What changed in this filing

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Item 1. Business

2024-02-21 compared with 2023-02-22 · 98 added, 98 removed, 313 unchanged (39% of the section changed)

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Lakeland Financial owns all of the outstanding stock of the Bank, a full-service commercial bank organized under Indiana law.

Lakeland Financial conducts no business except that which is incident to its ownership of the outstanding stock of the Bank and the operation of the Bank.

Lakeland Financial conducts no business except that which is incidental to its ownership of the outstanding stock of the Bank.

Although Lakeland Financial is a corporate entity, legally separate and distinct from its affiliates, bank holding companies such as Lakeland Financial are required to act as a source of financial strength for their subsidiary banks.

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See “Supervision and Regulation of the Company” below for further discussion of these matters.

Lakeland Financial’s executive offices are located at 202 East Center Street, Warsaw, Indiana 46580, and its telephone number is (574) 267-6144.

Bank’s Business.

The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization.

As of December 31, 2022, the Bank had 52 offices in fifteen counties, including 46 offices in northern Indiana and six offices in central Indiana, in the Indianapolis market.

As of December 31, 2023, the Bank had 53 offices in fifteen counties, including 46 offices in Northern Indiana and seven offices in Central Indiana, in the Indianapolis market.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided under federal law and FDIC regulations.

The Bank’s activities cover all traditional facets of commercial banking, including deposit products, commercial and consumer lending, retail and merchant credit card services, corporate treasury management services, and wealth advisory, trust and brokerage services.

On January 31, 2022, the Bank opened its 52 nd branch in downtown Elkhart.

On April 10, 2023, the Bank opened its 53 rd branch in the 16 Tech Innovation District on the northwest side of Indianapolis.

The Bank’s business strategy is focused on building long-term relationships with its customers based on in person, top-quality service, high ethical standards and safe and sound lending.

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Substantially all of the Bank’s assets and income are located in and derived from the United States.

The Company is not a party to any collective bargaining agreements, and employee relations are considered good.

The Company is not a party to any collective bargaining agreements, and employee relations are considered strong.

Operating Segment.

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During this period, the Company has grown its assets from $286 million to $6.5 billion, a compound annual growth rate of 10%.

Mergers and acquisitions have not played a role in this growth as the Company’s expansion strategy has been driven by organic growth.

The Company has opened eight de novo branches in the past eight years and plans to continue expansion in the Indianapolis market and additional markets that are in close proximity to the Company's Indiana footprint.

Over the past twenty-five years, the Company has primarily targeted growth in the larger cities located in Northern Indiana and the Indianapolis market in Central Indiana and areas that are two hours from a Lake City Bank branch.

Mergers and acquisitions have played an insignificant role as the Company’s expansion strategy over 33 years has been exclusively the result of its organic growth strategy.

The Company plans to continue its organic expansion by capturing increased share in existing markets of operation and by growing its branch network in the Indianapolis market and in additional markets that are in close proximity to the Company's footprint.

In addition, the Company evaluates new growth markets that are in close proximity to the Company's footprint, such as the nine de novo branches that have been added in the past decade.

The Company has primarily targeted growth in the larger cities located in Northern Indiana and the Indianapolis market in Central Indiana and areas that are two hours from a Lake City Bank branch.

The Company believes these areas offer above average growth potential with attractive demographics and potential for commercial lending and deposit gathering opportunities.

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Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience.

Our competitors include national, regional and community banks, e-commerce and other Fintech or nonbanking companies offering financial services, as well as thrifts, credit unions, farm credit services, finance companies, personal loan companies, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers and mutual fund companies.

Our competitors include national, regional and community banks, e-commerce and other Fintech or nonbanking companies offering financial services, private credit funds, thrifts, credit unions, farm credit services, finance companies, personal loan companies, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers and mutual fund companies.

Many of these competitors enjoy fewer regulatory constraints and some may have lower cost structures.

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In 2022, every employee participated in a foundational course to establish a base level of awareness and education on the topic of diversity and inclusion.

In 2023 the effort continues with a host of interactive, informative courses being offered to continue the learning process around these important issues.

Eighty-four percent of our employees identify as women or people of color.

At present, women comprise 59% of the Bank’s officers (267 officers – 158 women), 33% (8 of 25 members) of Senior Leadership Council (which includes those with the title of “Senior Vice President” and above) and 44% (4 of 9 members) of the executive Management Committee.

Additionally, three of our 11 board members identify as women or people of color.

In 2023, these efforts continued with a host of interactive, informative courses being offered to continue the learning process around these important issues.

Eighty-three percent of our employees identify as women or people of color.

At present, women represent 62% of the Bank’s officers (277 officers – 171 women), 38% (9 of 24 members) of the Senior Leadership Council (which includes those with the title of “Senior Vice President” and above) and 44% (4 of 9 members) of the executive Management Committee.

Additionally, four of our 11 board members identify as women or people of color.

Employee Engagement and Development.

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Founded in 1999, Lake City University is dedicated to helping employees thrive professionally and personally.

In 2022, the Bank employees averaged 26.34 hours per employee of instruction through the program.

From courses to improve technical skills, product knowledge, and customer service to classes focused on an employee’s well-being, like personal financial planning and benefits education, Lake City University supports and promotes the personal and professional growth of all the Bank employees.

In 2023, the Bank employees averaged 23.47 hours of instruction per employee through the program.

From courses to improve technical skills, product knowledge, and customer service to classes focused on well-being, like personal financial planning and benefits education, Lake City University supports and promotes the personal and professional growth of all the Bank employees.

In 2023, 168 employees were promoted and 144 employees were hired externally, demonstrating a commitment to the professional development of Lake City Bank employees.

In addition to the substantial investment in employee professional development, the Bank’s benefit and compensation programs are designed to ensure we recruit and retain top talent.

The Bank offers employees a comprehensive health benefits package, a 401(k) match of up to 6% of an employee’s salary to encourage retirement savings and tuition reimbursement that 28 employees took advantage of in 2022.

The Bank offers employees a comprehensive health benefits package, a 401(k) match of up to 6% of an employee’s salary to encourage retirement savings, and tuition reimbursement that 22 employees used in 2023.

The Bank also structures its bonus program for officers to create meaningful performance-based incentives.

These programs, combined with an intentional focus to create a positive, values-based culture, ensures the Bank team will continue as the acknowledged and recognized leader in Indiana community banking.

Impact of Strong Labor Market .

Indiana has a strong labor market, with an unemployment rate of 3.1% as of December 31, 2022.

Census Bureau announced Indiana's population grew by 4.7% between 2010 and 2020, and manufacturing jobs increased 1.5% from December 2019 to December 2021.

In this tight labor market, the Company has focused on hiring and retaining talented employees, which has increased compensation expense during 2022.

Forward-looking Statements

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Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:

• the effects of future economic, business and market conditions and changes, including prevailing interest rates, the rate of inflation and the effects of the COVID-19 pandemic;

• governmental monetary and fiscal policies and the impact the current economic environment will have on these;

• the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, availability of wholesale funding and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;

• the effects of economic, business and market conditions and changes, particularly in our Indiana market area, including prevailing interest rates and the rate of inflation;

• governmental monetary and fiscal policies;

• the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;

• changes in borrowers’ credit risks and payment behaviors;

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• the effects of disruption and volatility in capital markets on the value of our investment portfolio;

• the risk of labor availability, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector;

• changes in the prices, values and sales volumes of residential and commercial real estate;

• changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages;

• changes in the availability and cost of credit and capital in the financial markets;

• the outcome of pending litigation and other claims we may be subject to from time to time;

• the anticipated phase out of the remaining LIBOR tenors by mid-2023 and implementation of a new reference rate or rates;

• the performance of our commercial real estate loan portfolio, including the effects of the elevated interest rate environment, the strength of the commercial real estate market in our Indiana markets, and recent changes in retail and office usage patterns;

• risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company;

• the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

• the risks related to the recent failures of First Republic Bank, Silicon Valley Bank and Signature Bank, including the effects already recognized and increased deposit volatility;

• the outcome of pending litigation and other claims we may be subject to from time to time;

• the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, and their application by our regulators;

• risk of cyber-security attacks that could result in damage to the Company’s or third-party service providers' networks or data of the Company;

• changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages;

• changes in the prices, values and sales volumes of residential real estate;

• the risk of labor shortages, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector;

• the effects of fraud by or affecting employees, customers or third parties;

• the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets;

• changes in the availability and cost of credit and capital in the financial markets;

• changes in technology or products that may be more difficult or costly, or less effective than anticipated;

• the effects of any employee or customer fraud;

• the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

• the risks related to mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

• changes in accounting policies, rules and practices;

• the risks noted in the Risk Factors discussed under Item 1A of Part 1 of this Annual Report on Form 10-K, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the Securities and Exchange Commission (the "SEC").

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The Company makes available free of charge, in the Investor Relations section on this site, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other statements and reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.

All such documents filed with the SEC are also available for free on the SEC’s website (www.sec.gov).

All such documents filed with or furnished to the SEC are also available for free on the SEC’s website (www.sec.gov).

The Company’s Articles of Incorporation, Bylaws, Code of Conduct and the charters of the various committees of the Company’s board of directors are also available on the Investor Relations section of the website at investors.lakecitybank.com.

The Company's website is not incorporated by reference into this Annual Report on Form 10-K.

SUPERVISION AND REGULATION

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Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase.

Then, in May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Regulatory Relief Act”) was enacted by Congress in part to provide regulatory relief for community banks and their holding companies.

their holding companies.

To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds.

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The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, beginning with a discussion of the impact of the COVID-19 pandemic on the banking industry.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, ending with a discussion of the impact of the COVID-19 pandemic on the banking industry.

It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described.

The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

COVID-19 Pandemic

The federal bank regulatory agencies, along with their state counterparts, issued a steady stream of guidance responding to the COVID-19 pandemic and took a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact.

These include, without limitation:

requiring banks to focus on business continuity and pandemic planning;

adding pandemic scenarios to stress testing;

encouraging bank use of capital buffers and reserves in lending programs;

permitting certain regulatory reporting extensions;

reducing margin requirements on swaps;

permitting certain otherwise prohibited investments in investment funds;

issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts;

and providing credit under the Community Reinvestment Act ("CRA") for certain pandemic-related loans, investments and public service.

Because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews.

Moreover, the Federal Reserve issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities.

The FDIC also acted to mitigate the deposit insurance assessment effects of participating in the Paycheck Protection Program ("PPP") and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

Reference is made to the discussion of "Risks Relating to General Economic Conditions in the Risk Factors" section below for information on the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), PPP program and the Federal Reserve’s lending facilities and for discussions of the economic impact of the COVID-19 pandemic.

In addition, information as to selected topics, such as the impact on capital requirements, dividend payments, reserves and CRA, is contained in the relevant sections of this Supervision and Regulation discussion.

The Role of Capital

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Thus, the Company and the Bank are each currently subject to the Basel III Rule as described below.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but, in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments.

Equity Tier 1 minority interests subject to certain regulatory adjustments.

The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations).

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For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.

Further, any banking organization experiencing or anticipating

significant growth would be expected to maintain capital ratios, including tangible capital positions ( i.e.

Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions ( i.e.

, Tier 1 Capital less all intangible assets), well above the minimum levels.

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less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%.

The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.

We may elect the CBLR framework at any time but have not currently determined to do so.

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Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States.

company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.

In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.

Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions.

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The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

We have elected to operate as a financial holding company.

In order to maintain our status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have at least a satisfactory CRA rating.

In order to maintain our status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have at least a satisfactory Community Reinvestment Act ("CRA") rating.

If the Federal Reserve determines that a financial holding company or any bank subsidiary is not well-capitalized or well-managed, the Federal Reserve will provide a period of time in which to achieve compliance, but, during the period of noncompliance, the Federal Reserve may place any additional limitations on the Company that it deems appropriate.

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or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

These factors have come into consideration in the industry as a result of the COVID-19 pandemic.

These factors have come into consideration in the industry as a result of the COVID-19 pandemic and United States banking crisis of 2023.

The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.

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The Bank is also a member of the Federal Reserve System (a “member bank”).

As an Indiana-chartered FDIC- insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFI, the chartering authority for Indiana banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of the DIF.

As an Indiana-chartered FDIC- insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement

requirements of the DFI, the chartering authority for Indiana banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of the DIF.

Deposit Insurance .

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At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking.

The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits.

For this purpose, the reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits.

The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits.

The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory required minimum.

As a result, the FDIC provided assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%.

The FDIC applied the small bank credits for quarterly assessment periods beginning July 1, 2019.

However, the reserve ratio then fell to 1.30% in 2020 as a result of extraordinary insured deposit growth caused by an unprecedented inflow of more than $1 trillion in estimated insured deposits in the first half of 2020, stemming mainly from the COVID-19 pandemic stimulus programs.

On September 15, 2020, the FDIC adopted a Restoration Plan to restore the reserve ratio to at least 1.35% within eight years.

Although the FDIC could have ceased the small bank credits, it waived the requirement that the reserve ratio be at least 1.35% for full remittance of the remaining assessment credits, and it refunded all small bank credits as of September 30, 2020.

On October 18, 2022, the FDIC adopted a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023.

The increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum of 1.35% by the statutory deadline of September 30, 2028.

The new assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds 2.00% in order to support growth in the DIF in progressing toward the FDIC's long-term goal of a 2.00% designated reserve ratio.

Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2.00% and again when it reaches 2.50%.

In the semi-annual update in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35% by September 30, 2028, the statutory deadline.

Based on this update, the FDIC approved an increase in initial base deposit insurance assessment rate schedules by two basis points, applicable to all insured depository institutions.

The increase was effective on January 1, 2023, applicable to the first quarterly assessment of the 2023 assessment (January 1 through March 31, 2023).

In addition, because the total cost of the failures of Silicon Valley Bank and Signature Bank was approximately $16.3 billion, the FDIC adopted a special assessment for banks having deposits above $5 billion, at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 (January 1 through March 31, 2024) with an invoice payment date of June 28, 2024, and will continue to collect special assessments for an anticipated total of eight quarterly assessment periods.

The base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits for the December 31, 2022 reporting period, adjusted to exclude the first $5 billion in estimated uninsured deposits.

Supervisory Assessments .

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Liquidity Requirements.

Liquidity is a measure of the ability and ease with which bank assets may be converted to cash.

Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations.

To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors.

Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests.

Liquidity is a measure of the ability and ease with which bank assets may be converted to meet financial obligations, such as deposits or other funding sources.

Banks are required to implement liquidity risk management frameworks that ensure they maintain sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events.

The level and speed of deposit outflows contributing to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in the first half of 2023 was unprecedented and contributed to acute liquidity and funding strain.

These events have further underscored the importance of liquidity risk management and contingency funding planning by insured depository institutions like the Bank.

The primary roles of liquidity risk management are to:

(i) prospectively assess the need for funds to meet financial obligations;

and (ii) ensure the availability of cash or collateral to fulfill those needs at the appropriate time by coordinating the various sources of funds available to the institution under normal and stressed conditions.

Because the global financial crisis was in part a liquidity crisis, Basel III includes a liquidity framework that requires the largest FDIC-insured institutions to measure their liquidity against specific liquidity tests.

One test, referred to as the Liquidity Coverage Ratio, or LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario.

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Indiana law prohibits the Bank from paying dividends in an amount greater than its undivided profits.

The Bank is required to obtain the approval of the DFI for the payment of any dividend if the total of all dividends declared by the Bank during the calendar year, including the proposed dividend, would exceed the sum of the Bank's net income for the year-to-date combined with its retained net income for the previous two years.

previous two years.

Indiana law defines "retained net income" to mean the net income of a specified period, calculated under the consolidated report of income instructions, less the total amount of all dividends declared for the specified period.

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Notwithstanding the availability of funds for dividends, however, the Federal Reserve and the DFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice.

In addition, under the Basel III Rule, institutions that seek the freedom to pay unrestricted dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.

In addition, under the Basel III Rule, institutions that want to pay unrestricted dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.

See “The Role of Capital” above.

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The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions.

The standards apply to internal

controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.

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The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk.

Bank regulators have identified key risk themes for 2023 as:

Bank regulators have identified key risk

themes for 2023 as:

credit risk management given the current interest rate environment and persistent inflationary concerns, cybersecurity risk, and commercial and residential real estate concentration risk management.

The agencies will also be monitoring banks for their transition away from LIBOR (London Interbank Offered Rate) as a reference rate, Bank Secrecy Act/anti-money laundering (“AML”) compliance, cybersecurity, third-party and change management, climate and environmental, social and governance initiatives, digital assets and CRA performance.

The agencies will also be monitoring banks for Bank Secrecy Act/anti-money laundering (“AML”) compliance, cybersecurity, third-party and change management, climate and environmental, social and governance initiatives, digital assets and CRA performance.

The Bank is expected to have active board and senior management oversight;

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The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments.

Transaction Account Reserves.

Federal law required FDIC-insured institutions to maintain reserves against their transaction acco unts (primarily NOW and regular checking accounts) to provide liquidity.

Reserves were maintained on deposit at the Federal Reserve Banks.

However, in March 2020, in an unprecedented move, the Federal Reserve announced that the banking system had ample reserves, and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the reserve maintenance requirement.

Th e action permits the Bank to loan or invest funds that were previously unavailable.

The Federal Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.

Community Reinvestment Act Requirements.

CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods.

The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods.

Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities.

Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.

In a joint statement responding to the COVID-19 pandemic, the bank regulatory agencies announced favorable CRA consideration for banks providing retail banking services and lending activities in their assessment areas, consistent with safe and sound banking practices, that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by the pandemic.

Those activities include waiving certain fees, easing restrictions on out-of-state and non-customer checks, expanding credit products, increasing credit limits for creditworthy borrowers, providing alternative service options, and offering prudent payment accommodations.

The joint statement also provided favorable CRA consideration for certain pandemic-related community development activities.

Applications for acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.

On October 24, 2023, the bank regulatory agencies issued a final rule to strengthen and modernize the CRA regulations (the “CRA Rule”), portions of which become effective on April 1, 2024.

The CRA Rule is designed to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated.

More specifically, the bank regulatory agencies described the goals of the CRA Rule as follows:

(i) to expand access to credit, investment, and basic banking services in low and moderate income communities;

(ii) to adapt to changes in the banking industry, including mobile and internet banking by modernizing assessment areas while maintaining a focus on branch based areas;

(iii) to provide greater clarity, consistency, and transparency in the application of the regulations through the use of standardized metrics as part of CRA evaluation and clarifying eligible CRA activities focused on low and moderate income communities and underserved rural communities;

(iv) to tailor CRA rules and data collection to bank size and business model;

and (v) to maintain a unified approach among the regulators.

Anti-Money Laundering.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) is designed to deny terrorists and criminals the ability to obtain access to the U.S.

The Bank Secrecy Act (BSA) is the common name for a series of laws and regulations enacted in the United States to combat money laundering and the financing of terrorism.

They are designed to deny terrorists and criminals the ability to obtain access to the U.S.

financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money.

The USA PATRIOT Act, along with other legal authority, mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters:

The so-called Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime under the BSA provides a foundation to promote financial transparency and deter and detect those who seek to misuse the U.S.

financial system to launder criminal proceeds, financed terrorist acts or move funds for other illicit purposes.

The laws require financial services companies to have policies and procedures with respect to measures designed to address:

(i) customer identification programs;

11 unchanged sentences

The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations.

On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.

On July 10, 2023, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks and an easing of CRE underwriting standards.

The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage the risks arising from CRE lending.

1 unchanged sentence

Based on the Bank’s loan portfolio as of December 31, 2023, it did not exceed the 300% guideline for commercial real estate loans nor did it exceed the 100% guideline for construction and land development loans.

Also, commercial real estate loans have not increased by 50 percent or more during the previous 36 months.

Consumer Financial Services.

The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws.

The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices.

The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices.

The CFPB has examination and enforcement authority over providers with more than $10 billion in assets.

5 unchanged sentences

The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.

COVID-19 Pandemic

These included, without limitation:

requiring banks to focus on business continuity and pandemic planning;

adding pandemic scenarios to stress testing;

encouraging bank use of capital buffers and reserves in lending programs;

permitting certain regulatory reporting extensions;

reducing margin requirements on swaps;

permitting certain otherwise prohibited investments in investment funds;

issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts;

and providing credit under the CRA for certain pandemic-related loans, investments and public service.

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 1. Business