Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of Lakeland Financial Corporation
Warsaw, Indiana
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Lakeland Financial Corporation (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 4 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (“ASC 326”). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses (ACL) – Qualitative Adjustments
As described in Notes 1 and 4 to the consolidated financial statements and referred to in the change in accounting principle explanatory paragraph above, the Company adopted ASC 326 as of January 1, 2021, which among other things, required the Company to recognize expected credit losses over the contractual lives of financial asset carried at amortized costs, including loans receivables, utilizing the Current Expected Credit Losses (“CECL”) methodology. As of December 31, 2023, the ACL balance was $71,972,000. Estimates of expected credit losses are based on relevant information about current conditions, past events, and reasonable and supportable forward-looking forecasts regarding collectability of the reported amounts. The Company utilized a Probability of Default/ Loss Given Default model derived from historical charge-off data to construct a loss rate for each identified loan segment. The loss rates, subject to a floor, are then adjusted, for reasonable and supportable forecasts of relevant economic indicators as well as other environmental factors based on the risks present for each portfolio segment. The environmental factors (“qualitative adjustments”) include consideration of economic conditions and portfolio trends.
We have identified auditing the qualitative adjustments as a critical audit matter as management’s determination of the qualitative adjustments used in the ACL is subjective and involves significant management judgments; and our audit procedures related to the qualitative adjustments involved a high degree of auditor judgment and required significant audit effort, including the need to involve more experienced audit personnel.
The primary procedures we performed to address this critical audit matter included:
• Testing th e effectiveness of controls over the qualitative adjustments used in the ACL calculation including controls addressing the:
◦ Significant assumptions and judgments applied in the development of the qualitative adjustments.
◦ Mathematical accuracy of the qualitative adjustments applied to the loan segments in the ACL calculation.
• Substantively testing management's determination of the qualitative adjustments used in the ACL estimate, including:
◦ Testing management’s process for developing the qualitative adjustments, which included assessing the relevance and reliability of data used to develop the qualitative adjustments, including evaluating their judgments and assumptions for reasonableness. Among other procedures, our evaluation considered evidence from internal and external sources.
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◦ Analytically evaluating the qualitative adjustments for directional consistency, testing for reasonableness, and obtaining evidence for significant changes.
◦ Testing the mathematical accuracy of the qualitative adjustments applied to the loan segments in the ACL calculation.
/s/ Crowe LLP
Crowe LLP
We have served as the Company’s auditor since 1983.
South Bend, Indiana
February 21, 2024
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CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31 2023 2022
ASSETS
Cash and due from banks $ 70,451 $ 80,992
Short-term investments 81,373 49,290
Total cash and cash equivalents 151,824 130,282
Securities available-for-sale, at fair value 1,051,728 1,185,528
Securities held-to-maturity, at amortized cost (fair value of $ 119,215 and $ 111,029 respectively)
129,918 128,242
Real estate mortgage loans held-for-sale 1,158 357
Loans, net of allowance for credit losses of $ 71,972 and $ 72,606
4,844,562 4,637,790
Land, premises and equipment, net 57,899 58,097
Bank owned life insurance 109,114 108,407
Federal Reserve and Federal Home Loan Bank Stock 21,420 15,795
Accrued interest receivable 30,011 27,994
Goodwill 4,970 4,970
Other assets 121,425 134,909
Total assets $ 6,524,029 $ 6,432,371
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Noninterest bearing deposits $ 1,353,477 $ 1,736,761
Interest bearing deposits 4,367,048 3,723,859
Total deposits 5,720,525 5,460,620
Federal Funds purchased 0 22,000
Federal Home Loan Bank advances 50,000 275,000
Total borrowings 50,000 297,000
Accrued interest payable 20,893 3,186
Other liabilities 82,818 102,678
Total liabilities 5,874,236 5,863,484
Commitments, off-balance sheet risks and contingencies (Notes 1 and 17)
STOCKHOLDERS’ EQUITY
Common stock: 90,000,000 shares authorized, no par value
25,903,686 shares issued and 25,430,566 outstanding as of December 31, 2023
25,825,127 shares issued and 25,349,225 outstanding as of December 31, 2022
127,692 127,004
Retained earnings 692,760 646,100
Accumulated other comprehensive income (loss) ( 155,195 ) ( 188,923 )
Treasury stock, at cost ( 473,120 shares and 475,902 shares as of December 31, 2023 and 2022, respectively)
( 15,553 ) ( 15,383 )
Total stockholders’ equity 649,704 568,798
Noncontrolling interest 89 89
Total equity 649,793 568,887
Total liabilities and equity $ 6,524,029 $ 6,432,371
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data)
Years Ended December 31 2023 2022 2021
NET INTEREST INCOME
Interest and fees on loans
Taxable $ 304,130 $ 202,004 $ 170,081
Tax exempt 3,885 1,664 470
Interest and dividends on securities
Taxable 13,153 14,132 9,086
Tax exempt 16,396 19,553 13,033
Other interest income 5,703 2,214 549
Total interest income 343,267 239,567 193,219
Interest on deposits 137,791 36,281 14,827
Interest on borrowings
Short-term 8,441 272 7
Long-term 0 127 297
Total interest expense 146,232 36,680 15,131
NET INTEREST INCOME 197,035 202,887 178,088
Provision for credit losses 5,850 9,375 1,077
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 191,185 193,512 177,011
NONINTEREST INCOME
Wealth advisory fees 9,080 8,636 8,750
Investment brokerage fees 1,815 2,318 1,975
Service charges on deposit accounts 10,773 11,595 10,608
Loan and service fees 11,750 12,214 11,922
Merchant and interchange fee income 3,651 3,560 3,023
Bank owned life insurance income 3,133 432 2,467
Interest rate swap fee income 794 579 1,035
Mortgage banking income (loss) ( 254 ) 633 1,418
Net securities gains (losses) ( 25 ) 21 797
Other income 9,141 1,874 2,725
Total noninterest income 49,858 41,862 44,720
NONINTEREST EXPENSE
Salaries and employee benefits 59,147 58,530 57,882
Net occupancy expense 6,360 6,287 5,728
Equipment costs 5,632 5,763 5,530
Data processing fees and supplies 14,003 12,826 12,674
Corporate and business development 4,807 5,198 4,262
FDIC insurance and other regulatory fees 3,363 1,999 2,242
Professional fees 8,583 6,483 7,064
Wire fraud loss 18,058 0 0
Other expense 10,757 13,124 8,905
Total noninterest expense 130,710 110,210 104,287
INCOME BEFORE INCOME TAX EXPENSE 110,333 125,164 117,444
Income tax expense 16,566 21,347 21,711
NET INCOME $ 93,767 $ 103,817 $ 95,733
BASIC WEIGHTED AVERAGE COMMON SHARES 25,604,751 25,528,328 25,475,994
BASIC EARNINGS PER COMMON SHARE $ 3.67 $ 4.07 $ 3.76
DILUTED WEIGHTED AVERAGE COMMON SHARES 25,723,165 25,712,538 25,620,105
DILUTED EARNINGS PER COMMON SHARE $ 3.65 $ 4.04 $ 3.74
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
Years Ended December 31 2023 2022 2021
Net income $ 93,767 $ 103,817 $ 95,733
Other comprehensive income (loss)
Change in available-for-sale and transferred securities:
Unrealized holding gain (loss) on securities available-for-sale arising during the period 40,639 ( 261,256 ) ( 14,553 )
Reclassification adjustment for amortization of unrealized losses on securities transferred to held-to-maturity 1,987 1,518 0
Reclassification adjustment for (gains) losses included in net income 25 ( 21 ) ( 797 )
Net securities gain (loss) activity during the period 42,651 ( 259,759 ) ( 15,350 )
Tax effect ( 8,957 ) 54,549 3,224
Net of tax amount 33,694 ( 205,210 ) ( 12,126 )
Defined benefit pension plans:
Net gain (loss) on defined benefit pension plans ( 13 ) 115 390
Amortization of net actuarial loss 59 144 242
Net gain on activity during the period 46 259 632
Tax effect ( 12 ) ( 65 ) ( 157 )
Net of tax amount 34 194 475
Total other comprehensive income (loss), net of tax 33,728 ( 205,016 ) ( 11,651 )
Comprehensive income (loss) $ 127,495 $ ( 101,199 ) $ 84,082
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share and per share data)
Accumulated
Other Total
Common Stock Retained Comprehensive Treasury Stockholders’ Noncontrolling Total
Shares Amount Earnings Income (Loss) Stock Equity Interest Equity
Balance at January 1, 2021 25,239,748 $ 114,927 $ 529,005 $ 27,744 $ ( 14,581 ) $ 657,095 $ 89 $ 657,184
Impact of adopting ASC 326, net of tax ( 6,951 ) ( 6,951 ) ( 6,951 )
Net income 95,733 95,733 95,733
Other comprehensive loss, net of tax ( 11,651 ) ( 11,651 ) ( 11,651 )
Cash dividends declared, $ 1.36 per share
( 34,653 ) ( 34,653 ) ( 34,653 )
Treasury shares purchased under deferred directors' plan ( 8,820 ) 559 ( 559 ) 0 0
Treasury shares sold and distributed under deferred directors’ plan 5,664 ( 115 ) 115 0 0
Stock activity under equity incentive plans 64,201 ( 1,914 ) ( 1,914 ) ( 1,914 )
Stock based compensation expense 7,158 7,158 7,158
Balance at December 31, 2021 25,300,793 $ 120,615 $ 583,134 $ 16,093 $ ( 15,025 ) $ 704,817 $ 89 $ 704,906
Net income 103,817 103,817 103,817
Other comprehensive loss, net of tax ( 205,016 ) ( 205,016 ) ( 205,016 )
Cash dividends declared, $ 1.60 per share
( 40,851 ) ( 40,851 ) ( 40,851 )
Treasury shares purchased under deferred directors’ plan ( 7,641 ) 579 ( 579 ) 0 0
Treasury shares sold and distributed under deferred directors’ plan 8,555 ( 221 ) 221 0 0
Stock activity under equity incentive plans 47,518 ( 1,780 ) ( 1,780 ) ( 1,780 )
Stock based compensation expense 7,811 7,811 7,811
Balance at December 31, 2022 25,349,225 $ 127,004 $ 646,100 $ ( 188,923 ) $ ( 15,383 ) $ 568,798 $ 89 $ 568,887
Net income 93,767 93,767 93,767
Other comprehensive income, net of tax 33,728 33,728 33,728
Cash dividends declared, $ 1.84 per share
( 47,107 ) ( 47,107 ) ( 47,107 )
Treasury shares purchased under deferred directors’ plan ( 10,073 ) 575 ( 575 ) 0 0
Treasury shares sold and distributed under deferred directors’ plan 12,855 ( 405 ) 405 0 0
Stock activity under equity incentive plans 78,559 ( 3,135 ) ( 3,135 ) ( 3,135 )
Stock based compensation expense 3,653 3,653 3,653
Balance at December 31, 2023 25,430,566 $ 127,692 $ 692,760 $ ( 155,195 ) $ ( 15,553 ) $ 649,704 $ 89 $ 649,793
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31 2023 2022 2021
Cash flows from operating activities:
Net income $ 93,767 $ 103,817 $ 95,733
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 6,173 6,020 6,105
Provision for credit losses 5,850 9,375 1,077
Net loss on sale and write down of other real estate owned 0 96 67
Amortization of loan servicing rights 0 757 2,282
Net change in loan servicing rights valuation allowance 540 ( 715 ) 0
Loans originated for sale, including participations ( 8,601 ) ( 28,666 ) ( 119,439 )
Net gain on sales of loans ( 292 ) ( 1,028 ) ( 4,376 )
Proceeds from sale of loans, including participations 8,022 36,454 126,391
Net (gain) loss on sale of premises and equipment 3 7 43
Net (gain) loss on sales and calls of securities available-for-sale 25 ( 21 ) ( 797 )
Net securities amortization 4,915 6,342 4,959
Stock based compensation expense 3,653 7,811 7,158
Earnings on life insurance ( 3,133 ) ( 432 ) ( 2,467 )
Gain on life insurance ( 131 ) 0 ( 415 )
Tax benefit of stock award issuances ( 718 ) ( 514 ) ( 330 )
Net change:
Interest receivable and other assets ( 6,169 ) ( 10,711 ) ( 1,852 )
Interest payable and other liabilities 10,077 40,750 ( 371 )
Total adjustments 20,214 65,525 18,035
Net cash from operating activities 113,981 169,342 113,768
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale 105,175 25,332 13,964
Proceeds from maturities, calls and principal paydowns of securities available-for-sale 71,833 108,129 137,812
Proceeds from maturities, calls and principal paydowns of securities held-to-maturity 5 30 0
Purchases of securities available-for-sale ( 7,178 ) ( 315,272 ) ( 835,001 )
Purchase of life insurance ( 258 ) ( 10,808 ) ( 711 )
Net (increase) decrease in total loans ( 212,906 ) ( 427,097 ) 356,660
Proceeds from sales of land, premises and equipment 13 6 8
Purchases of land, premises and equipment ( 5,991 ) ( 4,821 ) ( 6,167 )
Proceeds from redemption of Federal Home Loan Bank stock 0 932 0
Purchases of Federal Home Loan Bank stock ( 5,625 ) ( 2,955 ) 0
Proceeds from sales of other real estate owned 0 0 946
Proceeds from life insurance 0 0 943
Net cash from investing activities ( 54,932 ) ( 626,524 ) ( 331,546 )
Cash flows from financing activities:
Net increase (decrease) in total deposits 259,905 ( 274,787 ) 698,602
Net increase (decrease) in short-term borrowings ( 22,000 ) 22,000 ( 10,500 )
Payments on short-term FHLB borrowings ( 275,000 ) 0 0
Proceeds from short-term FHLB borrowings 50,000 275,000 0
Payments on long-term FHLB borrowings 0 ( 75,000 ) 0
Proceeds from long-term FHLB borrowings 0 0 0
Common dividends paid ( 47,094 ) ( 40,838 ) ( 34,640 )
Preferred dividends paid ( 13 ) ( 13 ) ( 13 )
Payments related to equity incentive plan ( 3,135 ) ( 1,780 ) ( 1,914 )
Purchase of treasury stock ( 575 ) ( 579 ) ( 559 )
Sales of treasury stock 405 221 115
Net cash from financing activities ( 37,507 ) ( 95,776 ) 651,091
Net change in cash and cash equivalents 21,542 ( 552,958 ) 433,313
Cash and cash equivalents at beginning of the year 130,282 683,240 249,927
Cash and cash equivalents at end of the year $ 151,824 $ 130,282 $ 683,240
Cash paid during the year for:
Interest $ 128,525 $ 36,113 $ 18,471
Income taxes 14,075 20,580 25,947
Supplemental non-cash disclosures:
Loans transferred to other real estate owned 284 0 893
Property transferred to held-for-sale 0 0 0
Right-of-use assets obtained in exchange for lease liabilities 0 1,612 0
The accompanying notes are an integral part of these consolidated financial statements.
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation:
The consolidated financial statements include Lakeland Financial Corporation (the “Holding Company”) and its wholly owned subsidiary, Lake City Bank (the “Bank”), referred to as (the "Company"). On December 18, 2006, LCB Investments II, Inc. was formed as a wholly owned subsidiary of the Bank incorporated in Nevada to manage a portion of the Bank’s investment portfolio beginning in 2007. On December 21, 2006, LCB Funding, Inc., a real estate investment trust incorporated in Maryland, was formed as a wholly owned subsidiary of LCB Investments II, Inc. On December 28, 2012, LCB Risk Management, Inc., a captive insurance company incorporated in Nevada, was formed as a wholly owned subsidiary of the Holding Company. LCB Risk Management, Inc. was dissolved as a corporate entity on December 18, 2023. All assets of the subsidiary were distributed to the Holding Company upon decommissioning. All intercompany transactions and balances are eliminated in consolidation.
The Company provides financial services through the Bank, a full-service commercial bank with 53 branch offices in fifteen counties in Northern and Central Indiana. The Company provides commercial, retail, trust and investment services to its customers. Commercial products include commercial loans and technology-driven solutions to meet commercial customers’ treasury management needs such as mobile business banking and online treasury management services. Retail banking clients are provided a wide array of traditional retail banking services, including lending, deposit and investment services. Retail lending programs are focused on mortgage loans, home equity lines of credit and traditional retail installment loans. Retail customers utilize the Lake City Bank Digital application to access and transact banking transactions. The Company provides credit card services to retail and commercial customers through its retail card program and merchant processing activity. The Company provides wealth advisory and trust clients with traditional personal and corporate trust services. The Company also provides retail brokerage services, including an array of financial and investment products such as annuities and life insurance. Other financial instruments, which represent potential concentrations of credit risk, include deposit accounts in other financial institutions.
Use of Estimates:
To prepare financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and future results could differ.
Cash Flows:
Cash and cash equivalents include cash, demand deposits in other financial institutions and short-term investments and certificates of deposit with maturities of 90 days or less. Cash flows are reported net for customer loan and deposit transactions, and certain short-term borrowings.
Securities:
Securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax. Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
Purchase premiums or discounts are recognized in interest income using the interest method over the terms of the securities or over estimated lives for mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.
For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likel y than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, nature of the security, the underlying collateral, and the financial condition of the issuer, among other factors. If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and a valuation allowance for securities losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through a valuation allowance for securities losses is recognized in other comprehensive income (loss).
Changes in the valuation allowance for securities losses are recorded as a component of credit loss expense. Losses are charged against the valuation allowance for securities losses when management believes the uncollectibility of the security is confirmed or when either criteria regarding intent or requirement to sell is met.
A portion of the municipal bond portfolio is classified as held-to-maturity. The Company measures expected credit losses on investment securities held-to-maturity on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Company's portfolio have been insignificant. After completing this assessment, the Company determined any credit losses as of December 31, 2023 and 2022 were not material to the consolidated financial statements.
Real Estate Mortgage Loans Held-for-Sale:
Loans held-for-sale are reported at the lower of cost or fair value on an aggregate basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Loan sales occur on the delivery date agreed to in the relevant commitment agreement. The Company retains servicing on the majority of loans sold. The carrying value of loans sold is reduced by the amount allocated to the servicing right. The gain or loss on the sale of loans is the difference between the carrying value of the loans sold and the funds received from the sale.
Loans:
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for credit losses.
Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. All classes of commercial and industrial, commercial real estate and multi-family residential, agri-business and agricultural, other commercial and consumer 1-4 family mortgage loans for which collateral is insufficient to cover all principal and accrued interest are reclassified as nonaccrual loans, on or before the date when the loan becomes 90 days delinquent. When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued, all unpaid accrued interest is reversed and interest income is subsequently recorded on the cash-basis or cost-recovery method. Accrual status is resumed when all contractually due payments are brought current and future payments are reasonably assured. Other consumer loans are not placed on a 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. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated and individually analyzed loans.
The recorded investment in loans is the loan balance net of unamortized deferred loan fees and costs. The total amount of loans accrued interest as of December 31, 2023 and 2022 was $ 21.5 million and $ 18.4 million.
Allowance for Credit Losses:
The allowance for credit losses is a valuation allowance to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management's judgment, should be charged against the allowance. A provision for credit losses is taken based on management's ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control.
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for credit losses that generally includes consideration of changes in the nature and volume of the loan portfolio and overall portfolio quality, along with current and forecasted economic conditions that may affect borrowers' ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. To determine the specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, an appropriate level of general allowance is determined by portfolio segment using a pr obability of default-loss given default ("PD/LGD") model, subject to a floor. A default can be triggered by one of several different asset quality factors, including past due status, nonaccrual status, material modification to a borrower experiencing financial difficulty or if the loan has had a charge off. This PD is then combined with a LGD derived from historical charge off data to construct a loss rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee's Summary of Economic Projections, as well as portfolio trends based on the risks present for each portfolio segment. These environmental factors include consideration of portfolio trends and conditions; industry conditions; and effects of changes in credit concentrations. 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. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover expected losses within the loan portfolio.
Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other, and a consensus is reached by credit administration and the loan officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate it should be evaluated on an individual basis. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) the sufficiency of the customer's cash flow or net worth to repay the loan; (b) the adequacy of the discounted value of collateral relative to the loan balance; (c) whether the loan has been criticized in a regulatory examination; (d) whether the loan is nonperforming; (e) any other reasons the ultimate collectability of the loan may be in question; or (f) any unique loan characteristics that require special monitoring.
Allocations are also applied to categories of loans considered not to be individually analyzed, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. These general pooled loan allocations are performed for portfolio segments of commercial and industrial; commercial real estate, multi-family, and construction; agri-business and agricultural; other commercial loans; and consumer 1-4 family mortgage and other consumer loans. General allocations of the allowance are determined by a historical loss rate based on the calculation of each pool's probability of default-loss given default, subject to a floor. The length of the historical period for each pool is based on the average life of the pool. The historical loss rates are all supplemented with consideration of economic conditions and portfolio trends. The risk characteristics of each of the identified portfolio segments are as follows:
Commercial and Industrial - Borrowers may be subject to industry conditions including decreases in product demand; increase in material or other production costs that cannot be immediately recaptured in the sales or distribution cycle; interest rate increases that could have an adverse impact on profitability; non-payment of credit that has been extended under normal vendor terms for goods sold or services; and interruption related to the importing or exporting of production materials or sold products.
Commercial Real Estate and Multi-Family Residential - Borrowers may be subject to potential adverse market conditions that cause a decrease in market value or lease rates; the potential for environmental impairment from events occurring on subject or neighboring properties; and obsolescence in location or function. Multi-family residential is also subject to adverse market conditions associated with a change in governmental or personal funding sources for tenants; over supply of units in a specific region; a shift in population; and reputational risks. Construction and land development risks include slower absorption than anticipated on speculative projects; deterioration in market conditions that may impact a project's value; unforeseen costs not considered in the original construction budget; or any other factors that may impact the completion or success of the project.
Agri-business and Agricultural - Borrowers may be subject to adverse market or weather conditions including changes in local or foreign demand; lower yields than anticipated; political or other impact on storage, distribution or use; foreign trade policies including tariffs; and exposure to increasing commodity prices which result in higher production, distribution or exporting costs.
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Other Commercial - Borrowers may be subject to an interruption in the flow of funds to states and other political subdivisions for the purpose of debt repayments on loans held by the Bank.
Consumer 1-4 Family Mortgage - Borrowers may be subject to adverse employment conditions in the local economy leading to increased default rates; decreased market values from oversupply in a geographic area; and impact to the borrowers' ability to maintain payments in the event of incremental rate increases on adjustable rate mortgages.
Other Consumer - Borrowers may be subject to adverse employment conditions in the local economy which may lead to higher default rates; and decreases in the value of underlying collateral.
A loan is individually analyzed for specific allocation when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Allocations are analyzed individually or in total for smaller-balance loans of similar nature such as all classes of consumer 1-4 family and other consumer loans, and individually for all classes of commercial and industrial, commercial real estate and multi-family, agribusiness and agricultural and other commercial loans. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $ 250,000 . Factors considered by management in determining individual evaluation include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as individually evaluated. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is individually evaluated, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral less anticipated costs to sell. All classes of commercial and industrial, commercial real estate and multifamily residential, agribusiness and agricultural, other commercial, consumer 1-4 family mortgage loans and other consumer loans that become delinquent beyond 90 days are analyzed and a charge off is taken when it is determined that the underlying collateral, if any, is not sufficient to offset the indebtedness.
Loans, for which the terms have been modified for borrowers experiencing financial difficulties and a concession has been granted that could materially change the Company's expected future cash flows, are classified as individually evaluated and may be either accruing or non-accruing. Modifications to borrowers experiencing financial difficulties on nonaccrual status follow the same policy as described above for other loans. Individual evaluation for modifications to borrowers experiencing financial difficulty is measured at the present value of estimated future cash flows using the loan’s effective rate at inception or at discounted collateral value for collateral dependent loans.
Due to the imprecise nature of estimating the allowance for credit losses, the Company's allowance for credit losses includes an immaterial unallocated component. The unallocated component of the allowance for credit losses incorporates the Company's judgmental determination of potential expected losses that may not be fully reflected in other allocations. As a practical expedient, the Company has elected to disclose accrued interest separately from loan principal balances on the consolidated balance sheet. Additionally, when a loan is placed on non-accrual, interest payments are reversed through interest income.
For off balance sheet credit exposures outlined in the ASC at 326-20-30-11, it is the Company's position that nearly all of the unfunded amounts on lines of credit are unconditionally cancellable, and therefore not subject to having a liability recorded.
Investments in Limited Partnerships:
The Company enters into and invests in limited partnerships in order to invest in affordable housing projects to support Community Reinvestment Act activities and secondarily to obtain available tax benefits. The Company also invests in Small Business Investment Company Program funds and a technology consortium fund. The Company is a limited partner in these investments and, as such, the Company is not involved in the management or operation of such investments. These investments are accounted for using the equity method of accounting. Under the equity method of accounting, the Company records its share of the partnership’s earnings or losses in its income statement and adjusts the carrying amount of the investments on the consolidated balance sheet. These investments are evaluated for impairment when events indicate the carrying amount may not be recoverable. The investments recorded at December 31, 2023 and 2022 were $ 13.0 million and $ 12.2 million, respectively and are included with other assets in the consolidated balance sheet. The Company also has a commitment to fund an additional
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$ 2.8 million at December 31, 2023 in six of the limited partnerships compared to $ 3.9 million in six of the limited partnerships at December 31, 2022, which is included with other liabilities in the consolidated balance sheet.
Foreclosed Assets:
Assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines, a valuation allowance is recorded through expense. Costs incurred after acquisition are expensed. At December 31, 2023 and 2022, the balance of other real estate owned was $ 384,000 and $ 100,000 , respectively, and is included with other assets on the consolidated balance sheet.
Land, Premises and Equipment, Net:
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the useful lives of the assets. Premises and improvements assets have useful lives between 5 and 40 years. Equipment and furniture assets have useful lives between 3 and 7 years.
Loan Servicing Rights:
Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in mortgage banking income . Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The amortization of servicing rights is netted against mortgage banking income. Servicing fees were $ 1.2 million for the years ended 2023, 2022 and 2021. Late fees and ancillary fees related to loan servicing are not material.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as loan type, term and interest rate. Any impairment of a grouping is reported as a valuation allowance, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in the valuation allowance are reported with mortgage banking income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
The carrying value of mortgage servicing rights, which is included with other assets in the consolidated balance sheet, was $ 2.2 million and $ 2.7 million as of December 31, 2023 and 2022, respectively.
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $ 333.1 million and $ 364.3 million at December 31, 2023 and 2022, respectively. Custodial escrow balances maintained in connection with serviced loans were $ 1.5 million and $ 1.7 million at year end 2023 and 2022, respectively.
Servicing fee income (loss), which is included in loan and service fees on the income statement, is recorded for fees earned for servicing loans. Fees earned for servicing loans are based on a contractual percentage of the outstanding principal amount of the loan and are recorded as income when earned.
Transfers of Financial Assets:
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
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Mortgage Banking Derivatives:
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free-standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in fair values of these derivatives are included in mortgage banking income.
Interest Rate Swap Derivatives:
The Company offers a derivative product to certain creditworthy commercial banking customers. This product allows the commercial banking customers to enter into an agreement with the Company to swap a variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the borrower’s interest rate exposure. The extension of credit incurred in connection with these derivative products is subject to the same approval and underwriting standards as traditional credit products. The Company limits its risk exposure by simultaneously entering into a similar, offsetting swap agreement with a separate, well-capitalized and highly rated counterparty previously approved by the Company’s Asset Liability Committee. By using these interest rate swap arrangements, the Company is also better insulated from the interest rate risk associated with underwriting fixed-rate loans and is better able to meet customer demand for fixed rate loans. These derivative contracts are not designated against specific assets or liabilities and, therefore, do not qualify for hedge accounting. The derivatives are recorded as assets and liabilities on the balance sheet at fair value with changes in fair value recorded in non-interest income for both the commercial banking customer swaps and the related offsetting swaps. The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820), resulting in some potential volatility in earnings each period. Cash flow activity is recorded through other assets and other liabilities.
The notional amount of the combined interest rate swaps with customers and counterparties at December 31, 2023 and 2022 was $ 826.4 million and $ 760.5 million, respectively. The fair value of the interest rate swap asset was $ 27.2 million and $ 36.9 million and the fair value of the interest rate swap liability was $ 27.2 million and $ 36.9 million at December 31, 2023 and 2022, respectively.
Bank Owned Life Insurance:
At December 31, 2023 and 2022, the Company owned $ 104.8 million and $ 102.5 million, respectively, of life insurance policies on certain officers to provide a life insurance benefit for these officers. At December 31, 2023 and 2022, the Company also owned $ 4.3 million and $ 5.9 million, respectively, of variable life insurance on certain officers related to a deferred compensation plan. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, i.e., the cash surrender value adjusted for other changes or other amounts due that are probable at settlement.
Goodwill and Other Intangible Assets:
All goodwill on the Company’s consolidated balance sheet resulted from business combinations prior to January 1, 2009 and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is not amortized, but assessed at least annually for impairment and any such impairment would be recognized in the period identified.
FHLB and Federal Reserve Bank Stock:
FHLB and Federal Reserve Bank stock are carried at cost in other assets, classified as a restricted security and are periodically evaluated for impairment based on ultimate recoverability of par value. Both cash and stock dividends are reported as income.
Long-term Assets:
Premises and equipment, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. There was no such impairment identified for the years ended December 31, 2023, 2022 and 2021.
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Benefit Plans:
The Company has a noncontributory defined benefit pension plan, which covered substantially all employees until the plan was frozen effective April 1, 2000. Funding of the plan equals or exceeds the minimum funding requirement determined by the actuary. Pension expense is the net of interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Benefits are based on years of service and compensation levels.
The Company maintains a 401(k) profit sharing plan for all employees meeting certain age and service requirements. The Company contributions are based upon the percentage of budgeted net income earned during the year.
An employee deferred compensation plan is available to certain employees with returns based on investments in mutual funds.
The Company maintains a directors’ deferred compensation plan. Effective January 1, 2003, the directors’ deferred compensation plan was amended to restrict the deferral to be in stock only and deferred directors’ fees are included in equity. The Company acquires shares on the open market and records such shares as treasury stock.
Revenue Recognition:
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following is a description of principal activities from which we generate revenue. Revenues are recognized as the Company satisfies its obligations with our customers, in an amount that reflects the consideration that we expect to receive in exchange for those services.
Wealth advisory fees
The Company provides wealth advisory services to its customers and earns fees from its contracts with trust customers to manage assets for investment and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted monthly, quarterly, or annual services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed. Other related services, such as escrow accounts that are based on a fixed schedule, are recognized when the services are rendered.
Investment brokerage services
The Company provides investment brokerage services through a full service brokerage and investment and advisory firm, Cetera Investment Services LLC (“Cetera”). The Company receives commissions from Cetera on a monthly basis based upon customer activity for the month. The fees are recognized monthly and a receivable is recorded until commissions are generally paid by the 5th business day of the following month. Because the Company (i) acts as an agent in arranging the relationship between the customer and the Cetera and (ii) does not control the services to the customers, investment brokerage service fees are presented net of Cetera’s related costs.
Service charges on deposit accounts
The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s balance.
Interchange income
The Company provides the ability to transact on certain deposit accounts through the use of debit cards by outsourcing the services through third party service providers. Performance obligations are met on a transactional basis and income is recognized monthly based on transaction type and volume. Under the accounting standards in effect in the prior period, revenue was previously recognized net of the third party’s costs. Under ASC 606, fees from interchange income related to its customers use of debit cards will be reported gross in loan and service fees under noninterest income. The cost of using third party providers for these interchange services are reported in data processing fees and supplies under noninterest expense.
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Gain on sale of other real estate owned ("OREO") financed by seller
On occasion, the Company underwrites a loan to purchase property owned by the Company. Under ASC 606, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.
Debit card incentive rebates
The Company receives incentive rebates based on debit card transaction volume. Performance obligations are met on a transactional basis and income is recognized monthly based on transaction volume. Under ASC 606, these rebates related to debit card transaction volume are reported as a contra expense in data processing fees and supplies under noninterest expense.
Stock Based Compensation:
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant adjusted for the present value of expected dividends is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. Certain of the restricted stock awards are performance based, as more fully discussed in Note 14 – Stock Based Compensation.
Income Taxes:
Annual consolidated federal and state income tax returns are filed by the Company. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Income tax expense is recorded based on the amount of taxes due on its tax return plus net deferred taxes computed based upon the expected future tax consequences of temporary differences between carrying amounts and tax basis of assets and liabilities, using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more likely of being realized on examination than not. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Off-Balance Sheet Financial Instruments:
Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. The fair value of standby letters of credit is recorded as a liability during the commitment period.
Earnings Per Common Share:
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, restricted stock awards and warrants. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements. The common shares included in treasury stock for 2023 and 2022 were 473,120 and 475,902 shares, respectively. Common stock that has been purchased under the directors’ deferred compensation plan, described above, is included in the treasury stock total and represented 184,019 and 186,801 shares of treasury stock as of December 31, 2023 and 2022, respectively. Because these shares are held in trust for the participants,
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they are treated as outstanding when computing the weighted-average common shares outstanding for the calculation of both basic and diluted earnings per share. Treasury stock is carried at cost using the treasury stock method.
Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, reclassification adjustments for securities transferred to held-to-maturity, reclassification adjustments for gains on the sale of available-for-sale securities and changes in the funded status of the pension plan, which are also recognized as separate components of equity.
Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
The Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al ., which are pending in the United States Bankruptcy Court for the Western District of Michigan. On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust. On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank and the Company, and agreed to stay prosecution of the action through August 31, 2022. The original complaint focused on a series of business transactions among the client, related entities and the Bank, which the liquidating trustee alleged are voidable under applicable federal bankruptcy and state law. The complaint also addressed treatment of the Bank's claims filed in the bankruptcy cases.
On August 31, 2022, the trustee filed his amended complaint against the former client, the Bank, the Company, four officers of the Bank and one independent director of the Bank. The amended complaint alleges that the former client engaged in a check kiting scheme involving multiple banks. The amended complaint alleges that a series of business transactions among the client, his related entities and the Bank are voidable under applicable bankruptcy and state laws. The amended complaint also alleges that the Bank, the Company and the five individual bank representatives who are named as defendants violated various federal and state laws in assisting the former client in his check kiting scheme. On October 26, 2022, the trustee filed his second amended complaint which was virtually identical to his amended complaint. On January 5, 2023, the Bank, the Company and the five individual bank representatives filed motions to dismiss the second amended complaint. On May 30, 2023, the court issued its decision granting the defendants' motion to dismiss in part and denying it in part. The court dismissed all claims against the Company and the Bank's independent director. The court dismissed several of the claims against the defendants but granted the trustee the right to file an amended complaint. On June 20, 2023, the trustee filed his third amended complaint. The trustee alleges many of the same claims that were alleged in the second amended complaint. The defendants filed a motion to dismiss the third amended complaint on July 25, 2023. The trustee subsequently filed a response to this motion. On November 26, 2023, the court issued its decision granting the defendants' motion to dismiss in part and denying it in part, with pre-trial discovery scheduled to start in early 2024 for all claims not dismissed by the court in its November ruling. Based on current information, we have determined that a material loss is neither probable nor estimable at this time, and the Bank and the four individual Bank representatives who remain as defendants intend to vigorously defend themselves against all allegations asserted in this amended complaint.
Restrictions on Cash:
The Federal Reserve Bank eliminated the reserve requirement for all depository institutions in March of 2020. Therefore, the Company was not required to have cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at December 31, 2023 and 2022.
Dividend Restriction:
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to its stockholders. These restrictions currently pose no practical limit on the ability of the Bank or Company to pay dividends at historical levels.
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Fair Value of Financial Instruments:
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disc losed in Note 5 - Fair Value. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Operating Segments:
The Company’s chief decision-makers monitor and evaluate financial performance on a Company-wide basis. All of the Company’s financial service operations are similar and considered by management to be aggregated into one reportable operating segment. While the Company has assigned certain management responsibilities by region and business-line, the Company’s chief decision-makers monitor and evaluate financial performance on a Company-wide basis. The majority of the Company’s revenue is from the business of banking and the Company’s assigned regions have similar economic characteristics, products, services and customers. Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable operating segment.
Adoption of New Accounting Standards:
On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform of Financial Reporting." ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to to be discontinued. On December 22, 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (ASC848): Deferral of the Sunset Date of Topic 848" , which provided a definitive sunset date of December 31, 2024 for the relief guidance under Topic 848. The ASU was effective immediately upon issuance.
The Company formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which included the Secure Overnight Financing Rate ("SOFR"), amongst others. The Company identified certain loans that renewed prior to 2021 and obtained updated reference rate language at the time of the renewal. Additionally, management utilized timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during the transitional period. The Company's policy is to adhere to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020. The Company discontinued the use of new LIBOR-based loans by December 31, 2021, according to regulatory guidelines. The Company transitioned LIBOR-based loans to an alternative reference rate before June 30, 2023. The Company adopted the LIBOR transition relief allowed under this standard, and it did not have a material impact on the consolidated financial statements.
On March 28, 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method." ASC 815 previously permitted only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendment in this update allows nonrepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope allows an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. The update become effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU 2022-01 on January 1, 2023, which did not have a material impact on the consolidated financial statements.
On March 31, 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures." The update amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosures requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications or receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The update is available for entities that have adopted the amendments in update
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2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company elected to early adopt the provisions of the ASU related to the discontinuance of TDR reporting, with retrospective application of modification reporting effective starting January 1, 2022. The Company adopted the provisions related to reporting of current-period gross write-offs within the vintage disclosures effective January 1, 2023. The adoption of the provisions contained within ASU 2022-20 did not have a material impact on the consolidated financial statements.
On March 28, 2023, the FASB issued ASU 2023-02, "Investments - Equity Method and Join Ventures (ASC 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." ASU 2014-01, "Investments - Equity method and Joint Ventures (ASC 323): Accounting for Investments in Qualified Affordable Housing Projects" , previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items.
The amendments in this update permit reporting entities to elect to account for certain tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax benefits in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, all of the following conditions must be met: (1) It is probable that the income tax credits allocated to the tax equity investor will be available; (2) The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project; (3) Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits included income tax credits, other income tax benefits, and other non-income tax -related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project; (4) The tax equity investor's projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive; and (5) The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor's liability is limited to its capital investment. An accounting policy election is allowed to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The amendments in this update require specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The amendments require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understanding the following information about its investments that generate income tax credits and other income tax benefits from a tax credit program including: (1) The nature of its tax equity investments; and (2) The effect of its tax equity investments and related income tax credits and other income tax benefits on its financial position and results of operations.
For public business entities, the amendments in this update are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, the provisions shall be adopted as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company chose the modified retrospective approach and recorded a day one adjustment of less than $ 1.0 million to beginning retained earnings upon adoption of ASU 2023-02 on January 1, 2024, which did not have a material impact on the consolidated financial statements.
Newly Issued But Not Yet Effective Accounting Standards:
On October 9, 2023, the FASB issued ASU 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative" , which modified the disclosure or presentation requirements of a variety of Topics in the Codification and was intended to both clarify or improve such requirements and align the requirements with the SEC's regulations. The amendments to Topics of Codification provided in this update apply to all reporting entities within the scope of the affected Topics unless otherwise indicated by the update. Given the variety of Topics
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
amended, a broad range of entities may be affected by one or more of the amendments provided in the update. The Company evaluated the amendments provided in the update and believes certain of the disclosure improvements are applicable to the
Company's interim or annual disclosures. Subtopic 230-10, as amended, requires disclosure within the accounting policy in annual periods of where cash flows associated with derivative instruments and their related gains and losses are presented within the statement of cash flows. Subtopic 260-10, as amended, requires disclosure of the methods used in the diluted earnings-per-share computation for each dilutive security and clarifies that certain disclosures should be made during interim
periods. Subtopic 470-10, as amended, requires disclosure of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on short-term borrowings outstanding as of the date of each balance sheet presented. The effective date for each amendment for entities subject to the SEC's existing disclosure requirements is the effective date of the removal of the related disclosure from Regulation S-X or Regulation S-K, with early adoption prohibited. The amendments in the update are to be applied prospectively. The Company will apply prospectively the provisions provided in the amendments as such provisions become effective, and does not believe the application of these modified disclosure requirements will have a material impact on the consolidated financial statements. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment in the Update will be removed from the Codification and will not become effective.
On November 27, 2023, the FASB issued ASU 2023-07, "Segment Reporting (ASC 280): Improvements to Reportable Segment Disclosures" , intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment segment expenses. Provisions in the amendment include: (1) Requirement that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss (collectively referred to as the "significant expense principle"); (2) Requirement that a public entity disclose, on an an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss; (3) Requirement that a public entity provide all annual disclosures about a reportable segment's profit or loss and assets currently required by ASC 280 in interim periods; (4) Clarification that if the CODM uses more than one measure of a segment's profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at lease one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity's consolidated financial statements; (5) Requirement that a public entity disclose the title and position of the CODM and explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources; and (6) Requirement that a public entity that has a single reportable segment provide all the disclosures by the amendments in the update and all existing segment disclosures in ASC 280.
The amendments in the update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. For public business entities, amendments in the update should be applied retrospectively to all periods presented in the financial statements, and upon transition the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the impact of this standard on its disclosures, however does not expect adoption of the Update to have a material impact on the consolidated financial statements.
On December 14, 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" , to address investor requests for greater transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The amendments are designed to enhance transparency surrounding income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by taxing jurisdiction, which will allow investors to better assess, in their capital allocation decisions, how an entity's operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows. Other amendments in this Update improve the effectiveness and comparability of disclosures by (1) adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with the SEC's Regulation S-X 210.4-08(h), Rules of General Application-General Notes to Financial Statements: Income Tax Expense , and (2) removing disclosures that are no longer considered cost beneficial or relevant.
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The amendments in the Update are effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this Update should be applied on a prospective basis, however retrospective application is permitted. The Company is currently evaluating the impact of this Update on its disclosures, however does not expect adoption of the Update to have a material impact on the consolidated financial statements.
Reclassifications:
Certain amounts appearing in the financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.
NOTE 2 – SECURITIES
Debt securities purchased with the intent and ability to hold to their maturity are classified as held-to-maturity securities. All other investment securities are classified as available-for-sale securities.
Available-for-Sale Securities
Information related to the amortized cost, fair value and allowance for credit losses of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31, 2023 and 2022 is provided in the tables below.
(dollars in thousands) Amortized
Cost Gross
Unrealized
Gain Gross
Unrealized
Losses Allowance for Credit Losses Fair
Value
2023
U.S. government sponsored agencies $ 146,692 $ 0 $ ( 27,213 ) $ 0 $ 119,479
Mortgage-backed securities: residential 522,275 118 ( 74,551 ) 0 447,842
State and municipal securities 557,352 65 ( 73,010 ) 0 484,407
Total $ 1,226,319 $ 183 $ ( 174,774 ) $ 0 $ 1,051,728
2022
U.S. Treasury securities $ 3,057 $ 0 $ ( 23 ) $ 0 $ 3,034
U.S. government sponsored agencies 156,184 0 ( 29,223 ) 0 126,961
Mortgage-backed securities: residential 578,175 67 ( 85,934 ) 0 492,308
State and municipal securities 663,367 157 ( 100,299 ) 0 563,225
Total $ 1,400,783 $ 224 $ ( 215,479 ) $ 0 $ 1,185,528
Held-to-Maturity Securities
Information related to the amortized cost, fair value and allowance for credit losses of securities held-to-maturity and the related gross gains and unrealized gains and losses at December 31, 2023 and 2022 is presented in the table below.
(dollars in thousands) Amortized
Cost Gross Unrealized Gain Gross Unrealized Losses Allowance for Credit Losses Fair Value
2023
State and municipal securities $ 129,918 $ 0 $ ( 10,703 ) $ 0 $ 119,215
2022
State and municipal securities $ 128,242 $ 0 $ ( 17,213 ) $ 0 $ 111,029
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NOTE 2 – SECURITIES (continued)
On April 1, 2022, the Company elected to transfer securities from available-for-sale to held-to-maturity as an overall balance sheet management strategy. The fair value of securities transferred was $ 127.0 million from available-for-sale to held-to-maturity. The unrealized loss on the securities transferred from available-for-sale to held-to-maturity was $ 24.4 million ($ 19.3 million, net of tax) based on the fair value of the securities on the transfer date and was $ 20.9 million ($ 16.5 million, net of tax) at December 31, 2023. The Company has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or loss on the transferred securities included in accumulated other comprehensive income (loss) at the time of the transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. No securities were transferred from available-for-sale to held-to-maturity during the year ended December 31, 2023.
Information regarding the fair value and amortized cost of available-for-sale and held-to-maturity debt securities by maturity as of December 31, 2023 is presented on the next page. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without prepayment penalty.
Available-for-Sale Held-to-Maturity
(dollars in thousands) Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Due in one year or less $ 1,190 $ 1,191 $ 0 $ 0
Due after one year through five years 8,011 7,421 0 0
Due after five years through ten years 40,627 38,730 0 0
Due after ten years 654,216 556,544 129,918 119,215
704,044 603,886 129,918 119,215
Mortgage-backed securities 522,275 447,842 0 0
Total debt securities $ 1,226,319 $ 1,051,728 $ 129,918 $ 119,215
Security proceeds, gross gains and gross losses for 2023, 2022 and 2021 were as follows:
(dollars in thousands) 2023 2022 2021
Sales of securities available-for-sale
Proceeds $ 105,175 $ 25,332 $ 13,964
Gross gains 439 140 797
Gross losses ( 464 ) ( 119 ) 0
Number of securities 115 30 9
In accordance with ASU No. 2017-8, purchase premiums for callable securities are amortized to the earliest call date and premiums on non-callable securities as well as discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.
Securities with fair values of $ 792.0 million and $ 298.2 million were pledged as of December 31, 2023 and 2022, respectively, as collateral for borrowings from the FHLB and Federal Reserve Bank and for other purposes as permitted or required by law.
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NOTE 2 – SECURITIES (continued)
Unrealized Loss Analysis on Available-for-Sale and Held-to-Maturity Securities
Information regarding available-for-sale securities securities with unrealized losses as of December 31, 2023 and 2022 is prese nted below. Th e tables distribute the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.
Less than 12 months 12 months or more Total
(dollars in thousands) Fair
Value Unrealized Losses Fair
Value Unrealized Losses Fair
Value Unrealized Losses
2023
U.S. government sponsored agencies $ 0 $ 0 $ 119,479 $ 27,213 $ 119,479 $ 27,213
Mortgage-backed securities: residential 52 0 442,765 74,551 442,817 74,551
State and municipal securities 31,345 440 440,446 72,570 471,791 73,010
Total temporarily impaired $ 31,397 $ 440 $ 1,002,690 $ 174,334 $ 1,034,087 $ 174,774
2022
U.S. Treasury securities $ 3,034 $ 23 $ 0 $ 0 $ 3,034 $ 23
U.S. government sponsored agencies 8,420 1,350 118,541 27,873 126,961 29,223
Mortgage-backed securities: residential 165,897 18,637 323,727 67,297 489,624 85,934
State and municipal securities 277,967 33,405 244,436 66,894 522,403 100,299
Total temporarily impaired $ 455,318 $ 53,415 $ 686,704 $ 162,064 $ 1,142,022 $ 215,479
Information regarding held-to-maturity securities with unrealized losses as of December 31, 2023 and 2022 is presented below. The table divides the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.
Less than 12 months 12 months or more Total
(dollars in thousands) Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
2023
State and municipal securities $ 0 $ 0 $ 119,215 $ 10,703 $ 119,215 $ 10,703
2022
State and municipal securities $ 0 $ 0 $ 111,029 $ 17,213 $ 111,029 $ 17,213
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NOTE 2 – SECURITIES (continued)
The number of securities with unrealized losses as of December 31, 2023 and 2022 is presented below.
Available-for-Sale Held-to-Maturity
Less than
12 months 12 months
or more Total Less than
12 months 12 months
or more Total
2023
U.S. government sponsored agencies 0 17 17 0 0 0
Mortgage-backed securities: residential 1 126 127 0 0 0
State and municipal securities 40 370 410 0 41 41
Total temporarily impaired 41 513 554 0 41 41
2022
U.S. Treasury securities 7 0 7 0 0 0
U.S. government sponsored agencies 1 16 17 0 0 0
Mortgage-backed securities: residential 95 41 136 0 0 0
State and municipal securities 269 223 492 0 41 41
Total temporarily impaired 372 280 652 0 41 41
Available-for-sale and held-to-maturity debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the consolidated income statement. For available-for-sale debt securities that do not meet the criteria and for held-to-maturity securities, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For available-for-sale debt securities, any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of applicable taxes.
No allowance for credit losses for available-for-sale or held-to-maturity securities was recorded at December 31, 2023 or 2022. Accrued interest receivable on available-for-sale and held-to-maturity debt securities totaled $ 7.6 million and $ 8.9 million at December 31, 2023 and 2022, respectively, and is excluded from the estimate of credit losses.
Ninety-nine percent of the securities are backed by the U.S. government, government agencies, government sponsored agencies or are rated above investment grade with a long history of no credit losses, except for certain non-local or local municipal securities, which are not rated. The U.S. government sponsored agencies and mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. State and municipal securities credit losses are benchmarked against highly rated municipal securities of similar duration, as published by Moody's, resulting in an immaterial allowance for credit losses.
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NOTE 3 – LOANS
Total loans outstanding as of the years ended December 31, 2023 and 2022 consisted of the following:
(dollars in thousands) 2023 2022
Commercial and industrial loans:
Working capital lines of credit loans $ 604,893 $ 650,948
Non-working capital loans 815,871 842,101
Total commercial and industrial loans 1,420,764 1,493,049
Commercial real estate and multi-family residential loans:
Construction and land development loans 634,435 517,664
Owner occupied loans 825,464 758,091
Nonowner occupied loans 724,101 706,107
Multi-family loans 253,534 197,232
Total commercial real estate and multi-family residential loans 2,437,534 2,179,094
Agri-business and agricultural loans:
Loans secured by farmland 162,890 201,200
Loans for agricultural production 225,874 230,888
Total agri-business and agricultural loans 388,764 432,088
Other commercial loans 120,726 113,593
Total commercial loans 4,367,788 4,217,824
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans 258,103 212,742
Open end and junior lien loans 189,663 175,575
Residential construction and land development loans 8,421 19,249
Total consumer 1-4 family mortgage loans 456,187 407,566
Other consumer loans 96,022 88,075
Total consumer loans 552,209 495,641
Gross loans 4,919,997 4,713,465
Less: Allowance for credit losses ( 71,972 ) ( 72,606 )
Net deferred loan fees ( 3,463 ) ( 3,069 )
Loans, net $ 4,844,562 $ 4,637,790
The recorded investment in loans does not include accrued interest, which totaled $ 21.5 million and $ 18.4 million at December 31, 2023 and 2022, respectively.
The Company had $ 238,000 and $ 306,000 in residential real estate loans in process of foreclosure as of December 31, 2023 and 2022, respectively.
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
The Company adopted ASC 326 using the modified retrospective for all financial assets measured at amortized cost. Results for reporting periods after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
The following table presents the activity in the allowance for credit losses by portfolio segment for the year ended December 31, 2023, 2022 and 2021:
(dollars in thousands) Commercial
and
Industrial Commercial
Real Estate
and
Multi-family
Residential Agri-business
and
Agricultural Other
Commercial Consumer
1-4 Family
Mortgage Other
Consumer Unallocated Total
2023
Beginning balance $ 35,290 $ 27,394 $ 4,429 $ 917 $ 3,001 $ 1,021 $ 554 $ 72,606
Provision for credit losses 1,209 3,619 ( 279 ) 212 598 673 ( 182 ) 5,850
Loans charged-off ( 6,341 ) 0 0 0 ( 163 ) ( 828 ) 0 ( 7,332 )
Recoveries 180 322 0 0 38 308 0 848
Net loans (charged-off) recovered ( 6,161 ) 322 0 0 ( 125 ) ( 520 ) 0 ( 6,484 )
Ending balance $ 30,338 $ 31,335 $ 4,150 $ 1,129 $ 3,474 $ 1,174 $ 372 $ 71,972
(dollars in thousands) Commercial
and
Industrial Commercial
Real Estate
and
Multi-family
Residential Agri-business
and
Agricultural Other
Commercial Consumer
1-4 Family
Mortgage Other
Consumer Unallocated Total
2022
Beginning balance $ 30,595 $ 26,535 $ 5,034 $ 1,146 $ 2,866 $ 1,147 $ 450 $ 67,773
Provision for credit losses 8,646 1,179 ( 605 ) ( 229 ) 125 155 104 9,375
Loans charged-off ( 4,022 ) ( 597 ) 0 0 ( 42 ) ( 473 ) 0 ( 5,134 )
Recoveries 71 277 0 0 52 192 0 592
Net loans (charged-off) recovered ( 3,951 ) ( 320 ) 0 0 10 ( 281 ) 0 ( 4,542 )
Ending balance $ 35,290 $ 27,394 $ 4,429 $ 917 $ 3,001 $ 1,021 $ 554 $ 72,606
(dollars in thousands) Commercial
and
Industrial Commercial
Real Estate
and
Multi-family
Residential Agri-business
and
Agricultural Other
Commercial Consumer
1-4 Family
Mortgage Other
Consumer Unallocated Total
2021
Beginning balance $ 28,333 $ 22,907 $ 3,043 $ 416 $ 2,619 $ 951 $ 3,139 $ 61,408
Impact of adopting ASC 326 4,312 4,316 1,060 941 953 349 ( 2,881 ) 9,050
Provision for credit losses 1,966 ( 632 ) 611 ( 211 ) ( 777 ) ( 72 ) 192 1,077
Loans charged-off ( 5,575 ) ( 70 ) 0 0 ( 51 ) ( 287 ) 0 ( 5,983 )
Recoveries 1,559 14 320 0 122 206 0 2,221
Net loans (charged-off) recovered ( 4,016 ) ( 56 ) 320 0 71 ( 81 ) 0 ( 3,762 )
Ending balance $ 30,595 $ 26,535 $ 5,034 $ 1,146 $ 2,866 $ 1,147 $ 450 $ 67,773
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $ 250,000 .
The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized as the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans are considered to be "Pass" rated when they are reviewed as part of the previously described process and do not meet the criteria above with the exception of consumer troubled debt restructurings, which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with “Not Rated” loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status.
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
The following tables summarize the risk category of loans by loan segment and origination date as of December 31, 2023 and 2022. Balances presented are at the amortized cost basis by origination year.
(dollars in thousands) 2023 2022 2021 2020 2019 Prior Term Total Revolving Total
Commercial and industrial loans:
Working capital lines of credit loans:
Pass $ 193 $ 1,876 $ 2,214 $ 1,132 $ 0 $ 50 $ 5,465 $ 532,086 $ 537,551
Special Mention 0 0 0 0 0 0 0 46,498 46,498
Substandard 0 200 0 0 125 0 325 20,516 20,841
Total 193 2,076 2,214 1,132 125 50 5,790 599,100 604,890
Working capital lines of credit loans:
Current period gross write offs 0 0 75 0 139 0 214 327 541
Non-working capital loans:
Pass 199,071 224,333 85,273 49,999 28,773 10,501 597,950 171,264 769,214
Special Mention 4,038 9,577 1,051 2,498 2,306 4,298 23,768 5,477 29,245
Substandard 3,754 1,612 683 3,892 51 218 10,210 397 10,607
Not Rated 2,585 1,999 881 707 162 18 6,352 0 6,352
Total 209,448 237,521 87,888 57,096 31,292 15,035 638,280 177,138 815,418
Non-working capital loans:
Current period gross write offs 0 5,445 0 178 129 0 5,752 48 5,800
Commercial real estate and multi-family residential loans:
Construction and land development loans:
Pass 50,693 15,558 17,655 0 177 0 84,083 547,570 631,653
Total 50,693 15,558 17,655 0 177 0 84,083 547,570 631,653
Construction and land development loans:
Current period gross write offs 0 0 0 0 0 0 0 0 0
Owner occupied loans:
Pass 144,411 132,850 156,680 132,407 61,415 118,406 746,169 40,288 786,457
Special Mention 7,597 686 4,913 0 1,394 2,245 16,835 14,739 31,574
Substandard 362 250 3,325 1,474 345 1,161 6,917 0 6,917
Total 152,370 133,786 164,918 133,881 63,154 121,812 769,921 55,027 824,948
Owner occupied loans:
Current period gross write offs 0 0 0 0 0 0 0 0 0
Nonowner occupied loans:
Pass 123,633 158,415 112,582 134,050 87,288 66,755 682,723 27,860 710,583
Special Mention 4,503 0 6,257 0 0 2,246 13,006 0 13,006
Total 128,136 158,415 118,839 134,050 87,288 69,001 695,729 27,860 723,589
Nonowner occupied loans:
Current period gross write offs 0 0 0 0 0 0 0 0 0
Multi-family loans:
Pass 90,954 23,315 9,042 35,648 13,971 14,609 187,539 45,987 233,526
Special Mention 19,671 0 0 0 0 0 19,671 0 19,671
Total 110,625 23,315 9,042 35,648 13,971 14,609 207,210 45,987 253,197
Multi-family loans:
Current period gross write offs 0 0 0 0 0 0 0 0 0
Agri-business and agricultural loans:
Loans secured by farmland:
Pass 24,503 32,060 25,308 27,924 9,104 19,160 138,059 24,724 162,783
Substandard 0 0 0 0 0 100 100 0 100
Total 24,503 32,060 25,308 27,924 9,104 19,260 138,159 24,724 162,883
Loans secured by farmland:
Current period gross write offs 0 0 0 0 0 0 0 0 0
Loans for agricultural production:
Pass 28,657 13,589 27,175 25,504 3,533 10,429 108,887 116,406 225,293
Special Mention 0 0 187 0 0 0 187 500 687
Total 28,657 13,589 27,362 25,504 3,533 10,429 109,074 116,906 225,980
Loans for agricultural production:
Current period gross write offs 0 0 0 0 0 0 0 0 0
Other commercial loans:
Pass 7,058 26,918 33,247 13,684 90 7,332 88,329 29,819 118,148
Special Mention 0 0 0 0 0 2,419 2,419 0 2,419
Total 7,058 26,918 33,247 13,684 90 9,751 90,748 29,819 120,567
Other commercial loans:
Current period gross write offs 0 0 0 0 0 0 0 0 0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans
Pass 9,910 10,541 12,486 8,614 3,924 4,625 50,100 8,330 58,430
Special Mention 0 0 0 519 0 0 519 0 519
Substandard 87 0 96 123 0 253 559 0 559
Not Rated 64,233 51,018 38,014 17,432 4,314 23,225 198,236 0 198,236
Total 74,230 61,559 50,596 26,688 8,238 28,103 249,414 8,330 257,744
Closed end first mortgage loans
Current period gross write offs 0 0 0 0 0 0 0 0 0
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
Open end and junior lien loans
Pass 557 137 491 335 0 6 1,526 8,689 10,215
Substandard 108 0 23 0 26 48 205 68 273
Not Rated 24,792 29,648 8,471 1,554 2,286 1,962 68,713 112,371 181,084
Total 25,457 29,785 8,985 1,889 2,312 2,016 70,444 121,128 191,572
Open end and junior lien loans
Current period gross write offs 0 50 14 0 0 0 64 99 163
Residential construction loans
Not Rated 1,525 2,982 1,515 839 263 1,220 8,344 0 8,344
Total 1,525 2,982 1,515 839 263 1,220 8,344 0 8,344
Residential construction loans
Current period gross write offs 0 0 0 0 0 0 0 0 0
Other consumer loans
Pass 1,082 789 1,391 301 0 0 3,563 11,894 15,457
Substandard 40 34 35 0 2 0 111 0 111
Not Rated 32,481 17,585 9,994 6,008 1,611 1,957 69,636 10,545 80,181
Total 33,603 18,408 11,420 6,309 1,613 1,957 73,310 22,439 95,749
Other consumer loans
Current period gross write offs 16 258 90 8 212 1 585 243 828
Total Loans $ 846,498 $ 755,972 $ 558,989 $ 464,644 $ 221,160 $ 293,243 $ 3,140,506 $ 1,776,028 $ 4,916,534
Total current period gross write offs $ 16 $ 5,753 $ 179 $ 186 $ 480 $ 1 $ 6,615 $ 717 $ 7,332
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
(dollars in thousands) 2022 2021 2020 2019 2018 Prior Term Total Revolving Total
Commercial and industrial loans:
Working capital lines of credit loans:
Pass $ 2,207 $ 2,718 $ 1,601 $ 0 $ 0 $ 0 $ 6,526 $ 597,108 $ 603,634
Special Mention 0 0 0 0 0 0 0 36,410 36,410
Substandard 200 0 0 300 0 0 500 10,495 10,995
Total 2,407 2,718 1,601 300 0 0 7,026 644,013 651,039
Non-working capital loans:
Pass 272,273 124,600 91,850 47,711 9,981 13,670 560,085 240,490 800,575
Special Mention 448 1,620 0 109 159 2,961 5,297 2,153 7,450
Substandard 11,831 872 5,021 194 1,351 3,979 23,248 4,171 27,419
Not Rated 2,891 1,550 1,254 413 120 23 6,251 0 6,251
Total 287,443 128,642 98,125 48,427 11,611 20,633 594,881 246,814 841,695
Commercial real estate and multi-family residential loans:
Construction and land development loans:
Pass 26,889 19,944 14,026 356 0 0 61,215 453,953 515,168
Total 26,889 19,944 14,026 356 0 0 61,215 453,953 515,168
Owner occupied loans:
Pass 113,656 179,014 139,880 97,353 65,519 97,335 692,757 40,533 733,290
Special Mention 2,960 7,608 0 446 1,491 8,054 20,559 0 20,559
Substandard 308 105 1,491 373 1,161 229 3,667 0 3,667
Total 116,924 186,727 141,371 98,172 68,171 105,618 716,983 40,533 757,516
Nonowner occupied loans:
Pass 194,294 125,190 134,661 91,907 15,109 64,874 626,035 68,603 694,638
Special Mention 0 11,024 0 0 0 0 11,024 0 11,024
Total 194,294 136,214 134,661 91,907 15,109 64,874 637,059 68,603 705,662
Multi-family loans:
Pass 38,460 25,741 36,929 35,695 2,046 28,866 167,737 7,349 175,086
Special Mention 21,855 0 0 0 0 0 21,855 0 21,855
Total 60,315 25,741 36,929 35,695 2,046 28,866 189,592 7,349 196,941
Agri-business and agricultural loans:
Loans secured by farmland:
Pass 38,344 28,684 29,741 9,656 8,145 19,638 134,208 63,094 197,302
Special Mention 260 0 1,676 1,780 0 15 3,731 0 3,731
Substandard 0 0 0 0 0 145 145 0 145
Total 38,604 28,684 31,417 11,436 8,145 19,798 138,084 63,094 201,178
Loans for agricultural production:
Pass 6,040 30,262 22,167 3,625 9,248 4,539 75,881 143,599 219,480
Special Mention 947 243 7,262 928 0 0 9,380 2,129 11,509
Total 6,987 30,505 29,429 4,553 9,248 4,539 85,261 145,728 230,989
Other commercial loans:
Pass 27,097 4,815 17,911 147 931 10,985 61,886 48,295 110,181
Special Mention 0 0 0 0 0 3,160 3,160 0 3,160
Total 27,097 4,815 17,911 147 931 14,145 65,046 48,295 113,341
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans
Pass 8,768 12,809 12,289 4,805 4,045 3,860 46,576 5,634 52,210
Special Mention 0 0 552 0 0 0 552 0 552
Substandard 0 0 0 0 83 1,944 2,027 0 2,027
Not Rated 57,404 44,331 20,023 5,936 2,970 27,004 157,668 0 157,668
Total 66,172 57,140 32,864 10,741 7,098 32,808 206,823 5,634 212,457
Open end and junior lien loans
Pass 137 541 357 63 75 0 1,173 5,841 7,014
Substandard 0 0 0 31 49 0 80 111 191
Not Rated 44,472 13,597 3,014 3,616 1,476 2,252 68,427 101,750 170,177
Total 44,609 14,138 3,371 3,710 1,600 2,252 69,680 107,702 177,382
Residential construction loans
Not Rated 14,463 2,167 897 291 129 1,223 19,170 0 19,170
Total 14,463 2,167 897 291 129 1,223 19,170 0 19,170
Other consumer loans
Pass 1,344 1,841 432 600 0 948 5,165 16,152 21,317
Substandard 0 0 0 210 0 0 210 0 210
Not Rated 24,395 14,563 9,168 3,606 2,755 1,352 55,839 10,492 66,331
Total 25,739 16,404 9,600 4,416 2,755 2,300 61,214 26,644 87,858
TOTAL $ 911,943 $ 653,839 $ 552,202 $ 310,151 $ 126,843 $ 297,056 $ 2,852,034 $ 1,858,362 $ 4,710,396
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
As of December 31, 2023 and 2022, $ 1.3 million and $ 1.5 million, respectively, in PPP loans were included in the "Pass" category of non-working capital commercial and industrial loans. These loans were included in this risk rating category because they are fully guaranteed by the Small Business Administration ("SBA").
Nonaccrual and Past Due Loans:
For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and the payments are reasonably assured.
The following table presents the aging of the amortized cost basis in past due loans as of December 31, 2023 and 2022 by class of loans and loans past due 90 days or more and still accruing by class of loan:
(dollars in thousands) Loans Not Past Due 30-89 Days Past Due Greater than 89 Days Past Due and Accruing Total Accruing Total Nonaccrual Nonaccrual With No Allowance For Credit Loss Total
2023
Commercial and industrial loans:
Working capital lines of credit loans $ 602,236 $ 0 $ 0 $ 602,236 $ 2,654 $ 0 $ 604,890
Non-working capital loans 805,305 1,372 0 806,677 8,741 244 815,418
Commercial real estate and multi-family residential loans:
Construction and land development loans 631,653 0 0 631,653 0 0 631,653
Owner occupied loans 821,701 0 0 821,701 3,247 1,161 824,948
Nonowner occupied loans 723,589 0 0 723,589 0 0 723,589
Multi-family loans 253,197 0 0 253,197 0 0 253,197
Agri-business and agricultural loans:
Loans secured by farmland 162,783 0 0 162,783 100 0 162,883
Loans for agricultural production 225,980 0 0 225,980 0 0 225,980
Other commercial loans 120,567 0 0 120,567 0 0 120,567
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans 256,016 1,142 27 257,185 559 329 257,744
Open end and junior lien loans 190,956 344 0 191,300 272 164 191,572
Residential construction loans 8,344 0 0 8,344 0 0 8,344
Other consumer loans 95,135 502 0 95,637 112 3 95,749
Total $ 4,897,462 $ 3,360 $ 27 $ 4,900,849 $ 15,685 $ 1,901 $ 4,916,534
As of December 31, 2023, there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the year ended December 31, 2023.
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
(dollars in thousands) Loans Not Past Due 30-89 Days Past Due Greater than 89 Days Past Due and Accruing Total Accruing Total Nonaccrual Nonaccrual With No Allowance For Credit Loss Total
2022
Commercial and industrial loans:
Working capital lines of credit loans $ 649,529 $ 68 $ 0 $ 649,597 $ 1,442 $ 0 $ 651,039
Non-working capital loans 830,033 39 1 830,073 11,622 727 841,695
Commercial real estate and multi-family residential loans:
Construction and land development loans 515,168 0 0 515,168 0 0 515,168
Owner occupied loans 754,451 0 0 754,451 3,065 1,469 757,516
Nonowner occupied loans 705,662 0 0 705,662 0 0 705,662
Multi-family loans 196,941 0 0 196,941 0 0 196,941
Agri-business and agricultural loans:
Loans secured by farmland 201,033 0 0 201,033 145 0 201,178
Loans for agricultural production 230,989 0 0 230,989 0 0 230,989
Other commercial loans 113,341 0 0 113,341 0 0 113,341
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans 211,736 306 122 212,164 293 225 212,457
Open end and junior lien loans 176,758 436 0 177,194 188 188 177,382
Residential construction loans 19,170 0 0 19,170 0 0 19,170
Other consumer loans 87,333 316 0 87,649 209 6 87,858
Total $ 4,692,144 $ 1,165 $ 123 $ 4,693,432 $ 16,964 $ 2,615 $ 4,710,396
As of December 31, 2022, there were an insignificant number of loans 30-89 days past due or greater than 89 days past due on nonaccrual. Additionally, interest income recognized on nonaccrual loans was insignificant during the year ended December 31, 2022.
When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant year over year changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
The following tables present the amortized cost basis of collateral dependent loans by class of loan as of December 31, 2023 and 2022:
(dollars in thousands) Real Estate General
Business
Assets Other Total
2023
Commercial and industrial loans:
Working capital lines of credit loans $ 50 $ 2,454 $ 0 $ 2,504
Non-working capital loans 40 8,202 400 8,642
Commercial real estate and multi-family residential loans:
Owner occupied loans 595 1,474 1,161 3,230
Nonowner occupied loans 0 0 0 0
Agri-business and agricultural loans:
Loans secured by farmland 0 100 0 100
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans 559 0 0 559
Open end and junior lien loans 164 0 0 164
Other consumer loans 0 0 112 112
Total $ 1,408 $ 12,230 $ 1,673 $ 15,311
(dollars in thousands) Real Estate General
Business
Assets Other Total
2022
Commercial and industrial loans:
Working capital lines of credit loans $ 50 $ 5,402 $ 0 $ 5,452
Non-working capital loans 544 18,109 229 18,882
Commercial real estate and multi-family residential loans:
Owner occupied loans 413 1,491 1,161 3,065
Nonowner occupied loans 0 0 0 0
Agri-business and agricultural loans:
Loans secured by farmland 0 145 0 145
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans 2,030 0 0 2,030
Open end and junior lien loans 188 0 0 188
Other consumer loans 0 0 7 7
Total $ 3,225 $ 25,147 $ 1,397 $ 29,769
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
Modifications Made to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point to estimate such credit losses is historical loss information. The Company uses a probability of default/loss given default model to determine the allowance for credit losses recorded at origination. Occasionally, the Company subsequently modifies 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. In some instances, the Company provides multiple types of concessions for such modifications. Because the effect of most modifications to borrowers experiencing financial difficulty is already included in the allowance for credit losses, no change to the allowance for credit losses is generally recorded for these modifications.
The following tables present the amortized cost basis at the end of the reporting period of loans that were experiencing financial difficulty and received a modification of terms during the twelve months ended December 31, 2023, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivables at the end of the reporting period is also presented below:
(dollars in thousands) Interest Rate Reduction Combination Interest Rate Reduction and Term Extension Combination Principal Forgiveness, Interest Rate Reduction, Term Extension and Payment Delay Total Modifications Total Class of Financing Receivable
Twelve Months Ended December 31, 2023
Commercial and industrial loans:
Working capital lines of credit loans $ 1,912 $ 944 $ 0 $ 2,856 0.47 %
Non-working capital loans 0 0 1,572 1,572 0.19
Total commercial and industrial loans 1,912 944 1,572 4,428 0.31
Total loan modifications made to borrowers experiencing financial difficulty $ 1,912 $ 944 $ 1,572 $ 4,428 0.09 %
The Company has no material commitments to lend additional funds to borrowers included in the previous table.
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NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY (continued)
The following table presents the financial effect of the loan modifications presented above for borrowers experiencing financial difficulty for the twelve months ended December 31, 2023:
(dollars in thousands) Principal Forgiveness Interest Rate Reduction Term Extension Payment Delay Total Class of Financing Receivable
Twelve Months Ended December 31, 2023
Commercial and industrial loans:
Working capital lines of credit loans $ 0 Reduction of two variable Prime Rate lines of credit to 1.00 % Fixed
Reduction of one variable line of credit from Prime plus 1.00 % to 1.00 % Fixed
Term extension for one variable rate line of credit from 12 months to 120 months
None 0.47 %
Non-working capital loans (1) 9,380 Reduction of one term loan from Prime plus 0.75 % to 1.00 % Fixed
Term extension from 40 months to 60 months
Extension of amortization period from 40 months to 480 months with excess cash flow recapture provisions for earlier repayment
0.19
(1) Represents one $ 11.0 million non-working capital loan that received principal forgiveness of $ 9.4 million, of which $ 3.7 million and $ 5.6 million was charged off during the twelve months ended December 31, 2023 and 2022, respectively.
During the twelve months ended December 31, 2022, no modifications were made to loans for borrowers experiencing financial difficulty.
The company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. At December 31, 2023, no loans receiving such a modification within the last twelve months were 30 days or greater past due.
At December 31, 2023, no loans receiving a modification due to borrower financial difficulty within the last twelve months has experienced a payment default.
Upon the Company's determination that a modified loan (or portion thereof) has subsequently been deemed uncollectible, the loan (or a portion thereof) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
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NOTE 5 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities: Securities available-for-sale are valued primarily by a third party pricing service. The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).
The Company’s Finance Department, which is responsible for all accounting and SEC compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the board of directors (the “Board”) are made aware of such assets at their next scheduled meeting.
Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/- 5 %, government agency/MBS/CMO +/- 3 % and U.S. treasuries +/- 1 %. If any securities fall outside the tolerance threshold and have a variance of $ 100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material differences are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.
Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2).
Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing
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NOTE 5 – FAIR VALUE (continued)
services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).
Collateral dependent loans: Collateral dependent loans with specific allocations of the allowance for credit losses generally based on the fair value of the underlying collateral when repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of collateral dependent loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 30 - 50 % with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw materials inventory is discounted from its cost or book value by 40 %- 60 %, depending on the marketability of the goods (b) finished goods are generally discounted by 40 %- 60 %, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 60 %- 100 %, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 20 %- 50 % after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10 %- 30 %, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.
Mortgage servicing rights: As of December 31, 2023, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $ 2.2 million, carried at amortized cost and no valuation reserve. These residential mortgage loans have a weighted average interest rate of 3.5 %, a weighted average maturity of 20 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A valuation model is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At December 31, 2023, the constant prepayment speed (“PSA”) used was 148 and discount rate used was 10.5 %. At December 31, 2022, the PSA used was 159 and the discount rate used was 9.5 %.
Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Real estate mortgage loans held-for-sale : Real estate mortgage loans held-for-sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.
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NOTE 5 – FAIR VALUE (continued)
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and 2022:
2023
Fair Value Measurements Using Assets
(dollars in thousands) Level 1 Level 2 Level 3 at Fair Value
Assets:
U.S. government sponsored agency securities $ 0 $ 119,479 $ 0 $ 119,479
Mortgage-backed securities: residential 0 447,842 0 447,842
State and municipal securities 0 482,127 2,280 484,407
Total Available-for-Sale Securities 0 1,049,448 2,280 1,051,728
Mortgage banking derivative 0 47 0 47
Interest rate swap derivative 0 27,189 0 27,189
Total assets $ 0 $ 1,076,684 $ 2,280 $ 1,078,964
Liabilities:
Mortgage banking derivative $ 0 $ 11 $ 0 $ 11
Interest rate swap derivative 0 27,190 0 27,190
Total liabilities $ 0 $ 27,201 $ 0 $ 27,201
2022
Fair Value Measurements Using Assets
(dollars in thousands) Level 1 Level 2 Level 3 at Fair Value
Assets:
U.S. Treasury securities $ 3,034 $ 0 $ 0 $ 3,034
U.S. government sponsored agency securities 0 126,961 0 126,961
Mortgage-backed securities: residential 0 492,308 0 492,308
State and municipal securities 0 561,150 2,075 563,225
Total Available-for-Sale Securities 3,034 1,180,419 2,075 1,185,528
Mortgage banking derivative 0 43 0 43
Interest rate swap derivative 0 36,920 0 36,920
Total assets $ 3,034 $ 1,217,382 $ 2,075 $ 1,222,491
Liabilities:
Mortgage banking derivative $ 0 $ 0 $ 0 $ 0
Interest rate swap derivative 0 36,921 0 36,921
Total liabilities $ 0 $ 36,921 $ 0 $ 36,921
The fair value of Level 3 available-for-sale securities was immaterial to warrant additional recurring fair value disclosures as of December 31, 2023 and 2022.
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NOTE 5 – FAIR VALUE (continued)
The tables below present the amount of assets measured at fair value on a nonrecurring basis as of December 31, 2023 and 2022:
2023
Fair Value Measurements Using Assets
(dollars in thousands) Level 1 Level 2 Level 3 at Fair Value
Assets
Collateral dependent loans:
Commercial and industrial loans:
Working capital lines of credit loans $ 0 $ 0 $ 1,263 $ 1,263
Non-working capital loans 0 0 3,374 3,374
Commercial real estate and multi-family residential loans:
Owner occupied loans 0 0 682 682
Agri-business and agricultural loans:
Loans secured by farmland 0 0 31 31
Total collateral dependent loans $ 0 $ 0 $ 5,350 $ 5,350
Other real estate owned 0 0 384 384
Total assets $ 0 $ 0 $ 5,734 $ 5,734
2022
Fair Value Measurements Using Assets
(dollars in thousands) Level 1 Level 2 Level 3 at Fair Value
Assets
Collateral dependent loans:
Commercial and industrial loans:
Working capital lines of credit loans $ 0 $ 0 $ 3,178 $ 3,178
Non-working capital loans 0 0 8,354 8,354
Commercial real estate and multi-family residential loans:
Owner occupied loans 0 0 425 425
Agri-business and agricultural loans:
Loans secured by farmland 0 0 35 35
Total collateral dependent loans $ 0 $ 0 $ 11,992 $ 11,992
Other real estate owned 0 0 100 100
Total assets $ 0 $ 0 $ 12,092 $ 12,092
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NOTE 5 – FAIR VALUE (continued)
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2023:
(dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs
Collateral dependent loans:
Commercial and industrial $ 4,637 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 64 %
9 %- 99 %
Collateral dependent loans:
Commercial real estate and multi-family residential 682 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 37 %
9 %- 69 %
Collateral dependent loans:
Loans secured by farmland 31 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 69 %
Other real estate owned 384 Appraisals Discount to reflect current market conditions and ultimate collectability 36 %
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NOTE 5 – FAIR VALUE (continued)
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2022:
(dollars in thousands) Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs
Collateral dependent loans:
Commercial and industrial $ 11,532 Collateral based measurements Discount to reflect current market conditions and ultimate collectability
62 %
29 %- 99 %
Collateral dependent loans:
Commercial real estate 425 Collateral based measurements Discount to reflect current market conditions and ultimate collectability
57 %
37 %- 76 %
Collateral dependent loans:
Loans secured by farmland 35 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 76 %
Other real estate owned 100 Appraisals Discount to reflect current market conditions and ultimate collectability 68 %
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NOTE 5 – FAIR VALUE (continued)
The following tables contain the estimated fair values and the related carrying values of the Company’s financial instruments at December 31, 2023 and 2022. Items which are not financial instruments are not included.
2023
Carrying Estimated Fair Value
(dollars in thousands) Value Level 1 Level 2 Level 3 Total
Financial Assets:
Cash and cash equivalents $ 151,824 $ 151,824 $ 0 $ 0 $ 151,824
Securities available-for-sale 1,051,728 0 1,049,448 2,280 1,051,728
Securities held-to-maturity 129,918 0 119,215 0 119,215
Real estate mortgages held-for-sale 1,158 0 1,158 0 1,158
Loans, net 4,844,562 0 0 4,694,532 4,694,532
Mortgage banking derivative 47 0 47 0 47
Interest rate swap derivative 27,189 0 27,189 0 27,189
Federal Reserve and Federal Home Loan Bank Stock 21,420 N/A N/A N/A N/A
Accrued interest receivable 30,011 0 8,558 21,453 30,011
Financial Liabilities:
Certificates of deposit 1,016,821 0 1,010,172 0 1,010,172
All other deposits 4,703,704 4,703,704 0 0 4,703,704
Federal Home Loan Bank advances 50,000 50,000 0 0 50,000
Mortgage banking derivative 11 0 11 0 11
Interest rate swap derivative 27,190 0 27,190 0 27,190
Standby letters of credit 289 0 0 289 289
Accrued interest payable 20,893 753 20,140 0 20,893
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NOTE 5 – FAIR VALUE (continued)
2022
Carrying Estimated Fair Value
(dollars in thousands) Value Level 1 Level 2 Level 3 Total
Financial Assets:
Cash and cash equivalents $ 130,282 $ 129,069 $ 1,213 $ 0 $ 130,282
Securities available-for-sale 1,185,528 3,034 1,180,419 2,075 1,185,528
Securities held-to-maturity 128,242 0 111,029 0 111,029
Real estate mortgages held-for-sale 357 0 372 0 372
Loans, net 4,637,790 0 0 4,454,678 4,454,678
Mortgage banking derivative 43 0 43 0 43
Interest rate swap derivative 36,920 0 36,920 0 36,920
Federal Reserve and Federal Home Loan Bank Stock 15,795 N/A N/A N/A N/A
Accrued interest receivable 27,994 0 9,598 18,396 27,994
Financial Liabilities:
Certificates of deposit 626,186 0 621,206 0 621,206
All other deposits 4,834,434 4,834,434 0 0 4,834,434
Federal Funds purchased 22,000 22,000 0 0 22,000
Federal Home Loan Bank advances 275,000 275,000 0 0 275,000
Interest rate swap derivative 36,921 0 36,921 0 36,921
Standby letters of credit 249 0 0 249 249
Accrued interest payable 3,186 486 2,700 0 3,186
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NOTE 6 – LAND, PREMISES AND EQUIPMENT, NET
Land, premises and equipment and related accumulated depreciation were as follows at December 31, 2023 and 2022:
(dollars in thousands) 2023 2022
Land $ 12,472 $ 12,472
Premises and improvements 63,862 61,185
Equipment and furniture 37,483 37,460
Total cost 113,817 111,117
Less accumulated depreciation 55,918 53,020
Land, premises and equipment, net $ 57,899 $ 58,097
The Company had no land, premises and equipment held for sale and included in other assets as of December 31, 2023 and 2022.
NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
There have been no changes in the $ 5.0 million carrying amount of goodwill since 2002.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2023, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. The Company’s annual impairment analysis was performed as of May 31, 2023. Circumstances did not substantially change during the second half of the year such that the Company believed it was necessary to perform an additional impairment analysis.
NOTE 8 – DEPOSITS
The following table details total deposits as of December 31, 2023 and 2022:
(dollars in thousands) 2023 2022
Non-interest bearing demand deposits $ 1,353,477 $ 1,736,761
Savings and transaction accounts:
Savings deposits 301,168 403,773
Interest bearing demand deposits 3,049,059 2,693,900
Time deposits:
Other time deposits 224,083 170,759
Deposits of $100,000 to $250,000 235,096 185,194
Deposits of $250,000 or more 557,642 270,233
Total deposits $ 5,720,525 $ 5,460,620
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NOTE 8 – DEPOSITS (continued)
At December 31, 2023, the scheduled maturities of time deposits were as follows:
(dollars in thousands) Amount
Maturing in 2024 $ 879,303
Maturing in 2025 84,751
Maturing in 2026 16,885
Maturing in 2027 31,638
Maturing in 2028 4,110
Thereafter 134
Total time deposits $ 1,016,821
During 2023 and 2022 the Bank entered into agreements with IntraFi Network relative to their Insured Cash Sweep One-Way Buy program. As of December 31, 2023 and 2022 the total amount available to the Bank via this program was $ 100.0 million, of which, $ 10.0 million was drawn.
NOTE 9 – BORROWINGS
The following table details outstanding fixed rate bullet advances with the Federal Home Loan Bank ("FHLB") of Indianapolis for the years ended December 31, 2023 and 2022:
(dollars in thousands) 2023 2022
Federal Home Loan Bank of Indianapolis $ 50,000 $ 275,000
The advance outstanding at December 31, 2023 was a fixed-rate bullet advance and could not be prepaid by the Company without a penalty. The advance had an interest rate of 5.55 % and matured on January 5, 2024. The note required payment at maturity and was secured by residential real estate loans and securities with a carrying value of approximately $ 824.0 million at December 31, 2023.
The advance outstanding at December 31, 2022 was a fixed-rate bullet advance and could not be prepaid by the Company without a penalty. The advance had an interest rate of 4.21 % and matured on January 5, 2023. The note required payment at maturity and was secured by residential real estate loans and securities with a carrying value of $ 549.0 million.
At December 31, 2023 and 2022, the Company owned $ 18.0 million and $ 12.4 million, respectively, of FHLB stock which also secures debts owed to the FHLB. The Company is authorized by the Board to borrow up to $ 800.0 million at the FHLB, but availability is limited to $ 574.9 million based on collateral and outstanding borrowings. Federal Reserve Discount Window borrowings were secured by commercial loans and investment securities with a carrying value of $ 1.59 billion and $ 928.6 million as of December 31, 2023 and 2022. The Company had a borrowing capacity of $ 1.26 billion and $ 758.3 million at the Federal Reserve Bank as of December 31, 2023 and 2022, respectively. The Company enrolled in the Federal Reserve Bank Term Funding Program, initiated in March 2023, and had borrowings secured by investment securities with a collateral value of $ 150.5 million as of December 31, 2023. There were no borrowings outstanding under either program at the Federal Reserve Bank at December 31, 2023 and 2022.
The Company had $ 325.0 million and $ 350.0 million of availability in federal funds lines with eleven correspondent banks as of December 31, 2023 and 2022, respectively; $ 0 and $ 22.0 million were drawn upon as of December 31, 2023 and 2022, respectively. The Bank is also a member of the American Financial Exchange (AFX) where overnight fed funds purchased can be obtained from other banks on the Exchange that have approved the Bank for an unsecured, overnight line. These funds are only available if the approving banks have an ‘offer’ out to sell that day. The total amount approved for the Bank via AFX banks was $ 319.0 million at December 31, 2023 and 2022. There were no amounts drawn as of December 31, 2023 and 2022.
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NOTE 9 – BORROWINGS (continued)
On October 11, 2023, the Company entered into an unsecured revolving credit agreement with another financial institution allowing the Company to borrow up to $ 30.0 million. This credit agreement replaced an existing agreement of $ 12.5 million in place with a different financial institution that the Company terminated on October 11, 2023. There were no borrowings outstanding on either credit agreement at December 31, 2023 or December 31, 2022. Funds provided under the current agreement may be used to repurchase shares of the Company's common stock under the share repurchase program, which was reauthorized by the Company's board of directors on April 11, 2023 and expires on April 30, 2025, and for general operations. The credit agreement includes a negative pledge agreement whereby the Company agrees not to pledge or otherwise encumber the stock of the Bank. The credit agreement has a one year term which may be amended, extended, modified or renewed.
NOTE 10 – PENSION AND OTHER POSTRETIREMENT PLANS
In April 2000, the Lakeland Financial Corporation Pension Plan was frozen. The Company also maintains a Supplemental Executive Retirement Plan (“SERP”) for select officers that was established as a funded, non-qualified deferred compensation plan. Currently, six retired officers are the only participants in the SERP. The measurement date for both the pension plan and SERP is December 31, 2023 and 2022.
Information as to the Company’s employee benefit plans at December 31, 2023 and 2022 is as follows:
Pension Benefits SERP Benefits
(dollars in thousands) 2023 2022 2023 2022
Change in benefit obligation:
Beginning benefit obligation $ 1,546 $ 2,298 $ 700 $ 867
Interest cost 75 53 33 20
Actuarial (gain) loss ( 112 ) ( 611 ) 93 ( 52 )
Benefits paid ( 12 ) ( 194 ) ( 133 ) ( 135 )
Ending benefit obligation 1,497 1,546 693 700
Change in plan assets (primarily equity and fixed income investments and money market funds), at fair value:
Beginning plan assets 1,820 2,303 606 848
Actual return 232 ( 289 ) 73 ( 107 )
Employer contribution 0 0 0 0
Benefits paid ( 217 ) ( 194 ) ( 133 ) ( 135 )
Ending plan assets 1,835 1,820 546 606
Funded status at end of year $ 338 $ 274 $ ( 147 ) $ ( 94 )
Amounts recognized in the consolidated balance sheets consist of:
Pension Benefits SERP Benefits
(dollars in thousands) 2023 2022 2023 2022
Funded status included in other liabilities $ 338 $ 274 $ ( 147 ) $ ( 94 )
Amounts recognized in accumulated other comprehensive income consist of:
Pension Benefits SERP Benefits
(dollars in thousands) 2023 2022 2023 2022
Net actuarial loss $ 478 $ 538 $ 502 $ 487
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NOTE 10 – PENSION AND OTHER POSTRETIREMENT PLANS (continued)
The accumulated benefit obligation for the pension plan was $ 1.5 million for both December 31, 2023 and 2022. The accumulated benefit obligation for the SERP was $ 693,000 and $ 700,000 for December 31, 2023 and 2022, respectively.
Net period benefit cost and other amounts recognized in other comprehensive income (loss) include the following:
Pension Benefits SERP Benefits
(dollars in thousands) 2023 2022 2021 2023 2022 2021
Net pension expense:
Service cost $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest cost 75 53 52 33 20 18
Expected return on plan assets ( 123 ) ( 130 ) ( 133 ) ( 38 ) ( 45 ) ( 47 )
Recognized net actuarial (gain) loss 18 99 160 42 45 82
Settlement cost 27 23 65 0 0 0
Net pension expense $ ( 3 ) $ 45 $ 144 $ 37 $ 20 $ 53
Net (gain) loss $ ( 43 ) $ ( 215 ) $ ( 350 ) $ 56 $ 100 $ ( 40 )
Amortization of net loss ( 17 ) ( 99 ) ( 160 ) ( 42 ) ( 45 ) ( 82 )
Total recognized in other comprehensive income (loss) ( 60 ) ( 314 ) ( 510 ) 14 55 ( 122 )
Total recognized in net pension expense and other comprehensive income (loss) $ ( 63 ) $ ( 269 ) $ ( 366 ) $ 51 $ 75 $ ( 69 )
The estimated net loss (gain) for the defined benefit pension plan and SERP that will be amortized (accreted) from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is ($ 34,000 ) for the pension plan and $ 42,000 for the SERP. The settlement costs in 2023, 2022 and 2021 were related to participants taking lump sum distributions from the pension plan during those years.
For 2023, 2022 and 2021, the assumed form of payment elected by active participants upon retirement was a lump sum to reflect participant trends. The lump sum assumed interest rates, on the next page, for December 31, 2023, 2022 and 2021 reflect the mortality table in effect for 2023, 2022 and 2021, respectively. For 2023, 2022, and 2021, the mortality assumption was the PRI-2012 White Collar Mortality Table, with full generational Projection Scale MP-2021 at year-end.
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NOTE 10 – PENSION AND OTHER POSTRETIREMENT PLANS (continued)
Pension Benefits SERP Benefits
2023 2022 2021 2023 2022 2021
The following assumptions were used in calculating the net benefit obligation:
Weighted average discount rate 4.83 % 5.03 % 2.49 % 4.83 % 5.03 % 2.49 %
Rate of increase in future compensation N/A N/A N/A N/A N/A N/A
Lump sum assumed interest rates First 5 years 5.77 % 5.10 % 0.87 % N/A N/A N/A
Next 15 years 6.14 % 5.83 % 2.74 % N/A N/A N/A
All future years 6.19 % 5.68 % 3.16 % N/A N/A N/A
The following assumptions were used in calculating the net pension expense:
Weighted average discount rate 5.03 % 2.49 % 2.08 % 5.03 % 2.49 % 2.08 %
Rate of increase in future compensation N/A N/A N/A N/A N/A N/A
Expected long-term rate of return 6.50 % 6.50 % 6.50 % 6.50 % 6.50 % 6.50 %
Pension Plan and SERP Assets
The Company’s investment strategies are to invest in a prudent manner for the purpose of providing benefits to participants in the pension plan and the SERP. The investment strategies are targeted to maximize the total return of the portfolio net of inflation, spending and expenses. Risk is controlled through diversification of asset types and investments in domestic and international equities and fixed income securities. The target allocations for plan assets are shown in the tables below. Equity securities primarily include investments in common stocks. Debt securities include government agency and commercial bonds. Other investments consist of money market mutual funds.
The weighted average expected long-term rate of return on pension plan and SERP assets is developed in consultation with the plans actuary. It is primarily based upon industry trends and consensus rates of return which are then adjusted to reflect the specific asset allocations and historical rates of return of the Company’s plan assets. The following assumptions were used in determining the total long-term rate of return: equity securities were assumed to have a long-term rate of return of approximately 8.85 % and debt securities were assumed to have a long-term rate of return of approximately 3.00 %. These rates of return were adjusted to reflect an approximate target allocation of 60 % equity securities and 40 % debt securities with a small downward adjustment due to investments in the “Other” category, which consist of low yielding money market mutual funds.
Certain asset types and investment strategies are prohibited including, the investment in commodities, options, futures, short sales, margin transactions and non-marketable securities.
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NOTE 10 – PENSION AND OTHER POSTRETIREMENT PLANS (continued)
The Company’s pension plan asset allocation at year end 2023 and 2022, target allocation for 2024, and expected long-term rate of return by asset category are as follows:
Target
Allocation Percentage of Plan
Assets
at Year End Weighted
Average Expected
Long-Term Rate
of Return
Asset Category 2024 2023 2022
Equity securities 55 - 65 % 63 % 60 % 8.85 %
Debt securities 35 - 45 % 34 % 39 % 3.00 %
Other 5 - 10 % 3 % 1 % 0.10 %
Total 100 % 100 % 6.50 %
The Company’s SERP plan asset allocation at year end 2023 and 2022, target allocation for 2024, and expected long-term rate of return by asset category are as follows:
Target
Allocation Percentage of Plan
Assets
at Year End Weighted
Average Expected
Long-Term Rate
of Return
Asset Category 2024 2023 2022
Equity securities 55 - 65 % 65 % 62 % 8.85 %
Debt securities 35 - 45 % 33 % 35 % 3.00 %
Other 5 - 10 % 2 % 3 % 0.10 %
Total 100 % 100 % 6.50 %
Fair Value of Pension Plan and SERP Assets
Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. Also, a fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Equity and debt securities: The fair values of securities are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models, which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
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NOTE 10 – PENSION AND OTHER POSTRETIREMENT PLANS (continued)
The fair values of the Company’s pension plan assets at December 31, 2023, by asset category are as follows:
Asset Category Total Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks $ 763 $ 763 $ 0 $ 0
Equity securities - US mid cap stock mutual funds 44 44 0 0
Equity securities - US small cap stock mutual funds 135 135 0 0
Equity securities - international stock mutual funds 143 143 0 0
Equity securities - emerging markets stock mutual funds 68 68 0 0
Debt securities - intermediate term bond mutual funds 373 373 0 0
Debt securities - short term bond mutual funds 153 153 0 0
Debt securities - high yield bond mutual funds 18 18 0 0
Debt securities - nontraditional bond mutual funds 12 12 0 0
Debt securities - bank loan mutual funds 35 35 0 0
Debt securities - preferred stock mutual funds 36 36 0 0
Cash - money market account 55 55 0 0
Total $ 1,835 $ 1,835 $ 0 $ 0
The fair values of the Company’s pension plan assets at December 31, 2022, by asset category are as follows:
Asset Category Total Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2 ) Significant
Unobservable
Inputs
(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks $ 718 $ 718 $ 0 $ 0
Equity securities - US mid cap stock mutual funds 43 43 0 0
Equity securities - US small cap stock mutual funds 131 131 0 0
Equity securities - international stock mutual funds 158 158 0 0
Equity securities - emerging markets stock mutual funds 34 34 0 0
Debt securities - intermediate term bond mutual funds 232 232 0 0
Debt securities - short term bond mutual funds 484 484 0 0
Cash - money market account 20 20 0 0
Total $ 1,820 $ 1,820 $ 0 $ 0
There were no Level 2 or 3 securities during either year.
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NOTE 10 – PENSION AND OTHER POSTRETIREMENT PLANS (continued)
The fair values of the Company’s SERP assets at December 31, 2023, by asset category are as follows:
Asset Category Total Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks $ 236 $ 236 $ 0 $ 0
Equity securities - US mid cap stock mutual funds 42 42 0 0
Equity securities - US small cap stock mutual funds 13 13 0 0
Equity securities - emerging markets stock mutual funds 20 20 0 0
Equity securities - international stock mutual funds 45 45 0 0
Debt securities - intermediate term bond mutual funds 107 107 0 0
Debt securities - short term bond mutual funds 44 44 0 0
Debt securities - high yield bond mutual funds 5 5 0 0
Debt securities - nontraditional bond mutual funds 4 4 0 0
Debt securities - bank loan mutual funds 10 10 0 0
Debt securities - preferred stock mutual funds 10 10 0 0
Cash - money market account 10 10 0 0
Total $ 546 $ 546 $ 0 $ 0
The fair values of the Company’s SERP assets at December 31, 2022, by asset category are as follows:
Asset Category Total Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks $ 249 $ 249 $ 0 $ 0
Equity securities - US mid cap stock mutual funds 16 16 0 0
Equity securities - US small cap stock mutual funds 43 43 0 0
Equity securities - emerging markets stock mutual funds 12 12 0 0
Equity securities - international stock mutual funds 57 57 0 0
Debt securities - intermediate term bond mutual funds 63 63 0 0
Debt securities - short term bond mutual funds 149 149 0 0
Cash - money market account 17 17 0 0
Total $ 606 $ 606 $ 0 $ 0
There were no Level 2 or 3 securities during either year.
Contributions
The Company did not contribute to its pension or SERP plans in 2023.
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NOTE 10 – PENSION AND OTHER POSTRETIREMENT PLANS (continued)
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next ten years:
Plan Year Pension
Benefits SERP
Benefits
(dollars in thousands)
2024 $ 185 $ 129
2025 176 120
2026 186 109
2027 132 97
2028 132 84
2029-2033 491 232
NOTE 11 – OTHER BENEFIT PLANS
401(k) Plan
The Company maintains a 401(k) profit sharing plan for all employees meeting certain age and service requirements. The 401(k) plan allows employee contributions up to the maximum amount allowable under the Internal Revenue Code, which are matched based upon the percentage of budgeted net income earned during the year on the first 6 % of the compensation contributed. The expense recognized from matching was $ 2.0 million, $ 2.4 million and $ 2.3 million in 2023, 2022 and 2021, respectively.
Deferred Compensation Plan
Effective January 1, 2004, the Company adopted the Lake City Bank Deferred Compensation Plan. The purpose of the deferred compensation plan is to extend full 401(k) type retirement benefits to certain individuals without regard to statutory limitations under tax qualified plans. A liability is accrued by the Company for its obligation under this plan. The expense (benefit) recognized was $ 425,000 , ($ 1.0 ) million and $ 1.2 million during the years ended December 31, 2023, 2022 and 2021, respectively. This resulted in a deferred compensation liability of $ 4.1 million and $ 6.1 million as of year end 2023 and 2022, respectively. The deferred compensation plan is funded solely by participant contributions and does not receive a Company match.
Employee Agreements
Under employment agreements with certain executives, certain events leading to separation from the Company could result in cash payments totaling $ 5.1 million as of December 31, 2023. On December 31, 2023, no amounts were accrued on these contingent obligations.
Directors’ Deferred Compensation and Cash Plans
The Company maintains a directors’ deferred compensation plan and a cash plan. The amount owed to directors for fees under the deferred directors’ compensation and cash plans as of December 31, 2023 and 2022 was $ 5.8 million and $ 5.6 million, respectively. The related expense for the deferred directors’ compensation and cash plans for the years ended December 31, 2023, 2022 and 2021 was $ 432,000 , $ 458,000 and $ 482,000 , respectively.
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NOTE 12 – INCOME TAXES
Income tax expense for the years ended December 31, 2023, 2022 and 2021 consisted of the following:
(dollars in thousands) 2023 2022 2021
Current federal $ 16,171 $ 22,825 $ 21,329
Deferred federal 1,302 ( 2,327 ) ( 1,249 )
Current state ( 131 ) 1,297 1,892
Deferred state ( 776 ) ( 448 ) ( 261 )
Total income tax expense $ 16,566 $ 21,347 $ 21,711
The differences between financial statement tax expense and amounts computed by applying the statutory federal income tax rate of 21 % to income before income taxes were as follows:
(dollars in thousands) 2023 2022 2021
Income taxes at statutory federal rate of 21% $ 23,170 $ 26,284 $ 24,663
Increase (decrease) in taxes resulting from:
Tax exempt income ( 4,226 ) ( 4,438 ) ( 2,822 )
Nondeductible expense 269 159 116
State income tax, net of federal tax effect ( 716 ) 671 1,288
Captive insurance premium income ( 261 ) ( 417 ) ( 303 )
Tax credits ( 713 ) ( 586 ) ( 578 )
Bank owned life insurance ( 658 ) ( 78 ) ( 596 )
Long-term incentive plan and deferred compensation ( 715 ) ( 530 ) ( 274 )
Nondeductible compensation expense 784 181 156
Other ( 368 ) 101 61
Total income tax expense $ 16,566 $ 21,347 $ 21,711
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NOTE 12 – INCOME TAXES (continued)
The net deferred tax asset recorded in the consolidated balance sheets at December 31, 2023 and 2022 consisted of the following:
(dollars in thousands) 2023 2022
Deferred tax assets:
Bad debts $ 18,384 $ 18,561
Pension and deferred compensation liability 1,823 2,272
Nonaccrual loan interest 494 256
Long-term incentive plan 2,342 2,894
Lease liability 1,199 1,354
Deferred loan fees 781 572
Accrued legal reserve 635 819
Net operating loss carryforward 913 0
Other 591 1,130
27,162 27,858
Deferred tax liabilities:
Depreciation 3,645 4,257
Loan servicing rights 570 694
State taxes 949 786
Intangible assets 1,270 1,270
REIT spillover dividend 2,140 1,290
Prepaid expenses 801 988
Lease right of use 1,199 1,354
Other 480 585
11,054 11,224
Valuation allowance 0 0
Net deferred tax asset $ 16,108 $ 16,634
At December 31, 2023, the Company has Indiana net operating loss carryforwards of approximately $ 20.0 million that will expire in 2038 if not used. Management has concluded that the state net operating losses will be fully utilized and therefore no valuation allowance is necessary on the state net operating loss.
In addition to the net deferred tax assets included above, the deferred income tax asset (liability) allocated to the unrealized net gain (loss) on securities available-for-sale included in equity was $ 41.1 million and $ 50.0 million for 2023 and 2022, respectively. The deferred income tax asset allocated to the pension plan and SERP included in equity was $ 243,000 and $ 255,000 for 2023 and 2022, respectively.
The Company evaluated its deferred tax asset at year end 2023 and has concluded that it is more likely than not that it will be realized. The Company expects to have taxable income in the future such that the deferred tax asset will be realized. Therefore, no valuation allowance is required.
Unrecognized Tax Benefits
The Company did no t have any unrecognized tax benefits at December 31, 2023 or 2022. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.
No interest or penalties were recorded in the income statement and no amount was accrued for interest and penalties for the periods ending December 31, 2023, 2022 and 2021. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income taxes accounts.
The Company and its subsidiaries file a consolidated U.S. federal tax return and a combined unitary return in the States of Indiana and Michigan. These returns are subject to examinations by authorities for all years after 2019.
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NOTE 13 – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates as of December 31, 2023 and 2022 were as follows:
(dollars in thousands) 2023 2022
Beginning balance $ 113,435 $ 99,865
New loans and advances 69,822 54,085
Effect of changes in related parties 230 ( 10,463 )
Repayments and renewals ( 51,006 ) ( 30,052 )
Ending balance $ 132,481 $ 113,435
Deposits from principal officers, directors, and their affiliates at year end 2023 and 2022 were $ 22.5 million and $ 16.2 million, respectively.
The Company and Bank are an investor in certain funds managed by Centerfield Capital (“Centerfield”), a private equity investment firm. Faraz Abbasi, a director of the Company, is a Managing Partner and an owner of Centerfield. As of December 31, 2023 and 2022, the Company had an aggregate investment balance of approximately $ 3.0 million and $ 2.3 million, respectively, in such funds, which are included in other assets on the consolidated balance sheet, and had remaining commitments to invest up to approximately $ 2.3 million and $ 2.8 million, respectively. Under the terms of the applicable funds, Centerfield is entitled to customary management fees with respect to the amounts under management and investment gains, and it is estimated that Mr. Abbasi’s interest in such fees was less than $ 25,000 annually for the years ended December 31, 2023 and 2022.
NOTE 14 – STOCK BASED COMPENSATION
Effective April 8, 2008, the Company adopted the Lakeland Financial Corporation 2008 Equity Incentive Plan (the “2008 Plan”), which was approved by the Company’s stockholders. At its inception there were 1,125,000 shares of common stock reserved for grants of stock options, stock appreciation rights, stock awards and cash incentive awards to employees of the Company, its subsidiaries and Board. Effective April 9, 2013, the Company adopted the Lakeland Financial Corporation 2013 Equity Incentive Plan (the “2013 Plan”), which was also approved by the Company’s stockholders. At its inception the remaining shares of common stock available to grant under the 2008 Plan of 435,867 were transferred to the 2013 Plan and reserved for grants of stock options, stock appreciation rights, stock awards and cash incentive awards to employees of the Company, its subsidiaries and Board. Non-vested shares from the 2008 Plan that were unused at vesting were added to the shares available to grant of the 2013 Plan. Effective April 12, 2017, the Company adopted the Lakeland Financial Corporation 2017 Equity Incentive Plan (the “2017 Plan”), which was also approved by the Company’s stockholders and does not permit share recycling. At its inception there were 1,000,000 shares of common stock reserved for grants of stock options, stock appreciation rights, stock awards and cash incentive awards to employees of the Company, its subsidiaries and Board. As of December 31, 2023, 279,618 shares were available for future grants in the 2017 Plan, which is the only active plan. Certain stock awards provide for accelerated vesting if there is a change in control. The Company has a policy of issuing new shares to satisfy exercises of stock awards.
Included in net income for the years ended December 31, 2023, 2022 and 2021 was employee stock compensation expense of $ 3.7 million, $ 7.8 million and $ 7.2 million, and a related tax benefit of $ 908,000 , $ 2.0 million and $ 1.8 million, respectively.
Stock Options
The equity incentive plan requires that the exercise price for options be the market price on the date the options are granted. The maximum option term is ten years and the awards usually vest over three years . The fair value of each stock option is estimated with the Black-Scholes pricing model, using the following weighted-average assumptions as of the grant date for stock options granted during the years presented. Expected volatilities are based on historical volatility of the Company’s stock over the immediately preceding expected life period, as well as other factors known on the grant date that would have a significant effect on the stock price during the expected life period. The expected stock option life used is the historical option life of the similar employee base or Board. The turnover rate is based on historical data of the similar employee base as a group
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NOTE 14 – STOCK BASED COMPENSATION (continued)
and the Board as a group. The risk-free interest rate is the Treasury rate on the date of grant corresponding to the expected life period of the stock option.
There were no stock option grants or modifications in 2023, 2022 or 2021. As of December 31, 2023, there was no unrecognized compensation cost related to non-vested stock options granted under the plan.
There were no options exercised during the years ended December 31, 2023, 2022 or 2021.
Restricted Stock Awards and Units
The fair value of restricted stock awards and units is the closing price of the Company’s common stock on the date of grant adjusted for the present value of expected dividends. The restricted stock awards fully vest after one year or more of service, determined at the grant date, with the exception of 13,000 shares granted to non-employee directors of the Board included as vested, below, which vested on the grant date.
A summary of the changes in the Company’s non-vested shares for the year follows:
Nonvested Shares Shares Weighted-Average
Grant-Date
Fair Value
Nonvested at January 1, 2023 23,065 $ 76.13
Granted 40,109 63.36
Vested ( 14,026 ) 61.84
Forfeited ( 1,808 ) 73.32
Nonvested at December 31, 2023 47,340 $ 69.65
As of December 31, 2023, there was $ 862,000 unrecognized compensation cost related to non-vested shares granted under the plan. The cost is expected to be recognized over a weighted period of 1.7 years. The total fair value of shares vested during the years ended December 31, 2023, 2022 and 2021 was $ 862,000 , $ 1.2 million and $ 1.1 million, respectively.
Performance Stock Units
The fair value of stock awards is the closing price of the Company’s common stock on the date of grant, adjusted for the present value of expected dividends. The expected dividend rate is assumed to be the most recent dividend rate declared by the Board on the grant date. The grant date fair value of stock awards is assumed at the target payout rate. The stock awards fully vest on the third anniversary of the grant date. The 2022-2024, 2021-2023 and 2020-2022 Long-Term Incentive Plans must be paid in stock and have performance conditions which include revenue growth, diluted earnings per share growth and average return on beginning equity. Shares granted below include the number of shares assumed granted based on actual performance criteria of the 2022-2024, 2021-2023 and 2020-2022 Long-Term Incentive Plans at December 31, 2023.
Nonvested Shares Shares Weighted-Average
Grant-Date
Fair Value
Nonvested at January 1, 2023 304,621 $ 57.79
Granted, net ( 33,137 ) 69.56
Vested ( 107,789 ) 45.65
Forfeited ( 7,489 ) 68.32
Nonvested at December 31, 2023 156,206 $ 63.18
As of December 31, 2023, there wa s $ 2.1 million of total unrecognized compensation cost related to non-vested shares granted under the plan. The cost is expected to be recognized over a weighted period of 1.5 years. The total fair value of shares vested during the year ended December 31, 2023, 2022 and 2021 was $ 7.8 million , $ 4.3 million and $ 5.2 million, respectively. During the years ended December 31, 2023, 2022 and 2021, 107,789 , 53,670 and 83,216 shares vested, respectively.
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NOTE 15 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company became a financial holding company effective May 30, 2012 and is now required to be well capitalized under the applicable regulatory guidelines. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet certain heightened minimum capital requirements can initiate certain mandatory, and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
The capital adequacy requirements were heightened by the Basel III Rule, previously defined, which went into effect on January 1, 2015 with a phase-in period for certain aspects of the rule through 2019. Under the Basel III rule, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.00 % for 2015 to 2.50 % by 2019. The capital conservation buffer for 2023 and 2022 was 2.50 %. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. The quantitative measures established by regulation to ensure capital adequacy that were in effect on December 31, 2023 and 2022, require the Company and the Bank to maintain minimum capital amounts and ratios (set forth in the following table) of Total, Tier I and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulation), and of Tier I capital (as defined in the regulation) to average assets (as defined). Management believes, as of the years ended December 31, 2023 and 2022, that the Company and the Bank met all capital adequacy requirements to which they are subject.
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NOTE 15 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (continued)
As of December 31, 2023, the most recent notification from the federal regulators categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum Total risk-based capital ratios, Tier I risk-based capital ratios and Tier I leverage capital ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Company and the Bank’s category.
Actual Minimum Required
For Capital
Adequacy Purposes For Capital Adequacy
Purposes Plus Capital
Conservation Buffer Minimum "Required" to
Be "Well" Capitalized
Under "Prompt" Corrective
Action Regulations
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2023
Total Capital (to Risk Weighted Assets)
Consolidated $ 870,390 15.47 % $ 450,211 8.00 % $ 590,901 N/A N/A N/A
Bank 852,405 15.16 449,894 8.00 590,486 10.50 % $ 562,367 10.00 %
Tier I Capital (to Risk Weighted Assets)
Consolidated 799,929 14.21 337,658 6.00 478,349 N/A N/A N/A
Bank 781,999 13.91 337,420 6.00 478,012 8.50 449,894 8.00
Common Equity Tier 1 (CET1)
Consolidated 799,929 14.21 253,243 4.50 393,934 N/A N/A N/A
Bank 781,999 13.91 253,065 4.50 393,657 7.00 365,539 6.50
Tier I Capital (to Average Assets)
Consolidated 799,929 11.82 270,636 4.00 270,636 N/A N/A N/A
Bank 781,999 11.58 270,041 4.00 270,041 4.00 337,551 5.00
As of December 31, 2022
Total Capital (to Risk Weighted Assets)
Consolidated $ 821,008 15.07 % $ 435,786 8.00 % $ 571,969 N/A N/A N/A
Bank 801,044 14.74 434,758 8.00 570,620 10.50 % $ 543,448 10.00 %
Tier I Capital (to Risk Weighted Assets)
Consolidated 752,751 13.82 326,840 6.00 463,023 N/A N/A N/A
Bank 732,966 13.49 326,069 6.00 461,930 8.50 434,758 8.00
Common Equity Tier 1 (CET1)
Consolidated 752,751 13.82 245,130 4.50 381,313 N/A N/A N/A
Bank 732,966 13.49 244,551 4.50 380,413 7.00 353,241 6.50
Tier I Capital (to Average Assets)
Consolidated 752,751 11.50 261,859 4.00 261,859 N/A N/A N/A
Bank 732,966 11.22 261,222 4.00 261,222 4.00 326,527 5.00
The Bank is required to obtain the approval of the Indiana Department of Financial Institutions for the payment of any dividend if the total amount of all dividends declared by the Bank during the calendar year, including the proposed dividend, would exceed the sum of the retained net income for the year-to-date combined with the retained net income for the 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. As of December 31, 2023, approximately $ 116.7 million was available to be paid as dividends to the Company by the Bank.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2023. Notwithstanding the availability of funds for dividends, however, the FDIC may prohibit the payment of any dividends by the Bank if the FDIC determines such payment would constitute an unsafe or unsound practice.
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NOTE 16 – OFFSETTING ASSETS AND LIABILITIES
The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at December 31, 2023 and 2022.
2023
Gross
Amounts of
Recognized Assets/
Liabilities Gross
Amounts
Offset in the
Statement
of Financial
Position Net Amounts
presented in
the Statement
of Financial
Position Gross Amounts Not
Offset in the Statement
of Financial Position
(dollars in thousands) Financial
Instruments Cash Collateral
Position Net
Amount
Assets
Interest Rate Swap Derivatives $ 27,189 $ 0 $ 27,189 $ 0 $ ( 25,555 ) $ 1,634
Total Assets $ 27,189 $ 0 $ 27,189 $ 0 $ ( 25,555 ) $ 1,634
Liabilities
Interest Rate Swap Derivatives $ 27,190 $ 0 $ 27,190 $ 0 $ ( 90 ) $ 27,100
Total Liabilities $ 27,190 $ 0 $ 27,190 $ 0 $ ( 90 ) $ 27,100
2022
Gross
Amounts of
Recognized
Assets/
Liabilities Gross
Amounts
Offset in the
Statement of
Financial
Position Net Amounts
presented in
the Statement
of Financial
Position Gross Amounts Not
Offset in the Statement
of Financial Position
(dollars in thousands) Financial
Instruments Cash Collateral
Position Net
Amount
Assets
Interest Rate Swap Derivatives $ 36,920 $ 0 $ 36,920 $ 0 $ ( 34,185 ) $ 2,735
Total Assets $ 36,920 $ 0 $ 36,920 $ 0 $ ( 34,185 ) $ 2,735
Liabilities
Interest Rate Swap Derivatives $ 36,921 $ 0 $ 36,921 $ 0 $ ( 90 ) $ 36,831
Total Liabilities $ 36,921 $ 0 $ 36,921 $ 0 $ ( 90 ) $ 36,831
If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.
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NOTE 17 – COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
During the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended revolving lines of credit. Amounts as of the years ended December 31, 2023 and 2022, were as follows:
2023 2022
(dollars in thousands) Fixed
Rate Variable Rate Fixed
Rate Variable Rate
Commercial loan lines of credit $ 96,814 $ 2,373,830 $ 140,022 $ 2,129,211
Standby letters of credit 0 51,383 0 48,406
Real estate mortgage loans 302 4,271 377 5,668
Real estate construction mortgage loans 0 4,271 2,212 9,043
Home equity mortgage open-ended revolving lines 0 364,928 0 341,622
Consumer loan open-ended revolving lines 0 26,870 0 25,916
Total $ 97,116 $ 2,825,553 $ 142,611 $ 2,559,866
The index on variable rate commercial loan commitments is principally the national prime rate. Interest rate ranges on commitments and open-ended revolving lines of credit for years ended December 31, 2023 and 2022, were as follows:
2023 2022
Fixed
Rate Variable
Rate Fixed
Rate Variable
Rate
Commercial loan 1.00 - 14.50 %
1.63 - 14.50 %
1.99 - 14.50 %
1.63 - 13.00 %
Real estate mortgage loan 7.38 %
4.63 - 13.50 %
0.00 - 7.00 %
3.13 - 12.50 %
Consumer loan open-ended revolving line 15.00 %
8.50 - 15.00 %
15.00 %
7.00 - 15.00 %
Commitments, excluding open-ended revolving lines, generally have fixed expiration dates of one year or less. Open-ended revolving lines are monitored for proper performance and compliance on a monthly basis. Since many commitments expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company follows the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as it follows for those loans that are recorded in its financial statements.
The Company’s exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments.
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NOTE 18 – PARENT COMPANY STATEMENTS
The Company operates primarily in the banking industry, which accounts for substantially all of its revenues, operating income and assets. Presented below are parent only financial statements:
CONDENSED BALANCE SHEETS
December 31,
(dollars in thousands) 2023 2022
ASSETS
Deposits with Lake City Bank $ 15,239 $ 386
Deposits with other depository institutions 1,887 1,954
Cash 17,126 2,340
Investments in banking subsidiary 631,774 549,031
Investments in other subsidiaries 0 3,845
Other assets 3,578 13,819
Total assets $ 652,478 $ 569,035
LIABILITIES
Dividends payable and other liabilities $ 2,774 $ 237
STOCKHOLDERS’ EQUITY 649,704 568,798
Total liabilities and stockholders’ equity $ 652,478 $ 569,035
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
(dollars in thousands) 2023 2022 2021
Dividends from Lake City Bank $ 46,263 $ 40,590 $ 47,355
Dividends from non-bank subsidiaries 1,525 1,300 1,035
Other income 5 1 3
Interest expense 0 0 ( 7 )
Miscellaneous expense ( 4,768 ) ( 8,795 ) ( 8,133 )
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 43,025 33,096 40,253
Income tax benefit 1,957 2,770 2,360
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 44,982 35,866 42,613
Equity in undistributed income of subsidiaries 48,785 67,951 53,120
NET INCOME $ 93,767 $ 103,817 $ 95,733
COMPREHENSIVE INCOME (LOSS) $ 127,495 $ ( 101,199 ) $ 84,082
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NOTE 18 – PARENT COMPANY STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(dollars in thousands) 2023 2022 2021
Cash flows from operating activities:
Net income $ 93,767 $ 103,817 $ 95,733
Adjustments to net cash from operating activities:
Equity in undistributed income of subsidiaries ( 48,785 ) ( 67,951 ) ( 53,120 )
Other changes 16,601 6,157 5,177
Net cash from operating activities 61,583 42,023 47,790
Cash flows from investing activities:
Return of capital from subsidiary 3,602 0 0
Cash flows from investing activities 3,602 0 0
Cash flows from financing activities:
Proceeds from (payments on) short-term borrowings 0 0 ( 10,500 )
Payments related to equity incentive plans ( 3,135 ) ( 1,780 ) ( 1,914 )
Purchase of treasury stock ( 575 ) ( 579 ) ( 559 )
Sales of treasury stock 405 221 115
Dividends paid ( 47,094 ) ( 40,838 ) ( 34,640 )
Cash flows from financing activities ( 50,399 ) ( 42,976 ) ( 47,498 )
Net increase (decrease) in cash and cash equivalents 14,786 ( 953 ) 292
Cash and cash equivalents at beginning of the year 2,340 3,293 3,001
Cash and cash equivalents at end of the year $ 17,126 $ 2,340 $ 3,293
NOTE 19 – EARNINGS PER SHARE
Following are the factors used in the earnings per share computations:
(dollars in thousand except share and per share data) 2023 2022 2021
Basic earnings per common share:
Net income $ 93,767 $ 103,817 $ 95,733
Weighted-average common shares outstanding 25,604,751 25,528,328 25,475,994
Basic earnings per common share $ 3.67 $ 4.07 $ 3.76
Diluted earnings per common share:
Net income $ 93,767 $ 103,817 $ 95,733
Weighted-average common shares outstanding for basic earnings per common share 25,604,751 25,528,328 25,475,994
Add: Dilutive effect of assumed exercises of stock options and awards 118,414 184,210 144,111
Average shares and dilutive potential common shares 25,723,165 25,712,538 25,620,105
Diluted earnings per common share $ 3.65 $ 4.04 $ 3.74
There were no antidilutive stock options for 2023, 2022 and 2021.
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NOTE 20 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the years ended December 31, 2023 and 2022, all shown net of tax:
(dollars in thousands) Unrealized
Gains and
(Losses) on
Available-for-Sales
Securities Defined
Benefit
Pension
Items Total
Balance at January 1, 2023 $ ( 188,154 ) $ ( 769 ) $ ( 188,923 )
Other comprehensive income (loss) before reclassification 32,105 ( 10 ) 32,095
Amounts reclassified from accumulated other comprehensive income (loss) 1,589 44 1,633
Net current period other comprehensive income (loss) 33,694 34 33,728
Balance at December 31, 2023 $ ( 154,460 ) $ ( 735 ) $ ( 155,195 )
(dollars in thousands) Unrealized
Gains and
(Losses) on
Available-for-Sales
Securities Defined
Benefit
Pension
Items Total
Balance at January 1, 2022 $ 17,056 $ ( 963 ) $ 16,093
Other comprehensive income (loss) before reclassification ( 206,392 ) 86 ( 206,306 )
Amounts reclassified from accumulated other comprehensive income (loss) 1,182 108 1,290
Net current period other comprehensive income (loss) ( 205,210 ) 194 ( 205,016 )
Balance at December 31, 2022 $ ( 188,154 ) $ ( 769 ) $ ( 188,923 )
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NOTE 20 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (continued)
Reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2023, 2022 and 2021 are as follows:
Details about
Accumulated Other
Comprehensive
Income Components Amount
Reclassified From
Accumulated Other
Comprehensive
Income (Loss) Affected Line Item
in the Statement
Where Net
Income is Presented
2023
(dollars in thousands)
Amortization of unrealized losses on held-to-maturity securities $ ( 1,987 ) Interest income
Realized gains and (losses) on available-for-sale securities ( 25 ) Net securities gains (losses)
Tax effect 423 Income tax expense
Subtotal ( 1,589 ) Net of tax
Amortization of defined benefit pension items (1)
( 59 ) Salaries and employee benefits
Tax effect 15 Income tax expense
Subtotal ( 44 ) Net of tax
Total reclassifications for the period $ ( 1,633 ) Net income
2022
(dollars in thousands)
Amortization of unrealized losses on held-to-maturity securities $ ( 1,518 ) Interest income
Realized gains and (losses) on available-for-sale securities 21 Net securities gains (losses)
Tax effect 315 Income tax expense
Subtotal ( 1,182 ) Net of tax
Amortization of defined benefit pension items (1)
( 144 ) Salaries and employee benefits
Tax effect 36 Income tax expense
Subtotal ( 108 ) Net of tax
Total reclassifications for the period $ ( 1,290 ) Net income
2021
(dollars in thousands)
Realized gains and (losses) on available-for-sale securities $ 797 Net securities gains (losses)
Tax effect ( 167 ) Income tax expense
Subtotal 630 Net of tax
Amortization of defined benefit pension items (1)
( 242 ) Salaries and employee benefits
Tax effect 60 Income tax expense
Subtotal ( 182 ) Net of tax
Total reclassifications for the period $ 448 Net income
(1) Included in the computation of net pension plan expense as more fully discussed in Note 10 – Pension and Other Postretirement Plans.
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NOTE 21 – SELECTED QUARTERLY DATA (UNAUDITED) (in thousands except per share data)
2023 4th
Quarter 3rd
Quarter 2nd
Quarter 1st
Quarter
Interest income $ 90,942 $ 88,623 $ 84,482 $ 79,220
Interest expense 42,343 40,230 35,958 27,701
Net interest income 48,599 48,393 48,524 51,519
Provision for credit losses 300 400 800 4,350
Net interest income after provision 48,299 47,993 47,724 47,169
Noninterest income 17,208 10,835 11,501 10,314
Noninterest expense 29,445 29,097 42,734 29,434
Income tax expense 6,436 4,479 1,880 3,771
Net income $ 29,626 $ 25,252 $ 14,611 $ 24,278
Basic earnings per common share $ 1.16 $ 0.99 $ 0.57 $ 0.95
Diluted earnings per common share $ 1.16 $ 0.98 $ 0.57 $ 0.94
2022 4th
Quarter 3rd
Quarter 2nd
Quarter 1st
Quarter
Interest income $ 75,353 $ 62,558 $ 53,622 $ 48,034
Interest expense 18,516 10,066 4,944 3,154
Net interest income 56,837 52,492 48,678 44,880
Provision for credit losses 8,958 0 0 417
Net interest income after provision 47,879 52,492 48,678 44,463
Noninterest income 10,519 10,164 10,492 10,687
Noninterest expense 27,434 27,894 27,913 26,969
Income tax expense 4,987 6,237 5,584 4,539
Net income $ 25,977 $ 28,525 $ 25,673 $ 23,642
Basic earnings per common share $ 1.02 $ 1.12 $ 1.00 $ 0.93
Diluted earnings per common share $ 1.01 $ 1.11 $ 1.00 $ 0.92
NOTE 22 – LEASES
The Company leases certain office facilities under long-term operating lease agreements. The leases expire at various dates through 2037 and some include renewal options. Many of these leases require the payment of property taxes, insurance premiums, maintenance, utilities and other costs. In many cases, rentals are subject to increase in relation to a cost-of-living index. The Company accounts for lease and non-lease components together as a single lease component. The Company determines if an arrangement is a lease at inception. Operating leases are recorded as a right-of-use (“ROU”) lease assets and are included in other assets on the consolidated balance sheet. The Company’s corresponding lease obligations are included in other liabilities on the consolidated balance sheet. ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
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NOTE 22 - LEASES (continued)
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as practical expedient of the lease standard.
The following is a maturity analysis of the operating lease liabilities as of December 31, 2023:
Years ending December 31, (in thousands) Operating Lease
Obligation
2024 $ 744
2025 756
2026 731
2027 753
2028 593
2029 and thereafter 1,591
Total undiscounted lease payments 5,168
Less imputed interest ( 473 )
Lease liability $ 4,695
Right-of-use asset $ 4,695
Year Ended Year Ended Year Ended
December 31, 2023 December 31, 2022 December 31, 2021
Lease cost
Operating lease cost $ 724 $ 667 $ 536
Short-term lease cost 18 22 24
Total lease cost $ 742 $ 689 $ 560
Other information
Operating cash outflows from operating leases $ 724 $ 667 $ 536
Weighted-average remaining lease term - operating leases 6.3 7.3 7.9
Weighted average discount rate - operating leases 2.5 % 2.5 % 2.8 %
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Within the prior two years of the date of the most recent financial statement, there have been no changes in or disagreements with the Company’s accountants.