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What changed in LAKELAND FINANCIAL CORP's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of LAKELAND FINANCIAL CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+410 added−377 removedSource: 10-K (2024-02-21) vs 10-K (2023-02-22)

Top changes in LAKELAND FINANCIAL CORP's 2023 10-K

410 paragraphs added · 377 removed · 287 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

70 edited+13 added−20 removed108 unchanged
Biggest changeActual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation: • the effects of future economic, business and market conditions and changes, including prevailing interest rates, the rate of inflation and the effects of the COVID-19 pandemic; • governmental monetary and fiscal policies and the impact the current economic environment will have on these; • the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, availability of wholesale funding and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities; • changes in borrowers’ credit risks and payment behaviors; • the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates; • the effects of disruption and volatility in capital markets on the value of our investment portfolio; • the risk of labor availability, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector; • changes in the prices, values and sales volumes of residential and commercial real estate; • changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages; • changes in the availability and cost of credit and capital in the financial markets; • the outcome of pending litigation and other claims we may be subject to from time to time; • the anticipated phase out of the remaining LIBOR tenors by mid-2023 and implementation of a new reference rate or rates; • the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; • the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators; • risk of cyber-security attacks that could result in damage to the Company’s or third-party service providers' networks or data of the Company; • changes in technology or products that may be more difficult or costly, or less effective than anticipated; • the effects of any employee or customer fraud; 5 Table of Contents • the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; • changes in accounting policies, rules and practices; • the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; and • the risks noted in the Risk Factors discussed under Item 1A of Part 1 of this Annual Report on Form 10-K, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the Securities and Exchange Commission (the “SEC”).
Biggest changeActual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation: • the effects of economic, business and market conditions and changes, particularly in our Indiana market area, including prevailing interest rates and the rate of inflation; • governmental monetary and fiscal policies; • the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities; • changes in borrowers’ credit risks and payment behaviors; • the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates; • the effects of disruption and volatility in capital markets on the value of our investment portfolio; • the performance of our commercial real estate loan portfolio, including the effects of the elevated interest rate environment, the strength of the commercial real estate market in our Indiana markets, and recent changes in retail and office usage patterns; • risk of cyber-security attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company; • the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; • the risks related to the recent failures of First Republic Bank, Silicon Valley Bank and Signature Bank, including the effects already recognized and increased deposit volatility; • the outcome of pending litigation and other claims we may be subject to from time to time; • the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, and their application by our regulators; • changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages; • changes in the prices, values and sales volumes of residential real estate; • the risk of labor shortages, trade policy and tariffs, as well as supply chain constraints could impact loan demand from the manufacturing sector; • the effects of fraud by or affecting employees, customers or third parties; 6 Table of Contents • the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; • changes in the availability and cost of credit and capital in the financial markets; • changes in technology or products that may be more difficult or costly, or less effective than anticipated; • the risks related to mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; • changes in accounting policies, rules and practices; and • the risks noted in the Risk Factors discussed under Item 1A of Part 1 of this Annual Report on Form 10-K, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the Securities and Exchange Commission (the "SEC").
The Basel III Rule . In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”).
In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”).
Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern.
Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity 10 Table of Contents and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.
In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding 9 Table of Contents company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above. As of December 31, 2022: (i) the Bank was not subject to a directive from the Federal Reserve to increase its capital and (ii) the Bank was well-capitalized, as defined by Federal Reserve regulations.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above. As of December 31, 2023: (i) the Bank was not subject to a directive from the Federal Reserve to increase its capital and (ii) the Bank was well-capitalized, as defined by Federal Reserve regulations.
As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2022. Notwithstanding the availability of funds for dividends, however, the Federal Reserve and the DFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice.
As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2023. Notwithstanding the availability of funds for dividends, however, the Federal Reserve and the DFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice.
At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits.
At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. For this purpose, the reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits.
The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital.
The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: 14 Table of Contents (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital.
Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but, in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments.
Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but, in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common 8 Table of Contents Equity Tier 1 minority interests subject to certain regulatory adjustments.
From courses to improve technical skills, product knowledge, and customer service to classes focused on an employee’s well-being, like personal financial planning and benefits education, Lake City University supports and promotes the personal and professional growth of all the Bank employees.
From courses to improve technical skills, product knowledge, and customer service to classes focused on well-being, like personal financial planning and benefits education, Lake City University supports and promotes the personal and professional growth of all the Bank employees.
The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets.
The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets.
The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers.
Privacy and Cybersecurity . The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers.
The Bank is required to obtain the approval of the DFI for the payment of any dividend if the total of all dividends declared by the Bank during the calendar year, including the proposed dividend, would exceed the sum of the Bank's net income for the year-to-date combined with its retained net income for the previous two years.
The Bank is required to obtain the approval of the DFI for the payment of any dividend if the total of all dividends declared by the Bank during the calendar year, including the proposed dividend, would exceed the sum of the Bank's net income for the year-to-date combined with its retained net income for the 12 Table of Contents previous two years.
The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to internal 12 Table of Contents controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, beginning with a discussion of the impact of the COVID-19 pandemic on the banking industry.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, ending with a discussion of the impact of the COVID-19 pandemic on the banking industry.
Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests.
Because the global financial crisis was in part a liquidity crisis, Basel III includes a liquidity framework that requires the largest FDIC-insured institutions to measure their liquidity against specific liquidity tests.
All such documents filed with the SEC are also available for free on the SEC’s website (www.sec.gov). The Company’s Articles of Incorporation, Bylaws, Code of Conduct and the charters of the various committees of the Company’s board of directors are also available on the Investor Relations section of the website at investors.lakecitybank.com.
All such documents filed with or furnished to the SEC are also available for free on the SEC’s website (www.sec.gov). The Company’s Articles of Incorporation, Bylaws, Code of Conduct and the charters of the various committees of the Company’s board of directors are also available on the Investor Relations section of the website at investors.lakecitybank.com.
In addition, under the Basel III Rule, institutions that seek the freedom to pay unrestricted dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “The Role of Capital” above. State Bank Investments and Activities.
In addition, under the Basel III Rule, institutions that want to pay unrestricted dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “The Role of Capital” above. State Bank Investments and Activities.
The CFPB has from time to time released additional rules as to qualified mortgages and the borrower’s ability to repay, most recently in July of 2021. The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs. 14 Table of Contents
The CFPB has from time to time released additional rules as to qualified mortgages and the borrower’s ability to repay, most recently in July of 2021. The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.
These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act ("CRA") for certain pandemic-related loans, investments and public service.
These included, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the CRA for certain pandemic-related loans, investments and public service.
Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. 10 Table of Contents Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries.
Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries.
As an Indiana-chartered FDIC- insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DFI, the chartering authority for Indiana banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of the DIF. Deposit Insurance .
As an Indiana-chartered FDIC- insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement 11 Table of Contents requirements of the DFI, the chartering authority for Indiana banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of the DIF. Deposit Insurance .
We have elected to operate as a financial holding company. In order to maintain our status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have at least a satisfactory CRA rating.
We have elected to operate as a financial holding company. In order to maintain our status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have at least a satisfactory Community Reinvestment Act ("CRA") rating.
The Company is not dependent upon any single industry or customer. At December 31, 2022, Lakeland Financial had consolidated total assets of $6.4 billion and was the seventh largest independent bank holding company headquartered in the State of Indiana. Company’s Business .
The Company is not dependent upon any single industry or customer. At December 31, 2023, Lakeland Financial had consolidated total assets of $6.5 billion and was the seventh largest independent bank holding company headquartered in the State of Indiana. Company’s Business .
These factors have come into consideration in the industry as a result of the COVID-19 pandemic. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.
These factors have come into consideration in the industry as a result of the COVID-19 pandemic and United States banking crisis of 2023. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.
Our competitors include national, regional and community banks, e-commerce and other Fintech or nonbanking companies offering financial services, as well as thrifts, credit unions, farm credit services, finance companies, personal loan companies, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers and mutual fund companies.
Our competitors include national, regional and community banks, e-commerce and other Fintech or nonbanking companies offering financial services, private credit funds, thrifts, credit unions, farm credit services, finance companies, personal loan companies, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers and mutual fund companies.
The FDIC also acted to mitigate the deposit insurance assessment effects of participating in the Paycheck Protection Program ("PPP") and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.
The FDIC also acted to mitigate the deposit insurance assessment effects of participating in the Paycheck Protection Program ("PPP") and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility. 15 Table of Contents
Over the past twenty-five years, the Company has primarily targeted growth in the larger cities located in Northern Indiana and the Indianapolis market in Central Indiana and areas that are two hours from a Lake City Bank branch. The Company believes these areas offer above average growth potential with attractive demographics and potential for commercial lending and deposit gathering opportunities.
The Company has primarily targeted growth in the larger cities located in Northern Indiana and the Indianapolis market in Central Indiana and areas that are two hours from a Lake City Bank branch. The Company believes these areas offer above average growth potential with attractive demographics and potential for commercial lending and deposit gathering opportunities.
For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points.
For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are based on examination ratings and financial ratios. The total base assessment rates currently range from 2.5 basis points to 32 basis points.
Further, any banking organization experiencing or anticipating 8 Table of Contents significant growth would be expected to maintain capital ratios, including tangible capital positions ( i.e. , Tier 1 Capital less all intangible assets), well above the minimum levels.
Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions ( i.e. , Tier 1 Capital less all intangible assets), well above the minimum levels.
Then, in May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Regulatory Relief Act”) was enacted by Congress in part to provide regulatory relief for community banks and their holding companies.
Then, in May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Regulatory Relief Act”) was enacted by Congress in part to provide regulatory relief for community banks and 7 Table of Contents their holding companies.
As of December 31, 2022, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized. We are also in compliance with the capital conservation buffer. Prompt Corrective Action .
As of December 31, 2023, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized. We are also in compliance with the capital conservation buffer. 9 Table of Contents Prompt Corrective Action .
To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds.
To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. We believe these reforms are favorable to our operations.
On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.
On July 10, 2023, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks and an easing of CRE underwriting standards.
In 2022, 153 employees were promoted and 170 employees were hired externally, demonstrating a commitment to the professional development of Lake City Bank employees. In addition to the substantial investment in employee professional development, the Bank’s benefit and compensation programs are designed to ensure we recruit and retain top talent.
In 2023, 168 employees were promoted and 144 employees were hired externally, demonstrating a commitment to the professional development of Lake City Bank employees. In addition to the substantial investment in employee professional development, the Bank’s benefit and compensation programs are designed to ensure we recruit and retain top talent.
The Bank offers employees a comprehensive health benefits package, a 401(k) match of up to 6% of an employee’s salary to encourage retirement savings and tuition reimbursement that 28 employees took advantage of in 2022. The Bank also structures its bonus program for officers to create meaningful performance-based incentives.
The Bank offers employees a comprehensive health benefits package, a 401(k) match of up to 6% of an employee’s salary to encourage retirement savings, and tuition reimbursement that 22 employees used in 2023. The Bank also structures its bonus program for officers to create meaningful performance-based incentives.
The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. As of December 31, 2022, the Bank had 52 offices in fifteen counties, including 46 offices in northern Indiana and six offices in central Indiana, in the Indianapolis market.
The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. As of December 31, 2023, the Bank had 53 offices in fifteen counties, including 46 offices in Northern Indiana and seven offices in Central Indiana, in the Indianapolis market.
In 2023 the effort continues with a host of interactive, informative courses being offered to continue the learning process around these important issues. Eighty-four percent of our employees identify as women or people of color.
In 2023, these efforts continued with a host of interactive, informative courses being offered to continue the learning process around these important issues. Eighty-three percent of our employees identify as women or people of color.
The Bank team is 652 people strong, including 610 full-time, 30 part-time, and 12 seasonal/temporary employees as of December 31, 2022. Diversity and Inclusiveness. The Bank is committed to social and governance responsibility, and in 2020, the management team added “inclusivity” as the eighth core value defining our organizational culture.
The Bank team is 655 people strong, including 608 full-time, 35 part-time, and 12 seasonal/temporary employees as of December 31, 2023. Diversity and Inclusiveness. The Bank is committed to social and governance responsibility, and in 2020, the management team added “inclusivity” as the eighth core value defining our organizational culture.
As a bank holding company, we are registered with, and subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”).
Supervision and Regulation of the Company General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, we are registered with, and subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”).
We believe these reforms are favorable to our operations. 6 Table of Contents The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business.
The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business.
Lakeland Financial is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. Lakeland Financial owns all of the outstanding stock of the Bank, a full-service commercial bank organized under Indiana law.
Lakeland Financial is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. Lakeland Financial owns all of the outstanding stock of the Bank, a full-service commercial bank organized under Indiana law. Lakeland Financial conducts no business except that which is incidental to its ownership of the outstanding stock of the Bank.
CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods.
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities.
Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects our earnings capabilities.
The Role of Capital Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects our earnings capabilities.
Based on the Bank’s loan portfolio as of December 31, 2022, it did not exceed the 300% guideline for commercial real estate loans nor did it exceed the 100% guideline for construction and land development loans. Consumer Financial Services.
Based on the Bank’s loan portfolio as of December 31, 2023, it did not exceed the 300% guideline for commercial real estate loans nor did it exceed the 100% guideline for construction and land development loans. Also, commercial real estate loans have not increased by 50 percent or more during the previous 36 months. Consumer Financial Services.
During the year ended December 31, 2022, the Bank paid supervisory assessments to the DFI totaling approximately $255,000. 11 Table of Contents Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “The Role of Capital” above. Liquidity Requirements.
The amount of the assessment is calculated on the basis of the Bank’s total assets. During the year ended December 31, 2023, the Bank paid supervisory assessments to the DFI totaling approximately $314,000. Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “The Role of Capital” above.
The USA PATRIOT Act, along with other legal authority, mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.
The laws require financial services companies to have policies and procedures with respect to measures designed to address: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities. Concentrations in Commercial Real Estate.
There are certain regulatory restrictions on the extent to which subsidiary banks can pay dividends or otherwise supply funds to their holding companies. See “Supervision and Regulation of the Company” below for further discussion of these matters. Lakeland Financial’s executive offices are located at 202 East Center Street, Warsaw, Indiana 46580, and its telephone number is (574) 267-6144. Bank’s Business.
There are certain regulatory restrictions on the extent to which subsidiary banks can pay dividends or otherwise supply funds to their holding companies. See “Supervision and Regulation of the Company” below for further discussion of these matters. Bank’s Business.
Founded in 1999, Lake City University is dedicated to helping employees thrive professionally and personally. In 2022, the Bank employees averaged 26.34 hours per employee of instruction through the program.
Building and strengthening this positive workplace culture starts with Lake City University. Founded in 1999, Lake City University is dedicated to helping employees thrive professionally and personally. In 2023, the Bank employees averaged 23.47 hours of instruction per employee through the program.
Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.
Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. We may elect the CBLR framework at any time but have not currently determined to do so.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money.
They are designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money.
Employee Engagement and Development. A positive workplace culture is vital to the Bank’s success. By supporting, respecting, engaging, and appreciating employees, the Bank has built a team well-equipped to show the same commitment to its customers. Building and strengthening this positive workplace culture starts with Lake City University.
Additionally, four of our 11 board members identify as women or people of color. Employee Engagement and Development. A positive workplace culture is vital to the Bank’s success. By supporting, respecting, engaging, and appreciating employees, the Bank has built a team well-equipped to show the same commitment to its customers.
The accords recognized that bank assets for the purpose of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations. 7 Table of Contents Following the global financial crisis, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.
Following the global financial crisis, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis. The Basel III Rule .
The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk. Bank regulators have identified key risk themes for 2023 as: credit risk management given the current interest rate environment and persistent inflationary concerns, cybersecurity risk, and commercial and residential real estate concentration risk management.
Bank regulators have identified key risk 13 Table of Contents themes for 2023 as: credit risk management given the current interest rate environment and persistent inflationary concerns, cybersecurity risk, and commercial and residential real estate concentration risk management.
SUPERVISION AND REGULATION General FDIC-insured institutions, like the Bank, their holding companies and their affiliates are extensively regulated under federal and state law.
The Company's website is not incorporated by reference into this Annual Report on Form 10-K. SUPERVISION AND REGULATION General FDIC-insured institutions, like the Bank, their holding companies and their affiliates are extensively regulated under federal and state law.
Despite this local-market, community-based focus, the Bank offers many of the products and services available at much larger regional and national competitors. While our strategy encompasses all phases of traditional community banking, including consumer lending and wealth advisory and trust services, we focus on building expansive commercial relationships and developing retail and commercial deposit gathering strategies through relationship-based client services.
While our strategy encompasses all phases of traditional community banking, including consumer lending and wealth advisory and trust services, we focus on building expansive commercial relationships and developing retail and commercial deposit gathering strategies through relationship-based client services. Substantially all of the Bank’s assets and income are located in and derived from the United States.
At present, women comprise 59% of the Bank’s officers (267 officers – 158 women), 33% (8 of 25 members) of Senior Leadership Council (which includes those with the title of “Senior Vice President” and above) and 44% (4 of 9 members) of the executive Management Committee. Additionally, three of our 11 board members identify as women or people of color.
At present, women represent 62% of the Bank’s officers (277 officers – 171 women), 38% (9 of 24 members) of the Senior Leadership Council (which includes those with the title of “Senior Vice President” and above) and 44% (4 of 9 members) of the executive Management Committee.
The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits. The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory required minimum.
The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits. In the semi-annual update in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35% by September 30, 2028, the statutory deadline.
On October 18, 2022, the FDIC adopted a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023.
Based on this update, the FDIC approved an increase in initial base deposit insurance assessment rate schedules by two basis points, applicable to all insured depository institutions. The increase was effective on January 1, 2023, applicable to the first quarterly assessment of the 2023 assessment (January 1 through March 31, 2023).
The Bank’s local market orientation is reflected in its regional management, which divides the Bank’s market area into five distinct geographic regions, each headed by a retail and commercial regional manager. This arrangement allows decision making to be as close to the customer as possible and enhances responsiveness to local banking needs.
The Bank operates as a community-based financial services organization augmented by experienced, centralized support in select critical areas. The Bank’s local market orientation is reflected in its regional management, which divides the Bank’s market area into five distinct geographic regions, each headed by a retail and commercial regional manager.
The agencies will also be monitoring banks for their transition away from LIBOR (London Interbank Offered Rate) as a reference rate, Bank Secrecy Act/anti-money laundering (“AML”) compliance, cybersecurity, third-party and change management, climate and environmental, social and governance initiatives, digital assets and CRA performance.
The agencies will also be monitoring banks for Bank Secrecy Act/anti-money laundering (“AML”) compliance, cybersecurity, third-party and change management, climate and environmental, social and governance initiatives, digital assets and CRA performance. The Bank is expected to have active board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls.
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.
The Company is not a party to any collective bargaining agreements, and employee relations are considered strong. 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.
On January 31, 2022, the Bank opened its 52 nd branch in downtown Elkhart. The Bank’s business strategy is focused on building long-term relationships with its customers based on in person, top-quality service, high ethical standards and safe and sound lending. The Bank operates as a community-based financial services organization augmented by experienced, centralized support in select critical areas.
On April 10, 2023, the Bank opened its 53 rd branch in the 16 Tech Innovation District on the northwest side of Indianapolis. The Bank’s business strategy is focused on building long-term relationships with its customers based on in person, top-quality service, high ethical standards and safe and sound lending.
The Company has opened eight de novo branches in the past eight years and plans to continue expansion in the Indianapolis market and additional markets that are in close proximity to the Company's Indiana footprint.
The Company plans to continue its organic expansion by capturing increased share in existing markets of operation and by growing its branch network in the Indianapolis market and in additional markets that are in close proximity to the Company's footprint.
In this tight labor market, the Company has focused on hiring and retaining talented employees, which has increased compensation expense during 2022. 4 Table of Contents Forward-looking Statements This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law.
These programs, combined with an intentional focus to create a positive, values-based culture, ensures the Bank team will continue as the acknowledged and recognized leader in Indiana community banking. 5 Table of Contents Forward-looking Statements This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law.
During this period, the Company has grown its assets from $286 million to $6.4 billion, a compound annual growth rate of 10%. Mergers and acquisitions have not played a role in this growth as the Company’s expansion strategy has been driven by organic growth.
Since 1990, the Company has expanded from 17 offices in four Indiana counties to 53 offices in fifteen Indiana counties primarily through de novo branching. During this period, the Company has grown its assets from $286 million to $6.5 billion, a compound annual growth rate of 10%.
Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable operating segment. 3 Table of Contents Expansion Strategy. Since 1990, the Company has expanded from 17 offices in four Indiana counties to 52 offices in fifteen Indiana counties primarily through de novo branching.
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. 4 Table of Contents Expansion Strategy.
Supervisory Assessments . All Indiana banks are required to pay supervisory assessments to the DFI to fund the operations of that agency. The amount of the assessment is calculated on the basis of the Bank’s total assets.
The base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits for the December 31, 2022 reporting period, adjusted to exclude the first $5 billion in estimated uninsured deposits. Supervisory Assessments . All Indiana banks are required to pay supervisory assessments to the DFI to fund the operations of that agency.
Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors.
Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to meet financial obligations, such as deposits or other funding sources. Banks are required to implement liquidity risk management frameworks that ensure they maintain sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events.
Removed
Lakeland Financial conducts no business except that which is incident to its ownership of the outstanding stock of the Bank and the operation of the Bank.
Added
This arrangement allows decision making to be as close to the customer as possible and enhances responsiveness to local banking needs. Despite this local-market, community-based focus, the Bank offers many of the products and services available at much larger regional and national competitors.
Removed
Substantially all of the Bank’s assets and income are located in and derived from the United States. The Company is not a party to any collective bargaining agreements, and employee relations are considered good. Operating Segment.
Added
Mergers and acquisitions have played an insignificant role as the Company’s expansion strategy over 33 years has been exclusively the result of its organic growth strategy.
Removed
These programs, combined with an intentional focus to create a positive, values-based culture ensures the Bank team will continue as the acknowledged and recognized leader in Indiana community banking. Impact of Strong Labor Market . Indiana has a strong labor market, with an unemployment rate of 3.1% as of December 31, 2022. The U.S.
Added
In addition, the Company evaluates new growth markets that are in close proximity to the Company's footprint, such as the nine de novo branches that have been added in the past decade.
Removed
Census Bureau announced Indiana's population grew by 4.7% between 2010 and 2020, and manufacturing jobs increased 1.5% from December 2019 to December 2021.
Added
The accords recognized that bank assets for the purpose of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations.
Removed
Reference is made to the discussion of "Risks Relating to General Economic Conditions in the Risk Factors" section below for information on the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), PPP program and the Federal Reserve’s lending facilities and for discussions of the economic impact of the COVID-19 pandemic.
Added
In addition, because the total cost of the failures of Silicon Valley Bank and Signature Bank was approximately $16.3 billion, the FDIC adopted a special assessment for banks having deposits above $5 billion, at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 (January 1 through March 31, 2024) with an invoice payment date of June 28, 2024, and will continue to collect special assessments for an anticipated total of eight quarterly assessment periods.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

60 edited+31 added−7 removed102 unchanged
Biggest changeIf we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected. 21 Table of Contents We may be subject to a higher consolidated effective tax rate if there is a change in tax laws relating to LCB Investments II, Inc. or if LCB Funding, Inc. fails to qualify as a real estate investment trust.
Biggest changeWe may be subject to a higher consolidated effective tax rate if there is a change in tax laws relating to LCB Investments II, Inc. or if LCB Funding, Inc. fails to qualify as a real estate investment trust. The Bank holds certain investment securities in its wholly owned subsidiary LCB Investments II, Inc., which is incorporated in Nevada.
The Company is or may become involved from time to time in suits, legal proceedings, information-gathering requests, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.
The Company is and may become involved from time to time in suits, legal proceedings, information-gathering requests, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.
For example, as customer deposit levels have decreased over the past year, we have observed that our sensitivity to rising deposits costs has increased as competition for deposits has risen.
For example, as customer deposit levels have increased over the past year, we have observed that our sensitivity to rising deposits costs has increased as competition for deposits has risen.
In addition to our continuing expansion in Indianapolis and larger cities in Northern Indiana, we may expand into additional communities or attempt to strengthen our position in our current markets through opportunistic acquisitions of all or part of other financial institutions, or by opening new branches in or within two hours of our contiguous geographic footprint.
In addition to our continuing expansion in Indianapolis and larger cities in Northern Indiana, we may expand into additional communities or attempt to strengthen our position in our current markets through opportunistic acquisitions of all or part of other financial institutions, or by opening new branches in or within three hours of our contiguous geographic footprint.
Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them.
Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the 25 Table of Contents transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them.
A more detailed description of the primary federal and state banking laws and regulations that affect us is contained in the section of this Annual Report on Form 10-K captioned “Supervision and Regulation”. Banking regulations are primarily intended to protect depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than our shareholders.
A more detailed description of the primary federal and state banking laws and regulations that affect us is contained in the section of this Annual Report on Form 10-K captioned “Supervision and Regulation of the Bank”. Banking regulations are primarily intended to protect depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than our shareholders.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions.
There are risks inherent in making any loan, including risks inherent in working with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions.
The inability to maintain these public funds on deposit could result in a material adverse effect on the Bank’s liquidity and could materially impact our ability to grow and remain profitable. Declines in asset values may result in impairment charges and adversely affect the value of our investment securities, financial performance and capital.
The inability to maintain these public funds on deposit could result in a material adverse effect on the Bank’s liquidity and could materially impact our ability to grow and remain profitable. 20 Table of Contents Declines in asset values may result in impairment charges and adversely affect the value of our investment securities, financial performance and capital.
Any acquisition could be dilutive to our earnings and stockholders’ equity per share of our common stock. 20 Table of Contents Risks Relating to Regulation, Tax and Accounting We may be materially and adversely affected by the highly regulated environment in which we operate. We are subject to extensive federal and state regulation, supervision and examination.
Any acquisition could be dilutive to our earnings and stockholders’ equity per share of our common stock. Risks Relating to Regulation, Tax and Accounting We may be materially and adversely affected by the highly regulated environment in which we operate. We are subject to extensive federal and state regulation, supervision and examination.
If LCB Funding, Inc. fails to meet any of the required provisions for real estate investment trusts, it could no longer qualify as a real estate investment trust and the resulting tax consequences would increase our effective tax rate or cause us to have a tax liability for prior years.
If LCB Funding, Inc. fails to meet any of the required provisions for real estate investment trusts, it could no longer qualify as a real estate investment trust and the resulting tax consequences would increase our effective tax rate or cause us to have a tax liability for 23 Table of Contents prior years.
These measurements require significant use of management judgments as well as forward-looking information and forecasts. Any failure of these judgments or forecasts to be correct could negatively affect our results of operations and financial condition . 22 Table of Contents We may be adversely affected by changes in U.S. tax laws and regulations.
These measurements require significant use of management judgments as well as forward-looking information and forecasts. Any failure of these judgments or forecasts to be correct could negatively affect our results of operations and financial condition . We may be adversely affected by changes in U.S. tax laws and regulations.
Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage.
Many of our larger competitors have substantially greater resources to invest in technological improvements, such as articifical intelligence. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage.
The market value of these investment securities may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as changes in the interest rate environment, negative trends in the residential and commercial real estate markets, ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities.
The market value of these investment securities has been, and may continue to be, affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as changes in the interest rate environment, negative trends in the residential and commercial real estate markets, ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities.
Although a formal evaluation of the adequacy of the credit loss allowance is conducted monthly, we cannot predict credit losses with certainty and we cannot provide assurance that our allowance for credit losses will prove sufficient to cover actual credit losses in the future.
Although a formal evaluation of the adequacy of the credit loss allowance is conducted 18 Table of Contents monthly, we cannot predict credit losses with certainty and we cannot provide assurance that our allowance for credit losses will prove sufficient to cover actual credit losses in the future.
If we cannot raise additional capital when needed, our financial condition and our ability to further expand our operations through internal growth or acquisitions could be materially impaired. 19 Table of Contents We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively impact our net income.
If we cannot raise additional capital when needed, our financial condition and our ability to further expand our operations through internal growth or acquisitions could be materially impaired. We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively impact our net income.
We face intense competition in all phases of our business from other banks, financial institutions and nonbank financial service providers. The banking and financial services business in our market is highly competitive.
We face intense competition in all phases of our business from other banks, financial institutions, private credit funds and nonbank financial service providers. The banking and financial services business in our market is highly competitive.
In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against financial institutions, particularly denial of service attacks, which are designed to disrupt key business services, such as customer-facing web sites and social engineering attacks that could influence an employee of the Company to click on a link that downloads malware or ransomware to the Company’s system.
In addition to cyber-attacks, business e-mail compromise campaigns or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against financial institutions, particularly denial of service attacks, which are designed to disrupt key business services, such as customer-facing web sites and social engineering attacks that could influence an employee of the Company to click on a link that downloads malware or ransomware to the Company’s system or prompts the employee to enter system credentials.
Harm to our reputation could arise from numerous sources, including employee misconduct, compliance failures, litigation or our failure to deliver appropriate levels of service.
Harm to our reputation could arise from numerous sources, including employee misconduct, compliance failures, internal control deficiencies, litigation or our failure to deliver appropriate levels of service.
Our competitors include large national, regional and local community banks, credit unions, Fintech and nonbank financial service providers, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds and farm credit services.
Our competitors include large national, regional and local community banks, credit unions, Fintech and nonbank financial service providers, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds and farm 21 Table of Contents credit services.
The actual amount of credit losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2022, our allowance for credit losses as a percentage of total loans was 1.54% and as a percentage of total nonperforming loans was 425%.
The actual amount of credit losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2023, our allowance for credit losses as a percentage of total loans was 1.46% and as a percentage of total nonperforming loans was 458%.
Conversely, when interest rates fall our interest bearing assets generally reprice more quickly than our interest bearing liabilities, given our asset-sensitive balance sheet, which may cause our net interest income to decrease.
Conversely, 17 Table of Contents when interest rates fall, our interest bearing assets generally reprice more quickly than our interest bearing liabilities, given our asset-sensitive balance sheet, which may cause our net interest income to decrease.
Credit losses in excess of our reserves may adversely affect our business, results of operations and financial condition. Commercial and industrial loans make up a significant portion of our loan portfolio. Commercial and industrial loans were $1.493 billion, or approximately 32% of our total loan portfolio, as of December 31, 2022.
Credit losses in excess of our reserves may adversely affect our business, results of operations and financial condition. Commercial and industrial loans make up a significant portion of our loan portfolio. Commercial and industrial loans were $1.421 billion, or approximately 29% of our total loan portfolio, as of December 31, 2023.
Historically, the Bank's largest charge offs have been in this segment of the loan portfolio. Our loan portfolio includes commercial real estate loans, which involve risks specific to real estate value. Commercial real estate loans were $2.179 billion, or approximately 46% of our total loan portfolio as of December 31, 2022.
Historically, the Bank's largest charge offs have been in this segment of the loan portfolio. Our loan portfolio includes commercial real estate loans, which involve risks specific to real estate value. Commercial real estate loans were $2.438 billion, or approximately 50% of our total loan portfolio, as of December 31, 2023.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or other real estate owned, which adversely affects our net income and returns on assets and equity, increases our loan administration costs and adversely affects our efficiency ratio.
We do not record interest income on nonaccrual loans or other real estate owned, which adversely affects our net income and returns on assets and equity, increases our loan administration costs and adversely affects our efficiency ratio.
In the current environment, economic and business conditions are significantly affected by U.S. monetary policy, particularly the actions of the Federal Reserve to raise short-term interest rates in an effort to fight elevated levels of inflation.
In the current environment, economic and business conditions are significantly affected by U.S. monetary policy, particularly the anticipated actions of the Federal Reserve to pivot from its campaign to raise short-term interest rates in an effort to fight elevated levels of inflation impacting the U.S. economy.
Our loan portfolio has a notable concentration in agri-business, which has a higher level of uncontrolled risk. Our agri-business loans, which totaled $432.1 million, or approximately 9% of our total loan portfolio as of December 31, 2022, are subject to risks outside of our or the borrower’s control.
Our loan portfolio has a notable concentration in agri-business, which has a higher level of uncontrolled risk. Our agri-business loans, which totaled $388.8 million, or approximately 8% of our total loan portfolio, as of December 31, 2023, are subject to risks outside of our or the borrower’s control.
It is also possible that governmental responses to the current inflation environment could adversely affect our business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls. The duration and severity of the current inflationary period cannot be estimated with precision.
It is also possible that governmental responses to the current inflation environment could adversely affect our business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls.
If the overall economic climate in the United States, generally, and our market areas, specifically, does not perform in the manner we expect, or even if it does, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the provision for credit losses, which would cause our net income and return on equity to decrease. 16 Table of Contents If our allowance for credit losses is not sufficient to absorb losses that may occur in our loan portfolio, our financial condition and liquidity could suffer.
If the overall economic climate in the United States, generally, and our market areas, specifically, does not perform in the manner we expect, or even if it does, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge offs and delinquencies could rise and require increases in the provision for credit losses, which would cause our net income and return on equity to decrease.
The market value of real estate can fluctuate significantly in a short period of time as a result of interest rates and market conditions in the geographic area in which the real estate is located, and, as a general matter, some of these values have been significantly and negatively affected by the recent rise in prevailing interest rates.
The market value of real estate can fluctuate significantly in a short period of time as a result of interest rates and market conditions in our Indiana markets, where substantially all of our commercial real estate collateral is located, and, as a general matter, some of these values have been significantly and negatively affected by the recent rise in prevailing interest rates.
These effects have diminished in the past year, but future developments and uncertainties will be difficult to predict, such as the potential emergence of a new variant, the course of the pandemic in China and other major economies, the persistence of pandemic-related work and lifestyle changes, changes in consumer preferences associated with the emergence of the pandemic, and other market disruptions.
While these effects have diminished, future developments and uncertainties are difficult to predict, such as the potential emergence of new variants, the course of the pandemic in other major economies, the persistence of pandemic-related work and lifestyle changes, changes in consumer preferences associated with the emergence of the pandemic, the emergence of a new health crisis and other market disruptions.
As a result of the recent increase in interest rates and other factors, we have observed a corresponding decline in the value of commercial real estate securing these loans.
As a result of the recent increase in interest rates and other factors, we have observed a corresponding decline in the value of commercial real estate securing these loans, substantially all of which are located within our Indiana markets.
Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. 17 Table of Contents If the loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time of originating the loan, which could cause us to increase our provision for credit losses and adversely affect our operating results and financial condition.
If the loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time of originating the loan, which could cause us to increase our provision for credit losses and adversely affect our operating results and financial condition.
Our primary sources of funds consist of deposits, cash from operations and investment security maturities and sales. Additional liquidity is provided by brokered deposits, CD Option of IntraFi Network Deposits (“CD Option”, formerly known as CDARS), American Financial Exchange overnight borrowings, IntraFi Network’s insured cash sweep program.
Our primary sources of funds consist of deposits, cash from operations and investment security maturities and sales. Additional liquidity is provided by brokered deposits, Certificate of Deposit Account Registry Service ("CDARS") deposits, American Financial Exchange overnight borrowings and IntraFi Network’s insured cash sweep program.
As of December 31, 2022, Indiana's unemployment rate was 3.1%. A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees.
A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees.
Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income. Risks Relating to Our Business If we do not effectively manage our credit risk, we may experience increased levels of nonperforming loans, charge offs and delinquencies, which could require further increases in our provision for credit losses.
Risks Relating to Our Business If we do not effectively manage our credit risk, we may experience increased levels of nonperforming loans, charge offs and delinquencies, which could require further increases in our provision for credit losses.
For example, elevated inflation harms consumer purchasing power, which could negatively affect our retail customers and the economic environment and, ultimately, many of our business customers, and could also negatively affect our levels of non-interest expense.
Continued high levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse. For example, elevated inflation harms consumer purchasing power, which could negatively affect our retail customers and the economic environment and, ultimately, many of our business customers, and could also negatively affect our levels of non-interest expense.
Accordingly, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect our financial condition and results of operations. ITEM 1B. UNRESOLVED STAFF COMMENTS We have no unresolved SEC staff comments. 24 Table of Contents
Accordingly, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect our financial condition and results of operations.
Risks Relating to our Operations Our ability to attract and retain management and key personnel and any damage to our reputation may affect future growth and earnings. Much of our success and growth has been influenced strongly by our ability to attract and retain management experienced in banking and financial services and familiar with the communities in our market areas.
Much of our success and growth has been influenced strongly by our ability to attract and retain management experienced in banking and financial services and familiar with the communities in our market areas.
Any change in federal or state tax laws or regulations, including any increase in the federal corporate income tax rate from the current level of 21%, could negatively affect our business and results of operations, including as a result of our income tax expense and any impact to the profitability of our loan customers.
Any change in federal or state tax laws or regulations, including any increase in the federal corporate income tax rate from the current level of 21%, could negatively affect our business and results of operations, including as a result of our income tax expense and any impact to the profitability of our loan customers. 24 Table of Contents Risks Relating to our Operations Our ability to attract and retain management and key personnel and any damage to our reputation may affect future growth and earnings.
To the extent these or other factors affect the performance or financial condition of our agri-business borrowers, our results of operations and financial performance could suffer. Our consumer loans generally have a higher degree of risk of default than our other loans. At December 31, 2022, consumer loans totaled $88.1 million, or 2% of our total loan portfolio.
To the extent these or other factors affect the performance or financial condition of our agri-business borrowers, our results of operations and financial performance could suffer. 19 Table of Contents Our consumer loans generally have a higher degree of risk of default than our other loans.
In addition, we may determine to sell securities in our available-for-sale investment securities portfolio, and any such sale could cause us to realize currently unrealized losses that resulted from the recent increases in the prevailing interest rates. We may be adversely impacted by the discontinuance of LIBOR as a short-term interest rate utilized for loans and other financing agreements.
In addition, we may determine to sell securities in our available-for-sale investment securities portfolio, and any such sale could cause us to realize currently unrealized losses that resulted from the recent increases in the prevailing interest rates.
Many aspects of our business and operations involve the risk of legal liability, and in some cases we or our subsidiaries have been named or threatened to be named as defendants in various lawsuits arising from our business activities. In addition, companies in our industry are frequently the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings.
Many aspects of our business and operations involve the risk of legal liability, and in some cases we or our subsidiaries have been named or threatened to be named as defendants in various lawsuits arising from our business activities.
Any decline in available funding could adversely impact our ability to originate loans, purchase investment securities, meet our expense obligations, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition. 18 Table of Contents Any action or steps to change coverages or eliminate Indiana’s Public Deposit Insurance Fund could require us to find alternative, higher-cost funding sources to replace public fund deposits or to provide for collateralization of these deposits.
Any decline in available funding could adversely impact our ability to originate loans, purchase investment securities, meet our expense obligations, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
In the context of resulting bankruptcy proceedings involving the former client, the liquidating trustee has filed a complaint against the Bank, focused on a series of business transactions among the former client, related entities and the Bank.
In the context of resulting bankruptcy proceedings involving the former client, the liquidating trustee has filed a complaint against the Bank, focused on a series of business transactions among the former client, related entities and the Bank. In addition, companies in our industry are frequently the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings.
We establish our allowance for credit losses and maintain it at a level considered adequate by management to absorb expected credit losses within the portfolio.
If our allowance for credit losses is not sufficient to absorb losses that may occur in our loan portfolio, our financial condition and liquidity could suffer. We establish our allowance for credit losses and maintain it at a level considered adequate by management to absorb expected credit losses within the portfolio.
Any such developments could have a complex and negative effect on our business, including with respect to the prevailing economic environment, our lending and investment activities, and our business operations. 15 Table of Contents Labor shortages and failure to attract and retain qualified employees could negatively impact our business, results of operations and financial condition .
Any such developments could have a complex and negative effect on our business, including with respect to the prevailing economic environment, our lending and investment activities, and our business operations.
In addition, it is possible that we may not be able to detect security breaches on a timely basis, or at all, which could increase the costs and risks associated with any such breach. 23 Table of Contents The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding the Company’s customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors.
The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding the Company’s customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors.
Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. For example, as previously disclosed, in the third quarter of 2019, the Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks.
For example, as previously disclosed in the third quarter of 2019, the Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks.
At December 31, 2022 , appro ximately 26% of our deposits are concentrated in public funds from a small number of municipalities and government agencies located in the Bank’s geographic footprint.
At December 31, 2023 , appro ximately 27% of our deposits are concentrated in public funds from municipalities and government agencies located in the Bank’s geographic footprint. These accounts represent less than 1% of total customer deposit accounts at December 31, 2023.
We are able to borrow from several federal funds lines at correspondent banks and are eligible borrowers from the Federal Reserve and the Federal Home Loan Bank (the “FHLB”) subject to collateral availability. At December 31, 2022, $995.3 million of unpledged investment securities were eligible to serve as collateral for liquidity availability at FHLB and Federal Reserve Bank.
We are able to borrow from several federal funds lines at correspondent banks and are eligible to borrow from the Federal Reserve and the Federal Home Loan Bank (the “FHLB”) subject to collateral availability.
The Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. We face significant capital and other regulatory requirements as a financial institution, which were heightened with the implementation of the Basel III Rule and the phase-in of capital conservation buffer requirement.
We face significant capital and other regulatory requirements as a financial institution, which were heightened with the implementation of the Basel III Rule and the phase-in of capital conservation buffer requirement and could be further impacted by the proposed Basel III Endgame Rule.
The Bank holds certain investment securities in its wholly owned subsidiary LCB Investments II, Inc., which is incorporated in Nevada. Pursuant to the State of Indiana’s current tax laws and regulations, we are not subject to Indiana income tax for income earned through that subsidiary.
Pursuant to the State of Indiana’s current tax laws and regulations, we are not subject to Indiana income tax for income earned through that subsidiary.
The COVID-19 pandemic could continue to have adverse effects on our business. The COVID-19 pandemic has had a significant economic impact on the communities in which we operate, our borrowers and depositors, and the national economy generally.
Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income. A resurgence of the COVID-19 pandemic, or a similar health crisis, could adversely affect our business. The COVID-19 pandemic had a significant economic impact on the communities in which we operate, our borrowers and depositors, and the national economy generally.
Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us.
Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
Given the complex factors affecting the strength of the U.S. economy, including uncertainties regarding the persistence of inflation, geopolitical developments such as the war in Ukraine and resulting disruptions in the global energy market, the effects of the pandemic in China, tight labor market conditions and supply chain issues, there is a meaningful risk that the Federal Reserve and other central banks may raise interest rates too much.
Given the complex factors affecting the strength of the U.S. economy, including uncertainties regarding the persistence of inflation, international geopolitical developments, strength of the banking system, disruptions in the global energy market, labor market conditions and the impact of higher rates on consumers and businesses, there is a meaningful risk that the Federal Reserve and other central banks may underestimate the impact of their tightening policies and potentially cause an economic recession.
Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans. Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition and could result in further losses in the future.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition and could result in further losses in the future. Our nonperforming assets adversely affect our net income in various ways.
The investment securities net unrealized losses are recorded as a reduction of tangible equity and tangible book value per share. Higher interest rates can also negatively affect our customers’ businesses and financial condition, and the value of collateral securing loans in our portfolio.
Lower interest rates can also positively affect our customers’ businesses and financial condition, and increase the value of collateral securing loans in our portfolio.
A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, and decreased labor force size and participation rates. Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and competitive local labor market, especially for commercial lenders.
Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and competitive local labor market, especially for commercial lenders. As of December 31, 2023, Indiana's unemployment rate was 3.6%.
The significant increases to short-term interest rates has benefited our net interest income during 2022 due to loans repricing faster than deposits. However, the rising interest rate environment has negatively impacted the fair value of our investment securities portfolio, which had $215.3 million in net unrealized losses from available-for-sale investment securities at December 31, 2022.
A pivot in policy by the Federal Reserve to lower the target Federal Funds rate could further erode the Company’s net interest income due to lags in deposits repricing. However, a reduction in rates would positively impact the fair value of our investment securities portfolio, which had $174.6 million in unrealized losses in available-for-sale investment securities at December 31, 2023.
Consumer loans typically have shorter terms and lower balances with higher yields as compared to commercial loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.
At December 31, 2023, consumer loans totaled $96.0 million, or 2% of our total loan portfolio. Consumer loans typically have shorter terms and lower balances with higher yields as compared to commercial loans, but generally carry higher risks of default.
Removed
The Federal Reserve is mandated to pursue the goals of maximum employment and price stability, and beginning in March 2022 it made a series of significant increases to the target Federal Funds rate as part of an effort to combat elevated levels of inflation affecting the U.S. economy, which is expected to continue in the near term.
Added
Beginning in March of 2022, the Federal Reserve substantially increased the target Federal Funds rate in pursuit of its policy mandate to maintain maximum employment and achieve price stability and subsequently paused further rate raises starting in September 2023 as the rate of inflation had significantly subsided from levels experienced in 2022.
Removed
The United States has recently experienced elevated levels of inflation, with the consumer price index climbing 6.5% in 2022. Continued high levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse.
Added
In December 2023, the Federal Reserve indicated the possibility it would pivot from the current rate tightening cycle, forecasting a series of cuts to the Federal Funds rate in 2024. Rate increases benefited our net interest income during 2022, due to the asset sensitive nature of the Company’s balance sheet.
Removed
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In March 2021, the ICE Benchmark Administration, which administers LIBOR, announced that it would stop publishing all LIBOR tenors by June 30, 2023.
Added
In 2023, funding costs rose substantially as the cost to retain deposits and borrow increased due to market competition and a series of bank failures in the first quarter of 2023. The Company's increase in cost of funds negatively affected net interest income in 2023.
Removed
The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR.
Added
The United States has recently experienced elevated levels of inflation, with the rate peaking in 2022 and remaining elevated in 2023. Inflation pressures are currently expected to remain elevated as the inflation rate remains above the Federal Reserve’s target rate of 2%, which is intended to help accomplish its policy.
Removed
ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are continuing to work on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.
Added
The duration and severity of the current inflationary period cannot be estimated with precision. 16 Table of Contents Adverse developments or concerns affecting the financial services industry or specific financial institutions could adversely affect our financial condition and results of operations. The 2023 United States banking crisis could continue to have adverse effects on our business.
Removed
This includes identifying outstanding USD-LIBOR-based loans without ARRC recommended fallback language, internal training and education, and working with our core provider to ensure proper integration once an alternative reference is implemented. At December 31, 2022, the Bank had 95 commercial loans with an outstanding balance of $460.6 million to transition from a USD-LIBOR index.
Added
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar events, have in the past and may in the future lead to erosion of customer confidence in the banking system, deposit volatility, liquidity issues, stock price volatility and other adverse developments.
Removed
The Company has formed a cross-functional project team to lead the transition from LIBOR to adoption of alternative reference rates which include SOFR, CME Term SOFR, American Interbank Offered Rate , and Bloomberg Short-Term Bank Yield Index. Management is monitoring ARRC publications for best practices as the Company transitions legacy LIBOR loans by the June 30, 2023 deadline.
Added
For example, the failures of Silicon Valley Bank and Signature Bank in March 2023 and First Republic Bank in May 2023 led to disruption and volatility, including deposit outflows and increased need for liquidity, at certain banks.
Added
Although depositors of these banks were largely protected, it is not certain that the Federal Reserve or FDIC will treat future bank failures similarly. Inflation and the rapid increases in interest rates have led to a decline in the trading value of previously issued debt securities with interest rates below current market interest rates.
Added
Any sale of investment securities that are held in an unrealized loss position by a financial institution for liquidity or other purposes will cause actual losses to be realized.
Added
There can be no assurance that there will not be additional bank failures or issues such as liquidity concerns in the broader financial services industry or in the U.S. financial system as a whole.
Added
Adverse financial market and economic conditions can exert downward pressure on stock prices, security prices and credit availability for financial institutions without regard to their underlying financial strength. The volatility and economic disruption resulting from the failures of Silicon Valley Bank and Signature Bank particularly impacted the market valuation of securities issued by financial institutions.
Added
While we did not experience any abnormal changes in our total outstanding deposit balances following these bank closure events, we experienced changes in deposit balances resulting from typical seasonal fluctuations due to the nature of our business.
Added
While our deposit base primarily consists of a stable mix of retail, commercial and public fund deposits, we cannot be assured that unusual deposit withdrawal activity will not affect banks generally or the Company specifically in the future.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES The Company is headquartered in the main office building of the Bank at 202 E. Center Street, Warsaw, Indiana 46580. The Company operates in 59 locations, 51 of which are owned by the Bank and eight of which are leased from third parties. None of the Company’s real property assets are the subject of any material encumbrances.
Biggest changeITEM 2. PROPERTIES The Company is headquartered in the main office building of the Bank at 202 E. Center Street, Warsaw, Indiana 46580. The Company operates in 60 locations, 51 of which are owned by the Bank and nine of which are leased from third parties.
Added
None of the Company’s real property assets are the subject of any material encumbrances. 27 Table of Contents

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+1 added−1 removed3 unchanged
Biggest changeAlthough the Company does not believe that the outcome of pending legal matters will be material to the Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future. ITEM 4.
Biggest changeAlthough the Company does not believe that the outcome of pending legal matters will be material to the Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
Removed
MINE SAFETY DISCLOSURES Not applicable. 25 Table of Contents PART II
Added
See "Note 1 - Summary of Significant Accounting Policies - Loss Contingencies" in our audited financial statements included in this Annual Report on Form 10-K. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 28 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

10 edited+2 added−0 removed2 unchanged
Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The quarterly high and low prices for the Company’s common stock and the cash dividends declared and paid on that common stock are set forth in the table below. 2022 2021 High* Low* Cash Dividend High* Low* Cash Dividend Fourth quarter $ 83.57 $ 71.37 $ 0.40 $ 80.77 $ 69.51 $ 0.34 Third quarter $ 81.27 $ 64.05 $ 0.40 $ 73.04 $ 56.06 $ 0.34 Second quarter $ 79.14 $ 64.84 $ 0.40 $ 70.25 $ 57.02 $ 0.34 First quarter $ 85.71 $ 72.78 $ 0.40 $ 77.05 $ 53.02 $ 0.34 The common stock of the Company was first quoted on The Nasdaq Stock Market under the symbol “LKFN” on August 14, 1997.
Biggest changeMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The quarterly high and low prices for the Company’s common stock and the cash dividends declared and paid on that common stock are set forth in the table below. 2023 2022 High* Low* Cash Dividend High* Low* Cash Dividend Fourth quarter $ 67.88 $ 45.59 $ 0.46 $ 83.57 $ 71.37 $ 0.40 Third quarter 57.00 44.47 0.46 81.27 64.05 0.40 Second quarter 62.71 43.05 0.46 79.14 64.84 0.40 First quarter 77.07 59.55 0.46 85.71 72.78 0.40 The common stock of the Company was first quoted on The Nasdaq Stock Market under the symbol “LKFN” on August 14, 1997.
The Company’s ability to pay dividends to stockholders is largely dependent upon the dividends it receives from the Bank, and the Bank is subject to regulatory limitations on the amount of cash dividends it may pay. See “Supervision and Regulation – Dividend Payments” for additional information.
The Company’s ability to pay dividends to stockholders is largely dependent upon the dividends it receives from the Bank, and the Bank is subject to regulatory limitations on the amount of cash dividends it may pay. See “Supervision and Regulation of the Company – Dividend Payments” for additional information.
Equity Compensation Plan Information The table below sets forth the following information as of December 31, 2022 for (i) all compensation plans previously approved by the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders: (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights; (b) the weighted-average exercise price of such outstanding options, warrants and rights; and (c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans.
Equity Compensation Plan Information The table below sets forth the following information as of December 31, 2023 for (i) all compensation plans previously approved by the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders: (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights; (b) the weighted-average exercise price of such outstanding options, warrants and rights; and (c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans.
EQUITY COMPENSATION PLAN INFORMATION Plan category Number of securities to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders (1) 0 $ 0 387,388 Equity compensation plans not approved by security holders 0 0 0 Total 0 $ 0 387,388 (1) Lakeland Financial Corporation 2017 Equity Incentive Plan was adopted on April 12, 2017 by the board of directors. 26 Table of Contents STOCK PRICE PERFORMANCE GRAPH The graph below compares the cumulative total return of the Company, the Nasdaq Market Index, the KBW Nasdaq Bank Index, and the S&P U.S.
EQUITY COMPENSATION PLAN INFORMATION Plan category Number of securities to be issued upon exercise of outstanding options Weighted-average exercise price of outstanding options Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders (1) 0 $ 0 279,618 Equity compensation plans not approved by security holders 0 0 0 Total 0 $ 0 279,618 (1) Lakeland Financial Corporation 2017 Equity Incentive Plan was adopted on April 12, 2017 by the board of directors. 29 Table of Contents STOCK PRICE PERFORMANCE GRAPH The graph below compares the cumulative total return of the Company, the Nasdaq Market Index, the KBW Nasdaq Bank Index, and the S&P U.S.
ISSUER PURCHASES OF EQUITY SECURITIES On January 8, 2019, the Company's board of directors approved a share repurchase program, under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company's common stock with an aggregate purchase price of up to $30 million.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PARTIES On January 8, 2019, the Company's board of directors approved a share repurchase program, under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company's common stock with an aggregate purchase price of up to $30 million.
Currently, the Company’s common stock is listed for trading on the Nasdaq Global Select Market under the symbol “LKFN.” On February 15, 2023, the Company had approximately 310 stockholders of record. The Company paid dividends on its common stock as set forth in the table above.
Currently, the Company’s common stock is listed for trading on the Nasdaq Global Select Market under the symbol “LKFN.” On February 13, 2024, the Company had approximately 299 stockholders of record. The Company paid dividends on its common stock as set forth in the table above.
Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. On April 13, 2021, the Company's board of directors reauthorized and extended the share repurchase program through April 30, 2023. As extended, the repurchase program has an aggregate purchase price cap of $30 million.
Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. On April 11, 2023, the Company's board of directors reauthorized and extended the share repurchase program through April 30, 2025. As extended, the repurchase program has remaining aggregate purchase price authority of $30 million as of December 31, 2023.
There were no repurchases under this plan during the year ended December 31, 2022. 27 Table of Contents The following table provides information about purchases by the Company and its affiliates during the quarter ended December 31, 2022 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs 10/01/22 - 10/31/22 0 $ 0.00 0 $ 19,998,273 11/01/22 - 11/30/22 909 81.81 0 19,998,273 12/01/22 - 12/31/22 0 0.00 0 19,998,273 Total 909 $ 81.81 0 $ 19,998,273 The shares purchased during the quarter were credited to the deferred share accounts of non-employee directors under the Company’s directors’ deferred compensation plan.
The following table provides information about purchases by the Company and its affiliates during the quarter ended December 31, 2023 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act: Period Total Number of Shares Purchased (a) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (b) 10/01/23 - 10/31/23 0 $ 0.00 0 $ 30,000,000 11/01/23 - 11/30/23 1,580 53.15 0 30,000,000 12/01/23 - 12/31/23 0 0.00 0 30,000,000 Total 1,580 $ 53.15 0 $ 30,000,000 (a) The shares purchased during the quarter were credited to the deferred share accounts of non-employee directors under the Company’s directors’ deferred compensation plan.
BMI Banks Index 100.00 83.54 114.74 100.10 136.10 112.89 The above returns assume that $100 was invested on December 31, 2017 and that all dividends were reinvested.
BMI Banks Index 100.00 137.36 119.83 162.92 135.13 147.41 The above returns assume that $100 was invested on December 31, 2018 and that all dividends were reinvested.
BMI Banks Index. Lakeland Financial Corporation Period Ending Index 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Lakeland Financial Corporation $ 100.00 $ 84.59 $ 105.73 $ 119.00 $ 181.75 $ 169.03 NASDAQ Composite Index 100.00 97.16 132.81 192.47 235.15 158.65 SNL U.S. Bank NASDAQ Index 100.00 82.29 112.01 100.46 138.97 109.23 S&P U.S.
BMI Banks Index. Lakeland Financial Corporation Period Ending Index 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 Lakeland Financial Corporation $ 100.00 $ 124.99 $ 140.68 $ 214.86 $ 199.83 $ 184.29 NASDAQ Composite Index 100.00 136.69 198.10 242.03 163.28 236.17 KBW NASDAQ Bank Index 100.00 136.13 122.09 168.88 132.75 131.57 S&P U.S.
Added
There were no repurchases under this plan during the year ended December 31, 2023. 30 Table of Contents During the quarter ended December 31, 2023, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement, in each case as defined in Item 408 of Regulation S-K.
Added
(b) Following the renewal and extension of the Company's share repurchase program on April 11, 2023, the maximum dollar value of shares that may bet be repurchased under the program is $30 million as of December 31, 2023. The share repurchase program terminates April 30, 2025. ITEM 6. [Reserved] 31 Table of Contents

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeYear Ended Dec. 31, 2022 Dec. 31, 2021 Dec. 31, 2020 Total Equity $ 568,887 $ 704,906 $ 657,184 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,176 Tangible Common Equity 565,084 701,112 653,390 AOCI Market Value Adjustment 188,154 (17,056) (29.182) Adjusted Tangible Common Equity 753,238 684,056 653,361 Assets $ 6,432,371 $ 6,557,323 $ 5,830,435 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,176 1,176 Tangible Assets 6,428,568 6,553,529 5,826,641 Securities Market Value Adjustment 238,170 (21,589) (36,939) Adjusted Tangible Assets 6,666,738 6,531,940 5,789,702 Ending Common Shares Issued 25,536,026 25,488,508 25,424,307 Tangible Book Value Per Common Share $ 22.13 $ 27.50 $ 25.70 Tangible Common Equity/Tangible Assets 8.79 % 10.70 % 11.21 % Adjusted Tangible Common Equity/Adjusted Tangible Assets 11.30 % 10.47 % 10.78 % Net Interest Income $ 202,887 $ 178,088 $ 163,008 Plus: Noninterest Income 41,862 44,720 46,843 Minus: Noninterest Expense (110,210) (104,287) (91,205) Pretax Pre-Provision Earnings $ 134,539 $ 118,521 $ 118,646 32 Table of Contents The impact of the Paycheck Protection Program on Net Interest Margin FTE is provided below (dollars in thousands).
Biggest changeYear Ended Dec. 31, 2023 Dec. 31, 2022 Dec. 31, 2021 Noninterest Income $ 49,858 $ 41,862 $ 44,720 Less: Recoveries (6,300) 0 0 Adjusted Core Noninterest Income $ 43,558 $ 41,862 $ 44,720 Noninterest Expense $ 130,710 $ 110,210 $ 104,287 Less: Wire Fraud Loss (18,058) 0 0 Plus: Salaries and Employee Benefits 1,397 0 0 Adjusted Core Noninterest Expense $ 114,049 $ 110,210 $ 104,287 Earnings Before Income Taxes $ 110,333 $ 125,164 $ 117,444 Adjusted Core Impact: Noninterest Income (6,300) 0 0 Noninterest Expense 16,661 0 0 Total Adjusted Core Impact 10,361 0 0 Adjusted Earnings Before Income Taxes 120,694 125,164 117,444 Tax Effect (19,119) (21,347) (21,711) Core Operational Profitability $ 101,575 $ 103,817 $ 95,733 Diluted Earnings Per Share $ 3.65 $ 4.04 $ 3.74 Impact of Wire Fraud Loss, Net of Recoveries 0.30 0.00 0.00 Core Operational Diluted Earnings Per Common Share $ 3.95 $ 4.04 $ 3.74 Adjusted Core Efficiency Ratio 47.40 % 45.03 % 46.81 % 36 Table of Contents Year Ended (dollars in thousands, except per share data) Dec. 31, 2023 Dec. 31, 2022 Dec. 31, 2021 Total Equity $ 649,793 $ 568,887 $ 704,906 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 1,176 Tangible Common Equity 645,990 565,084 701,112 Market Value Adjustment in AOCI 154,460 188,154 (17,056) Adjusted Tangible Common Equity 800,450 753,238 684,056 Assets $ 6,524,029 $ 6,432,371 $ 6,557,323 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 1,176 Tangible Assets 6,520,226 6,428,568 6,553,529 Market Value Adjustment in AOCI 154,460 188,154 (17,056) Adjusted Tangible Assets 6,674,686 6,616,722 6,536,473 Ending Common Shares Issued 25,614,585 25,536,026 25,488,508 Tangible Book Value Per Common Share $ 25.22 $ 22.13 $ 27.50 Tangible Common Equity/Tangible Assets 9.91 % 8.79 % 10.70 % Adjusted Tangible Common Equity/Adjusted Tangible Assets 11.99 11.38 10.47 Net Interest Income $ 197,035 $ 202,887 $ 178,088 Plus: Noninterest Income 49,858 41,862 44,720 Minus: Noninterest Expense (130,710) (110,210) (104,287) Pretax Pre-Provision Earnings $ 116,183 $ 134,539 $ 118,521 37 Table of Contents The impact of the Paycheck Protection Program on Net Interest Margin FTE for the years ended December 31, 2022 and 2021 is presented below (dollars in thousands).
The Company manages this risk by utilizing conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area and by obtaining personal loan guarantees. There were no loan concentrations within industries, which exceeded ten percent of total loans, except commercial real estate.
The Company manages this risk by utilizing conservative credit structures, adjusting its pricing to the perceived risk of each individual credit, diversifying the portfolio by customer, product, industry and market area and by obtaining personal loan guarantees. There were no loan concentrations within industries, which exceeded ten percent of total loans, except commercial real estate.
Loan Portfolio The Company has a relatively high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits.
Loan Portfolio The Company has a high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits.
The increase in net income from 2021 to 2022 was primarily due to an increase in net interest income of $24.8 million, or 13.9%. Offsetting the increase in net interest income, noninterest expense increased $5.9 million, or 5.7%, noninterest income decreased $2.9 million, or 6.4%, and the provision for credit losses increased $8.3 million, or 770.5%.
The increase in net income from 2021 to 2022 was primarily due to an increase in net interest income of $24.8 million, or 13.9%, and an increase in the provision for credit losses of $8.3 million, or 770.5%. Noninterest expense increased $5.9 million, or 5.7%, and noninterest income decreased $2.9 million, or 6.4%.
This asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells almost all of the conforming mortgage loans it originates in the secondary market.
This asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the quantity and timing of loan sales into the secondary market. The Company generally sells almost all of the conforming mortgage loans it originates in the secondary market.
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.
It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are subject to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general.
The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions including inflation and the resulting impact on the interest rate environment, and other factors that may influence the assessment of the collectability of loans. The Company adopted CECL on January 1, 2021.
The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions including the impact of the increased interest rate environment, inflation levels, and other factors that may influence the assessment of the collectability of loans. The Company adopted CECL on January 1, 2021.
In general, we expect loans to reprice quicker than deposits in a rising and falling rate environment as quantified in the sensitivity to market rates table in Item 7A. The effects of price changes and inflation can vary substantially for most financial institutions.
In general, we expect loans to reprice quicker than deposits in a rising and falling rate environment as quantified in the sensitivity to market rates table in Item 7A. 58 Table of Contents The effects of price changes and inflation can vary substantially for most financial institutions.
Actual collections may be impacted by wider economic conditions such as changes in the competitive environment or in the levels of business investment or consumer 30 Table of Contents spending, or by the quality of borrowers’ management teams and the success of their strategy execution.
Actual collections may be impacted by wider economic conditions such as changes in the competitive environment or in the levels of business investment or consumer 33 Table of Contents spending, or by the quality of borrowers’ management teams and the success of their strategy execution.
The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic 29 Table of Contents conditions and historical loss analysis.
The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic 32 Table of Contents conditions and historical loss analysis.
The impact to equity due to other comprehensive income (loss) is not included in regulatory capital. 44 Table of Contents RISK MANAGEMENT Overview The Company, with the oversight of the Corporate Risk Committee of the board of directors, has developed a company-wide risk management program intended to help identify, manage and mitigate the various business risks it faces.
The impact to equity due to other comprehensive income (loss) is not included in regulatory capital. RISK MANAGEMENT Overview The Company, with the oversight of the Corporate Risk Committee of the board of directors, has developed a company-wide risk management program intended to help identify, manage and mitigate the various business risks it faces.
The Company's continued growth strategy promotes diversification among industries as well as continued focus on the enforcement of a disciplined credit culture and a conservative portion in loan work-out situations.
The Company's continued growth strategy promotes diversification among industries as well as continued focus on the enforcement of a disciplined credit culture and a conservative posture in loan work-out situations.
Our primary credit risks result from lending and to a lesser extent, investment activities. Investment Portfolio The Company’s investment portfolio consists of U.S. treasuries, government agencies and municipal bonds subject to an investment security policy that is approved annually by the board of directors.
Our primary credit risks result from lending and to a lesser extent, investment activities. 50 Table of Contents Investment Portfolio The Company’s investment portfolio consists of U.S. treasuries, government agencies and municipal bonds subject to an investment security policy that is approved annually by the board of directors.
Additionally, net interest margin during the year ended December 31, 2022 was positively impacted by the recognition of nonaccrual interest resulting from the interest recovery of two nonaccrual commercial borrowers during the fourth quarter of 2022. The interest recovery was from 35 Table of Contents two loans placed on nonaccrual status in 2009 and 2021.
Additionally, net interest margin during the year ended December 31, 2022 was positively impacted by the recognition of nonaccrual interest resulting from the interest recovery of two nonaccrual commercial borrowers during the fourth quarter of 2022. The interest recovery was from two loans placed on nonaccrual status in 2009 and 2021.
At December 31, 2022, 93% of municipal securities owned by the Company were AAA or AA rated with a diversified geography of state issuer. In addition, the Company has historically sold the majority of its originated mortgage loans on the secondary market to reduce interest rate risk and to create an additional source of funding.
At December 31, 2023, 92% of municipal securities owned by the Company were AAA or AA rated with a diversified geography of state issuer. In addition, the Company has historically sold the majority of its originated mortgage loans on the secondary market to reduce interest rate risk and to create an additional source of funding.
The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the IntraFi Network CD Option One-Way Buy program, to access these funds when desired with settlement of funds in one to two weeks’ time.
The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the IntraFi Network CDARS One-Way Buy program, to access these funds when desired with settlement of funds in one to two weeks’ time.
The residential construction and land development loans class included construction loans totaling $12.0 million and $3.3 million as of December 31, 2022 and 2021. Increases in consumer loans during 2022 resulted from an increased focus on indirect lending to consumers and the introduction of a new adjustable rate mortgage product.
The residential construction and land development loans class included construction loans totaling $1.0 million and $12.0 million as of December 31, 2023 and 2022. Increases in consumer loans during 2023 resulted from an increased focus on indirect lending to consumers and the introduction of a new adjustable rate mortgage product.
As of December 31, 2022, the total amount approved for the Bank via AFX banks was $319.0 million and none was outstanding at year end. The Company had 91% of its securities in the available-for-sale portfolio at December 31, 2022, allowing the Company extensive flexibility to sell securities to meet funding demands.
As of December 31, 2023, the total amount approved for the Bank via AFX banks was $319.0 million and none was outstanding at year end. The Company had 90% of its securities in the available-for-sale portfolio at December 31, 2023, allowing the Company extensive flexibility to sell securities to meet funding demands.
Management believes this is an important measure because it provide for better comparability to prior periods, given the expectation that PPP represents a limited governmental intervention in the lending market, designed to support small businesses through the pandemic, its low fixed interest rate of 1.0% and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA.
Management believes this is an important measure because it provides for better comparability to subsequent periods, given the expectation that PPP represented a limited governmental intervention in the lending market, designed to support small businesses through the pandemic, its low fixed interest rate of 1.0% and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA.
M anufacturing loans are included in the commercial and industrial loans total and are well diversified by industry. Agri-business and agricultural loans represent 9.2% of total loans as of December 31, 2022 and are not concentrated to any agricultural sector.
M anufacturing loans are included in the commercial and industrial loans total and are well diversified by industry. Agri-business and agricultural loans represent 7.9% of total loans as of December 31, 2023 and are not concentrated to any agricultural sector.
Additionally, the Bank has entered agreements with IntraFi Network relative to their Insured Cash Sweep One-Way Buy program. As of December 31, 2022, the total amount available to the Bank via this program was $100.0 million, of which $10.0 million was drawn.
Additionally, the Bank has entered agreements with IntraFi Network relative to their Insured 56 Table of Contents Cash Sweep One-Way Buy program. As of December 31, 2023, the total amount available to the Bank via this program was $100.0 million, of which $10.0 million was drawn.
The concentration of this loan growth was in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining credit loss allocations.
This growth is primarily concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining credit loss allocations.
Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period. See reconciliation on the next page.
Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period.
Net loan fees attributable to PPP loans were $692,000, $12.5 million and $9.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. (2) Nonaccrual loans are included in the average balance of taxable loans. 34 Table of Contents (3) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate.
Net loan fees attributable to PPP loans were $10,000 , $692,000 and $12.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. (2) Nonaccrual loans are included in the average balance of taxable loans. (3) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate.
The Company has board of directors approval to borrow up to $800.0 million at the FHLB, but given the Company’s current collateral structure and outstanding borrowings as of December 31, 2022, the Company could have only borrowed up to $66.5 million under this authority.
The Company has board of directors approval to borrow up to $800.0 million at the FHLB, but given the Company’s current collateral structure and outstanding borrowings as of December 31, 2023, the Company could have only borrowed up to $574.9 million under this authority.
Commercial real estate was $2.179 billion, or 46.2% , of total loans at December 31, 2022. The owner occupied commercial real estate portfolio generally represents the financing of factories and operational facilities for the Bank's commercial and industrial borrowers. The Company’s in-house lending limit is $40.0 million.
Commercial real estate was $2.438 billion, or 49.5% , of total loans at December 31, 2023. The owner occupied commercial real estate portfolio generally represents the financing of factories and operational facilities for the Bank's commercial and industrial borrowers. The Company’s in-house lending limit is $40.0 million.
Paydowns from prepayments and scheduled payments of $98.8 million , $113.1 million and $90.4 million were received in 2022, 2021 and 2020, and the amortization of premiums, net of the accretion of discounts, was $6.3 million, $5.0 million and $4.0 million, respectively.
Paydowns from prepayments and scheduled payments of $56.2 million, $98.8 million and $113.1 million were received in 2023, 2022 and 2021, and the amortization of premiums, net of the accretion of discounts, was $4.9 million, $6.3 million and $5.0 million, respectively.
(2) Non-GAAP financial measure. Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity. Management believes this is an important measure because it is useful for planning and forecasting purposes. See reconciliation on the next page. (3) Non-GAAP financial measure.
Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity. Management believes this is an important measure because it is useful for planning and forecasting purposes. See reconciliation on the following pages. (4) Non-GAAP financial measure.
Based upon the table above, all loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 2022 amounted to $1.729 billion and $1.622 billion, respectively.
Based upon the table above, all loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 2023 amounted to $2.290 billion and $1.188 billion, respectively.
Net interest income for 2022 included $772,000 in PPP interest and fee income compared to $14.9 million for 2021. The increase in provision expense for 2022 was driven primarily by the downgrade of a single commercial relationship that occurred in late December 2022. The remaining increase in provision was driven by loan growth during the year.
Net interest income for 2022 included $772,000 in PPP interest and fee income, compared to $14.9 million for 2021. The increase in provision expense for 2022 was driven primarily by the downgrade of a single commercial relationship, with the remaining increase attributable to loan growth.
The analysis indicated a negative 17.98% change in market value in the event of a 300 basis point upward, instantaneous rate shock and an approximate positive 6.54% change in market value in the event of a 100 basis point downward, instantaneous rate shock.
The analysis indicated a negative 18.1% change in market value in the event of a 300 basis point upward, instantaneous rate shock and an approximate positive 6.5% change in market value in the event of a 100 basis point downward, instantaneous rate shock.
At December 31, 2022, on the basis of management’s review of the loan portfolio, the Company had 58 credits totaling $161.0 million on the classified loan list versus 81 credits totaling $234.5 million on December 31, 2021. These amounts represent outstanding balances, excluding deferred fees and costs.
At December 31, 2023, on the basis of management’s review of the loan portfolio, the Company had 68 credits totaling $183.1 million on the classified loan list versus 58 credits totaling $161.0 million on December 31, 2022. These amounts represent outstanding balances, excluding deferred fees and costs.
The Company has a formalized Contingency Funding Plan (“CFP”). The Board and management recognize the importance of liquidity during times of normal operations and in times of stress. The CFP was developed to ensure that the multiple liquidity sources available to the Company are readily available. The CFP specifically considers liquidity at the Bank and the Company level.
The Company has a formalized Contingency Funding Plan (“CFP”). The Board and management recognize the importance of liquidity during times of normal operations and in times of stress. The CFP was developed to ensure that the multiple liquidity sources available to the Company are readily available. All liquidity sources are tested annually.
Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $758.3 million given its current collateral structure at the Federal Reserve Bank discount window program and the terms of that facility at December 31, 2022, with no balances outstanding at December 31, 2022.
Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $1.259 billion given its current collateral structure at the Federal Reserve Bank discount window program and the terms of that facility at December 31, 2023, with no balances outstanding at December 31, 2023.
Calculated by subtracting the impact PPP loans had on average earnings assets, loan interest income, average interest bearing liabilities, and interest expense.
(5) Non-GAAP financial measure. Calculated by subtracting the impact PPP loans had on average earnings assets, loan interest income, average interest bearing liabilities, and interest expense.
On April 1, 2022, the Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity as an overall balance sheet management strategy. The fair value of these securities transferred was $127.0 million. Purchases of securities available-for-sale totaled $315.3 million in 2022, $835.0 million in 2021 and $216.5 million in 2020.
On April 1, 2022, the Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity as an overall balance sheet management strategy. The fair value of these securities transferred was $127.0 million. Securities sales totaled $105.2 million in 2023, $25.3 million in 2022 and $14.0 million in 2021.
The Company had $350.0 million of availability in federal funds lines with eleven correspondent banks, of which $22.0 million was drawn on as of December 31, 2022.
The Company had $325.0 million of availability in federal funds lines with eleven correspondent banks, of which none was drawn on as of December 31, 2023.
The Company deployed $250 million of excess liquidity to the investment securities portfolio during 2022, $652 million in 2021 and $100 million in 2020 to preserve net interest margin prior to the Federal Reserve Board's tightening cycle, which began in March of 2022.
Prior to the recent Federal Reserve monetary tightening cycle starting in March of 2022, the Company deployed $250 million of excess liquidity to the investment securities portfolio during 2022 and $652 million in 2021 to preserve net interest margin.
The Company’s yield on earning assets increased 67 basis points during 2022 as assets repriced at higher rates primarily due to the FOMC rate increases noted above and a significantly higher yield curve as when compared to 2021. The commercial loan portfolio represents 89% of the total loan portfolio.
The Company’s yield on earning assets increased 170 basis points during 2023 as assets repriced at higher rates primarily due to the FOMC rate increases during both 2022 and 2023 and a higher yield curve for the majority of 2023 as when compared to 2022. The commercial loan portfolio represents 89% of the total loan portfolio.
As of December 31, 2022, the Company had $ 115.7 million of assets classified as Special Mention , $45.3 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $176.6 million, $57.9 million, $0 and $0, respectively, at December 31, 2021.
As of December 31, 2023, the Company had $143.6 million of assets classified as Special Mention , $39.4 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $115.7 million, $45.3 million, $0 and $0, respectively, at December 31, 2022.
Return on average total assets was 1.62% in 2022 versus 1.56% in 2021 and 1.55% in 2020. Return on average total equity was 17.40% in 2022 versus 14.19% in 2021 and 13.51% in 2020. The dividend payout ratio, with respect to diluted earnings per share, was 39.60% in 2022, 36.36% in 2021 and 36.36% in 2020.
Return on average total assets was 1.45% in 2023, versus 1.62% in 2022 and 1.56% in 2021. Return on average total equity was 15.93% in 2023, versus 17.40% in 2022 and 14.19% in 2021. The dividend payout ratio, with respect to diluted earnings per share, was 50.41% in 2023, versus 39.60% in 2022 and 36.36% in 2021.
A loan is individually analyzed when full payment under the original loan terms is not expected. Reserves are evaluated in total for smaller-balance loans of similar nature not in nonaccrual status such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans including material modifications made to borrowers experiencing financial difficulty.
Reserves are evaluated in total for smaller-balance loans of similar nature not in nonaccrual status such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans including material modifications made to borrowers experiencing financial difficulty.
Income Taxes The Company recognized income tax expense in 2022 of $21.3 million, compared to $21.7 million in 2021 and $19.5 million in 2020. The effective tax rate was 17.1% in 2022, compared to 18.5% in 2021 and 18.8% in 2020.
Income Taxes The Company recognized income tax expense in 2023 of $16.6 million, compared to $21.3 million in 2022 and $21.7 million in 2021. The effective tax rate was 15.0% in 2023, compared to 17.1% in 2022 and 18.5% in 2021.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in 2022 was $103.8 million, up 8.4% from $95.7 million in 2021. Net income for 2021 was 13.5% higher than $84.3 million in 2020. Diluted net income per common share was $4.04 in 2022, $3.74 in 2021 and $3.30 in 2020.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in 2023 was $93.8 million, down 9.7%, from $103.8 million in 2022. Net income for 2022 was 8.4% higher than $95.7 million in 2021. Diluted net income per common share was $3.65 in 2023, $4.04 in 2022 and $3.74 in 2021.
Maturities and calls of securities totaled $9.3 million , $24.7 million and $7.6 million in 2022, 2021 and 2020, respectively. No provision for allowance for credit loss was recorded in connection with the investment securities portfolio in 2022 or 2021, and n o other-than-temporary impairment was recognized in 2020.
Maturities and calls of securities totaled $13.6 million , $9.3 million and $24.7 million in 2023, 2022 and 2021, respectively. No provision for allowance for credit loss was recorded in connection with the investment securities portfolio in 2023, 2022 or 2021 .
The Company has additional collateral that could be pledged to the FHLB of $486.2 million as of December 31, 2022 to generate additional liquidity.
The Company has additional collateral that could be pledged to the FHLB of $8.4 million as of December 31, 2023 to generate additional liquidity.
Year ended December 31, 2022 2021 2020 Return on average assets 1.62 % 1.56 % 1.55 % Return on equity 17.40 % 14.19 % 13.51 % Average equity to average assets 9.28 % 10.96 % 11.51 % Dividend payout ratio 39.60 % 36.36 % 36.36 % 38 Table of Contents Return on average assets is computed by dividing net income by average assets for each indicated fiscal year.
Year ended December 31, 2023 2022 2021 Return on average assets 1.45 % 1.62 % 1.56 % Return on equity 15.93 17.40 14.19 Average equity to average assets 9.11 9.28 10.96 Dividend payout ratio 50.41 39.60 36.36 Return on average assets is computed by dividing net income by average assets for each indicated fiscal year.
(dollars in thousands) 2022 2021 2020 Amount of loans outstanding, net of deferred fees, December 31, $ 4,710,396 $ 4,287,841 $ 4,649,156 Average daily loans outstanding during the year ended December 31, $ 4,427,166 $ 4,421,094 $ 4,424,472 Allowance for credit losses, January 1, $ 67,773 $ 61,408 $ 50,652 Impact of adopting ASC 326 0 9,050 0 Loans charged-off: Commercial and industrial loans 4,022 5,575 4,524 Commercial real estate and multi-family residential loans 597 70 72 Agri-business and agricultural loans 0 0 0 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 42 51 141 Other consumer loans 473 287 516 Total loans charged-off 5,134 5,983 5,253 Recoveries of loans previously charged-off: Commercial and industrial loans 71 1,559 428 Commercial real estate and multi-family residential loans 277 14 315 Agri-business and agricultural loans 0 320 0 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 52 122 333 Other consumer loans 192 206 163 Total recoveries 592 2,221 1,239 Net loans charged-off (recovered) 4,542 3,762 4,014 Provision for credit loss charged to expense 9,375 1,077 14,770 Balance, December 31, $ 72,606 $ 67,773 $ 61,408 Ratios: Net charge-offs to average daily loans outstanding: Commercial and industrial loans 0.09 % 0.09 % 0.09 % Commercial real estate and multi-family residential loans 0.01 0.00 0.00 Agri-business and agricultural loans 0.00 0.00 0.00 Other commercial loans 0.00 0.00 0.00 Consumer 1-4 family mortgage loans 0.00 0.00 0.00 Other consumer loans 0.00 0.00 0.00 Total ratio of net charge-offs (recoveries) 0.10 % 0.09 % 0.09 % Allowance for credit losses on loans to: Total loans 1.54 % 1.58 % 1.32 % Total loans (excluding PPP loans) 1.54 % 1.59 % 1.45 % Ratio of allowance for credit losses to nonperforming loans 424.91 % 449.13 % 507.42 % 48 Table of Contents The following is a summary of the allocation for credit losses as of December 31, 2022 and 2021.
(dollars in thousands) 2023 2022 2021 Amount of loans outstanding, net of deferred fees, December 31, $ 4,916,534 $ 4,710,396 $ 4,287,841 Average daily loans outstanding during the year ended December 31, $ 4,813,678 $ 4,427,166 $ 4,421,094 Allowance for credit losses, January 1, $ 72,606 $ 67,773 $ 61,408 Impact of adopting ASC 326 0 0 9,050 Loans charged-off: Commercial and industrial loans 6,341 4,022 5,575 Commercial real estate and multi-family residential loans 0 597 70 Agri-business and agricultural loans 0 0 0 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 163 42 51 Other consumer loans 828 473 287 Total loans charged-off 7,332 5,134 5,983 Recoveries of loans previously charged-off: Commercial and industrial loans 180 71 1,559 Commercial real estate and multi-family residential loans 322 277 14 Agri-business and agricultural loans 0 0 320 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 38 52 122 Other consumer loans 308 192 206 Total recoveries 848 592 2,221 Net loans charged-off 6,484 4,542 3,762 Provision for credit loss charged to expense 5,850 9,375 1,077 Balance, December 31, $ 71,972 $ 72,606 $ 67,773 Ratios: Net charge offs (recoveries) to average daily loans outstanding: Commercial and industrial loans 0.13 % 0.09 % 0.09 % Commercial real estate and multi-family residential loans (0.01) 0.01 0.00 Agri-business and agricultural loans 0.00 0.00 0.00 Other commercial loans 0.00 0.00 0.00 Consumer 1-4 family mortgage loans 0.00 0.00 0.00 Other consumer loans 0.01 0.00 0.00 Total ratio of net charge offs (recoveries) 0.13 % 0.10 % 0.09 % Allowance for credit losses on loans to: Total loans 1.46 % 1.54 % 1.58 % Ratio of allowance for credit losses to nonperforming loans 458.01 % 424.91 % 449.13 % 54 Table of Contents The following is a summary of the allocation for credit losses as of December 31, 2023 and 2022.
Year Ended Dec. 31, 2022 Dec. 31, 2021 Dec. 31, 2020 Total Average Earnings Assets $ 6,123,163 $ 5,906,640 $ 5,184,836 Less: Average Balance of PPP Loans (7,942) (237,951) (376,785) Total Adjusted Earning Assets 6,115,221 5,668,689 4,808,051 Total Interest Income FTE $ 245,194 $ 196,806 $ 195,549 Less: PPP Loan Income (772) (14,945) (12,832) Total Adjusted Interest Income FTE 244,422 181,861 182,717 Adjusted Earning Asset Yield, net of PPP Impact 4.00 % 3.21 % 3.80 % Total Average Interest Bearing Liabilities $ 3,913,195 $ 3,761,520 $ 3,437,338 Less: Average Balance of PPP Loans (7,942) (237,951) (376,785) Total Adjusted Interest Bearing Liabilities 3,905,253 $ 3,523,569 $ 3,060,553 Total Interest Expense FTE $ 36,680 $ 15,131 $ 30,095 Less: PPP Cost of Funds (20) (595) (956) Total Adjusted Interest Expense FTE 36,660 14,536 29,139 Adjusted Cost of Funds, net of PPP Impact 0.60 % 0.26 % 0.61 % Net Interest Margin FTE, net of PPP Impact 3.40 % 2.95 % 3.19 % Net Income Net income was $103.8 million in 2022, an increase of $8.1 million, or 8.4%, versus net income of $95.7 million in 2021.
Year Ended Dec. 31, 2022 Dec. 31, 2021 Total Average Earnings Assets $ 6,123,163 $ 5,906,640 Less: Average Balance of PPP Loans (7,942) (237,951) Total Adjusted Earning Assets 6,115,221 5,668,689 Total Interest Income FTE $ 245,194 $ 196,806 Less: PPP Loan Income (772) (14,945) Total Adjusted Interest Income FTE 244,422 181,861 Adjusted Earning Asset Yield, net of PPP Impact 4.00 % 3.21 % Total Average Interest Bearing Liabilities $ 3,913,195 $ 3,761,520 Less: Average Balance of PPP Loans (7,942) (237,951) Total Adjusted Interest Bearing Liabilities 3,905,253 3,523,569 Total Interest Expense FTE $ 36,680 $ 15,131 Less: PPP Cost of Funds (20) (595) Total Adjusted Interest Expense FTE 36,660 14,536 Adjusted Cost of Funds, net of PPP Impact 0.60 % 0.26 % Net Interest Margin FTE, net of PPP Impact 3.40 % 2.95 % Net Income Net income was $93.8 million in 2023, a decrease of $10.1 million, or 9.7%, versus net income of $103.8 million in 2022.
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 only to the extent cash payments are received. Accrual status is resumed when all contractually due payments are brought current and future payments are reasonably assured.
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 only to the extent cash payments are received.
Pooled loan allocations decreased $492,000 from $58.7 million at December 31, 2021 to $58.2 million at December 31, 2022. The unallocated component of the allowance for credit losses was $554,000 at December 31, 2022, which increased from $450,000 reported at December 31, 2021 .
Pooled loan allocations increased $5.6 million from $58.2 million at December 31, 2022 to $63.8 million at December 31, 2023. The unallocated component of the allowance for credit losses was $372,000 at December 31, 2023, which decreased from $554,000 reported at December 31, 2022 .
The day one impact of the adoption was an increase in the allowance for credit losses of $9.1 million, with an offset, net of taxes, to stockholders' equity. 36 Table of Contents Noninterest Income The following table presents changes in the components of noninterest income for the years ended December 31, 2020, 2021 and 2022. % Change From Prior Year (dollars in thousands) 2022 2021 2020 2022 2021 Wealth advisory fees $ 8,636 $ 8,750 $ 7,468 (1.3) % 17.2 % Investment brokerage fees 2,318 1,975 1,670 17.4 % 18.3 % Service charges on deposit accounts 11,595 10,608 10,110 9.3 % 4.9 % Loan and service fees 12,214 11,922 10,085 2.4 % 18.2 % Merchant and interchange fee income 3,560 3,023 2,408 17.8 % 25.5 % Bank owned life insurance income 432 2,467 2,105 (82.5) % 17.2 % Interest rate swap fee income 579 1,035 5,089 (44.1) % (79.7) % Mortgage banking income 633 1,418 3,911 (55.4) % (63.7) % Net securities gains 21 797 433 (97.4) % 84.1 % Other income 1,874 2,725 3,564 (31.2) % (23.5) % Total noninterest income $ 41,862 $ 44,720 $ 46,843 (6.4) % (4.5) % Noninterest income to total revenue 17.1 % 20.1 % 22.3 % Noninterest income was $41.9 million in 2022 versus $44.7 million in 2021, a decrease of $2.9 million, or 6.4%.
Adoption of the standard resulted in a day one impact to the allowance for credit losses of $9.1 million, with an offset, net of taxes, to stockholders' equity. 42 Table of Contents Noninterest Income The following table presents changes in the components of noninterest income for the years ended December 31, 2023, 2022 and 2021. % Change From Prior Year (dollars in thousands) 2023 2022 2021 2023 2022 Wealth advisory fees $ 9,080 $ 8,636 $ 8,750 5.1 % (1.3) % Investment brokerage fees 1,815 2,318 1,975 (21.7) 17.4 Service charges on deposit accounts 10,773 11,595 10,608 (7.1) 9.3 Loan and service fees 11,750 12,214 11,922 (3.8) 2.4 Merchant and interchange fee income 3,651 3,560 3,023 2.6 17.8 Bank owned life insurance income 3,133 432 2,467 625.2 (82.5) Interest rate swap fee income 794 579 1,035 37.1 (44.1) Mortgage banking income (loss) (254) 633 1,418 (140.1) (55.4) Net securities gains (losses) (25) 21 797 (219.0) (97.4) Other income 9,141 1,874 2,725 387.8 (31.2) Total noninterest income $ 49,858 $ 41,862 $ 44,720 19.1 % (6.4) % Noninterest income to total revenue 20.2 % 17.1 % 20.1 % Noninterest income was $49.9 million in 2023 versus $41.9 million in 2022, an increase of $8.0 million, or 19.1%.
Management believes that it is prudent to continue to provide for credit losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions. Watch list loans were $73.5 million lower at $161.0 million as of December 31, 2022, compared to $234.5 million at December 31, 2021.
Management believes that it is prudent to continue to provide for credit losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions. Watch list loans increased $22.1 million to $183.1 million as of December 31, 2023, compared to $161.0 million at December 31, 2022, or an increase of 13.7%.
In 2021, net loan balances decreased by $367.7 million to $4.220 billion, and excluded approximately $119.4 million in loans originated for sale. In 2020, net loan balances increased by $572.6 million to $4.588 billion, and excluded approximately $117.6 million in loans originated for sale.
In 2022, net loan balances increased by $417.7 million to $4.638 billion, and excluded approximately $28.7 million in loans originated for sale. In 2021, net loan balances decreased by $367.7 million to $4.220 billion, and excluded approximately $119.4 million in loans originated for sale.
Loans to the agriculture and agri-business sector of our Indiana footprint represent a significant loan segment of the overall loan portfolio. This loan segment is well diversified with loans to corn, soybean, poultry, dairy, swine, beef and egg growers.
Loans totaling $71.2 million for this sector represented 1.5% of total loans at December 31, 2023. Loans to the agriculture and agri-business sector of our Indiana footprint represent a significant loan segment of the overall loan portfolio. This loan segment is well diversified with loans to corn, soybean, poultry, dairy, swine, beef and egg growers.
Total nonperforming loans were $17.1 million, or 0.36% of total loans, at December 31, 2022 versus $15.1 million, or 0.35% of total loans, at December 31, 2021. There were 39 loans totaling $31.3 million classified as individually analyzed as of December 31, 2022 versus 34 loans totaling $25.6 million at the end of 2021.
Total nonperforming loans were $15.7 million, or 0.32% of total loans, at December 31, 2023 versus $17.1 million, or 0.36% of total loans, at December 31, 2022. There were 33 relationships totaling $16.1 million classified as individually analyzed as of December 31, 2023 versus 39 relationships totaling $31.3 million at the end of 2022.
The Company declared cash dividends of $1.60 per share in 2022, which decreased equity by $40.9 million. The Company declared cash dividends of $1.36 per share in 2021, which decreased equity by $34.7 million. Total stockholder's equity has been impacted by declines in the market value of the Company's available-for-sale investment securities portfolio.
The Company declared cash dividends of $1.60 per share in 2022, which decreased equity by $40.9 million. Total stockholder's equity has been impacted by declines in the market value of the Company's available-for-sale investment securities portfolio. The market value decline, resulting from higher interest rate environment, has generated unrealized losses in the available-for-sale portfolio.
CERTAIN STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES We are required to provide certain statistical disclosures as a bank holding company under the SEC's Industry Guide 3. The following table provides certain of those disclosures.
For a detailed analysis of the Company’s income taxes see "Note 12 – Income Taxes". 44 Table of Contents CERTAIN STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES We are required to provide certain statistical disclosures as a bank holding company under the SEC's Industry Guide 3. The following table provides certain of those disclosures.
Investment securities represented 20% of total assets on December 31, 2022 compared to 21% on December 31, 2021 and 13% on December 31, 2020.
Investment securities represented 18.1% of total assets on December 31, 2023 compared to 20.4% on December 31, 2022 and 21.3% on December 31, 2021.
Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
The methodology management uses to determine the adequacy of the credit loss reserve includes the considerations below. Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Market value declines impacted the overall decrease in noninterest income. Bank owned life insurance income for the year ended December 31, 2022 decreased by $2.0 million, primarily due to declines in the market value of variable life insurance policies that are tied to the equity markets.
Bank owned life insurance income for the year ended December 31, 2022 decreased by $2.0 million, primarily due to declines in the market value of variable life insurance policies that are tied to the equity markets. A reduction of market value of $950,000 was recorded during 2022 compared to market value gains of $1.1 million for 2021.
The average equity to average assets ratio was 9.28% in 2022 compared to 10.96% in 2021 and 11.51% in 2020. Net income in 2022 was positively impacted by a $24.8 million increase in net interest income.
The average equity to average assets ratio was 9.11% in 2023, compared to 9.28% in 2022 and 10.96% in 2021. Net income in 2023 was negatively impacted by a $20.5 million increase in noninterest expense and a $5.9 million decrease in net interest income.
Net Interest Income The following table presents a three-year average balance sheet and, for each major asset and liability category, its related interest income and yield or its expense and rate for the years ended December 31, 2022, 2021 and 2020. 33 Table of Contents THREE YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS 2022 2021 2020 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Earning Assets Loans: Taxable (1)(2) $ 4,391,590 $ 202,004 4.60 % $ 4,406,456 $ 170,081 3.86 % $ 4,405,994 $ 176,538 4.01 % Tax exempt (3) 35,576 2,094 5.89 14,638 594 4.06 18,478 813 4.40 Investments: (3) Securities 1,432,287 38,882 2.71 1,068,325 25,582 2.39 633,956 17,830 2.81 Short-term investments 2,266 30 1.32 2,254 2 0.09 25,046 67 0.27 Interest bearing deposits 261,444 2,184 0.84 414,967 547 0.13 101,362 301 0.30 Total earning assets $ 6,123,163 $ 245,194 4.00 % $ 5,906,640 $ 196,806 3.33 % $ 5,184,836 $ 195,549 3.77 % Less: Allowance for credit losses (67,717) (72,083) (56,824) Nonearning Assets Cash and due from banks 72,302 70,035 62,242 Premises and equipment 58,894 59,667 60,492 Other nonearning assets 240,937 189,521 174,050 Total assets $ 6,427,579 $ 6,153,780 $ 5,424,796 Interest Bearing Liabilities Savings deposits $ 419,997 $ 327 0.08 % $ 360,915 $ 278 0.08 % $ 270,010 $ 219 0.08 % Interest bearing checking accounts 2,689,572 31,182 1.16 2,392,220 6,759 0.28 1,862,077 9,268 0.50 Time deposits: In denominations under $100,000 185,215 1,289 0.70 218,624 2,038 0.93 262,040 4,361 1.66 In denominations over $100,000 579,797 3,483 0.60 714,353 5,752 0.81 946,569 15,494 1.64 Miscellaneous short-term borrowings 6,559 272 4.15 408 7 1.72 34,347 506 1.47 Long-term borrowings and subordinated debentures 32,055 127 0.40 75,000 297 0.40 62,295 247 0.40 Total interest bearing liabilities $ 3,913,195 $ 36,680 0.94 % $ 3,761,520 $ 15,131 0.40 % $ 3,437,338 $ 30,095 0.88 % Noninterest Bearing Liabilities Demand deposits 1,842,777 1,671,172 1,309,901 Other liabilities 75,120 46,451 53,384 Stockholders' Equity 596,487 674,637 624,173 Total liabilities and stockholders' equity $ 6,427,579 $ 6,153,780 $ 5,424,796 Interest Margin Recap Interest income/average earning assets 245,194 4.00 % 196,806 3.33 % 195,549 3.77 % Interest expense/average earning assets 36,680 0.60 15,131 0.26 30,095 0.58 Net interest income and margin $ 208,514 3.40 % $ 181,675 3.07 % $ 165,454 3.19 % (1) Loan fees are included as taxable loan interest income.
Net Interest Income The following table presents a three-year average balance sheet and, for each major asset and liability category, its related interest income and yield or its expense and rate for the years ended December 31, 2023, 2022 and 2021. 39 Table of Contents THREE YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS 2023 2022 2021 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Earning Assets Loans: Taxable (1)(2) $ 4,755,341 $ 304,130 6.40 % $ 4,391,590 $ 202,004 4.60 % $ 4,406,456 $ 170,081 3.86 % Tax exempt (3) 58,337 4,839 8.29 35,576 2,094 5.89 14,638 594 4.06 Investments: (3) Securities 1,184,659 33,907 2.86 1,432,287 38,882 2.71 1,068,325 25,582 2.39 Short-term investments 2,425 109 4.49 2,266 30 1.32 2,254 2 0.09 Interest bearing deposits 113,463 5,594 4.93 261,444 2,184 0.84 414,967 547 0.13 Total earning assets $ 6,114,225 $ 348,579 5.70 % $ 6,123,163 $ 245,194 4.00 % $ 5,906,640 $ 196,806 3.33 % Less: Allowance for credit losses (72,222) (67,717) (72,083) Nonearning Assets Cash and due from banks 70,941 72,302 70,035 Premises and equipment 58,633 58,894 59,667 Other nonearning assets 293,403 240,937 189,521 Total assets $ 6,464,980 $ 6,427,579 $ 6,153,780 Interest Bearing Liabilities Savings deposits $ 347,009 $ 246 0.07 % $ 419,997 $ 327 0.08 % $ 360,915 $ 278 0.08 % Interest bearing checking accounts 2,909,464 107,471 3.69 2,689,572 31,182 1.16 2,392,220 6,759 0.28 Time deposits: In denominations under $100,000 202,904 5,106 2.52 185,215 1,289 0.70 218,624 2,038 0.93 In denominations over $100,000 669,545 24,968 3.73 579,797 3,483 0.60 714,353 5,752 0.81 Miscellaneous short-term borrowings 166,821 8,441 5.06 6,559 272 4.15 408 7 1.72 Long-term borrowings 0 0 0.00 32,055 127 0.40 75,000 297 0.40 Total interest bearing liabilities $ 4,295,743 $ 146,232 3.40 % $ 3,913,195 $ 36,680 0.94 % $ 3,761,520 $ 15,131 0.40 % Noninterest Bearing Liabilities Demand deposits 1,475,306 1,842,777 1,671,172 Other liabilities 105,264 75,120 46,451 Stockholders' Equity 588,667 596,487 674,637 Total liabilities and stockholders' equity $ 6,464,980 $ 6,427,579 $ 6,153,780 Interest Margin Recap Interest income/average earning assets 348,579 5.70 % 245,194 4.00 % 196,806 3.33 % Interest expense/average earning assets 146,232 2.39 36,680 0.60 15,131 0.26 Net interest income and margin $ 202,347 3.31 % $ 208,514 3.40 % $ 181,675 3.07 % (1) Loan fees are included as taxable loan interest income.
Proceeds from sales totaled $36.5 million in 2022, $126.4 million in 2021 and $114.2 million in 2020. 40 Table of Contents Loan Portfolio The loan portfolio by class as of December 31, 2022, 2021 and 2020 was as follows: (dollars in thousands) 2022 2021 2020 Commercial and industrial loans: Working capital lines of credit loans $ 650,948 $ 652,861 $ 626,023 Non-working capital loans 842,101 736,608 1,165,355 Total commercial and industrial loans 1,493,049 1,389,469 1,791,378 Commercial real estate and multi-family residential loans: Construction and land development loans 517,664 379,813 362,653 Owner occupied loans 758,091 739,371 648,019 Nonowner occupied loans 706,107 588,458 579,625 Multi-family loans 197,232 247,204 304,717 Total commercial real estate and multi-family residential loans 2,179,094 1,954,846 1,895,014 Agri-business and agricultural loans: Loans secured by farmland 201,200 206,331 195,410 Loans for agricultural production 230,888 239,494 234,234 Total agri-business and agricultural loans 432,088 445,825 429,644 Other commercial loans 113,593 73,490 94,013 Total commercial loans 4,217,824 3,863,630 4,210,049 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 212,742 176,561 167,847 Open end and junior lien loans 175,575 156,238 163,664 Residential construction and land development loans 19,249 11,921 12,007 Total consumer 1-4 family mortgage loans 407,566 344,720 343,518 Other consumer loans 88,075 82,755 103,616 Total consumer loans 495,641 427,475 447,134 Gross loans 4,713,465 4,291,105 4,657,183 Less: Allowance for credit losses (72,606) (67,773) (61,408) Net deferred loan fees (3,069) (3,264) (8,027) Loans, net $ 4,637,790 $ 4,220,068 $ 4,587,748 The ratio of loans to total loans by portfolio segment as of December 31, 2022, 2021 and 2020 was as follows: 2022 2021 2020 Commercial and industrial loans 31.68 % 32.38 % 38.46 % Commercial real estate and multi-family residential loans 46.23 % 45.56 % 40.69 % Agri-business and agricultural loans 9.17 % 10.39 % 9.23 % Other commercial loans 2.41 % 1.71 % 2.02 % Consumer 1-4 family mortgage loans 8.64 % 8.03 % 7.38 % Other consumer loans 1.87 % 1.93 % 2.22 % Total Loans 100.00 % 100.00 % 100.00 % 41 Table of Contents In 2022, net loan balances increased by $417.7 million to $4.638 billion, and excludes approximately $28.7 million in loans originated for sale.
Proceeds from sales totaled $8.0 million in 2023, $36.5 million in 2022 and $126.4 million in 2021. 46 Table of Contents Loan Portfolio The loan portfolio by class as of December 31, 2023, 2022 and 2021 was as follows: (dollars in thousands) 2023 2022 2021 Commercial and industrial loans: Working capital lines of credit loans $ 604,893 $ 650,948 $ 652,861 Non-working capital loans 815,871 842,101 736,608 Total commercial and industrial loans 1,420,764 1,493,049 1,389,469 Commercial real estate and multi-family residential loans: Construction and land development loans 634,435 517,664 379,813 Owner occupied loans 825,464 758,091 739,371 Nonowner occupied loans 724,101 706,107 588,458 Multi-family loans 253,534 197,232 247,204 Total commercial real estate and multi-family residential loans 2,437,534 2,179,094 1,954,846 Agri-business and agricultural loans: Loans secured by farmland 162,890 201,200 206,331 Loans for agricultural production 225,874 230,888 239,494 Total agri-business and agricultural loans 388,764 432,088 445,825 Other commercial loans 120,726 113,593 73,490 Total commercial loans 4,367,788 4,217,824 3,863,630 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 258,103 212,742 176,561 Open end and junior lien loans 189,663 175,575 156,238 Residential construction and land development loans 8,421 19,249 11,921 Total consumer 1-4 family mortgage loans 456,187 407,566 344,720 Other consumer loans 96,022 88,075 82,755 Total consumer loans 552,209 495,641 427,475 Gross loans 4,919,997 4,713,465 4,291,105 Less: Allowance for credit losses (71,972) (72,606) (67,773) Net deferred loan fees (3,463) (3,069) (3,264) Loans, net $ 4,844,562 $ 4,637,790 $ 4,220,068 The ratio of loans to total loans by portfolio segment as of December 31, 2023, 2022 and 2021 was as follows: 2023 2022 2021 Commercial and industrial loans 28.89 % 31.68 % 32.38 % Commercial real estate and multi-family residential loans 49.54 46.23 45.56 Agri-business and agricultural loans 7.90 9.17 10.39 Other commercial loans 2.45 2.41 1.71 Consumer 1-4 family mortgage loans 9.27 8.64 8.03 Other consumer loans 1.95 1.87 1.93 Total Loans 100.00 % 100.00 % 100.00 % 47 Table of Contents In 2023, net loan balances increased by $206.8 million to $4.845 billion, and excludes approximately $8.6 million in loans originated for sale.
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. Off-balance sheet transactions are more fully discussed in "Note 17 – Commitments, Off-Balance Sheet Risks and Contingencies".
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.
(dollars in thousands) 2022 2021 Allocated allowance for credit losses: Commercial and industrial loans $ 35,290 $ 30,595 Commercial real estate and multi-family residential loans 27,394 26,535 Agri-business and agricultural loans 4,429 5,034 Other commercial loans 917 1,146 Consumer 1-4 family mortgage loans 3,001 2,866 Other consumer loans 1,021 1,147 Total allocated allowance for credit losses 72,052 67,323 Unallocated allowance for credit losses 554 450 Total allowance for credit losses $ 72,606 $ 67,773 At December 31, 2022, the allowance for credit losses was 1.54% of total loans outstanding, versus 1.58% of total loans outstanding at December 31, 2021.
(dollars in thousands) 2023 2022 Allocated allowance for credit losses: Commercial and industrial loans $ 30,338 $ 35,290 Commercial real estate and multi-family residential loans 31,335 27,394 Agri-business and agricultural loans 4,150 4,429 Other commercial loans 1,129 917 Consumer 1-4 family mortgage loans 3,474 3,001 Other consumer loans 1,174 1,021 Total allocated allowance for credit losses 71,600 72,052 Unallocated allowance for credit losses 372 554 Total allowance for credit losses $ 71,972 $ 72,606 At December 31, 2023, the allowance for credit losses was 1.46% of total loans outstanding, versus 1.54% of total loans outstanding at December 31, 2022.
The realized increase in the rate paid on deposit accounts and purchased funds was lessened by an increase in the average balance of non-interest bearing demand deposit accounts for 2022 verses 2021, primarily in commercial deposit accounts. 52 Table of Contents Future changes in the net interest margin will be dependent upon multiple factors including further actions by the FOMC during 2023 in response to inflation, economic conditions and geopolitical concerns, the results of any of the administration’s changes to economic policy and laws, competitive pressures in the various markets served, and changes in the structure of the balance sheet as a result of changes in customer demands for products and services.
Future changes in the net interest margin will be dependent upon multiple factors including further actions by the FOMC during 2024 in response to inflation, economic conditions and geopolitical concerns, the results of any of the administration’s changes to economic policy and laws, competitive pressures in the various markets served, and changes in the structure of the balance sheet as a result of changes in customer demands for products and services.
The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31.
Taxable equivalent basis adjustments were $5.3 million, $5.6 million and $3.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. 40 Table of Contents The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31.
(dollars in thousands) 2022 2021 2020 Income Statement Summary: Net interest income $ 202,887 $ 178,088 $ 163,008 Provision for credit losses 9,375 1,077 14,770 Noninterest income 41,862 44,720 46,843 Noninterest expense 110,210 104,287 91,205 Other Data: Efficiency ratio (1) 45.03 % 46.81 % 43.46 % Dilutive EPS $ 4.04 $ 3.74 $ 3.30 Total equity $ 568,887 $ 704,906 $ 657,184 Tangible capital ratio (2) 8.79 % 10.70 % 11.21 % Adjusted tangible capital ratio (3) 11.30 % 10.47 % 10.78 % Net charge-offs to average loans 0.10 % 0.09 % 0.09 % Net interest margin 3.40 % 3.07 % 3.19 % Net interest margin excluding PPP loans (4) 3.40 % 2.95 % 3.19 % Noninterest income to total revenue 17.10 % 20.07 % 22.32 % Pretax Pre-Provision Earnings (5) $ 134,539 $ 118,521 $ 118,646 (1) Noninterest expense/Net interest income plus Noninterest income.
(dollars in thousands, except per share data) 2023 2022 2021 Income Statement Summary: Net interest income (a) $ 197,035 $ 202,887 $ 178,088 Provision for credit losses 5,850 9,375 1,077 Noninterest income (b) 49,858 41,862 44,720 Adjusted Core Noninterest Income (1) 43,558 41,862 44,720 Noninterest expense (c) 130,710 110,210 104,287 Adjusted Core Noninterest Expense (1) 114,049 110,210 104,287 Other Data: Efficiency ratio (2) 52.94 % 45.03 % 46.81 % Adjusted Core Efficiency Ratio (1) 47.40 45.03 46.81 Dilutive EPS $ 3.65 $ 4.04 $ 3.74 Total equity 649,793 568,887 704,906 Tangible capital ratio (3) 9.91 % 8.79 % 10.70 % Adjusted tangible capital ratio (4) 11.99 11.38 10.47 Net charge offs to average loans 0.13 0.10 0.09 Net interest margin 3.31 3.40 3.07 Net interest margin excluding Paycheck Protection Program ("PPP") loans (5) 3.31 3.40 2.95 Noninterest income to total revenue 20.19 17.10 20.07 Pretax Pre-Provision Earnings (6) $ 116,183 $ 134,539 $ 118,521 (1) Non-GAAP financial measure.
The CFP identifies the potential funding sources at the Bank level, which includes the FHLB, the Federal Reserve Bank, brokered deposits, one-way buy products via the IntraFi Network (CD Option and ICS) and Federal Funds. The CFP also addresses the Bank’s ability to liquidate its securities portfolio.
The CFP specifically considers liquidity at the Bank and the Company level. The CFP identifies the potential funding sources at the Bank level, which includes the FHLB, the Federal Reserve Bank, brokered deposits, one-way buy products via the IntraFi Network (CDARS and ICS) and Federal Funds.
Nearly all of the Bank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries. 45 Table of Contents The following is a summary of nonperforming loans as of December 31, 2022 and 2021.
Substantially all of the Bank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries.
Amount of Commitment Expiration Per Period (dollars in thousands) Total Amount Committed One year or less Over one year Unused loan commitments $ 2,654,071 $ 1,400,103 $ 1,253,968 Standby letters of credit 48,406 45,415 2,991 Total commitments and letters of credit $ 2,702,477 $ 1,445,518 $ 1,256,959 Interest Rate Risk Interest rate risk is the risk that the estimated fair value of the Company’s assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that net income will be significantly reduced by interest rate changes.
Amount of Commitment Expiration Per Period (dollars in thousands) Total Amount Committed One year or less Over one year Unused loan commitments $ 2,871,286 $ 1,505,958 $ 1,365,328 Standby letters of credit 51,383 47,566 3,817 Total commitments and letters of credit $ 2,922,669 $ 1,553,524 $ 1,369,145 Interest Rate Risk Interest rate risk is the risk that the estimated fair value of the Company’s assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that net income will be significantly reduced by interest rate changes.
Payments Due by Period (dollars in thousands) Total One year or less 1-3 years 3-5 years After 5 years Operating leases $ 5,896 $ 727 $ 1,500 $ 1,484 $ 2,185 Pension and SERP plans 2,263 328 579 550 806 Total contractual long-term cash obligations $ 8,159 $ 1,055 $ 2,079 $ 2,034 $ 2,991 51 Table of Contents 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.
Payments Due by Period (dollars in thousands) Total One year or less 2-3 years 4-5 years After 5 years Operating leases $ 5,168 $ 744 $ 1,487 $ 1,346 $ 1,591 Pension and SERP plans 2,073 314 591 445 723 Total contractual long-term cash obligations $ 7,241 $ 1,058 $ 2,078 $ 1,791 $ 2,314 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.
The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $5.6 million, $3.6 million and $2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.
Management expects the investment securities portfolio as a percentage of assets to decrease over time and return to historical levels of approximately 14% as the proceeds from paydowns and maturities of these investment securities are used to fund future loan portfolio growth. 39 Table of Contents Securities sales totaled $25.3 million in 2022, $14.0 million in 2021 and $8.0 million in 2020.
Management expects the investment securities portfolio as a percentage of assets to decrease over time and return to historical levels of approximately 12%-14% during 2014 to 2020 as the proceeds from paydowns and maturities of these investment securities provide liquidity to fund future loan growth.
The allowance for credit losses represented 1.54% of total loans as of December 31, 2022 versus 1.58% at December 31, 2021 and 1.32% at December 31, 2020. The company’s credit loss reserve to total loans, excluding PPP loans, was 1.54% at December 31, 2022 compared to 1.59% at December 31, 2021 and 1.45% at December 31, 2020.
The Company’s allowance for credit losses as of December 31, 2023 was $72.0 million compared to $72.6 million as of December 31, 2022 and $67.8 million as of December 31, 2021. The allowance for credit losses represented 1.46% of total loans as of December 31, 2023 versus 1.54% at December 31, 2022 and 1.58% at December 31, 2021.
Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to prior periods. See reconciliation on the next page. 31 Table of Contents (4) Non-GAAP financial measure.
Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio included in accumulated other comprehensive income ("AOCI") from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to periods preceding the recent significant rise in prevailing interest rates. See reconciliation on the following pages.
The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment applicable to nondeductible interest expense. Net interest income increased by $24.8 million to $202.9 million in 2022 compared to 2021, partially due to a $216.5 million, or 3.7%, increase in average earning assets.
The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment applicable to nondeductible interest expense. Net interest income decreased by $5.9 million to $197.0 million in 2023 compared to $202.9 million in 2022, primarily as a result of increased funding costs. Total interest expense increased $109.6 million, or 298.7%.
Growth of the investment portfolio during the past three years served to provide an earning asset alternative for excess balance sheet liquidity stemming from increased levels of core deposits as a result of the U.S. government's COVID-19 pandemic stimulus programs.
Growth of the investment portfolio during 2021 and 2022 served to provide an earning asset alternative for excess balance sheet liquidity stemming from increased levels of liquidity provided by government stimulus programs in response to the COVID-19 pandemic.
During 2022, purchases in the securities portfolio consisted of primarily municipal bonds, agency securities and mortgage-backed securities. As of December 31, 2022, the Company’s investment in U.S government sponsored mortgage-backed securities represented approximately 38% of total investment securities fair value consisting of Collateralized Mortgage Obligations, Commercial Mortgage-Backed Securities and mortgage pools issued by Ginnie Mae, Fannie Mae and Freddie Mac.
As of December 31, 2023, the Company’s investment in U.S government sponsored mortgage-backed securities represented approximately 38% of total investment securities fair value consisting of mortgage pools issued by Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae, Fannie Mae and Freddie Mac securities are each guaranteed by their respective agencies as to principal and interest.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+2 added−2 removed10 unchanged
Biggest changeThe Company’s asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below.
Biggest changeEstimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements.
Results for the base, falling 300 basis points, falling 200 basis points, falling 100 basis points, falling 50 basis points, falling 25 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points, and rising 300 basis points interest rate scenarios are listed below based upon the Company’s rate sensitive assets and liabilities at December 31, 2022.
Results for the base, falling 300 basis points, falling 200 basis points, falling 100 basis points, falling 50 basis points, falling 25 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points, and rising 300 basis points interest rate scenarios are listed below based upon the Company’s rate sensitive assets and liabilities at December 31, 2023.
Management believes that the Company’s liquidity and interest sensitivity position at December 31, 2022, remained adequate to meet the Company’s primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The Company places a greater level of credence in net interest income simulation modeling.
Management believes that the Company’s liquidity and interest sensitivity position at December 31, 2023, remained adequate to meet the Company’s primary goal of achieving optimum interest margins while 60 Table of Contents avoiding undue interest rate risk. The Company places a greater level of credence in net interest income simulation modeling.
The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Company. The base scenario is highly dependent on numerous assumptions embedded in the model.
Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Company. The base scenario is highly dependent on numerous assumptions embedded in the model.
Although management does not consider GAP ratios in planning, the information can be used in a general fashion to look at asset and liability mismatches.
Although management does not consider GAP ratios in planning, the information can be used in a general fashion to look at asset and liability mismatches. The Company’s cumulative repricing GAP ratio as of December 31, 2023 for the next 12 months using a scenario in which interest rates remained unchanged was a negative 13.78% of earning assets.
(dollars in thousands) Base Falling (300 Basis Points) Falling (200 Basis Points) Falling (100 Basis Points) Falling (50 Basis Points) Falling (25 Basis Points) Rising (25 Basis Points) Rising (50 Basis Points) Rising (100 Basis Points) Rising (200 Basis Points) Rising (300 Basis Points) Net interest income $ 229,133 $ 198,763 $ 210,083 $ 220,508 $ 225,023 $ 227,183 $ 230,806 $ 232,466 $ 235,761 $ 242,422 $ 249,200 Variance from Base ($30,370) ($19,050) ($8,625) ($4,110) ($1,950) $ 1,673 $ 3,333 $ 6,628 $ 13,289 $ 20,067 Percent of change from Base (13.25) % (8.31) % (3.76) % (1.79) % (0.85) % 0.73 % 1.45 % 2.89 % 5.80 % 8.76 % For more information on the Company’s interest rate sensitivity see the Interest Rate Risk discussion in Item 7A. above. 55 Table of Contents
(dollars in thousands) Base Falling (300 Basis Points) Falling (200 Basis Points) Falling (100 Basis Points) Falling (50 Basis Points) Falling (25 Basis Points) Rising (25 Basis Points) Rising (50 Basis Points) Rising (100 Basis Points) Rising (200 Basis Points) Rising (300 Basis Points) Net interest income $ 210,702 $ 197,914 $ 203,707 $ 207,878 $ 209,476 $ 210,151 $ 211,168 $ 211,542 $ 212,130 $ 213,232 $ 214,375 Variance from Base ($12,788) ($6,995) ($2,824) ($1,226) ($551) $466 $840 $1,428 $ 2,530 $ 3,673 Percent of change from Base (6.07) % (3.32) % (1.34) % (0.58) % (0.26) % 0.22 % 0.40 % 0.68 % 1.20 % 1.74 % For more information on the Company’s interest rate sensitivity see the Interest Rate Risk discussion in Item 7A. above. 61 Table of Contents
Removed
Weighted-average variable rates are based upon rates existing at the reporting date. 53 Table of Contents 2022 Principal/Notional Amount Maturing in: (dollars in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total Fair Value 12/31/2022 Rate sensitive assets: Fixed interest rate loans $ 611,713 $ 378,532 $ 254,896 $ 145,491 $ 83,612 $ 122,762 $ 1,597,006 $ 1,541,036 Average interest rate 4.19 % 4.28 % 4.36 % 4.34 % 4.63 % 4.65 % Variable interest rate loans $ 1,498,699 $ 489,011 $ 288,555 $ 221,376 $ 160,702 $ 455,047 $ 3,113,390 $ 2,999,754 Average interest rate 7.05 % 6.79 % 6.37 % 6.39 % 6.57 % 6.82 % Total loans $ 2,110,412 $ 867,543 $ 543,451 $ 366,867 $ 244,314 $ 577,809 $ 4,710,396 $ 4,540,790 Average interest rate 6.22 % 5.70 % 5.43 % 5.58 % 5.91 % 6.36 % Fixed interest rate securities $ 111,438 $ 71,094 $ 62,859 $ 62,190 $ 57,016 $ 1,164,428 $ 1,529,025 $ 1,296,557 Average interest rate 2.33 % 2.08 % 1.99 % 2.04 % 2.05 % 2.53 % Other interest-bearing assets $ 49,290 $ 0 $ 0 $ 0 $ 0 $ 0 $ 49,290 $ 49,290 Average interest rate 3.73 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Total earning assets $ 2,271,140 $ 938,637 $ 606,310 $ 429,057 $ 301,330 $ 1,742,237 $ 6,288,711 $ 5,886,637 Average interest rate 5.97 % 5.42 % 5.07 % 5.06 % 5.18 % 3.79 % Rate sensitive liabilities: Noninterest bearing checking $ 314,375 $ 155,094 $ 138,092 $ 123,173 $ 109,641 $ 896,386 $ 1,736,761 $ 1,736,761 Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Savings & interest bearing checking $ 552,144 $ 193,903 $ 174,028 $ 156,700 $ 141,564 $ 1,879,335 $ 3,097,674 $ 3,097,674 Average interest rate 2.50 % 1.90 % 1.96 % 2.02 % 2.08 % 2.73 % Time deposits $ 379,459 $ 206,081 $ 15,132 $ 12,583 $ 12,546 $ 384 $ 626,185 $ 621,206 Average interest rate 0.76 % 2.11 % 1.60 % 1.00 % 2.11 % 0.99 % Total deposits $ 1,245,978 $ 555,078 $ 327,252 $ 292,456 $ 263,751 $ 2,776,105 $ 5,460,620 $ 5,455,641 Average interest rate 1.34 % 1.45 % 1.12 % 1.13 % 1.22 % 1.85 % Fixed interest rate borrowings $ 297,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 297,000 $ 275,000 Average interest rate 4.24 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Total funds $ 1,542,978 $ 555,078 $ 327,252 $ 292,456 $ 263,751 $ 2,776,105 $ 5,757,620 $ 5,752,641 Average interest rate 1.90 % 1.45 % 1.12 % 1.13 % 1.22 % 1.85 % Interest rate sensitivity gap by period $ 728,162 $ 383,559 $ 279,058 $ 136,601 $ 37,579 $ (1,033,868) Cumulative rate sensitivity gap $ 728,162 $ 1,111,721 $ 1,390,779 $ 1,527,380 $ 1,564,959 $ 531,091 Cumulative rate sensitivity ratio at December 31, 2022 147.2 % 169.1 % 185.3 % 146.7 % 114.2 % 62.8 % at December 31, 2021 178.8 % 167.5 % 140.5 % 110.9 % 123.2 % 47.2 % The Company utilizes computer modeling software to stress test the balance sheet under a wide variety of interest rate scenarios.
Added
Weighted-average variable rates are based upon rates existing at the reporting date. 59 Table of Contents 2023 Principal/Notional Amount Maturing in: (dollars in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total Fair Value 12/31/2023 Rate sensitive assets: Fixed interest rate loans $ 739,021 $ 448,779 $ 247,462 $ 163,758 $ 72,188 $ 127,235 $ 1,798,443 $ 1,748,419 Average interest rate 4.93 % 5.29 % 5.13 % 5.52 % 5.77 % 5.05 % Variable interest rate loans $ 1,518,052 $ 515,816 $ 288,064 $ 213,893 $ 180,428 $ 401,838 $ 3,118,091 $ 3,031,362 Average interest rate 8.20 % 7.75 % 7.32 % 7.10 % 7.09 % 6.96 % Total loans $ 2,257,073 $ 964,595 $ 535,526 $ 377,651 $ 252,616 $ 529,073 $ 4,916,534 $ 4,779,781 Average interest rate 7.13 % 6.61 % 6.31 % 6.42 % 6.71 % 6.50 % Fixed interest rate securities $ 72,231 $ 59,972 $ 67,025 $ 55,691 $ 66,237 $ 1,056,008 $ 1,377,164 $ 1,170,943 Average interest rate 2.27 % 2.07 % 2.12 % 2.12 % 2.04 % 2.25 % Variable interest rate securities $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Other interest-bearing assets $ 81,373 $ 0 $ 0 $ 0 $ 0 $ 0 $ 81,373 $ 81,373 Average interest rate 5.35 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Total earning assets $ 2,410,677 $ 1,024,567 $ 602,551 $ 433,342 $ 318,853 $ 1,585,081 $ 6,375,071 $ 6,032,097 Average interest rate 6.92 % 6.34 % 5.84 % 5.86 % 5.74 % 3.67 % Rate sensitive liabilities: Noninterest bearing checking $ 230,963 $ 130,956 $ 115,678 $ 102,183 $ 90,262 $ 683,435 $ 1,353,477 $ 1,353,477 Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Savings & interest bearing checking $ 810,190 $ 214,131 $ 188,996 $ 167,764 $ 149,533 $ 1,819,613 $ 3,350,227 $ 3,350,227 Average interest rate 3.72 % 2.87 % 2.95 % 3.02 % 3.08 % 3.82 % Time deposits $ 879,296 $ 84,752 $ 16,885 $ 31,638 $ 4,110 $ 140 $ 1,016,821 $ 1,010,172 Average interest rate 4.28 % 3.91 % 2.70 % 3.32 % 3.23 % 0.73 % Total deposits $ 1,920,449 $ 429,839 $ 321,559 $ 301,585 $ 243,905 $ 2,503,188 $ 5,720,525 $ 5,713,876 Average interest rate 3.53 % 2.20 % 1.88 % 2.03 % 1.94 % 2.78 % Fixed interest rate borrowings $ 50,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 50,000 $ 50,000 Average interest rate 5.63 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Variable interest rate borrowings $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Average interest rate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % Total funds $ 1,970,449 $ 429,839 $ 321,559 $ 301,585 $ 243,905 $ 2,503,188 $ 5,770,525 $ 5,763,876 Average interest rate 3.58 % 2.20 % 1.88 % 2.03 % 1.94 % 2.78 % Interest rate sensitivity gap by period $ 440,228 $ 594,728 $ 280,992 $ 131,757 $ 74,948 $ (918,107) Cumulative rate sensitivity gap $ 440,228 $ 1,034,956 $ 1,315,948 $ 1,447,705 $ 1,522,653 $ 604,546 Cumulative rate sensitivity ratio at December 31, 2023 122.3 % 238.4 % 187.4 % 143.7 % 130.7 % 63.3 % at December 31, 2022 147.2 % 169.1 % 185.3 % 146.7 % 114.2 % 62.8 % The Company utilizes computer modeling software to measure interest rate risk and to stress test the balance sheet under a wide variety of interest rate scenarios.
Removed
The Company’s cumulative repricing GAP ratio as of December 31, 2022 for the next 12 months using a scenario in which interest rates remained unchanged was a negative 6.49% of earning assets. 54 Table of Contents Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements.
Added
Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. Interest rate risk modeling is supported by liquidity risk modeling. The Company’s asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling.

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