Item 1. Business
ITEM 1. BUSINESS.
GENERAL
The Corporation is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s Common Stock is traded on the Nasdaq Global Select Market under the symbol FRME. The Corporation has one full-service bank charter, First Merchants Bank, which opened for business in Muncie, Indiana, in March 1893. The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank includes 116 banking locations in Indiana, Ohio, Michigan and Illinois. In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking.
Through the Bank, the Corporation offers a broad range of financial services, including accepting time, savings and demand deposits; making consumer, commercial, agri-business and real estate mortgage loans; providing personal and corporate trust services; offering full-service brokerage and private wealth management; and providing letters of credit, repurchase agreements and other corporate services.
All inter-company transactions are eliminated during the preparation of consolidated financial statements.
As of December 31, 2023, the Corporation had consolidated asse ts of $18.4 billion, consolidated deposits of $14.8 billion and stockholders’ equity of $2.2 billion.
HUMAN CAPITAL
As of December 31, 2023, the Corporation and its subsidiaries had 2,162 full-time equivalent employees. Our stated mission to be the most attentive, knowledgeable, and high performing bank requires a dedicated and talented team of colleagues to succeed. Our employees prepare, every day, to deliver a customer and colleague experience that grows the Corporation. We seek to attract, retain and develop a team of diverse, committed colleagues who are capable of delivering a whole-bank delivery approach. And, we promote a work culture of development, growth, internal promotion and career pathing as expressed in Our Team statement:
We are a collection of dynamic colleagues with diverse experiences and perspectives who share a passion for positively impacting lives. We are genuinely committed to attracting and engaging teammates of diverse backgrounds. We believe in the power of inclusion and belonging.
Best Places to Work / Employer of Choice : The Bank will continue to participate in the Best Places to Work surveys in the four states we operate. We constantly strive to be an employer of choice. Onboarding, training, talent assessment and development, career conversations, development planning and a culture of pride in high performance help us achieve employer of choice status. We have identified three core ways in which we will succeed - Authentic, Driven and Collaborative.
Employee Engagement : Our biennial Employee Engagement Survey is conducted by a third-party vendor for confidentiality and anonymity and for increased candid feedback. Results show consistently strong employee engagement with 70 percent of our employees considered to be “highly engaged.” Our response rates are high (83 percent) with the survey results providing valuable feedback that helps managers promote work satisfaction and high contribution. We offer specific and concerted effort in supporting our managers who score under 70 percent engagement.
Education Assistance : First Merchants offers an education assistance program that supports full- and part-time colleagues as they seek degree programs that will help them advance their careers. In 2023, over 60 employees participated in this program.
Corporate Training : Leveraging a blend of custom designed / internally built training programs and external development resources, First Merchants employees are trained and prepared to perform confidently. Role-based training focuses on topics such as privacy, fair banking and many other industry specific topics and regulations. Our training completion rates are very high related to required development (99 percent completion for required courses) and our Learning Management System (LMS) archives all development in the Corporation.
Employee Resource Groups and Diversity, Equity and Inclusion : We believe in attracting, retaining, and promoting a diverse workforce. Diversity, Equity and Inclusion (“DEI”) initiatives are aimed at promoting the career growth and engagement of all First Merchants employees. We continue that work through our highest profile employee resource groups (“ERGs”), First Women Connections and People of Color ERGs, by promoting the development and career growth of those employees. In 2022, we launched two additional ERGs - Pride and Emerging Professionals. In 2023, we added a Veterans ERG and announced the creation of an InterFaith ERG. Additionally, we have created an Employee Community Call, which hosts monthly Zoom/TEAMS calls that are attended by over 150 employees. Our DEI Steering Committee provides guidance on all efforts.
Talent Assessment, Succession Planning and Career Path : Over 1,400 of our employees participated in our annual Calibration Process (9 Box Talent Assessment) with the goal of identifying specific development action plans to help retain employees with high potential and performance, increase job satisfaction and improve productivity. Talent calibration supports succession and career planning for the Corporation. Development plans are captured in a documented Career Growth Plan for all employees.
5
PART I: ITEM 1. BUSINESS
AVAILABLE INFORMATION
The Corporation makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available on its website at https://www.firstmerchants.com without charge, as soon as reasonably practicable, after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Corporation. Those filings are accessible on the SEC’s website at http://www.sec.gov.
ACQUISITION AND DIVESTITURE POLICY
The Corporation anticipates that it will continue its policy of geographic expansion of its banking business through the acquisition of banks whose operations are consistent with its banking philosophy. Management routinely explores opportunities to acquire financial institutions and other financial services-related businesses and to enter into strategic alliances to expand the scope of the Corporation’s services and customer base. Future acquisitions and divestitures will be driven by a disciplined financial evaluation process and will be consistent with the Corporation’s strategy of community banking, client relationships and consistent quality earnings. As with previous acquisitions, the consideration paid in future acquisitions may be in the form of cash or First Merchants common stock, or a combination thereof. The amount and structure of such consideration is based on reasonable growth, synergies and economies of scale and a thorough analysis of the impact on both long- and short-term financial results. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per share may occur in connection with any future transaction. The Corporation’s ability to engage in certain merger or acquisition transactions, whether or not any regulatory approval is required, will be dependent upon the Corporation’s bank regulators’ views at the time as to the capital levels, quality of management and the Corporation’s overall condition, and their assessment of a variety of other factors. Certain merger or acquisition transactions, including those involving the acquisition of a depository institution or the assumption of the deposits of any depository institution, require formal approval from various bank regulatory authorities, which will be subject to a variety of factors and considerations.
On April 1, 2022, the Corporation acquired 100 percent of Level One Bancorp, Inc. (“Level One”). Level One was headquartered in Farmington Hills, Michigan and had 17 banking centers serving the Michigan market. Pursuant to the merger agreement, each common shareholder of Level One received, for each outstanding share of Level One common stock held, (a) a 0.7167 share of the Corporation’s common stock, and (b) a cash payment of $10.17. The Corporation issued 5.6 million shares of common stock and paid $79.3 million in cash in exchange for all outstanding shares of Level One common stock. Additionally, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $2,500 per share, in exchange for the outstanding Level One Series B preferred stock. As part of the preferred stock exchange, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One Series B preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock (Nasdaq: FRMEP). Details of the Level One acquisition can be found in NOTE 2. ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
COMPETITION
The Bank is located in Indiana, Ohio, Michigan and Illinois counties where other financial services companies provide similar banking services. The Bank faces substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have more financial resources. Such competitors primarily include national, regional and internet banks within the various markets in which the Bank operates, though the Bank also competes with smaller community banks that seek to offer similar service levels. The Bank also faces competition from many other types of institutions, including, without limitation savings and loans associations, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries.
The financial services industry continues to become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can operate as affiliates under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to enter and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our nonbank competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer broader range of products and services as well as better pricing for those products and services than we can. Finally, the Bank’s competitors may choose to offer lower loan interest rates and pay higher deposit rates.
The Bank believes that the most important criteria to their targeted clients when selecting a bank is the customer’s desire to receive exceptional and personal customer service while being able to enjoy convenient access to a broad array of financial products. Additionally, when presented with a choice, the Bank believes that many of their targeted clients prefer to deal with an institution that favors local decision making as opposed to where many important decisions regarding a client’s financial affairs are made outside the local community.
6
PART I: ITEM 1. BUSINESS
REGULATION AND SUPERVISION OF FIRST MERCHANTS CORPORATION AND SUBSIDIARIES
The Corporation and its subsidiaries are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Significant elements of the laws and regulations applicable to the Corporation and its subsidiaries are described below. The description is qualified in its entirety by reference to the full text of the statues, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Corporation and its subsidiaries could have a material effect on the Corporation’s business, financial condition or results of operations.
Bank Holding Company Regulation
The Corporation is registered as a bank holding company and has elected to be a financial holding company. It is subject to the supervision of, and regulation by the Board of Governors of the Federal Reserve under the BHC Act, as amended. Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to the Bank. Thus, it is the policy of the Federal Reserve that a bank holding company should stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. Additionally, under the FDICIA, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become “undercapitalized” (as defined in the FDICIA section of this Form 10-K) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency. Under the BHC Act, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the determination that such activity constitutes a serious risk to the financial stability of any bank subsidiary.
The BHC Act requires the Corporation to obtain the prior approval of the Federal Reserve before:
• acquiring direct or indirect control or ownership of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company will directly or indirectly own or control more than 5 percent of the voting shares of the bank or bank holding company;
• merging or consolidating with another bank holding company; or
• acquiring substantially all of the assets of any bank.
The BHC Act generally prohibits bank holding companies that have not become financial holding companies from (i) engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries, and (ii) acquiring or retaining direct or indirect control of any company engaged in the activities other than those activities determined by the Federal Reserve to be closely related to banking or managing or controlling banks.
Capital Adequacy Guidelines for Bank Holding Companies (Basel III)
The Corporation and the Bank are subject to certain risk-based capital and leverage ratio requirements under the Basel III capital rules adopted by United States banking regulators. These rules implement the Basel III international regulatory capital standards in the United States, as well as certain provisions of the Dodd-Frank Act.
The Basel III rules require the Corporation and the Bank to maintain minimum ratios of common equity tier 1 capital (“CET1”), tier 1 capital, and total capital to total risk-weighted assets, and of tier 1 capital to average total assets, all of which are calculated as defined in the regulations. Basel III specifies that CET1 consists primarily of common stock instruments (that meet the Basel III eligibility criteria), retained earnings, and CET1 minority interest. Basel III also defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1, and not to the other components of capital. Tier 1 capital consists of CET1 and additional tier 1 capital instruments meeting the specified requirements of Basel III.
Under Basel III, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a capital conservation buffer of 2.50 percent above the adequately capitalized CET1, tier 1 and total capital to risk-weighted assets ratios.
Specifically, Basel III requires the Corporation and the Bank to maintain:
• a minimum ratio of CET1 to risk-weighted assets of a least 4.5 percent, plus the 2.5 percent capital conservation buffer effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0 percent;
• a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0 percent, plus the 2.5 percent capital conservation buffer effectively resulting in a minimum tier 1 capital ratio of 8.5 percent;
• a minimum ratio of total capital (tier 1 plus tier 2 capital) to risk-weighted assets of at least 8.0 percent, plus the 2.5 percent capital conservation buffer effectively resulting in a minimum total capital ratio of 10.5 percent; and
• a minimum leverage ratio of 4.0 percent, calculated as the ratio of tier 1 capital to adjusted average consolidated assets.
Basel III also provides for a “countercyclical capital buffer” that is applicable to only certain covered institutions and is not expected to have any current applicability to the Corporation or the Bank.
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with risk-weighted capital ratios above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.
7
PART I: ITEM 1. BUSINESS
Basel III provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1. Under Basel III, the Corporation and the Bank made a one-time election to filter out certain AOCI components.
Basel III permits banks with less than $15 billion in assets to continue to treat trust preferred securities as tier 1 capital. This treatment is permanently grandfathered as tier 1 capital even if the Corporation should ever exceed $15 billion in assets due to organic growth but not following certain mergers or acquisitions. As a result, while the Corporation’s total assets exceeded $15 billion as of December 31, 2021, the Corporation had continued to treat its trust preferred securities as tier 1 capital as of such date. However, under certain amendments to the “transition rules” of Basel III, if a bank holding company that held less than $15 billion of assets as of December 31, 2009 (which would include the Corporation) acquires a bank holding company with under $15 billion in assets at the time of acquisition (which would include Level One), and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization’s call report for the period in which the transaction occurred, the resulting organization must begin reflecting its trust preferred securities as tier 2 capital at such time. As a result, effective with the April 1, 2022 consummation of the Level One merger, the Corporation began reflecting all of its trust preferred securities as tier 2 capital.
Basel III permits banks with less than $250 billion in assets to choose to continue excluding unrealized gains and losses on certain securities holdings for purposes of calculating regulatory capital. The rules limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of CET1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.
Historically, the regulation and monitoring of a bank and bank holding company’s liquidity has been addressed as a supervisory matter, without minimum required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, is now required by regulation. One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25 percent of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (NSFR), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are expected to incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. However, the federal banking agencies have not proposed rules implementing the Basel III liquidity framework and have not determined to what extent they will apply to U.S. banks that are not large, internationally active banks.
The following are the Corporation’s regulatory capital ratios as of December 31, 2023:
Corporation Basel III Minimum Capital Required (1)
Total risk-based capital to risk-weighted assets 13.67 % 10.50 %
Tier 1 capital to risk-weighted assets 11.52 % 8.50 %
Common equity tier 1 capital to risk-weighted assets 11.35 % 7.00 %
Tier 1 capital to average assets 9.64 % 4.00 %
(1) The Basel III Minimum Capital Required are inclusive of the 2.5 percent capital conservation buffer where applicable.
Impact of CECL Implementation on Regulatory Capital
As discussed in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, the FASB issued the “current expected credit losses” (“CECL”) accounting standard in 2016 to address concerns relating to the ability to record credit losses that are expected, but do not yet meet the “probable” threshold by replacing the current “incurred loss” model for recognizing credit losses with an “expected life of loan loss” model referred to as the CECL model. While the original implementation date of the CECL model was January 1, 2020, the CARES Act and a related joint statement of federal banking regulators provided financial institutions with optional temporary relief from having to comply with implementation of the CECL standard. This temporary relief was set to expire on December 31, 2020. However, the 2021 Consolidated Appropriations Act (the “2021 CAA”), which was signed into law on December 27, 2020, amended the CARES Act by extending the temporary relief from CECL compliance to, effectively, January 1, 2022. The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the 2021 CAA, the Corporation elected to adopt CECL on January 1, 2021. As a result, the Corporation has utilized the CECL standard for 2023, 2022, and 2021.
As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced. Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available. While the 2021 CAA provided for a further extension of the mandatory adoption of CECL until January 1, 2022, the federal banking regulators elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects. Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the CARES Act. As a result, because implementation of the CECL standard was delayed by the Corporation until January 1, 2021, it began phasing in the cumulative effect of the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition period that began on January 1, 2021. Under that phase-in schedule, the cumulative effect of the adoption will be fully reflected in regulatory capital on January 1, 2024.
8
PART I: ITEM 1. BUSINESS
Bank Regulation
The Bank is subject to the primary regulatory oversight, supervision and examination of the FDIC and the Indiana DFI. These agencies have the authority to issue cease-and-desist orders if they determine that activities of the Bank regularly represent an unsafe and unsound banking practice or a violation of law. Federal law extensively regulates various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things, to make deposited funds available within specified time periods.
The Consumer Financial Protection Bureau (“CFPB”), an independent federal agency created under the Dodd-Frank Act, was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, primarily with authority over banks and their affiliates with assets of more than $10 billion. As the quarter ended December 31, 2019 was the fourth consecutive quarter that the Bank reported assets exceeding $10 billion, effective as of the beginning of the second quarter of 2020, the Bank and its affiliates became subject to CFPB supervisory and enforcement authority. See “- Dodd-Frank Wall Street Reform and Consumer Protection Act” and “- Consumer Financial Protection” below for additional information.
Bank Capital Requirements
Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies including, in the case of both the Bank and the Corporation, the Basel III requirements discussed above under “- Capital Adequacy Guidelines for Bank Holding Companies (Basel III)” and, in the case of the Bank, the “prompt corrective action” requirements discussed below under “- FDIC Improvement Act of 1991 (FDICIA).” Under the regulations, a capital category is assigned to the regulated entity, which is largely determined by four ratios that are calculated according to the applicable regulations: total risk-based capital, tier 1 risk-based capital, common equity tier 1 capital, and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity’s activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from “well capitalized” to “critically undercapitalized”. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank’s operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, tier 1 capital and common equity tier 1 capital, in each case, to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the regulations. Banks with lower capital levels are deemed to be “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized”, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is in an unsafe or unsound practice. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.
FDIC Improvement Act of 1991 (FDICIA)
The FDICIA requires, among other things, federal bank regulatory authorities to take “prompt corrective action” with respect to banks, which do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC has adopted regulations to implement the prompt corrective action provisions of FDICIA.
The “prompt corrective action” regulations require the following for “well capitalized” status:
• a minimum CET1 risk-based capital ratio of a least 6.5 percent;
• a minimum tier 1 risk-based capital ratio of at least 8.0 percent;
• a minimum total risk-based capital ratio of at least 10.0 percent; and
• a minimum leverage ratio of 5.0 percent.
The FDICIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. A bank’s compliance with such plan is required to be guaranteed by the bank’s parent holding company. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. “Significantly undercapitalized” banks are subject to various requirements and restrictions, including an order by the FDIC to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets and cease receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. “Critically undercapitalized” institutions may not, beginning 60 days after becoming “critically undercapitalized,” make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any transaction outside the ordinary course of business. In addition, “critically undercapitalized” institutions are subject to appointment of a receiver or conservator.
9
PART I: ITEM 1. BUSINESS
As of December 31, 2023, the Bank was “well capitalized” based on the “prompt corrective action” ratios described above. It should be noted that a bank’s capital category is determined solely for the purpose of applying the FDIC’s “prompt corrective action” regulations and that the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance changes. Although most of the required regulations of the Dodd-Frank Act have been promulgated and implemented (or are being implemented over time), there are additional regulations yet to be finalized by the authorized federal agencies. The changes resulting from the Dodd-Frank Act have impacted the profitability of the Corporation’s business activities, required changes to certain business practices, and imposed more stringent capital, liquidity and leverage requirements, and, when fully implemented, may further adversely affect our business. Among other things, the Dodd-Frank Act has resulted, and in the future will likely result, in:
• increases to the cost of the Corporation’s operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, including higher deposit insurance premiums;
• limitations on the Corporation’s ability to raise additional capital through the use of trust preferred securities, as new issuances of these securities can no longer be included as tier 1 capital;
• reduced flexibility for the Corporation to generate or originate certain revenue-producing assets based on increased regulatory capital standards;
• limitations on the Corporation’s ability to expand consumer product and service offerings due to stricter consumer protection laws and regulations; and
• as the Corporation’s assets now exceed $10 billion, compliance with the Durbin Amendment has resulted in a material reduction of interchange fee income paid by merchants when debit cards are used as payment.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”), which was enacted in May 2018, repealed or modified several provisions of the Dodd-Frank Act. In particular, the asset threshold at which banks are subject to annual company-run stress tests were increased from $10 billion to $250 billion under the Economic Growth Act. As a result, the Corporation and the Bank are not subject to the Dodd-Frank Act stress testing requirements.
The Corporation’s management continues to take the steps necessary to minimize the adverse impact of the Dodd-Frank Act on its business, financial condition and results of operation.
Durbin Amendment
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
Interchange fees, or “swipe” fees, are charges that merchants pay the Bank and other card-issuing banks for processing electronic payment transactions. Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. An upward adjustment of no more than 1 cent to the issuer’s debit card interchange fee is allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
Volcker Rule
The Volcker Rule, which was adopted under the Dodd-Frank Act, places certain limitations on the trading activity of insured depository institutions and their affiliates subject to certain exceptions. The restricted trading activity includes purchasing or selling certain types of securities or instruments in order to benefit from short-term price movements or to realize short-term profits. Exceptions to the Volcker Rule include trading in certain U.S. Government or other municipal securities and trading conducted (i) in certain capacities as a broker or other agent, or as a fiduciary on behalf of customers, (ii) to satisfy a debt previously contracted, (iii) pursuant to repurchase and securities lending agreements, and (iv) in risk-mitigating hedging activities. The Volcker Rule also prohibits banking institutions from having an ownership interest in a hedge fund or private equity fund.
A banking entity that engages in proprietary trading (which excludes the exceptions discussed above) or covered fund-related activities or investments, and has total consolidated assets of more than $10 billion for two years, must implement and maintain a compliance program that meets certain minimum requirements and must also maintain certain documentation with respect to covered fund activities, in each case, as described in the Volcker Rule. While the Corporation’s total consolidated assets first exceeded $10 billion during the quarter ended March 31, 2019, the Volcker Rule has not had, and is not expected to have, a material impact on the Corporation or the Bank.
10
PART I: ITEM 1. BUSINESS
Deposit Insurance
The Bank’s deposit accounts are currently insured by the Deposit Insurance Fund of the FDIC. The insurance benefit generally covers up to a maximum of $250,000 per separately insured depositor. As an FDIC-insured bank, the Bank is subject to deposit insurance premiums and assessments to maintain the Deposit Insurance Fund. The Bank’s deposit insurance premium assessment rate depends on the asset and supervisory categories to which it is assigned. The FDIC has authority to raise or lower assessment rates on insured banks in order to achieve statutorily required reserve ratios in the Deposit Insurance Fund and to impose special additional assessments. Additionally, the Bank’s Indiana public funds (state of Indiana and its political subdivisions) are insured by the the Public Deposit Insurance Fund (“PDIF”). The PDIF provides insurance to those Indiana public funds deposited in approved financial institutions which exceed the limits of coverage provided by any federal deposit insurance.
Deposit insurance assessments are based on average consolidated total assets minus average tangible equity. Under the FDIC’s risk-based assessment system, insured institutions with a least $10 billion in assets, such as the Bank, are assessed on the basis of a scoring system that combine the institution’s regulatory ratings and certain financial measures. The scoring system assesses risk measures to produce two scores, a performance score and a loss severity score, that will be combined and converted to an initial assessment rate.
The performance score measures an institution’s financial performance and its ability to withstand stress. The loss severity score quantifies the relative magnitude of potential losses to the FDIC in the event of an institution’s failure. Once the performance and loss severity scores are calculated, those scores are converted to a total score. An institution with a total score of 30 or less will pay the minimum base assessment rate, and an institution with a total score of 90 or more will pay the maximum initial base assessment rate. For total scores between 30 and 90, initial base assessment rates will rise at an increasing rate as the total score increases.
The FDIC may also terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Dividend Limitations
The Corporation’s principal source of funds for dividend payments to shareholders is dividends received from the Bank. Banking regulations limit the maximum amount of dividends that a bank may pay without requesting prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the bank’s retained income (as defined under the regulations) for the current year plus those for the previous two years, subject to the capital requirements described above. As of December 31, 2023, the amount available for dividends from the Corporation’s subsidiaries (both banking and non-banking), without prior regulatory approval or notice, was $305.9 million.
Brokered Deposits
Under FDIC regulations, no FDIC-insured depository institution can accept brokered deposits unless it (i) is well capitalized, or (ii) is adequately capitalized and received a waiver from the FDIC. In addition, these regulations prohibit any depository institution that is not well capitalized from (a) paying an interest rate on deposits in excess of 75 basis points over certain prevailing market rates or (b) offering “pass through” deposit insurance on certain employee benefit plan accounts unless it provides certain notice to affected depositors. The Corporation and the Bank were well capitalized as of December 31, 2023.
Consumer Financial Protection
The Bank is subject to a number of federal and state consumer protection laws that govern its relationship with customers. These laws include, but are not limited to:
• the Equal Credit Opportunity Act (prohibiting discrimination on the basis of race, religion or other prohibited factors in the extension of credit);
• the Fair Credit Reporting Act (governing the provision of consumer information to credit reporting agencies and the use of consumer information);
• the Truth-In-Lending Act (governing disclosures of credit terms to consumer borrowers);
• the Truth-in-Savings Act (which requires disclosure of deposit terms to consumers);
• the Electronic Funds Transfer Act (governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services);
• the Fair Debt Collection Act (governing the manner in which consumer debts may be collected by collection agencies);
• the Right to Financial Privacy Act (which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records);
• the Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home mortgage and refinanced loans; and
• the respective state-law counterparts to the above laws, as applicable, as well as state usury laws and laws regarding unfair and deceptive acts and practices.
11
PART I: ITEM 1. BUSINESS
Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also result in the Corporation’s failure to obtain any required bank regulatory approval for merger or acquisition transactions that it may wish to pursue or prohibition from engaging in such transactions even if approval is not required. The CFPB, an independent federal agency created under the Dodd-Frank Act, was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, primarily with authority over banks and their affiliates with assets of more than $10 billion. As stated previously, with its assets having exceeded $10 billion for four consecutive quarters, the Bank and its affiliates became subject to CFPB supervisory and enforcement authority effective as of the beginning of the second quarter of 2020.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the Equal Credit Opportunity Act and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (the “CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing investment in and credit to low- and moderate-income individuals and small businesses in those communities. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The applicable federal regulators regularly conduct CRA examinations to assess the performance of financial institutions and assign one of four ratings to the institution’s records of meeting the credit needs of its community. These ratings are outstanding, satisfactory, needs to improve or substantial noncompliance. During its last examination, a rating of satisfactory was received by the Bank.
Financial Privacy
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal banking agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.
The Bank Secrecy Act (the “BSA”) requires financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, and mandates that every bank has a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA. In addition, banks are required to adopt a customer identification program as part of their BSA compliance program, and are required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA. The Bank is also required to (1) identify and verify, subject to certain exceptions, the identity of the beneficial owners of all legal entity customers at the time a new account is opened, and (2) include, in its anti-money laundering program, risk-based procedures for conducting ongoing customer due diligence, which are to include procedures that: (a) assist in understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (b) require ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.
Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
12
PART I: ITEM 1. BUSINESS
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others which are administered by the U.S. Treasury Department Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Additional Matters
The Corporation and the Bank are subject to the Federal Reserve Act, which restricts financial transactions between banks and affiliated companies. The statute limits credit transactions between banks, affiliated companies and its executive officers and its affiliates. The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices. It also restricts the types of collateral security permitted in connection with the bank’s extension of credit to an affiliate. Additionally, all transactions with an affiliate must be on terms substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated parties.
The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign, and by the monetary and fiscal policies of the United States Government and its various agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States Government obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against financial institution deposits, and restricting certain borrowings by financial institutions and their subsidiaries. The monetary policies of the Federal Reserve have had a significant effect on the operating results of the Bank in the past and are expected to continue to do so in the future.
Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry, the Corporation or the Bank would be affected.
13
PART I: ITEM 1. BUSINESS
STATISTICAL DATA
The following tables set forth statistical data on the Corporation and its subsidiaries.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
The daily average balance sheet amounts, the related interest income or interest expense, and average rates earned or paid are presented in the following table:
Average Balance Interest
Income /
Expense Average
Rate Average Balance Interest
Income /
Expense Average
Rate Average Balance Interest
Income /
Expense Average
Rate
(Dollars in Thousands) 2023 2022 2021
Assets:
Interest-bearing deposits $ 431,581 $ 17,719 4.11 % $ 296,863 $ 2,503 0.84 % $ 521,637 $ 634 0.12 %
Federal Home Loan Bank stock 41,319 3,052 7.39 35,580 1,176 3.31 28,736 597 2.08
Investment securities: (1)
Taxable 1,854,438 35,207 1.90 2,056,586 38,354 1.86 1,751,910 29,951 1.71
Tax-exempt (2)
2,366,475 73,566 3.11 2,653,611 85,292 3.21 2,106,180 70,039 3.33
Total Investment Securities 4,220,913 108,773 2.58 4,710,197 123,646 2.63 3,858,090 99,990 2.59
Loans held for sale 21,766 1,292 5.94 14,715 692 4.70 19,190 747 3.89
Loans: (3)
Commercial (6)
8,519,706 603,611 7.08 7,877,271 380,621 4.83 6,818,968 276,368 4.05
Real estate mortgage 2,035,488 82,183 4.04 1,471,802 51,853 3.52 916,314 34,783 3.80
Installment 830,006 60,751 7.32 785,520 37,302 4.75 683,925 26,111 3.82
Tax-exempt (2)
891,008 40,448 4.54 793,743 31,803 4.01 732,253 27,987 3.82
Total Loans 12,297,974 788,285 6.41 10,943,051 502,271 4.59 9,170,650 365,996 3.99
Total Earning Assets 16,991,787 917,829 5.40 % 15,985,691 629,596 3.94 % 13,579,113 467,217 3.44 %
Total Non-earning Assets 1,194,720 1,234,311 1,251,284
Total Assets $ 18,186,507 $ 17,220,002 $ 14,830,397
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits $ 5,435,733 $ 138,012 2.54 % $ 5,206,131 $ 32,511 0.62 % $ 4,769,482 $ 14,512 0.30 %
Money market deposits 2,884,271 83,777 2.90 2,915,397 19,170 0.66 2,351,803 3,203 0.14
Savings deposits 1,694,230 14,606 0.86 1,927,122 5,019 0.26 1,754,972 1,886 0.11
Certificates and other time deposits 1,923,268 69,697 3.62 881,176 6,239 0.71 783,733 3,718 0.47
Total Interest-bearing Deposits 11,937,502 306,092 2.56 10,929,826 62,939 0.58 9,659,990 23,319 0.24
Borrowings 1,111,472 42,394 3.81 888,392 21,864 2.46 639,791 12,633 1.97
Total Interest-bearing Liabilities 13,048,974 348,486 2.67 11,818,218 84,803 0.72 10,299,781 35,952 0.35
Noninterest-bearing deposits 2,783,996 3,268,417 2,516,241
Other liabilities 226,275 160,922 147,743
Total Liabilities 16,059,245 15,247,557 12,963,765
Stockholders' Equity 2,127,262 1,972,445 1,866,632
Total Liabilities and Stockholders' Equity $ 18,186,507 348,486 $ 17,220,002 84,803 $ 14,830,397 35,952
Net Interest Income (FTE) $ 569,343 $ 544,793 $ 431,265
Net Interest Spread (FTE) (4)
2.73 % 3.22 % 3.09 %
Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets 5.40 % 3.94 % 3.44 %
Interest Expense / Average Earning Assets 2.05 % 0.53 % 0.26 %
Net Interest Margin (FTE) (5)
3.35 % 3.41 % 3.18 %
______________________________
(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments. Annualized amounts are computed using a 30/360 day basis.
(2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2023, 2022 and 2021. These totals equal $23.9 million, $24.6 million and $20.6 million for the years ended December 31, 2023, 2022, and 2021, respectively.
(3) Non accruing loans have been included in the average balances.
(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average interest-bearing liabilities.
(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets.
(6) Commercial loans included $2.7 million, $4.7 million and $106.6 million of PPP loans at December 31, 2023, 2022 and 2021, respectively.
14
PART I: ITEM 1. BUSINESS
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income components on a tax-equivalent basis and reflects changes between periods attributable to movement in either the average balance or average interest rate for both earning assets and interest-bearing liabilities. The volume differences were computed as the difference in volume between the current and prior year multiplied by the interest rate from the prior year. The interest rate changes were computed as the difference in rate between the current and prior year multiplied by the volume from the prior year. Volume and rate variances have been allocated on the basis of the absolute relationship between volume variances and rate variances.
2023 Compared to 2022
Increase (Decrease) Due To 2022 Compared to 2021
Increase (Decrease) Due To 2021 Compared to 2020
Increase (Decrease) Due To
(Dollars in Thousands, Fully Taxable Equivalent Basis) Volume Rate Total Volume Rate Total Volume Rate Total
Interest Income:
Interest-bearing deposits $ 1,597 $ 13,619 $ 15,216 $ (383) $ 2,252 $ 1,869 $ 412 $ (716) $ (304)
Federal Home Loan Bank stock 217 1,659 1,876 166 413 579 — (445) (445)
Investment securities (12,644) (2,229) (14,873) 22,353 1,303 23,656 29,977 (8,023) 21,954
Loans held for sale 388 212 600 (193) 138 (55) 26 (60) (34)
Loans 67,684 217,730 285,414 76,919 59,411 136,330 4,223 (23,651) (19,428)
Totals 57,242 230,991 288,233 98,862 63,517 162,379 34,638 (32,895) 1,743
Interest Expense:
Interest-bearing deposit accounts 1,496 104,005 105,501 1,440 16,559 17,999 3,344 (9,071) (5,727)
Money market deposit accounts (207) 64,814 64,607 941 15,026 15,967 1,997 (6,604) (4,607)
Savings deposits (676) 10,263 9,587 202 2,931 3,133 465 (2,220) (1,755)
Certificates and other time deposits 14,157 49,301 63,458 508 2,013 2,521 (6,211) (10,121) (16,332)
Borrowings 6,437 14,093 20,530 5,649 3,582 9,231 (2,521) 513 (2,008)
Totals 21,207 242,476 263,683 8,740 40,111 48,851 (2,926) (27,503) (30,429)
Change in net interest income (fully taxable equivalent basis) $ 36,035 $ (11,485) 24,550 $ 90,122 $ 23,406 113,528 $ 37,564 $ (5,392) 32,172
Tax equivalent adjustment using marginal rate of 21% for 2023, 2022 and 2021 647 (4,005) (3,619)
Change in net interest income $ 25,197 $ 109,523 $ 28,553
INVESTMENT SECURITIES
In determining the fair value of the investment securities portfolio, the Corporation utilizes a third party for portfolio accounting services, including market value input, for those securities classified as Level 1 and Level 2 in the fair value hierarchy. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor classified these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis; and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time. Fair value of securities classified as Level 3 in the valuation hierarchy were determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.
The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale at the dates indicated.
Amortized
Cost Gross Unrealized
Gains Gross Unrealized
Losses Fair
Value
Available for sale at December 31, 2023
U.S. Government-sponsored agency securities $ 111,521 $ — $ 16,214 $ 95,307
State and municipal 1,181,029 364 116,222 1,065,171
U.S. Government-sponsored mortgage-backed securities 541,343 462 86,990 454,815
Corporate obligations 12,947 — 1,128 11,819
Total available for sale $ 1,846,840 $ 826 $ 220,554 $ 1,627,112
Amortized
Cost Gross Unrealized
Gains Gross Unrealized
Losses Fair
Value
Available for sale at December 31, 2022
U.S. Treasury $ 2,501 $ — $ 42 $ 2,459
U.S. Government-sponsored agency securities 119,154 — 17,192 101,962
State and municipal 1,530,048 438 178,726 1,351,760
U.S. Government-sponsored mortgage-backed securities 608,630 1 100,358 508,273
Corporate obligations 13,014 — 807 12,207
Total available for sale $ 2,273,347 $ 439 $ 297,125 $ 1,976,661
15
PART I: ITEM 1. BUSINESS
Amortized
Cost Gross Unrealized
Gains Gross Unrealized
Losses Fair
Value
Available for sale at December 31, 2021
US Treasury $ 1,000 $ — $ 1 $ 999
U.S. Government-sponsored agency securities 96,244 437 1,545 95,136
State and municipal 1,495,696 81,734 898 1,576,532
U.S. Government-sponsored mortgage-backed securities 671,684 7,109 11,188 667,605
Corporate obligations 4,031 256 8 4,279
Total available for sale $ 2,268,655 $ 89,536 $ 13,640 $ 2,344,551
The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity at the dates indicated.
Amortized
Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized
Gains Gross Unrealized
Losses Fair
Value
Held to maturity at December 31, 2023
U.S. Government-sponsored agency securities $ 374,002 $ — $ 374,002 $ — $ 64,159 $ 309,843
State and municipal 1,099,201 245 1,098,956 1,625 152,113 948,713
U.S. Government-sponsored mortgage-backed securities 709,794 — 709,794 — 99,448 610,346
Foreign investment 1,500 — 1,500 — 28 1,472
Total held to maturity $ 2,184,497 $ 245 $ 2,184,252 $ 1,625 $ 315,748 $ 1,870,374
Amortized
Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized
Gains Gross Unrealized
Losses Fair
Value
Held to maturity at December 31, 2022
U.S. Government-sponsored agency securities $ 392,246 $ — $ 392,246 $ — $ 69,147 $ 323,099
State and municipal 1,117,552 245 1,117,307 647 197,064 921,135
U.S. Government-sponsored mortgage-backed securities 776,074 — 776,074 — 113,915 662,159
Foreign investment 1,500 — 1,500 — 28 1,472
Total held to maturity $ 2,287,372 $ 245 $ 2,287,127 $ 647 $ 380,154 $ 1,907,865
Amortized
Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized
Gains Gross Unrealized
Losses Fair
Value
Held to maturity at December 31, 2021
U.S. Government-sponsored agency securities $ 371,457 $ — $ 371,457 $ 226 $ 7,268 $ 364,415
State and municipal 1,057,301 245 1,057,056 29,593 2,170 1,084,724
U.S. Government-sponsored mortgage-backed securities 749,789 — 749,789 7,957 5,881 751,865
Foreign investment 1,500 — 1,500 — 1 1,499
Total held to maturity $ 2,180,047 $ 245 $ 2,179,802 $ 37,776 $ 15,320 $ 2,202,503
In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income (loss). Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality.
16
PART I: ITEM 1. BUSINESS
The allowance for credit losses on investment securities held to maturity is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation’s portfolio have been insignificant. Furthermore, as of December 31, 2023, there were no past due principal and interest payments associated with these securities. At CECL adoption, an allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. The balance of the allowance for credit losses on investments securities remained unchanged at $245,000 as of December 31, 2023.
The cost and yield for Federal Home Loan Bank stock is included in the table below.
2023 2022 2021
(Dollars in Thousands) Cost Yield Cost Yield Cost Yield
Federal Home Loan Bank stock $ 41,769 7.3 % $ 38,525 3.1 % $ 28,736 2.1 %
Total $ 41,769 7.3 % $ 38,525 3.1 % $ 28,736 2.1 %
The Corporation’s Federal Home Loan Bank stock is primarily in the Federal Home Loan Bank of Indianapolis and it continued to produce sufficient financial results to pay dividends.
There were no issuers included in the investment security portfolio at December 31, 2023, 2022 or 2021 where the aggregate carrying value of any one issuer exceeded 10 percent of the Corporation’s stockholders’ equity at those dates. The term “issuer” excludes the U.S. Government and its sponsored agencies and corporations.
The maturity distribution and average yields for the securities portfolio at December 31, 2023 were:
Within 1 Year 1-5 Years 5-10 Years
(Dollars in Thousands) Amount Yield (1)
Amount Yield (1)
Amount Yield (1)
Securities available for sale December 31, 2023
U.S. Government-sponsored agency securities $ — — % $ 8,945 1.4 % $ — — %
State and municipal 1,382 2.6 % 9,568 2.4 % 113,456 3.1 %
Corporate obligations — — % 4,859 6.1 % 6,929 4.5 %
$ 1,382 2.6 % $ 23,372 2.8 % $ 120,385 3.2 %
Due After Ten Years U.S. Government-
Sponsored Mortgage - Backed
Securities
Total
Amount Yield (1)
Amount Yield (1)
Amount Yield (1)
U.S. Government-sponsored agency securities $ 86,362 2.3 % $ — — % $ 95,307 2.2 %
State and municipal 940,765 3.1 % — — % 1,065,171 3.0 %
U.S. Government-sponsored mortgage-backed securities — — % 454,815 2.5 % 454,815 2.5 %
Corporate obligations 31 — % — — % 11,819 5.2 %
$ 1,027,158 3.0 % $ 454,815 2.5 % $ 1,627,112 2.9 %
17
PART I: ITEM 1. BUSINESS
Within 1 Year 1-5 Years 5-10 Years
(Dollars in Thousands) Amount Yield (1)
Amount Yield (1)
Amount Yield (1)
Securities held to maturity at December 31, 2023
U.S. Government-sponsored agency securities $ — — % $ 70,586 1.3 % $ 29,807 1.3 %
State and municipal 3,041 4.0 % 46,506 4.1 % 105,998 3.5 %
Foreign investment — — % 1,500 3.5 % — — %
$ 3,041 4.0 % $ 118,592 2.5 % $ 135,805 3.0 %
Due After Ten Years U.S. Government-
Sponsored Mortgage - Backed
Securities
Total
Amount Yield (1)
Amount Yield (1)
Amount Yield (1)
U.S. Government-sponsored agency securities $ 273,609 1.6 % $ — — % $ 374,002 1.5 %
State and municipal 943,656 2.9 % — — % 1,099,201 3.1 %
U.S. Government-sponsored mortgage-backed securities — — % 709,794 2.6 % 709,794 2.6 %
Foreign investment — — % — — % 1,500 3.5 %
$ 1,217,265 2.6 % $ 709,794 2.6 % $ 2,184,497 2.6 %
_____________________________
(1) Interest yields are presented on a fully taxable equivalent basis using a 21 percent tax rate.
LOAN PORTFOLIO
Loans are generated from customers primarily in Indiana, Illinois, Ohio, and Michigan and are typically secured by specific items of collateral, including real property, consumer assets, and business assets. The following table shows the composition of the Corporation’s loan portfolio by collateral classification, including purchased credit deteriorated loans, for the years indicated:
2023 2022 2021 2020 2019
(Dollars in Thousands) Amount % Amount % Amount % Amount % Amount %
Loans at December 31:
Commercial and industrial loans (1)
$ 3,670,948 29.4 % $ 3,437,126 28.6 % $ 2,714,565 29.4 % $ 2,776,699 30.0 % $ 2,109,879 24.9 %
Agricultural land, production and other loans to farmers 263,414 2.1 241,793 2.0 246,442 2.7 281,884 3.0 334,172 4.0
Real estate loans:
Construction 957,545 7.7 835,582 6.9 523,066 5.7 484,723 5.2 787,568 9.3
Commercial real estate, non-owner occupied 2,400,839 19.2 2,407,475 20.1 2,135,459 23.1 2,220,949 24.0 1,902,692 22.4
Commercial real estate, owner occupied 1,162,083 9.3 1,246,528 10.4 986,720 10.7 958,501 10.4 909,695 10.8
Residential 2,288,921 18.4 2,096,655 17.5 1,159,127 12.5 1,234,741 13.4 1,143,217 13.5
Home equity 617,571 4.9 630,632 5.3 523,754 5.7 508,259 5.5 588,984 7.0
Individuals' loans for household and other personal expenditures 168,388 1.3 175,211 1.4 146,092 1.5 129,479 1.5 135,989 1.6
Public finance and other commercial loans 956,318 7.7 932,892 7.8 806,636 8.7 647,939 7.0 547,114 6.5
Loans 12,486,027 100.0 % 12,003,894 100.0 % 9,241,861 100.0 % 9,243,174 100.0 % 8,459,310 100.0 %
Allowance for loan/credit losses (204,934) (223,277) (195,397) (130,648) (80,284)
Net Loans $ 12,281,093 $ 11,780,617 $ 9,046,464 $ 9,112,526 $ 8,379,026
(1) Includes PPP loans of $2.7 million in 2023, $4.7 million in 2022, $106.6 million in 2021, and $667.1 million in 2020.
At December 31, 2023, 2022, 2021, 2020, and 2019, the remaining fair value discount on acquired loans was $23.2 million, $31.3 million, $10.9 million, $23.0 million, and $36.6 million, respectively.
18
PART I: ITEM 1. BUSINESS
LOAN MATURITIES
The following tables present the maturity distribution of our loan portfolio, excluding loans held for sale, by collateral classification at December 31, 2023 according to contractual maturities of (1) one year or less, (2) after one year but within five years and (3) after five years. The second table presents the same classifications including only fixed interest rate loans and the third table presents the same classifications including only the variable interest rate loans where the rates fluctuate over the life of the loans in accordance with changes in an interest rate index.
(Dollars in Thousands) Maturing
Within 1 Year Maturing
1-5 Years Maturing Over
5 Years Total
Commercial and industrial loans $ 737,370 $ 2,610,806 $ 322,772 $ 3,670,948
Agricultural land, production and other loans to farmers 95,932 36,461 131,021 263,414
Real estate loans:
Construction 337,109 421,644 198,792 957,545
Commercial real estate, non-owner occupied 373,792 998,239 1,028,808 2,400,839
Commercial real estate, owner occupied 96,053 588,195 477,835 1,162,083
Residential 19,443 135,919 2,133,559 2,288,921
Home Equity 21,306 37,400 558,865 617,571
Individuals' loans for household and other personal expenditures 23,953 91,318 53,117 168,388
Public finance and other commercial loans 5,297 47,133 903,888 956,318
Total $ 1,710,255 $ 4,967,115 $ 5,808,657 $ 12,486,027
(Dollars in Thousands) Maturing
Within 1 Year Maturing
1-5 Years Maturing Over
5 Years Total
Commercial and industrial loans $ 36,799 $ 433,358 $ 172,620 $ 642,777
Agricultural land, production and other loans to farmers 11,680 26,507 13,086 51,273
Real estate loans:
Construction 11,604 32,276 158,544 202,424
Commercial real estate, non-owner occupied 133,073 458,759 167,500 759,332
Commercial real estate, owner occupied 56,180 372,668 130,631 559,479
Residential 12,239 113,043 930,748 1,056,030
Home Equity 5,644 9,508 10,395 25,547
Individuals' loans for household and other personal expenditures 6,547 74,618 22,512 103,677
Public finance and other commercial loans 5,245 24,663 874,050 903,958
Total $ 279,011 $ 1,545,400 $ 2,480,086 $ 4,304,497
(Dollars in Thousands) Maturing
Within 1 Year Maturing
1-5 Years Maturing Over
5 Years Total
Commercial and industrial loans $ 700,571 $ 2,177,448 $ 150,152 $ 3,028,171
Agricultural land, production and other loans to farmers 84,252 9,954 117,935 212,141
Real estate loans:
Construction 325,505 389,368 40,248 755,121
Commercial real estate, non-owner occupied 240,719 539,480 861,308 1,641,507
Commercial real estate, owner occupied 39,873 215,527 347,204 602,604
Residential 7,204 22,876 1,202,811 1,232,891
Home Equity 15,662 27,892 548,470 592,024
Individuals' loans for household and other personal expenditures 17,406 16,700 30,605 64,711
Public finance and other commercial loans 52 22,470 29,838 52,360
Total $ 1,431,244 $ 3,421,715 $ 3,328,571 $ 8,181,530
NONPERFORMING ASSETS
The table below summarizes nonperforming assets for the years indicated:
December 31, December 31, December 31, December 31, December 31,
(Dollars in Thousands) 2023 2022 2021 2020 2019
Nonperforming assets:
Nonaccrual loans $ 53,580 $ 42,324 $ 43,062 $ 61,471 $ 15,949
Renegotiated loans (1)
— 224 329 3,240 841
Nonperforming loans (NPL) 53,580 42,548 43,391 64,711 16,790
OREO and Repossessions 4,831 6,431 558 940 7,527
Nonperforming assets (NPA) 58,411 48,979 43,949 65,651 24,317
Loans 90-days or more delinquent and still accruing 172 1,737 963 746 69
NPAs and loans 90-days or more delinquent $ 58,583 $ 50,716 $ 44,912 $ 66,397 $ 24,386
(1) As a result of the adoption of ASU 2022-02 on January 1, 2023, the renegotiated classification is no longer applicable.
19
PART I: ITEM 1. BUSINESS
Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in the prior year, if any, is charged to the allowance for credit losses. Payments subsequently received on non-accrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance.
At December 31, 2023, non-accrual loans totaled $53.6 million, an increase of $11.3 million from December 31, 2022. The primary increase was in the residential portfolio of $11.5 million. At December 31, 2023, 2022, 2021, 2020, and 2019, non-accrual loans include assets acquired of $5.2 million, $8.2 million, $3.2 million, $7.9 million, and $3.7 million, respectively.
Other real estate owned (“OREO”) at December 31, 2023 decreased $1.6 million from the December 31, 2022 balance of $6.4 million. At December 31, 2023, 2022 and 2021, OREO did not include any acquired assets. OREO did include assets that were acquired from MBT of $136,000 as of December 31, 2019.
For the year ended December 31, 2023, interest income of $3.2 million was recognized on the non-accruing and renegotiated loans listed in the table above, aligning with the amount of interest income that would have been recognized under their loan terms.
In addition to the nonperforming loans discussed above, management also identified loans totaling $515.2 million and $417.3 million as of December 31, 2023 and 2022, respectively, that were deemed to be risk graded criticized. A loan risk graded criticized is a loan in which there are concerns regarding the borrower’s ability to comply with the repayment terms and would include loans graded special mention or worse. Consumer loans are not risk graded. However, for purposes of disclosure, the consumer loans are classified as follows: loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard.
See additional information regarding loan credit quality in the “LOAN QUALITY” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K and in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
SUMMARY OF CREDIT LOSS EXPERIENCE
The following table summarizes the credit loss experience, by collateral segment, for the years indicated:
(Dollars in Thousands) 2023 2022 2021 2020 2019
Allowance for credit losses:
Balances, January 1 $ 223,277 $ 195,397 $ 130,648 $ 80,284 $ 80,552
Impact of adopting ASC 326 — — 74,055 — —
Balances, January 1, 2021 Post-ASC 326 adoption 223,277 195,397 204,703 80,284 80,552
Charge-offs:
Commercial (1)
(23,264) (1,215) (5,849) (8,536) (1,732)
Commercial real estate (2)
(116) (3,017) (4,533) (313) (3,675)
Construction — — (6) — —
Consumer — — — (643) (569)
Residential — — — (993) (645)
Consumer & Residential (4,659) (2,369) (1,496) — —
Total Charge-offs (28,039) (6,601) (11,884) (10,485) (6,621)
Recoveries:
Commercial (1)
995 872 724 819 1,244
Commercial real estate (2)
60 1,096 580 431 1,289
Construction — 863 1 — —
Consumer — — — 260 401
Residential — — — 666 619
Consumer & Residential 1,341 1,096 1,273 — —
Total Recoveries 2,396 3,927 2,578 2,176 3,553
Net Charge-offs (25,643) (2,674) (9,306) (8,309) (3,068)
Provisions for credit losses - loans 7,300 — — 58,673 2,800
CECL Day 1 non-PCD provision for credit losses — 13,955 — — —
CECL Day 1 PCD ACL — 16,599 — — —
Balance at December 31 $ 204,934 $ 223,277 $ 195,397 $ 130,648 $ 80,284
Ratio of net charge-offs during the period to average loans outstanding during the period 0.21 % 0.02 % 0.10 % 0.09 % 0.04 %
(1) Category includes commercial and industrial, agricultural land, production and other loans to farmers, and other commercial loans.
(2) Category includes commercial real estate, non-owner occupied and commercial real estate, owner occupied.
In calculating the allowance for credit losses, the loan portfolio was pooled into loan segments with similar credit risk characteristics. The Corporation pooled consumer and residential loans into one segment at adoption of CECL on January 1, 2021, but prior to adoption, consumer and residential loans were classified in separate segments. Additionally, prior to CECL adoption, construction loans were classified within the commercial real estate segment, but after CECL adoption, construction loans were classified as a separate segment. Details of the Allowance for Credit Losses and nonperforming loans are discussed within the “LOAN QUALITY” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.
20
PART I: ITEM 1. BUSINESS
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
Presented below is an analysis of the composition of the allowance for credit losses and percent of loans in each category to total loans, by collateral segment, as of the years indicated.
2023 2022 2021 2020 2019
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Balance at December 31:
Commercial $ 97,348 39.2 % $ 102,216 38.4 % $ 69,935 40.8 % $ 47,115 37.9 % $ 32,902 32.5 %
Commercial real estate 44,048 28.5 % 46,839 30.4 % 60,665 33.8 % 51,070 41.8 % 28,778 45.4 %
Construction 24,823 7.7 % 28,955 7.0 % 20,206 5.6 % — — % — — %
Consumer — — % — — % — — % 9,648 1.4 % 4,035 1.6 %
Residential — — % — — % — — % 22,815 18.9 % 14,569 20.5 %
Consumer & Residential 38,715 24.6 % 45,267 24.2 % 44,591 19.8 % — — % — — %
Totals $ 204,934 100.0 % $ 223,277 100.0 % $ 195,397 100.0 % $ 130,648 100.0 % $ 80,284 100.0 %
The allowance for credit losses decreased $18.3 million during the twelve months ended December 31, 2023. The allowance decreased primarily due to $25.6 million of net charge-offs during the twelve months ended December 31, 2023. The increase in net charge-offs was primarily related to two large commercial and industrial charge-offs of $13.7 million and $5.4 million in the third quarter of 2023. The larger charge-off involved fraudulent activity by the borrower and was idiosyncratic in nature and not indicative of a larger portfolio credit issue. There was $7.3 million in provision for credit losses during the twelve months ended December 31, 2023.
Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. At December 31, 2023, two concentrations of commercial loans within a single industry (as segregated by North American Industry Classification System “NAICS code”) were in excess of 10 percent of total loans. Lessors of Residential Buildings and Dwellings and Lessors of Nonresidential Buildings represented 12.23 percent and 10.39 percent of total loans, respectively.
CREDIT LOSS CHARGE-OFF PROCEDURES
The Corporation maintains an allowance to cover estimated credit losses in its loan portfolio. The allowance is increased by the provision for credit losses and decreased by charge-offs less recoveries. All charge-offs are approved by the senior loan officers or loan committees, depending on the amount of the charge-off and are reported to the Risk and Credit Policy Committee of the Board of Directors. Loans are charged off when a determination is made that all or a portion of a loan is uncollectible.
PROVISION FOR CREDIT LOSSES
Credit losses are a cost of doing business in the banking industry. Although management emphasizes the early detection and charge-off of loan losses, it is inevitable that certain losses, which have not been specifically identified, exist in the portfolio. Accordingly, the provision for credit losses is charged to earnings on an anticipatory basis and recognized credit losses, net of recoveries, are deducted from the established allowance. Over time, all net credit losses are charged to earnings. Based on management’s judgment as to the appropriate level of the allowance for credit losses, the amount provided in any period may be greater or less than net credit losses for the same period. In any period, the determination of the provision for credit losses is based on management’s continuing review and evaluation of the loan portfolio. The evaluation by management includes consideration of the current forecasted economic conditions, past loan loss experience, changes in the composition of the loan portfolio, reasonable and supportable economic forecasts as well as the current condition and amount of loans outstanding. See additional information in the “PROVISION EXPENSE AND ALLOWANCE FOR CREDIT LOSSES” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.
DEPOSITS
The average balances, interest expense and average rates on deposits for the years ended December 31, 2023, 2022 and 2021 are presented in the Part I. Item I. Business section titled “DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL” of this Annual Report on Form 10-K.
As of December 31, 2023, certificates of deposit and other time deposits exceeding the FDIC insurance limit of $250,000 mature as follows:
(Dollars in Thousands)
Maturing 3
Months or Less Maturing 3-6
Months Maturing 6-12
Months Maturing Over
12 Months Total
Uninsured certificates of deposit and other time deposits $ 105,835 $ 58,249 $ 175,946 $ 29,780 $ 369,810
Percent 29 % 16 % 47 % 8 % 100 %
21
PART I: ITEM 1. BUSINESS
SHORT-TERM BORROWINGS
Borrowings maturing in one year or less are included in the following table:
(Dollars in Thousands) 2023 2022 2021
Balance at December 31:
Federal funds purchased $ — $ 171,560 $ —
Securities sold under repurchase agreements (short-term portion) 157,280 167,413 181,577
Federal Home Loan Bank advances (short-term portion) 60,000 460,097 75,097
Subordinated debentures and other borrowings (short-term portion) $ 1,176 $ 1,182 $ —
Total short-term borrowings $ 218,456 $ 800,252 $ 256,674
Securities sold under repurchase agreements are categorized as borrowings maturing within one year and are secured by U.S. Government-Sponsored Enterprise obligations.
Pertinent information with respect to borrowings maturing in one year or less is summarized below:
(Dollars in Thousands) 2023 2022 2021
Weighted Average Interest Rate on Outstanding Balance at December 31:
Federal funds purchased — % 3.5 % 1.4 %
Securities sold under repurchase agreements (short-term portion) 2.3 % 1.3 % 0.2 %
Federal Home Loan Bank advances (short-term portion) 2.8 % 2.4 % 2.1 %
Subordinated debentures and other borrowings (short-term portion) 1.0 % 1.0 % — %
Total short-term borrowings 2.4 % 2.4 % 0.7 %
Weighted Average Interest Rate During the Year:
Federal funds purchased 5.2 % 3.0 % 0.8 %
Securities sold under repurchase agreements (short-term portion) 2.0 % 0.6 % 0.2 %
Federal Home Loan Bank advances (short-term portion) 3.4 % 2.5 % 2.0 %
Subordinated debentures and other borrowings (short-term portion) 0.8 % 0.7 % — %
Total short-term borrowings 2.9 % 1.8 % 0.7 %
Highest Amount Outstanding at Any Month End During the Year:
Federal funds purchased $ 188,329 $ 240,406 $ —
Securities sold under repurchase agreements (short-term portion) 242,194 218,882 199,104
Federal Home Loan Bank advances (short-term portion) 410,000 460,000 75,000
Subordinated debentures and other borrowings (short-term portion) $ 1,182 $ 1,230 $ —
Total short-term borrowings $ 841,705 $ 920,518 $ 274,104
Average Amount Outstanding During the year:
Federal funds purchased $ 27,115 $ 44,041 $ 617
Securities sold under repurchase agreements (short-term portion) 171,291 185,082 173,839
Federal Home Loan Bank advances (short-term portion) 208,251 265,822 64,356
Subordinated debentures and other borrowings (short-term portion) $ 1,178 $ 1,212 $ —
Total short-term borrowings $ 407,835 $ 496,157 $ 238,812