from the fair value hedge adjustment in the carrying amount, included in loans receivable in the statements of financial condition as of June 30, 2022 and December 31, 2021, respectively.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.

Non-designated hedges

Derivatives not designated as hedges are not speculative and consist of interest rate swaps with commercial banking clients that facilitate their respective risk management strategies. Interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the client swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2022, the Company had matched interest rate swap transactions with an aggregate notional amount of $369.6 million related to this program. As of December 31, 2021, the Company had matched interest rate swap transactions with an aggregate notional amount of $394.4 million.

As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the clients have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Fair value changes of certain loans under interest rate lock commitments are hedged with forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in non-interest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying assets. The fair value of

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the underlying assets is impacted by current interest rates, remaining origination fees, costs of production to be incurred and the probability that the interest rate lock commitments will close or will be funded.

Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Company does not expect any counterparty to any MBS contract to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Company fails to deliver the loans subject to interest rate risk lock commitments, it will still be obligated to “pair off” MBS to the counterparty. Should this be required, the Company could incur significant costs in acquiring replacement loans and such costs could have an adverse effect on the consolidated financial statements.

The fair value of the mortgage banking derivative is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.

The Company had interest rate lock commitments with a notional value of $102.9 million and forward contracts with a notional value of $104.1 million at June 30, 2022. At December 31, 2021, the Company had interest rate lock commitments with a notional value of $110.0 million and forward contracts with a notional value of $198.3 million.

Effect of derivative instruments on the consolidated statements of operations

The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three and six months ended June 30, 2022 and 2021:

Location of gain (loss)

Amount of (loss) gain recognized in income on derivatives

Derivatives in fair value

recognized in income on

For the three months ended June 30,

For the six months ended June 30,

hedging relationships

derivatives

2022

2021

2022

2021

Interest rate products

Interest and fees on loans

(6,902)

(28,100)

11,694

(7,228)

Location of gain (loss)

Amount of gain (loss) recognized in income on hedged items

recognized in income on

For the three months ended June 30,

For the six months ended June 30,

Hedged items

hedged items

2022

2021

2022

2021

Interest rate products

Interest and fees on loans

7,428

23,726

(12,792)

5,157


	Location of gain (loss)	Amount of (loss) gain recognized in income on derivatives
Derivatives not designated	recognized in income on	For the three months ended June 30,				For the six months ended June 30,
as hedging instruments	derivatives	2022		2021		2022		2021
Interest rate products	Other non-interest expense	$	(50)	$	4	$	(44)	$	10
Interest rate lock commitments	Mortgage banking income		243		(1,029)		(844)		(5,101)
Forward contracts	Mortgage banking income		(2,795)		(3,698)		(84)		2,384
Total		$	(2,602)	$	(4,723)	$	(972)	$	(2,707)

Credit-risk-related contingent features

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness for reasons other than an error or omission of an administrative or operational nature, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty has the right to terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of June 30, 2022, the termination value of derivatives in a net liability position related to these agreements was $23.6 million, which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and, as of June 30, 2022, the Company had posted $0.1 million in eligible collateral. If the Company had breached any of these provisions at June 30, 2022, it could have been required to settle its obligations under the agreements at the termination value.

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Note 16 Commitments and Contingencies

In the normal course of business, the Company enters into various off-balance sheet commitments to help meet the financing needs of clients. These financial instruments include commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. The same credit policies are applied to these commitments as the loans in the consolidated statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these commitments, offset by any additional collateral pledged, represents the Company’s potential credit loss exposure.

Total unfunded commitments at June 30, 2022 and December 31, 2021 were as follows:


	June 30, 2022		December 31, 2021
Commitments to fund loans	$	573,082	$	462,151
Unfunded commitments under lines of credit		584,554		530,397
Commercial and standby letters of credit		7,236		7,321
Total unfunded commitments	$	1,164,872	$	999,869

Commitments to fund loans—Commitments to fund loans are legally binding agreements to lend to clients in accordance with predetermined contractual provisions providing there have been no violations of any conditions specified in the contract. These commitments are generally at variable interest rates and are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments are not necessarily representative of future credit exposure or cash requirements, as commitments often expire without being drawn upon.

Unfunded commitments under lines of credit—In the ordinary course of business, the Company extends revolving credit to its clients. These arrangements may require the payment of a fee.

Commercial and standby letters of credit—As a provider of financial services, the Company routinely issues commercial and standby letters of credit, which may be financial standby letters of credit or performance standby letters of credit. These are various forms of “back-up” commitments to guarantee the performance of a client to a third party. While these arrangements represent a potential cash outlay for the Company, the majority of these letters of credit will expire without being drawn upon. Letters of credit are subject to the same underwriting and credit approval process as traditional loans, and as such, many of them have various forms of collateral securing the commitment, which may include real estate, personal property, receivables or marketable securities.

Contingencies

Mortgage loans sold to investors may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company established a reserve liability for expected losses related to these representations and warranties based upon management’s evaluation of actual and historic loss history, delinquency trends in the portfolio and economic conditions. Charges against the reserve during the three and six months ended June 30, 2022 totaling $98 thousand and $144 thousand, respectively, were primarily driven by early payoffs and repurchases. Charges against the reserve during the three and six months ended June 30, 2021 totaling $116 thousand and $241 thousand, respectively, were primarily driven by early payoffs and repurchases. The repurchase reserve is included in other liabilities in the consolidated statements of financial condition.

The following table summarizes mortgage repurchase reserve activity for the periods presented:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021
Beginning balance	$	1,969	$	2,620	$	2,102	$	2,741
Provision charged to (released from) operating expense, net		7		(106)		(80)		(102)
Charge-offs		(98)		(116)		(144)		(241)
Ending balance	$	1,878	$	2,398	$	1,878	$	2,398

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In the ordinary course of business, the Company and the Bank may be subject to litigation. Based upon the available information and advice from the Company’s legal counsel, management does not believe that any potential, threatened or pending litigation to which it is a party will have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

Note 17 Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is defined as the 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. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels are defined as follows:

●

Level 1—Includes assets or liabilities in which the valuation methodologies are based on unadjusted quoted prices in active markets for identical assets or liabilities.

●

Level 2—Includes assets or liabilities in which the inputs to the valuation methodologies are based on similar assets or liabilities in inactive markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs other than quoted prices that are observable, such as interest rates, yield curves, volatilities, prepayment speeds and other inputs obtained from observable market input.

●

Level 3—Includes assets or liabilities in which the inputs to the valuation methodology are based on at least one significant assumption that is not observable in the marketplace. These valuations may rely on management’s judgment and may include internally-developed model-based valuation techniques.

Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. While third-party price indications may be available in those cases, limited trading activity can challenge the observability of those inputs.

Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfer occurs. During the six months ended June 30, 2022 and 2021, there were no transfers of financial instruments between the hierarchy levels.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the valuation hierarchy:

Fair Value of Financial Instruments Measured on a Recurring Basis

Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as level 1. When quoted market prices in active markets for identical assets or liabilities are not available, quoted prices of securities with similar characteristics, discounted cash flows or other pricing characteristics are used to estimate fair values and the securities are then classified as level 2.

Loans held for sale—The Company has elected to record loans originated and intended for sale in the secondary market at estimated fair value. The portfolio consists primarily of fixed rate residential mortgage loans that are sold within 45 days. The Company estimates fair value based on quoted market prices for similar loans in the secondary market and are classified as level 2.

Interest rate swap derivatives—The Company's derivative instruments are limited to interest rate swaps that may be accounted for as fair value hedges or non-designated hedges. The fair values of the swaps incorporate credit valuation adjustments in order to appropriately reflect nonperformance risk in the fair value measurements. The credit valuation adjustment is the dollar amount of the

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fair value adjustment related to credit risk and utilizes a probability weighted calculation to quantify the potential loss over the life of the trade. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the respective counterparties’ credit spreads to the exposure offset by marketable collateral posted, if any. Certain derivative transactions are executed with counterparties who are large financial institutions ("dealers"). International Swaps and Derivative Association Master Agreements ("ISDA") and Credit Support Annexes ("CSA") are employed for all contracts with dealers. These contracts contain bilateral collateral arrangements. The fair value inputs of these financial instruments are determined using discounted cash flow analysis through the use of third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk, and are classified as level 2.

Mortgage banking derivatives—The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an average 84.9% estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.

The tables below present the financial instruments measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 in the consolidated statements of financial condition utilizing the hierarchy structure described above:


	June 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
U.S. Treasuries	$	73,054	$	—	$	—	$	73,054
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		252,778		—		252,778
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		477,301		—		477,301
Municipal securities		—		230		—		230
Corporate debt		—		2,026		—		2,026
Loans held for sale		—		48,816		—		48,816
Interest rate swap derivatives		—		26,096		—		26,096
Mortgage banking derivatives		—		—		1,536		1,536
Total assets at fair value	$	73,054	$	807,247	$	1,536	$	881,837
Liabilities:
Interest rate swap derivatives	$	—	$	5,062	$	—	$	5,062
Mortgage banking derivatives		—		—		959		959
Total liabilities at fair value	$	—	$	5,062	$	959	$	6,021

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	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Investment securities available-for-sale:
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises	$	—	$	227,696	$	—	$	227,696
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		—		461,334		—		461,334
Municipal securities		—		237		—		237
Corporate debt		—		2,111		—		2,111
Loans held for sale		—		139,142		—		139,142
Interest rate swap derivatives		—		8,798		—		8,798
Mortgage banking derivatives		—		—		1,883		1,883
Total assets at fair value	$	—	$	839,318	$	1,883	$	841,201
Liabilities:
Interest rate swap derivatives	$	—	$	20,550	$	—	$	20,550
Mortgage banking derivatives		—		—		463		463
Total liabilities at fair value	$	—	$	20,550	$	463	$	21,013

The table below details the changes in level 3 financial instruments during the six months ended June 30, 2022:


		Mortgage banking
		derivatives, net
Balance at December 31, 2021	$	1,420
Loss included in earnings, net		(928)
Fees and costs included in earnings, net		85
Balance at June 30, 2022	$	577

Fair Value of Financial Instruments Measured on a Non-recurring Basis

Certain assets may be recorded at fair value on a non-recurring basis as conditions warrant. These non-recurring fair value measurements typically result from the application of lower of cost or fair value accounting or a write-down occurring during the period.

Individually evaluated loans—The Company records individually evaluated loans based on the fair value of the collateral when it is probable that the Company will be unable to collect all contractual amounts due in accordance with the terms of the loan agreement. The Company relies on third-party appraisals and internal assessments, utilizing a discount rate in the range of 5% - 17% with a weighted average discount rate of 9.8%, in determining the estimated fair values of these loans. The inputs used to determine the fair values of loans are considered level 3 inputs in the fair value hierarchy. At June 30, 2022, the Company recorded a specific reserve of $0.5 million related to three loans with a carrying balance of $2.4 million. At June 30, 2021, the Company recorded a specific reserve of $1.4 million related to seven loans with a carrying balance of $5.7 million.

OREO—OREO is recorded at the fair value of the collateral less estimated selling costs using a range of 6% to 10% with a weighted average discount rate of 7.2%. The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a new basis. The Company recognized $188 thousand of OREO impairment during the six months ended June 30, 2022. There was no OREO impairment during the six months ended June 30, 2021. The fair values of OREO are derived from third-party price opinions or appraisals that generally use an income approach or a market value approach. If reasonable comparable appraisals are not available, the Company may use internally developed models to determine fair values. The inputs used to determine the fair value of OREO properties are considered level 3 inputs in the fair value hierarchy.

Mortgage servicing rights—MSRs represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes a discount rate and weighted average rate of 9.5% at June 30, 2022 and prepayment speed assumption ranges of 7.8% to 8.2% with a weighted average rate of 7.9% at June 30, 2022. The weighted average MSRs are subject to impairment testing. The carrying

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values of these MSRs are reviewed quarterly for impairment based upon the calculation of fair value. For purposes of measuring impairment, the MSRs are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance and the adjustment is included in mortgage banking income in the consolidated statements of operations. During the six months ended June 30, 2022, the Company recorded $39 thousand of impairment. There was $0.7 million of recovery during the six months ended June 30, 2021. The inputs used to determine the fair values of MSRs are considered level 3 inputs in the fair value hierarchy.

Premises and equipment—During the first quarter of 2021, the Company approved plans to consolidate seven banking centers. Premises and equipment held-for-sale are written down to estimated fair value less costs to sell in the period in which the held-for-sale criteria are met. Fair value is estimated in a process that considers current local commercial real estate market conditions, the judgment of the sales agent and often involves obtaining third-party appraisals from certified real estate appraisers. These fair value measurements are classified as level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. As of June 30, 2021, the Company recognized $1.6 million of impairment in its consolidated statements of operations related to premises and equipment classified as held-for-sale totaling $6.0 million.

The Company may be required to record fair value adjustments on other available-for-sale and municipal securities valued at par on a non-recurring basis.

The tables below provide information regarding losses from assets recorded at fair value on a non-recurring basis during the six months ended June 30, 2022 and 2021:


	June 30, 2022
	Total		Losses from fair value changes
Individually evaluated loans	$	14,916	$	1,085
Other real estate owned		4,992		188
Mortgage servicing rights		8,795		39
Total	$	28,703	$	1,312


	June 30, 2021
	Total		Losses from fair value changes
Individually evaluated loans	$	20,807	$	1,227
Premises and equipment		6,032		1,552
Total	$	26,839	$	2,779

The Company did not record any liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2022.

Note 18 Fair Value of Financial Instruments

The fair value of a financial instrument is the amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is determined based upon quoted market prices to the extent possible; however, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques that may be significantly impacted by the assumptions used, including the discount rate and estimates of future cash flows. Changes in any of these assumptions could significantly affect the fair value estimates. The fair value of the financial instruments listed below does not reflect a premium or discount that could result from offering all of the Company’s holdings of financial instruments at one time, nor does it reflect the underlying value of the Company, as ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are based on the exit price concept within ASC Topic 825 and applied to this disclosure on a prospective basis. Considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.

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The fair value of financial instruments at June 30, 2022 and December 31, 2021 are set forth below:


	Level in fair value	June 30, 2022				December 31, 2021
	measurement	Carrying		Estimated		Carrying		Estimated
	hierarchy	amount		fair value		amount		fair value
ASSETS
Cash and cash equivalents	Level 1	$	448,375	$	448,375	$	845,695	$	845,695
U.S. Treasury securities - AFS	Level 1		73,054		73,054		—		—
U.S. Treasury securities - HTM	Level 1		24,794		24,918		—		—
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale	Level 2		252,778		252,778		227,696		227,696
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale	Level 2		477,301		477,301		461,334		461,334
Municipal securities available-for-sale	Level 2		230		230		237		237
Municipal securities available-for-sale	Level 3		—		—		—		—
Corporate debt	Level 2		2,026		2,026		2,111		2,111
Other available-for-sale securities	Level 3		469		469		469		469
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity	Level 2		303,370		271,016		312,916		309,614
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity	Level 2		254,486		220,751		296,096		289,646
Non-marketable securities	Level 2		14,534		14,534		14,533		14,533
Loans receivable	Level 3		4,817,070		4,741,285		4,513,383		4,540,847
Loans held for sale	Level 2		48,816		48,816		139,142		139,142
Accrued interest receivable	Level 2		19,785		19,785		17,848		17,848
Interest rate swap derivatives	Level 2		26,095		26,095		8,798		8,798
Mortgage banking derivatives	Level 3		1,536		1,536		1,883		1,883
LIABILITIES
Deposit transaction accounts	Level 2		5,416,421		5,416,421		5,394,257		5,394,257
Time deposits	Level 2		777,977		761,336		833,916		833,163
Securities sold under agreements to repurchase	Level 2		24,396		24,396		22,768		22,768
Long-term debt	Level 2		40,000		37,149		40,000		40,000
Accrued interest payable	Level 2		3,345		3,345		3,944		3,944
Interest rate swap derivatives	Level 2		5,062		5,062		20,550		20,550
Mortgage banking derivatives	Level 3		959		959		463		463

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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and six months ended June 30, 2022, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2021, 2020 and 2019. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” located elsewhere in this quarterly report and in Item 1A“Risk Factors” in the annual report on Form 10-K, referenced above, and should be read herewith.

All amounts are in thousands, except share and per share data, or as otherwise noted.

Overview

Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We are executing on strategic acquisition opportunities to expand our presence in attractive markets and to diversify our revenue streams. Additionally, we are innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for our clients. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to blockchain payment tools, under the safety of a regulated bank. We believe that our established presence in our core markets of Colorado, the greater Kansas City region, Texas, Utah and New Mexico, as well as our ongoing investment in digital and blockchain solutions and strategic acquisitions position us well for growth opportunities. As of June 30, 2022, we had $7.2 billion in assets, $4.8 billion in loans, $6.2 billion in deposits and $0.8 billion in equity.

Operating Highlights and Key Challenges

Profitability and returns


●		Net income totaled $38.7 million, or $1.27 per diluted share, for the six months ended June 30, 2022, compared to net income of $51.0 million, or $1.63 per diluted share, for the same period in the prior year. Adjusting for $1.3 million of non-recurring expenses related to the previously announced acquisitions of Bank of Jackson Hole (“BOJH”) and Rock Canyon Bank (“RCB”), net income totaled $39.7 million, or $1.30 per diluted share, for the six months ended June 30, 2022.
●		The return on average tangible assets was 1.11% for the six months ended June 30, 2022, compared to 1.53% for the same period in the prior year. Adjusting for non-recurring acquisition-related expenses, the return on average tangible assets for the six months ended June 30, 2022 was 1.14%.
●		The return on average tangible common equity was 10.97% for the six months ended June 30, 2022, compared to 14.29% for the same period in the prior year. Adjusting for non-recurring acquisition-related expenses, the return on average tangible common equity for the six months ended June 30, 2022 was 11.24%.

Strategic execution


●		Announced a merger agreement with Community Bancorporation (“CB”), the holding company for RCB, which had $814.3 million in assets, $736.6 million in deposits and $494.2 million in loans as of December 31, 2021, further expanding our presence in the Salt Lake City region. We received regulatory approval on July 21, 2022, and the acquisition is expected to close in September 2022.
●		Announced a merger agreement with BOJH located in the fast-growing Wyoming and Boise markets, which had $1.6 billion in assets, $1.5 billion in deposits, $1.0 billion in loans and a favorable Wyoming-domiciled trust business with $0.6 billion in assets under management as of December 31, 2021.
●		Upon completion of the BOJH and CB mergers, NBHC will have approximately $9.6 billion in pro forma assets measured as of December 31, 2021.

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●		Continued to invest in digital solutions for our clients through our financial eco-system, 2UniFi^SM, for small and medium-sized businesses that we believe will increase access to financial services while reducing the costs of banking services.
●		Maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most industry sector concentrations at 5% or less of total loans, and all concentration levels remain well below our self-imposed limits.

Loan portfolio


●		Total loans ended the quarter at $4.8 billion increasing $303.7 million, or 13.6% annualized, since December 31, 2021.
●		New loan fundings over the trailing 12 months totaled a record $1.8 billion, led by commercial loan fundings of $1.3 billion.

Credit quality


●		Allowance for credit losses totaled 1.06% of total loans at June 30, 2022, compared to 1.10% at December 31, 2021.
●		The Company recorded an allowance for loan losses provision expense of $2.2 million for the six months ended June 30, 2022, compared to an allowance for loan losses provision release of $9.4 million for the six months ended June 30, 2021. The provision expense was driven by loan growth and higher reserve requirements from changes in the CECL model’s underlying macro-economic forecast.
●		Net charge-offs to average total loans for the six months ended June 30, 2022 totaled 0.04%, annualized, compared to 0.03% for the full year ended December 31, 2021.
●		Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs) improved to a record low 0.20% of total loans, compared to 0.24% at December 31, 2021. Non-performing assets to total loans and OREO improved to a record low 0.31% at June 30, 2022, compared to 0.39% at December 31, 2021.

Client deposit funded balance sheet


●		Average transaction deposits for the six months ended June 30, 2022 increased 8.6% to $5.4 billion, compared to $5.0 billion for the same period in the prior year.
●		Average total deposits totaled $6.2 billion during the six months ended June 30, 2022, increasing 4.8%, compared to $5.9 billion for the same period in the prior year.
●		The mix of transaction deposits to total deposits improved 90 basis points to 87.4% at June 30, 2022, compared to 86.5% at December 31, 2021.
●		Cost of deposits totaled a record low 0.16% during the six months ended June 30, 2022, compared to 0.26% for the same period in the prior year.

Revenues


●		Fully taxable equivalent (“FTE”) net interest income totaled $105.3 million during the six months ended June 30, 2022, increasing $12.7 million, or 13.7%, compared to the same period in the prior year.
●		The FTE net interest margin widened 23 basis points to 3.15% for the six months ended June 30, 2022, as compared to the same period in the prior year. The yield on earning assets increased 16 basis points, led by the remix of assets into higher-yielding loan balances and increases in the federal funds rate since March 2022. The cost of funds decreased eight basis points to 0.18% for the six months ended June 30, 2022, compared to the same period in the prior year.
●		Non-interest income totaled $35.8 million during the six months ended June 30, 2022, compared to $58.6 million for the same period in 2021, primarily due to lower mortgage banking income from reduced refinance activity and tighter gain on sale margins for mortgage loans sold in the secondary market.

Expenses


●		Non-interest expense totaled $89.6 million during the six months ended June 30, 2022, representing a decrease of $6.4 million, or 6.6%, compared to the six months ended June 30, 2021, primarily due to lower salaries and benefits from lower mortgage banking-related compensation.
●		Included in the first six months of 2022 were $1.3 million of non-recurring acquisition-related expenses, with $1.1 million included in professional fees and $0.2 million included in other non-interest expense.

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●		The FTE efficiency ratio during the six months ended June 30, 2022 totaled 63.09%, compared to 63.08% during the six months ended June 30, 2021. Adjusting for non-recurring acquisition-related expenses, the FTE efficiency ratio improved 89 basis points to 62.19% during the six months ended June 30, 2022, compared to the same period in the prior year.
●		Income tax expense totaled $8.0 million during the six months ended June 30, 2022, compared to $11.1 million during the six months ended June 30, 2021. The effective tax rate for the six months ended June 30, 2022 was 17.1%, compared to 17.9% for the six months ended June 30, 2021.

Strong capital position


●		Capital ratios continue to be strong and in excess of federal bank regulatory agency “well capitalized” thresholds. As of June 30, 2022, our consolidated tier 1 leverage ratio was 10.54%, and our common equity tier 1 and consolidated tier 1 risk based capital ratios were 13.75%.
●		At June 30, 2022, common book value per share was $27.12. The tangible common book value per share decreased $0.88 to $23.45 at June 30, 2022 compared to December 31, 2022 as earnings, net of dividends paid, were outpaced by an increase in accumulated other comprehensive loss. Excluding accumulated other comprehensive loss, the tangible book value per share increased $0.82 to $25.38 at June 30, 2022.

Key Challenges

There are a number of significant challenges confronting us and our industry. We face continual challenges implementing our business strategy. These include growing our assets, particularly loans, and deposits amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive environment.

The COVID-19 pandemic has caused disruption to the U.S. labor market, supply chain, consumer spending and business operations. The prolonged economic impacts from the pandemic, including inflationary pressures, are likely to continue to present challenges to our business and to our clients.

We are focused on growing our loan portfolio while adhering to our established underwriting standards and self-imposed concentration limits. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio.

The agriculture industry continues to be impacted by elevated and volatile commodity prices and intermittent disruptions in supply chains. Our food and agribusiness portfolio is only 4.1% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 0.7% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.

Future growth in our interest income will ultimately be dependent on our ability to originate high-quality loans and other high-quality earning assets such as investment securities. Cash balances total $0.5 billion as of June 30, 2022 and have decreased $397.3 million from December 31, 2021 and $556.1 million from June 30, 2021. Investment securities totaled $1.4 billion as of June 30, 2022 and increased $87.6 million, or 6.7%, compared to December 31, 2021. As of June 30, 2022, our loans outstanding totaled $4.8 billion, increasing $303.7 million, or 6.7%, compared to December 31, 2021. During 2022, our weighted average rate on new loans funded at the time of origination was 4.32%, compared to the weighted average yield of our originated loan portfolio of 4.05% (FTE). During the six months ended June 30, 2022, the Federal Reserve increased prevailing interest rates by a total of 1.50%. Our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions.

Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including fintechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges and expand our offerings in digital technology, including by partnering with and investing in fintechs where appropriate. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.

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Performance Overview

In evaluating our consolidated statements of financial condition and results of operations financial statement line items, we evaluate and manage our performance based on key earnings indicators, balance sheet ratios, asset quality metrics and regulatory capital ratios, among others. The table below presents some of the primary performance indicators that we use to analyze our business on a regular basis for the periods indicated:

Key Ratios⁽¹⁾


	As of and for the three months ended			As of and for the six months ended
	June 30,	December 31,	June 30,	June 30,	June 30,
	2022	2021	2021	2022	2021
Return on average assets	1.13%	1.26%	1.38%	1.08%	1.49%
Return on average tangible assets⁽²⁾	1.16%	1.30%	1.41%	1.11%	1.53%
Return on average tangible assets, adjusted^(2)(10)	1.20%	1.30%	1.41%	1.14%	1.53%
Return on average equity	9.96%	10.64%	11.51%	9.40%	12.26%
Return on average tangible common equity⁽²⁾	11.64%	12.37%	13.41%	10.97%	14.29%
Return on average tangible common equity, adjusted^(2)(10)	12.08%	12.37%	13.41%	11.24%	14.29%
Loan to deposit ratio (end of period)	77.76%	72.47%	69.84%	77.76%	69.84%
Non-interest bearing deposits to total deposits (end of period)	39.63%	40.24%	39.58%	39.63%	39.58%
Net interest margin⁽³⁾	3.30%	2.95%	2.74%	3.07%	2.84%
Net interest margin FTE^(2)(3)(4)	3.38%	3.03%	2.82%	3.15%	2.92%
Interest rate spread FTE⁽⁴⁾⁽⁵⁾	3.26%	2.89%	2.66%	3.02%	2.75%
Yield on earning assets⁽⁶⁾	3.47%	3.13%	2.96%	3.24%	3.08%
Yield on earning assets FTE^(2)(4)(6)	3.55%	3.21%	3.04%	3.32%	3.16%
Cost of interest bearing liabilities	0.29%	0.32%	0.38%	0.30%	0.41%
Cost of deposits	0.16%	0.18%	0.24%	0.16%	0.26%
Non-interest income to total revenue FTE⁽⁴⁾	22.62%	31.37%	35.38%	25.38%	38.76%
Non-interest expense to average assets	2.53%	2.47%	2.63%	2.51%	2.80%
Efficiency ratio	62.18%	60.81%	65.66%	64.29%	64.16%
Efficiency ratio FTE⁽²⁾⁽⁴⁾	61.06%	59.74%	64.48%	63.09%	63.08%
Efficiency ratio FTE, adjusted^(2)(4)(10)	59.70%	59.74%	64.48%	62.19%	63.08%

Total Loans Asset Quality Data^(7)(8)(9)
Non-performing loans to total loans	0.20%	0.24%	0.32%	0.20%	0.32%
Non-performing assets to total loans and OREO	0.31%	0.39%	0.44%	0.31%	0.44%
Allowance for credit losses to total loans	1.06%	1.10%	1.14%	1.06%	1.14%
Allowance for credit losses to non-performing loans	515.72%	458.77%	353.22%	515.72%	353.22%
Net charge-offs to average loans	0.03%	0.02%	0.07%	0.04%	0.04%


(1)		Ratios are annualized.
(2)		Ratio represents non-GAAP financial measure. See non-GAAP reconciliations below.
(3)		Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average interest earning assets.
(4)		Presented on an FTE basis using the statutory rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,336, $1,299 and $1,279 for the three months ended June 30, 2022, December 31, 2021 and June 30, 2021, respectively. The taxable equivalent adjustments included above are $2,649 and $2,547 for the six months ended June 30, 20221 and June 30, 2021, respectively.
(5)		Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average cost of interest bearing liabilities.
(6)		Interest earning assets include assets that earn interest/accretion or dividends. Any market value adjustments on investment securities are excluded from interest earning assets.
(7)		Non-performing loans consist of non-accruing loans and restructured loans on non-accrual.
(8)		Non-performing assets include non-performing loans and OREO.
(9)		Total loans are net of unearned discounts and fees.
(10)		Ratios are adjusted for acquisition-related expenses. See non-GAAP reconciliation below.

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About Non-GAAP Financial Measures

Certain of the financial measures and ratios we present, including “tangible assets,” “average tangible assets,” “return on average tangible assets,” “return on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible common equity,” “tangible common equity to tangible assets,” “adjusted non-interest expense,” “non-interest expense to average assets, adjusted,” “adjusted net income,” “adjusted earnings per share - diluted,” “adjusted return on average tangible assets,” “adjusted return on average tangible common equity,” “Tangible common book value, excluding accumulated other comprehensive loss (income), net of tax,” “Tangible common book value per share, excluding accumulated other comprehensive loss (income), net of tax,” “Adjusted efficiency ratio FTE,” “Adjusted net income excluding CDI amortization expense, after tax” and “fully taxable equivalent” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenses or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on an FTE basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.

These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.

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A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows:

Tangible Common Book Value Ratios


	June 30,		December 31,		June 30,
	2022		2021		2021
Total shareholders’ equity	$	815,551	$	840,106	$	851,866
Less: goodwill and CDI assets, net		(120,800)		(121,392)		(121,983)
Add: deferred tax liability related to goodwill		10,527		10,070		9,612
Tangible common equity (non-GAAP)	$	705,278	$	728,784	$	739,495

Total assets	$	7,167,999	$	7,214,011	$	7,136,128
Less: goodwill and CDI assets, net		(120,800)		(121,392)		(121,983)
Add: deferred tax liability related to goodwill		10,527		10,070		9,612
Tangible assets (non-GAAP)	$	7,057,726	$	7,102,689	$	7,023,757

Tangible common equity to tangible assets calculations:
Total shareholders' equity to total assets		11.38%		11.65%		11.94%
Less: impact of goodwill and CDI assets, net		(1.39)%		(1.39)%		(1.41)%
Tangible common equity to tangible assets (non-GAAP)		9.99%		10.26%		10.53%

Tangible common book value per share calculations:
Tangible common equity (non-GAAP)	$	705,278	$	728,784	$	739,495
Divided by: ending shares outstanding		30,075,175		29,958,764		30,800,985
Tangible common book value per share (non-GAAP)	$	23.45	$	24.33	$	24.01

Tangible common book value per share, excluding accumulated other comprehensive loss (income) calculations:
Tangible common equity (non-GAAP)	$	705,278	$	728,784	$	739,495
Accumulated other comprehensive loss (income), net of tax		58,001		6,963		(1,695)
Tangible common book value, excluding accumulated other comprehensive loss (income), net of tax (non-GAAP)		763,279		735,747		737,800
Divided by: ending shares outstanding		30,075,175		29,958,764		30,800,985
Tangible common book value per share, excluding accumulated other comprehensive loss (income), net of tax (non-GAAP)	$	25.38	$	24.56	$	23.95

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Return on Average Tangible Assets and Return on Average Tangible Equity


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2022		2021		2021		2022		2021
Net income	$	20,362	$	22,769	$	24,200	$	38,714	$	51,012
Add: impact of CDI amortization expense, after tax		227		227		228		455		455
Net income excluding the impact of CDI amortization expense, after tax	$	20,589	$	22,996	$	24,428	$	39,169	$	51,467

Average assets	$	7,231,319	$	7,146,571	$	7,056,894	$	7,203,016	$	6,907,022
Less: average goodwill and CDI asset, net of deferred tax liability related to goodwill		(110,446)		(111,508)		(112,552)		(110,594)		(112,698)
Average tangible assets (non-GAAP)	$	7,120,873	$	7,035,063	$	6,944,342	$	7,092,422	$	6,794,324

Average shareholders' equity	$	819,614	$	848,803	$	843,116	$	830,716	$	838,930
Less: average goodwill and CDI asset, net of deferred tax liability related to goodwill		(110,446)		(111,508)		(112,552)		(110,594)		(112,698)
Average tangible common equity (non-GAAP)	$	709,168	$	737,295	$	730,564	$	720,122	$	726,232

Return on average assets		1.13%		1.26%		1.38%		1.08%		1.49%
Return on average tangible assets (non-GAAP)		1.16%		1.30%		1.41%		1.11%		1.53%
Return on average equity		9.96%		10.64%		11.51%		9.40%		12.26%
Return on average tangible common equity (non-GAAP)		11.64%		12.37%		13.41%		10.97%		14.29%

Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2022		2021		2021		2022		2021
Interest income	$	58,836	$	52,501	$	48,450	$	108,361	$	97,663
Add: impact of taxable equivalent adjustment		1,336		1,299		1,279		2,649		2,547
Interest income FTE (non-GAAP)	$	60,172	$	53,800	$	49,729	$	111,010	$	100,210

Net interest income	$	56,017	$	49,486	$	44,868	$	102,678	$	90,089
Add: impact of taxable equivalent adjustment		1,336		1,299		1,279		2,649		2,547
Net interest income FTE (non-GAAP)	$	57,353	$	50,785	$	46,147	$	105,327	$	92,636

Average earning assets	$	6,802,300	$	6,655,918	$	6,561,588	$	6,752,676	$	6,400,651
Yield on earning assets		3.47%		3.13%		2.96%		3.24%		3.08%
Yield on earning assets FTE (non-GAAP)		3.55%		3.21%		3.04%		3.32%		3.16%
Net interest margin		3.30%		2.95%		2.74%		3.07%		2.84%
Net interest margin FTE (non-GAAP)		3.38%		3.03%		2.82%		3.15%		2.92%

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Efficiency Ratio


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2022		2021		2021		2022		2021
Net interest income	$	56,017	$	49,486	$	44,868	$	102,678	$	90,089
Add: impact of taxable equivalent adjustment		1,336		1,299		1,279		2,649		2,547
Net interest income, FTE (non-GAAP)	$	57,353	$	50,785	$	46,147	$	105,327	$	92,636

Non-interest income	$	16,762	$	23,215	$	25,266	$	35,816	$	58,627

Non-interest expense	$	45,552	$	44,505	$	46,343	$	89,634	$	96,011
Less: CDI asset amortization		(296)		(296)		(296)		(592)		(592)
Non-interest expense, excluding CDI asset amortization (non-GAAP)	$	45,256	$	44,209	$	46,047	$	89,042	$	95,419

