What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-02-24 compared with 2024-02-29 · 201 added, 262 removed, 511 unchanged (48% of the section changed)

4 unchanged sentences

See our cautionary “Statement Regarding Forward-Looking Statements.” For a more complete discussion of the factors that could affect our future results, see “Risk Factors” under Item 1A of this Annual Report on Form 10-K.

RECENT DEVELOPMENTS

Correction of Prior Period Error

As disclosed in NOTE 10.

QUALIFIED AFFORDABLE HOUSING INVESTMENTS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, the Corporation identified a prior period accounting error substantially in the form of an immaterial understatement of other assets and other liabilities, solely related to the Corporation’s Low-Income Housing Tax Credit (“LIHTC”) partnerships.

In general, the unfunded commitment related to these agreements was being carried off balance sheet and should have been recorded as part of the investment asset and unfunded commitment liability.

The financial reporting periods affected by this error include the Corporation’s previously reported audited consolidated financial statements for the fiscal year ended December 31, 2022 and 2021, and the Corporation’s previously reported interim unaudited consolidated financial statements for each of the quarterly and year-to-date periods ended March 31, 2021, June 30, 2021, September 30, 2021, March 31, 2022, June 30, 2022, September 30, 2022, March 31, 2023, June 30, 2023 and September 30, 2023 (collectively the “previously reported financial statements”).

This correction impacted the Consolidated Balance Sheets as other assets and other liabilities were understated by $96.4 million and $63.9 million as of December 31, 2023 and 2022, respectively.

There was a nominal impact to income tax expense in the Consolidated Statement of Operations for the years ended December 31, 2023, 2022 and 2021.

The Corporation concluded based on quantitative and qualitative analysis that this error was not material, on an individual or aggregate basis, to the Company’s previously reported financial statements and correction of the error would not be material to the current year financial statements, including any interim periods.

However, the Corporation corrected this error as a voluntary immaterial revision to the accompanying consolidated financial statements of this Annual Report on Form 10-K, as of and for the fiscal years ended December 31, 2023, 2022 and 2021, in the periods in which the error occurred.

In addition, the Corporation expects to present the corrected interim 2023 amounts as a voluntary immaterial revision in its 2024 consolidated interim financial statements on a quarterly basis and a year-to-date basis upon the filing of its Quarterly Reports on Form 10-Q.

As a result, the financial results in the periods presented within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth below, have been revised to give effect to the correction of this error.

First Merchants Corporation (the “Corporation”) is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982.

2 unchanged sentences

The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank).

The Bank includes 116 banking locations in Indiana, Ohio, Michigan and Illinois.

The Bank includes 110 banking locations in Indiana, Ohio, and Michigan.

In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers.

The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

Through the Bank, the Corporation offers a broad range of financial services, including accepting time, savings and demand deposits;

making consumer, commercial, agri-business, public finance and real estate mortgage loans;

providing personal and corporate trust services;

offering full-service brokerage and private wealth management;

and providing letters of credit, repurchase agreements and other corporate services.

Through the Bank, the Corporation offers a broad range of commercial and consumer banking services to meet the diverse needs of our customers.

Our commercial banking team offers a full spectrum of debt capital, treasury management services and depository products.

The consumer banking group offers a variety of consumer deposit and lending products.

The mortgage banking team offers consumer mortgage solutions to assist with the purchase, refinance, construction or renovation of residential properties.

Private Wealth Advisors offers personal wealth management services with expertise in investment management, private banking, fiduciary estate and financial planning.

HIGHLIGHTS FOR 2024

• Net income available to common stockholders for the year ended December 31, 2023 was $221.9 million compared to $220.7 million for the year ended 2022, an increase of 0.6 percent.

Earnings per fully diluted common share totaled $3.73 for 2023 and $3.81 for 2022.

• Adjusted net income available to common stockholders for 2023, excluding income on PPP loans, Level One acquisition-related expenses and non-core expenses, was $231.5 million and adjusted diluted earnings per common share totaled $3.89, compared to $243.4 million and $4.20, respectively, in 2022.

• Net income available to common stockholders for the year ended December 31, 2024 was $199.5 million compared to $221.9 million for the year ended 2023, a decrease of 10.1 percent.

Earnings per fully diluted common share totaled $3.41 for 2024 compared to $3.73 for 2023, a decrease of 8.6 percent.

• When adjusting for certain non-recurring items, 2024 adjusted net income available to common stockholders was $203.3 million and adjusted diluted earnings per common share totaled $3.47, compared to 2023 adjusted net income available to common stockholders and adjusted diluted earnings per common share of $236.7 million and $3.98, respectively.

These adjusted net income and earnings per share amounts are non-GAAP measures.

For reconciliations of non-GAAP measures to their most comparable GAAP measures, see “NON-GAAP FINANCIAL MEASURES” within the “Results of Operations” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

• Strong capital position with Common Equity Tier 1 Capital Ratio of 11.43 percent and Tangible Common Equity to Tangible Assets Ratio of 8.81 percent.

• Net interest margin was 3.19 percent during the year ended December 31, 2024 compared to 3.35 percent during the year ended December 31, 2023.

• Total loans grew $368.1 million, or 2.9 percent, during the year ended December 31, 2024.

• Net interest income totaled $545.4 million in 2023, an increase of $25.2 million, or 4.8 percent over 2022.

• Return on average assets was 1.23 percent and the return on average equity was 10.43 percent for the year ended December 31, 2023.

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

• Total deposits decreased $299.8 million, or 2.0 percent, during the year ended December 31, 2024 primarily due to $267.4 million of deposits sold with the Old Second National Bank branch sale.

• Nonperforming assets to total assets were 43 basis points at December 31, 2024 compared to 32 basis points at the year ended December 31, 2023.

• Completed the sale of five Illinois branches and certain loans and deposits to Old Second National Bank on December 6, 2024.

CRITICAL ACCOUNTING ESTIMATES

5 unchanged sentences

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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

Allowance for Credit Losses - Loans

2 unchanged sentences

The amount of allowance represents management’s best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument.

Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts.

Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable economic forecasts.

While historical credit loss experience provides the basis for the estimation of expected credit losses, the Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio.

4 unchanged sentences

The Corporation reported net income available to common stockholders and diluted earnings per common share for the year ended 2024 of $199.5 million and $3.41 per diluted common share, respectively, compared to $221.9 million and $3.73 per diluted common share, respectively, for the year ended 2023.

Adjusted net income available to common stockholders for the year ended 2023, excluding income on PPP loans, Level One acquisition-related expenses and other non-core expenses, was $231.5 million and adjusted diluted earnings per common share totaled $3.89, compared to $243.4 million and $4.20, respectively, for the year ended 2022.

When adjusting for certain non-recurring items, 2024 adjusted net income available to common stockholders was $203.3 million and adjusted diluted earnings per common share totaled $3.47, compared to 2023 $236.7 million and $3.98, respectively.

These adjusted net income and earnings per share amounts are non-GAAP measures.

As of December 31, 2024, total assets equaled $18.3 billion, a decrease of $93.9 million or 0.5 percent from December 31, 2023.

Cash and due from banks and interest-bearing deposits decreased from December 31, 2023 by $162.2 million.

Total investment securities decreased $350.7 million from December 31, 2023, primarily due to the sales of $268.5 million of investment securities during the year ended December 31, 2024.

Scheduled paydowns and maturities and unrealized losses in available for sale securities decreased investment securities by $147.9 million and $18.7 million, respectively, which was offset by $94.7 million in purchases of CRA eligible securities.

The investment portfolio as a percentage of total assets was 18.9 percent at December 31, 2024 compared to 20.7 percent at December 31, 2023.

During 2024, the Corporation repositioned the investment securities portfolio with a primary focus of using liquidity generated from sales of securities to fund loan growth, the sale of deposits to Old Second National Bank and reinvestment in higher-yielding assets.

Additional details of the changes in the Corporation’s investment securities portfolio are discussed within NOTE 4.

INVESTMENT SECURITIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s total loan portfolio grew $368.1 million or 2.9 percent since December 31, 2023.

The composition of the loan portfolio is 75.0 percent commercial oriented with the largest loan classes of commercial and industrial and commercial real estate, non-owner occupied, representing 31.9 percent and 17.7 percent of the total loan portfolio, respectively.

The increase was primarily driven by an increase in commercial and industrial, public finance and other commercial loans, and residential real estate loans.

Partially offsetting those increases was a decrease in construction and non-owner occupied commercial real estate loans.

Additional details of the changes in the Corporation’s loan portfolio are discussed within NOTE 5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, and the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation’s allowance for credit losses - loans (“ACL - loans”) totaled $192.8 million as of December 31, 2024 and equaled 1.50 percent of total loans, compared to $204.9 million and 1.64 percent of total loans at December 31, 2023.

During the year ended December 31, 2024, the Corporation recognized $49.4 million of net charge-offs, or 39 basis points of average loans, compared to net charge-offs of $25.6 million, or 21 basis points of average loans, for the year ended December 31, 2023.

The increase in net charge-offs is primarily related to two commercial and industrial relationships that accounted for $42.7 million of charge-offs during 2024.

One borrower experienced a sudden change in revenue from the cancellation and inability to renegotiate their contracts with the U.S.

This negatively impacted the value of the borrower's business and resulted in their inability to repay principal and interest.

The second borrower provided notification of its plans to cease operations, which resulted in their inability to repay principal and interest and a charge-off for the Corporation.

The Corporation recorded $35.7 million of provision for credit losses during 2024 compared to $3.5 million during 2023.

The increase in the provision for credit losses was primarily driven by the increase in net charge-offs described above.

Nonaccrual loans as of December 31, 2024 totaled $73.8 million, an increase of $20.2 million from December 31, 2023, primarily due to a $24.1 million increase in non-accrual balances within the construction loan class.

The increase was offset by a $3.6 million decrease in non-accrual balances within the residential loan class.

The coverage ratio of ACL - Loans to nonaccrual loans is 261.3 percent at December 31, 2024.

Additional details of the Corporation’s allowance methodology and asset quality are discussed within NOTE 5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and within the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

The Corporation’s premises and equipment decreased $4.2 million from December 31, 2023 primarily due to the sale of five Illinois branches.

Additional details of the Corporation’s divestiture of assets related to the Old Second National Bank branch sale is discussed within NOTE 2.

ACQUISITIONS AND DIVESTITURES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.

The Corporation’s tax asset, deferred and receivable decreased from $99.9 million at December 31, 2023 to $92.4 million at December 31, 2024.

The $7.5 million decrease was a combination of the Corporation’s net deferred tax asset increasing from $84.7 million at December 31, 2023 to $85.9 million at December 31, 2024, and the income tax receivable decreasing from $15.2 million at December 31, 2023 to $6.5 million at December 31, 2024.

The Corporation’s other assets increased $64.8 million from December 31, 2023.

The Corporation’s continual investment in community redevelopment funds resulted in an increase of $57.0 million when compared to December 31, 2023.

Additionally, the prepaid pension asset at December 31, 2024 increased by $4.0 million compared to the same period in 2023.

Additional details of the Corporation’s investments in community redevelopment funds and pension plan are discussed in NOTE 9.

QUALIFIED AFFORDABLE HOUSING INVESTMENTS and NOTE 18.

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Deposits decreased $299.8 million from December 31, 2023.

The decrease in deposits was primarily driven by the sale of $267.4 million of deposits related to the Illinois branch sale that closed in the fourth quarter of 2024.

Total deposits excluding time deposits greater than $100,000 represented 92.8 percent of the deposit portfolio at December 31, 2024.

Noninterest bearing deposits represents 16.0 percent of the deposit portfolio, down slightly from 16.9 percent as of December 31, 2023.

The decline is the result of a mix shift occurring across the industry as clients move into higher yielding deposit products.

The average account balance within the deposit portfolio was $35,000 at December 31, 2024.

Insured deposits totaled 70.6 percent of total deposits, with the State of Indiana’s Public Deposit Insurance Fund, which insures certain public deposits, providing insurance to 14.0 percent of deposits and the FDIC providing insurance to the remaining 56.6 percent.

Only 29.4 percent of deposits are uninsured and our available liquidity is ample to cover those when considering both on balance sheet sources of liquidity and unused capacity from the Federal Reserve Discount Window, FHLB and unsecured borrowing sources.

Total borrowings increased $129.4 million as of December 31, 2024, compared to December 31, 2023.

Federal funds purchased and Federal Home Loan Bank advances increased $99.2 million and $109.7 million, respectively, compared to December 31, 2023 as the Corporation utilized borrowings to fund loan growth and supplement deposit balances in 2024.

Offsetting these increases was a $65.1 million decrease in subordinated debt and other borrowings due to the Corporation exercising its rights to redeem $65.0 million in principal of subordinated debt in 2024.

Additional details of the Corporation’s borrowings are discussed within NOTE 11.

BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s other liabilities as of December 31, 2024 increased $22.0 million from the same period in 2023, primarily due to an increase in unfunded commitments related to the Corporation’s LIHTC partnerships which totaled $35.8 million.

The Corporation continued to maintain all regulatory capital ratios in excess of the regulatory definition of “well-capitalized.” Details of the regulatory capital ratios are discussed within the “CAPITAL” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS - 2023

The Corporation reported net income available to common stockholders and diluted earnings per common share for the year ended 2023 of $221.9 million and $3.73 per diluted common share, respectively, compared to $220.7 million and $3.81 per diluted common share, respectively, for the year ended 2022.

Adjusted net income available to common stockholders for the year ended 2023, adjusting for certain non-recurring items, was $236.7 million and adjusted diluted earnings per common share totaled $3.98, compared to $242.5 million and $4.19, respectively, for the year ended 2022.

These adjusted net income and earnings per share amounts are non-GAAP measures.

As of December 31, 2023, total assets equaled $18.4 billion, an increase of $403.7 million, or 2.2 percent, from December 31, 2022.

Cash and due from banks and interest-bearing deposits increased from December 31, 2022 by $300.1 million, primarily due to deposit growth and proceeds from investment securities principal and interest cashflows in addition to sales, which were held in cash for liquidity purposes.

Cash and due from banks and interest-bearing deposits decreased from December 31, 2022 by $300.1 million, primarily due to deposit growth and proceeds from investment securities principal and interest cashflows in addition to sales, which were held in cash for liquidity purposes.

Total investment securities decreased $452.4 million from December 31, 2022, primarily due to the sales of $395.2 million of investment securities during the year ended December 31, 2023.

Scheduled paydowns and maturities decreased investment securities by $161.2 million, which was offset by a decrease of $77.0 million in unrealized losses in the available for sale portfolio during 2023.

Currently, the Corporation is using cashflows from the investment portfolio to fund loan growth and pay down borrowings.

During 2023 the Corporation used cashflows from the investment portfolio to fund loan growth and pay down borrowings.

The investment portfolio as a percentage of total assets was 20.8 percent at December 31, 2023 compared to 23.8 percent at December 31, 2022.

This decrease reflects progress towards a more normalized earning asset mix.

This decrease reflected progress towards a more normalized earning asset mix.

Additional details of the changes in the Corporation’s investment securities portfolio are discussed within NOTE 4.

INVESTMENT SECURITIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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

The Corporation’s total loan portfolio grew $492.0 million or 4.1 percent since December 31, 2022.

3 unchanged sentences

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

The Corporation’s allowance for credit losses - loans (“ACL - loans”) totaled $204.9 million as of December 31, 2023 and equaled 1.64 percent percent of total loans, compared to $223.3 million and 1.86 percent of total loans at December 31, 2022.

The Corporation’s allowance for credit losses - loans totaled $204.9 million as of December 31, 2023 and equaled 1.64 percent of total loans, compared to $223.3 million and 1.86 percent of total loans at December 31, 2022.

During the year ended December 31, 2023, the Corporation recognized $25.6 million of net charge-offs, compared to net charge-offs of $2.7 million for the year ended December 31, 2022.

2 unchanged sentences

Reserves for unfunded commitments were reduced by $3.8 million, resulting in a net provision expense of $3.5 million as of December 31, 2023.

As of December 31, 2022, the ACL - loans increased $16.6 million in connection with the Level One acquisition for CECL Day 1 purchased credit deteriorated (“PCD”) loans and provision expense of $14.0 million was recorded for CECL Day 1 non-PCD loans.

Additionally, the reserve for unfunded commitments increased $2.8 million for CECL Day 1 unfunded commitments as of December 31, 2022.

The Corporation did not recognize any provision expense during 2022 other than CECL Day 1 expense.

Nonaccrual loans as of December 31, 2023 totaled $53.6 million, an increase of $11.3 million from December 31, 2022.

16 unchanged sentences

Total deposits less time deposits greater than $100,000, or core deposits, represented 90.5 percent of the deposit portfolio at December 31, 2023.

Noninterest bearing deposits represents 16.9 percent of the deposit portfolio, which is a decline from December 31, 2022 of 22.1 percent.

The decline is the result of a mix shift occurring across the industry as clients move into higher yielding deposit products.

Noninterest bearing deposits represented 16.9 percent of the deposit portfolio, which is a decline from December 31, 2022 of 22.1 percent.

The decline is the result of a mix shift which occurred across the industry as clients moved into higher yielding deposit products.

The Corporation experienced increases from December 31, 2022 in certificates and other time deposits of $100,000 or more of $666.4 million, other certificates and time deposits of $381.2 million and brokered certificates of deposit of $14.7 million.

Demand and savings accounts decreased from December 31, 2022 by $482.9 million and $140.7 million, respectively.

The average account within the deposit portfolio totals only $34,000.

The average account within the deposit portfolio totaled only $34,000.

Insured deposits totaled 72.1 percent of total deposits, with the State of Indiana’s Public Deposit Insurance Fund, which insures certain public deposits, providing insurance to 15.1 percent of deposits and the FDIC providing insurance to the remaining 57.0 percent.

Only 27.9 percent of deposits are uninsured and our available liquidity is ample to cover those when considering both on balance sheet sources of liquidity and unused capacity from the Federal Reserve Discount Window, FHLB and unsecured borrowing sources.

Only 27.9 percent of deposits were uninsured and our available liquidity was ample to cover those when considering both on balance sheet sources of liquidity and unused capacity from the Federal Reserve Discount Window, FHLB and unsecured borrowing sources.

Total borrowings decreased $285.2 million as of December 31, 2023, compared to December 31, 2022.

8 unchanged sentences

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

RESULTS OF OPERATIONS - 2022

The Corporation reported net income available to common stockholders and diluted earnings per common share for the year ended 2022 of $220.7 million and $3.81 per diluted common share, respectively, compared to $205.5 million and $3.81 per diluted common share, respectively, for the year ended 2021.

Adjusted net income available to common stockholders for the year ended 2022, excluding income on PPP loans and Level One acquisition-related expenses, was $243.4 million and adjusted diluted earnings per common share totaled $4.20, compared to $182.2 million and $3.38, respectively, for the year ended 2021.

These adjusted net income and earnings per share amounts are non-GAAP measures.

As of December 31, 2022, total assets equaled $18.0 billion, an increase of $2.5 billion from December 31, 2021.

The Corporation acquired Level One on April 1, 2022, which added $2.5 billion in assets at acquisition.

Details of the acquisition are discussed within NOTE 2.

ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Cash and due from banks and interest-bearing deposits decreased from December 31, 2021 by $44.6 million and $348.1 million, respectively, as excess cash was used to fund organic loan growth.

Total investment securities decreased $260.6 million from December 31, 2021.

The net unrealized gain on the Corporation’s available for sale investment securities portfolio of $75.9 million at December 31, 2021 changed to a net unrealized loss of $296.7 million as of December 31, 2022.

The change to a net unrealized loss position was due to changes in interest rates and not credit quality.

Additional details of the changes in the Corporation’s investment securities portfolio are discussed within NOTE 4.

INVESTMENT SECURITIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s total loan portfolio grew $2.8 billion since December 31, 2021, of which, $1.6 billion was the result of the Level One acquisition.

At acquisition, Level One’s loan portfolio included $43.5 million of PPP loans.

As of December 31, 2022, the Corporation’s PPP loan portfolio, which included PPP loans from Level One, were primarily in the commercial and industrial loans class and totaled $4.7 million, a decrease of $145.3 million from the December 31, 2021 balance of $106.6 million plus the additional $43.5 million from Level One.

Excluding the decline in PPP loans and the effect of Level One’s acquired loans at acquisition date, the Corporation experienced organic loan growth of $1.3 billion, or 13.9 percent since December 31, 2021.

All loan classes experienced increases from December 31, 2021, with the exception of agricultural land, production and other loans to farmers, and the largest increases were in residential real estate, commercial and industrial loans and construction real estate.

Additional details of the changes in the Corporation’s loan portfolio are discussed within NOTE 5.

The Corporation’s allowance for credit losses - loans totaled $223.3 million as of December 31, 2022 and equaled 1.86 percent of total loans, compared to $195.4 million and 2.11 percent of total loans at December 31, 2021.

The ACL - loans increased $16.6 million in connection with the Level One acquisition for CECL Day 1 PCD loans and provision expense of $14.0 million was recorded for CECL Day 1 non-PCD loans.

Additionally, provision expense of $2.8 million was recorded for CECL Day 1 unfunded commitments, which increased other liabilities.

The Corporation did not recognize any provision expense during 2022 and 2021 other than CECL Day 1 expense.

During the year ended December 31, 2022, the Corporation recognized $2.7 million of net charge-offs, compared to net charge-offs of $9.3 million for the year ended December 31, 2021.

Nonaccrual loans totaled $42.3 million, a decrease of $738,000 from December 31, 2021, but when considering the nonaccrual loans acquired from Level One of $9.4 million, nonaccruals decreased $10.1 million.

The coverage ratio of ACL - Loans to nonaccrual loans is a robust 527.5 percent.

Additional details of the Corporation’s allowance methodology and asset quality are discussed within NOTE 5.

Several additional asset categories increased from December 31, 2021 primarily due to the acquisition of Level One, including premises and equipment of $11.5 million, FHLB stock of $9.8 million, interest receivable of $27.9 million, goodwill of $166.6 million, other intangibles of $10.4 million and cash surrender value of life insurance of $17.3 million.

OREO totaled $6.4 million as of December 31, 2022 and increased $5.9 million from the December 31, 2021 balance of $558,000, primarily due to a $5.8 million student housing property that was moved into OREO during the first quarter of 2022.

A loss on this project is not expected.

The Corporation’s tax asset, deferred and receivable increased from $35.6 million at December 31, 2021 to $111.2 million at December 31, 2022, which included the Corporation’s net deferred tax asset increasing from $24.3 million at December 31, 2021 to $109.5 million at December 31, 2022.

The $85.2 million increase in the Corporation’s net deferred tax asset was primarily due to accounting for unrealized gains and losses on available for sale securities and an increase in CECL from the acquisition of Level One.

The Corporation’s other assets increased $145.4 million from December 31, 2021.

The Corporation’s continual investment in community redevelopment funds resulted in an increase of $72.6 million when compared to December 31, 2021.

Additionally, the Corporation’s derivative assets (recorded in other assets) and derivative liabilities (recorded in other liabilities) increased $51.9 million and $50.8 million, respectively, from December 31, 2021.

The increase in valuations are due to an increase in the total notional amount outstanding, continual increases in the FOMC’s target fed funds rate resulting in higher nominal rates and increased forward rate expectations.

The remaining increases in other assets relate to the Corporation’s investments in community redevelopment funds, which increased $16.0 million since December 31, 2021 and an increase of $3.9 million in receivables due to pending settlements related to asset sales.

The Level One acquisition contributed to an increase in the right of use lease asset of $5.8 million related to the addition of Level One’s leased facilities and an increase in mortgage servicing rights of $3.4 million related to Level One’s mortgage servicing portfolio.

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

Deposits increased $1.7 billion from December 31, 2021, of which, the acquisition of Level One contributed $1.9 billion in deposits.

When excluding the deposits related to the acquisition, the Corporation experienced an organic deposit decline of $280.6 million, or 2.2 percent.

Additional details regarding the acquisition are discussed within NOTE 2.

ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The majority of the organic deposit decline was due to decreases in nonmaturity deposits of $513.5 million, which was offset by increases in maturity deposits of $232.9 million when compared to December 31, 2021.

Higher interest rates have resulted in customers migrating funds from nonmaturity products into maturity time deposit products.

Total borrowings increased $679.7 million as of December 31, 2022, compared to December 31, 2021.

Federal funds purchased and Federal Home Loan Bank advances increased $171.6 million and $489.6 million, respectively, compared to December 31, 2021 as the Corporation utilized liquidity sources to fund organic loan growth.

The Level One acquisition contributed to the increase in borrowings due to the assumption of $160.0 million of Federal Home Loan Bank advances and $32.6 million of subordinated debentures.

Additional details of the Corporation’s borrowings are discussed within NOTE 12.

BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s other liabilities as of December 31, 2022 increased $92.2 million compared to December 31, 2021.

As noted above, the Corporation continues to invest in community redevelopment funds and as a result the Corporation’s unfunded commitment liability increased by $63.9 million from December 31, 2021.

Also as noted above, the derivative hedge liability increased $50.8 million from December 31, 2021.

At December 31, 2021, the Corporation accrued $46.1 million of trade date accounting related to loan and investment securities purchases, of which, there was no accrual at December 31, 2022.

The Corporation’s liability related to mortgages sold in the secondary market, but with the servicing retained, increased $11.6 million from December 31, 2021.

The Level One acquisition contributed to an increase in the lease liability of $5.7 million related to the addition of Level One’s leased facilities and an additional $2.8 million for CECL Day 1 allowance for credit losses on off-balance sheet credit exposures recorded in liabilities.

As part of the Level One acquisition, each outstanding share of 7.5 percent non-cumulative perpetual preferred stock, Series B, of Level One was exchanged for one share of a newly created 7.5 percent non-cumulative perpetual preferred stock, Series A, of the Corporation with a liquidation preference of $2,500 per share.

As a result, the Corporation issued 10,000 shares of Series A preferred stock at the acquisition date resulting in $25.0 million of outstanding preferred stock at December 31, 2022.

The Corporation continued to maintain all regulatory capital ratios in excess of the regulatory definition of “well-capitalized.” Details of the Stock Repurchase Program and regulatory capital ratios are discussed within the “CAPITAL” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

NON-GAAP FINANCIAL MEASURES

4 unchanged sentences

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure can be found in the following tables.

Adjusted earnings per share, excluding PPP loan income, acquisition-related expenses and non-core expenses, are meaningful non-GAAP financial measures for management, as they provide a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance.

Adjusted earnings per share, excluding PPP loan income, net realized gains/losses on the sales of available for sale securities, acquisition-related expenses and non-core expenses, are meaningful non-GAAP financial measures for management, as they provide a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance.

These non-GAAP financial measures are also used by management to assess the performance of the Corporation’s business, because management does not consider these items to be relevant to ongoing financial performance on a per share basis.

2 unchanged sentences

Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

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

ADJUSTED NET INCOME AND DILUTED EARNINGS PER COMMON SHARE - non-GAAP

3 unchanged sentences

PPP loan income — (49) (3,207)

Net realized losses/(gains) on sales of available for sale securities 20,757 6,930 (1,194)

Gain on branch sale (19,983) — —

Acquisition-related expenses — — 16,531

1 unchanged sentence

Non-core expenses 1,2

Tax on adjustment (3,078) (7,376) 7,577

4,243 12,682 —

Tax on adjustments (1,229) (4,767) (7,084)

Adjusted Net Income Available to Common Stockholders - non-GAAP $ 203,315 $ 236,707 $ 242,484

2 unchanged sentences

PPP loan income — — (0.06)

Net realized losses/(gains) on sales of available for sale securities 0.35 0.12 (0.02)

Gain on branch sale (0.34) — —

Acquisition-related expenses — — 0.28

1 unchanged sentence

Non-core expenses 0.07 0.21 —

Tax on adjustment (0.05) (0.13) 0.14

Tax on adjustments (0.02) (0.08) (0.12)

Adjusted Diluted Earnings Per Common Share - non-GAAP $ 3.47 $ 3.98 $ 4.19

1 Non-core expenses include one-time charges consisting of $6.3 million from early retirement and severance costs, $4.3 million from the FDIC special assessment, and $2.1 million from a lease termination.

1 Non-core expenses in 2024 included $0.8 million of costs directly related to the branch sale, $1.1 million from the FDIC special assessment, and $2.4 million from digital platform conversion costs.

2 Non-core expenses in 2023 included $4.3 million from the FDIC special assessment, $6.3 million from early retirement and severance costs, and $2.1 million from a lease termination.

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

TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS - non-GAAP

16 unchanged sentences

Tangible book value - common (non-GAAP) $ 26.78 $ 25.06

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

TANGIBLE EARNINGS PER SHARE, RETURN ON TANGIBLE ASSETS AND RETURN ON TANGIBLE EQUITY - non-GAAP

35 unchanged sentences

The federal statutory rate of 21 percent was used for 2024, 2023, and 2022.

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

The FTE analysis portrays the income tax benefits associated with tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets.

3 unchanged sentences

Average Balance Sheet

Average earning assets for the year ended December 31, 2023 increased $1.0 billion compared to the same period in 2022.

The increase for the year ended December 31, 2023 when compared to the same period in 2022 was driven by a $1.4 billion increase in average loans as a result of organic loan growth primarily within the commercial and residential real estate loan portfolios.

The increase in average loans was offset by a decrease in average investment securities of $489.3 million when compared to the same period in 2022, which was due to the Corporation selling $395.2 million of securities in 2023, in addition to not reinvesting cashflows into the investment securities portfolio, but rather using the liquidity to fund loan growth and pay down borrowings.

The investment portfolio as a percentage of total assets is 20.8 percent at December 31, 2023, which is down from the same period in 2022 of 23.8 percent and down from the peak at December 31, 2021 of 29.3 percent.

This reflects progress towards a more normalized earning asset mix.

Average interest-bearing deposits for the year ended December 31, 2023 increased $1.0 billion compared to the same period in 2022, with the largest increase in the certificates and other time deposit portfolio.

Noninterest bearing deposits represents 16.9 percent of the deposit portfolio, which is a decline from the same period in 2022 of 22.1 percent.

The decline is the result of a mix shift occurring across the industry as clients move into higher yielding deposit products.

Noninterest bearing deposits act to mitigate deposit yield increases as interest rates rise.

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

Average borrowings increased $223.1 million for the year ended December 31, 2023 compared to the same period of 2022 as the average balance of FHLB advances increased $243.2 million during 2023.

Throughout 2022 and early 2023, the Corporation’s outstanding FHLB advances were increasing, which caused the year ended December 31, 2022 average balance to be less than the actual balance at December 31, 2022.

After the March 2023 failures of Silicon Valley Bank and Signature Bank there was general uncertainty and concerns regarding the adequacy of liquidity in the banking sector as a whole.

As a result, the Corporation utilized some cash flows from scheduled paydowns, maturities and sales of investment securities to pay down borrowings in the second half of 2023.

This resulted in a higher average balance in 2023 when compared to 2022.

Average earning assets for the year ended December 31, 2024 increased $62.5 million compared to the same period in 2023.

The increase for the year ended December 31, 2024 when compared to the same period in 2023 was driven by a $336.4 million increase in average loans as a result of organic loan growth primarily within the commercial and residential real estate loan portfolios, the average balances of which increased $167.9 million and $123.3 million, respectively.

The increase in average loans was partially offset by a $260.9 million decrease in average investment securities as the Corporation repositioned the securities portfolio by selling $268.5 million of lower-yielding securities.

Average total deposits increased $95.1 million, or 0.6 percent, for the year ended December 31, 2024 compared to the year ended December 31, 2023.

The increase was due to a $508.1 million, or 4.3 percent, increase in average interest-bearing deposits partially offset by a $413.0 million, or 14.8 percent, decrease in average noninterest-bearing deposits.

The increase in the average balance of interest-bearing deposits was driven by certificates and other time deposits, money market deposits and interest-bearing deposits, which increased $490.6 million, $177.2 million and $70.8 million, respectively but was partially offset by a $230.5 million decrease in the average balance of savings deposits.

The decrease in the average balance of noninterest-bearing deposits reflects clients moving funds from noninterest-bearing accounts into interest-bearing deposit products.

Average borrowings decreased $106.5 million, or 9.6 percent, for the year ended December 31, 2024 compared to the same period of 2023.

This decrease was primarily driven by decreases of $53.8 million, $35.3 million and $18.2 million in the average balance of subordinated debt, repurchase agreements and fed funds purchased, respectively.

The Corporation redeemed $65.0 million of subordinated debt in the first half of 2024 which contributed to the decrease in the average balance of subordinated debt.

The decreases in repurchase agreements and fed funds purchased were due primarily to the Corporation utilizing liquidity to pay down borrowings in 2024.

Interest Income/Expense and Average Yields

In the year ended December 31, 2023, FTE asset yields increased 146 basis points compared to the same period in 2022.

The increase in interest income, on an FTE basis, of $288.2 million during the year ended December 31, 2023 compared to the same period in 2022 was p rimarily due to an increase in average earning assets, coupled with the FOMC’s interest rate increases of 525 basis points since March of 2022.

The Corporation also recognized fair value accretion income on purchased loans, which is included in interest income, of $8.1 million, which accounted for 5 basis points of net interest margin in the year ended December 31, 2023.

Comparatively, the Corporation recognized fair value accretion on purchased loans of $10.1 million, which accounted for 6 basis points of net interest margin in the year ended December 31, 2022.

The Corporation’s loan portfolio is 65.5 percent variable wi th 49.1 percent of the portfolio repricing within one month and 51.7 perce nt repricing within three months.

Additionally, due to the FOMC interest rate increases in 2023 and 2022, the yields on new and renewed loans increased for the year ended December 31, 2023 compared to the same period in 2022.

Interest costs increased 195 basis points, which mitigated the 146 basis point increase in asset yields and resulted in a 49 basis point FTE decrease in net interest spread when compared to the same period in 2022.

Interest costs increased during the year ended December 31, 2023 due to deposit pricing pressure and deposit portfolio mix changes as a result of customers migrating out of noninterest-bearing deposit products into interest-bearing deposit products.

Interest-bearing deposits and borrowing costs for the year ended December 31, 2023 were 2.56 percent and 3.81 percent, respectively, compared to 0.58 percent and 2.46 percent, respectively, during the same period in 2022.

Total cost of funds was 267 basis points for the year ended December 31, 2023 compared to 72 basis points during the same period in 2022.

FTE net interest income decreased $24.9 million, or 4.4 percent, during the year ended December 31, 2024 compared to the year ended December 31, 2023.

FTE interest income increased $58.7 million, or 7.5 percent, compared to the same period in 2023 but was more than offset by a $78.4 million, or 22.5 percent increase in total interest expense.

The increase in FTE interest income was primarily due to a shift in the earning asset mix from securities to loans as well as a 29 basis point increase in the yield earned on earning assets.

Most notably, the yield earned on loans increased 29 basis points in 2024 compared to 2023.

The increase in total interest expense was primarily due to an $80.0 million, or 26.1 percent, increase in interest-bearing deposits coupled with a 54 basis point increase in the rate paid on those deposits.

Interest costs increased during 2024 due to continued deposit pricing pressure and deposit portfolio mix changes due to customers migrating from noninterest-bearing deposit products into interest-bearing deposit products.

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

The following table presents the Corporation’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets/liabilities for the three-year period ended December 31, 2023.

Average Balance Interest

15 unchanged sentences

Real estate mortgage 2,158,743 94,890 4.40 2,035,488 82,183 4.04 1,471,802 51,853 3.52

Installment 830,006 60,751 7.32 785,520 37,302 4.75 683,925 26,111 3.82

HELOC and installment 830,079 65,577 7.90 830,006 60,751 7.32 785,520 37,302 4.75

Tax-exempt (2)

34 unchanged sentences

NONINTEREST INCOME

Noninterest income totaled $125.6 million in 2024, an increase of $20.0 million, or 18.9 percent, from 2023.

The Corporation recorded a $20.0 million gain on the Illinois branch sale during the fourth quarter of 2024.

This was partially offset by a $13.8 million increase in net realized losses on sales of available for sale securities.

Additionally, the Corporation realized higher gains on the sales of mortgage loans and increased private wealth fees of $5.2 million and a $3.4 million, respectively, for the year ended December 31, 2024 compared to 2023.

Other income increased $3.6 million primarily related to an increase in the valuation of CRA fund investments for the year ended December 31, 2024 compared to 2023.

Noninterest income totaled $105.6 million in 2023, a decrease of $2.3 million, or 2.2 percent, from 2022.

1 unchanged sentence

Additionally, gains on life insurance benefits decreased $2.9 million during the year ended December 31, 2023 compared to 2022.

Offsetting these declines was an increase of $5.6 million in net gains and fees on sales of loans.

Offsetting these declines was an increase of $5.6 million in net gains and fees on sales of mortgage loans.

Service charges on deposit accounts increased $2.5 million from 2022, primarily due to the Level One acquisition in the second quarter of 2022.

Noninterest income totaled $107.9 million in 2022, a decrease of $1.4 million, or 1.3 percent, from 2021.

Customer related line items where decreases were experienced included net gains and fees on sales of loans of $9.6 million due to lower mortgage origination volume in 2022 compared to 2021, in addition to the $2.9 million gain on the portfolio mortgage loan sale that occurred in the second quarter of 2021, and in derivative hedge fees which decreased $0.5 million due to the rising interest rate environment.

Offsetting these decreases were increases in customer related line items, which totaled $10.2 million, with the most significant increases experienced in service charges on deposit accounts, card payment fees, and fiduciary and wealth management fees, which were all influenced by the larger customer base from the Level One acquisition on April 1, 2022.

Net realized gains on sales of available for sale securities decreased $4.5 million from 2021 and other income decreased $1.1 million in 2022, when compared to 2021, primarily as a result of a $1.9 million write-down of an equity investment in the third quarter of 2022.

Finally, gains on life insurance benefits of $6.0 million increased $3.8 million from 2021 as a result of increased BOLI death benefits.

Details of the Level One acquisition can be found in NOTE 2.

ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

NONINTEREST EXPENSES

Noninterest expense totaled $379.3 million in 2024, a decrease of $9.0 million, or 2.3 percent from 2023.

The largest decrease of $7.6 million was in salaries and employee benefits which resulted primarily from $6.3 million in charges in 2023 related to early retirement and severance costs.

Other notable decreases include professional and other outside services of $1.6 million, net occupancy of $1.5 million, intangible asset amortization of $1.5 million and other real estate owned and foreclosure expenses of $1.2 million.

These decreases were offset by a $2.7 million increase in equipment expense and a $2.0 million increase in outside data processing expenses as the Corporation continued to invest in customer facing digital solutions throughout 2024.

Noninterest expense totaled $388.3 million in 2023, an increase of $32.6 million, or 9.2 percent from 2022.

5 unchanged sentences

The increase in other expenses is primarily due to higher customer-related contingent losses during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

These increases were offset by a $5.5 million decrease in professional and other outside services due primarily to $7.1 million of expenses related to Level One acquisition that were recorded in 2022.

Noninterest expense totaled $355.7 million in 2022, an increase of $76.5 million, or 27.4 percent from 2021.

Level One acquisition-related costs in 2022 totaled $16.5 million, of which $7.1 million was in professional and other outside services, $6.0 million was reflected in salaries and employee benefits, and $2.2 million in equipment expenses and outside data processing expenses.

The acquisition-related expenses were primarily contract termination charges, core system conversion expenses, transaction advisory services, and employee retention bonuses and severance.

Additionally, $20.0 million of post-acquisition noninterest expenses related to Level One operations were recorded during 2022, which primarily included $13.8 million in salaries and employee benefits and $3.1 million in net occupancy expenses.

In addition to the salary and benefits expense increases related to the acquisition of Level One, merit and incentive expense increases contributed to the overall $39.9 million increase in salaries and employee benefits for 2022 compared to 2021.

Increases in other expenses of $7.4 million, in 2022 over 2021, were driven by higher customer-related contingent losses, increased customer related travel and entertainment expenses, and increased mortgage servicing rights amortization.

Equipment and outside data processing expenses increased $4.5 million and $3.4 million, respectively, as the Corporation’s investment in customer-facing digital solutions in 2022, such as online account origination, resulted in increased software costs when compared to 2021.

As the Bank continues to grow both organically and via acquisition, FDIC assessments have increased $4.0 million when compared to 2021.

Finally, intangible asset amortization increased $2.5 million due to the core deposit intangible and non-compete amortization related to the Level One acquisition.

Details of the Level One acquisition can be found in NOTE 2.

ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

These increases were offset by a $5.5 million decrease in professional and other outside services due primarily to $7.1 million of transaction costs related to the Level One acquisition that were recorded in 2022.

The Corporation’s federal statutory income tax rate for 2024 is 21 percent and its state tax rate varies from 0 to 9.5 percent depending on the state in which the subsidiary company operates.

2 unchanged sentences

For 2023, income tax expense was $35.4 million on pre-tax income of $259.2 million, or 13.7 percent.

The higher effective income tax rate in 2023 compared to 2022 was primarily driven by decreases in tax-exempt earnings and gains on life insurance, which are also non-taxable.

The lower effective income tax rate in 2024 compared to 2023 was primarily driven by an increase in income tax credits generated from investments in affordable housing projects.

The detailed reconciliation of federal statutory to actual tax expense is shown in NOTE 19.

INCOME TAX of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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

The Corporation’s tax asset, deferred and receivable decreased from $111.2 million at December 31, 2022 to $99.9 million at December 31, 2023, which included the Corporation’s net deferred tax asset decreasing from $109.5 million at December 31, 2022 to $84.7 million at December 31, 2023.

The $24.8 million decrease in the Corporation’s net deferred tax asset was primarily due to accounting for unrealized gains and losses on available for sale securities and accounting for loan losses.

The Corporation’s tax asset, deferred and receivable decreased from $99.9 million at December 31, 2023 to $92.4 million at December 31, 2024.

Preferred Stock

4 unchanged sentences

The Series A preferred stock qualifies as tier 1 capital for purposes of the regulatory capital calculations.

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

Stock Repurchase Program

2 unchanged sentences

On a share basis, the amount of common stock subject to the repurchase program represented approximately 6 percent of the Corporation’s outstanding shares at the time the program became effective.

As of December 31, 2023 and 2022, the Corporation had approximately 2.7 million shares at an aggregate value of $74.5 million available to repurchase under the program.

The Corporation repurchased 1,648,466 shares of its common stock pursuant to the repurchase program during 2024.

As of December 31, 2024, the Corporation had approximately 1.0 million shares at an aggregate value of $18.4 million available to repurchase under the program.

The Corporation did not repurchase any shares of its common stock pursuant to the repurchase program during 2022 or 2023.

3 unchanged sentences

With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

For the twelve months ended December 31, 2024, the Corporation recorded excise tax of $0.5 million, related to its share repurchase during the period, which is reflected in Stockholders’ Equity as a component of additional paid-in capital.

Regulatory Capital

2 unchanged sentences

The assigned capital category is largely determined by four ratios that are calculated according to the regulations:

total risk-based capital, tier 1 risk-based capital, CET1, and tier 1 leverage ratios.

total risk-based capital, tier 1 risk-based capital, common equity tier 1 ("CET1"), and tier 1 leverage ratios.

The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity.

14 unchanged sentences

This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available.

While the 2021 CAA provided for a further extension of the mandatory adoption of CECL until January 1, 2022, the federal banking regulators elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects.

Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the CARES Act.

While the Consolidated Appropriations Act of 2021 provided for a further extension of the mandatory adoption of CECL until January 1, 2022, the federal banking regulators elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects.

As a result, because implementation of the CECL standard was delayed by the Corporation until January 1, 2021, it began phasing in the cumulative effect of the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition period that began on January 1, 2021.

Under that phase-in schedule, the cumulative effect of the adoption will be fully reflected in regulatory capital on January 1, 2024.

Under that phase-in schedule, the cumulative effect of the adoption was fully reflected in regulatory capital on January 1, 2024.

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

30 unchanged sentences

First Merchants Bank 1,746,299 9.89 706,331 4.00 $ 882,913 5.00 %

Basel III permits banks with less than $15 billion in assets to continue to treat trust preferred securities as tier 1 capital.

This treatment is permanently grandfathered as tier 1 capital even if the Corporation should ever exceed $15 billion in assets due to organic growth but not following certain mergers or acquisitions.

As a result, while the Corporation’s total assets exceeded $15 billion as of December 31, 2021, the Corporation has continued to treat its trust preferred securities as tier 1 capital as of such date.

However, under certain amendments to the “transition rules” of Basel III, if a bank holding company that held less than $15 billion of assets as of December 31, 2009 (which would include the Corporation) acquires a bank holding company with under $15 billion in assets at the time of acquisition (which would include Level One), and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization’s call report for the period in which the transaction occurred, the resulting organization must begin reflecting its trust preferred securities as tier 2 capital at such time.

As a result, effective with the April 1, 2022 consummation of the Level One merger, the Corporation began reflecting all of its trust preferred securities, of $49.1 million, as tier 2 capital.

On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $70.0 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5 million and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due October 30, 2028 in the aggregate principal amount of $65.0 million.

As of December 31, 2023 the Corporation began the five year phase out (at a rate of 20 percent per year) as defined in the Basel III capital rules, which resulted in a reduction of $13 million in tier 2 capital.

The Corporation exercised its right to redeem $65 million of the subordinated debt on the scheduled interest payment date during the first half of 2024.

On April 1, 2022, the Corporation assumed $30.0 million of subordinated notes in conjunction with its acquisition of Level One.

The notes mature on December 18, 2029, and the Corporation has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or upon the occurrence of a tier 2 capital event or tax event.

As of December 31, 2024, these subordinated debentures were classified as tier 2 capital and were subject to the five year phase-out.

Management believes the disclosed capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation.

1 unchanged sentence

The Federal Reserve focuses its assessment of capital adequacy on a component of tier 1 capital known as CET1.

Because the Federal Reserve has long indicated that voting common shareholders’ equity (essentially tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories.

Tier I regulatory capital consists primarily of total stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses.

Because the Federal Reserve has long indicated that voting common stockholders’ equity (essentially tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories.

Tier I regulatory capital consists primarily of total common stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses.

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

32 unchanged sentences

Tangible common equity to tangible assets ratio was 8.81 percent at December 31, 2024, and 8.40 percent at December 31, 2023.

The increase in tangible common equity and tangible assets is primarily due to earnings growth and the recapture or increase in mark-to-market values associated with the available for sale investment securities portfolio.

At December 31, 2023 and 2022, the Corporation had net unrealized losses of $219.7 million and $296.7 million, respectively, due to interest rate changes and not due to credit quality.

Non-GAAP financial measures such as tangible common equity to tangible assets, tangible earnings per share, return on average tangible assets and return on average tangible equity are important measures of the strength of the Corporation’s capital and ability to generate

earnings on tangible common equity invested by our shareholders.

These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the Corporation’s financial position without regard to the effects of intangible assets and preferred stock, but retain the effect of accumulated other comprehensive gains (losses) in shareholder’s equity.

The increase in the tangible common equity to tangible assets ratio was primarily due to tangible common equity increasing $64.5 million, or 4.4 percent, while tangible assets decreased $86.6 million, or 0.5 percent, from 2023.

The growth in tangible common equity was primarily due to 2024 net income earned of $201.4 million partially offset by dividends declared of $83.5 million and common stock repurchases totaling $56.2 million.

The decline in tangible assets was mostly attributable to a $350.7 million decrease in the balance of investment securities and a $162.2 million decrease in total cash balances partially offset by a $368.1 million increase in loans and a $64.8 million increase in other assets.

Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

The tables within the “NON-GAAP FINANCIAL MEASURES” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations reconcile traditional GAAP measures to these non-GAAP financial measures at December 31, 2024 and December 31, 2023.

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

LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS

3 unchanged sentences

Consumer loans are typically underwritten with statistical decision-making tools and are managed throughout their life cycle on a portfolio basis.

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

The quality of the loan portfolio and the amount of nonperforming loans may increase or decrease as a result of acquisitions, organic portfolio growth, problem loan recognition and resolution through collections, sales or charge-offs.

The performance of any loan can be affected by external factors such as economic conditions, or internal factors specific to a particular borrower, such as the actions of a customer’s internal management.

At December 31, 2023, nonperforming loans totaled $53.6 million, an increase of $11.0 million from December 31, 2022.

Non-accrual loans totaled $53.6 million at December 31, 2023, an increase of $11.3 million from December 31, 2022.

The primary increase was in the residential portfolio of $11.5 million.

Other real estate owned and repossessions, totaling $4.8 million at December 31, 2023, decreased $1.6 million from December 31, 2022.

For other real estate owned, current appraisals are obtained to determine fair value as management continues to aggressively market these real estate assets.

According to applicable accounting guidance, loans that no longer exhibit similar risk characteristics are individually evaluated to determine if there is a need for a specific reserve.

Commercial loans under $500,000 and consumer loans, with the exception of troubled debt restructures, are not individually evaluated.

At December 31, 2024, non-accrual loans totaled $73.8 million, an increase of $20.2 million from December 31, 2023, primarily due to a $24.1 million increase in non-accrual balances within the construction loan class.

The increase was offset by a $3.6 million decrease in non-accrual balances within the residential loan class.

At December 31, 2024, loans 90-days or more delinquent and still accruing totaled $5.9 million, an increase of $5.7 million from December 31, 2023.

The increase was primarily driven by two loans totaling $5.3 million, including $3.7 million and $1.6 million within the construction and commercial and industrial loan classes, respectively.

According to applicable accounting guidance, loans that no longer exhibit similar risk characteristics are evaluated individually to determine if there is a need for a specific reserve.

Commercial loans under $500,000 and consumer loans are not individually evaluated.

The determination for individual evaluation is made based on current information or events that may suggest it is probable that not all amounts due of principal and interest, according to the contractual terms of the loan agreement, will be substantially collected.

3 unchanged sentences

Nonaccrual loans $ 73,773 $ 53,580

Renegotiated loans (1)

Nonperforming loans (NPL) 53,580 42,548

OREO and Repossessions 4,948 4,831

2 unchanged sentences

NPAs and loans 90-days or more delinquent $ 84,623 $ 58,583

(1) As a result of the adoption of ASU 2022-02 on January 1, 2023, the renegotiated classification is no longer applicable.

The composition of nonperforming assets plus accruing loans 90-days or more delinquent is reflected in the following table.

The composition of nonperforming assets plus accruing loans 90-days or more delinquent is reflected in the following table by loan class.

(Dollars in Thousands) December 31, 2024 December 31, 2023

11 unchanged sentences

Nonperforming assets and loans 90-days or more delinquent $ 84,623 $ 58,583

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

PROVISION EXPENSE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS

The Corporation adopted FASB Accounting Standards Update (ASU) No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“CECL”) on January 1, 2021.

CECL replaces the previous “incurred loss” model with an “expected loss” model of measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio.

The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost based on historical experiences, current conditions and reasonable and supportable economic forecasts.

The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost based on historical experiences, current conditions and reasonable and supportable forecasts.

CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio.

Additional details of the Corporation’s methodology for measuring expected credit losses on loans is discussed in NOTE 5.

Additional details of the Corporation's CECL methodology and allowance calculation are discussed within NOTE 5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The CECL allowance is maintained through the provision for credit losses, which is a charge against earnings.

Based on management’s judgment as to the appropriate level of the allowance, the amount provided in any period may be greater or less than net loan losses for the same period.

The CECL allowance is maintained through the provision for credit losses - loans, which is a charge against earnings.

Based on management’s judgment as to the appropriate level of the ACL - Loans, the amount provided in any period may be greater or less than net loan losses for the same period.

The determination of the provision amount and the adequacy of the allowance in any period is based on management’s continuing review and evaluation of the loan portfolio.

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

The Corporation’s total loan balance, excluding loans held for sale, increased $368.3 million, ending December 31, 2024 at $12.9 billion.

At December 31, 2023, the allowance for credit losses totaled $204.9 million, which represents a decrease of $18.3 million from December 31, 2022.

The allowance decreased primarily due to $25.6 million of net charge-offs during the twelve months ended December 31, 2023.

The increase in net charge-offs was primarily related to two large commercial and industrial charge-offs of $13.7 million and $5.4 million in the third quarter of 2023.

The larger charge-off involved fraudulent activity by the borrower and was idiosyncratic in nature and not indicative of a larger portfolio credit issue.

As a percentage of loans, the allowance for credit losses was 1.64 percent at December 31, 2023, compared to 1.86 percent at December 31, 2022 and 2.11 percent at December 31, 2021.

At December 31, 2024, the ACL - Loans totaled $192.8 million, which represents a decrease of $12.2 million from December 31, 2023.

The allowance decreased primarily due to $49.4 million of net charge-offs during the year ended December 31, 2024.

As a percentage of loans, the ACL - Loans was 1.50 percent at December 31, 2024, compared to 1.64 percent at December 31, 2023 and 1.86 percent at December 31, 2022.

The Corporation deems the current estimate for loan portfolio credit exposure as appropriate.

1 unchanged sentence

(Dollars in Thousands) 2024 2023 2022

Allowance for credit losses:

Allowance for credit losses - loans:

Balances, December 31 $ 204,934 $ 223,277 $ 195,397

Impact of adopting ASC 326 — — 74,055

Balances, January 1, 2021 Post-ASC 326 adoption — — 204,703

Loans charged off (54,243) (28,039) (6,601)

2 unchanged sentences

Provision for credit losses - loans 37,200 7,300 —

CECL Day 1 non-PCD provision for credit losses — 13,955 —

CECL Day 1 PCD ACL — 16,599 —

CECL Day 1 non-PCD provision for credit losses - loans — — 13,955

CECL Day 1 PCD ACL - loans — — 16,599

Ending balance, December 31 $ 192,757 $ 204,934 $ 223,277

2 unchanged sentences

Ratio of allowance for credit losses - loans to total loans outstanding 1.50 % 1.64 % 1.86 %

In 2023, there was $7.3 million in provision for credit losses - loans, which was offset by a reserve release of $3.8 million related to the allowance for unfunded commitments, resulting in a net provision expense for the year ended December 31, 2023 of $3.5 million.

In 2022, the Corporation recorded a $14.0 million provision for credit losses for loans and a $2.8 million provision for credit losses for unfunded commitments, both were related to the Level One acquisition, which resulted in provision expense for the year ended December 31, 2022 of $16.8 million.

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

Net charge-offs totaling $25.6 million, $2.7 million, and $9.3 million were recognized for the twelve months ended December 31, 2023, 2022, and 2021, respectively.

For the twelve months ended December 31, 2023, there were three individual charge-offs greater than $500,000 that totaled $21.2 million.

For the twelve months ended December 31, 2023, there were not any individual recoveries greater than $500,000.

For the twelve months ended December 31, 2022, there was one individual charge-off greater than $500,000 that totaled $2.8 million.

For the twelve months ending December 31, 2022, there were two individual recoveries greater than $500,000 that totaled $1.2 million.

For the twelve months ended December 31, 2021, there were four individual charge-offs greater than $500,000 that totaled $9.0 million.

For the twelve months ending 2021, there were not any individual recoveries greater than $500,000.

In 2024, the Corporation recorded $37.2 million in provision for credit losses - loans, which was offset by a release in reserve of $1.5 million related to the allowance for unfunded commitments, resulting in a net provision expense for the year ended December 31, 2024 of $35.7 million.

In 2023, the Corporation recorded a $7.3 million provision for credit losses - loans, which was offset by a release in reserve of $3.8 million related to the allowance for unfunded commitments, resulting in a net provision expense for the year ended December 31, 2023 of $3.5 million.

Net charge-offs totaling $49.4 million, $25.6 million, and $2.7 million were recognized for the years ended December 31, 2024, 2023, and 2022, respectively.

The increase in net charge-offs was primarily related to two commercial relationships that accounted for $42.7 million of charge-offs during the year ended December 31, 2024.

One borrower experienced a sudden change in revenue from the cancellation and inability to renegotiate their contracts with the U.S.

This negatively impacted the value of the borrower’s business and resulted in their inability to repay principal and interest.

The second borrower provided notification of its plans to cease operations, which resulted in their inability to repay principal and interest and a charge-off for the Corporation.

The Corporation does not believe these charge-offs are indicative of the portfolio as a whole.

The distribution of the net charge-offs (recoveries) for the twelve months ended December 31, 2024, 2023, and 2022 are reflected in the following table.

13 unchanged sentences

The determination of the provision for credit losses in any period is based on management’s continuing review and evaluation of the loan portfolio, and its judgment as to the impact of current economic conditions on the portfolio.

The allowance for credit losses remains robust, along with $23.2 million of fair value accretion remaining on the acquired portfolio.

Corporation continues to monitor economic forecast changes, loan growth and credit quality to determine provision needs in the future.

During the fourth quarter of 2023 and 2022, the Corporation performed its annual goodwill impairment testing and in each valuation, the fair value exceeded the Corporation’s carrying value;

therefore, it was concluded goodwill was not impaired as of either date.

The Level One acquisition on April 1, 2022 resulted in $166.6 million of goodwill.

Details regarding the Level One acquisition are discussed in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation continues to monitor economic forecast changes, loan growth and credit quality to determine provision needs in the future.

During the fourth quarter of 2024 and 2023, the Corporation performed its annual goodwill impairment testing and the fair value exceeded the Corporation’s carrying value.

Based on the analysis performed, the Corporation concluded goodwill was not impaired as of December 31, 2024 and 2023.

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

Liquidity management is the process by which the Corporation ensures that adequate liquid funds are available for the holding company and its subsidiaries.

10 unchanged sentences

Federal funds purchased and securities sold under agreements to repurchase are also considered a source of liquidity.

In addition, FHLB advances and Federal Reserve Discount Window borrowings are utilized as funding sources.

At December 31, 2023, total borrowings from the FHLB were $712.9 million and there were no outstanding borrowings from the Federal Reserve Discount Window.

In addition, FHLB advances and Federal Reserve Discount Window borrowings are utilized as a funding source.

At December 31, 2024, total borrowings from the FHLB were $822.6 million and there was $10,000 of outstanding borrowings from the Federal Reserve Discount Window.

The Bank has pledged certain mortgage loans and investments to the FHLB and Federal Reserve.

The total available remaining borrowing capacity from the FHLB and Federal Reserve at December 31, 2023 was $664.9 million and $804.6 million, respectively.

In March 2023, the Federal Reserve created the Bank Term Funding Program (“BTFP”).

The BTFP is a new facility established in response to recent liquidity concerns within the banking industry in part due to recent deposit runs that resulted in a few large bank failures.

The BTFP was designed to provide available additional funding to eligible depository institutions in order to help assure that banks have the ability to meet the needs of all their depositors.

Under the program, eligible depository institutions can obtain loans of up to one year in length by pledging U.S.

Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.

These assets will be valued at par.

The BTFP is intended to eliminate the need for depository institutions to quickly sell their securities when they are experiencing stress on their liquidity.

As of December 31, 2023, the Bank had borrowing capacity of $388.8 million and no outstanding balance from the BTFP facility.

The Federal Reserve has announced it will discontinue making new loans as scheduled on March 11, 2024.

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

The Corporation and the Bank receive outside credit ratings from Moody’s.

Both the Corporation and the Bank currently have Issuer Ratings of Baa1.

Additionally, the Bank has a Baseline Credit Assessment Rating of a3.

Management considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper.

Because of the Corporation’s and Bank’s current levels of long-term debt, management believes it could generate additional liquidity from various sources should the need arise.

The total available remaining borrowing capacity from the FHLB and Federal Reserve at December 31, 2024 was $733.1 million and $2.5 billion, respectively.

The following table presents the Corporation’s material cash requirements from known contractual and other obligations at December 31, 2024:

5 unchanged sentences

Federal Home Loan Bank advances 95,000 727,554 822,554

Federal Funds Purchased 99,226 — 99,226

Subordinated debentures and term loans 1,333 92,196 93,529

55 unchanged sentences

Historical retention rate assumptions are applied to nonmaturity deposits for modeling purposes.

The comparative rising 200 basis points and falling 100 basis points scenarios below, as of December 31, 2023 and 2022, assume further interest rate changes in addition to the base simulation discussed above.

The comparative rising 200 and 100 basis points and falling 200 and 100 basis points scenarios below, as of December 31, 2024 and 2023, assume further interest rate changes in addition to the base simulation discussed above.

These changes are immediate and parallel changes to the base case scenario.

Results for rising 200 basis points and falling 100 basis points interest rate scenarios are listed below based upon the Corporation’s rate sensitive assets and liabilities at December 31, 2023 and 2022.

Results for rising 200 and 100 basis points and falling 200 and 100 basis points interest rate scenarios are listed below based upon the Corporation’s rate sensitive assets and liabilities at December 31, 2024 and 2023.

The change from the base case represents cumulative net interest income over a twelve-month time horizon.

2 unchanged sentences

Rising 200 basis points from base case 4.1% 4.0 %

Rising 100 basis points from base case 2.5% 2.1 %

Falling 100 basis points from base case (2.2)% (5.0) %

Falling 200 basis points from base case (4.5)% (7.8) %

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

DEPOSITS AND BORROWINGS

The table below reflects the level of deposits and borrowed funds (repurchase agreements, FHLB advances, subordinated debentures and term loans) at December 31, 2023 and 2022.

The table below reflects the level of deposits and borrowed funds at December 31, 2024 and 2023.

December 31, December 31,

11 unchanged sentences

$ 15,679,811 $ 15,850,229

Deposits increased $438.7 million from December 31, 2022.

The majority of the organic deposit growth was due to increases in maturity deposits of $1.1 billion, which was offset by decreases in nonmaturity deposits of $623.6 million when compared to December 31, 2022.

Higher interest rates have resulted in customers migrating funds from nonmaturity products into maturity time deposit products.

Federal Home Loan Bank advances decreased $110.8 million compared to December 31, 2022 as the Corporation utilized increased liquidity to pay down FHLB advances in order to increase borrowing capacity.

Deposits decreased $299.8 million from December 31, 2023.

The majority of the decrease was due to the sale of the Illinois branch deposits of $267.4 million.

In addition to the overall balance decline resulting from the Illinois branch sale, as interest rates declined in the second half of 2024, customers began migrating funds from maturity time deposit products into nonmaturity deposit products.

Federal funds purchased increased $99.2 million, and securities sold under repurchase agreements decreased $14.4 million from December 31, 2023, respectively.

The Corporation utilized the funds due to increased loan growth during the year ended December 31, 2024.

Further discussion regarding federal funds purchased and repurchase agreements is included in NOTE 11.

BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Federal Home Loan Bank advances increased $109.7 million compared to December 31, 2023 as the Corporation utilized FHLB advances in order to fund loan growth and supplement deposit balances in 2024.

Further discussion regarding FHLB advances is included in NOTE 11.

1 unchanged sentence

Additionally, the interest rate risk is included as part of the Corporation’s interest simulation discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK”.

Subordinated debentures and term loans increased $7.3 million compared to December 31, 2022.

During the third quarter of 2023, the Corporation acquired a secured borrowing in conjunction with the purchase of the Indianapolis regional headquarters building.

The secured borrowing bears a fixed interest rate of 3.41 percent and had a balance of $7.3 million as of December 31, 2023.

During the fourth quarter of 2023, the Corporation issued notice to the holders of the 6.75 percent Fixed-to-Floating Subordinated Debt Notes (“Subordinated Debt”) that it intends to exercise its rights to redeem $40.0 million in principal.

The redemption was permitted under the optional redemption provisions of the Subordinated Note Certificate representing the Subordinated Debt and occurred in the first quarter of 2024 on the scheduled interest payment date.

Subordinated debentures and term loans decreased $65.1 million compared to December 31, 2023.

During the first half of 2024, the Corporation exercised its rights to redeem $65.0 million in principal of the US Bank Subordinated Debt Notes (“Subordinated Debt”) and paid the debt in full on the scheduled interest payment dates.

During the first quarter of 2025, the Corporation distributed notice of redemption of $30.0 million in principal amount.

The redemption is permitted under the optional redemptions provisions of the Subordinated Notes and will occur in the first quarter of 2025 on the scheduled interest payment date.

Additional details regarding the subordinated debentures and other borrowings are discussed within NOTE 11.

BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s financial statements are presented in accordance with GAAP, which requires the measurement of financial position and operating results primarily in terms of historic dollar values.

Changes in the purchasing power of money due to inflation are generally not considered.

Historically, changes in interest rates have affected the financial condition of this financial institution to a far greater degree than changes in the inflation rate.

However, with inflation receding, the impact to the financial institution is lower but still reflective of higher labor and vendor costs.

During 2023, the Federal Reserve continued the tightening of monetary policy to address inflation by increasing the target federal funds rate by 100 basis points.

As a result, the Corporation’s sensitivity to interest rate changes are presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK”.

Finally, the increase in interest rates can impact consumer spending as goods and services cost more thereby causing deposit balances to decline.

In addition, the Corporation’s loan growth could moderate as customers respond to the impact of higher interest rates, high costs and a slowing economy.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis