GERMAN AMERICAN BANCORP, INC. 10-K

Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of German American Bancorp, Inc. Jasper, Indiana Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of German American Bancorp, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 50 Report of Independent Registered Public Accounting Firm Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses on Loans As discussed in Notes 1 and 4, the allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures in accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The standard requires the Company’s loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the estimated life of the loans. In order to estimate the expected credit losses, the Company utilizes a loss estimation model. The Company utilizes the static pool methodology for determining the allowance for credit losses. The static pool methodology tracks loan pool by segment over a period of time to calculate a loss rate. Loss rates are then qualitatively adjusted for current conditions and reasonable and supportable forecast. Commercial and agricultural loans graded special mention and substandard are also adjusted based on a migration analysis technique. Auditing the Allowance for Credit Losses for Loans was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management. The principal considerations resulting in our determination included the following: • Significant auditor judgment and effort were used in evaluating the qualitative factors used in the calculation. • Significant audit effort to test the completeness and accuracy of data used in the migration analysis calculation, including accuracy of loan risk rating, and its application to the commercial and agricultural loan segments. The primary procedures performed to address this critical audit matter included: • Testing the effectiveness of controls over the Company’s preparation and review of the allowance for credit loss calculation, including relevance and reliability of data used as the basis for adjustments related to the qualitative factors, management’s judgments and significant assumptions in the development and reasonableness of qualitative factors, and mathematical accuracy and appropriateness of the application of qualitative factors; 51 Report of Independent Registered Public Accounting Firm • Substantively testing management’s process for developing the qualitative factors and assessing relevance and reliability of data used to develop factors, including evaluating their judgments and significant assumptions for reasonableness, and mathematical accuracy and appropriateness of the application of qualitative factors; • Testing the effectiveness of controls over the Company’s loan risk rating; • Substantively testing the accuracy of both the loan risk ratings as well as testing the accuracy of the transition matrix. Crowe LLP We have served as the Company’s auditor since 1977. Louisville, Kentucky February 27, 2024 52 Consolidated Balance Sheets Dollars in thousands, except share and per share data December 31, 2023 2022 ASSETS Cash and Due from Banks $ 78,805 $ 75,476 Federal Funds Sold and Other Short-term Investments 36,525 41,905 Cash and Cash Equivalents 115,330 117,381 Interest-bearing Time Deposits with Banks 500 500 Securities Available-for-Sale, at Fair Value (Amortized Cost $ 1,871,260 for December 31, 2023; Amortized Cost $ 2,094,826 for December 31, 2022; No Allowance for Credit Losses) 1,596,832 1,761,669 Other Investments 353 353 Loans Held-for-Sale, at Fair Value 5,226 8,600 Loans 3,977,900 3,788,645 Less: Unearned Income ( 6,818 ) ( 3,711 ) Allowance for Credit Losses ( 43,765 ) ( 44,168 ) Loans, Net 3,927,317 3,740,766 Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost 14,687 15,037 Premises, Furniture and Equipment, Net 106,776 112,237 Other Real Estate — — Goodwill 180,357 180,357 Intangible Assets 6,307 9,426 Company Owned Life Insurance 85,840 83,998 Accrued Interest Receivable and Other Assets 112,673 125,667 TOTAL ASSETS $ 6,152,198 $ 6,155,991 LIABILITIES Non-interest-bearing Demand Deposits $ 1,493,160 $ 1,691,804 Interest-bearing Demand, Savings, and Money Market Accounts 2,992,761 3,229,778 Time Deposits 767,042 428,469 Total Deposits 5,252,963 5,350,051 FHLB Advances and Other Borrowings 193,937 203,806 Accrued Interest Payable and Other Liabilities 41,740 43,741 TOTAL LIABILITIES 5,488,640 5,597,598 Commitments and Contingencies (See Note 14) SHAREHOLDERS’ EQUITY Common Stock, no par value, $ 1 stated value; 45,000,000 shares authorized 29,585 29,493 Additional Paid-in Capital 389,411 387,171 Retained Earnings 461,622 405,167 Accumulated Other Comprehensive Income (Loss) ( 217,060 ) ( 263,438 ) TOTAL SHAREHOLDERS’ EQUITY 663,558 558,393 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 6,152,198 $ 6,155,991 End of period shares issued and outstanding 29,584,709 29,493,193 See accompanying notes to the consolidated financial statements. 53 Consolidated Statements of Income Dollars in thousands, except per share data Years Ended December 31, 2023 2022 2021 INTEREST INCOME Interest and Fees on Loans $ 212,517 $ 169,158 $ 139,151 Interest on Federal Funds Sold and Other Short-term Investments 1,677 5,765 488 Interest and Dividends on Securities: Taxable 20,614 20,453 12,962 Non-taxable 21,848 23,550 17,778 TOTAL INTEREST INCOME 256,656 218,926 170,379 INTEREST EXPENSE Interest on Deposits 56,916 13,514 4,955 Interest on FHLB Advances and Other Borrowings 9,307 4,828 4,594 TOTAL INTEREST EXPENSE 66,223 18,342 9,549 NET INTEREST INCOME 190,433 200,584 160,830 Provision for Credit Losses 2,550 6,350 ( 6,500 ) NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 187,883 194,234 167,330 NON-INTEREST INCOME Wealth Management Fees 11,711 10,076 10,321 Service Charges on Deposit Accounts 11,538 11,457 7,723 Insurance Revenues 9,596 10,020 9,268 Company Owned Life Insurance 1,731 2,264 1,529 Interchange Fee Income 17,452 15,820 13,116 Other Operating Income 5,830 5,116 6,991 Net Gains on Sales of Loans 2,363 3,818 8,267 Net Gains on Securities 40 562 2,247 TOTAL NON-INTEREST INCOME 60,261 59,133 59,462 NON-INTEREST EXPENSE Salaries and Employee Benefits 83,244 84,145 68,570 Occupancy Expense 10,887 11,223 11,081 Furniture and Equipment Expense 3,580 3,698 3,750 FDIC Premiums 2,829 1,860 1,419 Data Processing Fees 11,112 15,406 7,611 Professional Fees 5,575 6,295 5,009 Advertising and Promotion 4,857 4,416 4,197 Intangible Amortization 2,840 3,711 2,731 Other Operating Expenses 19,573 23,437 19,639 TOTAL NON-INTEREST EXPENSE 144,497 154,191 124,007 Income before Income Taxes 103,647 99,176 102,785 Income Tax Expense 17,759 17,351 18,648 NET INCOME $ 85,888 $ 81,825 $ 84,137 Basic Earnings per Share $ 2.91 $ 2.78 $ 3.17 Diluted Earnings per Share $ 2.91 $ 2.78 $ 3.17 See accompanying notes to the consolidated financial statements. 54 Consolidated Statements of Comprehensive Income (Loss) Dollars in thousands Years Ended December 31, 2023 2022 2021 NET INCOME $ 85,888 $ 81,825 $ 84,137 Other Comprehensive Income (Loss): Unrealized Gains (Losses) on Securities: Unrealized Holding Gain (Loss) Arising During the Period 58,769 ( 353,013 ) ( 23,011 ) Reclassification Adjustment for Gains Included in Net Income ( 40 ) ( 563 ) ( 2,247 ) Tax Effect ( 12,351 ) 74,600 5,367 Net of Tax 46,378 ( 278,976 ) ( 19,891 ) Postretirement Benefit Obligation: Net (Loss) Arising During the Period — — — Reclassification Adjustment for Amortization of Prior Service Cost and Net — 54 — Tax Effect — — — Net of Tax — 54 — Total Other Comprehensive Income (Loss) 46,378 ( 278,922 ) ( 19,891 ) COMPREHENSIVE INCOME (LOSS) $ 132,266 $ ( 197,097 ) $ 64,246 See accompanying notes to the consolidated financial statements. 55 Consolidated Statements of Changes in Shareholders’ Equity Dollars in thousands, except share and per share data Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balances, December 31, 2020 26,502,157 $ 26,502 $ 274,385 $ 288,447 $ 35,375 $ 624,709 Net Income 84,137 84,137 Other Comprehensive Income (Loss) ( 19,891 ) ( 19,891 ) Cash Dividends ($ 0.84 per share) ( 22,220 ) ( 22,220 ) Issuance of Common Stock for: Restricted Share Grants 51,351 52 1,672 1,724 Balances, December 31, 2021 26,553,508 26,554 276,057 350,364 15,484 668,459 Net Income 81,825 81,825 Other Comprehensive Income (Loss) ( 278,922 ) ( 278,922 ) Cash Dividends ($ 0.92 per share) ( 27,022 ) ( 27,022 ) Issuance of Common Stock for: Acquisition of Citizens Union Bancorp 2,870,975 2,871 108,852 111,723 Restricted Share Grants 68,710 68 2,262 2,330 Balances, December 31, 2022 29,493,193 29,493 387,171 405,167 ( 263,438 ) 558,393 Net Income 85,888 85,888 Other Comprehensive Income (Loss) 46,378 46,378 Cash Dividends ($ 1.00 per share) ( 29,433 ) ( 29,433 ) Issuance of Common Stock for: Restricted Share Grants 91,516 92 2,240 2,332 Balances, December 31, 2023 29,584,709 $ 29,585 $ 389,411 $ 461,622 $ ( 217,060 ) $ 663,558 See accompanying notes to the consolidated financial statements. 56 Consolidated Statements of Cash Flows Dollars in thousands Years Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES 2023 2022 2021 Net Income $ 85,888 $ 81,825 $ 84,137 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net Amortization on Securities 5,566 6,452 6,638 Depreciation and Amortization 9,560 10,116 8,770 Loans Originated for Sale ( 106,781 ) ( 162,959 ) ( 261,529 ) Proceeds from Sales of Loans Held-for-Sale 112,525 171,591 276,417 Provision for Credit Losses 2,550 6,350 ( 6,500 ) Gain on Sale of Loans, net ( 2,363 ) ( 3,818 ) ( 8,267 ) Gain on Securities, net ( 40 ) ( 562 ) ( 2,247 ) Loss (Gain) on Sales of Other Real Estate and Repossessed Assets ( 83 ) ( 18 ) ( 101 ) Loss (Gain) on Disposition and Donation of Premises and Equipment ( 547 ) ( 37 ) 1,640 Loss (Gain) on Disposition of Land ( 83 ) — — Post Retirement Medical Benefit — 54 — Increase in Cash Surrender Value of Company Owned Life Insurance ( 1,842 ) ( 1,820 ) ( 1,369 ) Equity Based Compensation 2,332 2,330 1,724 Change in Assets and Liabilities: Interest Receivable and Other Assets 3,725 ( 1,094 ) 2,716 Interest Payable and Other Liabilities ( 3,173 ) 1,626 ( 1,185 ) Net Cash from Operating Activities 107,234 110,036 100,844 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Maturity of Other Short-term Investments — 495 496 Proceeds from Maturities of Securities Available-for-Sale 287,084 143,418 208,156 Proceeds from Sales of Securities Available-for-Sale 114,259 145,237 111,124 Purchase of Securities Available-for-Sale ( 183,302 ) ( 417,940 ) ( 1,020,695 ) Proceeds from Redemption of Federal Home Loan Bank Stock 350 8,089 120 Purchase of Loans ( 1,502 ) ( 933 ) — Proceeds from Sales of Loans Held for Investment — 3,916 — Loans Made to Customers, net of Payments Received ( 187,624 ) ( 107,236 ) 59,557 Proceeds from Sales of Other Real Estate 108 88 1,423 Property and Equipment Expenditures ( 5,745 ) ( 7,852 ) ( 4,686 ) Proceeds from Sale of Land and Building 3,627 — 1,963 Proceeds from Life Insurance — 773 549 Sale of Bank Branches — — 1,694 Acquisition of Citizens Union Bancorp of Shelbyville, Inc. — 207,764 — Net Cash from Investing Activities 27,255 ( 24,181 ) ( 640,299 ) CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits ( 96,782 ) ( 324,771 ) 655,485 Change in Short-term Borrowings ( 35,193 ) 29,817 15,423 Advances in Long-term Debt 25,000 — — Repayments of Long-term Debt ( 132 ) ( 41,690 ) ( 58,091 ) Issuance (Retirement) of Common Stock — — — Dividends Paid ( 29,433 ) ( 27,022 ) ( 22,220 ) Net Cash from Financing Activities ( 136,540 ) ( 363,666 ) 590,597 Net Change in Cash and Cash Equivalents ( 2,051 ) ( 277,811 ) 51,142 Cash and Cash Equivalents at Beginning of Year 117,381 395,192 344,050 Cash and Cash Equivalents at End of Year $ 115,330 $ 117,381 $ 395,192 Cash Paid During the Year for Interest $ 60,663 $ 17,442 $ 10,020 Income Taxes 15,375 11,649 14,434 Supplemental Non Cash Disclosures Loans Transferred to Other Real Estate $ — $ 30 $ — Reclass of Land & Buildings to Other Assets 691 — — Interest Rate Swap Fair Value Activity ( 2,282 ) 4,988 ( 4,287 ) See Note 18 (Business Combinations, Goodwill and Intangible Assets) regarding non-cash transactions included in the acquisition. See accompanying notes to the consolidated financial statements. 57 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies Description of Business and Basis of Presentation The operations of German American Bancorp, Inc. (the “Company”) are primarily comprised of three business segments: core banking, trust and investment advisory services, and insurance operations. The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles. The more significant policies are described below. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. Certain prior year amounts have been reclassified to conform with current classifications. Reclassifications had no impact on shareholders’ equity or net income. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Securities Debt securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity. Held-to-maturity securities, when present, are carried at amortized cost. As of December 31, 2023, and 2022, the Company held no securities classified as held-to-maturity. Debt securities classified as available-for-sale include securities that management may use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, or similar reasons. Securities classified as available-for-sale are reported at fair value with unrealized gains or losses included as a separate component of equity (other comprehensive income), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on trade date and determined using the specific identification method. Investments with readily determinable values (except those accounted for under equity method of accounting or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values are carried at historical cost and evaluated for impairment on a periodic basis. Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at fair value. Fair value is determined based on collateral value and prevailing market prices for loans with similar characteristics. Net unrealized gains or losses are recorded through earnings. Mortgage loans held for sale are generally sold on a servicing released basis. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $ 20,580 at December 31, 2023 and was reported in Accrued Interest Receivable and Other Assets on the Consolidated Balance Sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Purchase Credit Deteriorated (PCD) Loans The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses on loans is determined using the same methodology as other loans held for investment. The initial allowance for credit losses on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses on loans are recorded through provision expense. Allowance for Credit Losses - Loans The allowance for credit losses is a valuation account that is deducted from the loans ’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the 58 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company utilizes the static pool methodology in determining expected future credit losses. Static pool analysis includes segmenting and tracking loans over a period of time based on similar risk characteristics such as loan structure, collateral type, industry of borrower and concentrations, contractual terms and credit risk indicators. Static pool calculates a loss rate on a closed pool of loans that existed on a specified start date based upon the remaining life of each segment. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2014 through the current period, on a monthly basis. The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values. The Company separately assigns allocations for substandard and special mention commercial and agricultural credits as well as other categories of loans based on migration analysis techniques. The migration analysis factors are calculated using a transition matrix to determine the likelihood of a customer ’ s asset quality rating migrating from its current rating to any other rating. The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and identified the risk characteristics of each portfolio listed below: Commercial and Industrial Loans - The principal risk of commercial and industrial loans is that these loans are primarily based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most commercial loans are secured by accounts receivable, inventory and equipment. If cash flow from business operations is reduced, the borrower ’ s ability to repay the loan may diminish, and over time, it may also be difficult to substantiate current value of inventory and equipment. Repayment of these loans are more sensitive than other types of loans to adverse conditions in the general economy. Commercial Real Estate Loans - Commercial real estate lending is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans are collateralized by the borrower ’ s underlying real estate. Therefore, diminished cash flows not only affects the ability to repay the loan, it may also reduce the underlying collateral value. Agricultural Loans - This portfolio is diversified between real estate financing, equipment financing and lines of credit in various segments including grain production, poultry production and livestock production. Mitigating any concentration of risk that may exist in the Company ’ s agricultural loan portfolio is the use of federal government guarantee programs. Leases - Leases are primarily for equipment leased to varying types of businesses. If the cash flows from the business operations is reduced, the business ’ s ability to repay the lease is diminished as well. Home Equity Loans - Home equity loans are generally secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Consumer Loans - Consumer loan repayment is typically dependent on the borrower remaining employed through the life of the loan as well as the borrower maintaining the underlying collateral adequately. Credit Cards - Credit card loans are unsecured and repayment is primarily dependent on the personal income of the borrower. Residential Mortgage Loans - Residential mortgage loans are typically secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values. 59 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs. Modifications to Borrowers Experiencing Financial Difficulty From time to time, the Company may modify certain loans to borrowers who are experiencing financial difficulty. The Company’s loan modifications for borrowers experiencing financial difficulties will typically include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. Allowance for Credit Losses on Available-For-Sale Securities For available-for-sale debt securities in an unrealized loss position, the Company 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 income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, 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. Any impairment that has not been recorded through an allowance for credit losses is recorded in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense included in other expense on the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Expected utilization rates are compared to the current funded portion of the total commitment amount as a practical expedient for funded exposure at default. Federal Home Loan Bank (FHLB) Stock The Bank is a member of the FHLB of Indianapolis and FHLB of Cincinnati. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Premises, Furniture and Equipment Land is carried at cost. Premises, furniture, and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging generally from 10 to 40 years. Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives ranging generally from 3 to 10 years. Other Real Estate Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of commercial/residential real estate property collateralizing a commercial/consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through the completion of a deed in lieu of foreclosure or through a similar legal 60 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) agreement. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Goodwill and Other Intangible Assets Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet. Other intangible assets consist of core deposit and acquired customer relationship intangible assets. They are initially measured at fair value and then are amortized over their estimated useful lives, which range from 6 to 10 years. Company Owned Life Insurance The Company has purchased life insurance policies on certain directors and executives. This life insurance is recorded at its cash surrender value or the amount that can be realized, which considers any adjustments or changes that are probable at settlement. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe currently that there are any such matters that will have a material impact on the financial statements. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Restrictions on Cash At December 31, 2023 and 2022, the Company was no t required to have balance on deposits with the Federal Reserve, or as cash on hand. Long-term Assets Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Stock Based Compensation Compensation cost is recognized for restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. Market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and changes in unrecognized amounts in pension and other postretirement benefits, which are also recognized as a separate component of equity. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that 61 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in other operating expense. Retirement Plans Pension expense under the suspended defined benefit plan is the net of interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. Earnings Per Share Earnings per share are based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share show the potential dilutive effect of additional common shares issuable under the Company’s stock based compensation plans. Earnings per share are retroactively restated for stock splits and stock dividends. Cash Flow Reporting The Company reports net cash flows for customer loan transactions, deposit transactions, deposits made with other financial institutions and short-term borrowings. Cash and cash equivalents are defined to include cash on hand, demand deposits in other institutions and Federal Funds Sold. Fair Values of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Recently Adopted Accounting Guidance In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2024. The Company has discontinued originating LIBOR based loans and has a plan in place to transition LIBOR indexed loans primarily to term SOFR or other indices. On March 31, 2022, the FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” which eliminates the troubled debt restructuring recognition and measurement guidance and instead requires an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosures and include new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. To improve consistency for vintage disclosures, the ASU requires that public business entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. For entities that have adopted ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not adopted ASU 2016-13, the effective dates for the amendments are the same as the effective dates in ASU 2016-13. Early adoption is permitted if ASU 2016-13 has been adopted, including adoption in an interim period. If an entity elects to adopt the amendments in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company adopted the new guidance prospectively with no material impact to the consolidated financial statements. The SEC released Staff Accounting Bulletin No. 121 (“SAB 121”), which provides interpretive guidance regarding the accounting for obligations to safeguard crypto-assets an entity holds for its customers, either directly through an agent or another third party acting on its behalf. SAB 121 requires an entity to recognize a liability on its balance sheet to reflect the obligation to safeguard the crypto-assets of others, along with a corresponding safeguarding asset, both of which are measured 62 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 1 – Summary of Significant Accounting Policies (continued) at fair value. The Company has completed an evaluation and concluded that it does not have a safeguarding obligation under SAB 121 and therefore the disclosures do not apply. Newly Issued But Not Yet Effective Accounting Standards On March 29, 2023, the FASB issued ASU 2023-02, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” to expand use of the proportional amortization method of accounting to equity investments in tax credit programs beyond those in low-income-housing tax credit (LIHTC) programs. The amendments in this update permit reporting entities to account for certain tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. This guidance provides clarifications to address interpretive issues and prescribes specific information that reporting entities must disclose about tax credit investments each period. This ASU is effective for reporting periods beginning after December 15, 2023, for public business entities. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted, including early adoption in any interim period as of the beginning of the fiscal year that includes that interim period. Entities have the option of applying the forthcoming revisions using either a modified retrospective or retrospective adoption approach. The Company is currently evaluating the impact of adopting this new guidance, however, adoption of the standard is not expected to have a material impact on the Company’s financial statements or disclosures. NOTE 2 – Securities The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows: Securities Available-for-Sale: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 2023 U.S. Treasury $ — $ — $ — $ — Obligations of State and Political Subdivisions 889,940 1,309 ( 122,374 ) 768,875 MBS/CMO 761,025 28 ( 116,013 ) 645,040 US Gov’t Sponsored Entities & Agencies 220,295 — ( 37,378 ) 182,917 Total $ 1,871,260 $ 1,337 $ ( 275,765 ) $ 1,596,832 2022 U.S. Treasury $ 64,097 $ 22 $ — $ 64,119 Obligations of State and Political Subdivisions 939,193 673 ( 162,014 ) 777,852 MBS/CMO 846,519 — ( 131,838 ) 714,681 US Gov’t Sponsored Entities & Agencies 245,017 — ( 40,000 ) 205,017 Total $ 2,094,826 $ 695 $ ( 333,852 ) $ 1,761,669 All mortgage-backed securities in the above table (identified above and throughout this Note 2 as “MBS/CMO”) are residential and multi-family mortgage-backed securities and guaranteed by government sponsored entities. The US Gov’t Sponsored Entities & Agencies in the above table have underlying collateral of equipment, machinery and commercial real estate. 63 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 2 – Securities (continued) The amortized cost and fair value of securities at December 31, 2023 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgage-backed securities are not due at a single maturity date and are shown separately. Amortized Cost Fair Value Securities Available-for-Sale: Due in one year or less $ 1,768 $ 1,766 Due after one year through five years 17,548 17,589 Due after five years through ten years 65,213 62,296 Due after ten years 805,411 687,224 MBS/CMO 761,025 645,040 US Gov’t Sponsored Entities & Agencies 220,295 182,917 Total $ 1,871,260 $ 1,596,832 2023 2022 2021 Proceeds from the Sales of Securities are summarized below: Available- for-Sale Available- for-Sale Available- for-Sale Proceeds from Sales $ 114,259 $ 145,237 $ 111,124 Gross Gains on Sales 346 750 2,399 Gross Losses on Sales 306 188 152 Income Taxes on Net Gains 8 118 472 The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $ 366,576 and $ 354,123 as of December 31, 2023 and 2022, respectively. Below is a summary of securities with unrealized losses as December 31, 2023 and 2022, presented by length of time the securities have been in a continuous unrealized loss position: Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2023 Obligations of State and Political Subdivisions $ 13,469 $ ( 175 ) $ 668,223 $ ( 122,199 ) $ 681,692 $ ( 122,374 ) MBS/CMO 135 ( 1 ) 643,172 ( 116,012 ) 643,307 ( 116,013 ) US Gov’t Sponsored Entities & Agencies — — 182,917 ( 37,378 ) 182,917 ( 37,378 ) Total $ 13,604 $ ( 176 ) $ 1,494,312 $ ( 275,589 ) $ 1,507,916 $ ( 275,765 ) Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2022 Obligations of State and Political Subdivisions $ 579,267 $ ( 117,423 ) $ 122,992 $ ( 44,591 ) $ 702,259 $ ( 162,014 ) MBS/CMO 240,344 ( 20,920 ) 474,327 ( 110,918 ) 714,671 ( 131,838 ) US Gov’t Sponsored Entities & Agencies 198,702 ( 38,818 ) 6,314 ( 1,182 ) 205,016 ( 40,000 ) Total $ 1,018,313 $ ( 177,161 ) $ 603,633 $ ( 156,691 ) $ 1,621,946 $ ( 333,852 ) Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, the Company assesses whether we intend to sell, or it is more likely than not that we 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 reduced to fair value through 64 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 2 – Securities (continued) income. For available-for sale debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The decrease in unrealized losses from December 31, 2022 to December 31, 2023 was primarily the result of fair value adjustments caused by the change in market interest rates. No allowance for credit losses for available-for-sale debt securities was needed at December 31, 2023 or 2022. Although management has the ability to sell these securities if the need arises, their designation as available-for-sale should not necessarily be interpreted as an indication that management anticipates such sales. Accrued interest receivable on available-for-sale debt securities totaled $ 9,620 at December 31, 2023 and $ 10,637 at December 31, 2022. Accrued interest receivable is excluded from the estimate of credit losses. The Company’s equity securities are listed as Other Investments on the Consolidated Balance Sheets and consist of one non-controlling investment in a single banking organization at December 31, 2023 and 2022. The original investment totaled $ 1,350 and other-than-temporary impairment was previously recorded totaling $ 997 . The Company’s equity securities are considered not to have readily determinable fair value and are carried at cost and evaluated for impairment. There was no additional impairment recognized through earnings during 2023 or 2022. NOTE 3 - Derivatives The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $ 139,751 at December 31, 2023 and $ 134,684 at December 31, 2022. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand-alone derivatives and changes in the fair value of derivatives are reported in earnings as non-interest income. While the derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures. The following table reflects the fair value of derivative instruments included in the Consolidated Balance Sheets as of: December 31, 2023 December 31, 2022 Notional Amount Fair Value Notional Amount Fair Value Included in Other Assets: Interest Rate Swaps $ 139,751 $ 7,458 $ 134,684 $ 9,899 Included in Other Liabilities: Interest Rate Swaps $ 139,751 $ 7,467 $ 134,684 $ 9,749 65 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 3 – Derivatives (continued) The following table presents the effect of derivative instruments on the Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021 is as follows: 2023 2022 2021 Interest Rate Swaps: Included in Other Income $ 344 $ 403 $ 1,131 NOTE 4 - Loans Loans were comprised of the following classifications at December 31: 2023 2022 Commercial: Commercial and Industrial Loans $ 589,541 $ 620,106 Commercial Real Estate Loans 2,121,835 1,966,884 Agricultural Loans 423,803 417,413 Leases 71,988 56,396 Retail: Home Equity Loans 299,685 279,748 Consumer Loans 87,853 79,904 Credit Cards 20,351 17,512 Residential Mortgage Loans 362,844 350,682 Subtotal 3,977,900 3,788,645 Less: Unearned Income ( 6,818 ) ( 3,711 ) Allowance for Credit Losses ( 43,765 ) ( 44,168 ) Loans, net $ 3,927,317 $ 3,740,766 The table above includes $ 13,237 and $ 21,149 of purchase credit deteriorated loans as of December 31, 2023 and 2022, respectively. Allowance for Credit Losses for Loans: The following tables present the activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2023, 2022 and 2021: December 31, 2023 Commercial and Industrial Loans Commercial Real Estate Loans Agricultural Loans Leases Consumer Loans Home Equity Loans Credit Cards Residential Mortgage Loans Total Allowance for Credit Losses: Beginning Balance $ 13,749 $ 21,598 $ 4,188 $ 209 $ 595 $ 1,344 $ 257 $ 2,228 $ 44,168 Provision (Benefit) for Credit Losses ( 4,190 ) 4,305 ( 324 ) 137 919 551 563 589 2,550 Loans Charged-off ( 1,792 ) ( 56 ) ( 27 ) — ( 1,309 ) ( 94 ) ( 455 ) ( 58 ) ( 3,791 ) Recoveries Collected 154 76 — — 554 33 18 3 838 Total Ending Allowance Balance $ 7,921 $ 25,923 $ 3,837 $ 346 $ 759 $ 1,834 $ 383 $ 2,762 $ 43,765 66 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) December 31, 2022 Commercial and Industrial Loans Commercial Real Estate Loans Agricultural Loans Leases Consumer Loans Home Equity Loans Credit Cards Residential Mortgage Loans Total Allowance for Credit Losses: Beginning Balance $ 9,554 $ 19,245 $ 4,505 $ 200 $ 507 $ 1,061 $ 240 $ 1,705 $ 37,017 Acquisition of Citizens Union Bank of Shelbyville, KY - PCD Loans 376 1,945 689 — 2 — — 105 3,117 Provision (Benefit) for Credit Losses 4,942 463 ( 1,006 ) 9 991 351 163 437 6,350 Loans Charged-off ( 1,149 ) ( 79 ) — — ( 1,364 ) ( 69 ) ( 165 ) ( 24 ) ( 2,850 ) Recoveries Collected 26 24 — — 459 1 19 5 534 Total Ending Allowance Balance $ 13,749 $ 21,598 $ 4,188 $ 209 $ 595 $ 1,344 $ 257 $ 2,228 $ 44,168 December 31, 2021 Commercial and Industrial Loans Commercial Real Estate Loans Agricultural Loans Leases Consumer Loans Home Equity Loans Credit Cards Residential Mortgage Loans Total Allowance for Credit Losses: Beginning Balance $ 6,445 $ 29,878 $ 6,756 $ 200 $ 490 $ 996 $ 150 $ 1,944 $ 46,859 Provision (Benefit) for Credit Losses 5,825 ( 10,663 ) ( 2,251 ) — 385 44 387 ( 227 ) ( 6,500 ) Loans Charged-off ( 2,777 ) ( 10 ) — — ( 675 ) ( 15 ) ( 313 ) ( 45 ) ( 3,835 ) Recoveries Collected 61 40 — — 307 36 16 33 493 Total Ending Allowance Balance $ 9,554 $ 19,245 $ 4,505 $ 200 $ 507 $ 1,061 $ 240 $ 1,705 $ 37,017 The Company utilizes the Static Pool methodology in determining expected future credit losses. Static pool analysis means segmenting and tracking loans over a period of time based on similar risk characteristics such as loan structure, collateral type, industry of borrower and concentrations, contractual terms and credit risk indicators. Static pool calculates a loss rate on a closed pool of loans that existed on a specified start date based upon the remaining life of each segment. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back period includes January 2014 through the current period, on a monthly basis. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration industry and collateral concentrations, acquired loan portfolio characteristics and other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves by anchoring to specific data points when possible. The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values. The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist. Based on the potential increased losses related to the advancing stress on the economy as a result of inflationary pressures, rising interest rates and financial market volatility, the Company has considered this loss experience may align with loss experience from the recessionary period from 2008-2011 and qualitative adjustments have been made accordingly. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs. 67 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) For the year ended December 31, 2023, the decline in allowance for credit losses 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 which was slightly offset by additional reserve for loan portfolio growth. Key indicators utilized in forecasting for the allowance calculations include unemployment rates and gross domestic product as well as commodity prices for the agricultural segment of the portfolio. There has been some improvement in these factors over previous periods; however, rising interest rates and the expanded inflationary impact on consumer discretionary spending were considered in the qualitative factors to determine the allowance for credit losses. All classes of loans, including loans acquired with deteriorated credit quality, are generally placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. For purchased loans, the determination is made at the time of acquisition as well as over the life of the loan. Uncollected accrued interest for each class of loans is reversed against income at the time a loan is placed on non-accrual. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All classes of loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. The following tables present the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing as of December 31, 2023 and 2022: December 31, 2023 Non-Accrual With No Allowance for Credit Loss ⁽¹⁾ Non-Accrual Loans Past Due Over 89 Days Still Accruing Commercial and Industrial Loans $ 1,864 $ 3,707 $ — Commercial Real Estate Loans 942 1,889 55 Agricultural Loans 665 879 — Leases — — — Home Equity Loans 1,033 1,033 — Consumer Loans 111 111 — Credit Cards 142 142 — Residential Mortgage Loans 1,125 1,375 — Total $ 5,882 $ 9,136 $ 55 (1) Includes non-accrual loans with no allowance for credit loss and are also included in Non-Accrual loans totaling $ 9,136 . December 31, 2022 Non-Accrual With No Allowance for Credit Loss ⁽¹⁾ Non-Accrual Loans Past Due Over 89 Days Still Accruing Commercial and Industrial Loans $ 1,142 $ 7,936 $ 1,427 Commercial Real Estate Loans 49 1,950 — Agricultural Loans 994 1,062 — Leases — — — Home Equity Loans 262 310 — Consumer Loans 240 254 — Credit Cards 146 146 — Residential Mortgage Loans 676 1,230 — Total $ 3,509 $ 12,888 $ 1,427 (1) Includes non-accrual loans with no allowance for credit loss and are also included in Non-Accrual loans totaling $ 12,888 . Interest income on non-accrual loans recognized during the years ended December 31, 2023 and 2022 totaled $ 106 and $ 32 . 68 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2023 and 2022: December 31, 2023 Real Estate Equipment Accounts Receivable Other Total Commercial and Industrial Loans $ 3,668 $ 49 $ — $ 1,888 $ 5,605 Commercial Real Estate Loans 8,553 — — — 8,553 Agricultural Loans 3,338 1,055 — — 4,393 Leases — — — — — Home Equity Loans 420 — — — 420 Consumer Loans 9 — — — 9 Credit Cards — — — — — Residential Mortgage Loans 753 — — — 753 Total $ 16,741 $ 1,104 $ — $ 1,888 $ 19,733 December 31, 2022 Real Estate Equipment Accounts Receivable Other Total Commercial and Industrial Loans $ 2,078 $ 1,219 $ 272 $ 5,851 $ 9,420 Commercial Real Estate Loans 12,192 36 — — 12,228 Agricultural Loans 4,944 318 — — 5,262 Leases — — — — — Home Equity Loans 467 — — — 467 Consumer Loans 8 2 — 12 22 Credit Cards — — — — — Residential Mortgage Loans 1,060 — — — 1,060 Total $ 20,749 $ 1,575 $ 272 $ 5,863 $ 28,459 The following tables present the aging of the amortized cost basis in past due loans by class of loans as of December 31, 2023 and 2022: December 31, 2023 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Total Past Due Loans Not Past Due Total Commercial and Industrial Loans $ 832 $ 257 $ 3,299 $ 4,388 $ 585,153 $ 589,541 Commercial Real Estate Loans 1,215 484 938 2,637 2,119,198 2,121,835 Agricultural Loans 5 248 497 750 423,053 423,803 Leases — — — — 71,988 71,988 Home Equity Loans 1,016 571 1,033 2,620 297,065 299,685 Consumer Loans 658 84 110 852 87,001 87,853 Credit Cards 165 87 142 394 19,957 20,351 Residential Mortgage Loans 7,362 1,647 1,215 10,224 352,620 362,844 Total $ 11,253 $ 3,378 $ 7,234 $ 21,865 $ 3,956,035 $ 3,977,900 69 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) December 31, 2022 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Total Past Due Loans Not Past Due Total Commercial and Industrial Loans $ 268 $ 681 $ 8,285 $ 9,234 $ 610,872 $ 620,106 Commercial Real Estate Loans 1,617 14 616 2,247 1,964,637 1,966,884 Agricultural Loans 343 — 123 466 416,947 417,413 Leases — — — — 56,396 56,396 Home Equity Loans 1,770 140 310 2,220 277,528 279,748 Consumer Loans 219 64 252 535 79,369 79,904 Credit Cards 86 24 146 256 17,256 17,512 Residential Mortgage Loans 6,330 2,783 1,051 10,164 340,518 350,682 Total $ 10,633 $ 3,706 $ 10,783 $ 25,122 $ 3,763,523 $ 3,788,645 Loan Modifications Made to Borrowers Experiencing Financial Difficulty Effective January 1, 2023, the Company prospectively adopted ASU 2022-02, which eliminated the accounting for troubled debt restructurings while establishing a new standard for the treatment of modifications made to borrowers experiencing financial difficulties. As such, effective with the adoption of the new standard, the Company will now include, prospectively, financial difficulty modifications in its presentation of nonperforming loans, nonperforming assets or classified assets. Prior period data, which included troubled debt restructurings, has not been adjusted. The Company’s loan modifications for borrowers experiencing financial difficulties will typically include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. No modifications in 2023 resulted in the permanent reduction of the recorded investment in the loan. At December 31, 2023, the Company had no modified loans made to borrowers experiencing financial difficulty. There were no modified loans that had a payment default during the year ended December 31, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty. The Company considers a loan to be in payment default once it is 30 days contractually past due under the modified terms. Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $ 250 . This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings: Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. 70 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following table presents the risk category of loans and current period gross charge-offs as of December 31, 2023 by loan class and vintage year: Term Loans Amortized Cost Basis by Origination Year As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Commercial and Industrial: Risk Rating Pass $ 112,626 $ 134,590 $ 80,738 $ 28,492 $ 32,585 $ 45,764 $ 134,936 $ 569,731 Special Mention 47 453 128 829 — 1,948 3,048 6,453 Substandard — 294 5,689 780 1,696 1,471 3,427 13,357 Doubtful — — — — — — — — Total Commercial and Industrial Loans $ 112,673 $ 135,337 $ 86,555 $ 30,101 $ 34,281 $ 49,183 $ 141,411 $ 589,541 Current Period Gross Charge-Offs $ — $ 911 $ 32 $ 493 $ 7 $ 88 $ 261 $ 1,792 Commercial Real Estate: Risk Rating Pass $ 300,569 $ 416,874 $ 470,917 $ 225,668 $ 147,431 $ 458,821 $ 41,102 $ 2,061,382 Special Mention 13,906 2,401 11,155 1,651 259 19,532 638 49,542 Substandard — 617 5,510 1,142 729 2,737 176 10,911 Doubtful — — — — — — — — Total Commercial Real Estate Loans $ 314,475 $ 419,892 $ 487,582 $ 228,461 $ 148,419 $ 481,090 $ 41,916 $ 2,121,835 Current Period Gross Charge-Offs $ — $ — $ 56 $ — $ — $ — $ — $ 56 Agricultural: Risk Rating Pass $ 44,948 $ 56,291 $ 39,852 $ 42,279 $ 23,217 $ 100,391 $ 89,455 $ 396,433 Special Mention 1,495 164 903 5,047 2,338 9,894 2,259 22,100 Substandard — — 199 188 200 4,683 — 5,270 Doubtful — — — — — — — — Total Agricultural Loans $ 46,443 $ 56,455 $ 40,954 $ 47,514 $ 25,755 $ 114,968 $ 91,714 $ 423,803 Current Period Gross Charge-Offs $ — $ — $ — $ 2 $ — $ — $ 25 $ 27 Leases: Risk Rating Pass $ 36,848 $ 12,281 $ 10,634 $ 6,086 $ 4,788 $ 1,351 $ — $ 71,988 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total Leases $ 36,848 $ 12,281 $ 10,634 $ 6,086 $ 4,788 $ 1,351 $ — $ 71,988 Current Period Gross Charge-Offs $ — $ — $ — $ — $ — $ — $ — $ — 71 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) As of December 31, 2022, the risk category of loans by class of loans is as follows: Term Loans Amortized Cost Basis by Origination Year As of December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Commercial and Industrial: Risk Rating Pass $ 156,318 $ 117,648 $ 39,949 $ 46,505 $ 18,423 $ 51,482 $ 154,203 $ 584,528 Special Mention 56 148 577 78 551 2,346 1,672 5,428 Substandard 1,714 5,629 849 1,304 1,028 2,237 17,389 30,150 Doubtful — — — — — — — — Total Commercial and Industrial Loans $ 158,088 $ 123,425 $ 41,375 $ 47,887 $ 20,002 $ 56,065 $ 173,264 $ 620,106 Commercial Real Estate: Risk Rating Pass $ 398,631 $ 490,747 $ 261,462 $ 162,701 $ 129,151 $ 427,433 $ 35,163 $ 1,905,288 Special Mention 3,982 1,568 4,612 135 13,689 25,371 — 49,357 Substandard — 4,628 489 1,415 979 4,728 — 12,239 Doubtful — — — — — — — — Total Commercial Real Estate Loans $ 402,613 $ 496,943 $ 266,563 $ 164,251 $ 143,819 $ 457,532 $ 35,163 $ 1,966,884 Agricultural: Risk Rating Pass $ 62,673 $ 47,682 $ 47,355 $ 25,431 $ 21,728 $ 92,344 $ 83,862 $ 381,075 Special Mention 634 842 6,066 4,149 2,355 11,440 4,310 29,796 Substandard — 210 628 429 85 5,190 — 6,542 Doubtful — — — — — — — — Total Agricultural Loans $ 63,307 $ 48,734 $ 54,049 $ 30,009 $ 24,168 $ 108,974 $ 88,172 $ 417,413 Leases: Risk Rating Pass $ 20,057 $ 14,461 $ 9,648 $ 8,901 $ 1,851 $ 1,478 $ — $ 56,396 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total Leases $ 20,057 $ 14,461 $ 9,648 $ 8,901 $ 1,851 $ 1,478 $ — $ 56,396 72 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential, home equity and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the amortized cost in residential, home equity and consumer loans based on payment activity as well as the current period gross charge-offs for the period ended December 31, 2023. Term Loans Amortized Cost Basis by Origination Year As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Consumer: Payment performance Performing $ 49,208 $ 21,459 $ 9,708 $ 2,756 $ 917 $ 1,911 $ 1,783 $ 87,742 Nonperforming 74 21 12 — — 1 3 111 Total Consumer Loans $ 49,282 $ 21,480 $ 9,720 $ 2,756 $ 917 $ 1,912 $ 1,786 $ 87,853 Current Period Gross Charge-Offs $ 1,162 $ 42 $ 23 $ 71 $ 3 $ 1 $ 7 $ 1,309 Home Equity: Payment performance Performing $ — $ 170 $ 236 $ 90 $ 165 $ 1,207 $ 296,784 $ 298,652 Nonperforming — 247 252 60 — 102 372 1,033 Total Home Equity Loans $ — $ 417 $ 488 $ 150 $ 165 $ 1,309 $ 297,156 $ 299,685 Current Period Gross Charge-Offs $ — $ — $ — $ 55 $ — $ 24 $ 15 $ 94 Residential Mortgage: Payment performance Performing $ 56,306 $ 65,301 $ 85,753 $ 41,352 $ 17,831 $ 94,926 $ — $ 361,469 Nonperforming 11 60 417 287 109 491 — 1,375 Total Residential Mortgage Loans $ 56,317 $ 65,361 $ 86,170 $ 41,639 $ 17,940 $ 95,417 $ — $ 362,844 Current Period Gross Charge-Offs $ — $ — $ 22 $ 36 $ — $ — $ — $ 58 73 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) The following table presents the amortized cost in residential, home equity and consumer loans based on payment activity for the period ended December 31, 2022. Term Loans Amortized Cost Basis by Origination Year As of December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Consumer: Payment performance Performing $ 42,685 $ 22,708 $ 5,610 $ 2,394 $ 1,543 $ 1,553 $ 3,157 $ 79,650 Nonperforming 3 19 212 8 2 10 — 254 Total Consumer Loans $ 42,688 $ 22,727 $ 5,822 $ 2,402 $ 1,545 $ 1,563 $ 3,157 $ 79,904 Home Equity: Payment performance Performing $ 63 $ — $ — $ — $ — $ 591 $ 278,784 $ 279,438 Nonperforming — 20 — — 19 1 270 310 Total Home Equity Loans $ 63 $ 20 $ — $ — $ 19 $ 592 $ 279,054 $ 279,748 Residential Mortgage: Payment performance Performing $ 69,982 $ 97,176 $ 46,851 $ 20,080 $ 16,664 $ 98,699 $ — $ 349,452 Nonperforming — 161 253 — 78 738 — 1,230 Total Residential Mortgage Loans $ 69,982 $ 97,337 $ 47,104 $ 20,080 $ 16,742 $ 99,437 $ — $ 350,682 The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For certain retail loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in retail loans based on payment activity: Credit Cards December 31, 2023 December 31, 2022 Performing $ 20,209 $ 17,366 Nonperforming 142 146 Total $ 20,351 $ 17,512 The following table presents loans purchased and/or sold during the year by portfolio segment: Commercial and Industrial Loans Commercial Real Estate Loans Agricultural Loans Leases Consumer Loans Home Equity Loans Credit Cards Residential Mortgage Loans Total December 31, 2023 Purchases $ — $ 1,502 $ — $ — $ — $ — $ — $ — $ 1,502 Sales — — — — — — — — — December 31, 2022 Purchases $ 522 $ 411 $ — $ — $ — $ — $ — $ — $ 933 Sales — 3,819 97 — — — — — 3,916 74 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 4 – Loans (continued) Certain directors, executive officers, and principal shareholders of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company during 2023. A summary of the activity of these loans follows: Balance January 1, 2023 Additions Changes in Persons or Interests Included Deductions Balance December 31, 2023 Collected Charged-off $ 51,086 $ 13,854 $ ( 7,087 ) $ ( 18,031 ) $ — $ 39,822 NOTE 5 – Premises, Furniture, and Equipment Premises, furniture, and equipment was comprised of the following classifications at December 31: 2023 2022 Land $ 27,100 $ 27,401 Buildings and Improvements 106,646 109,682 Furniture and Equipment 45,749 46,665 Total Premises, Furniture and Equipment 179,495 183,748 Less: Accumulated Depreciation ( 72,719 ) ( 71,511 ) Total $ 106,776 $ 112,237 Depreciation expense was $ 6,570 , $ 6,648 and $ 5,802 for 2023, 2022 and 2021, respectively. NOTE 6 - Deposits At year end 2023, stated maturities of time deposits were as follows: 2024 $ 707,978 2025 32,366 2026 16,952 2027 6,155 2028 3,591 Thereafter — Total $ 767,042 Time deposits and brokered certificates of deposit exceeding the FDIC insurance limit of $250 at December 31, 2023 and 2022 were $ 277,568 and $ 71,081 , respectively. Time deposits originated from outside the geographic area, generally through brokers, totaled $ 3,801 and $ 3,277 at December 31, 2023 and 2022, respectively. Deposits from principal officers, directors, and their affiliates at year-end 2023 and 2022 were $ 67,637 and $ 62,435 , respectively. 75 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 7 – FHLB Advances and Other Borrowings The Company’s funding sources include Federal Home Loan Bank advances, borrowings from other third party correspondent financial institutions, issuance and sale of subordinated debt and other capital securities, and repurchase agreements. Information regarding each of these types of borrowings or other indebtedness is as follows: December 31, 2023 2022 Principal Unamortized Discount and Debt Issuance Costs Principal Unamortized Discount and Debt Issuance Costs Long-term Advances from Federal Home Loan Bank collateralized by qualifying mortgages, investment securities, and mortgage-backed securities $ 50,000 $ — $ 25,000 $ — Junior Subordinated Debentures assumed from American Community Bancorp, Inc. 8,248 ( 1,723 ) 8,248 ( 1,873 ) Junior Subordinated Debentures assumed from River Valley Bancorp, Inc. 7,217 ( 977 ) 7,217 ( 1,082 ) Junior Subordinated Debentures assumed from Citizens First Corporation 5,155 ( 853 ) 5,155 ( 919 ) Junior Subordinated Debentures assumed from Citizens Union Bancorp of Shelbyville, Inc. 20,600 ( 1,885 ) 20,600 ( 2,020 ) Subordinated Debentures 40,000 ( 455 ) 40,000 ( 538 ) Finance Lease Obligation 2,642 — 2,857 — Long-term Borrowings 133,862 ( 5,893 ) 109,077 ( 6,432 ) Overnight Variable Rate Advances from Federal Home Loan Bank collateralized by qualifying mortgages, investment securities, and mortgage-backed securities — — 25,000 — Federal Funds Purchased 25,000 — 11,200 — Repurchase Agreements 40,968 — 64,961 — Short-term Borrowings 65,968 — 101,161 — Total Borrowings $ 199,830 $ ( 5,893 ) $ 210,238 $ ( 6,432 ) Repurchase agreements, which are classified as secured borrowings, generally mature within one day of the transaction date. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the value of the underlying securities. 2023 2022 Average Daily Balance During the Year $ 51,474 $ 52,932 Average Interest Rate During the Year 1.16 % 0.20 % Maximum Month-end Balance During the Year $ 60,055 $ 72,084 Weighted Average Interest Rate at Year-end 1.44 % 0.57 % At December 31, 2023, interest rates on long-term FHLB Advances ranged from 1.54 % to 3.57 % with a weighted average rate of 2.56 %. At December 31, 2022 the Company held one long-term FHLB advance with an interest rate of 1.54 %. At December 31, 2023 and 2022, the Company had no advances containing options whereby the FHLB may convert a fixed rate advance to an adjustable rate advance. At December 31, 2023 and 2022, the Company had outstanding $ 39,545 and $ 39,462 , respectively, in aggregate principal amount, of its 4.50 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “Notes”). The Notes bear interest at a fixed annual rate of 4.50 % until but excluding June 30, 2024, payable semi-annually in arrears. The indenture for the Notes contemplates that, from and including June 30, 2024 to but excluding the maturity date of June 30, 2029, or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to the then-current three-month CME Term SOFR, plus the applicable spread adjustment of 0.26161 % percent, plus 2.68 % percent. The Secured Overnight Financing Rate, or SOFR, is the preferred alternate rate to LIBOR, as identified by the Alternative Reference Rates Committee, a U.S.-based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York. The Federal Reserve subsequently 76 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 7 - FHLB Advances and Other Borrowings (continued) adopted final regulations that, among other things, established LIBOR benchmark replacements based on SOFR under certain circumstances. See Replacement of LIBOR Benchmark below for additional information. The Notes are not subject to any sinking fund and are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. The Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Notes rank junior in right to payment to the Company’s current and future senior indebtedness. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company. At December 31, 2023, the parent company had a $ 15 million line of credit with U.S. Bank National Association, which had no outstanding balance. The line of credit matures September 25, 2024. Interest on the line of credit is based upon one-month Term SOFR plus 2.10 %. At December 31, 2023, scheduled principal payments on long-term borrowings, excluding the capitalized lease obligation and acquired subordinated debentures (which are discussed below) are as follows: 2024 $ 25,000 2025 — 2026 — 2027 — 2028 25,000 Thereafter 39,545 Total $ 89,545 The Company assumed the obligations of junior subordinated debentures through the acquisitions of American Community Bancorp, Inc., River Valley Bancorp, Citizens First Corporation and Citizens Union Bancorp of Shelbyville, Inc. The junior subordinated debentures were issued to ACB Capital Trust I, ACB Capital Trust II, RIVR Statutory Trust I, Citizens First Statutory Trust I, CUB Capital Trust I and CUB Capital Trust II. The trusts are wholly owned by the Company. In accordance with accounting guidelines, the trusts are not consolidated with the Company’s financials, but rather the subordinated debentures are shown as borrowings. The Company guarantees payment of distributions on the trust preferred securities issued by the various trusts. Interest is payable on a quarterly basis. These securities qualify as Tier 1 capital (with certain limitations) for regulatory purposes. $ 34,829 of the junior subordinated debentures were treated as Tier 1 capital for regulatory capital purposes as of December 31, 2023. $ 34,378 of the junior subordinated debentures were treated as Tier 1 capital for regulatory capital purposes as of December 31, 2022. As a result of the acquisitions, these liabilities were recorded at fair value at the acquisition date with the discount amortizing into interest expense over the life of the liability, ultimately accreting to the issuance amount disclosed below. The following table summarizes the terms of each issuance: Date of Issuance Issuance Amount Carrying Amount at December 31, 2023 Variable Rate (1) Rate as of December 31, 2023 Rate as of December 31, 2022 (2) Maturity Date ACB Trust I 5/6/2005 $ 5,155 $ 4,105 3-Month SOFR + 2.15 % 7.81 % 6.90 % May 2035 ACB Trust II 7/15/2005 3,093 2,420 3-Month SOFR + 1.85 % 7.49 % 6.54 % July 2035 RIVR Statutory Trust I 3/26/2003 7,217 6,240 3-Month SOFR + 3.15 % 8.77 % 7.87 % March 2033 Citizens First Statutory Trust I 10/16/2006 5,155 4,302 3-Month SOFR + 1.65 % 7.31 % 5.39 % January 2037 CUB Capital Trust I 10/21/2004 10,310 9,642 3-Month SOFR + 2.00 % 7.64 % 6.69 % November 2034 CUB Capital Trust II 8/17/2005 10,310 9,073 3-Month SOFR + 1.50 % 7.16 % 5.58 % October 2035 (1) “3-Month SOFR” refers to the three-month CME Term SOFR, which became effective following the first London banking day after June 30, 2023, plus the applicable spread adjustment of 0.26161 % percent. (2) Prior to CME Term SOFR becoming effective, the variable rate was based upon LIBOR rates and tenors. See Replacement of LIBOR Benchmark below for additional information. 77 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 7 - FHLB Advances and Other Borrowings (continued) Replacement of LIBOR Benchmark: On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law in response to the U.K. Financial Conduct Authority, the authority regulating LIBOR, announcing that, among other things, the 1-month, 3-month, 6-month and 12-month U.S. dollar LIBOR settings would cease to exist after June 30, 2023. The LIBOR Act establishes a uniform national approach for replacing LIBOR in legacy contracts that do not provide for the use of a clearly defined replacement benchmark rate. As directed by the LIBOR Act, on December 16, 2022, the Federal Reserve issued a final rule setting forth regulations to implement the LIBOR Act, including establishing benchmark replacements based on SOFR for contracts governed by U.S. law that reference certain tenors of U.S. dollar LIBOR (the overnight and one-, three-, six-, and 12-month tenors) and that do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate (“fallback provisions”) following the first London banking day after June 30, 2023. As the junior subordinated debentures discussed above do not have LIBOR fallback provisions, after June 30, 2023, the interest paid on those debentures has been and will be based upon the CME Term SOFR, as the replacement benchmark, including a static spread adjustment for the appropriate tenor, as provided by the LIBOR Act and related Federal Reserve regulations. The relevant spread adjustment for a three-month tenor is 0.26161 %. NOTE 8 - Shareholders ’ Equity Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The current risk-based capital rules, as adopted by federal banking regulators, are based upon guidelines developed by the Basel Committee on Banking Supervision and reflect various requirements of the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules require banking organizations to, among other things, maintain a minimum ratio of Total Capital to risk-weighted assets, a minimum ratio of Tier 1 Capital to risk-weighted assets, a minimum ratio of “Common Equity Tier 1 Capital” to risk-weighted assets, and a minimum leverage ratio (calculated as the ratio of Tier 1 Capital to adjusted average consolidated assets). In addition, under the Basel III Rules, in order to avoid limitations on capital distributions, including dividend payments, the Company is required to maintain a 2.5 % capital conservation buffer above the adequately capitalized regulatory capital ratios. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. At December 31, 2023, the Company and Bank meet all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2023 and 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. 78 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders ’ Equity (continued) At December 31, 2023, consolidated and bank actual capital and minimum required levels are presented below: Actual: Minimum Required For Capital Adequacy Purposes: Minimum Required To Be Well-Capitalized Under Prompt Corrective Action Regulations: Amount Ratio Amount Ratio ⁽¹⁾ Amount Ratio Total Capital (to Risk Weighted Assets) Consolidated $ 810,391 16.50 % $ 392,870 8.00 % N/A N/A Bank 723,998 14.76 392,402 8.00 $ 490,503 10.00 % Tier 1 (Core) Capital (to Risk Weighted Assets) Consolidated $ 735,089 14.97 % $ 294,652 6.00 % N/A N/A Bank 688,696 14.04 294,302 6.00 $ 392,402 8.00 % Common Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets) Consolidated $ 700,260 14.26 % $ 220,989 4.50 % N/A N/A Bank 688,696 14.04 220,726 4.50 $ 318,827 6.50 % Tier 1 (Core) Capital (to Average Assets) Consolidated $ 735,089 11.75 % $ 250,162 4.00 % N/A N/A Bank 688,696 11.03 249,642 4.00 $ 312,053 5.00 % (1) Excludes 2.5 % capital conservation buffer. At December 31, 2022, consolidated and bank actual capital and minimum required levels are presented below: Actual: Minimum Required For Capital Adequacy Purposes: Minimum Required To Be Well-Capitalized Under Prompt Corrective Action Regulations: Amount Ratio Amount Ratio ⁽¹⁾ Amount Ratio Total Capital (to Risk Weighted Assets) Consolidated $ 747,542 15.45 % $ 387,024 8.00 % N/A N/A Bank 680,695 14.07 386,959 8.00 $ 483,698 10.00 % Tier 1 (Core) Capital (to Risk Weighted Assets) Consolidated $ 676,068 13.97 % $ 290,268 6.00 % N/A N/A Bank 649,221 13.42 290,219 6.00 $ 386,959 8.00 % Common Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets) Consolidated $ 641,690 13.26 % $ 217,701 4.50 % N/A N/A Bank 649,221 13.42 217,664 4.50 $ 314,404 6.50 % Tier 1 (Core) Capital (to Average Assets) Consolidated $ 676,068 10.50 % $ 257,622 4.00 % N/A N/A Bank 649,221 10.09 257,341 4.00 $ 321,677 5.00 % (1) Excludes 2.5 % capital conservation buffer. The Company and the Bank at year end 2023 and 2022 were categorized as well-capitalized. There have been no conditions or events that management believes has changed the classification of the Bank under the prompt corrective action regulations since the last notification from regulators. Regulations require the maintenance of certain capital levels at the Bank, and may limit the 79 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders ’ Equity (continued) dividends payable by the affiliate to the holding company, or by the holding company to its shareholders. At December 31, 2023 the Bank had approximately $ 175,000 in retained earnings available for payment of dividends to the parent company without prior regulatory approval. 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 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 effective January 1, 2022. 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. Equity Plans and Equity Based Compensation During the periods presented, the Company maintained one equity incentive plan under which stock options, restricted stock, and other equity incentive awards could be granted. The Company’s 2019 Long-Term Equity Incentive Plan (the “2019 LTI Plan”), which authorizes a maximum aggregate issuance of 1,000,000 shares of common stock (subject to certain permitted adjustments), became effective on May 16, 2019, following approval of the Company’s shareholders. It will remain in effect until May 16, 2029, or until all shares of common stock subject to the 2019 LTI Plan are distributed, all awards have expired or terminated, or the plan is terminated pursuant to its terms, whichever occurs first. Stock Options Options may be designated as incentive stock options or as nonqualified stock options. While the date after which options are first exercisable is determined by the appropriate committee of the Board of Directors of the Company or, in the case of options granted to directors, by the Board of Directors, no stock option may be exercised after ten years from the date of grant ( twenty years in the case of nonqualified stock options). The exercise price of stock options granted pursuant to the plans must be no less than the market value of the Common Stock on the date of the grant. The plans authorize an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash and common shares. An optionee may tender already-owned common shares to the Company in exercise of an option. Certain of these plans authorize an optionee to surrender the value of an unexercised option in payment of an equivalent amount of the exercise price of the option. The Company typically issues authorized but unissued common shares upon the exercise of options. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of common stock as of the reporting date. During 2023, 2022 and 2021, the Company granted no options, and recorded no stock compensation expense related to option grants. The Company recorded no other stock compensation expense applicable to options during the years ended December 31, 2023, 2022 and 2021. Restricted Stock During the periods presented, awards of long-term incentives were granted in the form of restricted stock. In 2019 and prior, awards that were granted to management and selected other employees under the Company’s management incentive plan were granted in tandem with cash credit entitlements in the form of 60 % restricted stock grants and 40 % cash credit entitlements. In 2020, awards granted under the management incentive plan were granted in tandem with cash credit entitlements in the form of 66.67 % restricted stock grants and 33.33 % cash credit entitlements. In 2019 and prior, the restricted stock grants and tandem cash credit entitlements, generally, vested in three annual installments of 33.3 % each. In 2020, 100 % of the cash portion of an award vests towards the end of the year in which the grant was made, followed by the restricted stock grants vesting 50 % in each of the 2nd and 3rd years. Beginning in 2021, for named executive officers, awards are granted in the form of 100 % restricted stock grants which will vest in one-third installments on the first, second and third anniversaries of the award date. 80 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders ’ Equity (continued) Awards that are granted to directors as additional retainers for their services do not include any cash credit entitlement. These director restricted stock grants are subject to forfeiture in the event that the recipient of the grant does not continue in service as a director of the Company through December 31 of the year after grant or does not satisfy certain meeting attendance requirements, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant. The following table presents expense recorded for restricted stock and cash entitlements as well as the related tax effect for the years ended 2023, 2022, and 2021: 2023 2022 2021 Restricted Stock Expense $ 2,345 $ 2,308 $ 1,692 Cash Entitlement Expense 750 646 732 Tax Effect ( 803 ) ( 766 ) ( 629 ) Net of Tax $ 2,292 $ 2,188 $ 1,795 Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $ 3,519 , $ 2,781 , and $ 2,497 as of December 31, 2023, 2022, and 2021, respectively. The following table presents information on restricted stock grants outstanding for the period shown: Year Ended December 31, 2023 Restricted Shares Weighted Average Market Price at Grant Outstanding at Beginning of Period 74,873 $ 41.05 Granted 96,931 33.72 Issued and Vested ( 49,757 ) 40.55 Forfeited ( 5,415 ) 37.20 Outstanding at End of Period 116,632 35.34 Employee Stock Purchase Plan The Company’s shareholders approved the Company’s 2019 Employee Stock Purchase Plan on May 16, 2019, as well as an Amended and Restated 2019 Employee Stock Purchase Plan on May 21, 2020, which was amended and restated to reflect certain clarifying changes (the “2019 ESPP”). The 2019 ESPP replaced the Company’s 2009 Employee Stock Purchase Plan, which expired by its own terms on August 16, 2019. The 2019 ESPP provides for a series of 3 -month offering periods, commencing on the first day and ending on the last trading day of each calendar quarter, for the purchase of the Company’s common stock by participating employees. The purchase price of the shares has been set at 95 % of the fair market value of the Company’s common stock on the last trading day of the offering period. A total of 750,000 common shares has been reserved for issuance under the 2019 ESPP. The 2019 ESPP will continue until September 30, 2029, or, if earlier, until all of the shares of common stock allocated to the 2019 ESPP have been purchased. Funding for the purchase of common stock is from employee and Company contributions. In 2023, the Company recorded $ 29 of expense, $ 22 net of tax, for the employee stock purchase plan. In 2022, the Company recorded $ 53 of expense, $ 39 net of tax, for the employee stock purchase plan. In 2021, the Company recorded $ 45 of expense, $ 34 net of tax, for the employee stock purchase plan. There was no unrecognized compensation expense as of December 31, 2023, 2022 and 2021 for the Employee Stock Purchase Plans. Stock Repurchase Plan On January 31, 2022, the Company’s Board of Directors approved a new plan to repurchase up to one 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 shares under the plan, and the plan may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such 81 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 8 – Shareholders ’ Equity (continued) factors as the market price of the stock, general market and economic conditions and applicable legal requirements. The Company has not repurchased an shares under this repurchase plan. In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations, like the Company. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. NOTE 9 - Employee Benefit Plans The Company provides a contributory trusteed 401(k) deferred compensation and profit sharing plan, which covers substantially all employees. The Company agrees to match certain employee contributions under the 401(k) portion of the plan, while profit sharing contributions are discretionary and are subject to determination by the Board of Directors. Company contributions were $ 2,356 , $ 2,152 , and $ 2,050 for 2023, 2022, and 2021, respectively. The Company self-insures employee health benefits. Stop loss insurance covers annual losses exceeding $ 175 per covered family. Management’s policy is to establish a reserve for claims not submitted by a charge to earnings based on prior experience. Charges to earnings were $ 7,227 , $ 7,619 , and $ 5,520 for 2023, 2022, and 2021, respectively. The Company maintains deferred compensation plans for the benefit of certain directors and officers. Under the plans, the Company agrees in return for the directors and officers deferring the receipt of a portion of their current compensation, to pay a retirement benefit computed as the amount of the compensation deferred plus accrued interest at a variable rate. Accrued benefits payable totaled $ 2,651 and $ 3,212 at December 31, 2023 and 2022, respectively. Deferred compensation expense was $ 261 , $ 1,143 , and $ 302 for 2023, 2022, and 2021, respectively. In conjunction with the plans, the Company purchased life insurance on certain directors and officers. Postretirement Medical and Life Benefit Plan The Company has an unfunded postretirement benefit plan covering substantially all of its employees. The medical plan is contributory with the participants’ contributions adjusted annually; the life insurance plans are noncontributory. Changes in Accumulated Postretirement Benefit Obligations: 2023 2022 Obligation at the Beginning of Year $ 1,530 $ 1,592 Unrecognized Loss (Gain) 187 ( 71 ) Components of Net Periodic Postretirement Benefit Cost Service Cost 101 105 Interest Cost 71 35 Net Expected Benefit Payments ( 142 ) ( 131 ) Amendments — — Obligation at End of Year $ 1,747 $ 1,530 Components of Postretirement Benefit Expense: 2023 2022 2021 Service Cost $ 101 $ 105 $ 119 Interest Cost 71 35 28 Amortization of Prior Service Costs ( 3 ) ( 2 ) ( 2 ) Amortization of Unrecognized Net (Gain) Loss 32 43 55 Net Postretirement Benefit Expense 201 181 200 Net Gain (Loss) During Period Recognized in Other Comprehensive Income (Loss) 158 ( 112 ) ( 121 ) Total Recognized in Net Postretirement Benefit Expense and Other Comprehensive Income $ 359 $ 69 $ 79 82 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 9 – Employee Benefit Plans (continued) Assumptions Used to Determine Net Periodic Cost and Benefit Obligations: 2023 2022 2021 Discount Rate 4.64 % 4.83 % 2.31 % Assumed Health Care Cost Trend Rates at Year-end: 2023 2022 Health Care Cost Trend Rate Assumed for Next Year 8.00 % 7.50 % Rate that the Cost Trend Rate Gradually Declines to 4.50 % 4.50 % Year that the Rate Reaches the Rate it is Assumed to Remain at 2030 2028 Contributions The Company expects to contribute $ 169 to its postretirement medical and life insurance plan in 2024. Estimated Future Benefits The following postretirement benefit payments, which reflect expected future service, are expected to be paid: 2024 $ 169 2025 129 2026 167 2027 177 2028 184 2029-2033 931 Multi-Employer Pension Plan Through the acquisition of River Valley Bancorp, the Company acquired a participation in a multi-employer defined benefit pension plan. Effective December 31, 2015, the plan was frozen. Pension expense was approximately $ 141 and $ 53 during 2023 and 2022, respectively. Specific plan asset and accumulated benefit information for the Company’s portion of the fund is not available. Under the Employee Retirement Income and Security Act of 1974 (“ERISA”), a contributor to a multi-employer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. The Company is in process of withdrawing from this multi-employer pension plan with finalization expected to occur in the second quarter of 2024. As a result, the Company has accrued a withdrawal liability in the amount of $ 101 as of December 31, 2023. The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “Pentegra DB Plan”), a tax-qualified defined-benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under ERISA and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $ 142,405 and $ 248,563 for the plan years ended June 30, 2022 and 2021, respectively. The Company’s contributions to the Pentegra DB Plan for the fiscal year ending December 31, 2023 were not more than 5 % of total contributions to the Pentegra DB Plan for the year ending June 30, 2022. 83 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 10 - Income Taxes The provision for income taxes consists of the following: 2023 2022 2021 Current Federal $ 13,067 $ 13,049 $ 13,437 Current State 1,934 1,763 2,547 Deferred Federal 2,602 1,868 2,056 Deferred State 156 671 608 Total $ 17,759 $ 17,351 $ 18,648 Effective tax rates differ from the federal statutory rate of 21 % for 2023, 2022 and 2021 applied to income before income taxes due to the following: 2023 2022 2021 Statutory Rate Times Pre-tax Income $ 21,766 $ 20,827 $ 21,585 Add (Subtract) the Tax Effect of: Income from Tax-exempt Loans and Investments ( 4,951 ) ( 5,223 ) ( 3,872 ) Non-deductible Merger Costs — 177 — State Income Tax, Net of Federal Tax Effect 1,651 1,923 2,492 General Business Tax Credits ( 1,128 ) ( 1,038 ) ( 1,013 ) Amortization of Tax Credit Investments 1,101 1,040 1,001 Company Owned Life Insurance ( 363 ) ( 476 ) ( 321 ) Other Differences ( 317 ) 121 ( 1,224 ) Total Income Taxes $ 17,759 $ 17,351 $ 18,648 84 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 10 – Income Taxes (continued) The net deferred tax asset/(liability) at December 31 consists of the following: 2023 2022 Deferred Tax Assets: Allowance for Credit Losses $ 10,888 $ 10,478 Lease Liability (Operating Leases) 1,313 1,585 Unrealized Loss on Securities 57,882 70,234 Deferred Compensation and Employee Benefits 1,026 1,162 Other-than-temporary Impairment 245 246 Accrued Expenses 1,224 1,325 Business Combination Fair Value Adjustments — 205 Pension and Postretirement Plans 182 182 Other Real Estate Owned 41 70 Non-Accrual Loan Interest Income 449 629 General Business Tax Credits — 198 Net Operating Loss Carryforward 650 828 Other 879 1,190 Total Deferred Tax Assets 74,779 88,332 Deferred Tax Liabilities: Depreciation ( 3,416 ) ( 2,859 ) Leasing Activities, Net ( 12,926 ) ( 10,983 ) FHLB Stock Dividends ( 455 ) ( 488 ) Prepaid Expenses ( 154 ) ( 684 ) Intangibles ( 2,376 ) ( 3,181 ) Deferred Loan Fees ( 954 ) ( 1,127 ) Mortgage Servicing Rights ( 51 ) ( 58 ) Right of Use Asset (Operating Leases) ( 1,274 ) ( 1,548 ) Business Combination Fair Value Adjustments ( 478 ) — Other ( 1,325 ) ( 924 ) Total Deferred Tax Liabilities ( 23,409 ) ( 21,852 ) Valuation Allowance — — Net Deferred Tax Asset/(Liability) $ 51,370 $ 66,480 Under the Internal Revenue Code, through 1996, three acquired banking companies, which are now a part of the Company’s single banking subsidiary, were allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The acquired banks were formerly known as River Valley Financial Bank (acquired in March 2016), Peoples Community Bank (acquired in October 2005) and First American Bank (acquired in January 1999). Subject to certain limitations, these banks were permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. Each of the banks generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, the banks were only allowed a deduction based on actual loss experience. Retained earnings at December 31, 2023, include approximately $ 5,095 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income, which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. The unrecorded deferred income tax liability on the above amount at December 31, 2023 was approximately $ 1,070 . As of December 31, 2023, the Company had Kentucky net operating loss carryforwards of $ 16,462 , which expire in years ranging from 2029 through 2040. These net operating loss carryforwards are expected to be fully utilized before their expiration dates. 85 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 10 – Income Taxes (continued) Unrecognized Tax Benefits The Company had no unrecognized tax benefits as of December 31, 2023, 2022, and 2021, and did no t recognize any increase in unrecognized benefits during 2023 relative to any tax positions taken in 2023. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income tax expense accounts; no such accruals existed as of December 31, 2023, 2022, and 2021. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2019. The Company and its corporate subsidiaries file combined/unitary returns in various states, which are subject to examination for all years after 2019. NOTE 11 - Revenue Recognition The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), for the years ended December 31, 2023, 2022 and 2021. Trust and investment product fees are included in the wealth management services segment while insurance revenues are included in the insurance segment. All other revenue streams are primarily included in the banking segment. Year Ended December 31, Non-interest Income 2023 2022 2021 In-Scope of Topic 606: Wealth Management Fees $ 11,711 $ 10,076 $ 10,321 Service Charges on Deposit Accounts 11,538 11,457 7,723 Insurance Revenues 9,596 10,020 9,268 Interchange Fee Income 17,452 15,820 13,116 Other Operating Income: ATM Fees 1,185 1,235 992 Wire Transfer Fees 696 737 703 Other (1) 1,251 1,251 1,182 Non-interest Income (in-scope of Topic 606) 53,429 50,596 43,305 Non-interest Income (out-of-scope of Topic 606) 6,832 8,537 16,157 Total Non-interest Income $ 60,261 $ 59,133 $ 59,462 (1) “ Other ” income includes safe deposit box rentals and other non-interest related fees totaling $ 1.2 million, $ 1.2 million, and $ 1.2 million for the years ended December 31, 2023, 2022, and 2021, respectively, all of which are within scope of ASC 606. A description of the Company’s revenue streams accounted for under Topic 606 follows: Service Charges on Deposit Accounts : The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed (the point in time the Company fills the customer’s request). Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Interchange Fee Income: The Company earns interchange fees from debit/credit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Wealth Management Fees: The Company earns wealth management and investment services income from its contracts with wealth management customers to manage assets for investment and/or to transact their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (trade date). 86 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 11 – Revenue Recognition (continued) Insurance Revenues : The Company earns insurance revenue from commissions derived from the sale of personal and corporate property and casualty insurance products. These commissions are primarily earned over time as the Company provides the contracted insurance product to customers. Other Operating Income : The other operating income revenue streams within the scope of Topic 606 consist of ATM fees, wire transfer fees, safe deposit box rentals, check printing commissions and other non-interest related fees. NOTE 12 - Per Share Data The computation of Basic Earnings per Share and Diluted Earnings per Share are provided below: 2023 2022 2021 Basic Earnings per Share: Net Income $ 85,888 $ 81,825 $ 84,137 Weighted Average Shares Outstanding 29,557,567 29,464,591 26,537,311 Basic Earnings per Share $ 2.91 $ 2.78 $ 3.17 Diluted Earnings per Share: Net Income $ 85,888 $ 81,825 $ 84,137 Weighted Average Shares Outstanding 29,557,567 29,464,591 26,537,311 Potentially Dilutive Shares, Net — — — Diluted Weighted Average Shares Outstanding 29,557,567 29,464,591 26,537,311 Diluted Earnings per Share $ 2.91 $ 2.78 $ 3.17 There were no anti-dilutive shares at December 31, 2023, 2022, and 2021. There were no stock options outstanding at December 31, 2023, 2022 and 2021. Restricted stock units are participating shares and included in outstanding shares for purposes of the calculation of earnings per share. NOTE 13 - Leases At the inception of a contract, an entity should determine whether the contract contains a lease. Topic 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of an identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset. The Bank has finance leases for branch offices as well as operating leases for branch offices, ATM locations and certain office equipment. The right-of-use asset is included in the ‘Premises, Furniture and Equipment, Net’ line of the Consolidated Balance Sheet. The lease liability is included in the ‘Accrued Interest Payable and Other Liabilities’ line of the Consolidated Balance Sheet. The Company used the implicit lease rate when determining the present value of lease payments for finance leases. The present value of lease payments for operating leases was determined using the incremental borrowing rate as of the date the Company adopted this standard. The components of lease expense were as follows: December 31, 2023 December 31, 2022 Finance Lease Cost: Amortization of Right-of-Use Assets $ 210 $ 210 Interest on Lease Liabilities 304 326 Operating Lease Cost 1,424 1,508 Short-term Lease Cost — — Total Lease Cost $ 1,938 $ 2,044 87 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 13 – Leases (continued) The weighted average lease term and discount rates were as follows: December 31, 2023 December 31, 2022 Weighted Average Remaining Lease Term: Finance Leases 8 years 9 years Operating Leases 7 years 7 years Weighted Average Discount Rate: Finance Leases 11.37 % 11.41 % Operating Leases 3.07 % 2.98 % Supplemental balance sheet information related to leases were as follows: December 31, 2023 December 31, 2022 Finance Leases Premises, Furniture and Equipment, Net $ 1,648 $ 1,858 Other Borrowings $ 2,642 $ 2,857 Operating Leases Operating Lease Right-of-Use Assets $ 5,180 $ 6,297 Operating Lease Liabilities $ 5,337 $ 6,447 Supplemental cash flow information related to leases were as follows: December 31, 2023 December 31, 2022 Cash Paid for Amounts in the Measurement of Lease Liabilities: Operating Cash Flows from Finance Leases $ 304 $ 326 Operating Cash Flows from Operating Leases 1,395 1,449 Financing Cash Flows from Finance Leases 211 186 The following table presents a maturity analysis of Finance and Operating Lease Liabilities: December 31, 2023 Finance Leases Operating Leases Year 1 $ 519 $ 1,256 Year 2 519 1,047 Year 3 519 845 Year 4 486 662 Year 5 438 620 Thereafter 1,509 1,488 Total Lease Payments 3,990 5,918 Less Imputed Interest ( 1,348 ) ( 581 ) Total $ 2,642 $ 5,337 NOTE 14 - Commitments and Off-balance Sheet Items In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and commitments to sell loans, which are not reflected in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make commitments as it uses for on-balance sheet items. The Company’s exposure to credit risk for commitments to sell loans is dependent upon the ability of the counter-party to purchase the loans. This is generally assured by the use of government sponsored entity counterparts. These commitments are subject to market risk resulting from fluctuations in interest rates. 88 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 14 – Commitments and Off-balance Sheet Items (continued) Commitments and contingent liabilities are summarized as follows, at December 31: 2023 2022 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to Fund Loans: Consumer Lines $ 13,978 $ 689,295 $ 15,238 $ 576,784 Commercial Operating Lines 120,352 546,016 161,058 611,357 Residential Mortgages 11,855 3,521 15,129 5,327 Total Commitments to Fund Loans $ 146,185 $ 1,238,832 $ 191,425 $ 1,193,468 Commitments to Sell Loans: Mandatory $ — $ — $ — $ — Non-mandatory $ 5,992 $ — $ 8,731 $ — Standby Letters of Credit $ 3,340 $ 16,161 $ 3,047 $ 17,117 The fixed rate commitments to fund loans have interest rates ranging from 2.00 % to 24.00 % and maturities ranging from less than 1 year to 27 years. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower, and may include accounts receivable, inventory, property, land, and other items. The Company maintains an allowance for credit losses on unfunded loan commitments to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses on loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued interest payable and other liabilities. NOTE 15 - Fair Value Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For investment securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At December 31, 2023, the Company held $ 75 in Level 3 securities which consist of non-rated Obligations of State and Political Subdivisions and $ 984 in Level 3 securities which consist of non-rated MBS/CMO. Absent the credit rating, significant 89 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) assumptions must be made such that the credit risk input becomes an unobservable input and thus these investment securities are reported by the Company in a Level 3 classification. Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Individually Analyzed Loans: Fair values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances includes consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor’s required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s Risk Management Area reviews the assumptions and approaches utilized in the appraisal. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return. Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized. Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for similar assets, adjusted for specific attributes of that loan resulting in a Level 2 classification. Assets and Liabilities Measured on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below: Fair Value Measurements at December 31, 2023 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: U.S. Treasury $ — $ — $ — $ — Obligations of State and Political Subdivisions — 768,800 75 768,875 MBS/CMO — 644,056 984 645,040 US Gov’t Sponsored Entities & Agencies — 182,917 — 182,917 Total Securities $ — $ 1,595,773 $ 1,059 $ 1,596,832 Loans Held-for-Sale $ — $ 5,226 $ — $ 5,226 Derivative Assets $ — $ 7,458 $ — $ 7,458 Derivative Liabilities $ — $ 7,467 $ — $ 7,467 90 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) Fair Value Measurements at December 31, 2022 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: U.S. Treasury $ 64,119 $ — $ — $ 64,119 Obligations of State and Political Subdivisions — 777,769 83 $ 777,852 MBS/CMO — 713,775 906 $ 714,681 US Gov’t Sponsored Entities & Agencies — 205,017 — 205,017 Total Securities $ 64,119 $ 1,696,561 $ 989 $ 1,761,669 Loans Held-for-Sale $ — $ 8,600 $ — $ 8,600 Derivative Assets $ — $ 9,899 $ — $ 9,899 Derivative Liabilities $ — $ 9,749 $ — $ 9,749 As of December 31, 2023 and 2022, the aggregate fair value, contractual balance (including accrued interest), and gain or loss on Loans Held-for-Sale were as follows: 2023 2022 Aggregate Fair Value $ 5,226 $ 8,600 Contractual Balance 5,125 8,474 Gain (Loss) 101 126 The total amount of gains and losses from changes in fair value included in earnings for the years ended December 31, 2023, 2022 and 2021 for loans held for sale were $( 25 ), $( 163 ), and $( 237 ), respectively. The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2023 and 2022: Obligations of State and Political Subdivisions MBS/CMO 2023 2022 2023 2022 Balance of Recurring Level 3 Assets at January 1 $ 83 $ — $ 906 $ — Total Gains (Losses) Included in Other Comprehensive Income ( 8 ) ( 17 ) 78 ( 76 ) Maturities / Calls — — — — Acquired through Bank Acquisition — 100 — 982 Balance of Recurring Level 3 Assets at December 31 $ 75 $ 83 $ 984 $ 906 Of the total gain/loss included in earnings for the years ended December 31, 2023 and 2022, $ 70 and $( 93 ) was attributable to other changes in fair value, respectively. 91 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) Assets and Liabilities Measured on a Non-Recurring Basis Assets and liabilities measured at fair value on a non-recurring basis are summarized below: Fair Value Measurements at December 31, 2023 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Individually Analyzed Loans Commercial and Industrial Loans $ — $ — $ 2,506 $ 2,506 Commercial Real Estate Loans — — 3,447 3,447 Agricultural Loans — — 2,395 2,395 Consumer Loans — — 9 9 Home Equity Loans — — 326 326 Residential Mortgage Loans — — 450 450 Fair Value Measurements at December 31, 2022 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Individually Analyzed Loans Commercial and Industrial Loans $ — $ — $ 1,858 $ 1,858 Commercial Real Estate Loans — — 10,040 10,040 Agricultural Loans — — 2,970 2,970 Consumer Loans — — 8 8 Home Equity Loans — — 368 368 Residential Mortgage Loans — — 718 718 There was no Other Real Estate carried at fair value less costs to sell at December 31, 2023 and 2022. No charge to earnings was included in the years ended December 31, 2023 and 2022. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2023 and 2022: December 31, 2023 Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) Individually Analyzed Loans - Commercial and Industrial Loans $ 2,506 Sales comparison approach Adjustment for physical condition of comparable properties sold 23 % - 100 % ( 33 %) Individually Analyzed Loans - Commercial Real Estate Loans $ 3,447 Sales comparison approach Adjustment for physical condition of comparable properties sold 20 % - 68 % ( 42 %) Individually Analyzed Loans - Agricultural Loans $ 2,395 Sales comparison approach Adjustment for physical condition of comparable properties sold 31 % - 100 % ( 51 %) Individually Analyzed Loans - Consumer Loans $ 9 Sales comparison approach Adjustment for physical condition of comparable properties sold 20 % - 20 % ( 20 %) Individually Analyzed Loans - Home Equity Loans $ 326 Sales comparison approach Adjustment for physical condition of comparable properties sold 20 % - 20 % ( 20 %) Individually Analyzed Loans - Residential Mortgage Loans $ 450 Sales comparison approach Adjustment for physical condition of comparable properties sold 20 % - 20 % ( 20 %) 92 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 15 – Fair Value (continued) December 31, 2022 Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) Individually Analyzed Loans - Commercial and Industrial Loans $ 1,858 Sales comparison approach Adjustment for physical condition of comparable properties sold 0 % - 100 % ( 40 %) Individually Analyzed Loans - Commercial Real Estate Loans $ 10,040 Sales comparison approach Adjustment for physical condition of comparable properties sold 30 % - 100 % ( 37 %) Individually Analyzed Loans - Agricultural Loans $ 2,970 Sales comparison approach Adjustment for physical condition of comparable properties sold 30 % - 100 % ( 48 %) Individually Analyzed Loans - Consumer Loans $ 8 Sales comparison approach Adjustment for physical condition of comparable properties sold 27 % - 100 % ( 20 %) Individually Analyzed Loans - Home Equity Loans $ 368 Sales comparison approach Adjustment for physical condition of comparable properties sold 20 % - 51 % ( 20 %) Individually Analyzed Loans - Residential Mortgage Loans $ 718 Sales comparison approach Adjustment for physical condition of comparable properties sold 20 % - 100 % ( 21 %) The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the tables below for the periods ending December 31, 2023 and 2022. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the tables. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision. Fair Value Measurements at December 31, 2023 Using Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Short-term Investments $ 115,330 $ 78,805 $ 36,525 $ — $ 115,330 Interest Bearing Time Deposits with Banks 500 — 500 — 500 Loans, Net 3,918,184 — — 3,801,738 3,801,738 Accrued Interest Receivable 30,595 — 10,014 20,581 30,595 Financial Liabilities: Demand, Savings, and Money Market Deposits ( 4,485,921 ) ( 4,485,921 ) — — ( 4,485,921 ) Time Deposits ( 767,042 ) — ( 759,217 ) — ( 759,217 ) Short-term Borrowings ( 65,968 ) ( 25,000 ) ( 40,968 ) — ( 65,968 ) Long-term Debt ( 127,969 ) — ( 52,522 ) ( 74,562 ) ( 127,084 ) Accrued Interest Payable ( 7,073 ) — ( 6,701 ) ( 372 ) ( 7,073 ) Fair Value Measurements at December 31, 2022 Using Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Short-term Investments $ 117,381 $ 75,476 $ 41,905 $ — $ 117,381 Interest Bearing Time Deposits with Banks 500 — 500 — 500 Loans, Net 3,724,804 — — 3,688,903 3,688,903 Accrued Interest Receivable 27,741 38 10,863 16,840 27,741 Financial Liabilities: Demand, Savings, and Money Market Deposits ( 4,921,582 ) ( 4,921,582 ) — — ( 4,921,582 ) Time Deposits ( 428,469 ) — ( 426,184 ) — ( 426,184 ) Short-term Borrowings ( 101,161 ) ( 36,200 ) ( 64,961 ) — ( 101,161 ) Long-term Debt ( 102,645 ) — ( 26,830 ) ( 72,272 ) ( 99,102 ) Accrued Interest Payable ( 1,513 ) — ( 1,205 ) ( 308 ) ( 1,513 ) NOTE 16 - Segment Information The Company’s operations include three primary segments: core banking, wealth management services, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial and agricultural, commercial and agricultural real estate, and residential mortgage loans, primarily in the Company’s local markets. The core banking segment also involves the sale of residential mortgage loans in the secondary 93 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 16 – Segment Information (continued) market. The wealth management segment involves providing trust, investment advisory, brokerage and retirement planning services to customers. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the Company’s banking subsidiary’s local markets. The core banking segment is comprised by the Company’s banking subsidiary, German American Bank, which operated through 76 banking offices at December 31, 2023. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The wealth management segment’s revenues are comprised primarily of fees generated by the trust operations of the Company’s banking subsidiary and by German American Investment Services, Inc. These fees are derived by providing trust, investment advisory, brokerage and retirement planning services to its customers. The insurance segment primarily consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment. The following segment financial information has been derived from the internal financial statements of the Company which are used by management to monitor and manage financial performance. The accounting policies of the three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments. Core Banking Wealth Management Services Insurance Other Consolidated Totals Year Ended December 31, 2023 Net Interest Income $ 195,215 $ 120 $ 56 $ ( 4,958 ) $ 190,433 Net Gains on Sales of Loans 2,363 — — — 2,363 Net Gains on Securities 40 — — — 40 Wealth Management Fees 5 11,706 — — 11,711 Insurance Revenues 1 24 9,572 ( 1 ) 9,596 Noncash Items: Provision for Credit Losses 2,550 — — — 2,550 Depreciation and Amortization 9,025 31 48 456 9,560 Income Tax Expense (Benefit) 18,698 695 556 ( 2,190 ) 17,759 Segment Profit (Loss) 85,037 2,974 1,682 ( 3,805 ) 85,888 Segment Assets at December 31, 2023 6,137,687 9,508 3,509 1,494 6,152,198 Core Banking Wealth Management Services Insurance Other Consolidated Totals Year Ended December 31, 2022 Net Interest Income $ 204,259 $ 46 $ 27 $ ( 3,748 ) $ 200,584 Net Gains on Sales of Loans 3,818 — — — 3,818 Net Gains on Securities 589 — — ( 27 ) 562 Wealth Management Fees 4 10,072 — — 10,076 Insurance Revenues 31 12 9,977 — 10,020 Noncash Items: Provision for Credit Losses 6,350 — — — 6,350 Depreciation and Amortization 9,571 41 48 456 10,116 Income Tax Expense (Benefit) 17,873 691 720 ( 1,933 ) 17,351 Segment Profit (Loss) 82,965 2,157 2,281 ( 5,578 ) 81,825 Segment Assets at December 31, 2022 6,152,346 8,846 14,706 ( 19,907 ) 6,155,991 94 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 16 – Segment Information (continued) Core Banking Wealth Management Services Insurance Other Consolidated Totals Year Ended December 31, 2021 Net Interest Income $ 163,395 $ 42 $ 11 $ ( 2,618 ) $ 160,830 Net Gains on Sales of Loans 8,267 — — — 8,267 Net Gains on Securities 2,247 — — — 2,247 Wealth Management Fees 4 10,317 — — 10,321 Insurance Revenues 14 7 9,247 — 9,268 Noncash Items: Provision for Credit Losses ( 6,500 ) — — — ( 6,500 ) Depreciation and Amortization 8,346 46 57 321 8,770 Income Tax Expense (Benefit) 18,774 826 652 ( 1,604 ) 18,648 Segment Profit (Loss) 82,066 2,543 2,034 ( 2,506 ) 84,137 Segment Assets at December 31, 2021 5,595,721 6,115 12,245 ( 5,542 ) 5,608,539 NOTE 17 - Parent Company Financial Statements The condensed financial statements of German American Bancorp, Inc. are presented below: CONDENSED BALANCE SHEETS December 31, 2023 2022 ASSETS Cash $ 66,835 $ 46,541 Securities Available-for-Sale 4,112 — Other Investments 353 353 Investment in Subsidiary Bank 652,452 566,494 Investment in Non-banking Subsidiaries 1,975 6,747 Other Assets 15,097 19,165 Total Assets $ 740,824 $ 639,300 LIABILITIES Borrowings $ 75,327 $ 74,788 Other Liabilities 1,939 6,119 Total Liabilities 77,266 80,907 SHAREHOLDERS’ EQUITY Common Stock 29,585 29,493 Additional Paid-in Capital 389,411 387,171 Retained Earnings 461,622 405,167 Accumulated Other Comprehensive Income (Loss) ( 217,060 ) ( 263,438 ) Total Shareholders’ Equity 663,558 558,393 Total Liabilities and Shareholders’ Equity $ 740,824 $ 639,300 95 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 17 – Parent Company Financial Statements (continued) CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) Years Ended December 31, 2023 2022 2021 INCOME Dividends from Subsidiaries Bank $ 50,000 $ 35,000 $ 65,000 Non-bank — — 1,470 Interest Income 277 104 109 Other Income (Loss) ( 28 ) 31 11 Total Income 50,249 35,135 66,590 EXPENSES Salaries and Employee Benefits 535 535 537 Professional Fees 777 1,989 1,256 Occupancy and Equipment Expense 8 8 10 Interest Expense 5,360 3,963 2,763 Other Expenses 1,183 1,162 1,200 Total Expenses 7,863 7,657 5,766 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 42,386 27,478 60,824 Income Tax Benefit 2,215 1,947 1,607 INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 44,601 29,425 62,431 Equity in Undistributed Income of Subsidiaries 41,287 52,400 21,706 NET INCOME 85,888 81,825 84,137 Other Comprehensive Income (Loss): Changes in Unrealized Gain (Loss) on Securities, Available-for-Sale 46,378 ( 278,976 ) ( 19,891 ) Changes in Unrecognized Loss in Postretirement Benefit Obligation, Net — 54 — TOTAL COMPREHENSIVE INCOME (LOSS) $ 132,266 $ ( 197,097 ) $ 64,246 96 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 17 – Parent Company Financial Statements (continued) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 85,888 $ 81,825 $ 84,137 Adjustments to Reconcile Net Income to Net Cash from Operations Change in Other Assets 3,929 3,861 ( 3,939 ) Change in Other Liabilities ( 3,113 ) 1,200 863 Equity Based Compensation 2,332 2,330 1,723 Equity in Excess Undistributed Income of Subsidiaries ( 41,287 ) ( 52,400 ) ( 21,706 ) Net Cash from Operating Activities 47,749 36,816 61,078 CASH FLOWS FROM INVESTING ACTIVITIES Cash Used for Business Acquisitions — ( 49,644 ) — Net Equity in Dissolution of Subsidiary 1,978 — — Net Cash from Investing Activities 1,978 ( 49,644 ) — CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid ( 29,433 ) ( 27,022 ) ( 22,220 ) Net Cash from Financing Activities ( 29,433 ) ( 27,022 ) ( 22,220 ) Net Change in Cash and Cash Equivalents 20,294 ( 39,850 ) 38,858 Cash and Cash Equivalents at Beginning of Year 46,541 86,391 47,533 Cash and Cash Equivalents at End of Year $ 66,835 $ 46,541 $ 86,391 NOTE 18 - Business Combinations, Goodwill and Intangible Assets Business Combinations On January 1, 2022, the Company acquired Citizens Union Bancorp of Shelbyville, Inc. (“CUB”) through the merger of CUB with and into the Company. This was immediately followed by the merger of Citizens Union Bank of Shelbyville, Inc., a wholly-owned subsidiary of CUB, into the Company’s subsidiary bank, German American Bank. CUB, headquartered in Shelbyville, Kentucky, operated 15 retail banking offices located in Shelby, Jefferson, Spencer, Bullitt, Oldham, Owen, Gallatin and Hardin counties in Kentucky through Citizens Union Bank of Shelbyville, Inc. As of the closing of the transaction, CUB had total assets of $ 1,108,546 , total loans of $ 683,807 , and total deposits of $ 930,533 . The Company accounted for the transaction under the acquisition method of accounting which means these financial assets and liabilities were recorded at fair value at the day of acquisition. The fair value of the common shares issued as part of the consideration paid for CUB was based upon the closing price of the Company’s common shares on the acquisition date. In accordance with ASC 805, the Company has expensed approximately $ 12,323 of direct acquisition costs and recorded $ 58,596 of goodwill and $ 7,572 of intangible assets. The goodwill of $ 58,596 arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. This goodwill will be evaluated annually for impairment and is non-deductible for tax purposes. The intangible assets are related to core deposits and are being amortized over 8 years. The following table summarizes the fair value of the total consideration transferred as a part of the CUB acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction. 97 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) Consideration Cash for Options and Fractional Shares $ 942 Cash Consideration 49,863 Equity Instruments 111,914 Fair Value of Total Consideration Transferred $ 162,719 Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed: Cash $ 20,244 Federal Funds Sold and Other Short-term Investments 238,325 Interest-bearing Time Deposits with Banks 250 Securities 102,233 Loans 678,142 Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost 10,078 Premises, Furniture & Equipment 19,805 Other Real Estate 40 Intangible Assets 7,572 Company Owned Life Insurance 12,881 Accrued Interest Receivable and Other Assets 18,309 Deposits - Non-interest Bearing ( 237,472 ) Deposits - Interest Bearing ( 696,750 ) FHLB Advances and Other Borrowings ( 60,837 ) Accrued Interest Payable and Other Liabilities ( 8,697 ) Total Identifiable Net Assets $ 104,123 Goodwill $ 58,596 Under the terms of the merger agreement, each CUB common shareholder of record at the effective time of the merger became entitled to receive a cash payment of $ 13.44 and a 0.7739 share of common stock of the Company for each of their former shares of CUB common stock. As a result, in connection with the closing of the merger on January 1, 2022, the Company issued 2,870,975 shares of its common stock to the former shareholders of CUB and paid cash consideration in the aggregate amount of $ 50.8 million. This acquisition is consistent with the Company’s strategy to build a regional presence in central and western Kentucky. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. The fair value of purchased financial assets with credit deterioration was $ 29,868 on the date of acquisition. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $ 34,453 . The Company estimates, on the date of acquisition, that $ 3,117 of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected. The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2021 after giving effect to certain adjustments. The unaudited pro forma information for the year ended December 30, 2022 and 2021 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date. 98 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) Unaudited Pro Forma Year Ended 12/31/2022 Unaudited Pro Forma Year Ended 12/31/2021 Net Interest Income $ 200,584 $ 195,691 Non-interest Income 59,133 64,951 Total Revenue 259,717 260,642 Provision for Credit Losses 50 ( 8,707 ) Non-interest Expense 141,868 142,978 Income Before Income Taxes 117,799 126,371 Income Tax Expense 21,858 24,260 Net Income $ 95,941 $ 102,111 Earnings Per Share and Diluted Earnings Per Share $ 3.26 $ 3.47 For the year ended December 31, 2022, the above pro forma financial information excludes non-recurring merger costs that totaled $ 12,323 on a pre-tax basis and Day 1 provision for credit losses under the CECL model of $ 6,300 on a pre-tax basis. Goodwill The changes in the carrying amount of goodwill for the periods ended December 31, 2023, 2022, and 2021, were classified as follows: 2023 2022 2021 Beginning of Year $ 180,357 $ 121,761 $ 121,956 Acquired Goodwill — 58,596 ( 195 ) Impairment — — — End of Year $ 180,357 $ 180,357 $ 121,761 Of the $ 180,357 carrying amount of goodwill, $ 179,025 is allocated to the core banking segment, and $ 1,332 is allocated to the insurance segment for both periods ended December 31, 2023 and 2022. Of the $ 121,761 carrying amount of goodwill, $ 120,429 is allocated to the core banking segment, and $ 1,332 is allocated to the insurance segment for the period ended December 31, 2021. The decrease of $ 195 in 2021 is attributable to the sale of two branches located in Lexington, Kentucky. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2023, the Company’s reporting units had positive equity, and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting units exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Acquired Intangible Assets Acquired intangible assets were as follows as of year end: 2023 Gross Amount Accumulated Amortization Core Banking Core Deposit Intangible $ 33,247 $ ( 27,811 ) Branch Acquisition Intangible 257 ( 257 ) Insurance Customer List 5,408 ( 5,408 ) Total $ 38,912 $ ( 33,476 ) 99 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued) 2022 Gross Amount Accumulated Amortization Core Banking Core Deposit Intangible $ 33,247 $ ( 25,001 ) Branch Acquisition Intangible 257 ( 257 ) Insurance Customer List 5,408 ( 5,378 ) Total $ 38,912 $ ( 30,636 ) Amortization Expense was $ 2,840 , $ 3,711 and $ 2,731 , for 2023, 2022 and 2021, respectively. Estimated amortization expense for each of the next five years is as follows: 2024 $ 2,032 2025 1,394 2026 916 2027 593 2028 361 NOTE 19 - Other Comprehensive Income (Loss) The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2023 and 2022, net of tax: December 31, 2023 Unrealized Gains and Losses on Available-for-Sale Securities Postretirement Benefit Items Total Beginning Balance $ ( 262,924 ) $ ( 514 ) $ ( 263,438 ) Other Comprehensive Income (Loss) Before Reclassification 46,410 — 46,410 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 32 ) — ( 32 ) Net Current Period Other Comprehensive Income (Loss) 46,378 — 46,378 Ending Balance $ ( 216,546 ) $ ( 514 ) $ ( 217,060 ) December 31, 2022 Unrealized Gains and Losses on Available-for-Sale Securities Postretirement Benefit Items Total Beginning Balance $ 16,052 $ ( 568 ) $ 15,484 Other Comprehensive Income (Loss) Before Reclassification ( 278,532 ) — ( 278,532 ) Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 444 ) 54 ( 390 ) Net Current Period Other Comprehensive Income (Loss) ( 278,976 ) 54 ( 278,922 ) Ending Balance $ ( 262,924 ) $ ( 514 ) $ ( 263,438 ) 100 Notes to the Consolidated Financial Statements Dollars in thousands, except per share data NOTE 19 – Other Comprehensive Income (Loss) (continued) The table below summarizes the classifications out of accumulated other comprehensive income (loss) by component for the year ended December 31, 2023: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement Where Net Income is Presented Unrealized Gains and Losses on Available-for-Sale Securities $ 40 Net Gain (Loss) on Securities ( 8 ) Income Tax Expense 32 Net of Tax Amortization of Post Retirement Plan Items Actuarial Gains (Losses) $ — Salaries and Employee Benefits — Income Tax Expense — Net of Tax Total Reclassifications for the Period $ 32 The table below summarizes the classifications out of accumulated other comprehensive income (loss) by component for the year ended December 31, 2022: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement Where Net Income is Presented Unrealized Gains and Losses on Available-for-Sale Securities $ 562 Net Gain (Loss) on Securities ( 118 ) Income Tax Expense 444 Net of Tax Amortization of Post Retirement Plan Items Actuarial Gains (Losses) $ — Salaries and Employee Benefits — Income Tax Expense — Net of Tax Total Reclassifications for the Period $ 444 The table below summarizes the classifications out of accumulated other comprehensive income (loss) by component for the year ended December 31, 2021: Details about Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified From Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement Where Net Income is Presented Unrealized Gains and Losses on Available-for-Sale Securities $ 2,247 Net Gain (Loss) on Securities ( 472 ) Income Tax Expense 1,775 Net of Tax Amortization of Post Retirement Plan Items Actuarial Gains (Losses) $ — Salaries and Employee Benefits — Income Tax Expense — Net of Tax Total Reclassifications for the Period $ 1,775 101 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable.