What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-03-01 · 162 added, 137 removed, 540 unchanged (36% of the section changed)

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For further information regarding this merger and acquisition transaction, see Note 18 (Business Combinations, Goodwill and Intangible Assets) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

As previously disclosed, during 2021, the Company executed an operating optimization plan, pursuant to which its banking subsidiary, German American Bank, consolidated seven branch offices and implemented various staff reductions.

In making its decision to consolidate these branches, which were generally integrated with other nearby bank branches, the Company considered, among other factors, the operating costs of the branches, certain physical limitations impacting the bank facilities, and their proximity to other branch locations.

In addition, the Company’s evaluation of the branch consolidations and the reductions in staff also took into consideration the numbers and types of transactions being conducted by its customers and the increased usage of online and mobile banking.

Also as part of the operating optimization plan, in September 2021, German American Bank sold its two branches located in Lexington, Kentucky to The Home Savings and Loan Company of Kenton, Ohio (“HSLC”).

HSLC assumed approximately $17.6 million in total deposits and purchased approximately $17.8 million in total loans as part of the sale.

Financial Overview

Net income for the year ended December 31, 2023 totaled $85,888,000, or $2.91 per share, an increase of $4,063,000, or approximately 5% on a per share basis, from the year ended December 31, 2022 net income of $81,825,000, or $2.78 per share.

The increase in net income during 2023, compared with 2022, was primarily attributable to increased non-interest income, a decline in non-interest expenses (which was driven by higher expenses in 2022 as a result of the January 1, 2022 acquisition of CUB), and a lower provision for credit losses.

The positive impact of those items was partially offset by a decline in net interest income resulting primarily from a reduced level of earning assets, which was somewhat mitigated by an improved net interest margin.

Net income for the year ended December 31, 2022 totaled $81,825,000, or $2.78 per share, a decline of $2,312,000, or approximately 12% on a per share basis, from the year ended December 31, 2021 net income of $84,137,000, or $3.17 per share.

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The decline in per share net income for the year ended December 31, 2022, as compared to 2021, was also impacted by the Company’s January 1, 2022 issuance of approximately 2.9 million shares of common stock as part of the merger consideration in the CUB transaction.

Net income for the year ended December 31, 2021 totaled $84,137,000, or $3.17 per share, an increase of $21,927,000, or approximately 35% on a per share basis, from the year ended December 31, 2020 net income of $62,210,000, or $2.34 per share.

The net income growth during 2021 compared with 2020 was driven by a number of factors including improved net interest income, lower provision for credit losses and increased non-interest revenue which was partially offset by a modestly higher level of non-interest expense.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized.

In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carry-back and carry-forward periods, including consideration of available tax planning strategies.

planning strategies.

Tax-related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

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RESULTS OF OPERATIONS

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NET INTEREST INCOME

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Many factors affecting net interest income are subject to control by management policies and actions.

Factors beyond the

control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.

During the year ended December 31, 2022, net interest income totaled $200,584,000, representing an increase of $39,754,000, or 25%, from the year ended December 31, 2021 net interest income of $160,830,000.

The increase in net interest income during 2022 compared with 2021 was primarily attributable to a higher level of earning assets, driven in large part by the CUB acquisition, and an expansion of the Company’s net interest margin.

The increase in net interest income was partially offset by a lower level of PPP loan fee recognition.

Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.

During the year ended December 31, 2023, net interest income, on a non tax-equivalent basis, totaled $190,433,000, a decline of $10,151,000, or 5%, compared to the year ended December 31, 2022 net interest income of $200,584,000.

The decline in net interest income during 2023 compared with 2022 was primarily attributable to a decline in average earning assets, driven by a reduced level of deposits which was somewhat offset by an improved net interest margin resulting from the rise in market interest rates.

The increase in net interest income during 2021 compared with 2020 was largely attributable to an increase in average earning assets, a higher level of fees recognized related to PPP loans which were partially offset by a lower level of accretion of loan discounts on acquired loans, and a decreased level of interest expense on interest bearing liabilities related to lower interest rates.

The increase in net interest income

during 2022 compared with 2021 was primarily attributable to a higher level of earning assets, driven in large part by the CUB acquisition, and an expansion of the Company’s net interest margin.

The increase in net interest income was partially offset by a lower level of Paycheck Protection Program (“PPP”) loan fee recognition.

The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets.

The net interest margin for the year ended December 31, 2023 was 3.58% compared to 3.45% in 2022 and 3.31% in 2021.

The improvement in the Company’s net interest margin during 2022 compared to 2021 was largely attributable to improved yields on earning assets driven by increased market rates.

Historically low market interest rates impacted the Company’s net interest margin in both 2021 and 2020 by reducing earning asset yields, with those declines being partially mitigated by a lower cost of funds.

Also contributing to the lower net interest margin was excess liquidity the Company had on its balance sheet that resulted from significant deposit growth during 2021 and 2020, PPP loan forgiveness and somewhat muted loan growth.

The improvement in the Company’s net interest margin during 2023 compared to 2022 of 13 basis points was primarily the result of a shift in the earning assets from the securities portfolio to higher yielding loans, which was somewhat reduced by the increasing cost of deposits as a result of the higher market interest rates.

The improvement in the Company’s net interest margin during 2022 compared to 2021 was largely attributable to improved yields on earning assets driven by increased market rates, which were partially mitigated by an increase in the overall cost of funds of the Company.

The Company’s net interest margin for all periods presented was impacted by the accretion of discounts on acquired loans.

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The fees recognized related to the PPP contributed approximately 1 basis point to the net interest margin in 2022 and 24 basis points to the net interest margin in 2021.

Accretion of discounts on acquired loans contributed approximately 7 basis points to the net interest margin during both 2022 and 2021, and 13 basis points during 2020.

Accretion of discounts on acquired loans contributed approximately 5 basis points to the net interest margin in 2023 and 7 basis points during both 2022 and 2021.

Accretion of discounts on acquired loans totaled $2,814,000 during 2023, $4,341,000 during 2022, and $3,476,000 during 2021.

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The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance.

During 2022, the Company recorded a provision for credit losses of $6,350,000 compared with a negative provision for credit losses of $6,500,000 during 2021 and a provision for credit losses of $17,550,000 during 2020.

During 2023, the Company recorded a provision for credit losses of $2,550,000 compared with $6,350,000 during 2022 and a negative provision for credit losses of $6,500,000 during 2021.

During 2023, the provision for credit losses represented approximately 7 basis points of average loans.

The provision for credit losses in 2022 included $6,300,000 for the Day 1 CECL addition to the allocation for credit loss related to the CUB acquisition for the non-PCD loans.

The lower provision recorded during 2023, as compared to 2022, was largely related to the resolution during the fourth quarter of 2023 of a single commercial borrowing relationship with minimal loss recognition for which the Company had established a significant reserve in previous periods.

The Company realized net charge-offs of $2,953,000 or 8 basis points of average loans during 2023.

During 2022, the provision for credit losses represented approximately 17 basis points of average loans.

The provision for credit losses in 2022 included $6,300,000 for the Day 1 CECL addition to the allocation for credit loss related to the CUB acquisition for the non-purchased with credit deterioration (“PCD”) loans.

The Company realized net charge-offs of $2,316,000 or 6 basis points of average loans during 2022.

During 2021, the negative provision for credit losses represented approximately 21 basis points of average loans.

The negative provision for credit losses in 2021 was largely due to declines in certain adversely criticized assets and improvement in certain pandemic-related stressed sectors for which the Company had provided significant levels of allowance for credit losses during 2020.

The Company realized net charge-offs of $3,342,000 or 11 basis points of average loans during 2021.

The provision for credit losses made during 2023 was made at a level deemed necessary by management to absorb expected losses in the loan portfolio.

A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.

qualitative and quantitative factors.

Refer also to the sections entitled “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” and “RISK MANAGEMENT - Lending and Loan Administration” for further discussion of the provision and allowance for credit losses.

NON-INTEREST INCOME

During the year ended December 31, 2022, non-interest income declined $329,000 or 1% from the year ended December 31, 2021.

During the year ended December 31, 2023, non-interest income increased $1,128,000 or 2% from the year ended December 31, 2022.

During the year ended December 31, 2022, non-interest income declined $329,000, or 1%, from the year ended December 31, 2021.

Non-interest Income

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TOTAL NON-INTEREST INCOME $ 60,261 $ 59,133 $ 59,462 2 (1)

Wealth management fees declined $245,000, or 2%, during 2022 compared with 2021.

Wealth management fees increased $1,635,000, or 16%, during 2023 compared with 2022.

The increase in 2021 compared to 2020 was largely attributable to increased assets under management in the Company’s wealth management group.

The increase during 2023 was largely attributable to increased assets under management within the Company’s wealth management group as compared with 2022.

Wealth management fees declined $245,000, or 2%, during 2022 compared with 2021.

Service charges on deposit accounts increased $81,000, or 1%, during 2023 compared to 2022.

Service charges on deposit accounts increased $3,734,000, or 48%, during 2022 compared to 2021.

The increase during 2022 compared with 2021 was the result of the CUB acquisition as well as increased deposit customer activity.

Service charges on deposit accounts increased $389,000, or 5%, during 2021 compared with 2020.

Insurance revenues declined $424,000, or 4%, during 2023 compared with 2022, which was primarily attributable to decreased contingency revenue.

Contingency revenue during 2023 totaled $955,000 compared with $1,641,000 during 2022.

Contingency revenue is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency.

Insurance revenues increased $752,000, or 8%, during 2022 compared with 2021, which was the result of increased contingency revenue as well as increases across multiple lines of business.

Company owned life insurance decreased $533,000, or 24%, during 2023 compared with 2022.

The decline in 2023 was primarily the result of a decrease in the death benefit claims received compared with 2022.

Company owned life insurance revenue increased $735,000, or 48%, during 2022 compared with 2021.

The increase during 2022 compared with 2021 was largely related to death benefits received from life insurance policies during 2022 and to the CUB acquisition.

Company owned life insurance revenue declined $778,000, or 34%, during 2021 compared with 2020.

The decline during 2021 compared with 2020 was largely related to death benefits received from life insurance policies during 2020.

Interchange fee income increased $1,632,000, or 10%, during the year ended December 31, 2023 compared with 2022.

The increase in the level of fees during 2023 compared with 2022 was due to increased card utilization by customers.

Interchange fees increased $2,704,000, or 21%, during 2022 compared with 2021.

The increased level of fees during 2022 compared with 2021 was related to the CUB acquisition as well as increased card utilization by customers.

Interchange fees increased $2,587,000, or 25%, during 2021 compared to 2020.

The increased level of fees during 2021 compared with 2020 was due to increased economic activity and increased card utilization by customers.

Other operating income declined $1,875,000 or 27%, during the year ended December 31, 2022 compared with 2021.

This decline was primarily attributable to the net gain of $1.4 million related to the sale of the two branch office locations in Lexington, Kentucky during the third quarter of 2021 and to a lower level of interest rate swap transaction fees with loan customers.

Other operating income increased $3,603,000, or 106%, during 2021 compared with 2020.

The increase during 2021 was largely attributable to the net gain of approximately $1.4 million related to the aforementioned sale of the two branch office locations and approximately $863,000 of fair value adjustments and higher transaction fees associated with interest rate swap transactions with loan customers.

Also contributing to the increase in 2021, was the donation of a building and accompanying real estate to a local municipality in one of the Company’s market areas.

Other operating income increased by $714,000, or 14%, during 2023 compared with 2022.

The increase during 2023 was largely attributable to the gain on sale of real estate related to the consolidation of various branch office facilities.

Other operating income declined $1,875,000, or 27%, during 2022 compared with 2021.

This decline was primarily attributable to the net gain of $1.4 million related to the sale of the two branch office locations during the third quarter of 2021 and to a lower level of interest rate swap transaction fees with loan customers.

Net gains on sales of loans declined $1,455,000, or 38%, during the year ended December 31, 2023 compared with 2022.

The decline during 2023 compared with 2022 was related to both a lower volume of loans sold and lower pricing levels.

Net gains on sales of loans declined $4,449,000, or 54%, during the year ended December 31, 2022 compared with 2021.

The decline in 2022 compared with 2021 was generally attributable to a lower volume of loans sold and lower pricing levels.

Net gains on sales of loans declined $1,641,000, or 17%, during 2021 compared with the 2020.

The decline in 2021 compared with 2020 was generally attributable to a lower level of fair value adjustments on commitments to sell loans and a modestly lower level of loans sold, which were partially offset by higher pricing levels on loans sold.

Loan sales totaled $109.0 million during 2023, $168.1 million during 2022, and $266.0 million during 2021.

The Company realized $40,000 in gains on sales of securities during 2023 compared with $562,000 during 2022 and $2,247,000 during 2021.

The sales of securities in all periods were done as part of shifts in the allocations within the securities portfolio.

The net gains on sales of securities in all periods presented were completed as part of adjustments in allocations within the normal course of business of securities portfolio management.

NON-INTEREST EXPENSE

During the year ended December 31, 2023, non-interest expense totaled $144,497,000, a decrease of $9,694,000, or 6%, compared with the year ended December 31, 2022.

During the year ended December 31, 2022, non-interest expense totaled $154,191,000, an increase of $30,184,000, or 24%, compared with the year ended December 31, 2021.

The 2022 non-interest expenses included approximately $12,323,000 of non-recurring acquisition-related expenses for the acquisition of CUB.

The primary drivers of the remaining increases during 2022 compared with 2021 were the operating costs for CUB.

During 2021, non-interest expense totaled $124,007,000, an increase of $6,884,000, or 6%, compared with 2020.

Non-interest Expense

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TOTAL NON-INTEREST EXPENSE $ 144,497 $ 154,191 $ 124,007 (6) 24

Salaries and benefits declined $901,000, or 1%, during the year ended December 31, 2023 compared with 2022.

The decline in salaries and benefits during 2023 compared with 2022 was largely related to approximately $1,480,000 of acquisition-related salary and benefit costs of a non-recurring nature in 2022 related to the CUB acquisition.

Salaries and benefits increased $15,575,000, or 23%, during 2022 compared with 2021.

The increase in salaries and benefits during 2022 compared with 2021 was largely attributable to the CUB acquisition, including approximately $1,480,000 of acquisition-related salary and benefit costs of a non-recurring nature, with the remainder of the increase due primarily to the salaries and benefits costs for the CUB employee base.

Salaries and benefits were relatively stable during 2021 compared with 2020, increasing by $458,000, or less than 1%.

Occupancy, furniture and equipment had a minimal increase of $90,000, or 1%, during 2022 compared with 2021.

Occupancy, furniture and equipment expense increased $807,000, or 6%, during 2021 compared with 2020.

The increase during 2021 was due in large part to lease termination costs associated with the Company’s operating optimization plan.

The increase in salaries and benefits during 2022 compared with 2021 was largely attributable to the CUB acquisition, including the aforementioned acquisition-related salary and benefit costs of a non-recurring nature, with the remainder of the increase due primarily to the salaries and benefits costs for the CUB employee base.

FDIC premiums increased $969,000, or 52%, during the year ended December 31, 2023 compared with 2022.

The increase during 2023 compared with 2022 was primarily related to an industry-wide 2 basis point increase in the base FDIC premium assessment effective January 1, 2023.

FDIC premiums increased $441,000, or 31%, during 2022 compared with 2021.

This increase is primarily attributable to an increase in total assessable assets from the acquisition of CUB as well as organic growth.

FDIC premiums increased $679,000, or 92%, during 2021 compared with 2020.

The increase during 2021 compared with 2020 was related to credits received from the FDIC during 2020.

No credits were received during 2021.

The credits received in 2020 and prior years were due to the reserve ratio of the deposit insurance fund exceeding the FDIC targeted levels.

Data processing fees declined $4,294,000, or 28%, during the year ended December 31, 2023 compared with the year ended December 31, 2022.

The decline during 2023 compared with 2022 was largely driven by acquisition-related costs associated with the CUB transaction, which totaled approximately $4,982,000 during 2022.

Data processing fees increased $7,795,000, or 102%, during the year ended December 31, 2022 compared with 2021.

The increase during 2022 compared with 2021 was largely driven by acquisition-related costs, which totaled approximately $4,982,000 during 2022, along with the CUB operating costs and costs related to continued data system enhancements.

Data processing fees increased $722,000, or 10%, during 2021 compared with 2020.

The increase was related to various software costs including expenses related to the PPP loan program as well as increased data processing fees for the branch sales during 2021.

The increase during 2022 compared with 2021 was largely driven by the aforementioned acquisition-related costs along with the CUB operating costs and costs related to continued data system enhancements.

Professional fees declined $720,000, or 11%, during the year ended December 31, 2023 compared with the year ended December 31, 2022.

The decline during 2023 compared with 2022 was primarily due to merger-related professional fees associated with the CUB acquisition that totaled approximately $1,802,000 in 2022, which were partially mitigated by increased legal and other professional fees during 2023.

Professional fees increased $1,286,000, or 26%, during 2022 compared with 2021.

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Merger and acquisition-related professional fees totaled approximately $1,802,000 during 2022 compared with $678,000 during 2021.

Professional fees increased $1,011,000, or 25%, during 2021 compared with 2020.

The increase during 2021 compared with 2020 was largely attributable to professional fees associated with the acquisition of CUB and an increase in legal fees related to non-acquisition related legal matters.

Advertising and promotion expense increased $219,000, or 5%, during the year ended December 31, 2022 compared with 2021.

Advertising and promotion expense increased $608,000, or 17%, during 2021 compared with 2020.

The increase during 2021 was attributable to the donation of a building and accompanying real estate to a local municipality in one of the Company’s market areas.

Other operating expenses increased $3,798,000, or 19%, during the year ended December 31, 2022 compared with 2021.

The increase in 2022 compared to 2021 was primarily attributable to acquisition-related costs that totaled approximately $3,862,000 during 2022 and operating costs associated with CUB.

Other operating expenses declined $3,864,000, or 16%, during the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decline during 2023 compared with 2022 was attributable to acquisition-related costs that totaled approximately $3,862,000 in 2022.

The acquisition-related costs were primarily vendor contract termination costs.

Other operating expenses increased $3,407,000, or 21%, during 2021 compared with 2020.

The increase during 2021

was primarily attributable to the establishment of a settlement reserve for a lawsuit challenging the Company’s assessment of overdraft fees for certain debit card transactions.

Settlement and dismissal of the lawsuit was approved by the court and completed in 2022.

In addition, the Company recognized $1,276,000 of charges related to various fixed asset write-downs as a part of the Company’s operating optimization plans announced in March 2021.

Other operating expenses increased $3,798,000, or 19%, during the year ended December 31, 2022 compared with 2021.

The increase in 2022 compared to 2021 was primarily attributable to the aforementioned acquisition-related costs and operating costs associated with CUB.

PROVISION FOR INCOME TAXES

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CAPITAL RESOURCES

As of December 31, 2022, shareholders’ equity declined by $110.1 million to $558.4 million compared with $668.5 million at year-end 2021.

The decline in shareholders’ equity was primarily attributable to a decline in accumulated other comprehensive income ("AOCI") of $278.9 million related to the decrease in value of the Company’s available-for-sale securities portfolio.

Partially offsetting the decline in shareholders’ equity was the issuance of the Company’s common shares in the acquisition of Citizens Union Bancorp of Shelbyville, Inc.

Approximately 2.9 million shares were issued to CUB shareholders resulting in an increase to shareholders’ equity of $111.7 million.

Also partially offsetting the decline in shareholders’ equity that was attributable to AOCI was the increase in retained earnings of $54.8 million due to net income of $81.8 million during 2022 which was partially offset by the payment of $27.0 million in shareholder dividends.

As of December 31, 2023, shareholders’ equity increased by $105.2 million to $663.6 million compared with $558.4 million at year-end 2022.

The increase in shareholders’ equity was partially attributable to the increase in retained earnings of $56.5 million due to net income of $85.9 million during 2023, which was partially offset by the payment of $29.4 million in shareholder dividends.

The increase in shareholders’ equity was also attributable to an increase in accumulated other comprehensive income (“AOCI”) of $46.4 million related to an increase in value of the Company’s available-for-sale securities portfolio.

Shareholders’ equity represented 10.8% of total assets at December 31, 2023 and 9.1% of total assets at December 31, 2022.

Shareholders’ equity included $186.7 million of goodwill and other intangible assets at December 31, 2023 compared to $189.8 million of goodwill and other intangible assets at December 31, 2022.

This increase in goodwill and other intangible assets was primarily related to the acquisition of CUB.

On January 25, 2021, the Company’s Board of Directors approved a stock repurchase program for up to 1.0 million of its outstanding common shares.

The Company did not repurchase any shares of common stock under the repurchase plan during 2021.

On January 31, 2022, the Company’s Board of Directors terminated the 2021 repurchase program and approved a new plan to repurchase up to 1.0 million shares of the Company’s outstanding common stock.

On a share basis, the amount of common stock subject to the new repurchase plan represented approximately 3% of the Company’s outstanding shares on the date it was approved, which was inclusive of the approximately 2.9 million shares issued in conjunction with the CUB acquisition.

In January 2022, the Company’s Board of Directors approved a plan to repurchase up to 1.0 million shares of the Company’s outstanding common stock.

On a share basis, the amount of common stock subject to the new repurchase plan represented approximately 3% of the Company’s outstanding shares on the date it was approved.

The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time.

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(1) Excludes capital conservation buffer.

In December 2018, the federal banking regulators approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL.

The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

On March 27, 2020, in an action related to the CARES Act, the federal banking regulators announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

The interim final rule, which was finalized effective September 30, 2020, maintained the three-year transition option in the previous rule and provided banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

The Company elected to adopt the five-year transition option and, as a result, began the required three-year phase-in by reflecting 25% of the previously deferred estimated capital impact of CECL in its regulatory capital effective January 1, 2022.

An additional 25% is to be phased in at the beginning of each subsequent year until fully phased in by January 1, 2025.

As discussed in Note 1 (Summary of Significant Accounting Policies) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, the Company adopted the CECL accounting standard under GAAP effective January 1, 2020.

The regulatory capital rules applicable to the Company provided an optional three-year phase-in period for the day-one adverse regulatory capital effects of adopting CECL.

In addition, as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), banking organizations were further permitted to mitigate the estimated cumulative regulatory capital effects of CECL for up to an additional two years.

As a result, on January 1, 2022, the Company began the required three-year phase-in by reflecting 25% of the previously deferred estimated capital impact of CECL in its regulatory capital.

An additional 25% was phased in on each of January 1, 2023 and January 1, 2024, and another 25% will be phased in on January 1, 2025 (at which time the cumulative effects of adopting CECL will have been fully phased into our regulatory capital).

Under the five-year transition option, the amount of adjustments to regulatory capital that could be deferred until the phase-in period began included both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the PPP to neutralize the regulatory capital effects of participating in the program.

Specifically, the agencies have clarified that banking organizations, including the Company and the Bank, are permitted to assign a zero percent risk weight to PPP loans for purposes of determining risk-weighted assets and risk-based capital ratios.

While there were no outstanding PPP loans at December 31, 2022, at December 31, 2021, risk-weighted assets included $19.5 million of PPP loans (net of deferred fees) at a zero risk weight.

USES OF FUNDS

December 31, 2023 total loans increased $189.3 million, or 5%, compared with December 31, 2022.

The increase in total loans at December 31, 2023 compared with year-end 2022 was broad-based across most segments of the portfolio.

Commercial real estate loans increased $155.0 million, or 8%, agricultural loans grew $6.4 million, or 2%, and retail loans increased $42.9 million, or 6%.

Partially offsetting these increases was a modest decline in commercial and industrial loans of $15.0 million, or 2%, as line of credit utilization remains muted.

December 31, 2022 total loans increased $780.7 million, or 26%, compared with December 31, 2021.

The increase in total loans at December 31, 2022 compared with year-end 2021 was largely due to the acquisition of CUB and organic loan growth from throughout the Company’s existing market areas, partially offset by a decrease in PPP loans.

Commercial and industrial

loans increased approximately $128.1 million, or 23%, compared with year-end 2021, commercial real estate loans increased $436.2 million, or 28%, and agricultural loans increased $59.3 million, or 17%.

At December 31, 2022, as compared with year-end 2021, retail loans increased $157.1 million, or 28%.

December 31, 2021 total loans declined $84.1 million, or 3%, compared with December 31, 2020.

The decline in total loans at December 31, 2021 compared to year-end 2020 was primarily due to a decrease in PPP loans.

PPP loans, net of deferred fees, totaled $19.5 million ($20.3 million principal balance and $0.8 million of remaining net deferred fees) at December 31, 2021 compared with $182.0 million at December 31, 2020.

The composition of the loan portfolio has remained relatively stable and diversified over the past several years, including 2022.

The portfolio is most heavily concentrated in commercial real estate loans at 52% of the portfolio and commercial and industrial loans at 18% of the portfolio, and agricultural loans at 11% of the portfolio.

The Company’s commercial lending is extended to various industries, including multi-family housing and lodging, agribusiness and manufacturing, as well as health care, wholesale, and retail services.

The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.

Management reviews and approves these policies and procedures on a regular basis.

A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans.

Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

As reflected in the table below, over the past several years (including 2023), the composition of the loan portfolio has remained relatively stable and diversified.

The portfolio is most heavily concentrated in commercial real estate loans at 53% of the portfolio in 2023, followed by commercial and industrial loans at 17% of the portfolio, and agricultural loans at 11% of the portfolio.

Loan Portfolio December 31,

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Subtotal 3,971,082 3,784,934 3,004,264 3,088,072 3,077,091

Allowance for Loan Losses (44,168) (37,017) (46,859) (16,278) (15,823)

Allowance for Credit Losses (43,765) (44,168) (37,017) (46,859) (16,278)

Loans, Net $ 3,927,317 $ 3,740,766 $ 2,967,247 $ 3,041,213 $ 3,060,813

Net PPP Loans (Included in Commercial and Industrial above) — 19,450 181,984 — —

Net PPP Loans (Included in Commercial and Industrial Loans above) — — 19,450 181,984 —

Ratio of Loans to Total Loans

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Commercial extensions of credit outside this market area are generally concentrated in real estate loans within a reasonable proximity of the Company’s primary market and are granted on a selective basis.

PPP loans, which were originated in 2020 and early 2021, were made to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic.

Loans covered by the PPP, which was administered by the Small Business Administration (“SBA”) under the provisions of the CARES Act, were eligible for loan forgiveness if program guidelines were met.

The Company actively participated in assisting its customers with PPP funding during the program.

PPP loans are reflected in Commercial and Industrial Loans and Leases in the table above.

While commercial real estate (“CRE”) is the largest component of the Company’s loan portfolio, it is well-diversified over numerous property types.

Specifically, the commercial real estate loan portfolio, as a percentage of the CRE portfolio and total loans at December 31, 2023, included the following property types:

multi-family dwellings (21% of CRE portfolio and 11% of total loans);

single family investment properties (12% of CRE portfolio and 7% of total loans);

retail space (14% of CRE portfolio and 7% of total loans);

office real estate (8% of CRE portfolio and 4% of total loans);

lodging (6% of CRE portfolio and 3% of total loans);

healthcare facilities (7% of CRE portfolio and 4% of total loans);

and land development and construction (6% of CRE portfolio and 3% of total loans).

The Company’s commercial real estate loan portfolio is further diversified by occupancy type, with approximately 77% of the CRE portfolio being non-owner occupied at December 31, 2023 (which is 41% of the Company’s overall loan portfolio), and 23% of the CRE portfolio being owner occupied (which is 12% of the Company’s total loan portfolio).

The commercial real estate loan portfolio, as a percentage of the CRE portfolio and total loans at December 31, 2022, included the following property types:

multi-family dwellings (20% of CRE portfolio and 11% of total loans);

single family investment properties (14% of CRE portfolio and 7% of total loans);

retail space (13% of CRE portfolio and 7% of total loans);

office real estate (7% of CRE portfolio and 4% of total loans);

lodging (6% of CRE portfolio and 3% of total loans);

healthcare facilities (6% of CRE portfolio and 3% of total loans);

and land development and construction (5% of CRE portfolio and 3% of total loans).

