What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 254 added, 217 removed, 635 unchanged (43% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net income in 2022 was $103.8 million, up 8.4% from $95.7 million in 2021.

Net income in 2023 was $93.8 million, down 9.7%, from $103.8 million in 2022.

Net income for 2022 was 8.4% higher than $95.7 million in 2021.

2 unchanged sentences

Return on average total equity was 15.93% in 2023, versus 17.40% in 2022 and 14.19% in 2021.

The dividend payout ratio, with respect to diluted earnings per share, was 39.60% in 2022, 36.36% in 2021 and 36.36% in 2020.

The dividend payout ratio, with respect to diluted earnings per share, was 50.41% in 2023, versus 39.60% in 2022 and 36.36% in 2021.

The average equity to average assets ratio was 9.11% in 2023, compared to 9.28% in 2022 and 10.96% in 2021.

Net income in 2023 was negatively impacted by a $20.5 million increase in noninterest expense and a $5.9 million decrease in net interest income.

Offsetting these decreases were an $8.0 million increase in noninterest income and a $3.5 million decrease in provision for credit losses.

On June 30, 2023, the Company discovered that it had been the victim of an international wire fraud resulting in a loss of $18.1 million.

During the fourth quarter of 2023, the Company recognized $6.3 million in insurance and loss recoveries associated with the wire fraud loss.

During 2023, the total impact of the wire fraud loss to income before income tax expense was $10.4 million, net of recoveries and adjustments to salaries and benefits expense, or $7.8 million net of tax, and $0.30 diluted earnings per common share.

Core operational profitability, a non-GAAP financial measure that excludes the impact of the wire fraud loss and related insurance and loss recoveries as well as adjustments to the Company's salaries and employee benefits expense, was $101.6 million for the twelve months ended December 31, 2023, a decrease of $2.2 million, or 2.2%, from the full year 2022.

Core operational diluted earnings per common share, a non-GAAP financial measure, for the twelve months ended December 31, 2023, was $3.95, also a decrease of 2.2%, from the full year 2022.

Net income in 2022 was positively impacted by a $24.8 million increase in net interest income.

Offsetting these positive impacts were a $5.9 million increase in noninterest expense, a $2.9 million decrease in noninterest income, and an $8.3 million increase in provision for credit losses.

Net income in 2021 was positively impacted by a $15.1 million increase in net interest income and a $13.7 million decrease in provision for credit losses.

Offsetting these positive impacts were a $13.1 million increase in noninterest expense and a $2.1 million decrease in noninterest income.

Total assets were $6.432 billion as of December 31, 2022 versus $6.557 billion as of December 31, 2021, a decrease of $125.0 million or 1.9%.

Early in 2022, the Company deployed $250.0 million of excess liquidity to the investment securities portfolio.

Loan growth of $422.6 million during 2022 was funded by cash and cash equivalents as well as deposits.

During the fourth quarter, deposit outflows from commercial and retail depositors contributed to the decline in deposits of $274.8 million during 2022.

Borrowings increased $222.0 million during 2022.

The increase was due to a $297.0 million increase in short-term borrowings at December 31, 2022, offset by the payoff of a $75.0 million long-term FHLB advance outstanding at December 31, 2021.

Total investment securities decreased $84.8 million during the year.

The decrease was driven primarily by a decrease in market value of available-for-sale securities as a result of the increased rate environment driven by the Federal Reserve's monetary tightening policy.

The decrease in fair value of available-for-sale investment securities was $236.9 million for the year 2022, from an unrealized gain position of $21.6 million at December 31, 2021 to an unrealized loss position of $215.3 million at December 31, 2022.

In addition, the Company elected to transfer securities from available-for-sale to held-to-maturity as an overall balance sheet management strategy in 2022.

The fair value of securities transferred during the second quarter of 2022 was $127.0 million, with $24.4 million in unrealized losses recorded in accumulated comprehensive income (loss) to be amortized over the remaining life of the securities transferred.

Offsetting the positive impact of net interest income were an $8.3 million increase in provision for credit losses, a $5.9 million increase in noninterest expense and a $2.9 million decrease in noninterest income.

Total assets were $6.524 billion as of December 31, 2023 versus $6.432 billion as of December 31, 2022, an increase of $91.7 million or 1.4%.

Balance sheet expansion in 2023 was driven by loan growth of $206.1 million, or 4.4%.

Offsetting the increase in loan growth was a decrease in investments securities of $132.1 million, or 10.1%.

Balance sheet expansion in 2023 was funded by an increase in deposits of $259.9 million, or 4.8%, and was offset by a decrease in borrowings of $247.0 million.

CRITICAL ACCOUNTING POLICIES

35 unchanged sentences

It is also possible that these factors could include social, political, economic, and terrorist events or activities.

All of these factors are susceptible to change, which may be significant.

All of these factors are subject to change, which may be significant.

As a result of this detailed process, the allowance results in two forms of allocations, specific and general.

37 unchanged sentences

RESULTS OF OPERATIONS

In 2022, the Company continued to grow loans organically in its geographic footprint of northern Indiana and in central Indiana in the Indianapolis market.

The Company had 52 branches as of December 31, 2022.

The Company’s net interest income was positively affected by the monetary tightening policy of the Federal Reserve during 2022.

The rise in short-term interest rates and loan growth were the primary drivers of the 13.9% increase in net interest income for 2022.

The increase in net interest income was the primary driver for the 8.4% increase in net income of $8.1 million, as noninterest expense increased 5.7%, noninterest income decreased 6.4% and the provision for credit losses increased 770.5%.

Asset quality metrics remained stable with watch list loans as a percentage of total loans at a historic low of 3.42%.

Fee based lines of business including treasury management services, commercial loan fees, interchange fee income and merchant interchange fee income positively contributed to growth in noninterest income.

Overall, expense growth has reflected the Company's continued investment in people, technology and our branch infrastructure.

The outlook for 2023 includes plans for continued loan growth, disciplined credit philosophy, continued investments in human capital, enhancements to the Lake City Bank digital platform, and targeted expansion of our branch network in the Indianapolis market with two new offices planned in the next 18 months.

The Company's net income in 2023 decreased $10.1 million, or 9.7%, as a result of an increase in noninterest expense of $20.5 million, or 18.6%, and a decrease in net interest income of $5.9 million, or 2.9%.

Noninterest income increased $8.0 million, or 19.1%.

Provision for credit losses decreased $3.5 million, or 37.6%.

The increases to noninterest expense and noninterest income were primarily driven by the wire fraud loss that occurred during the second quarter of 2023 and related insurance and loss recoveries and adjustments to salaries and benefits expense recorded by the Company as a result of the loss.

The wire fraud loss of $18.1 million was the primary driver of the increase to noninterest expense.

Insurance and loss recoveries associated with the event of $6.3 million were recorded as noninterest income during the fourth quarter of 2023.

Salaries and employee benefits expense was reduced by $1.4 million as a result of adjustments to the Company's long term incentive accrual due to the negative impact of the loss on the Company's net income for the year.

Core operational profitability, a non-GAAP financial measure which excludes the impact of the wire fraud loss and related insurance and loss recoveries and adjustments to the Company's salaries and employee benefits expense, was $101.6 million for the twelve months ended December 31, 2023, a decrease of $2.2 million, or 2.2%, from the full year 2022.

Core operational diluted earnings per common share, a non-GAAP financial measure, for the twelve months ended December 31, 2023, was $3.95, also a decrease of 2.2%, from the full year 2022.

The Company's net interest income was negatively impacted in 2023 by increased funding costs, primarily driven by deposit repricing as deposit rates adjusted to the higher interest rate environment as a result of tightened monetary policy by the Federal Reserve.

The rise in deposit costs combined with a shift in deposit mix from noninterest bearing deposits to interest bearing deposits were the primary drivers behind the 2.9% decrease in net interest income during 2023.

Asset quality metrics remained stable with watch list loans as a percentage of total loans remaining near historic lows at 3.72% at December 31, 2023, as compared to 3.42% at December 31, 2022.

The provision for credit losses decreased $3.5 million, or 37.6%.

The near-term outlook includes plans for continued loan growth, disciplined credit philosophy, continued investments in human capital and technological innovations and enhancements, and targeted expansion of our branch network in the Indianapolis market with two new offices planned in the next 24 months.

Selecte d income statement information for the years ended December 31, 2023, 2022 and 2021 is presented in the following table.

(dollars in thousands) 2022 2021 2020

(dollars in thousands, except per share data) 2023 2022 2021

Income Statement Summary:

Net interest income $ 202,887 $ 178,088 $ 163,008

Net interest income (a) $ 197,035 $ 202,887 $ 178,088

Provision for credit losses 5,850 9,375 1,077

Noninterest income 41,862 44,720 46,843

Noninterest expense 110,210 104,287 91,205

Noninterest income (b) 49,858 41,862 44,720

Adjusted Core Noninterest Income (1) 43,558 41,862 44,720

Noninterest expense (c) 130,710 110,210 104,287

Adjusted Core Noninterest Expense (1) 114,049 110,210 104,287

Efficiency ratio (2) 52.94 % 45.03 % 46.81 %

Adjusted Core Efficiency Ratio (1) 47.40 45.03 46.81

Dilutive EPS $ 3.65 $ 4.04 $ 3.74

4 unchanged sentences

Net interest margin 3.31 3.40 3.07

Net interest margin excluding PPP loans (4) 3.40 % 2.95 % 3.19 %

Net interest margin excluding Paycheck Protection Program ("PPP") loans (5) 3.31 3.40 2.95

Noninterest income to total revenue 20.19 17.10 20.07

Pretax Pre-Provision Earnings (6) $ 116,183 $ 134,539 $ 118,521

(1) Noninterest expense/Net interest income plus Noninterest income.

(1) Non-GAAP financial measure.

Calculated by excluding the wire fraud loss and related insurance and loss recoveries and adjustments to salary and benefits.

Management believes this is an important measure because meaningful to understanding the company’s core business performance for these periods.

See reconciliation on the following pages.

(2) Noninterest expense (c)/(Net interest income (a) plus Noninterest income (b)).

(3) Non-GAAP financial measure.

Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity.

Management believes this is an important measure because it is useful for planning and forecasting purposes.

See reconciliation on the next page.

See reconciliation on the following pages.

(4) Non-GAAP financial measure.

Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio from tangible equity and tangible assets.

Management believes this is an important measure because it provides better comparability to prior periods.

See reconciliation on the next page.

Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio included in accumulated other comprehensive income ("AOCI") from tangible equity and tangible assets.

Management believes this is an important measure because it provides better comparability to periods preceding the recent significant rise in prevailing interest rates.

See reconciliation on the following pages.

(5) Non-GAAP financial measure.

Calculated by subtracting the impact PPP loans had on average earnings assets, loan interest income, average interest bearing liabilities, and interest expense.

Management believes this is an important measure because it provide for better comparability to prior periods, given the expectation that PPP represents a limited governmental intervention in the lending market, designed to support small businesses through the pandemic, its low fixed interest rate of 1.0% and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA.

Management is actively monitoring net interest margin on a fully tax equivalent basis with and without PPP loan impact for the duration of this program.

See reconciliation on the next page.

Management believes this is an important measure because it provides for better comparability to subsequent periods, given the expectation that PPP represented a limited governmental intervention in the lending market, designed to support small businesses through the pandemic, its low fixed interest rate of 1.0% and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA.

See reconciliation on the following pages.

(6) Non-GAAP financial measure.

1 unchanged sentence

Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period.

See reconciliation on the next page.

See reconciliation on the following pages.

The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the company's financial performance.

A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data).

Reconciliations of these non-GAAP financial measures is provided below.

The impact of the wire fraud loss, insurance and loss recoveries and adjustments to salaries and benefits is presented below.

Management considers these measures of core financial performance to be meaningful to understanding the Company’s business performance for these periods.

31, 2023 Dec.

31, 2022 Dec.

Noninterest Income $ 49,858 $ 41,862 $ 44,720

Recoveries (6,300) 0 0

Adjusted Core Noninterest Income $ 43,558 $ 41,862 $ 44,720

Noninterest Expense $ 130,710 $ 110,210 $ 104,287

Wire Fraud Loss (18,058) 0 0

Salaries and Employee Benefits 1,397 0 0

Adjusted Core Noninterest Expense $ 114,049 $ 110,210 $ 104,287

Earnings Before Income Taxes $ 110,333 $ 125,164 $ 117,444

Adjusted Core Impact:

Noninterest Income (6,300) 0 0

Noninterest Expense 16,661 0 0

Total Adjusted Core Impact 10,361 0 0

Adjusted Earnings Before Income Taxes 120,694 125,164 117,444

Tax Effect (19,119) (21,347) (21,711)

Core Operational Profitability $ 101,575 $ 103,817 $ 95,733

Diluted Earnings Per Share $ 3.65 $ 4.04 $ 3.74

Impact of Wire Fraud Loss, Net of Recoveries 0.30 0.00 0.00

Core Operational Diluted Earnings Per Common Share $ 3.95 $ 4.04 $ 3.74

Adjusted Core Efficiency Ratio 47.40 % 45.03 % 46.81 %

(dollars in thousands, except per share data) Dec.

31, 2023 Dec.

31, 2022 Dec.

Total Equity $ 649,793 $ 568,887 $ 704,906

2 unchanged sentences

Tangible Common Equity 645,990 565,084 701,112

AOCI Market Value Adjustment 188,154 (17,056) (29.182)

Market Value Adjustment in AOCI 154,460 188,154 (17,056)

Adjusted Tangible Common Equity 800,450 753,238 684,056

3 unchanged sentences

Tangible Assets 6,520,226 6,428,568 6,553,529

Securities Market Value Adjustment 238,170 (21,589) (36,939)

Market Value Adjustment in AOCI 154,460 188,154 (17,056)

Adjusted Tangible Assets 6,674,686 6,616,722 6,536,473

7 unchanged sentences

Pretax Pre-Provision Earnings $ 116,183 $ 134,539 $ 118,521

The impact of the Paycheck Protection Program on Net Interest Margin FTE is provided below (dollars in thousands).

31, 2022 Dec.

The impact of the Paycheck Protection Program on Net Interest Margin FTE for the years ended December 31, 2022 and 2021 is presented below (dollars in thousands).

The impact of the Paycheck Protection Program on Net Interest Margin FTE for the year ended December 31, 2023 is excluded as the Program had an immaterial impact on average earning assets, interest income and cost of funds during the period.

31, 2022 Dec.

14 unchanged sentences

Net Interest Margin FTE, net of PPP Impact 3.40 % 2.95 %

Net income was $103.8 million in 2022, an increase of $8.1 million, or 8.4%, versus net income of $95.7 million in 2021.

The increase in net income from 2021 to 2022 was primarily due to an increase in net interest income of $24.8 million, or 13.9%.

Offsetting the increase in net interest income, noninterest expense increased $5.9 million, or 5.7%, noninterest income decreased $2.9 million, or 6.4%, and the provision for credit losses increased $8.3 million, or 770.5%.

Net interest income for 2022 included $772,000 in PPP interest and fee income compared to $14.9 million for 2021.

The increase in provision expense for 2022 was driven primarily by the downgrade of a single commercial relationship that occurred in late December 2022.

The remaining increase in provision was driven by loan growth during the year.

Net income was $93.8 million in 2023, a decrease of $10.1 million, or 9.7%, versus net income of $103.8 million in 2022.

The decrease in net income from 2022 to 2023 was driven by an increase in noninterest expense of $20.5 million, or 18.6% and a decrease in net interest income of $5.9 million, or 2.9%.

Offsetting these decreases was an increase in noninterest expense of $8.0 million, or 19.1%, and a decrease in the provision for credit losses of $3.5 million, or 37.6%.

The increases to noninterest expense and noninterest income were a result of the wire fraud loss and related insurance and loss recoveries and adjustments to salaries and employee benefits expense recorded by the Company during 2023.

The wire fraud loss, which occurred during the second quarter of 2023, was $18.1 million and was the primary driver of the increase to noninterest expense.

Insurance and loss recoveries associated with the event of $6.3 million were recorded as noninterest income during the fourth quarter of 2023.

Core operational profitability, a non-GAAP financial measure which excludes the impact of the wire fraud loss and related insurance and loss recoveries as well as adjustments to the Company's salaries and employee benefits expense, was $101.6 million for the twelve months ended December 31, 2023, a decrease of $2.2 million, or 2.2%, from the comparable period of 2022.

Core operational diluted earnings per common share, a non-GAAP financial measure, for the twelve months ended December 31, 2023, was $3.95, also a decrease of 2.2%, from the comparable period of 2022.

Net income was $103.8 million in 2022, an increase of $8.1 million, or 8.4%, versus net income of $95.7 million in 2021.

The increase in net income from 2020 to 2021 was primarily due to an increase in net interest income of $15.1 million, or 9.3%, and a decrease in the provision for credit losses of $13.7 million, or 92.7%.

The increase in net income from 2021 to 2022 was primarily due to an increase in net interest income of $24.8 million, or 13.9%, and an increase in the provision for credit losses of $8.3 million, or 770.5%.

Noninterest expense increased $5.9 million, or 5.7%, and noninterest income decreased $2.9 million, or 6.4%.

Net interest income for 2021 included $14.9 million in PPP interest and fee income.

The decrease in provision expense for 2021 was driven by improved economic conditions, which were supported by government stimulus programs and accommodative Federal Reserve Board's Federal Open Market Committee ("FOMC") monetary policy.

Net interest income for 2022 included $772,000 in PPP interest and fee income, compared to $14.9 million for 2021.

The increase in provision expense for 2022 was driven primarily by the downgrade of a single commercial relationship, with the remaining increase attributable to loan growth.

Net Interest Income

23 unchanged sentences

Miscellaneous short-term borrowings 166,821 8,441 5.06 6,559 272 4.15 408 7 1.72

Long-term borrowings and subordinated debentures 32,055 127 0.40 75,000 297 0.40 62,295 247 0.40

Long-term borrowings 0 0 0.00 32,055 127 0.40 75,000 297 0.40

Total interest bearing liabilities $ 4,295,743 $ 146,232 3.40 % $ 3,913,195 $ 36,680 0.94 % $ 3,761,520 $ 15,131 0.40 %

9 unchanged sentences

(1) Loan fees are included as taxable loan interest income.

Net loan fees attributable to PPP loans were $692,000, $12.5 million and $9.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Net loan fees attributable to PPP loans were $10,000 , $692,000 and $12.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.

(2) Nonaccrual loans are included in the average balance of taxable loans.

31 unchanged sentences

The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment applicable to nondeductible interest expense.

Net interest income increased by $24.8 million to $202.9 million in 2022 compared to 2021, partially due to a $216.5 million, or 3.7%, increase in average earning assets.

The increase in average assets was primarily driven by a $364.0 million increase in average investment securities offset by a decrease in interest bearing deposits.

The yield on average earning assets increased 67 basis points to 4.00% in 2022 from 3.33% in 2021.

The higher earning asset yields and cost of funds were driven by the 425 basis points increase to the target Federal Funds rate implemented by the Federal Reserve Board beginning in 2022 to combat elevated levels of inflation affecting the U.S.

The target Federal Funds rate increased from a zero-bound range of 0.00% - 0.25% in March 2022 to a range of 4.25% - 4.50% at December 31, 2022.

Net interest income decreased by $5.9 million to $197.0 million in 2023 compared to $202.9 million in 2022, primarily as a result of increased funding costs.

Total interest expense increased $109.6 million, or 298.7%.

Of this increase, deposit interest expense increased $101.5 million, or 279.8%, as a result of increased rates paid for customer deposits and a shift in deposit mix from noninterest bearing deposits to interest bearing deposits.

Funding costs for deposits increased 183 basis points to 2.46% during 2023, a 290.5% increase compared to 0.63% during 2022.

Average noninterest bearing deposits decreased $367.5 million, or 19.9%, to $1.48 billion for 2023 as compared to $1.84 billion for 2022.

Average interest bearing deposits increased $254.3 million, or 6.6%, to $4.13 billion for 2023 as compared to $3.87 billion for 2022.

Contributing further to the increased funding costs was an increase in borrowings expense of $8.0 million, as a result of increased average short-term borrowings to meet the Company's funding needs.

Average wholesale funding reliance remained low at 2.90% as of December 31, 2023 compared to 0.70% at December 31, 2022.

Investment securities interest income decreased $4.1 million, or 12.3%, and contributed to the decline in net interest income during 2023.

The decrease in investment securities income was driven by a decrease in average securities balances of $247.6 million, or 17.3%, during 2023 as a result of available-for-sale investment securities sales of $105.2 million, maturities, calls and paydowns of $71.8 million, and offset by purchases of CRA securities of $7.2 million.

Realized losses of $25,000

were recognized on the securities sales during 2023.

The yield on average investment securities increased 15 basis points to 2.86% for 2023, as compared to 2.71% for 2022, partially offsetting the impact of the decrease in securities average balances.

An increase in loans interest income offset the negative impacts to net interest income, increasing $104.3 million, or 51.2%, to $308.0 million during 2023 compared to $203.7 million during 2022.

The increase in average loans was driven by loan growth during the period as average loan balances increased $386.5 million, or 8.7%, from $4.43 billion during 2022 to $4.81 billion during 2023.

An increase in loan yields of 181 basis points, or 39.3%, from 4.61% for 2022 to 6.42% for 2023 as a result of continued Federal Reserve tightening during 2023 and loan repricing opportunities.

As a result of these effects, net interest margin decreased 9 basis points to 3.31% in 2023 versus 3.40% in 2022.

Net interest margin increased to 3.40% in 2022 from 3.07% in 2021, driven by the dramatic tightening of monetary policy by the Federal Reserve during 2022 and 2023 and deposit repricing to reflect the increased rate environment that lagged into 2023.

Additionally, net interest margin during the year ended December 31, 2022 was positively impacted by the recognition of nonaccrual interest resulting from the interest recovery of two nonaccrual commercial borrowers during the fourth quarter of 2022.

The interest recovery was from

two loans placed on nonaccrual status in 2009 and 2021.

The interest recovery was from two loans placed on nonaccrual status in 2009 and 2021.

The $1.9 million of nonaccrual interest income was recognized into loan interest income and contributed 3 basis points to the Company's net interest margin during 2022.

The net interest margin increased to 3.40% in 2022 versus 3.07% in 2021.

The net interest margin decreased to 3.07% in 2021 versus 3.19% in 2020, driven by margin compression from the lower interest rate environment and excess liquidity on the Company's balance sheet.

During 2022, average loans increased $6.1 million and average investment securities increased $364.0 million.

The growth in average assets and average investment securities was funded by a reduction of interest bearing deposits of $153.5 million, growth in interest bearing liabilities of $151.7 million and growth in average demand deposits of $171.6 million.

The increase in average deposits for 2022 resulted from excess liquidity on our customers’ balance sheets resulting from a combination of PPP and economic stimulus.

As a result of this excess liquidity on the Company's balance sheet, management deployed an additional $250 million into the available-for-sale investment securities portfolio during 2022, bringing total excess liquidity deployment to the investment securities portfolio of $902 million since the beginning of 2021.

The utilization of commercial and retail lines of credit remained unchanged at 42% in 2022 and 2021 and down from 43% at December 31, 2020.

However, available lines of credit have increased by a record $651 million to $4.752 billion at December 31, 2022 compared to $4.101 billion at December 31, 2021, or 16% growth.

While overall line usage as a percentage of total line availability remained unchanged, management remains encouraged because of the healthy expansion in overall line availability due to strong demand for traditional working capital from our commercial and industrial client base as well as continued development activity within our commercial real estate markets.

The utilization of commercial and retail lines of credit decreased to 39% at December 31, 2023, down from 42% at December 31, 2022 and 2021.

However, available lines of credit have increased by $124.0 million to $4.786 billion at December 31, 2023 compared to $4.662 billion at December 31, 2022, or 2.7% growth.

The decrease in line usage is attributable to the conservative approach commercial and industrial borrowers continue to take since the pandemic, due to continued elevated levels of average commercial demand deposits relative to pre-pandemic levels.

Provision for Credit Losses

The Company recorded a provision for credit losses of $5.9 million in 2023 compared to $9.4 million in 2022 and $1.1 million in 2021.

The increased provision in 2022 was driven by provision expense of $7.0 million related to the downgrade of a single $10.7 million commercial relationship.

The remainder of the increase was due to growth in the overall loan portfolio.

Provision expense during 2023 was driven primarily by increases in the qualitative and environmental risk factors for certain segments of the Company's loan portfolio that could be impacted by higher borrowing costs and potential economic weakness in the Company's markets.

The remainder of expense was driven by growth in the loan portfolio during the year.

The Company’s allowance for credit losses as of December 31, 2023 was $72.0 million compared to $72.6 million as of December 31, 2022 and $67.8 million as of December 31, 2021.

The allowance for credit losses represented 1.46% of total loans as of December 31, 2023 versus 1.54% at December 31, 2022 and 1.58% at December 31, 2021.

The company’s credit loss reserve to total loans, excluding PPP loans, was 1.54% at December 31, 2022 compared to 1.59% at December 31, 2021 and 1.45% at December 31, 2020.

PPP loans are guaranteed by the United States SBA and have not been allocated for within the allowance for credit losses.

The company’s credit loss reserve to total loans, excluding PPP loans, which are guaranteed by the United States SBA and have not been allocated for within the allowance for credit losses, was 1.59% at December 31, 2021.

The impact of PPP loans had an immaterial impact on the allowance coverage ratio at December 31, 2023 and 2022.

Net charge offs of $6.5 million, or 0.13%, and $4.5 million, or 0.10% of average loans, were recorded in 2023 and 2022, respectively.

The charge offs for 2022 and 2021 resulted primarily from a single commercial credit each year.

Management believes the charge offs were isolated instances that were negatively impacted by unique circumstances resulting from the pandemic and are not reflective of deteriorating trends in the loan portfolio.

The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions including inflation and the resulting impact on the interest rate environment, and other factors that may influence the assessment of the collectability of loans.

The charge offs for 2023 and 2022 resulted primarily from the deterioration of a single commercial credit.

Management believes the charge offs related to this credit were an isolated instance as a result of negative impacts caused by unique circumstances from the pandemic and are not reflective of deteriorating trends in the loan portfolio.

The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions including the impact of the increased interest rate environment, inflation levels, and other factors that may influence the assessment of the collectability of loans.

The Company adopted CECL on January 1, 2021.

Prior to this date, provision expense was recorded under the incurred loss methodology.

The day one impact of the adoption was an increase in the allowance for credit losses of $9.1 million, with an offset, net of taxes, to stockholders' equity.

Adoption of the standard resulted in a day one impact to the allowance for credit losses of $9.1 million, with an offset, net of taxes, to stockholders' equity.

Noninterest Income

9 unchanged sentences

Interest rate swap fee income 794 579 1,035 37.1 (44.1)

Mortgage banking income 633 1,418 3,911 (55.4) % (63.7) %

Net securities gains 21 797 433 (97.4) % 84.1 %

Mortgage banking income (loss) (254) 633 1,418 (140.1) (55.4)

Net securities gains (losses) (25) 21 797 (219.0) (97.4)

Other income 9,141 1,874 2,725 387.8 (31.2)

1 unchanged sentence

Noninterest income to total revenue 20.2 % 17.1 % 20.1 %

Noninterest income was $49.9 million in 2023 versus $41.9 million in 2022, an increase of $8.0 million, or 19.1%.

Adjusted core noninterest income, which excludes the net wire fraud loss, was $43.6 million in 2023, an increase of $1.7 million, or 4.1% compared to 2022.

Wealth advisory fees increased by 5.1%, or $444,000, during 2023, from $8.6 million to $9.1 million reflecting continued growth in the business and improving equity market valuations.

Service charges on deposit accounts decreased by 7.1%, or $822,000, during 2023 from $11.6 million to $10.8 million due primarily to an increase to earnings allowances on business checking accounts and reduced overdraft and other deposit fees.

Loan and service fees declined by 3.8%, or $464,000, during 2023 primarily due to a decline in interchange revenue due to reduced volume and spend per debit card as compared to higher trends during the pandemic.

Merchant fee income improved by 2.6%, or $91,000, during 2023.

Other income increased $7.3 million, or 387.8%, due primarily to insurance and loss recoveries of $6.3 million that were recognized during the fourth quarter of 2023.

Bank owned life insurance increased $2.7 million, or 625.2%, from improved performance for the Company's variable life insurance policies, which track with the performance of the equity markets.

The purchase of traditional bank owned life policies in December 2022 contributed further to the increase in bank owned life insurance income.

These increases were offset by decreases to mortgage banking income of $887,000, or 140.1%, and a decrease in investment brokerage fees of $503,000, or 21.7%.

Noninterest income was $41.9 million in 2022 versus $44.7 million in 2021, a decrease of $2.9 million, or 6.4%.

7 unchanged sentences

Wealth advisory fees declined by $114,000, or 1.3%, and were negatively impacted by market value declines of 8.0% in trust assets from $2.5 billion at December 31, 2021 to $2.3 billion at December 31, 2022.

Noninterest income was $44.7 million in 2021 compared to $46.8 million in 2020, a decrease of $2.1 million, or 4.5%.

The decrease was primarily driven by a $4.1 million decrease in interest rate swap fees generated from commercial lending transactions, as well as a $2.5 million decrease in mortgage banking income.

Demand for interest rate swap arrangements decreased in 2021.

The carrying value of mortgage servicing rights was negatively impacted by increased prepayment speeds, resulting from the low interest rate environment.

Offsetting these decreases were an increase in loan service fees of $1.8 million, an increase in wealth advisory and investment brokerage fees of $1.6 million, an increase in merchant and interchange fees of $615,000, and an increase in service charges on deposit accounts of $498,000.

The increases in fee income were driven by growth in fee-based business including from the wealth advisory group, merchant services, debit card interchange and institutional services areas due to higher transaction volumes and increased economic activity.

Noninterest Expense

9 unchanged sentences

Professional fees 8,583 6,483 7,064 32.4 (8.2)

Wire fraud loss 18,058 0 0 100.0 —

Other expense 10,757 13,124 8,905 (18.0) 47.4

Total noninterest expense $ 130,710 $ 110,210 $ 104,287 18.6 % 5.7 %

Noninterest expense increased by $5.9 million, or 5.7%, for the year ended December 31, 2022, to $110.2 million compared to $104.3 million for the year ended December 31, 2021.

Noninterest expense increased by $20.5 million, or 18.6%, for 2023 from $110.2 million to $130.7 million.

The increase to noninterest expense during the year was driven by an $18.1 million wire fraud loss that occurred during the second quarter of 2023.

Contributing to the increase in noninterest expense during 2023 was an increase to professional fees expense of $2.1 million, or 32.4%, an increase to FDIC insurance and other regulatory fees of $1.4 million, or 68.2%, from increased assessments due to a blanket increase to the assessment rate used by the FDIC to calculate premiums.

Data processing fees and supplies expense increased $1.2 million, or 9.2%.

Offsetting these increases was a decrease in other expense of $2.4 million, or 18.0%, driven by reduced accruals related to ongoing litigation matters.

Adjusted core noninterest expense, a non-GAAP measure, which excludes the impact of the wire fraud loss and corresponding adjustments to salaries and employee benefits, was $114.0 million during 2023, an increase of $3.8 million, or 3.5%, compared to 2022.

Noninterest expense increased by $5.9 million, or 5.7%, for 2022, to $110.2 million compared to $104.3 million for 2021.

The increase was due primarily to an increase of $4.2 million in other expense caused by accruals for ongoing legal matters of $3.5 million.

4 unchanged sentences

FDIC insurance and other regulatory fee expense decreased by $243,000, or 10.8%, due to declining deposits and reduced total assets of the Company.

Noninterest expense increased by $13.1 million, or 14.3%, to $104.3 million for the year ended December 31, 2021 as compared to $91.2 million for 2020.

Salaries and employee benefits increased by $8.5 million due primarily to increased performace-based compensation, increased salaries and increased health insurance expense.

Additionally, increased legal fees and costs associated with the digital platform conversion to LCB Digital contributed to an overall increase of $1.8 million in professional fees.

Corporate and business development expenses increased as the 2021 economy re-opened, and client events and contributions increased in 2021.

The Company recognized income tax expense in 2023 of $16.6 million, compared to $21.3 million in 2022 and $21.7 million in 2021.

The effective tax rate was 15.0% in 2023, compared to 17.1% in 2022 and 18.5% in 2021.

The effective tax rate declined due to the Indiana Financial Institution Tax rate being 5.0% in 2022, 5.5% in 2021 and 6.0% in 2020 as well as an increase in tax-free interest income from municipal securities and loans during 2022 and 2021.

The effective tax rate declined due to negative impact of the wire fraud loss and related effects on net income, which lowered income tax expense by $2.6 million for 2023.

Additionally, changes to the Indiana Financial Institution Tax rate to 4.9% in 2023, 5.0% in 2022 and 5.5% in 2021, as well as tax-free interest income from municipal securities and loans during 2023 contributed to the decreased effective tax rate.

For a detailed analysis of the Company’s income taxes see "Note 12 – Income Taxes".

14 unchanged sentences

Dividend payout ratio is computed by dividing dividends declared per common share by earnings per diluted common share for each indicated fiscal year.

The dividend payout ratio increased to 50.4% for 2023 as compared to prior periods due to the wire fraud loss and its negative impact to net income.

Refer to the "Financial Condition - Loan Portfolio", "Financial Condition - Sources of Funds" and "Risk Management - Loan Portfolio" sections of this MD&A and to the Notes to Consolidated Financial Statements of this Form 10-K for the other required statistical disclosures.

FINANCIAL CONDITION

Total assets of the Company were $6.432 billion as of December 31, 2022, a decrease of $125.0 million, or 1.9%, when compared to $6.557 billion as of December 31, 2021.

Total loans, excluding PPP loans, increased by $447.2 million, or 10.5%, to $4.709 billion as of December 31, 2022 from $4.262 billion at December 31, 2021.

Total assets of the Company were $6.524 billion as of December 31, 2023, an increase of $91.7 million, or 1.4%, when compared to $6.432 billion as of December 31, 2022.

Total loans outstanding increased by $206.1 million, or 4.4%, to $4.917 billion at December 31, 2023 from $4.710 billion at December 31, 2022.

PPP loans outstanding were $1.5 million as of December 31, 2022, compared to $26.2 million at December 31, 2021.

Total deposits decreased $274.8 million, from $5.735 billion at December 31, 2021, to $5.461 billion at December 31, 2022, as retail and commercial depositors utilized excess liquidity on their balance sheets.

Deposits contracted $274.8 million in 2022 and $203.5 million of that decrease occurred during the fourth quarter.

The $553.0 million decrease in cash and cash equivalents was utilized to fund $447.2 million in net organic loan growth during 2022.

Additionally, the Company deployed $250.0 million for the purchase of available-for-sale investment securities during the first quarter of 2022.

In mid 2022, the Company elected to utilize principal and interest cash flows from the investment securities portfolio to supplement liquidity for funding loans.

Cash flows from the investment securities portfolio provided $114.0 million of liquidity during 2022.

In addition, the Company utilized short-term borrowings of $297.0 million to offset deposit outflows.

Total deposits increased $259.9 million, from $5.461 billion at December 31, 2022, to $5.721 billion at December 31, 2023, driven by increased commercial and public funds deposits and offset by net retail outflows.

Total cash and equivalents increased $21.5 million, to $151.8 million at December 31, 2023 from $130.3 million at December 31, 2022.

Total investment securities decreased by $132.1 million, to $1.182 billion at December 31, 2023 from $1.314 billion at December 31, 2022.

The decrease was attributable to a decrease in available-for-sale securities, which decreased by $133.8 million, primarily as a result of investment sales of $105.2 million and maturities, calls and paydowns of $71.8 million, and offset by purchases of $7.2 million and improvement in fair market valuations of $40.7 million.

Losses of $25,000 were realized from the sale of available-for-sale securities in 2023.

Total borrowings decreased at December 31, 2023, as a result of the liquidity provided by increased levels of deposits at period end and cash inflows from the investment securities portfolio.

Total borrowings decreased by $247.0 million to $50.0 million at December 31, 2023 compared to $297.0 million at December 31, 2022.

Uses of Funds

3 unchanged sentences

See "Note 2 – Securities" for more information on these investments.

On April 1, 2022, the Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity as an overall balance sheet management strategy.

The fair value of these securities transferred was $127.0 million.

Purchases of securities available-for-sale totaled $7.2 million in 2023, $315.3 million in 2022 and $835.0 million in 2021.

Growth of the investment portfolio during the past three years served to provide an earning asset alternative for excess balance sheet liquidity stemming from increased levels of core deposits as a result of the U.S.

government's COVID-19 pandemic stimulus programs.

The Company deployed $250 million of excess liquidity to the investment securities portfolio during 2022, $652 million in 2021 and $100 million in 2020 to preserve net interest margin prior to the Federal Reserve Board's tightening cycle, which began in March of 2022.

Growth of the investment portfolio during 2021 and 2022 served to provide an earning asset alternative for excess balance sheet liquidity stemming from increased levels of liquidity provided by government stimulus programs in response to the COVID-19 pandemic.

Prior to the recent Federal Reserve monetary tightening cycle starting in March of 2022, the Company deployed $250 million of excess liquidity to the investment securities portfolio during 2022 and $652 million in 2021 to preserve net interest margin.

Investment securities represented 18.1% of total assets on December 31, 2023 compared to 20.4% on December 31, 2022 and 21.3% on December 31, 2021.

Management expects the investment securities portfolio as a percentage of assets to decrease over time and return to historical levels of approximately 14% as the proceeds from paydowns and maturities of these investment securities are used to fund future loan portfolio growth.

Management expects the investment securities portfolio as a percentage of assets to decrease over time and return to historical levels of approximately 12%-14% during 2014 to 2020 as the proceeds from paydowns and maturities of these investment securities provide liquidity to fund future loan growth.

The fair value of these securities transferred was $127.0 million.

Securities sales totaled $105.2 million in 2023, $25.3 million in 2022 and $14.0 million in 2021.

1 unchanged sentence

Maturities and calls of securities totaled $13.6 million , $9.3 million and $24.7 million in 2023, 2022 and 2021, respectively.

No provision for allowance for credit loss was recorded in connection with the investment securities portfolio in 2022 or 2021, and n o other-than-temporary impairment was recognized in 2020.

No provision for allowance for credit loss was recorded in connection with the investment securities portfolio in 2023, 2022 or 2021 .

The investment portfolio is managed to provide for an appropriate balance between liquidit y, credit risk and investment return and to limit the Company’s exposure to risk to an acceptable level.

8 unchanged sentences

Value Yield Fair

Treasury securities $ 1,673 2.08 % $ 1,361 2.46 % $ 0 0.00 % $ 0 0.00 %

government sponsor agency $ 0 0.00 % $ 4,376 1.00 % $ 0 0.00 % $ 115,103 1.57 %

5 unchanged sentences

Real Estate Mortgage Loans Held-For-Sale

Real estate mortgages held for sale decreased by $7.1 million to $357,000 at December 31, 2022 from $7.5 million at December 31, 2021 as a result of reduced mortgage refinancing demand caused by the rising interest rate environment.

This asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market.

Real estate mortgages held-for-sale increased by $801,000 to $1.2 million at December 31, 2023 from $357,000 at December 31, 2022 as a result of fluctuations in secondary market sales activity.

This asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the quantity and timing of loan sales into the secondary market.

The Company generally sells almost all of the conforming mortgage loans it originates in the secondary market.

40 unchanged sentences

In 2023, net loan balances increased by $206.8 million to $4.845 billion, and excludes approximately $8.6 million in loans originated for sale.

In 2021, net loan balances decreased by $367.7 million to $4.220 billion, and excluded approximately $119.4 million in loans originated for sale.

In 2022, net loan balances increased by $417.7 million to $4.638 billion, and excluded approximately $28.7 million in loans originated for sale.

PPP loans of $1.5 million, $26.2 million and $412.0 million were included in non-working capital loans of commercial and industrial loans at December 31, 2022, 2021 and 2020, respectively.

In 2021, net loan balances decreased by $367.7 million to $4.220 billion, and excluded approximately $119.4 million in loans originated for sale.

The mix of The Company's loan portfolio consists primarily of commercial loans, and the Bank's lending focus is on the commercial sector of the Lake City Bank footprint.

1 unchanged sentence

Commercial and industrial loans together with owner occupied commercial real estate loans represented 45.7% and 47.8% of total loans as of December 31, 2023 and 2022, respectively.

The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets.

Loans totaling $71.2 million for this sector represented 1.5% of total loans at December 31, 2023.

Loans to the agriculture and agri-business sector of our Indiana footprint represent a significant loan segment of the overall loan portfolio.

18 unchanged sentences

Bank Owned Life Insurance

Bank owned life insurance increased by $10.8 million to $108.4 million at December 31, 2022 and by $2.4 million to $97.7 million at December 31, 2021 from $95.2 million at December 31, 2020.

The increase during 2022 was primarily due to the purchase of additional life insurance policies on officers of the Bank.

The increase during 2021 was primarily due to investment returns on the life insurance policies of pre-existing life insurance policies.

Bank owned life insurance increased by $707,000 to $109.1 million at December 31, 2023 and by $10.8 million to $108.4 million at December 31, 2022 from $97.7 million at December 31, 2021.

The increase during 2023 was primarily due to increased income from traditional policies purchased in December 2022 and from improved market performance of the Bank's variable bank owned life insurance policies which track with the performance of the equity markets.

The increase during 2022 was primarily due to the purchase of life insurance policies on officers of the Bank.

Bank owned life insurance investment income is used as an offset to the cost of life insurance purchased by the Bank as a benefit for bank officers.

22 unchanged sentences

Total time certificates of deposit $ 792,738 $ 224,083 $ 1,016,821 100.00 %

Deposits by portfolio segment for December 31, 2023, 2022 and 2021 are presented below:

December 31, 2023 December 31, 2022 December 31, 2021

Commercial $ 2,227,147 38.9 % $ 2,085,934 38.2 % $ 2,262,229 39.4 %

Retail 1,794,958 31.4 1,934,787 35.4 2,178,534 38.0

Public fund 1,563,015 27.3 1,429,872 26.1 1,284,641 22.3

Core deposits 5,585,120 97.6 5,450,593 99.7 $ 5,725,404 99.7 %

Brokered deposits 135,405 2.4 10,027 0.3 10,003 0.3

Total $ 5,720,525 100.0 % $ 5,460,620 100.0 % $ 5,735,407 100.0 %

Total deposits increased by $259.9 million to $5.721 billion, at December 31, 2023 compared to $5.461 billion at December 31, 2022.

The increase in deposits was attributable to increases in commercial and public fund deposits.

Commercial deposits increased $141.2 million, or 6.8% and represented 38.9% and 38.2% of total deposits at December 31, 2023 and 2022, respectively.

Public fund deposits increased $133.1 million, or 9.3% and represented 27.3% and 26.1% of total deposits at December 31, 2023 and 2022, respectively.

Additionally, brokered deposits increased $125.4 million, and represented 2.4% and 0.3% of total deposits at December 31, 2023 and 2022, respectively.

Retail deposits decreased $139.8 million, or 7.2%, and represented 31.4% and 35.4% of deposits at December 31, 2023 and 2022, respectively.

The decline in retail deposits represents a continued utilization of retail deposits from peak savings levels during 2021.

Total deposits decreased by $274.8 million to $5.461 billion, at December 31, 2022 compared to December 31, 2021.

2 unchanged sentences

In addition, commercial deposits decreased $176.3 million, or 7.8%, while public funds deposits increased by $145.2 million, or 11.3%.

The decrease in deposits during 2022 reflects the normalization of excess liquidity in our customer's deposit accounts and occurred primarily during the fourth quarter of 2022.

The decrease in deposits during 2022 reflects the normalization of excess

liquidity in our customer's deposit accounts and occurred primarily during the fourth quarter of 2022.

Rising inflation is considered a contributor to the decline in deposits during 2022 after the surge in deposits experienced during 2020 and 2021 from PPP funding and COVID-related stimulus programs.

Total deposits increased by $698.6 million to $5.735 billion, at December 31, 2021 compared to December 31, 2020.

The growth in deposits consisted of $703.6 million in core deposit growth offset by a decrease of $5.0 million in brokered deposits.

Total deposit growth was led by an increase of $321.9 million, or 16.6%, in commercial deposits.

In addition, retail deposits increased by $259.5 million, or 13.5%, while public funds deposits increased by $122.2 million, or 10.5%.

PPP loan proceeds to borrowers and government stimulus to consumers impacted the increase in deposits during 2021 as loan proceeds and other stimulus payments were deposited into customer checking and savings accounts at the Bank.

Proceeds from the sale of customer businesses also contributed to the increase in deposits during 2021.

As previously noted, 26% of the Company’s deposit base is attributable to public fund entities which primarily represent customers in the Company’s geographic footprint.

As previously noted, 27.3% of the Company’s deposit base is attributable to public fund entities which consist primarily of customers in the Company’s geographic footprint.

A majority of public fund balances represent customers with operating accounts at the Bank.

The public fund segment is a stable source of deposit funding and a focus in the treasury management area due to their business needs.

A shift in funding away from public fund deposits could require the Company to execute alternative funding plans under the Contingency Funding Plan discussed in further detail under “Liquidity Risk”.

The following table presents total deposits by portfolio segment as of December 31, 2022, 2021 and 2020:

(dollars in thousands) 2022 2021 2020

Commercial $ 2,085,934 38.2 % $ 2,262,229 39.4 % $ 1,940,306 38.5 %

Retail 1,934,787 35.4 2,178,534 38.0 1,919,040 38.1

Public funds 1,429,872 26.1 1,284,641 22.3 1,162,457 23.0

Core deposits $ 5,450,593 99.7 % $ 5,725,404 99.7 % $ 5,021,803 99.6 %

Brokered deposits 10,027 0.3 10,003 0.3 15,002 0.4

Total deposits $ 5,460,620 100.0 % $ 5,735,407 100.0 % $ 5,036,805 100.0 %

FHLB Advances and Other Borrowings

During 2023, average total short-term borrowings increased by $160.3 million to $166.8 million.

Ending balances of short-term and miscellaneous borrowings decreased to $50.0 million at December 31, 2023 compared to $297.0 million at December 31, 2022.

Average total long-term borrowings decreased by $32.1 million to zero, as no long-term FHLB advances were outstanding during 2023.

During 2022, average total short-term borrowings increased by $6.2 million to $6.6 million, as the Company's excess liquidity position normalized after experiencing a reduction in cash and short-term investments.

Ending balances of short-term and miscellaneous borrowings increased to $297.0 million at December 31, 2022, from $0 at December 31, 2021.

Average total long-term borrowings decreased by $42.9 million to $32.1 million, due to the repayment of a $75.0 million long-term, putable FHLB advance.

The FHLB excercised its putable option during the second quarter of 2022 .

During 2021, average total short-term borrowings decreased by $33.9 million to $408,000, primarily due to lower short-term FHLB borrowings and lower usage of the Company's holding company line of credit.

Ending balances of short-term and miscellaneous borrowings decreased by $10.5 million during 2021 to $0.

The decrease was due to the payoff of the Company's holding company line of credit which was used in connection with its share repurchase activity during 2020.

The holding company's line repayment was funded by a dividend from the Bank.

Ending balances of short-term and miscellaneous borrowings increased to $297.0 million at December 31, 2022, from zero at December 31, 2021.

Average total long-term borrowings decreased by $42.9 million to $32.1 million, due to the repayment of an outstanding long-term advance during the second quarter of 2022.

The Company believes that a strong, appropriately managed capital position is critical to support continued growth of loans and earnings.

6 unchanged sentences

The ability to maintain these ratios is a function of the balance between net income and a prudent dividend policy.

Total stockholders’ equity decreased by 19.3% to $568.9 million as of December 31, 2022 from $704.9 million as of December 31, 2021.

Total stockholders’ equity increased by 14.2% to $649.8 million as of December 31, 2023 from $568.9 million as of December 31, 2022.

The Company earned $93.8 million in 2023 and $103.8 million in 2022.

2 unchanged sentences

Total stockholder's equity has been impacted by declines in the market value of the Company's available-for-sale investment securities portfolio.

The market value decline, resulting from rising interest rates during 2022, has generated unrealized losses in the available-for-sale portfolio.

The market value decline, resulting from higher interest rate environment, has generated unrealized losses in the available-for-sale portfolio.

Unrealized losses from the available-for-sale investment securities portfolio are recorded, net of tax, in accumulated other comprehensive income (loss) in the statement of stockholders' equity.

Changes in the fair value of available-for-sale securities and the defined benefit pension plan negatively impacted equity by $205.0 million in 2022 compared to a decrease of $11.7 million in 2021.

Improvements in the fair value of available-for-sale securities and net defined pension plan gains positively impacted equity by $33.7 million in 2023 compared to a decrease of $205.0 million in 2022.

The impact to equity due to other comprehensive income (loss) is not included in regulatory capital.

8 unchanged sentences

treasuries, government agencies and municipal bonds subject to an investment security policy that is approved annually by the board of directors.

During 2022, purchases in the securities portfolio consisted of primarily municipal bonds, agency securities and mortgage-backed securities.

As of December 31, 2022, the Company’s investment in U.S government sponsored mortgage-backed securities represented approximately 38% of total investment securities fair value consisting of Collateralized Mortgage Obligations, Commercial Mortgage-Backed Securities and mortgage pools issued by Ginnie Mae, Fannie Mae and Freddie Mac.

As of December 31, 2023, the Company’s investment in U.S government sponsored mortgage-backed securities represented approximately 38% of total investment securities fair value consisting of mortgage pools issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Ginnie Mae, Fannie Mae and Freddie Mac securities are each guaranteed by their respective agencies as to principal and interest.

6 unchanged sentences

Loan Portfolio

The Company has a relatively high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries.

The Company has a high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries.

Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits.

The Company manages this risk by utilizing conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area and by obtaining personal loan guarantees.

The Company manages this risk by utilizing conservative credit structures, adjusting its pricing to the perceived risk of each individual credit, diversifying the portfolio by customer, product, industry and market area and by obtaining personal loan guarantees.

There were no loan concentrations within industries, which exceeded ten percent of total loans, except commercial real estate.

4 unchanged sentences

Agri-business and agricultural loans represent 7.9% of total loans as of December 31, 2023 and are not concentrated to any agricultural sector.

Nearly all of the Bank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries.

The following is a summary of nonperforming loans as of December 31, 2022 and 2021.

Substantially all of the Bank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries.

When segmenting the Bank's loan portfolio by North American Industry Classification System code as of December 31, 2023, the largest segments are multifamily housing, agriculture, industrial warehouses and the recreational vehicle industry which represented 11%, 9%, 4% and 4% of total loans, respectively.

The following is a summary of nonperforming loans on an amortized cost basis as of December 31, 2023 and 2022.

(dollars in thousands) 2023 2022

26 unchanged sentences

Nonperforming loans to total loans 0.32 % 0.36 %

(1) Includes nonaccrual troubled debt restructured loans at December 31, 2021.

Nonperforming assets of the Company include nonperforming loans (as indicated above), nonaccrual investments and other real estate owned and repossessions, the total of which amounted to $17.2 million and $15.3 million at December 31, 2022 and 2021, respectively.

Nonperforming loans increased by $2.0 million during 2022, due primarily to one commercial relationship, partially offset by paydowns and upgrades.

During the fourth quarter 2022, the Company downgraded a single $10.7 million commercial relationship that the Bank became aware of in early 2023.

As a result of the deterioration of this credit, $3.7 million of the balance was charged off with the remaining $7.0 million placed on nonaccrual status.

The relationship was downgraded due to the severe impact on the business caused by the improving conditions related to the COVID-19 pandemic.

The borrower is a manufacturer of name brand home and commercial cleaning and disinfecting products that are sold through third party firms to regional and national grocery and retail chains.

Demand for these products substantially declined during 2022 as the pandemic subsided.

As a result, the borrower's largest customer encountered financial challenges, precipitated by the dramatic decline in demand for these products, and ceased operations.

The credit is supported by an unlimited personal guarantee of the business owner and the Bank

is actively working with the borrower to structure a long-term repayment plan.

Offsetting the increase to nonperforming assets caused by the placement of this credit on nonaccrual status were payoffs to other nonaccrual notes during 2022.

Nonperforming assets of the Company include nonperforming loans (as indicated above), nonaccrual investments, other real estate owned and repossessions, the total of which amounted to $16.1 million and $17.2 million at December 31, 2023 and 2022, respectively.

Nonperforming loans remained stable at 0.3% of total loans at December 31, 2023 compared to 0.4% at December 31, 2022.

Nonperforming loans decreased by $1.4 million during 2023, due to the net activity of charge offs, paydowns and upgrades.

One commercial relationship placed on nonaccrual during 2023 subsequently received a modification to loan terms due to financial difficulty experienced by the borrower.

Loans for which the borrower appears to be unable or unwilling to repay its debt in full or on time, and the collateral is insufficient to cover all principal and accrued interest, will be reclassified as nonperforming to the extent they are unsecured, on or before the date when the loan becomes 90 days delinquent, with the exception of small dollar other consumer loans which are not placed on nonaccrual status since these loans are charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness.

5 unchanged sentences

Total nonperforming loans were $15.7 million, or 0.32% of total loans, at December 31, 2023 versus $17.1 million, or 0.36% of total loans, at December 31, 2022.

There were 39 loans totaling $31.3 million classified as individually analyzed as of December 31, 2022 versus 34 loans totaling $25.6 million at the end of 2021.

The increase in individually analyzed loans during 2022 resulted primarily from the downgrade of the previously described $10.7 million commercial loan relationship placed on nonaccrual status.

The credit is supported by an unlimited personal guarantee of the business owner and the Bank is actively working with the borrower to structure a long-term repayment plan.

Paydowns and upgrades of other individually analyzed loans offset the increase to individually analyzed loans for the year ended December 31, 2022.

Loans renegotiated as modifications to borrowers experiencing financial difficulty are those loans for which either the contractual interest rate has been reduced below market rates and/or other concessions to market terms are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan.

No loans received a material modification as a result of borrower financial difficulty during the year ended December 31, 2022.

Prior to January 1, 2022, loans renegotiated as troubled debt restructurings are those for which either the contractual interest rate has been reduced below market rates and/or other concessions to market terms are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan.

As of December 31, 2021, there were 27 loans totaling $11.3 million renegotiated as troubled debt restructurings of which $217,000 wer e modified in 2021.

Of these loans, $6.2 million w ere included in nonaccrual loans in the previous table and the remaining $5.1 million w ere performing under their modified terms.

The Company has no commitments to lend additional funds to any of the borrowers.

There were 33 relationships totaling $16.1 million classified as individually analyzed as of December 31, 2023 versus 39 relationships totaling $31.3 million at the end of 2022.

The decrease in individually analyzed loans during 2023 resulted primarily from the payoff of two large commercial relationships and the partial charge off of another commercial relationship.

Paydowns and upgrades of other individually analyzed loans further contributed to the decrease for individually analyzed loans for the year ended December 31, 2023.

Loans renegotiated as modifications to borrowers experiencing financial difficulty are those loans for which the Company modifies the terms of loans for borrowers experiencing financial distress by providing the following forms of relief:

forgiveness of loan principal, extension of repayment terms, reduction of interest rate or an other than insignificant payment delay.

For the twelve months ended December 31, 2023, there were three loans to three financially distressed commercial borrowers with balances totaling $4.4 million at December 31, 2023 that received such modifications.

The Company has no material commitments to lend additional funds to these borrowers.

For the twelve months ended December 31, 2022, no loan modifications were made to borrowers experiencing financial difficulty.

The following is a summary of the credit loss experience for the years ended December 31, 2023, 2022 and 2021.

20 unchanged sentences

Total recoveries 848 592 2,221

Net loans charged-off (recovered) 4,542 3,762 4,014

Net loans charged-off 6,484 4,542 3,762

Provision for credit loss charged to expense 5,850 9,375 1,077

Balance, December 31, $ 71,972 $ 72,606 $ 67,773

Net charge-offs to average daily loans outstanding:

Net charge offs (recoveries) to average daily loans outstanding:

Commercial and industrial loans 0.13 % 0.09 % 0.09 %

7 unchanged sentences

Total loans 1.46 % 1.54 % 1.58 %

Total loans (excluding PPP loans) 1.54 % 1.59 % 1.45 %

Ratio of allowance for credit losses to nonperforming loans 458.01 % 424.91 % 449.13 %

12 unchanged sentences

At December 31, 2023, the allowance for credit losses was 1.46% of total loans outstanding, versus 1.54% of total loans outstanding at December 31, 2022.

The allowance for credit losses was 1.54% of total loans outstanding, excluding PPP loans of $1.5 million, as of December 31, 2022 versus 1.59% of total loans outstanding, excluding PPP loans of $26.2 million, as of December 31, 2021.

This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for credit losses calculation.

Management believes the allowance for credit losses is at a level commensurate with the overall risk exposure of the loan portfolio.

19 unchanged sentences

These amounts represent outstanding balances, excluding deferred fees and costs.

The decrease in classified loans during 2022 reflects the continued strengthening of the Company’s asset quality to historically strong levels and is reflective of the resilience of the Company's borrowers despite recent economic challenges presented by disruptions to the supply chain, the availability of labor, and elevated levels of inflation.

While the increase in classified loans during 2023 raises concern for the potential for an economic slowdown in the Company's Indiana footprint, it has not translated to broader loan quality issues in the portfolio as the ratio of watch list loans as a percentage of total loans remains near historic lows and was accompanied by a reduction in nonperforming loans during 2023.

As of December 31, 2023, the Company had $143.6 million of assets classified as Special Mention , $39.4 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $115.7 million, $45.3 million, $0 and $0, respectively, at December 31, 2022.

The balances reported in "Note 4 – Allowance for Credit Losses and Credit Quality" include deferred fees and costs.

There were no material modifications to borrowers experiencing financial difficulty performed during 2022 included in the classified loan amounts for December 31, 2022.

Included in the classified loan amounts for December 31, 2021 were the following troubled debt restructured loans:

13 mortgage loans totaling $1.2 million with total allocations of $209,000, and 7 commercial loans totaling $3.9 million with total allocations of $1.6 million.

In accordance with Section 4013 of the CARES Act, loan deferrals granted to customers that resulted from the impact of COVID-19 and who were not past due at the time of deferral were not considered trouble debt restructurings as of December 31, 2021.

This provision expired January 1, 2022 under the Consolidated Appropriations Act, 2021.

At the time of the expiration of the provision, one retail borrower in the amount of $11,000 had a COVID-19 related deferral and was not considered to be a troubled debt restructuring.

Included in the classified loan amounts above for December 31, 2023 were loans receiving modifications due to financial difficulty experienced by the borrower during the twelve months ended December 31, 2023 for three commercial loans to three commercial borrowers totaling $4.4 million million with total allocations of $2.3 million.

There were no loan modifications made to borrowers experiencing financial difficulty during the twelve months ended December 31, 2022.

Allowance estimates are developed by management taking into account actual loss experience, subject to a floor, adjusted for current economic conditions and a reasonably supportable forecast period.

3 unchanged sentences

For a more thorough discussion of the allowance for credit losses methodology see the "Critical Accounting Policies" section of this Item 2.

The allowance for credit losses increased 7.1%, or $4.8 million, from $67.8 million at December 31, 2021 to $72.6 million at December 31, 2022 due primarily to provision expense of $7.0 million recorded in the fourth quarter related to the previously described commercial loan placed on nonaccrual status.

Pooled loan allocations decreased $492,000 from $58.7 million at December 31, 2021 to $58.2 million at December 31, 2022.

The unallocated component of the allowance for credit losses was $554,000 at December 31, 2022, which increased from $450,000 reported at December 31, 2021 .

The allowance for credit losses decreased 0.9%, or $634,000, from $72.6 million at December 31, 2022 to $72.0 million at December 31, 2023 due primarily to net charge offs of $6.5 million and offset by provision expense of $5.9 million recorded during 2023.

Pooled loan allocations increased $5.6 million from $58.2 million at December 31, 2022 to $63.8 million at December 31, 2023.

The unallocated component of the allowance for credit losses was $372,000 at December 31, 2023, which decreased from $554,000 reported at December 31, 2022 .

The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of expected losses that may not be fully reflected in other allocations.

The Company has experienced growth in total loans, excluding PPP loans, over the last several years with organic growth exclusive of PPP loans of $447.2 million, or 10.5%, from December 31, 2021 to December 31, 2022.

The concentration of this loan growth was in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits.

The Company has experienced organic growth in total loans over the last several years with an increase in gross loans of $206.5 million, or 4.4%, from December 31, 2022 to December 31, 2023.

This growth is primarily concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits.

Management has historically considered growth and portfolio composition when determining credit loss allocations.

Management believes that it is prudent to continue to provide for credit losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions.

Watch list loans were $73.5 million lower at $161.0 million as of December 31, 2022, compared to $234.5 million at December 31, 2021.

Watch list loans represent 3.42% of total loans at December 31, 2022 compared to 5.47% at December 31, 2021.

Watch list loans excluding PPP loans reached a historic low of 3.42% of total loans at December 31, 2022 compared to 5.50% at December 31, 2021.

This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for credit losses calculation.

The reduction in watch list loans resulted primarily from upgrades of $19.3 million and payoffs of $43.2 million .

The Company's continued growth strategy promotes diversification among industries as well as continued focus on the enforcement of a disciplined credit culture and a conservative portion in loan work-out situations.

Watch list loans increased $22.1 million to $183.1 million as of December 31, 2023, compared to $161.0 million at December 31, 2022, or an increase of 13.7%.

Watch list loans represent 3.7 % of total loans at December 31, 2023 compared to a historical low of 3.4% at December 31, 2022.

PPP loans outstanding of $1.3 million and $1.5 million at December 31, 2023 and 2022, respectively, had an immaterial impact on these asset quality ratios.

The increase in watch list loans resulted primarily from downgraded credits of approximately $112.4 million and offset by upgrades of approximately $55.8 million in addition to paydowns to watch list credits .

Liquidity Risk

6 unchanged sentences

The cash flow from the securities portfolio is expected to provide approximately $103.9 million of potential contingent funding in 2024.

During 2022, the Company's liquidity levels normalized as commercial and retail depositors utilized liquidity that had built up in their accounts during 2020 and 2021.

Management expects future liquidity needs to be met by a combination of proceeds from paydowns, calls and maturities from the investment securities portfolio, deposit growth and borrowings.

The Bank had total available sources of liquidity totaling $3.4 billion at December 31, 2023 compared to $3.0 billion at December 31, 2022.

The Company has approval of $3.593 billion in secondary funding sources available as of December 31, 2023, of which $185.4 million was utilized.

The Company had $350.0 million of availability in federal funds lines with eleven correspondent banks, of which $22.0 million was drawn on as of December 31, 2022.

The Company had $325.0 million of availability in federal funds lines with eleven correspondent banks, of which none was drawn on as of December 31, 2023.

The Company has board of directors approval to borrow up to $800.0 million at the FHLB, but given the Company’s current collateral structure and outstanding borrowings as of December 31, 2023, the Company could have only borrowed up to $574.9 million under this authority.

The Company has additional collateral that could be pledged to the FHLB of $8.4 million as of December 31, 2023 to generate additional liquidity.

Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $758.3 million given its current collateral structure at the Federal Reserve Bank discount window program and the terms of that facility at December 31, 2022, with no balances outstanding at December 31, 2022.

The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the IntraFi Network CD Option One-Way Buy program, to access these funds when desired with settlement of funds in one to two weeks’ time.

Additionally, the Bank has entered agreements with IntraFi Network relative to their Insured Cash Sweep One-Way Buy program.

Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $1.259 billion given its current collateral structure at the Federal Reserve Bank discount window program and the terms of that facility at December 31, 2023, with no balances outstanding at December 31, 2023.

During 2023 the Company also became eligible to borrow funds under the Federal Reserve Bank's Bank Term Funding Program (BTFP);

available capacity secured by pledged eligible investment securities was $150.5 million with no outstanding balance at December 31, 2023.

The BTFP is scheduled to expire in March 2024.

The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the IntraFi Network CDARS One-Way Buy program, to access these funds when desired with settlement of funds in one to two weeks’ time.

Additionally, the Bank has entered agreements with IntraFi Network relative to their Insured

Cash Sweep One-Way Buy program.

As of December 31, 2023, the total amount available to the Bank via this program was $100.0 million, of which $10.0 million was drawn.

12 unchanged sentences

The CFP was developed to ensure that the multiple liquidity sources available to the Company are readily available.

All liquidity sources are tested annually.

The CFP specifically considers liquidity at the Bank and the Company level.

The CFP identifies the potential funding sources at the Bank level, which includes the FHLB, the Federal Reserve Bank, brokered deposits, one-way buy products via the IntraFi Network (CD Option and ICS) and Federal Funds.

The CFP also addresses the Bank’s ability to liquidate its securities portfolio.

The CFP also addresses the Bank’s ability to liquidate its securities portfolio or other liquid assets.

The CFP funding sources at the holding company level include a holding company committed line of credit, as well as the ability to transfer securities from the investment subsidiary of the Bank to the Company.

33 unchanged sentences

These policies set guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income, but it does not necessarily indicate the effect on future net interest income.

Given the Company’s mix of interest bearing liabilities and interest bearing assets on December 31, 2022 and using changes in the interest rate environment over a one-year period, the net interest margin could be expected to decline in a falling interest rate environment and increase in a rising interest rate environment.

Generally, the Bank is asset sensitive due to the impact of the variable rate commercial loan portfolio on the Bank's sensitivity to market rates.

During 2023, asset sensitivity declined due to a shift to short-term interest bearing deposit accounts such as money market accounts.

As a result, the Company expects net interest margin to remain stable in the first 25-50 basis points potential declines in the federal funds rate due to a more neutral posture for balance sheet sensitivity.

Deposit re-pricing in a declining interest rate environment is expected to exceed past easing cylces.

Earnings can also be affected by the monetary and fiscal policies of the U.S.

Government and its agencies, particularly the Federal Reserve Board.

During 2022 the FOMC increased the target federal funds rate a total of 425 basis points through seven rate moves.

Commencing in March 2022, rate increases were implemented at every remaining FOMC meeting for the year.

During 2023 the Federal Reserve Board’s Federal Open Market Committee (“FOMC”) increased the target federal funds rate a total of 100 basis points, following an increase of 425 basis points in 2022.

Rate increases were implemented during the first half of 2023 at the January, March, May and July FOMC meetings.

The combined effect of these actions increased the target federal funds rate to a range of 5.25% to 5.50%.

The FOMC statement released for the meeting in December 2022 repeated their commitment to lowering inflation to 2% and to further tightening, while also noting modest economic growth, strong employment growth and an unemployment rate that remains low.

The FOMC anticipates that ongoing increases to the target range will be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

The updated economic projections released at the December meeting project the median federal funds rate rising to 5.1% in 2023 before easing to 4.1% in 2024.

The FOMC statement released for the meeting in December 2023 recognized that inflation has eased over the past year but remains elevated and confirmed that the FOMC remains highly attentive to inflation risks.

The updated economic projections released at the December meeting project the median federal funds rate decreasing to 4.6% in 2024 (lowering of the target federal funds rate by 75 basis points), with continued easing to 3.6% in 2025.

Additionally, the longer run median forecast for the federal funds rate was left unchanged at 2.50%.

The combined result of the increase in the yield on earning assets offset by an increase in the cost of funding earning assets led to increase net interest margin from 3.07% for 2021 to 3.40% for 2022 given the Company’s asset sensitive balance sheet.

The Company’s yield on earning assets increased 67 basis points during 2022 as assets repriced at higher rates primarily due to the FOMC rate increases noted above and a significantly higher yield curve as when compared to 2021.

The combined result of the increase in the yield on earning assets, which was more than offset by an increase in the cost of funds due to increased competition for deposits experienced during 2023, led to a decrease in net interest margin from 3.40% for 2022 to 3.31% for 2023.

The Company’s yield on earning assets increased 170 basis points during 2023 as assets repriced at higher rates primarily due to the FOMC rate increases during both 2022 and 2023 and a higher yield curve for the majority of 2023 as when compared to 2022.

The commercial loan portfolio represents 89% of the total loan portfolio.

Approximately 67% of the commercial loan portfolio are variable rate loans which are primarily indexed to Prime, 1 Month Term SOFR, 1 Month LIBOR and FHLB indices.

The rate paid on deposit accounts and purchased funds increased 36 basis points for 2022 mainly due to increased rates paid on public fund transactional accounts as these accounts are typically more sensitive to interest rates.

The realized increase in the rate paid on deposit accounts and purchased funds was lessened by an increase in the average balance of non-interest bearing demand deposit accounts for 2022 verses 2021, primarily in commercial deposit accounts.

Approximately 64% of the commercial loan portfolio are variable rate loans which are primarily indexed to Prime, One Month Term SOFR and FHLB indices.

The increase in earning asset yields was offset by an increase in the Company's funding costs, as depositors sought higher interest bearing deposit products and competition for deposits increased throughout the industry.

The rate paid on deposit accounts and purchased funds increased 179 basis points for 2023.

The realized increase in the rate paid on deposit accounts and purchased funds was magnified by a decrease in the average balance of non-interest bearing demand deposit accounts for 2023 verses 2022, primarily in commercial deposit accounts.

The Company anticipates that cost of funds could continue to rise in 2024 if market competition for deposits continues and if noninterest bearing deposits continue to shift to interest-bearing deposit products.

Future changes in the net interest margin will be dependent upon multiple factors including further actions by the FOMC during 2024 in response to inflation, economic conditions and geopolitical concerns, the results of any of the administration’s changes to economic policy and laws, competitive pressures in the various markets served, and changes in the structure of the balance sheet as a result of changes in customer demands for products and services.

8 unchanged sentences

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