Non-interest expense, excluding CDI asset amortization	$	45,256	$	44,209	$	46,047	$	89,042	$	95,419
Acquisition-related expenses		(1,006)		—		—		(1,260)		—
Adjusted non-interest expense (non-GAAP)	$	44,250	$	44,209	$	46,047	$	87,782	$	95,419

Efficiency ratio		62.18%		60.81%		65.66%		64.29%		64.16%
Efficiency ratio FTE (non-GAAP)		61.06%		59.74%		64.48%		63.09%		63.08%
Adjusted efficiency ratio FTE (non-GAAP)		59.70%		59.74%		64.48%		62.19%		63.08%

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Adjusted Financial Results


	As of and for the three months ended						As of and for the six months ended
	June 30,		December 31,		June 30,		June 30,		June 30,
	2022		2021		2021		2022		2021
Adjustments to net income:
Net income	$	20,362	$	22,769	$	24,200	$	38,714	$	51,012
Adjustments⁽¹⁾		773		—		—		968		—
Adjusted net income (non-GAAP)	$	21,135	$	22,769	$	24,200	$	39,682	$	51,012

Adjustments to earnings per share:
Earnings per share - diluted	$	0.67	$	0.75	$	0.77	$	1.27	$	1.63
Adjustments⁽¹⁾		0.02		—		—		0.03		—
Adjusted earnings per share - diluted (non-GAAP)	$	0.69	$	0.75	$	0.77	$	1.30	$	1.63

Adjustments to return on average tangible assets:
Adjusted net income (non-GAAP)	$	21,135	$	22,769	$	24,200	$	39,682	$	51,012
Add: impact of CDI amortization expense, after tax		227		227		228		455		455
Adjusted net income excluding CDI amortization expense, after tax (non-GAAP)		21,362		22,996		24,428		40,137		51,467
Average tangible assets (non-GAAP)		7,120,873		7,035,063		6,944,342		7,092,422		6,794,324
Adjusted return on average tangible assets (non-GAAP)		1.20%		1.30%		1.41%		1.14%		1.53%

Adjustments to return on average tangible common equity:
Adjusted net income excluding CDI amortization expense, after tax (non-GAAP)	$	21,362	$	22,996	$	24,428	$	40,137	$	51,467
Average tangible common equity (non-GAAP)		709,168		737,295		730,564		720,122		726,232
Adjusted return on average tangible common equity (non-GAAP)		12.08%		12.37%		13.41%		11.24%		14.29%

Adjustments to non-interest expense:
Non-interest expense	$	45,552	$	44,505	$	46,343	$	89,634	$	96,011
Adjustments⁽¹⁾		1,006		—		—		1,260		—
Adjusted non-interest expense (non-GAAP)		44,546		44,505		46,343		88,374		96,011
Non-interest expense to average assets, adjusted (non-GAAP)		2.47%		2.47%		2.63%		2.47%		2.80%

(1) Adjustments:
Non-interest expense adjustments:
Acquisition-related expenses	$	1,006	$	—	$	—	$	1,260	$	—
Tax expense impact		(233)		—		—		(292)		—
Adjustments (non-GAAP)	$	773	$	—	$	—	$	968	$	—

Application of Critical Accounting Policies and Significant Estimates

We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the determination of the ACL. See additional discussion of our ACL policy in note 2 – Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2021 Annual Report on Form 10-K.

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Future Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was effective upon issuance and can be adopted during any interim period through December 31, 2022. It provides optional expedients and guidance for applying generally accepted accounting principles to contract modifications and hedging relationships, if certain criteria are met, that reference LIBOR or any other reference rate that is expected to be discontinued. To address reference rate reform, the Company established a LIBOR transition subcommittee in January of 2020 to identify exposure to reference rates within loan and derivative contracts. The Company had no exposure to LIBOR tenors that were discontinued as of January 1, 2022. For tenors expiring on future dates the Company is working to ensure all documentation includes contingency terms, if necessary, that may be utilized at such time when the LIBOR is discontinued. Beginning January 1, 2022, the Company no longer originates loans using LIBOR as a reference rate. The Company has assessed, and will continue to evaluate, the impact from ASU 2020-04 and does not expect the adoption of ASU 2020-04, or any updates issued to date, to have a material impact on its financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance on TDRs and requires disclosure of current-period gross write-offs by year of origination. The guidance also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancing and restructuring for borrowers experiencing financial difficulty. The guidance will be effective for fiscal years, and interim periods, beginning after December 15, 2022 for entities that have adopted ASU 2016-13. The Company is reviewing ASU 2022-02 and does not expect the adoption of that pronouncement to have a material impact on its financial statements.

Financial Condition

Total assets remained consistent at $7.2 billion from December 31, 2021 to June 30, 2022 as the increases in loans and investment securities were offset by a decrease in cash. Cash and cash equivalents decreased $397.3 million, or 47.0%, from December 31, 2021 as excess cash liquidity was deployed into higher earning investment securities and loans. Investment securities increased $87.6 million, or 6.7%, and loans increased $303.7 million, or 6.7%, compared to December 31, 2021. The allowance for credit losses increased $1.2 million to $50.9 million at June 30, 2022, compared to December 31, 2021.

During the six months ended June 30, 2022, lower cost demand, savings, and money market deposits ("transaction deposits") increased $22.2 million, or 0.8% annualized, compared to December 31, 2021, as we continued developing full banking relationships with our clients. In addition to providing excess cash liquidity, the increase in transaction deposits provided low-cost funding utilized to fund loan growth.

Investment securities

Available-for-sale

Total investment securities available-for-sale increased 16.5% during the six months ended June 30, 2022 to $0.8 billion. Purchases of available-for-sale securities during the six months ended June 30, 2022 and 2021 totaled $260.2 million and $86.2 million, respectively. Paydowns and maturities totaled $79.1 million and $131.1 million during the six months ended June 30, 2022 and 2021, respectively.

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Our available-for-sale investment securities portfolio is summarized in the following table as of the dates indicated. The weighted average yield was calculated based on amortized cost. Yields on tax exempt securities have not been adjusted for tax exempt status.


	June 30, 2022						December 31, 2021
						Weighted						Weighted
	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average
	cost		value		portfolio	yield	cost		value		portfolio	yield
Treasury securities	$	73,793	$	73,054	9.1%	2.54%	$	—	$	—	—	—
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises		282,052		252,778	31.4%	1.72%		231,523		227,696	32.9%	1.38%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		523,891		477,301	59.1%	1.69%		467,490		461,334	66.7%	1.47%
Municipal securities		230		230	0.0%	3.17%		230		237	0.0%	3.17%
Corporate debt		2,000		2,026	0.3%	5.87%		2,000		2,111	0.3%	5.80%
Other securities		469		469	0.1%	0.00%		469		469	0.1%	0.00%
Total investment securities available-for-sale	$	882,435	$	805,858	100.0%	1.78%	$	701,712	$	691,847	100.0%	1.46%

As of June 30, 2022 and December 31, 2021, nearly all the available-for-sale investment portfolio was backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate FHLMC, FNMA and GNMA securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities.

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 5.6 years and 4.2 years at June 30, 2022 and December 31, 2021, respectively. This estimate is based on assumptions and actual results may differ. At June 30, 2022 and December 31, 2021, the duration of the total available-for-sale investment portfolio was 4.8 years and 3.8 years, respectively.

At June 30, 2022 and December 31, 2021, adjustable rate securities comprised 10.4% and 1.7%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 1.76% per annum and 1.70% per annum at June 30, 2022 and December 31, 2021, respectively.

The available-for-sale investment portfolio included $76.7 million of unrealized losses and $0.1 million of unrealized gains at June 30, 2022 and $13.3 million of unrealized losses and $3.4 million of unrealized gains at December 31, 2021. We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities and U.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

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Held-to-maturity

Held-to-maturity investment securities decreased 4.3% during the six months ended June 30, 2022 to $0.6 billion. Purchases during the six months ended June 30, 2022 and 2021 totaled $44.3 million and $377.7 million, respectively. Paydowns and maturities totaled $69.7 million and $64.8 million during the six months ended June 30, 2022 and 2021, respectively.

Held-to-maturity investment securities are summarized as follows as of the dates indicated:


	June 30, 2022						December 31, 2021
						Weighted						Weighted
	Amortized		Fair		Percent of	average	Amortized		Fair		Percent of	average
	cost		value		portfolio	yield	cost		value		portfolio	yield
Treasury securities	$	24,794	$	24,918	4.3%	3.18%	$	—	$	—	—	—
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises		303,370		271,016	52.0 %	1.75%		312,916		309,614	51.4%	1.56%
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises		254,486		220,751	43.7%	1.31%		296,096		289,646	48.6%	1.25%
Total investment securities held-to-maturity	$	582,650	$	516,685	100.0%	1.62%	$	609,012	$	599,260	100.0%	1.41%

The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities.

The fair value of the held-to-maturity investment portfolio included $66.1 million of unrealized losses and $0.1 million of unrealized gains at June 30, 2022. At December 31, 2021, the held-to-maturity investment portfolio included $11.9 million of unrealized losses and $2.2 million of unrealized gains.

The Company does not measure expected credit losses on a financial asset, or groups of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell the securities and believes it will not be required to sell the securities before the recovery of their amortized cost.

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of June 30, 2022 and December 31, 2021 was 6.4 years and 4.1 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 5.3 years and 3.8 years as of June 30, 2022 and December 31, 2021, respectively.

Non-marketable securities

Non-marketable securities totaled $59.8 million and $50.7 million at June 30, 2022 and December 31, 2021, respectively, and included FRB stock, FHLB stock and other non-marketable securities. At June 30, 2022, other non-marketable securities totaled $45.2 million and consisted of equity method investments totaling $19.2 million and convertible preferred stock without a readily determinable fair value totaling $26.0 million. At December 31, 2021, other non-marketable securities totaled $36.2 million and consisted of equity method investments totaling $14.2 million and convertible preferred stock without a readily determinable fair value totaling $22.0 million. The Company continues to invest with fintech solution providers to support our ecosystem buildout, support our core bank products and offerings, and to leverage efficiencies and technological solutions in our shared services areas. Purchases of non-marketable securities totaled $9.4 million and $3.8 million during the six months ended June 30, 2022 and 2021, respectively.

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At June 30, 2022, the Company held $13.9 million of FRB stock and $0.7 million of FHLB stock for regulatory or debt facility purposes, consistent with December 31, 2021. These are restricted securities which, lacking a market, are carried at cost. The Company is not aware of any events or changes in circumstances that may have an adverse effect on the investments carried at cost.

Loans overview

At June 30, 2022, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our six acquisitions to date.

The table below shows the loan portfolio composition at the respective dates:


					June 30, 2022 vs.
					December 31, 2021
	June 30, 2022		December 31, 2021		% Change
Originated:
Commercial:
Commercial and industrial	$	1,588,241	$	1,479,895	7.3%
Municipal and non-profit		996,223		928,705	7.3%
Owner-occupied commercial real estate		592,334		503,663	17.6%
Food and agribusiness		196,829		200,412	(1.8)%
Total commercial		3,373,627		3,112,675	8.4%
Commercial real estate non-owner occupied		620,133		611,765	1.4%
Residential real estate		682,272		616,135	10.7%
Consumer		17,486		17,336	0.9%
Total originated		4,693,518		4,357,911	7.7%

Acquired:
Commercial:
Commercial and industrial		15,056		16,252	(7.4)%
Municipal and non-profit		330		340	(2.9)%
Owner-occupied commercial real estate		18,849		29,973	(37.1)%
Food and agribusiness		2,849		3,177	(10.3)%
Total commercial		37,084		49,742	(25.4)%
Commercial real estate non-owner occupied		42,771		52,964	(19.2)%
Residential real estate		43,486		52,521	(17.2)%
Consumer		211		245	(13.9)%
Total acquired		123,552		155,472	(20.5)%
Total loans	$	4,817,070	$	4,513,383	6.7%

The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. The loan portfolio increased $303.7 million, or 13.6% annualized, from December 31, 2021 to June 30, 2022. The increase was led by commercial loan growth of $248.3 million, or 15.8% annualized. Loan fundings for the first half of 2022 totaled a record $912.2 million, led by commercial loan fundings of $614.0 million.

Our commercial and industrial loan portfolio is comprised of diverse industry segments. At June 30, 2022, these segments included finance and financial services, primarily lender finance loans, of $174.1 million, hospital/medical loans of $346.8 million, manufacturing-related loans of $143.4 million, and a variety of smaller subcategories of commercial and industrial loans. Food and agribusiness loans, which are well-diversified across food production, crop and livestock types, totaled $199.7 million and were 23.6% of the Company’s risk based capital. Crop and livestock loans represent 0.7% of total loans.

Non-owner occupied CRE loans were 78.5% of the Company’s risk based capital, or 13.8% of total loans, and no specific property type comprised more than 5.0% of total loans. The Company maintains very little exposure to non-owner occupied CRE retail properties, comprising 1.3% of total loans. Multi-family loans totaled $70.9 million, or 1.5% of total loans as of June 30, 2022.

New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan fundings totaled a record $1.8 billion over the past 12 months, led by commercial loan fundings of $1.3 billion. Fundings are defined as closed-end funded loans and revolving lines of credit advances, net of any

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current period paydowns. Management utilizes this more conservative definition of fundings to better approximate the impact of fundings on loans outstanding and ultimately net interest income.

The following table represents new loan fundings for the periods presented:


	Second quarter		First quarter		Fourth quarter		Third quarter		Second quarter
	2022		2022		2021		2021		2021
Commercial:
Commercial and industrial	$	152,550	$	169,168	$	229,529	$	196,289	$	147,030
Municipal and non-profit		81,428		49,906		101,450		43,516		25,131
Owner occupied commercial real estate		78,905		67,597		28,914		53,445		48,225
Food and agribusiness		(4,186)		18,620		11,016		8,442		26,956
Total commercial		308,697		305,291		370,909		301,692		247,342
Commercial real estate non-owner occupied		88,612		63,416		46,128		55,392		58,532
Residential real estate		93,220		49,040		55,873		54,442		53,962
Consumer		1,989		1,904		2,524		1,810		2,267
Total	$	492,518	$	419,651	$	475,434	$	413,336	$	362,103

Included in fundings are net fundings under revolving lines of credit totaling $21,762, $66,430, $138,777, $29,154, and $59,250 as of the second and first quarters of 2022 and the fourth, third and second quarters of 2021, respectively.

The tables below show the contractual maturities of our total loans for the dates indicated:


	June 30, 2022
	Due within		Due after 1 but		Due after 5 but		Due after
	1 year		within 5 years		within 15 years		15 Years		Total
Commercial:
Commercial and industrial	$	154,565	$	1,179,280	$	260,290	$	9,162	$	1,603,297
Municipal and non-profit		(2,074)		140,808		547,362		310,457		996,553
Owner occupied commercial real estate		38,688		186,951		313,042		72,502		611,183
Food and agribusiness		47,769		139,972		8,093		3,844		199,678
Total commercial		238,948		1,647,011		1,128,787		395,965		3,410,711
Commercial real estate non-owner occupied		184,630		321,847		156,302		125		662,904
Residential real estate		8,358		35,602		178,425		503,373		725,758
Consumer		4,394		11,165		2,138		—		17,697
Total loans	$	436,330	$	2,015,625	$	1,465,652	$	899,463	$	4,817,070


	December 31, 2021
	Due within		Due after 1 but		Due after 5 but		Due after
	1 year		within 5 years		within 15 years		15 Years		Total
Commercial:
Commercial and industrial	$	143,152	$	1,119,195	$	226,793	$	7,007	$	1,496,147
Municipal and non-profit		23,827		112,022		559,493		233,703		929,045
Owner occupied commercial real estate		40,510		160,853		266,664		65,609		533,636
Food and agribusiness		79,507		107,799		11,193		5,090		203,589
Total commercial		286,996		1,499,869		1,064,143		311,409		3,162,417
Commercial real estate non-owner occupied		200,042		316,473		147,783		431		664,729
Residential real estate		12,605		30,233		201,918		423,900		668,656
Consumer		3,504		11,507		2,570		—		17,581
Total loans	$	503,147	$	1,858,082	$	1,416,414	$	735,740	$	4,513,383

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The stated interest rate (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of total loans with maturities over one year is as follows at the dates indicated:


	June 30, 2022
	Fixed			Variable			Total
			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial	$	623,325	4.27%	$	825,408	4.47%	$	1,448,733	4.38%
Municipal and non-profit⁽¹⁾		975,049	3.44%		23,580	3.28%		998,629	3.43%
Owner occupied commercial real estate		357,833	4.39%		214,662	4.43%		572,495	4.53%
Food and agribusiness		45,138	5.17%		106,770	4.96%		151,908	5.02%
Total commercial		2,001,345	3.94%		1,170,420	4.48%		3,171,765	4.14%
Commercial real estate non-owner occupied		207,690	4.35%		270,583	4.38%		478,273	4.37%
Residential real estate		391,076	3.51%		326,323	4.17%		717,399	3.81%
Consumer		10,473	4.46%		2,830	4.14%		13,303	4.39%
Total loans with > 1 year maturity	$	2,610,584	3.91%	$	1,770,156	4.41%	$	4,380,740	4.11%


	December 31, 2021
	Fixed			Variable			Total
			Weighted			Weighted			Weighted
	Balance		average rate	Balance		average rate	Balance		average rate
Commercial
Commercial and industrial	$	480,034	4.05%	$	872,961	3.41%	$	1,352,995	3.63%
Municipal and non-profit⁽¹⁾		881,339	3.37%		23,879	2.76%		905,218	3.35%
Owner occupied commercial real estate		293,190	4.70%		199,936	3.75%		493,126	4.45%
Food and agribusiness		49,303	5.21%		74,779	3.95%		124,082	4.45%
Total commercial		1,703,866	3.88%		1,171,555	3.49%		2,875,421	3.72%
Commercial real estate non-owner occupied		214,463	4.28%		250,224	3.51%		464,687	3.86%
Residential real estate		360,648	3.45%		295,403	4.00%		656,051	3.70%
Consumer		11,567	4.37%		2,510	3.52%		14,077	4.21%
Total loans with > 1 year maturity	$	2,290,544	3.85%	$	1,719,692	3.58%	$	4,010,236	3.74%


(1)		Included in municipal and non-profit fixed rate loans are loans totaling $344,648 and $343,089 that have been swapped to variable rates at current market pricing at June 30, 2022 and December 31, 2021, respectively. Included in the municipal and non-profit segment are tax exempt loans totaling $776,558 and $746,508 with an FTE weighted average rate of 4.00% and 3.97% at June 30, 2022 and December 31, 2021, respectively.

Asset quality

Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.

Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution for the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below.

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In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered TDRs in accordance with ASC 310-40. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ACL and any subsequent declines in carrying value charged to impairments on OREO.

Non-performing assets and past due loans

Non-performing assets consist of non-accrual loans and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and six months ended June 30, 2022 was $0.1 million and $0.3 million, respectively, and $0.2 million and $0.5 million during the three and six months ended June 30, 2021, respectively.

Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of collection.

The following table sets forth the non-performing assets and past due loans as of the dates presented:


	June 30, 2022		December 31, 2021
Non-accrual loans:
Non-accrual loans, excluding restructured loans	$	7,951	$	8,466
Restructured loans on non-accrual		1,911		2,366
Non-performing loans		9,862		10,832
OREO		4,992		7,005
Total non-performing assets	$	14,854	$	17,837

Loans 30-89 days past due and still accruing interest	$	1,781	$	1,687
Loans 90 days or more past due and still accruing interest		194		420
Non-accrual loans		9,862		10,832
Total past due and non-accrual loans	$	11,837	$	12,939
Accruing restructured loans	$	7,208	$	7,186
Allowance for credit losses		50,860		49,694
Non-performing loans to total loans		0.20%		0.24%
Total 90 days past due and still accruing interest and non-accrual loans to total loans		0.21%		0.25%
Total non-performing assets to total loans and OREO		0.31%		0.39%
ACL to non-performing loans		515.72%		458.77%

During the six months ended June 30, 2022, total non-performing loans decreased $1.0 million, or 9.0%, from December 31, 2021 to a record low $9.9 million.

Loans 30-89 days past due and still accruing interest were 0.04% of total loans at both June 30, 2022 and December 31, 2021. Loans 90 days or more past due and still accruing interest were 0.00% of total loans at June 30, 2022 and 0.01% at December 31, 2021.

Allowance for credit losses

The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. On January 1, 2020, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology for recognizing credit losses with a CECL model. The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing

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delays. The model incorporates forecasts of certain national macro-economic factors, including unemployment rates, home price index (“HPI”), retail sales and gross domestic product (“GDP”), which drive correlated loss rates. The determination and application of the ACL accounting policy involves judgments, estimates and uncertainties that are subject to change. For periods beyond the reasonable and supportable forecast period, we revert to historical long-term average loss rates on a straight-line basis.

We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary loan segments within the ACL model that are further stratified into 11 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following are the loan classes within each of the four primary loan segments:


	Non-owner occupied
Commercial	commercial real estate	Residential real estate	Consumer
Commercial and industrial	Construction	Senior lien	Consumer
Owner occupied commercial real estate	Acquisition and development	Junior lien
Food and agribusiness	Multifamily
Municipal and non-profit	Non-owner occupied

Loans on non-accrual, in bankruptcy and TDRs with a balance greater than $250,000 are excluded from the pooled analysis and are evaluated individually. If management determines that foreclosure is probable, expected credit losses are evaluated based on the criteria listed below, adjusted for selling costs as appropriate. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:


●		the borrower's resources, ability, and willingness to repay in accordance with the terms of the loan agreement;
●		the likelihood of receiving financial support from any guarantors;
●		the adequacy and present value of future cash flows, less disposal costs, of any collateral; and
●		the impact current economic conditions may have on the borrower's financial condition and liquidity or the value of the collateral.

The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.

Net charge-offs on loans during the three and six months ended June 30, 2022 were $0.3 million and $0.9 million, respectively. The Company recorded an allowance for loan losses provision expense of $2.5 million for the three months ended June 30, 2022, which included a provision expense of $2.4 million for funded loans and a provision expense of $0.1 million for unfunded loan commitments. During the six months ended June 30, 2022, the Company recorded an allowance for loan losses provision expense of $2.2 million, which included a provision expense of $2.1 million for funded loans and a provision expense of $0.1 million for unfunded loan commitments. Provision expense was driven by loan growth and higher reserve requirements from changes in the CECL model’s underlying economic forecast. Specific reserves on loans totaled $0.5 million at June 30, 2022.

Net charge-offs on loans during the three and six months ended June 30, 2021 were $0.7 million and $0.8 million, respectively. The Company recorded an allowance for loan losses provision release of $5.9 million for the three months ended June 30, 2021, which included a provision release of $5.3 million for funded loans and a provision release of $0.6 million for unfunded loan commitments. During the six months ended June 30, 2021, the Company recorded total provision release of $9.4 million, which included a provision release of $9.9 million for funded loans, partially offset by a provision expense of $0.5 million for unfunded loan commitments. Provision release was driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. Specific reserves on loans totaled $1.4 million at June 30, 2021.

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The Company has elected to exclude AIR from the ACL calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. As of June 30, 2022 and December 31, 2021, AIR from loans totaled $17.2 million and $15.7 million, respectively.

Total ACL

After considering the above mentioned factors, we believe that the ACL of $50.9 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at June 30, 2022. However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively affect the Company's results of operations, liquidity or financial condition.

The following schedules present, by class stratification, the changes in the ACL during the periods listed:


	As of and for the three months ended
	June 30, 2022			June 30, 2021
	Total loans		% NCOs⁽¹⁾	Total loans		% NCOs⁽¹⁾
Beginning allowance for credit losses	$	48,810		$	55,057
Charge-offs:
Commercial		(291)	0.02%		(781)	0.06%
Commercial real estate non owner-occupied		—	0.00%		—	0.00%
Residential real estate		—	0.00%		—	0.00%
Consumer		(160)	0.01%		(144)	0.01%
Total charge-offs		(451)			(925)
Recoveries		115			198
Net charge-offs		(336)	0.03%		(727)	0.07%
Provision expense (release) for loan losses		2,386			(5,300)
Ending allowance for credit losses	$	50,860		$	49,030
Average total loans outstanding during the period	$	4,711,416		$	4,312,128


	As of and for the six months ended
	June 30, 2022			June 30, 2021
	Total loans		% NCOs⁽¹⁾	Total loans		% NCOs⁽¹⁾
Beginning balance	$	49,694		$	59,777
Charge-offs:
Commercial		(754)	0.03%		(942)	0.03%
Commercial real estate non-owner occupied		—	0.00%		—	0.00%
Residential real estate		(2)	0.00%		(22)	0.00%
Consumer		(329)	0.01%		(263)	0.01%
Total charge-offs		(1,085)			(1,227)
Recoveries		190			380
Net charge-offs		(895)	0.04%		(847)	0.04%
Provision expense (release) for loan losses		2,061			(9,900)
Ending allowance for credit losses	$	50,860		$	49,030
Ratio of ACL to total loans outstanding at period end		1.06%			1.14%
Ratio of ACL to total non-performing loans at period end		515.72%			353.22%
Total loans	$	4,817,070		$	4,300,757
Average total loans outstanding during the period		4,616,339			4,294,900
Non-performing loans		9,862			13,881


(1)		Ratio of annualized net charge-offs to average total loans.

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The following tables present the allocation of the ACL and the percentage of the total amount of loans in each loan category listed as of the dates presented:


	June 30, 2022
						ACL as a %
	Total loans		% of total loans	Related ACL		of total ACL
Commercial	$	3,410,711	70.8%	$	32,011	62.9%
Commercial real estate non-owner occupied		662,904	13.8%		8,426	16.6%
Residential real estate		725,758	15.0%		10,072	19.8%
Consumer		17,697	0.4%		351	0.7%
Total	$	4,817,070	100.0%	$	50,860	100.0%


	December 31, 2021
						ACL as a %
	Total loans		% of total loans	Related ACL		of total ACL
Commercial	$	3,162,417	70.1%	$	31,256	62.9%
Commercial real estate non-owner occupied		664,729	14.7%		10,033	20.2%
Residential real estate		668,656	14.8%		8,056	16.2%
Consumer		17,581	0.4%		349	0.7%
Total	$	4,513,383	100.0%	$	49,694	100.0%

Deposits

Deposits from banking clients serve as a primary funding source for our banking operations, and our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a low-cost funding source for our loans, but also provide a foundation for the client relationships that are critical to future loan growth. The following table presents information regarding our deposit composition at June 30, 2022 and December 31, 2021:


							Increase (decrease)
	June 30, 2022			December 31, 2021			Amount		% Change
Non-interest bearing demand deposits	$	2,454,740	39.6%	$	2,506,265	40.2%	$	(51,525)	(2.1)%
Interest bearing demand deposits		597,000	9.6%		555,401	8.9%		41,599	7.5%
Savings accounts		782,579	12.6%		774,559	12.4%		8,020	1.0%
Money market accounts		1,582,102	25.6%		1,558,032	25.0%		24,070	1.5%
Total transaction deposits		5,416,421	87.4%		5,394,257	86.5%		22,164	0.4%
Time deposits < $250,000		663,847	10.7%		703,741	11.4%		(39,894)	(5.7)%
Time deposits > $250,000		114,130	1.9%		130,175	2.1%		(16,045)	(12.3)%
Total time deposits		777,977	12.6%		833,916	13.5%		(55,939)	(6.7)%
Total deposits	$	6,194,398	100.0%	$	6,228,173	100.0%	$	(33,775)	(0.5)%

The following table shows uninsured time deposits by scheduled maturity as of June 30, 2022:


	June 30, 2022
Three months or less	$	5,293
Over 3 months through 6 months		10,454
Over 6 months through 12 months		10,880
Thereafter		21,754
Total uninsured time deposits	$	48,381

At June 30, 2022 and December 31, 2021, time deposits that were scheduled to mature within 12 months totaled $536.7 million and $555.4 million, respectively. Of the time deposits scheduled to mature within 12 months at June 30, 2022, $69.4 million were in denominations of $250,000 or more, and $467.3 million were in denominations less than $250,000.

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Long-term debt

The note is subordinated, unsecured and matures on November 15, 2031. Payments consist of interest only. Interest expense on the note is payable semi-annually in arrears and will bear interest at 3.00% per annum until November 15, 2026 (or any earlier redemption date). From November 15, 2026 until November 15, 2031 (or any earlier redemption date) payments will be made quarterly in arrears, and the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month term SOFR plus 203 basis points. The Company is using the net proceeds from the sale of the note for general corporate purposes. Prior to November 5, 2026, the Company may redeem the note only under certain limited circumstances. Beginning on November 5, 2026 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the note being redeemed, together with any accrued and unpaid interest on the note being redeemed up to but excluding the date of redemption. The note is not subject to redemption at the option of the holder.

Other borrowings

As of June 30, 2022 and December 31, 2021, the Bank sold securities under agreements to repurchase totaling $24.4 million and $22.8 million, respectively. In addition, as a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $1.0 billion at June 30, 2022. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At June 30, 2022 and December 31, 2021, the Bank had no outstanding borrowings with the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at June 30, 2022 or December 31, 2021. Loans pledged were $1.4 billion and $1.3 billion at June 30, 2022 and December 31, 2021, respectively. The Company incurred no interest expense related to FHLB advances or other short-term borrowings for the three and six months ended June 30, 2022 or 2021.

Results of Operations

Our net income depends largely on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan losses and non-interest income, such as service charges, bank card income, swap fee income, and gain on sale of mortgages. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, occupancy costs, telecommunications data processing expense and intangible asset amortization. Any expenses related to the resolution of problem assets are also included in non-interest expense.

Overview of results of operations

Net income totaled $20.4 million and $38.7 million, or $0.67 and $1.27 per diluted share, during the three and six months ended June 30, 2022, respectively. Excluding $1.0 million of non-recurring acquisition-related expenses, net income totaled $21.1 million, or $0.69 per diluted share, during the three months ended June 30, 2022. Excluding $1.3 million of non-recurring acquisition-related expenses, net income totaled $39.7 million, or $1.30 per diluted share, during the six months ended June 30, 2022. During the three and six months ended June 30, 2021, net income totaled $24.2 million and $51.0 million, or $0.77 and $1.63 per diluted share, respectively. The rise in mortgage rates in 2022 has resulted in lower mortgage banking income during the first six months of 2022. However, the increases in the Federal Reserve’s interest rates are driving higher loan yields resulting in increasing levels of net interest income.

Net interest income

We regularly review net interest income metrics to provide us with indicators of how the various components of net interest income are performing. We regularly review: (i) our loan mix and the yield on loans; (ii) the investment portfolio and the related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast periods.

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The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale and loans.

The table below presents the components of net interest income on a FTE basis for the three months ended June 30, 2022 and 2021.


	For the three months ended					For the three months ended
	June 30, 2022					June 30, 2021
	Average balance		Interest		Average rate	Average balance		Interest		Average rate
Interest earning assets:
Originated loans FTE^(1)(2)(3)	$	4,594,799	$	47,787	4.17%	$	4,077,142	$	40,036	3.94%
Acquired loans		128,107		4,403	13.79%		211,126		3,923	7.45%
Loans held for sale		78,574		881	4.50%		159,068		1,213	3.06%
Investment securities available-for-sale		898,928		3,808	1.69%		638,039		2,397	1.50%
Investment securities held-to-maturity		559,712		2,067	1.48%		572,534		1,723	1.20%
Other securities		14,591		211	5.78%		15,079		209	5.54%
Interest earning deposits and securities purchased under agreements to resell		527,589		1,015	0.77%		888,600		228	0.10%
Total interest earning assets FTE⁽²⁾	$	6,802,300	$	60,172	3.55%	$	6,561,588	$	49,729	3.04%
Cash and due from banks	$	75,616				$	78,148
Other assets		402,529					472,142
Allowance for credit losses		(49,126)					(54,984)
Total assets	$	7,231,319				$	7,056,894
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits	$	2,992,986	$	1,494	0.20%	$	2,789,681	$	1,572	0.23%
Time deposits		790,998		991	0.50%		937,579		2,004	0.86%
Securities sold under agreements to repurchase		21,761		6	0.11%		19,891		6	0.12%
Long-term debt, net		39,516		328	3.33%		—		—	0.00%
Total interest bearing liabilities	$	3,845,261	$	2,819	0.29%	$	3,747,151	$	3,582	0.38%
Demand deposits	$	2,469,729				$	2,368,810
Other liabilities		96,715					97,817
Total liabilities		6,411,705					6,213,778
Shareholders' equity		819,614					843,116
Total liabilities and shareholders' equity	$	7,231,319				$	7,056,894
Net interest income FTE⁽²⁾			$	57,353				$	46,147
Interest rate spread FTE⁽²⁾					3.26%					2.66%
Net interest earning assets	$	2,957,039				$	2,814,437
Net interest margin FTE⁽²⁾					3.38%					2.82%
Average transaction deposits	$	5,462,715				$	5,158,491
Average total deposits		6,253,713					6,096,070
Ratio of average interest earning assets to average interest bearing liabilities		176.90%					175.11%


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,336 and $1,279 for the three months ended June 30, 2022 and 2021, respectively.
(3)		Loan fees included in interest income totaled $2,586 and $4,695 for the three months ended June 30, 2022 and 2021, respectively.

Net interest income totaled $56.0 million and $44.9 million during the three months ended June 30, 2022 and 2021, respectively. Net interest income on an FTE basis totaled a record $57.4 million and $46.1 million during the three months ended June 30, 2022 and 2021, respectively. During the three months ended June 30, 2022, the FTE net interest margin widened 56 basis points to 3.38%, compared to the three months ended June 30, 2021. The yield on earning assets increased 51 basis points, primarily driven by increases in the federal funds rate since March 2022 and excess cash being deployed into higher-yielding originated loans and

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investment securities. The cost of funds decreased five basis points to a record low 0.18% during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Average loans comprised $4.7 billion, or 69.4%, of total average interest earning assets during the three months ended June 30, 2022, compared to $4.3 billion, or 65.4%, during the three months ended June 30, 2021. The increase in average loan balances was driven by a $517.7 million increase in average originated loans.

Average investment securities comprised 21.4% and 18.4% of total interest earning assets during the three months ended June 30, 2022 and 2021, respectively. The increase in the investment portfolio was driven by a strategic decision to deploy a portion of the excess cash liquidity into higher-yielding investment securities.

Average balances of interest bearing liabilities increased $98.1 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $203.3 million, long-term debt totaling $39.5 million and securities sold under agreement to repurchase totaling $1.9 million. The increase was partially offset by a decrease in time deposits of $146.6 million.

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The table below presents the components of net interest income on an FTE basis for the six months ended June 30, 2022 and 2021:


	For the six months ended					For the six months ended
	June 30, 2022					June 30, 2021
	Average balance		Interest		Average rate	Average balance		Interest		Average rate
Interest earning assets:
Originated loans FTE^(1)(2)(3)	$	4,479,002	$	89,872	4.05%	$	4,041,268	$	79,596	3.97%
Acquired loans		137,819		6,971	10.20%		224,722		9,051	8.12%
Loans held for sale		86,065		1,637	3.84%		195,094		2,730	2.82%
Investment securities available-for-sale		825,694		6,657	1.61%		662,250		4,882	1.47%
Investment securities held-to-maturity		574,688		4,079	1.42%		497,245		3,139	1.26%
Other securities		14,590		420	5.76%		15,446		419	5.43%
Interest earning deposits and securities purchased under agreements to resell		634,818		1,374	0.44%		764,626		393	0.10%
Total interest earning assets FTE⁽²⁾	$	6,752,676	$	111,010	3.32%	$	6,400,651	$	100,210	3.16%
Cash and due from banks	$	77,489				$	79,692
Other assets		422,205					483,617
Allowance for credit losses		(49,354)					(56,938)
Total assets	$	7,203,016				$	6,907,022
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits	$	2,964,729	$	2,931	0.20%	$	2,717,983	$	3,224	0.24%
Time deposits		806,321		2,085	0.52%		952,431		4,339	0.92%
Securities sold under agreements to repurchase		22,263		13	0.12%		20,630		11	0.11%
Long-term debt, net		39,503		654	3.34%		—		—	0.00%
Total interest bearing liabilities	$	3,832,816	$	5,683	0.30%	$	3,691,044	$	7,574	0.41%
Demand deposits	$	2,452,062				$	2,267,900
Other liabilities		87,422					109,148
Total liabilities		6,372,300					6,068,092
Shareholders' equity		830,716					838,930
Total liabilities and shareholders' equity	$	7,203,016				$	6,907,022
Net interest income FTE⁽²⁾			$	105,327				$	92,636
Interest rate spread FTE⁽²⁾					3.02%					2.75%
Net interest earning assets	$	2,919,860				$	2,709,607
Net interest margin FTE⁽²⁾					3.15%					2.92%
Average transaction deposits	$	5,416,791				$	4,985,883
Average total deposits		6,223,112					5,938,314
Ratio of average interest earning assets to average interest bearing liabilities		176.18%					173.41%


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $2,649 and $2,547 for the six months ended June 30, 2022 and 2021, respectively.
(3)		Loan fees included in interest income totaled $4,950 and $9,238 for the six months ended June 30, 2022 and 2021, respectively.

Net interest income totaled $102.7 million and $90.1 million during the six months ended June 30, 2022 and 2021, respectively. Net interest income on an FTE basis totaled $105.3 million and $92.6 million during the six months ended June 30, 2022 and 2021, respectively. During the six months ended June 30, 2022, the FTE net interest margin widened 23 basis points to 3.15%, compared to the six months ended June 30, 2021. The yield on earnings assets increased 16 basis points, primarily driven by increases in the federal funds rate since March 2022 and excess cash being deployed into higher-yielding originated loans and investment securities. The cost of funds decreased eight basis points to a record low 0.18% during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

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Average loans comprised $4.6 billion, or 68.4%, of total average interest earning assets during the six months ended June 30, 2022, compared to $4.3 billion, or 66.6%, of total average interest earning assets during the six months ended June 30, 2021. The increase in average loan balances was driven by a $437.7 million increase in average originated loans. Year-to-date loan fundings through June 30, 2022 totaled a record $912.2 million.

Average investment securities comprised 20.7% and 18.1% of total interest earning assets during the six months ended June 30, 2022 and 2021, respectively. The increase in the investment portfolio was driven by strategic decisions to deploy a portion of excess cash liquidity into higher-yielding investment securities.

Average balances of interest bearing liabilities increased $141.8 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $246.8 million, long-term debt totaling $39.5 million and securities sold under agreements to repurchase totaling $1.6 million. The increase was partially offset by a decrease in time deposits of $146.1 million. The cost of deposits decreased 10 basis points to a record low 0.16% during the six months ended June 30, 2022, compared to 0.26% during the six months ended June 30, 2021.

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The following table summarizes the changes in net interest income on an FTE basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021:


	Three months ended June 30, 2022						Six months ended June 30, 2022
	compared to						compared to
	Three months ended June 30, 2021						Six months ended June 30, 2021
	Increase (decrease) due to						Increase (decrease) due to
	Volume		Rate		Net		Volume		Rate		Net
Interest income:
Originated loans FTE^(1)(2)(3)	$	5,384	$	2,367	$	7,751	$	8,783	$	1,493	$	10,276
Acquired loans		(2,853)		3,333		480		(4,396)		2,316		(2,080)
Loans held for sale		(903)		571		(332)		(2,074)		981		(1,093)
Investment securities available-for-sale		1,105		306		1,411		1,318		457		1,775
Investment securities held-to-maturity		(47)		391		344		550		390		940
Other securities		(7)		9		2		(25)		26		1
Interest earning deposits and securities purchased under agreements to resell		(695)		1,482		787		(281)		1,262		981
Total interest income	$	1,984	$	8,459	$	10,443	$	3,875	$	6,925	$	10,800
Interest expense:
Interest bearing demand, savings and money market deposits	$	101	$	(179)	$	(78)	$	244	$	(537)	$	(293)
Time deposits		(184)		(829)		(1,013)		(378)		(1,876)		(2,254)
Securities sold under agreements to repurchase		1		(1)		—		1		1		2
Long-term debt, net		328		—		328		654		—		654
Total interest expense		246		(1,009)		(763)		521		(2,412)		(1,891)
Net change in net interest income	$	1,738	$	9,468	$	11,206	$	3,354	$	9,337	$	12,691


(1)		Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
(2)		Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,336 and $1,279 for the three months ended June 30, 2022 and 2021, respectively. The taxable equivalent adjustments included above are $2,649 and $2,547 for the six months ended June 30, 2022 and 2021, respectively.
(3)		Loan fees included in interest income totaled $2,586 and $4,695 for the three months ended June 30, 2022 and 2021, respectively. Loan fees included in interest income totaled $4,950 and $9,238 for the six months ended June 30, 2022 and 2021, respectively.

Below is a breakdown of average deposits and the average rates paid during the periods indicated:


	For the three months ended						For the six months ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
			Average			Average			Average			Average
	Average		rate	Average		rate	Average		rate	Average		rate
	balance		paid	balance		paid	balance		paid	balance		paid
Non-interest bearing demand	$	2,469,729	0.00%	$	2,368,810	0.00%	$	2,452,062	0.00%	$	2,267,900	0.00%
Interest bearing demand		599,874	0.18%		560,591	0.21%		588,792	0.18%		551,371	0.22%
Money market accounts		1,608,317	0.24%		1,509,395	0.26%		1,592,044	0.24%		1,469,344	0.28%
Savings accounts		784,795	0.14%		719,695	0.16%		783,893	0.14%		697,268	0.17%
Time deposits		790,998	0.50%		937,579	0.86%		806,321	0.52%		952,431	0.92%
Total average deposits	$	6,253,713	0.16%	$	6,096,070	0.24%	$	6,223,112	0.16%	$	5,938,314	0.26%

Provision for loan losses

The provision for loan losses represents the amount of expense that is necessary to bring the ACL to a level that we deem appropriate to absorb estimated lifetime losses inherent in the loan portfolio as of the balance sheet date. The determination of the ACL, and the resultant provision for loan losses, is subjective and involves significant estimates and assumptions. The allowance for credit losses totaled 1.06% of total loans at June 30, 2022, compared to the allowance for credit losses of 1.14% at June 30, 2021.

The Company recorded loan losses provision expense of $2.5 million and $2.2 million for the three and six months ended June 30, 2022, respectively, which included a provision expense of $2.4 million and $2.1 million, respectively, for funded loans and a provision

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expense of $0.1 million and $0.1 million, respectively, for unfunded loan commitments, driven by strong loan growth and higher reserve requirements from changes in the CECL model’s underlying economic forecast

During the three and six months ended June 30, 2021, the Company recorded a provision release of $5.9 million and $9.4 million, respectively, which included a provision release of $5.3 million and $9.9 million, respectively, for funded loans and a provision release of $0.6 million and a provision expense of $0.5 million, respectively, for unfunded loan commitments, driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast.

Non-interest income

The table below details the components of non-interest income for the periods presented:


	For the three months ended June 30,				For the six months ended June 30,				Three months			Six months
									Increase (decrease)			Increase (decrease)
	2022		2021		2022		2021		Amount		% Change	Amount		% Change
Service charges	$	3,956	$	3,568	$	7,666	$	7,042	$	388	10.9 %	$	624	8.9 %
Bank card fees		4,541		4,614		8,664		8,687		(73)	(1.6)%		(23)	(0.3)%
Mortgage banking income		6,948		13,979		16,614		36,358		(7,031)	(50.3)%		(19,744)	(54.3)%
Bank-owned life insurance income		540		553		1,072		1,101		(13)	(2.4)%		(29)	(2.6)%
Other non-interest income		772		2,552		1,795		5,404		(1,780)	(69.7)%		(3,609)	(66.8)%
OREO-related income		5		—		5		35		5	100.0 %		(30)	(85.7)%
Total non-interest income	$	16,762	$	25,266	$	35,816	$	58,627	$	(8,504)	(33.7)%	$	(22,811)	(38.9)%

Non-interest income totaled $16.8 million for the three months ended June 30, 2022, compared to $25.3 million for the three months ended June 30, 2021. The decrease in mortgage banking income was driven by lower refinance activity and competition driving tighter gain on sale margins. Other non-interest income decreased $1.8 million primarily due to market adjustments on company-owned life insurance, equity method investments and banking center consolidation-related income. Service charges and bank card fees increased a combined $0.3 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, due to changes in consumer behavior.

Non-interest income totaled $35.8 million for the six months ended June 30, 2022, compared to $58.6 million for the six months ended June 30, 2021. The decrease in mortgage banking income was driven by lower refinance activity and competition driving tighter gain on sale margins. Other non-interest income decreased $3.6 million primarily due to market adjustments on company-owned life insurance, equity method investments and banking center consolidation-related income. Service charges and bank card fees increased a combined $0.6 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, due to changes in consumer behavior.

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Non-interest expense

The table below details the components of non-interest expense for the periods presented:


	For the three months ended June 30,				For the six months ended June 30,				Three months			Six months
									Increase (decrease)			Increase (decrease)
	2022		2021		2022		2021		Amount		% Change	Amount		% Change
Salaries and benefits	$	28,776	$	31,439	$	58,112	$	64,962	$	(2,663)	(8.5)%	$	(6,850)	(10.5)%
Occupancy and equipment		6,665		6,131		13,061		12,681		534	8.7 %		380	3.0 %
Telecommunications and data processing		2,453		2,315		4,834		4,652		138	6.0 %		182	3.9 %
Marketing and business development		674		570		1,347		1,022		104	18.2 %		325	31.8 %
FDIC deposit insurance		486		456		968		900		30	6.6 %		68	7.6 %
Bank card expenses		1,398		1,330		2,666		2,474		68	5.1 %		192	7.8 %
Professional fees		1,486		649		2,300		1,391		837	129.0 %		909	65.3 %
Other non-interest expense		3,169		2,348		5,717		4,824		821	35.0 %		893	18.5 %
Problem asset workout		144		294		307		732		(150)	(51.0)%		(425)	(58.1)%
Loss (gain) on OREO sales, net		5		221		(270)		192		(216)	(97.7)%		(462)	(240.6)%
Core deposit intangible asset amortization		296		296		592		592		—	—		—	—
Banking center consolidation-related expense		—		294		—		1,589		(294)	(100.0)%		(1,589)	(100.0)%
Total non-interest expense	$	45,552	$	46,343	$	89,634	$	96,011	$	(791)	(1.7)%	$	(6,377)	(6.6)%

During the three and six months ended June 30, 2022, non-interest expense decreased $0.8 million, or 1.7%, and $6.4 million, or 6.6%, respectively, compared to the three and six months ended June 30, 2021. Salaries and benefits decreased primarily due to lower mortgage banking-related compensation. The three months ended June 30, 2022 included $1.0 million of non-recurring acquisition-related expenses with $0.8 million included in professional fees and $0.2 million included in other non-interest expense. The six months ended June 30, 2022 included $1.3 million of non-recurring acquisition-related expenses with $1.1 million included in professional fees and $0.2 million included in other non-interest expense.

Income taxes

Income tax expense totaled $4.4 million and $8.0 million for the three and six months ended June 30, 2022, respectively. Income tax expense for the three and six months ended June 30, 2021 was $5.4 million and $11.1 million, respectively. The effective tax rate for the three and six months ended June 30, 2022 was 17.6% and 17.1%, respectively, compared to 18.4% and 17.9% for the same periods in the prior year. The effective tax rate is lower than the federal statutory rate primarily due to interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax income.

Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our 2021 Annual Report on Form 10-K.

Liquidity and Capital Resources

Liquidity

Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay our obligations to depositors and other creditors, while providing ample available funds for opportunistic and strategic investments. Management believes that the Company's excess cash, borrowing capacity and access to sufficient sources of capital are adequate to meet its short-term and long-term liquidity needs in the foreseeable future. Our primary sources of funds are deposits, securities sold under agreements to repurchase, prepayments and maturities of loans and investment securities, the sale of investment securities, and funds provided from operations. We anticipate having access to other third party funding sources, including the ability to raise funds through the issuance of shares of our common stock or other equity or equity-related securities, incurrence of debt, and federal funds purchased, that may also be a source of liquidity. We anticipate that these sources of liquidity will provide adequate funding and liquidity for at least a 12-month period, and we may utilize any combination of these funding sources for long-term liquidity needs if deemed prudent.

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On-balance sheet liquidity is represented by our cash and cash equivalents and unencumbered investment securities, and is detailed in the table below as of June 30, 2022 and December 31, 2021:


	June 30, 2022		December 31, 2021
Cash and due from banks	$	447,875	$	845,195
Interest bearing bank deposits		500		500
Unencumbered investment securities, at fair value		686,212		781,166
Total	$	1,134,587	$	1,626,861

Total on-balance sheet liquidity decreased $492.3 million at June 30, 2022, compared to December 31, 2021. The decrease was due to $95.0 million lower unencumbered available-for-sale and held-to-maturity securities balances and lower cash and due from banks of $397.3 million.

At present, financing activities primarily consist of changes in deposits and repurchase agreements, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As of June 30, 2022, $536.7 million of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions, and our consumer banking strategy focusing on lower cost transaction accounts, our strategy is to replace a portion of those maturing time deposits with transaction deposits and market-rate time deposits. During 2021, the Company entered into a subordinated note purchase agreement maturing on November 15, 2031. The Company is using the net proceeds from the sale of the note for general corporate purposes. At June 30, 2022, the balance on the note, net of issuance costs totaling $0.5 million, totaled $39.5 million.

Through our relationship with the FHLB, the Bank may pledge qualifying loans and investment securities allowing us to obtain additional liquidity through FHLB advances and lines of credit. There were no investment securities pledged at June 30, 2022 or December 31, 2021. The Bank had loans pledged as collateral for FHLB advances of $1.4 billion at June 30, 2022 and $1.3 billion at December 31, 2021. FHLB advances, lines of credit and other short-term borrowing availability totaled $1.0 billion at June 30, 2022. The Bank can obtain additional liquidity through the FHLB facility, if required, and also has access to federal funds lines of credit with correspondent banks. Currently, the Company does not have any advances from the FHLB.

Our primary uses of funds are loan fundings, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses, and share repurchases. For additional information regarding our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying consolidated financial statements.

Exclusive from the investing activities related to acquisitions, our primary investing activities are loan fundings and pay-offs and paydowns of loans and purchases and sales of investment securities. At June 30, 2022, pledgeable investment securities represented a significant source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled $1.4 billion at June 30, 2022, inclusive of pre-tax net unrealized losses of $76.6 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $66.0 million of pre-tax net unrealized losses at June 30, 2022. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of June 30, 2022, our investment securities portfolio consisted primarily of MBS, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base.

Capital

Under the Basel III requirements, at June 30, 2022, the Company and the Bank met all capital adequacy requirements and the Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on regulatory capital, see note 10 in our consolidated financial statements.

Our shareholders' equity is impacted by earnings, changes in unrealized gains and losses on securities, net of tax, stock-based compensation activity, share repurchases and the payment of dividends.

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The Board of Directors has from time to time authorized multiple programs to repurchase shares of the Company’s common stock either in open market or in privately negotiated transactions in accordance with applicable regulations of the SEC. On February 24, 2021, the Company’s Board of Directors authorized a program to repurchase up to $75.0 million of the Company’s stock. The remaining authorization under the program as of June 30, 2022 was $38.6 million.

On August 2, 2022, our Board of Directors declared a quarterly dividend of $0.23 per common share, payable on September 15, 2022 to shareholders of record at the close of business on August 26, 2022.

Asset/Liability Management and Interest Rate Risk

Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows.

The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee with direction from the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.

Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and utilize various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.

We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at June 30, 2022. At June 30, 2022, our asset sensitivity decreased slightly for a rising rate environment as a result of the balance sheet mix. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 25 basis point decrease in interest rates on net interest income based on the interest rate risk model at June 30, 2022 at the respective dates:


Hypothetical
shift in interest	% change in projected net interest income
rates (in bps)	June 30, 2022	December 31, 2021
200	6.45%	11.12%
100	3.22%	5.37%
(25)	(1.39)%	(0.67)%

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.

As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of longer duration loans. The strategy with respect to liabilities has been to continue to emphasize transaction deposit growth, particularly non-interest or low interest bearing non-maturing deposit accounts

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while building long-term client relationships. Non-maturing deposit accounts totaled 87.4% of total deposits at June 30, 2022, compared to 86.5% at December 31, 2021. We currently have no brokered time deposits.

Impact of Inflation and Changing Prices

The primary impact of inflation on our operations is reflected in increasing operating costs and non-interest expense. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than do changes in the general rate of inflation and changes in prices. Interest rate changes do not necessarily move in the same direction, nor have the same magnitude, as changes in the prices of goods and services. Although not as critical to the banking industry as many other industries, inflationary factors may have some impact on our ability to grow, total assets, earnings and capital levels. While we plan to continue our disciplined approach to expense management, an inflationary environment may cause wage pressures and general increases in our cost of doing business, which may increase our non-interest expense.

Off-Balance Sheet Activities

In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As of June 30, 2022 and December 31, 2021, we had loan commitments totaling $1.2 billion and $992.5 million, respectively, and standby letters of credit that totaled $7.2 million and $7.3 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.

Item 4. CONTROLS AND PROCEDURES

Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of June 30, 2022. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.

During the most recently completed fiscal quarter, there were no changes made in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

Item 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 with the exception of the following:

With respect to the merger between the Company and Bancshares of Jackson Hole Inc., regulatory approval may not be received, may take longer than expected, or regulators may impose conditions that are not presently anticipated or that could have an adverse effect on the Company. In addition, the Company is expected to incur significant costs related to the mergers and integration of both Bancshares of Jackson Hole Inc. and Community Bancorporation.

Before the mergers may be completed, various approvals, consents and non-objections must be obtained from the Board of Governors of the Federal Reserve System, and the relevant state regulators. Full regulatory approval for the merger between the Company and Community Bancorporation was received on July 21, 2022. Approvals related to Bancshares of Jackson Hole Inc. could be delayed or not obtained at all, including due to any or all of the following: an adverse development in the party’s regulatory standing, or any other factors considered by regulators in granting such approval; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment, including as a result of changes in regulatory agency leadership. Despite the Company’s commitments to use their reasonable best efforts to resolve any objection that may be asserted by any governmental entity with respect to the merger agreement, under the terms of the merger agreement, the Company is not required to take any action or agree to any condition or restriction in connection with obtaining these approvals that would reasonably be expected to have a material adverse effect on the Company’s business.

Additionally, the Company is expected to incur substantial costs in connection with the mergers, including legal, financial advisory, accounting, consulting and other advisory fees, severance/employee benefit-related costs, and other regulatory fees and related costs. There are a large number of processes, policies, procedures, operations, technologies, and systems that may need to be integrated, including purchasing, accounting and finance, payroll, compliance, treasury management, banking center operations, vendor management, risk management, lines of business, pricing, and benefits. While the Company has assumed that a certain level of costs will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration costs. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. These integration costs may result in the Company taking charges against earnings following the completion of the mergers, the amount, and timing of which are uncertain at present.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


					Maximum
				Total number of	approximate dollar
				shares purchased	value of shares
				as part of publicly	that may yet be
	Total number	Average price		announced plans	purchased under the
Period	of shares purchased	paid per share		or programs	plans or programs ⁽²⁾
April 1 - April 30, 2022⁽¹⁾	19,933	$	37.05	—	$	38,618,179
May 1 - May 31, 2022⁽¹⁾	3,355		37.03	—		38,618,179
June 1 - June 30, 2022⁽¹⁾	1,049		41.10	—	$	38,618,179
Total	24,337		37.22	—


(1)		Represents shares purchased other than through publicly announced plans purchased pursuant to the Company’s stock incentive plans at the then current market value in satisfaction of stock option exercise prices, settlements of restricted stock and tax withholdings.
(2)		On February 24, 2021, the Company’s Board of Directors authorized a program to repurchase up to $75.0 million of the Company’s stock from time to time in either the open market or through privately negotiated transactions. The remaining authorization under the program as of June 30, 2022 was $38.6 million.

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Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

2.1		Agreement and Plan of Merger, dated as of March 31, 2022, by and among Bancshares of Jackson Hole Incorporated and National Bank Holdings Corporation (incorporated herein by reference to Exhibit 2.1 to our Form 8-K dated March 31, 2022 and filed on April 5, 2022)

2.2		Agreement and Plan of Merger, dated as of April 18, 2022, by and among Community Bancorporation, National Bank Holdings Corporation, the Significant Stockholders named therein and Park Roney (incorporated herein by reference to Exhibit 2.1 to our Form 8-K dated April 18, 2022 and filed on April 20, 2022)

3.1		Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)

3.2		Second Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, filed November 7, 2014)

10.1		Form of Voting and Support Agreement, dated as of March 31, 2022, by and among Bancshares of Jackson Hole Incorporated, National Bank Holdings Corporation and certain shareholders of Bancshares of Jackson Hole Incorporated (incorporated herein by reference to Exhibit 2.1 to our Form 8-K dated March 31, 2022 and filed on April 5, 2022)

10.2		Form of Voting and Support Agreement, dated as of April 18, 2022, by and among National Bank Holdings Corporation and certain shareholders of Community Bancorporation (incorporated herein by reference to Exhibit 10.1 to our Form 8-K dated April 18, 2022 and filed on April 20, 2022)

10.3		Form of Aircraft Time-Sharing Agreement (filed herewith)

31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation

101.DEF		XBRL Taxonomy Extension Definition

101.LAB		XBRL Taxonomy Extension Labels

101.PRE		XBRL Taxonomy Extension Presentation

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

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

National Bank Holdings Corporation



By	/s/ Aldis Birkans
	Aldis Birkans
	Chief Financial Officer
	(principal financial officer)

Date: August 2, 2022