The Company’s commercial real estate loan portfolio is further diversified by occupancy type, with approximately 78% of the CRE portfolio being non-owner occupied at December 31, 2022 (which is 40% of the Company’s overall loan portfolio), and 22% of the CRE portfolio being owner occupied (which is 12% of the Company’s total loan portfolio).

Commercial real estate loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.

Like much of the Bank’s lending activities, the underwriting standards for commercial real estate are designed to promote relationship banking rather than transactional banking.

Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, our management examines market conditions and current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

As discussed above, the properties securing our commercial real estate portfolio are diverse in terms of property type, occupancy type, and geographic location.

This diversity helps reduce the Bank’s exposure to adverse economic events that affect any single market or industry.

Management will continue to monitor and evaluate commercial real estate loans based on collateral, geography and risk grade criteria.

The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences and consumer loans) outstanding as of December 31, 2023, which, based on remaining scheduled repayments of principal, are due in the periods indicated (dollars in thousands).

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Obligations of State and Political Subdivisions 889,940 47 939,193 44 896,048 40

MBS/CMO - Residential 846,519 40 797,693 36 535,526 37

MBS/CMO 761,025 40 846,519 40 797,693 36

US Gov’t Sponsored Entities & Agencies 220,295 11 245,017 11 175,457 8

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(1) n/m = not meaningful

The amortized cost of investment securities, including federal funds sold and short-term investments, decreased $82.2 million, or 4%, at year-end 2022 compared to year-end 2021 and increased $759.0 million, or 52%, at year-end 2021 compared with year-end 2020.

The amortized cost of investment securities, including federal funds sold and short-term investments, decreased $229.0 million, or 11%, at year-end 2023 compared to year-end 2022 and decreased $82.2 million, or 4%, at year-end 2022 compared to year-end 2021.

The decline in the available for sale portfolio during 2023 compared with 2022 was primarily the result of the Company’s utilization of cash flows of approximately $171 million from the securities portfolio to fund loan growth and overall modest deposit declines.

The decline in 2023 was broad-based across all areas of the investment portfolio.

Mortgage related securities declined $85.5 million, or 10%, obligations of state and political subdivisions declined $49.3 million, or 5%, and US treasuries declined $64 million, or 100%, as compared to 2022.

The decline from year-end 2022 compared with year-end 2021 was primarily attributable to the decrease in federal funds sold which is partially offset by the increase in amortized cost of obligations of state and political subdivisions, agency issued mortgage related securities and collateralized and uncollateralized federal agency securities.

The increase in the securities portfolio comparing year-end 2021 to year-end 2020 resulted from increased levels of deposits during 2021 in addition to PPP loan forgiveness and repayment activity over that same period.

The investment portfolio continues to be relatively balanced with agency issued mortgage related securities and collateralized and uncollateralized federal agency securities, totaling $1.092 billion, or 51% of the total securities portfolio at December 31, 2022.

The investment portfolio continues to be relatively balanced with agency issued mortgage related securities and collateralized and uncollateralized federal agency securities totaling $981.3 million, or 51% of the total securities portfolio at December 31, 2023.

The Company’s level of obligations of state and political subdivisions increased to $889.9 million, or 47% of the portfolio at December 31, 2023.

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Obligations of State and Political Subdivisions 768,875 777,852 925,706

MBS/CMO - Residential 714,681 791,950 548,307

MBS/CMO 645,040 714,681 791,950

US Gov’t Sponsored Entities & Agencies 182,917 205,017 171,961

Total Securities $ 1,596,832 $ 1,761,669 $ 1,889,617

As discussed above, the Company utilized cash flows from the available for sale portfolio to fund loan growth and an overall modest decline in deposits.

This cash flow utilization drove the decline in carrying value in the available for sale portfolio from 2023 to 2022, which was slightly offset by the fair value adjustments in the portfolio due to the change in interest rates.

The decline in the available for sale portfolio during 2022 compared with 2021 was largely attributable to fair value adjustments in the portfolio caused by the rise in market interest rates.

The fair value adjustment of the available for sale portfolio totaled $333.2 million at December 31, 2022.

The increase in the available for sale portfolio comparing year-end 2021 to year-end 2020 was largely the result of additions to the portfolio resulting from increased levels of deposits, PPP loan forgiveness and repayment activity during 2021.

The Company’s $1.597 billion available-for-sale investment portfolio provides an additional funding source for the liquidity needs of the Company’s subsidiaries and for asset/liability management requirements.

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Obligations of State and Political Subdivisions 1,768 3.72 % 17,548 4.28 % 65,213 3.26 % 805,411 3.01 %

MBS/CMO - Residential — — % 34,908 2.74 % 45,649 2.24 % 765,962 1.78 %

MBS/CMO — — % 35,091 2.72 % 31,116 2.22 % 694,818 1.77 %

US Gov’t Sponsored Entities & Agencies 333 2.48 % 8,675 1.14 % 12,094 2.94 % 199,193 1.82 %

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Core deposits consist of demand deposits, savings, interest-bearing checking, money market accounts, and certificates of deposit of less than $100,000.

Other sources of funds are certificates of deposit of $100,000 or more, brokered deposits, overnight borrowings from other financial institutions and securities sold under agreement to repurchase.

Other deposit sources include certificates of deposit of $100,000 or more.

The deposit base remains diverse with stable and manageable exposure to uninsured and uncollateralized deposits of approximately 21% of total deposits.

Other funding sources include overnight borrowings from other financial institutions and securities sold under agreement to repurchase.

The membership of the Company’s affiliate bank in the Federal Home Loan Bank System provides a significant additional source for both long and short-term collateralized borrowings.

In addition, the Company, as a separate and distinct corporation from its bank and other subsidiaries, also has the ability to borrow funds from other financial institutions and to raise debt or equity capital from the capital markets and other sources.

The following pages contain a discussion of changes in these areas.

The following pages contain a discussion of changes in funding sources.

The table below illustrates changes between years in the average balances of all funding sources:

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Total Core Deposits 4,866,069 5,488,854 4,307,337 (11) 27

Certificates of Deposits of $100,000 or more and Brokered Deposits 211,645 186,516 279,170 13 (33)

Certificates of Deposits of $100,000 or more 330,406 211,645 186,516 56 13

FHLB Advances and Other Borrowings 210,837 159,029 186,750 33 (15)

Total Funding Sources $ 5,407,312 $ 5,859,528 $ 4,680,603 (8) 25

Maturities of certificates of deposit of $100,000 or more and brokered deposits are summarized as follows:

Maturities of certificates of deposit of $100,000 or more are summarized as follows:

(dollars in thousands)

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CORE DEPOSITS

The Company’s overall level of average core deposits increased approximately $1.2 billion, or 27%, during 2022 compared with 2021, largely as a result of the CUB acquisition.

During 2022, average demand deposits (non-interest bearing and interest bearing) increased $778.1 million, average savings deposits increased $179.7 million, average money market demand deposits increased $187.4 million and average time deposits under $100,000 increased $36.3 million.

The Company’s overall level of average core deposits increased approximately $726.1 million, or 20%, during 2021 compared with 2020.

During 2021, average demand deposits (non-interest bearing and interest bearing) increased $593.9 million, average savings deposits increased $102.6 million, average money market demand deposits increased $92.0 million and average time deposits under $100,000 declined $62.3 million.

The Company’s overall level of average core deposits declined approximately $622.8 million, or 11%, during 2023 compared with 2022.

The Company’s overall level of period-end core deposits declined approximately $381.8 million, or 7%, during 2023 compared with 2022.

Competitive deposit pricing in the marketplace as well as customers actively looking for yield opportunities within and outside the banking industry are contributing factors to the decline in total deposits over the course of the past year.

A meaningful level of the outflow of deposits experienced during the past year was captured within the Company’s wealth management group.

The Company’s ability to attract core deposits continues to be influenced by competition and the interest rate environment, as well as the availability of alternative investment products.

The Company has continued to see customer movement from both interest bearing and non-interest bearing transactional accounts to time deposits due primarily to a higher interest rate environment.

Core deposits continue to represent a significant funding source for the Company’s operations and represented 90% of average total funding sources during 2023 compared with 94% during 2022 and 92% during 2021.

The Company’s overall level of average core deposits increased approximately $1.2 billion, or 27%, during 2022 compared with 2021, largely as a result of the CUB acquisition.

Demand, savings, and money market deposits have provided a growing source of funding for the Company in each of the periods reported.

Average demand, savings, and money market deposits increased 28% during 2022 following 24% growth during 2021.

Average demand, savings, and money market deposits declined 12% during 2023 following 28% growth during 2022.

Average demand, savings, and money market deposits totaled $4.608 billion or 95% of core deposits (85% of total funding sources) in 2023 compared with $5.226 billion or 95% of core deposits (89% of total funding sources) in 2022 and $4.080 billion or 95% of core deposits (87% of total funding sources) in 2021.

Other time deposits consist of certificates of deposits in denominations of less than $100,000.

These average deposits increased by 16% during 2022 following a decline of 22% during 2021.

Other time deposits comprised 5% of core deposits in 2022, 5% in 2021 and 8% in 2020.

These average deposits declined by 2% during 2023 following an increase of 16% during 2022.

Other time deposits comprised 5% of core deposits in all periods presented.

OTHER FUNDING SOURCES

Certificates of deposits in denominations of $100,000 or more and brokered deposits are an additional source of other funding for the Company’s bank subsidiary.

Large denomination certificates and brokered deposits increased $25.1 million, or 13%, following a decline of $92.7 million, or 33%, during 2021.

Large certificates and brokered deposits comprised approximately 4% of average total funding sources in 2021 compared with 4% in 2021 and 7% in 2020.

This type of funding is used as both long-term and short-term funding sources.

Federal Home Loan Bank advances and other borrowings represent an important source of other funding for the Company.

Average borrowed funds declined $27.8 million, or 15%, during 2022 and declined $35.1 million, or 16%, during 2021.

Certificates of deposits in denominations of $100,000 or more are an additional source of other funding for the Company’s bank subsidiary and are used as both long-term and short-term funding sources.

On an average basis, large denomination certificates increased $118.8 million, or 56%, during 2023.

This follows an increase of $25.1 million, or 13% during 2022.

Large certificate deposits comprised approximately 6% of average total funding sources in 2023 compared with 4% in 2022 and 4% in 2021.

On an end of period basis, certificates of deposits in denominations of $100,000 or more increased $284.7 million, or 147%, during 2023 compared to an increase of $47.8 million, or 33%, during 2022.

As previously discussed, customers seeking higher yield opportunities were a contributing factor to growth in this category of the Company’s funding sources.

The Company had no brokered deposits as of December 31, 2023 and 2022.

The Company participates in a reciprocal deposit program.

Reciprocal Deposits totaled $77.9 million at December 31, 2023 and $42.6 million at December 31, 2022.

FHLB advances and other borrowings represent an important source of other funding for the Company.

Average borrowed funds increased $51.8 million, or 33%, during 2023 compared to a decline of $27.8 million, or 15%, during 2022.

Borrowings comprised approximately 4% of average total funding sources during 2023 compared with 3% in 2022 and 4% in 2021.

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These borrowings represent an important source of short-term liquidity for the Company’s bank subsidiary.

The Company’s bank subsidiary is authorized by its Board to borrow up to $500 million at the FHLB, but availability at December 31, 2023 was limited to approximately $226 million based on the then pledged collateral and outstanding borrowings.

In addition, the Company had a borrowing capacity of approximately $200 million at the Federal Reserve Bank as of December 31, 2023, based on the then pledged collateral.

The capacity for borrowings from the FHLB and the Federal Reserve Bank could be increased, in each case, by the Company pledging additional available collateral.

The Company’s Asset/Liability Committee closely monitors the availability of these sources as part of its overall oversight and management of the bank subsidiary’s liquidity.

Long-term debt at the Company’s bank subsidiary is in the form of FHLB advances, which are secured by the pledge of certain investment securities, residential and housing-related mortgage loans, and certain other commercial real estate loans.

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See Note 8 (Shareholders’ Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which is incorporated herein by reference.

The parent company has, from time-to-time, supplemented the dividends received from its subsidiaries with borrowings.

company has, from time-to-time, supplemented the dividends received from its subsidiaries with borrowings.

For details related to borrowings, see Note 7 (FHLB Advances and Other Borrowings) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

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The Company maintains an allowance for credit losses to cover management’s estimate of all expected credit losses over the expected contractual life of the loan portfolio.

Management estimates the required level of allowance for credit losses using past loan loss experience, information about specific borrower situations and estimated collateral values, along with reasonable and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and

portfolio trends.

Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio.

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2023 2022 2021 2020 2019

Balance of Allowance for Possible Losses at Beginning of Period $ 37,017 $ 46,859 $ 16,278 $ 15,823 $ 15,694

Balance of Allowance for Expected Credit Losses at Beginning of Period $ 44,168 $ 37,017 $ 46,859 $ 16,278 $ 15,823

Impact of adopting ASC 326 — — — 8,767 —

32 unchanged sentences

The Company’s allowance for credit losses totaled $43.8 million at December 31, 2023 compared to $44.2 million at December 31, 2022.

The allowance for credit losses represented 1.17% of period-end loans at December 31, 2022 compared with 1.23% of period-end loans year-end 2021.

The allowance for credit losses represented 1.10% of period-end loans at December 31, 2023 compared with 1.17% of period-end loans at December 31, 2022.

The Company adopted ASU No.

2016-13, Financial instruments - Credit Losses (Topic 326) (“CECL”) on January 1, 2020.

2016-13, Financial instruments - Credit Losses (Topic 326) on January 1, 2020.

The Company added $9.4 million to the allowance for credit losses in conjunction with the closing of the CUB acquisition on January 1, 2022 related to the CUB loan portfolio.

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The Company also acquired $29.9 million in PCD loans (at time of acquisition) for which the company recorded a credit adjustment of $3.1 million which was included in the allowance for credit losses.

Under the CECL model, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses.

As of December 31, 2022, the Company held net discounts on acquired loans of $6.0 million which included $2.4 million related to the CUB loan portfolio.

The allowance for credit losses declined during 2021 as a result of the Company recording a negative $6.5 million provision for credit losses while recording modest net charge-offs.

The Company realized net charge-offs of $2,316,000, or 0.06% of average loans outstanding during 2022 compared with net charge-offs of $3,342,000, or 0.11% of average loans outstanding during 2021 and $2,622,000, or 0.08% of average loans during 2020.

The Company realized net charge-offs of $2,953,000, or 0.08% of average loans outstanding, during 2023 compared with $2,316,000, or 0.06% of average loans outstanding, during 2022 and $3,342,000, or 0.11% of average loans outstanding, during 2021.

Please see “RESULTS OF OPERATIONS - Provision for Credit Losses” and “CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Allowance for Credit Losses” for additional information regarding the allowance.

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Allowance for Credit Losses to Non-performing Loans 476.17 % 308.54 % 250.83 % 217.88 % 116.34 %

Non-performing assets totaled $14.3 million, or 0.23% of total assets at December 31, 2022 compared to $14.8 million, or 0.26% of total assets at December 31, 2021 and compared to $21.8 million, or 0.44% of total assets at December 31, 2020.

Non-performing loans totaled $14.3 million, or 0.38% of total loans at December 31, 2022 compared with $14.8 million, or 0.49% of total loans at December 31, 2021 and $21.5 million, or 0.70% of total loans at December 31, 2020.

The decline in the level of non-performing commercial and industrial loans and leases during 2022 was primarily attributable to certain credits that were either charged-off or paid off, which were in non-accrual status.

The decline in the level of commercial real estate non-performing loans during 2021 was largely attributable to the payoff of a commercial real estate credit in the lodging industry that was placed in non-accrual status.

The increase in the level of non-performing assets and non-performing loans at December 31, 2020 compared with year-end 2019 was largely attributable to the gross-up of purchased credit deteriorated loans upon the adoption of the CECL standard during 2020 and a commercial real estate credit in the lodging industry that was moved to non-performing status.

The following tables present an analysis of the Company’s non-accrual loans and loans past due 90 days or more and still accruing.

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Total $ 55 $ 1,427 $ 156 $ — $ 190

For additional detail on individually analyzed loans, see Note 4 in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Non-performing assets totaled $9.2 million, or 0.15% of total assets, at December 31, 2023 compared to $14.3 million, or 0.23% of total assets, at December 31, 2022 and compared to $14.8 million, or 0.26% of total assets, at December 31, 2021.

Non-performing loans totaled $9.2 million, or 0.23% of total loans, at December 31, 2023 compared with $14.3 million, or 0.38% of total loans, at December 31, 2022 and compared with $14.8 million, or 0.49% of total loans, at December 31, 2021.

The decline in the level of non-performing commercial and industrial loans and leases during 2023 was primarily attributable to the resolution of a single commercial borrowing relationship with minimal loss recognition for which the Company had established a significant reserve in previous periods.

For additional detail on individually analyzed loans, see Note 4 (Loans) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Interest income recognized on non-performing loans for 2023 was $231,000.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis