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Item 7. Management’s Discussion and Analysis

2025-03-03 compared with 2024-02-27 · 143 added, 130 removed, 572 unchanged (32% of the section changed)

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German American Bancorp, Inc.

is a Nasdaq-traded (symbol:

is a Nasdaq-listed (symbol:

GABC) financial holding company based in Jasper, Indiana.

German American, through its banking subsidiary German American Bank, operates 76 banking offices in 20 contiguous southern Indiana counties and 14 counties in Kentucky.

The Company also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full line property and casualty insurance agency (German American Insurance, Inc.).

Throughout this Management’s Discussion and Analysis, as elsewhere in this Report, when we use the term “Company”, we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole.

Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc., and the term “Bank” when we mean to refer to only the Company’s bank subsidiary.

German American, through its banking subsidiary German American Bank, operates 94 banking offices located throughout Indiana (central/southern), Kentucky (northern/central/western), and Ohio (central/ southwest).

In Columbus, Ohio and Greater Cincinnati, the Company does business as Heartland Bank, a Division of German American Bank.

The Company also owns an investment brokerage subsidiary German American Investment Services, Inc.

Throughout this Management’s Discussion and Analysis, as elsewhere in this Report, when we use the term “Company” and “German American”, we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole.

Occasionally, we will refer to the term “German American”, “Bancorp”, “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc., and the term “Bank” when we mean to refer to only the Company’s bank subsidiary.

This Management’s Discussion and Analysis includes an analysis of the major components of the Company’s operations for the years 2022 through 2024 and its financial condition as of December 31, 2023 and 2024.

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Business Developments

On January 1, 2022, the Company completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc.

(“CUB”) through the merger of CUB with and into the Company.

Immediately following completion of the CUB holding company merger, CUB’s subsidiary bank, Citizen Union Bank of Shelbyville, Inc., was merged with and into the Company’s subsidiary bank, German American Bank.

On February 1, 2025, German American Bancorp completed its previously announced acquisition of Heartland BancCorp (“Heartland”) through the merger of Heartland with and into the Bancorp.

Immediately following completion of the Heartland holding company merger, Heartland’s subsidiary bank, Heartland Bank, was merged with and into the Bancorp’s subsidiary bank, German American Bank.

Heartland, headquartered in Whitehall, Ohio, operated 20 retail banking offices located in Columbus, Ohio and Greater Cincinnati.

As of December 31, 2024, Heartland had total assets of approximately $1.97 billion (unaudited), total loans of approximately $1.56 billion (unaudited), and total deposits of approximately $1.75 billion (unaudited).

German American Bancorp issued approximately 7.74 million shares of its common stock, and paid approximately $23.1 million in cash, in exchange for all of the issued and outstanding shares of common stock of Heartland and in cancellation of all options to acquire Heartland common stock outstanding as of the effective time of the merger.

For further information regarding this merger and acquisition transaction, see Note 21 (Subsequent Events) in the Notes to the

Consolidated Financial Statements included in Item 8 of this Report, which Note 21 is incorporated into this Item 1 by reference.

During June and July 2024, the Company undertook a partial restructuring of its securities portfolio by selling available-for-sale securities totaling approximately $375.3 million in book value, at an after-tax loss of approximately $27.2 million.

The tax-equivalent yield on the bonds sold was approximately 3.12% with a duration of approximately 7 years.

The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024.

Effective June 1, 2024, German American Insurance, Inc.

(“GAI”), a wholly-owned subsidiary of the Bank, sold substantially all of its assets to The Hilb Group of Indiana, LLC, a Delaware limited liability company (“Hilb”), for a purchase price of $40.0 million in cash.

As part of the transaction, the Bank, as the parent of GAI, may receive payments for the referral of customers to Hilb, and the Company will refrain from conducting certain insurance activities, in each case, for a period of five (5) years following closing.

Prior to the sale, GAI was a full-service agency offering personal and commercial insurance products.

On January 1, 2022, German American Bancorp completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc.

(“CUB”) through the merger of CUB with and into the Bancorp.

Immediately following completion of the CUB holding company merger, CUB’s subsidiary bank, Citizen Union Bank of Shelbyville, Inc., was merged with and into the Bancorp’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 approximately $1.109 billion, total loans of approximately $683.8 million, and total deposits of approximately $930.5 million.

The Company issued approximately 2.9 million shares of its common stock, and paid approximately $50.8 million in cash, in exchange for all of the issued and outstanding shares of common stock of CUB.

German American Bancorp issued approximately 2.9 million shares of its common stock, and paid approximately $50.8 million in cash, in exchange for all of the issued and outstanding shares of common stock of CUB.

For further information regarding this merger and acquisition transaction, see Note 19 (Business Combinations, Goodwill and Intangible Assets) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Financial Overview

Net income for the year ended December 31, 2024 totaled $83,811,000, or $2.83 per share, a decline of $2,077,000, or approximately 3% on a per share basis, from the year ended December 31, 2023 net income of $85,888,000, or $2.91 per share.

Net income for the year ended December 31, 2024 included merger-related transaction costs associated with the Company’s merger with Heartland that totaled approximately $1,370,000, $1,082,000 after-tax, or $0.04 per share.

Net income for the year end December 31, 2024 was impacted by the sale of substantially all of the assets of GAI during the second quarter of 2024.

The all-cash sale price totaled $40.0 million and resulted in an after-tax gain, net of transaction costs, of approximately $27,476,000, or $0.93 per share.

GAI net income, excluding the after-tax gain, contributed approximately $767,000, or $0.03 per share, during 2024 compared with net income of $1,639,000, or $0.06 per share, during the full year of 2023.

Net income for the year ended December 31, 2024 was also impacted by the securities portfolio restructuring transaction whereby available-for-sale securities totaling approximately $375.3 million in book value were sold.

The approximate loss on these securities totaled $34,893,000, $27,189,000 after tax, or $0.92 per share, and was included in earnings for the second quarter of 2024.

The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024.

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

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

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

The change in net income during 2022, compared with 2021, was largely impacted by acquisition-related expenses for the CUB transaction that closed on January 1, 2022.

The 2022 results of operations included acquisition-related expenses of $12,323,000 ($9,372,000 or $0.32 per share, on an after tax basis) and also included Day 1 provision for credit losses under the CECL model of $6,300,000 ($4,725,000 or $1.16 per share, on an after tax basis).

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for the Company presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this Report, are, to a large degree, dependent upon the Company’s accounting policies.

The selection of and application of these policies involve estimates, judgments, and uncertainties that are subject to change.

The selection of and application of these

policies involve estimates, judgments, and uncertainties that are subject to change.

The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for credit losses, the valuation of securities available for sale, income tax expense, and the valuation of goodwill and other intangible assets.

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Historical loss rates from periods where the average unemployment rate, gross domestic product and agricultural producer pricing index matches the forecast range are considered when calculating the forecast period loss rate.

The impact of the changes in the unemployment and gross domestic product forecast range between December 31, 2023, and December 31, 2022, resulted in a decrease in the allowance for credit losses of approximately $400,000.

Based on sensitivity analysis of all portfolios, a 0.050% change (slight improvement or decline on the Company’s scale) in all ten qualitative risk factors would have a $1,900,000 impact on the reserve allocation.

The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgements or assumptions of qualitative loss factors that were utilized at December 31, 2023 in estimation of the allowance for credit losses on loans recognized on the Consolidated Balance Sheets.

The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgements or assumptions of qualitative loss

factors that were utilized at December 31, 2024 in estimation of the allowance for credit losses on loans recognized on the Consolidated Balance Sheets.

SECURITIES VALUATION

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

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

planning strategies.

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

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No impairment to Goodwill was indicated based on year-end testing.

Goodwill decreased $1,332,000 in 2024.

This decrease was attributable to sale of substantially all of the assets of German American Insurance, Inc.

For more information regarding goodwill and intangible assets, see Note 19 (Business Combinations, Goodwill and Intangible Assets) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

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RESULTS OF OPERATIONS

Net income for the year end December 31, 2024 was impacted by the sale of substantially all of the assets of GAI during the second quarter of 2024.

The all-cash sale price totaled $40.0 million and resulted in an after-tax gain, net of transaction costs, of approximately $27,476,000, or $0.93 per share.

The approximate loss on these securities totaled $34,893,000, $27,189,000 after tax, or $0.92 per share, and was included in earnings for the second quarter of 2024.

The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024.

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The change in net income during 2022, compared with 2021, was largely impacted by acquisition-related expenses for the CUB transaction that closed on January 1, 2022.

NET INTEREST INCOME

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

During the year ended December 31, 2024, net interest income, on a non tax-equivalent basis, totaled $190,591,000, which was relatively stable compared to the year ended December 31, 2023 net interest income of $190,433,000.

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

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

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

The increase in net interest income

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

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

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

The net interest margin for the year ended December 31, 2024 was 3.43%, compared to 3.58% in 2023 and 3.45% in 2022.

The decline in the net interest margin in 2024 compared with 2023 was largely driven by an increased cost of funds and a lower level of accretion of loan discounts on acquired loans.

The cost of funds increased 56 basis points year over year.

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

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

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

In 2022 and 2021, the Company’s net interest margin was also impacted by fees recognized as a part of the PPP.

Fees recognized on PPP loans through net interest income totaled $873,000 during 2022 and $12,196,000 during 2021.

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

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

Accretion of discounts on acquired loans contributed approximately 3 basis point to the net interest margin in 2024, 5 basis

points in 2023 and 7 basis points during 2022.

Accretion of discounts on acquired loans totaled $1,507,000 during 2024, $2,814,000 during 2023, and $4,341,000 during 2022.

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

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

During 2024, the Company recorded a provision for credit losses of $2,775,000 compared with $2,550,000 during 2023 and $6,350,000 during 2022.

During 2024, the provision for credit losses represented approximately 7 basis points of average loans.

The Company realized net charge-offs of $2,104,000 or 5 basis points of average loans during 2024.

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

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

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

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

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

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

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

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

The provision for credit losses made during 2024 was made at a level deemed necessary by management to absorb expected losses in the loan portfolio.

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

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

qualitative and quantitative factors.

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

Refer also to the sections entitled “CRITICAL ACCOUNTING POLICIES AND

ESTIMATES” and “RISK MANAGEMENT - Lending and Loan Administration” for further discussion of the provision and allowance for credit losses.

NON-INTEREST INCOME

During the year ended December 31, 2024, non-interest income increased $2,399,000, or 4%, compared with the year ended December 31, 2023.

The year ended December 31, 2024 non-interest income was positively impacted by the net proceeds of the sale of the GAI assets that totaled approximately $38,323,000 and was negatively impacted by $34,893,000 related to the net loss recognized on the securities restructuring transaction.

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

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

Non-interest Income

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Interchange Fee Income 17,125 17,452 15,820 (2) 10

Sale of Assets of German American Insurance 38,323 — — n/m (1)

Other Operating Income 5,419 5,830 5,116 (7) 14

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TOTAL NON-INTEREST INCOME $ 62,660 $ 60,261 $ 59,133 4 2

(1) n/m = not meaningful

Wealth management fees increased $2,705,000, or 23%, during 2024 compared with 2023 and increased $1,635,000, or 16%, during 2023 compared with 2022.

The increase in both periods was largely attributable to continued increases in assets under management due to healthy capital markets and strong new business results, as compared to the year ended December 31, 2023.

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

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

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

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

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

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

Insurance revenues declined $5,212,000, or 54%, during 2024 compared with 2023, as a result of the sale of the assets of GAI effective June 1, 2024, with only five months of revenue being recognized by the Company during 2024.

The year ended December 31, 2024 included $38,323,000 in net proceeds for the sale of the GAI assets.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net gains on sales of loans increased $691,000, or 29%, during the year ended December 31, 2024 compared with the year ended December 31, 2023.

The increase during 2024 compared with 2023 was related to both a higher volume of loans sold and improved pricing levels.

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

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

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

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

Loan sales totaled $130.7 million during 2024, $109.0 million during 2023, and $168.1 million during 2022.

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

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

The net loss on securities during the year ended December 31, 2024 totaled $34,788,000 and was primarily related to the net loss recognized on the securities restructuring transaction previously discussed.

The approximate loss on the transaction totaled $34,893,000, $27,189,000 after tax, or $0.92, per share and was included in earnings for the second quarter of 2024.

The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024.

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

The net gains on sales of securities in 2023 and 2022 were completed as part of adjustments in allocations within the normal course of business of securities portfolio management.

NON-INTEREST EXPENSE

During the year ended December 31, 2024, non-interest expense totaled $146,377,000, an increase of $1,880,000, or 1%, compared to the year ended December 31, 2023.

The increase in non-interest expenses during the year ended 2024 was in large part the result of professional fees related to the previously mentioned GAI asset sale and the merger transaction with Heartland, which totaled approximately $2,759,000.

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

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

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

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TOTAL NON-INTEREST EXPENSE $ 146,377 $ 144,497 $ 154,191 1 (6)

Salaries and benefits declined $987,000, or 1%, during the year ended December 31, 2024 compared with the year ended December 31, 2023.

The decline in salaries and benefits during 2024 compared with 2023 was largely related to the GAI asset sale.

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

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

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

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

FDIC Premiums increased $79,000, or 3%, during the year ended December 31, 2024 compared with 2023.

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

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

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

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

Data processing fees increased $1,131,000, or 10%, during the year ended December 31, 2024 compared with the year ended December 31, 2023.

The increase during 2024 compared with 2023 was largely driven by costs associated with enhancements to the Company’s digital banking and data systems.

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

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

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

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

Professional fees increased $2,572,000, or 46%, during the year ended December 31, 2024 compared with 2023.

The increase during 2024 compared with 2023 was attributable to the professional fees associated with the sale of assets of GAI and the merger with Heartland, which totaled $2,759,000 for the two transactions.

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

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

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

The increase during 2022 was primarily due to professional fees associated with the CUB acquisition.

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

Advertising and promotion expense declined $918,000, or 19%, during 2024 compared with 2023 as the Company employed a more targeted focus for sponsorships and contributions during 2024.

Advertising and promotion expense increased $441,000, or 10%, during 2023 as compared with 2022.

Intangible amortization expense consists primarily of amortization associated with the core deposit intangible of acquired deposit portfolios.

Intangible amortization decreased $808,000, or 28%, during 2024 compared with 2023 and decreased $871,000, or 23%, during 2023 compared with 2022.

The decreases in both years were largely related to the accelerated method for which the intangible assets are amortized.

Other operating expenses increased $334,000, or 2%, during the year ended December 31, 2024 compared to the year ended December 31, 2023.

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

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

The decline during 2023 compared with 2022 was attributable to acquisition-

related costs that totaled approximately $3,862,000 in 2022.

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

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

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

PROVISION FOR INCOME TAXES

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The Company’s effective tax rate was 19.5%, 17.1%, and 17.5%, respectively, in 2024, 2023, and 2022.

The effective tax rate in all periods is lower than the blended statutory rate.

The lower effective rate in all periods primarily resulted from the Company’s tax-exempt investment income on securities, loans, and company owned life insurance, income tax credits generated by investments in affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

The increase in effective tax rate for the year ended December 31, 2024 as compared to the same period of the prior year was primarily attributable to the previously mentioned sale of GAI assets and the securities restructuring transaction.

The effective tax rate in all periods presented was lower than the blended statutory rate resulting primarily from the Company’s tax-exempt investment income on securities, loans and company-owned life insurance, income tax credits generated from affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

See Note 11 to the Company’s consolidated financial statements included in Item 8 of this Report for additional details relative to the Company’s income tax provision.

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As of December 31, 2024, shareholders’ equity increased by $51.5 million to $715.1 million compared with $663.6 million at year-end 2023.

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

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

The increase in shareholders’ equity was primarily attributable to the increase in retained earnings of $52.0 million due to net income of $83.8 million during 2024, which was partially offset by the payment of $31.8 million in shareholder dividends.

Shareholders’ equity represented 11.4% of total assets at December 31, 2024 and 10.8% of total assets at December 31, 2023.

Shareholders’ equity included $183.0 million of goodwill and other intangible assets at December 31, 2024 compared to $186.7 million of goodwill and other intangible assets at December 31, 2023.

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

The Company’s Board of Directors previously approved a plan to repurchase up to 1.0 million shares of the Company’s outstanding common stock.

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

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The Company has not repurchased any shares of common stock under the 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.

The Inflation Reduction Act of 2022 (the “IRA”), among other things, imposes a 1% excise tax on the fair market value of stock repurchased by publicly traded U.S.

corporations, like the Company.

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

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

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

An additional 25% was phased in on each of January 1, 2023, January 1, 2024, and January 1, 2025.

As of January 1, 2025, the adverse cumulative effects of adopting CECL have been fully phased into our regulatory capital.

USES OF FUNDS

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The increase in total loans at December 31, 2024 compared with year-end 2023 was broad-based across most segments of the portfolio.

Commercial and industrial loans increased $9.5 million, or 1%, commercial real estate loans grew $103.0 million, or 5%, agricultural loans increased $7.2 million, or 2%, and retail loans increased $35.6 million, or 18%.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company’s commercial real estate portfolio is well-diversified over numerous property types.

The table below provides property type detail for the most significant segments of the Company’s commercial real estate loan portfolio.

December 31, 2024 December 31, 2023

% of Commercial Real Estate Portfolio % of Total Loan Portfolio % of Commercial Real Estate Portfolio % of Total Loan Portfolio

Multi-Family Dwellings 20 % 11 % 21 % 11 %

Retail Space 15 % 8 % 14 % 7 %

1-4 Family Investment Properties 11 % 6 % 12 % 7 %

Industrial, Manufacturing, Warehousing Properties 10 % 5 % 10 % 5 %

Office Real Estate 9 % 5 % 8 % 4 %

Healthcare Facilities 7 % 4 % 7 % 4 %

Land Development and Construction 7 % 4 % 6 % 3 %

Lodging 6 % 3 % 6 % 3 %

The Company’s commercial real estate (“CRE”) loan portfolio is further diversified by occupancy type, with approximately 77% of the CRE portfolio being non-owner occupied at December 31, 2024 (which is 42% of the Company’s overall loan portfolio), and 23% of the CRE portfolio being owner occupied (which is 12% of the Company’s total loan portfolio).

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

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

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

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

Once it is determined that the borrower’s

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

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

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(1) n/m = not meaningful

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

The amortized cost of investment securities, including federal funds sold and short-term investments, increased $7.8 million, or less than 1%, at year-end 2024 compared to year-end 2023 and decreased $229.0 million, or 11%, at year-end 2023.

As previously discussed, during June and July 2024, the Company undertook a partial restructuring of its securities portfolio by selling available-for-sale securities totaling approximately $375.3 million in book value.

The tax-equivalent yield on the bonds sold was approximately 3.12% with a duration of approximately 7 years.

The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024.

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

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

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

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

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

As mentioned above, the Company undertook a partial restructuring of its securities portfolio in mid-2024, with the proceeds from the sales of securities being reinvested back into the securities portfolio.

After the restructuring, the investment portfolio continues to be relatively balanced with agency issued mortgage related securities and collateralized and uncollateralized federal agency securities totaling $1.097 billion, or 57% of the total securities portfolio at December 31, 2024.

The Company’s

level of obligations of state and political subdivisions decreased to $588.0 million, or 31% of the portfolio at December 31, 2024.

Investment Securities, at Carrying Value

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Total Securities $ 1,517,287 $ 1,596,832 $ 1,761,669

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

In 2023, the Company utilized cash flows from the available for sale portfolio to fund loan growth and an overall modest decline in deposits.

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

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

The Company’s $1.517 billion available-for-sale investment portfolio provides an additional funding source for the liquidity needs of the Company’s subsidiaries and for asset/liability management requirements.

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In the normal course of business, the Company makes commitments to extend credit and commitments to sell loans, which are not reflected in its consolidated financial statements.

For further information about such commitments, see Note 14 (Commitments and Off-balance Sheet Items) in Notes to the Consolidated Financial Statements included in Item 8 of this Report.

For further information about such commitments, see Note 15

(Commitments and Off-balance Sheet Items) in Notes to the Consolidated Financial Statements included in Item 8 of this Report.

SOURCES OF FUNDS

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The Company’s overall level of average core deposits declined approximately $98.6 million, or 2%, during 2024 compared with 2023.

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

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

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

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

Throughout 2023, a meaningful level of the outflow of deposits experienced during the past year was captured within the Company’s wealth management group.

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

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Core deposits continue to represent a significant funding source for the Company’s operations and represented 90% of average total funding sources during 2024 compared with 90% during 2023 and 94% during 2022.

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

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

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

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

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

Average demand, savings, and money market deposits declined 4% during 2024 and 12% in 2023.

Average demand, savings, and money market deposits totaled $4.432 billion or 93% of core deposits (81% of total funding sources) in 2024 compared with $4.608 billion or 95% of core deposits (85% of total funding sources) in 2023 and $5.226 billion or 95%

of core deposits (89% of total funding sources) in 2022.

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

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

These average deposits increased by 30% in 2024 following a decline of 2% during 2023.

Other time deposits comprised 7% of core deposits in all periods presented.

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Large certificate deposits comprised approximately 10% of average total funding sources in 2024 compared with 6% in 2023 and 4% in 2022.

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

On an end of period basis, certificates of deposits in denominations of $100,000 or more increased $111.6 million, or 23%, during 2024 following an increase of $284.7 million, or 147%, during 2023.

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

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

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

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

Average borrowed funds decreased $14.4 million, or 7%, during 2024 following an increase of $51.8 million, or 33%, during 2023.

Borrowings comprised approximately 4% of average total funding sources during 2024 and 2023 compared with 3% in 2022.

The bank subsidiary of the Company also utilizes short-term funding sources from time to time.

These sources consist of overnight federal funds purchased from other financial institutions, secured repurchase agreements that generally mature within one day of the transaction date, and secured overnight variable rate borrowings from the FHLB.

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

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

The Company’s bank subsidiary is authorized by its Board to borrow up to $1.25 billion at the FHLB, but availability at December 31, 2024 was limited to approximately $470 million based on the then pledged collateral and outstanding borrowings.

In addition, the Company had a borrowing capacity of approximately $595 million at the Federal Reserve Bank as of December 31, 2024, based on the then pledged collateral.

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See Note 9 (Shareholders’ Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which is incorporated herein by reference.

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

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

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

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Non-performing loans totaled $11.1 million, or 0.27% of total loans, at December 31, 2024 compared with $9.2 million, or 0.23% of total loans, at December 31, 2023 and compared with $14.3 million, or 0.38% of total loans, at December 31, 2022.

Total non-performing loans increased in 2024 as compared to 2023;

however, there is no significant loss exposure on this increase.

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

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

For additional detail on individually analyzed loans, see Note 5 (Loans) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis