FIRST MERCHANTS CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm To the Stockholders, Board of Directors and Audit Committee First Merchants Corporation Muncie, Indiana Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of First Merchants Corporation (the “Corporation”) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America . We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2025, expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses As described in Note 5 to the consolidated financial statements, the Corporation’s allowance for credit losses (ACL) on loans was $192.8 million at December 31, 2024. The ACL is an estimate of current expected credit losses in the loan portfolio. The determination of the ACL requires significant judgment reflecting the Corporation’s best estimate of expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. We identified the econometric component of the ACL as a critical audit matter. The econometric component involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic forecasts and conditions and other environmental factors used to adjust historical loss rates. 52 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM How We Addressed the Matter in Our Audit The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of internal controls over the econometric component of the ACL • Obtained an understanding of the Corporation’s process over the selection of reasonable and supportable forecasts • Testing clerical and computational accuracy of the formulas within the econometric component of the calculation. • Testing of completeness and accuracy of the information and reports utilized in the econometric component of the ACL, including reports used in management review controls over the econometric component of the ACL. • Evaluating the forecast adjustment, including assessing that it is reasonable and supportable Forvis Mazars, LLP We have served as the Corporation’s auditor since at least 1982; however, an earlier year cannot be reliably determined. Indianapolis, Indiana February 24, 2025 53 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS December 31, December 31, (Dollars in Thousands, Except Share Data) 2024 2023 ASSETS Cash and due from banks $ 87,616 $ 112,649 Interest-bearing deposits 298,891 436,080 Investment securities available for sale 1,386,475 1,627,112 Investment securities held to maturity, net of allowance for credit losses of $ 245 and $ 245 (fair value of $ 1,723,520 and $ 1,870,374 ) 2,074,220 2,184,252 Loans held for sale 18,663 18,934 Loans 12,854,359 12,486,027 Less: Allowance for credit losses - loans ( 192,757 ) ( 204,934 ) Net loans 12,661,602 12,281,093 Premises and equipment 129,743 133,896 Federal Home Loan Bank stock 41,690 41,769 Interest receivable 91,829 97,664 Goodwill 712,002 712,002 Other intangibles 19,828 27,099 Cash surrender value of life insurance 304,906 306,301 Other real estate owned 4,948 4,831 Tax asset, deferred and receivable 92,387 99,883 Other assets 387,169 322,322 TOTAL ASSETS $ 18,311,969 $ 18,405,887 LIABILITIES Deposits: Noninterest-bearing $ 2,325,579 $ 2,500,062 Interest-bearing 12,196,047 12,321,391 Total Deposits 14,521,626 14,821,453 Borrowings: Federal funds purchased 99,226 — Securities sold under repurchase agreements 142,876 157,280 Federal Home Loan Bank advances 822,554 712,852 Subordinated debentures and other borrowings 93,529 158,644 Total Borrowings 1,158,185 1,028,776 Interest payable 16,102 18,912 Other liabilities 311,073 289,033 Total Liabilities 16,006,986 16,158,174 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Cumulative Preferred Stock, $ 1,000 par value, $ 1,000 liquidation value: Authorized - 600 cumulative shares Issued and outstanding - 125 cumulative shares 125 125 Preferred Stock, Series A, no par value, $ 2,500 liquidation preference: Authorized - 10,000 non-cumulative perpetual shares Issued and outstanding - 10,000 non-cumulative perpetual shares 25,000 25,000 Common Stock, $ 0.125 stated value: Authorized - 100,000,000 shares Issued and outstanding - 57,974,535 and 59,424,122 shares 7,247 7,428 Additional paid-in capital 1,188,768 1,236,506 Retained earnings 1,272,528 1,154,624 Accumulated other comprehensive loss ( 188,685 ) ( 175,970 ) Total Stockholders' Equity 2,304,983 2,247,713 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,311,969 $ 18,405,887 See notes to consolidated financial statements. 54 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Share Data) December 31, 2024 December 31, 2023 December 31, 2022 INTEREST INCOME Loans receivable: Taxable $ 803,652 $ 747,837 $ 470,468 Tax-exempt 34,262 31,954 25,124 Investment securities: Taxable 36,086 35,207 38,354 Tax-exempt 53,487 58,117 67,381 Deposits with financial institutions 16,992 17,719 2,503 Federal Home Loan Bank stock 3,527 3,052 1,176 Total Interest Income 948,006 893,886 605,006 INTEREST EXPENSE Deposits 386,127 306,092 62,939 Federal funds purchased 481 1,421 1,302 Securities sold under repurchase agreements 3,057 3,451 1,136 Federal Home Loan Bank advances 29,886 27,206 11,417 Subordinated debentures and other borrowings 7,341 10,316 8,009 Total Interest Expense 426,892 348,486 84,803 NET INTEREST INCOME 521,114 545,400 520,203 Provision for credit losses 35,700 3,500 16,755 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 485,414 541,900 503,448 NONINTEREST INCOME Service charges on deposit accounts 32,606 30,837 28,371 Fiduciary and wealth management fees 34,215 30,840 29,688 Card payment fees 19,317 18,862 20,207 Net gains and fees on sales of loans 20,840 15,659 10,055 Derivative hedge fees 3,082 3,385 3,388 Other customer fees 1,547 1,880 1,935 Increase in cash surrender value of life insurance 5,655 5,320 5,210 Gains on life insurance benefits 2,809 3,027 5,964 Net realized gains (losses) on sales of available for sale securities ( 20,757 ) ( 6,930 ) 1,194 Gain on branch sale 19,983 — — Other income 6,283 2,722 1,929 Total Noninterest Income 125,580 105,602 107,941 NONINTEREST EXPENSES Salaries and employee benefits 221,167 228,745 206,893 Net occupancy 28,387 29,859 26,211 Equipment 26,802 24,113 23,945 Marketing 7,389 7,427 7,708 Outside data processing fees 27,140 25,165 21,682 Printing and office supplies 1,462 1,552 1,588 Intangible asset amortization 7,271 8,743 8,275 FDIC assessments 15,029 14,674 10,235 Other real estate owned and foreclosure expenses 2,076 3,318 823 Professional and other outside services 14,586 16,172 21,642 Other expenses 27,957 28,502 26,713 Total Noninterest Expenses 379,266 388,270 355,715 INCOME BEFORE INCOME TAX 231,728 259,232 255,674 Income tax expense 30,326 35,446 33,585 NET INCOME 201,402 223,786 222,089 Preferred stock dividends 1,875 1,875 1,406 NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 199,527 $ 221,911 $ 220,683 NET INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE DATA: Basic Net Income Available to Common Stockholders $ 3.42 $ 3.74 $ 3.83 Diluted Net Income Available to Common Stockholders $ 3.41 $ 3.73 $ 3.81 Cash Dividends Paid to Common Stockholders $ 1.39 $ 1.34 $ 1.25 Average Diluted Common Shares Outstanding (in thousands) 58,533 59,489 57,950 See notes to consolidated financial statements. 55 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in Thousands) December 31, 2024 December 31, 2023 December 31, 2022 Net income $ 201,402 $ 223,786 $ 222,089 Other comprehensive income (loss): Unrealized gain (loss) on securities available-for-sale: Unrealized holding gain (loss) arising during the period ( 39,438 ) 70,084 ( 371,299 ) Reclassification adjustment for (gain) loss included in net income 20,757 6,930 ( 1,194 ) Tax effect 3,923 ( 16,173 ) 78,224 Net of tax ( 14,758 ) 60,841 ( 294,269 ) Unrealized gain (loss) on cash flow hedges: Unrealized holding gain (loss) arising during the period — ( 179 ) 479 Reclassification adjustment for (gain) loss included in net income — 15 521 Tax effect — 34 ( 210 ) Net of tax — ( 130 ) 790 Defined benefit pension plans: Net gain (loss) arising during the period 2,586 3,045 ( 1,076 ) Reclassification adjustment for amortization of prior service cost — 82 82 Tax effect ( 543 ) ( 657 ) 209 Net of tax 2,043 2,470 ( 785 ) Total other comprehensive income (loss), net of tax ( 12,715 ) 63,181 ( 294,264 ) Comprehensive income (loss) $ 188,687 $ 286,967 $ ( 72,175 ) See notes to consolidated financial statements. 56 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY Cumulative Preferred Stock Non-Cumulative Preferred Stock Common Stock Additional Accumulated Other (Dollars in Thousands, Except Share Data) Shares Amount Shares Amount Shares Amount Paid in Capital Retained Earnings Comprehensive Income (Loss) Total Balance, December 31, 2021 125 $ 125 — $ — 53,410,411 $ 6,676 $ 985,818 $ 864,839 $ 55,113 $ 1,912,571 Comprehensive loss: Net income — — — — — — — 222,089 — 222,089 Other comprehensive loss, net of tax — — — — — — — — ( 294,264 ) ( 294,264 ) Cash dividends on preferred stock ($ 140.64 per share) — — — — — — — ( 1,406 ) — ( 1,406 ) Cash dividends on common stock ($ 1.25 per share) — — — — — — — ( 72,748 ) — ( 72,748 ) Issuance of stock related to acquisition — — 10,000 25,000 5,588,962 699 236,690 — — 262,389 Share-based compensation — — — — 118,046 15 4,637 — — 4,652 Stock issued under employee benefit plans — — — — 20,267 3 703 — — 706 Stock issued under dividend reinvestment and stock purchase plan — — — — 50,559 6 2,050 — — 2,056 Stock options exercised — — — — 22,000 3 355 — — 358 Restricted shares withheld for taxes — — — — ( 39,662 ) ( 6 ) ( 1,627 ) — — ( 1,633 ) Balances, December 31, 2022 125 $ 125 10,000 $ 25,000 59,170,583 $ 7,396 $ 1,228,626 $ 1,012,774 $ ( 239,151 ) $ 2,034,770 Comprehensive income: Net income — — — — — — — 223,786 — 223,786 Other comprehensive income, net of tax — — — — — — — — 63,181 63,181 Cash dividends on preferred stock ($ 187.52 per share) — — — — — — — ( 1,875 ) — ( 1,875 ) Cash dividends on common stock ($ 1.34 per share) — — — — — — — ( 80,061 ) — ( 80,061 ) Share-based compensation — — — — 133,877 17 5,141 — — 5,158 Stock issued under employee benefit plans — — — — 27,902 3 751 — — 754 Stock issued under dividend reinvestment and stock purchase plan — — — — 67,135 8 2,172 — — 2,180 Stock options exercised — — — — 65,025 8 1,102 — — 1,110 Restricted shares withheld for taxes — — — — ( 40,400 ) ( 4 ) ( 1,286 ) — — ( 1,290 ) Balances, December 31, 2023 125 $ 125 10,000 $ 25,000 59,424,122 $ 7,428 $ 1,236,506 $ 1,154,624 $ ( 175,970 ) $ 2,247,713 Comprehensive income: Net income — — — — — — — 201,402 — 201,402 Other comprehensive loss, net of tax — — — — — — — — ( 12,715 ) ( 12,715 ) Cash dividends on preferred stock ($ 187.52 per share) — — — — — — — ( 1,875 ) — ( 1,875 ) Cash dividends on common stock ($ 1.39 per share) — — — — — — — ( 81,623 ) — ( 81,623 ) Repurchases of common stock — — — — ( 1,648,466 ) ( 206 ) ( 55,962 ) — — ( 56,168 ) Excise tax on common stock repurchases — — — — — — ( 517 ) — — ( 517 ) Share-based compensation — — — — 89,886 11 5,807 — — 5,818 Stock issued under employee benefit plans — — — — 21,330 3 653 — — 656 Stock issued under dividend reinvestment and stock purchase plan — — — — 62,825 8 2,253 — — 2,261 Stock options exercised — — — — 49,084 6 894 — — 900 Restricted shares withheld for taxes — — — — ( 24,246 ) ( 3 ) ( 866 ) — — ( 869 ) Balances, December 31, 2024 125 $ 125 10,000 $ 25,000 57,974,535 $ 7,247 $ 1,188,768 $ 1,272,528 $ ( 188,685 ) $ 2,304,983 See notes to consolidated financial statements. 57 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, December 31, December 31, (Dollars in Thousands) 2024 2023 2022 Cash Flow From Operating Activities: Net income $ 201,402 $ 223,786 $ 222,089 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 35,700 3,500 16,755 Depreciation and amortization 26,849 11,711 11,815 Change in deferred taxes 1,624 6,599 9,065 Share-based compensation 5,818 5,158 4,652 Loans originated for sale ( 1,171,131 ) ( 793,125 ) ( 251,306 ) Proceeds from sales of loans held for sale 1,183,481 791,764 265,723 Gains on sales of loans held for sale ( 12,079 ) ( 8,479 ) ( 4,373 ) Gain on branch sale ( 19,983 ) — — Net (gains) losses on sales of securities available for sale 20,757 6,930 ( 1,194 ) Increase in cash surrender of life insurance ( 5,655 ) ( 5,320 ) ( 5,210 ) Gains on life insurance benefits ( 2,809 ) ( 3,027 ) ( 5,964 ) Change in interest receivable 5,835 ( 12,594 ) ( 20,695 ) Change in interest payable ( 2,810 ) 11,382 3,703 Operating lease right-of-use abandonment — 2,083 — Other adjustments ( 789 ) 18,465 39,229 Net cash provided by operating activities 266,210 258,833 284,289 Cash Flows from Investing Activities: Net change in interest-bearing deposits 137,189 ( 310,019 ) 348,093 Purchases of: Securities available for sale ( 94,713 ) ( 32,852 ) ( 451,203 ) Securities held to maturity — ( 5,653 ) ( 292,493 ) Proceeds from sales of securities available for sale 247,747 388,254 606,873 Proceeds from maturities and redemptions of: Securities available for sale 51,424 56,182 201,846 Securities held to maturity 96,485 104,865 154,689 Change in Federal Home Loan Bank stock 79 ( 3,244 ) 1,899 Payment of capital calls to qualified affordable housing investments ( 29,682 ) ( 11,685 ) ( 11,589 ) Net change in loans ( 419,410 ) ( 621,786 ) ( 1,165,548 ) Net cash and cash equivalents received in acquisition — — 137,780 Net cash and cash equivalents paid in divestiture of branches ( 243,504 ) — — Proceeds from the sale of other real estate owned 781 1,748 496 Proceeds from life insurance benefits 9,859 10,357 24,047 Proceeds from mortgage portfolio loan sale 1,716 — — Proceeds from commercial portfolio loan sale 3,273 113,313 — Other adjustments ( 13,668 ) ( 33,905 ) ( 17,575 ) Net cash used in investing activities ( 252,424 ) ( 344,425 ) ( 462,685 ) Cash Flows from Financing Activities: Net change in : Demand and savings deposits 203,261 ( 623,642 ) ( 513,496 ) Certificates of deposit and other time deposits ( 235,640 ) 1,062,350 232,874 Borrowings 639,117 834,031 1,818,389 Repayment of borrowings ( 509,708 ) ( 1,119,200 ) ( 1,332,889 ) Cash dividends on preferred stock ( 1,875 ) ( 1,875 ) ( 1,406 ) Cash dividends on common stock ( 81,623 ) ( 80,061 ) ( 72,748 ) Stock issued under employee benefit plans 656 754 706 Stock issued under dividend reinvestment and stock purchase plans 2,261 2,180 2,056 Stock options exercised 900 1,110 358 Repurchase of common stock ( 56,168 ) — — Net cash provided (used) by financing activities ( 38,819 ) 75,647 133,844 Net Change in Cash and Cash Equivalents ( 25,033 ) ( 9,945 ) ( 44,552 ) Cash and Cash Equivalents, January 1 112,649 122,594 167,146 Cash and Cash Equivalents, December 31 $ 87,616 $ 112,649 $ 122,594 Additional cash flow information: Interest paid $ 429,702 $ 337,104 $ 80,035 Income tax paid 7,627 34,838 13,819 Loans transferred to other real estate owned 820 1,224 6,469 Premises and equipment transferred to other real estate owned 69 5,020 1,490 Non-cash investing activities using trade date accounting 10,018 3,273 46,106 ROU assets obtained in exchange for new operating lease liabilities 7,102 2,253 10,516 Qualified affordable housing investments obtained in exchange for funding commitments 65,500 44,200 36,500 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED In conjunction with the acquisition, liabilities were assumed as follows: December 31, 2024 December 31, 2023 December 31, 2022 Fair value of assets acquired $ — $ — $ 2,510,576 Cash paid in acquisition — — ( 79,324 ) Less: Common stock issued — — 237,389 Less: Preferred stock issued — — 25,000 Liabilities assumed $ — $ — $ 2,168,863 In conjunction with the divestiture, liabilities were divested as follows: December 31, 2024 December 31, 2023 December 31, 2022 Non-cash assets divested $ 10,664 $ — $ — Cash paid in divestiture 243,504 — — Less: Final settlement receivable 6,011 — — Net gain on divestiture 19,983 — — Liabilities divested $ 268,140 $ — $ — See notes to consolidated financial statements. 58 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FINANCIAL STATEMENT PREPARATION The accounting and reporting policies of the Corporation and the Bank, conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. The Corporation is a financial holding company whose principal activity is the ownership and management of the Bank and operates in a single significant business segment. The Bank provides full banking services under an Indiana state-charter. Additionally, the Bank operates as First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank generates commercial, mortgage, and consumer loans and receives deposits from customers located primarily in central and northern Indiana, northeast Illinois, central Ohio and southeast Michigan counties. The Bank’s loans are generally secured by specific items of collateral, including real property, consumer assets and business assets. A brief description of current accounting practices and current valuation methodologies are presented below. CONSOLIDATION The consolidation of the Corporation’s financial statements include the accounts of the Corporation and all its subsidiaries, after elimination of all material intercompany transactions. BUSINESS COMBINATIONS Business combinations are accounted for under the acquisition method of accounting. Under the acquisition method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition. Details of the Corporation’s acquisitions are included in NOTE 2. ACQUISITIONS AND DIVESTITURES of these Notes to Consolidated Financial Statements. CASH AND CASH EQUIVALENTS Cash on hand, cash items in process of collection and noninterest bearing cash held at various banks are included in cash and cash equivalents and have a maturity of less than three months. The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on cash and cash equivalents. INTEREST-BEARING DEPOSITS Interest-bearing cash held at other banks, the Federal Reserve Bank and federal funds sold are included in interest-bearing deposits and have a maturity of less than three months. The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on interest-bearing deposits. INVESTMENT SECURITIES Held to maturity securities are carried at amortized cost when the Corporation has the positive intent and ability to hold them until maturity. Available for sale securities are recorded at fair value on a recurring basis with the unrealized gains and losses, net of applicable income taxes, recorded in other comprehensive income (loss). Realized gains and losses are recorded in earnings and the prior fair value adjustments are reclassified within stockholders’ equity. Gains and losses on sales of securities are determined on the specific-identification method. Amortization of premiums are amortized to their earliest call date and accretion of discounts are amortized to the maturity date. The amortization is recorded as interest income from securities. Details of the Corporation’s investment securities portfolio are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. 59 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES AVAILABLE FOR SALE For investment securities available for sale in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income (loss). Adjustments to the allowance for credit losses are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality. Details of the Corporation’s allowance for credit losses on investment securities available for sale are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES HELD TO MATURITY (“ACL - INVESTMENTS”) The ACL - Investments is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the ACL - Investments when deemed uncollectible. Adjustments to the ACL - Investments are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on held to maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) the financial condition of the issuer, (3) historical loss rates for given bond ratings, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation’s portfolio have generally not been significant. An allowance for credit losses of $ 245,000 was recorded on state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. Details of the Corporation’s ACL - Investments are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. LOANS HELD FOR SALE Loans held for sale are carried at the lower of aggregate cost or market value. Loan fees (net of certain direct loan origination costs) on loans held for sale are deferred until the related loans are sold or repaid. Gains or losses on loan sales are recognized at the time of sale and determined using the specific identification method. LOANS The Corporation’s loan portfolio is carried at the principal amount outstanding, net of unearned income and principal charge-offs. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Interest income is accrued on the principal balances of loans. The accrual of interest is discontinued on a loan when, in management’s opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed against earnings when considered uncollectible. Interest income accrued in the prior year, if any, is charged to the allowance for credit losses. Interest income is subsequently recognized only to the extent cash payments are received and the loan is returned to accruing status. Details of the Corporation’s loan portfolio are included in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. PURCHASED CREDIT DETERIORATED (“PCD”) LOANS The Corporation accounts for its acquisitions under ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. The fair value of acquired loans at the time of acquisition is based on a variety of factors including discounted expected cash flows, adjusted for estimated prepayments and credit losses. In accordance with ASC 326, Financial Instruments – Credit Losses, the fair value adjustment is recorded as a premium or discount to the unpaid principal balance of each acquired loan. Acquired loans are classified into two categories: loans with more than insignificant credit deterioration (“PCD”) since origination, and loans with insignificant credit deterioration (“non-PCD”) since origination. Factors considered when determining whether a loan has a more-than-insignificant deterioration since origination include, but are not limited to, the materiality of the credit, risk grade, delinquency, nonperforming status, bankruptcies, and other qualitative factors. The net premium or discount on PCD loans is recorded in the Corporation’s allowance for credit losses on loans at the time of acquisition. The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using an effective yield method. The net premium or discount on non-PCD loans, that includes credit and non-credit components, is accreted or amortized into interest income over the remaining life of the loan using an effective yield method. Additionally, non-PCD loans have an allowance for credit loss established on acquisition date, which is recognized in the current period provision for credit loss expense. In the event of prepayment, unamortized discounts or premiums on PCD and non-PCD loans are recognized in interest income. 60 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) ALLOWANCE FOR CREDIT LOSSES - LOANS (“ACL - LOANS”) The ACL - Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged off against the allowance when the collectibility of the loan is unlikely. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Adjustments to the ACL - Loans are reported in the income statement as a component of provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding the policies and methodology used to estimate the ACL - Loans is detailed in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. PENSION The Corporation has defined-benefit pension plans, including non-qualified plans for certain employees, former employees and former non-employee directors. In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan. No additional pension benefits have been earned by any employees who had not met certain requirements as of March 1, 2005. The benefits are based primarily on years of service and employees’ pay near retirement. The Corporation’s accounting policies related to pensions and other post retirement benefits reflect the guidance in ASC 715, Compensation – Retirement Benefits. The Corporation does not consolidate the assets and liabilities associated with the pension plan. Instead, the Corporation recognizes the funded status of the plan in the Consolidated Balance Sheets. The measurement of the funded status and the annual pension expense involves actuarial and economic assumptions. Various statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liabilities related to the plans. Key factors include assumptions on the expected rates of return on plan assets, discount rates and health care costs and trends. The Corporation considers market conditions, including changes in investment returns and interest rates in making these assumptions. The primary assumptions used in determining the Corporation’s pension and post retirement benefit obligations and related expenses are presented in NOTE 18. PENSION AND OTHER POST RETIREMENT BENEFIT PLANS of these Notes to Consolidated Financial Statements. PREMISES AND EQUIPMENT Premises and equipment is carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line and declining balance methods based on the estimated useful lives of the assets ranging from three to forty years . Maintenance and repairs are expensed as incurred, while major additions and improvements, which extend the useful life, are capitalized. Gains and losses on dispositions are included in current operations. Details of the Corporation’s premises and equipment are included in NOTE 6. PREMISES AND EQUIPMENT of these Notes to Consolidated Financial Statements. LEASES The Corporation leases certain land and premises from third parties and all are classified as operating leases. Operating leases are included in Other Assets and Other Liabilities on the Corporation’s Consolidated Balance Sheets and lease expense for lease payments is recognized on a straight-line basis over the lease term. Right of Use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the term. An ROU asset represents the right to use the underlying asset for the lease term and also includes any direct costs and payments made prior to lease commencement and excludes lease incentives. When an implicit rate is not available, an incremental borrowing rate based on the information available at commencement date is used in determining the present value of the lease payments. A lease term may include an option to extend or terminate the lease when it is reasonably certain the option will be exercised. Short-term leases of twelve months or less are excluded from accounting guidance; as a result, the lease payments are recognized on a straight-line basis over the lease term and the leases are not reflected on the Corporation’s Consolidated Balance Sheets. Renewal and termination options are considered when determining short-term leases. Leases are accounted for at the individual level. Details of the Corporation’s leases are included in NOTE 8. LEASES of these Notes to Consolidated Financial Statements. QUALIFIED AFFORDABLE HOUSING INVESTMENTS Qualified affordable housing investments are investments related to low income housing tax credits (“LIHTC”). The purpose of the Corporation’s investment in LIHTC partnerships is to assist in achieving the goals of the Community Reinvestment Act and to earn an adequate return on capital via the federal income tax credit. LIHTC partnerships are managed by unrelated general partners that have the power to direct the activities which most significantly affect the performance of the partnerships and, therefore, the Corporation is not the primary beneficiary of these partnerships. Accordingly, the Corporation does not consolidate these variable interest entities into its consolidated financial statements. Investments in LIHTCs are included in other assets on the Consolidated Balance Sheets and the unfunded commitments to provide additional capital for LIHTC investments are included in other liabilities on the Consolidated Balance Sheets. Additionally, the Corporation amortizes the cost of the qualifying investments in proportion to the tax credit and other tax benefits received over the life of the investment. The amortization and income tax credits are included as a component of income tax expense in the Consolidated Statements of Income. Details of the Corporation’s LIHTC investments are included in NOTE 9. QUALIFIED AFFORDABLE HOUSING INVESTMENTS of these Notes to Consolidated Financial Statements. FEDERAL HOME LOAN BANK STOCK (“FHLB”) FHLB stock is a required investment for institutions that are members of the FHLB. The Bank is a member of the FHLB of Indianapolis. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and is classified as a restricted security. Both cash and stock dividends are reported as income. INTANGIBLE ASSETS Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Intangible assets with definite useful lives are subject to amortization and relate to core deposits, customer relationships and non-compete agreements. These intangible assets are being amortized on both the straight-line and accelerated basis over two to ten years . Intangible assets are periodically evaluated as to the recoverability of their carrying value. Details of the Corporation’s other intangible assets are included in NOTE 7. GOODWILL AND OTHER INTANGIBLES of these Notes to Consolidated Financial Statements. 61 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) GOODWILL Goodwill is maintained by applying the provisions of ASC 350, Intangibles – Goodwill and Other . For acquisitions, assets acquired, including identified intangible assets, and the liabilities assumed are required to be recorded at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. In addition, the determination of the useful lives over which the intangible asset will be amortized is subjective. Under ASC 350, the Corporation is required to evaluate goodwill for impairment on an annual basis, as well as on an interim basis, if events or changes indicate that the asset may be impaired, indicating that the carrying value may not be recoverable. The Corporation completed its most recent annual goodwill impairment test during the fourth quarter of 2024 and concluded, based on current events and circumstances goodwill is not impaired. Details of the Corporation’s goodwill are included in NOTE 7. GOODWILL AND OTHER INTANGIBLES of these Notes to Consolidated Financial Statements. BANK OWNED LIFE INSURANCE (“BOLI”) BOLI policies have been purchased, as well as obtained through acquisitions, on certain current and former employees and directors of the Corporation to offset a portion of the employee benefit costs. The Corporation records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Changes in cash surrender values and death benefits received in excess of cash surrender values are reported in noninterest income. A corporate policy is in place with defined thresholds that limit the amount of credit, interest rate and liquidity risk inherent in a BOLI portfolio. The Corporation actively monitors the overall portfolio performance along with the credit quality of the insurance carriers and the credit quality and yield of the underlying investments. OTHER REAL ESTATE OWNED (“OREO”) OREO consists of assets acquired through, or in lieu of, loan foreclosure and are held for sale. They are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in other real estate owned and foreclosure expenses. DERIVATIVE INSTRUMENTS Derivative instruments, which are recorded as assets or liabilities in the Consolidated Balance Sheets, are carried at fair value and reflects the estimated amounts that would have been received or paid to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information. As part of the asset/liability management program, the Corporation will utilize, from time to time, interest rate floors, caps or swaps to reduce its sensitivity to interest rate fluctuations. Changes in the fair values of derivatives are reported in the consolidated statements of operations or AOCI depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis. Derivatives that qualify for hedge accounting treatment are designated as either: (1) a hedge of the fair value of the recognized asset or liability, or of an unrecognized firm commitment (a fair value hedge); or (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For cash flow hedges, changes in the fair values of the derivative instruments are reported in AOCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in AOCI are reflected in the Consolidated Statements of Income in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, the Corporation establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized in the Consolidated Statements of Income. The Corporation excludes the time value expiration of the hedge when measuring ineffectiveness. The Corporation offers interest rate derivative products (e.g. interest rate swaps) to certain of its high-quality commercial borrowers. This product allows customers to enter into an agreement with the Corporation to swap their variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the risk of changes in the borrower’s interest rate or market price risk. The extension of credit incurred through the execution of these derivative products is subject to the same approvals and rigorous underwriting standards as the related traditional credit product. The Corporation limits its risk exposure to these products by entering into a mirror-image, offsetting swap agreement with a separate, well-capitalized and rated counterparty previously approved by the Credit and Asset Liability Committee. By using these interest rate swap arrangements, the Corporation is also better insulated from the interest rate risk associated with underwriting fixed-rate loans. These derivative contracts are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging , and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the customer and the offsetting swap agreements are recorded (and essentially offset) in noninterest income. The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820, Fair Value Measurements and Disclosures ), resulting in some volatility in earnings each period. 62 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Corporation’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair value of these mortgage banking derivatives are included in net gains and fees on sales of loans. In the normal course of business, the Corporation may decide to settle a forward contract rather than fulfill the contract. Cash received or paid in this settlement manner is included in “Net gains and fees on sales of loans” in the Consolidated Statements of Income and is considered a cost of executing a forward contract. Details of the Corporation’s derivative instruments are included in NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements represent securities the Corporation routinely sells to certain treasury management customers and then repurchases these securities the next day. Securities sold under repurchase agreements are reflected as secured borrowings in the Corporation’s Consolidated Balance Sheets at the amount of cash received in connection with each transaction. Details of the Corporation’s repurchase agreements are included in NOTE 11. BORROWINGS of these Notes to Consolidated Financial Statements. ALLOWANCE FOR CREDIT LOSSES - OFF-BALANCE SHEET CREDIT EXPOSURES The allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Corporation is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Corporation has the unconditional right to cancel the obligation. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. The allowance for off-balance sheet credit exposures is adjusted through the income statement as a component of provision for credit loss. Further information regarding the policies and methodology used to estimate the allowance for credit losses on off-balance sheet credit exposures is detailed in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. REVENUE RECOGNITION Revenue recognition guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Corporation’s revenue-generating transactions are not subject to ASU 2014-09, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the disclosures. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. Descriptions of revenue-generating activities that are within the scope of ASU 2014-09, which are presented in our income statements are as follows: Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed, which is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned monthly, representing the period which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance. Fiduciary activities : This represents monthly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction-based are recognized at the point in time that the transaction is executed. Investment Brokerage Fees : The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party provider on a monthly basis based upon customer activity for the month. The fees are paid to us by the third party on a monthly basis and are recognized when received. Interchange income : The Corporation earns interchange fees from debit and credit cardholder transactions conducted through the Visa and MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrent with the transaction processing services provided to the cardholder. 63 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Gains (Losses) on Sales of OREO : The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. TRANSFERS OF FINANCIAL ASSETS Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered, or in the case of a loan participation, a portion of the asset has been surrendered and meets the definition of a “participating interest.” Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. SHARE-BASED COMPENSATION Stock option and restricted stock award plans are maintained by the Corporation. The compensation costs are recognized for stock options and restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the appropriate service period, which is generally three years . Details of the Corporation’s share-based compensation are included in NOTE 17. SHARE-BASED COMPENSATION of these Notes to Consolidated Financial Statements. INCOME TAX Income tax expense in the Consolidated Statements of Income is the total of the current year income tax due or refundable and changes in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts from the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation files consolidated income tax returns with its subsidiaries. The Corporation is generally no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years before 2021. The Corporation accounts for income taxes under the provisions of ASC 740, Income Taxes , which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Per the guidance in ASC 740, the Corporation has not identified any uncertain tax positions that it believes should be recognized in the financial statements. The Corporation reviews income tax expense and the carrying value of deferred tax assets and liabilities quarterly; as new information becomes available, the balances are adjusted, if applicable. The Corporation’s policy is to recognize interest and penalties related to unrecognized tax benefits, if any, as a component of income tax expense. Details of the Corporation’s income taxes are included in NOTE 19. INCOME TAX of these Notes to Consolidated Financial Statements. NET INCOME PER COMMON SHARE Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options and non-vested restricted stock awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. Details of the Corporation’s net income per share are included in NOTE 20. NET INCOME PER COMMON SHARE of these Notes to Consolidated Financial Statements. RECENT ACCOUNTING CHANGES ADOPTED IN 2024 FASB Accounting Standards Updates - No. 2023-02 - Investments - Equity Method and Joint Ventures (Topic 323) - Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method Summary - The FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method , which is intended to improve the accounting and disclosures for investments in tax credit structures. The ASU is a consensus of the FASB’s Emerging Issues Task Force (“EITF”). The ASU allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU responds to stakeholder feedback that the proportional amortization method provides investors and other allocators of capital with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits. Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures. In recent years, stakeholders asked the FASB to extend the application of the proportional amortization method to qualifying tax equity investments that generate tax credits through other programs, which resulted in the EITF addressing this issue. For public business entities, the amendments became effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments will become effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Corporation adopted this guidance in the first quarter of 2024 and adoption did not have a significant impact on the Corporation’s financial statements or disclosures. 64 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) FASB Accounting Standards Updates - No. 2023-07 - Segment Reporting (Topic 280) — Improvements to Reportable Segment Disclosure Summary - The FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosure , which is intended to improve disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses. The key amendments: • Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss. • Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss. • Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by FASB ASC Topic 280, Segment Reporting , in interim periods. • Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit or loss. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. • Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. • Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280. ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , applies to all public entities that are required to report segment information in accordance with Topic 280. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Corporation adopted this guidance in 2024 and adoption did not have a significant impact on the Corporation’s financial statements or disclosures, as the Corporation has one operating segment. See NOTE 22. SEGMENT INFORMATION of these Notes to Consolidated Financial Statements for disclosure. New Accounting Pronouncements Not Yet Adopted The Corporation continually monitors potential accounting pronouncements and the following pronouncements have been deemed to have the most applicability to the Corporation's financial statements: FASB Accounting Standards Update - No. 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures Summary - The FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures in the fourth quarter of 2023. This ASU is intended to enhance income tax disclosures to address investor requests for more information about the tax risks and opportunities present in an entity’s worldwide operations. The two primary enhancements disaggregate existing income tax disclosures related to the effective tax rate reconciliation and income taxes paid. These amendments require that public business entities on an annual basis disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The amendments also require that all entities disclose on an annual basis the amount of income taxes paid (net of refunds received) disaggregated by federal, state and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid (net of refunds received). For public business entities, the amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issue. The amendments should be applied on a prospective basis. The Corporation is assessing the terms of this guidance, but adoption of the standard is not expected to have a significant impact on the Corporation’s financial statements or disclosures. FASB Accounting Standards Update - No. 2024-03 - Income Statement - Reporting Comprehensive Income-Expense Disaggregation Disclosures Summary - The FASB issued ASU No. 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures in the fourth quarter of 2024. This ASU requires public business entities to disclose specific information about certain costs and expenses in the notes to its financial statements for interim and annual reporting periods. The objective of the disclosure requirements is to provide disaggregated information about a public business entity's expenses to help investors (a) better understand the entity's performance, (b) better assess the entity's prospects for future cash flows, and (c) compare an entity's performance over time and with that of other entities. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Corporation is assessing the terms of this guidance, but adoption of the standard is not expected to have a significant impact on the Corporation’s financial statements or disclosures. 65 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 2 ACQUISITIONS AND DIVESTITURES Old Second National Bank Branch Sale On December 6, 2024, the Bank completed its sale of five branches in the suburban Chicago market to Old Second National Bank (“Old Second”). Pursuant to the terms of the branch sale agreement, Old Second assumed certain deposit liabilities and acquired certain loans, as well as cash and premises and equipment. The Bank recognized a gain on sale of $ 20.0 million related to the branch sale for the year ended December 31, 2024 . The following table summarizes the assets and liabilities related to the branch sale: December 6, 2024 Assets Cash and due from banks $ 419 Loans 7,410 Premises and equipment 3,233 Interest receivable and other assets 21 Total Assets $ 11,083 Liabilities Deposits $ 267,448 Interest payable and other liabilities 692 Total Liabilities 268,140 Level One Bancorp, Inc. On April 1, 2022, the Corporation acquired 100 percent of Level One Bancorp, Inc. (“Level One”). Level One, a Michigan corporation, merged with and into the Corporation (the “Merger”), whereupon the separate corporate existence of Level One ceased and the Corporation survived. Immediately following the Merger, Level One’s wholly owned subsidiary, Level One Bank, merged with and into the Bank, with the Bank as the surviving bank. Level One was headquartered in Farmington Hills, Michigan and had 17 banking centers serving the Michigan market. Pursuant to the merger agreement, each common shareholder of Level One received, for each outstanding share of Level One common stock held, (a) a 0.7167 share of the Corporation’s common stock, and (b) a cash payment of $ 10.17 . The Corporation issued 5.6 million shares of the Corporation’s common stock and paid $ 79.3 million in cash, in exchange for all outstanding shares of Level One common stock. Additionally, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $ 2,500 per share, in exchange for the outstanding Level One Series B preferred stock. Likewise, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One Series B preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock (Nasdaq: FRMEP). The Corporation engaged in this transaction with the expectation that it would be accretive to income and add to the existing market area in Michigan that has a demographic profile consistent with many of the current Midwest markets served by the Bank. Goodwill resulted from this transaction due to the expected synergies and economies of scale. 66 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change based on the timing of the transaction, the purchase price for the Level One acquisition is detailed in the following table. Fair Value Cash and due from banks $ 217,104 Investment securities available for sale 370,071 Investment securities held to maturity 587 Loans held for sale 7,951 Loans 1,627,423 Allowance for credit losses - loans ( 16,599 ) Premises and equipment 11,848 Federal Home Loan Bank stock 11,688 Interest receivable 7,188 Cash surrender value of life insurance 30,143 Tax asset, deferred and receivable 16,223 Other assets 41,690 Deposits ( 1,930,790 ) Securities sold under repurchase agreements ( 1,521 ) Federal Home Loan Bank advances ( 160,043 ) Subordinated debentures ( 32,631 ) Interest payable ( 1,065 ) Other liabilities ( 42,813 ) Net tangible assets acquired 156,454 Other intangibles 18,642 Goodwill 166,617 Purchase price $ 341,713 The Corporation performed an evaluation of the loan portfolio in which there were loans that, at acquisition, had more than an insignificant amount of credit quality deterioration and were classified as purchased credit deteriorated (“PCD”). Details of the PCD loans are included in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. Of the total purchase price, $ 18.6 million has been allocated to other intangible assets. Approximately $ 17.2 million was allocated to a core deposit intangible, which will be amortized over its estimated life of 10 years. Approximately $ 1.4 million was allocated to a non-compete intangible, which was amortized over its estimated life of 2 years. The remaining purchase price has been allocated to goodwill, which is not deductible for tax purposes. Pro Forma Financial Information The results of operations of Level One have been included in the Corporation’s consolidated financial statements since the acquisition date. The following schedule includes pro forma results for the year ended December 31, 2022 as if the Level One acquisition occurred as of the beginning of the periods presented. Year Ended December 31, 2022 Total revenue (net interest income plus other income) $ 654,313 Net Income $ 221,631 Net income available to common shareholders $ 219,756 Earnings per share: Basic $ 3.72 Diluted $ 3.70 The pro forma information includes adjustments for interest income on loans and investment securities, interest expense on deposits and borrowings, premises expense for the banking centers acquired and amortization of intangibles arising from the transaction and the related income tax effects. The pro forma information includes operating revenue of $ 56.9 million from Level One since the date of acquisition, $ 16.8 million of provision expense related to CECL Day 1 adjustments for PCD loans, and $ 16.5 million, net of tax, of acquisition-related expenses. The pro forma information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of January 1, 2022, nor is it intended to be a projection of future results. 67 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 3 CASH AND CASH EQUIVALENTS AND INTEREST-BEARING DEPOSITS At December 31, 2024, the Corporation’s noninterest bearing deposits, included in cash and cash equivalents, and interest-bearing deposits held at other institutions exceeded the $250,000 federally insured limits by approximately $ 35.8 million . Each correspondent bank’s financial performance and market rating are reviewed on a quarterly basis to ensure the Corporation has deposits only at institutions providing minimal risk for those exceeding the federally insured limits. Additionally, the Corporation had approximately $ 283.4 million at the Federal Home Loan Bank and Federal Reserve Bank, which are government-sponsored entities not insured by the FDIC. The Corporation has historically been required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. However, the Federal Reserve announced on March 15, 2020 that in order to support the flow of credit to households and businesses during the COVID-19 pandemic, reserve requirement ratios would move to zero effective March 26, 2020. The reserve requirement ratios remained at zero as of December 31, 2024. NOTE 4 INVESTMENT SECURITIES The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale as of December 31, 2024 and December 31, 2023. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale at December 31, 2024 U.S. Government-sponsored agency securities $ 95,462 $ — $ 16,081 $ 79,381 State and municipal 996,541 19 133,386 863,174 U.S. Government-sponsored mortgage-backed securities 519,943 403 88,724 431,622 Corporate obligations 12,960 — 662 12,298 Total available for sale $ 1,624,906 $ 422 $ 238,853 $ 1,386,475 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale at December 31, 2023 U.S. Government-sponsored agency securities $ 111,521 $ — $ 16,214 $ 95,307 State and municipal 1,181,029 364 116,222 1,065,171 U.S. Government-sponsored mortgage-backed securities 541,343 462 86,990 454,815 Corporate obligations 12,947 — 1,128 11,819 Total available for sale $ 1,846,840 $ 826 $ 220,554 $ 1,627,112 The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity as of December 31, 2024 and December 31, 2023. Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized Losses Fair Value Held to maturity at December 31, 2024 U.S. Government-sponsored agency securities $ 345,531 $ — $ 345,531 $ — $ 63,112 $ 282,419 State and municipal 1,085,921 245 1,085,676 299 185,784 900,436 U.S. Government-sponsored mortgage-backed securities 641,513 — 641,513 — 102,343 539,170 Foreign investment 1,500 — 1,500 — 5 1,495 Total held to maturity $ 2,074,465 $ 245 $ 2,074,220 $ 299 $ 351,244 $ 1,723,520 Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized Losses Fair Value Held to maturity at December 31, 2023 U.S. Government-sponsored agency securities $ 374,002 $ — $ 374,002 $ — $ 64,159 $ 309,843 State and municipal 1,099,201 245 1,098,956 1,625 152,113 948,713 U.S. Government-sponsored mortgage-backed securities 709,794 — 709,794 — 99,448 610,346 Foreign investment 1,500 — 1,500 — 28 1,472 Total held to maturity $ 2,184,497 $ 245 $ 2,184,252 $ 1,625 $ 315,748 $ 1,870,374 68 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Accrued interest on investment securities available for sale and held to maturity at December 31, 2024 and December 31, 2023 of $ 22.5 million and $ 25.2 million, respectively, is included in the Interest Receivable line on the Corporation’s Consolidated Balance Sheets. The total amount of accrued interest is excluded from the amortized cost of available for sale and held to maturity securities presented above. In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive loss. Adjustments to the allowance are reported in the income statement as a component of the provision for credit losses. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality. The allowance for credit losses on investment securities held to maturity is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in the income statement as a component of the provision for credit losses. The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and U.S. Government-sponsored mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation’s portfolio have been insignificant. Furthermore, as of December 31, 2024, there were no past due principal and interest payments associated with these securities. The balance of the allowance for credit losses on investment securities held to maturity remained unchanged at $ 245,000 as of December 31, 2024 and December 31, 2023 based on applying the long-term historical credit rate, as published by Moody’s, for similar rated securities. On a quarterly basis, the Corporation monitors the credit quality of investment securities held to maturity through the use of credit ratings. The following table summarizes the amortized cost of investment securities held to maturity at December 31, 2024, aggregated by credit quality indicator. Held to Maturity U.S. Government-sponsored agency securities (1) State and municipal U.S. Government-sponsored mortgage-backed securities (1) Foreign investment Total Credit Rating: Aaa $ 345,531 $ 120,801 $ 641,513 $ — $ 1,107,845 Aa1 — 148,923 — — 148,923 Aa2 — 184,341 — — 184,341 Aa3 — 185,166 — — 185,166 A1 — 65,665 — — 65,665 A2 — 20,317 — — 20,317 Non-rated — 360,708 — 1,500 362,208 Total $ 345,531 $ 1,085,921 $ 641,513 $ 1,500 $ 2,074,465 (1) U.S. Government agency securities and U.S. Government mortgage-backed securities are included within the Aaa credit rating category due to their explicit or implicit government guarantees, which provide a high level of assurance regarding the timely collection of principal and interest payments. 69 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables summarize, as of December 31, 2024 and December 31, 2023, investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and length of time in a continuous unrealized loss position. Less than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Investment securities available for sale at December 31, 2024 U.S. Government-sponsored agency securities $ — $ — $ 79,381 $ 16,081 $ 79,381 $ 16,081 State and municipal 40,398 2,115 820,663 131,271 861,061 133,386 U.S. Government-sponsored mortgage-backed securities 82,724 1,660 318,310 87,064 401,034 88,724 Corporate obligations — — 12,268 662 12,268 662 Total investment securities available for sale $ 123,122 $ 3,775 $ 1,230,622 $ 235,078 $ 1,353,744 $ 238,853 Less than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Investment securities available for sale at December 31, 2023 U.S. Government-sponsored agency securities $ — $ — $ 95,307 $ 16,214 $ 95,307 $ 16,214 State and municipal 55,514 1,076 963,584 115,146 1,019,098 116,222 U.S. Government-sponsored mortgage-backed securities 11,493 25 422,868 86,965 434,361 86,990 Corporate obligations — — 11,788 1,128 11,788 1,128 Total investment securities available for sale $ 67,007 $ 1,101 $ 1,493,547 $ 219,453 $ 1,560,554 $ 220,554 The following table summarizes investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and the number of securities in the portfolio as of the dates indicated. Gross Unrealized Losses Number of Securities Investment securities available for sale at December 31, 2024 U.S. Government-sponsored agency securities $ 16,081 12 State and municipal 133,386 611 U.S. Government-sponsored mortgage-backed securities 88,724 127 Corporate obligations 662 10 Total investment securities available for sale $ 238,853 760 Gross Unrealized Losses Number of Securities Investment securities available for sale at December 31, 2023 U.S. Government-sponsored agency securities $ 16,214 14 State and municipal 116,222 691 U.S. Government-sponsored mortgage-backed securities 86,990 150 Corporate obligations 1,128 10 Total investment securities available for sale $ 220,554 865 The unrealized losses in the Corporation’s investment portfolio were the result of changes in interest rates and not credit quality. As a result, the Corporation expects to recover the amortized cost basis over the term of the securities. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Certain investment securities available for sale are reported in the financial statements at an amount less than their historical cost as indicated in the table below. December 31, 2024 December 31, 2023 Investments available for sale reported at less than historical cost: Historical cost $ 1,592,597 $ 1,781,108 Fair value 1,353,744 1,560,554 Gross unrealized losses $ 238,853 $ 220,554 Percent of the Corporation's investments available for sale in an unrealized loss position 97.6 % 95.9 % 70 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) In determining the fair value of the investment securities portfolio, the Corporation utilizes a third party for portfolio accounting services, including market value input, for those securities classified as Level 1 and Level 2 in the fair value hierarchy. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor classified these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis; and (b) actual gains or losses resulting from the sale of certain securities has proven the data to be accurate over time. Fair value of securities classified as Level 3 in the valuation hierarchy was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active. The amortized cost and fair value of investment securities available for sale and held to maturity at December 31, 2024 and December 31, 2023, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Maturity Distribution at December 31, 2024 Due in one year or less $ 1,800 $ 1,795 $ 5,268 $ 5,254 Due after one through five years 12,189 11,857 124,004 117,999 Due after five through ten years 168,338 151,467 174,533 154,533 Due after ten years 922,636 789,734 1,129,147 906,564 1,104,963 954,853 1,432,952 1,184,350 U.S. Government-sponsored mortgage-backed securities 519,943 431,622 641,513 539,170 Total Investment Securities $ 1,624,906 $ 1,386,475 $ 2,074,465 $ 1,723,520 Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Maturity Distribution at December 31, 2023 Due in one year or less $ 1,390 $ 1,382 $ 3,041 $ 3,043 Due after one through five years 24,899 23,372 118,592 111,723 Due after five through ten years 127,948 120,385 135,805 126,461 Due after ten years 1,151,260 1,027,158 1,217,265 1,018,801 1,305,497 1,172,297 1,474,703 1,260,028 U.S. Government-sponsored mortgage-backed securities 541,343 454,815 709,794 610,346 Total Investment Securities $ 1,846,840 $ 1,627,112 $ 2,184,497 $ 1,870,374 Securities with a carrying value of approximately $ 3.3 billion and $ 1.8 billion were pledged at December 31, 2024 and 2023, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law. Pledged securities increased from December 31, 2023 as a result of the Corporation pledging additional securities to the Discount Window at the Federal Reserve Bank to be used as an alternative funding source, if needed. The book value of securities pledged and available under agreements to repurchase amounted to $ 173.0 million at December 31, 2024 and $ 181.4 million at December 31, 2023. Gross gains and losses on the sales of investment securities available for sale for the years indicated are shown below. 2024 2023 2022 Sales and redemptions of investment securities available for sale: Gross gains $ 8 $ 759 $ 1,264 Gross losses ( 20,765 ) ( 7,689 ) ( 70 ) Net gains (losses) of sales and redemptions of investment securities available for sale $ ( 20,757 ) $ ( 6,930 ) $ 1,194 71 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 5 LOANS AND ALLOWANCE FOR CREDIT LOSSES The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. The following tables show the composition of the loan portfolio and credit quality characteristics by collateral classification, excluding loans held for sale. Loans held for sale at December 31, 2024 and December 31, 2023, were $ 18.7 million and $ 18.9 million, respectively. The following table illustrates the composition of the Corporation’s loan portfolio by loan class as of the dates indicated: December 31, 2024 December 31, 2023 Commercial and industrial loans $ 4,114,292 $ 3,670,948 Agricultural land, production and other loans to farmers 256,312 263,414 Real estate loans: Construction 792,144 957,545 Commercial real estate, non-owner occupied 2,274,016 2,400,839 Commercial real estate, owner occupied 1,157,944 1,162,083 Residential 2,374,729 2,288,921 Home equity 659,811 617,571 Individuals' loans for household and other personal expenditures 166,028 168,388 Public finance and other commercial loans 1,059,083 956,318 Loans $ 12,854,359 $ 12,486,027 Credit Quality As part of the ongoing monitoring of the credit quality of the Corporation’s loan portfolio, management tracks certain credit quality indicators including trends related to: (i) the level of criticized commercial loans, (ii) net charge-offs, (iii) nonperforming loans, (iv) covenant failures and (v) the general national and local economic conditions. The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows: • Pass - Loans that are considered to be of acceptable credit quality. • Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification. • Substandard - Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. • Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable. • Loss – Loans that are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted. Loans will be classified as Loss when it is neither practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 72 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables summarize the risk grading of the Corporation’s loan portfolio by loan class and gross charge-offs by year of origination for the years indicated. Consumer loans are not risk graded. For the purposes of this disclosure, the consumer loans are classified in the following manner: loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. December 31, 2024 Term Loans (amortized cost basis by origination year) 2024 2023 2022 2021 2020 Prior Revolving loans amortized cost basis Revolving loans converted to term Total Commercial and industrial loans Pass $ 1,314,174 $ 493,138 $ 196,877 $ 158,215 $ 55,639 $ 49,554 $ 1,576,409 $ 130 $ 3,844,136 Special Mention 14,982 13,282 20,837 1,097 2,222 348 41,187 — 93,955 Substandard 29,238 32,285 26,973 7,249 1,081 1,134 75,649 513 174,122 Doubtful 1,473 606 — — — — — — 2,079 Total Commercial and industrial loans 1,359,867 539,311 244,687 166,561 58,942 51,036 1,693,245 643 4,114,292 Current period gross write-offs 1,242 39,087 341 8,605 500 424 — — 50,199 Agricultural land, production and other loans to farmers Pass 28,600 23,070 30,518 26,442 27,105 29,930 84,502 — 250,167 Special Mention 169 — 245 — 446 422 528 — 1,810 Substandard 2,554 48 800 682 34 81 136 — 4,335 Total Agricultural land, production and other loans to farmers 31,323 23,118 31,563 27,124 27,585 30,433 85,166 — 256,312 Current period gross write-offs — — — — — — — — — Real estate loans: Construction Pass 241,622 203,829 114,794 31,864 6,398 8,549 12,836 — 619,892 Special Mention 74,879 21,853 19,019 15,214 — 40 — — 131,005 Substandard 22,305 — 18,292 — — — — — 40,597 Doubtful — — — 650 — — — — 650 Total Construction 338,806 225,682 152,105 47,728 6,398 8,589 12,836 — 792,144 Current period gross write-offs — — — — — — — — — Commercial real estate, non-owner occupied Pass 383,279 275,907 342,442 406,289 327,372 278,362 19,863 — 2,033,514 Special Mention 79,440 9,051 35,230 12,975 5,287 28,200 — — 170,183 Substandard 34,215 2,506 6,737 6,656 18,607 1,598 — — 70,319 Total Commercial real estate, non-owner occupied 496,934 287,464 384,409 425,920 351,266 308,160 19,863 — 2,274,016 Current period gross write-offs — 339 3 — — 1 — — 343 Commercial real estate, owner occupied Pass 194,703 141,964 164,725 217,319 198,314 127,431 31,573 — 1,076,029 Special Mention 1,887 11,013 7,555 9,910 8,603 1,951 460 — 41,379 Substandard 13,310 7,669 3,189 11,294 1,522 3,552 — — 40,536 Total Commercial real estate, owner occupied 209,900 160,646 175,469 238,523 208,439 132,934 32,033 — 1,157,944 Current period gross write-offs — — — — 9 — — — 9 Residential Pass 221,016 413,552 672,713 397,192 326,154 293,785 8,887 13 2,333,312 Special Mention 1,528 1,953 6,228 4,102 2,891 3,152 150 — 20,004 Substandard 1,306 1,912 8,849 3,989 1,216 3,794 347 — 21,413 Total Residential 223,850 417,417 687,790 405,283 330,261 300,731 9,384 13 2,374,729 Current period gross write-offs — 173 779 136 20 288 — — 1,396 Home equity Pass 6,788 4,354 24,810 51,313 10,486 3,976 535,132 12,124 648,983 Special Mention 38 — 375 285 297 69 4,568 442 6,074 Substandard 61 — 572 815 — 96 2,244 966 4,754 Total Home Equity 6,887 4,354 25,757 52,413 10,783 4,141 541,944 13,532 659,811 Current period gross write-offs — 10 35 22 — 267 — — 334 Individuals' loans for household and other personal expenditures Pass 40,819 21,867 31,356 10,520 2,276 4,693 53,180 180 164,891 Special Mention 153 234 347 175 59 40 128 — 1,136 Substandard — — — — — — — 1 1 Total Individuals' loans for household and other personal expenditures 40,972 22,101 31,703 10,695 2,335 4,733 53,308 181 166,028 Current period gross write-offs 208 920 523 184 47 80 — — 1,962 Public finance and other commercial loans Pass 161,072 53,750 203,884 195,066 146,377 298,802 132 — 1,059,083 Total Public finance and other commercial loans 161,072 53,750 203,884 195,066 146,377 298,802 132 — 1,059,083 Loans $ 2,869,611 $ 1,733,843 $ 1,937,367 $ 1,569,313 $ 1,142,386 $ 1,139,559 $ 2,447,911 $ 14,369 $ 12,854,359 Total current period gross charge-offs $ 1,450 $ 40,529 $ 1,681 $ 8,947 $ 576 $ 1,060 $ — $ — $ 54,243 73 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) December 31, 2023 Term Loans (amortized cost basis by origination year) 2023 2022 2021 2020 2019 Prior Revolving loans amortized cost basis Revolving loans converted to term Total Commercial and industrial loans Pass $ 1,175,967 $ 474,601 $ 253,148 $ 86,226 $ 47,910 $ 45,020 $ 1,393,756 $ 60 $ 3,476,688 Special Mention 34,356 3,911 1,546 5,149 2,986 241 45,994 — 94,183 Substandard 12,311 20,245 17,733 2,479 1,507 1,512 40,449 144 96,380 Doubtful 857 — — — — — 2,840 — 3,697 Total Commercial and industrial loans 1,223,491 498,757 272,427 93,854 52,403 46,773 1,483,039 204 3,670,948 Current period gross write-offs 13,973 2,711 576 5,665 78 261 — — 23,264 Agricultural land, production and other loans to farmers Pass 35,633 38,145 31,511 31,048 12,995 25,462 87,534 — 262,328 Special Mention — 266 — — — 122 — — 388 Substandard 58 150 — 454 — 36 — — 698 Total Agricultural land, production and other loans to farmers 35,691 38,561 31,511 31,502 12,995 25,620 87,534 — 263,414 Current period gross write-offs — — — — — — — — — Real estate loans: Construction Pass 403,578 267,587 198,350 8,372 7,723 2,357 11,735 — 899,702 Special Mention 25,894 — — 20,846 — — — — 46,740 Substandard 1,451 4,330 5,322 — — — — — 11,103 Total Construction 430,923 271,917 203,672 29,218 7,723 2,357 11,735 — 957,545 Current period gross write-offs — — — — — — — — — Commercial real estate, non-owner occupied Pass 373,378 504,280 535,327 418,553 141,320 200,821 16,744 — 2,190,423 Special Mention 76,382 21,145 7,005 4,531 19,479 27,941 37 — 156,520 Substandard 20,358 10,537 219 20,236 — 2,299 247 — 53,896 Total Commercial real estate, non-owner occupied 470,118 535,962 542,551 443,320 160,799 231,061 17,028 — 2,400,839 Current period gross write-offs — 66 — — — — — — 66 Commercial real estate, owner occupied Pass 176,750 199,821 256,346 263,522 99,180 77,485 27,369 — 1,100,473 Special Mention 6,712 5,034 9,319 2,460 919 2,902 514 — 27,860 Substandard 18,092 3,712 4,183 4,545 289 2,929 — — 33,750 Total Commercial real estate, owner occupied 201,554 208,567 269,848 270,527 100,388 83,316 27,883 — 1,162,083 Current period gross write-offs 48 — — — 2 — — — 50 Residential Pass 395,363 695,056 442,495 365,297 98,654 254,718 4,988 83 2,256,654 Special Mention 2,167 5,591 3,202 1,924 1,065 4,837 200 81 19,067 Substandard 804 3,708 2,529 1,199 866 4,063 31 — 13,200 Total Residential 398,334 704,355 448,226 368,420 100,585 263,618 5,219 164 2,288,921 Current period gross write-offs 101 252 208 3 3 94 — — 661 Home equity Pass 9,375 29,784 61,591 11,084 1,092 3,875 484,330 5,837 606,968 Special Mention — 715 — 1,092 15 2 5,031 149 7,004 Substandard 63 — 727 — — 123 2,589 97 3,599 Total Home Equity 9,438 30,499 62,318 12,176 1,107 4,000 491,950 6,083 617,571 Current period gross write-offs 69 213 224 149 193 1,596 — — 2,444 Individuals' loans for household and other personal expenditures Pass 35,781 49,295 28,387 6,726 2,070 5,904 38,619 772 167,554 Special Mention 184 246 138 69 — 14 176 — 827 Substandard — 6 — — 1 — — — 7 Total Individuals' loans for household and other personal expenditures 35,965 49,547 28,525 6,795 2,071 5,918 38,795 772 168,388 Current period gross write-offs 147 770 342 77 62 156 — — 1,554 Public finance and other commercial loans Pass 65,357 208,347 204,863 155,132 91,619 229,355 1,645 — 956,318 Total Public finance and other commercial loans 65,357 208,347 204,863 155,132 91,619 229,355 1,645 — 956,318 Loans $ 2,870,871 $ 2,546,512 $ 2,063,941 $ 1,410,944 $ 529,690 $ 892,018 $ 2,164,828 $ 7,223 $ 12,486,027 Total current period gross charge-offs $ 14,338 $ 4,012 $ 1,350 $ 5,894 $ 338 $ 2,107 $ — $ — $ 28,039 74 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Total past due loans equaled $ 116.2 million as of December 31, 2024, a $ 37.0 million increase from the total of $ 79.2 million for December 31, 2023. At December 31, 2024, 30-59 Days Past Due loans totaled $ 35.8 million, an increase of $ 1.7 million from December 31, 2023. At December 31, 2024, 60-89 Days Past Due loans totaled $ 32.6 million, an increase of $ 21.4 million from December 31, 2023. Of the $ 21.4 million increase, $ 20.0 million was in the construction loan class. At December 31, 2024, 90 Days or More Past Due loans totaled $ 47.8 million, an increase of $ 13.8 million from December 31, 2023. The primary increases were $ 2.9 million , $ 4.0 million , and $ 6.7 million , in the commercial and industrial, construction and residential loan classes, respectively. The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, as of the dates indicated: December 31, 2024 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due And Accruing Commercial and industrial loans $ 4,096,605 $ 7,428 $ 473 $ 9,786 $ 4,114,292 $ 2,010 Agricultural land, production and other loans to farmers 256,148 164 — — 256,312 — Real estate loans: Construction 761,819 4,332 22,005 3,988 792,144 3,683 Commercial real estate, non-owner occupied 2,259,549 2,407 1,718 10,342 2,274,016 — Commercial real estate, owner occupied 1,153,861 3,783 — 300 1,157,944 — Residential 2,337,002 12,302 6,606 18,819 2,374,729 208 Home equity 649,238 4,431 1,569 4,573 659,811 — Individuals' loans for household and other personal expenditures 164,891 926 210 1 166,028 1 Public finance and other commercial loans 1,059,083 — — — 1,059,083 — Loans $ 12,738,196 $ 35,773 $ 32,581 $ 47,809 $ 12,854,359 $ 5,902 December 31, 2023 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due And Accruing Commercial and industrial loans $ 3,657,447 $ 5,021 $ 1,622 $ 6,858 $ 3,670,948 $ 86 Agricultural land, production and other loans to farmers 263,414 — — — 263,414 — Real estate loans: Construction 955,588 — 1,957 — 957,545 — Commercial real estate, non-owner occupied 2,376,184 12,995 195 11,465 2,400,839 — Commercial real estate, owner occupied 1,161,869 — 104 110 1,162,083 — Residential 2,259,496 11,810 5,472 12,143 2,288,921 — Home equity 608,948 3,614 1,647 3,362 617,571 52 Individuals' loans for household and other personal expenditures 167,553 635 192 8 168,388 — Public finance and other commercial loans 956,284 — — 34 956,318 34 Loans $ 12,406,783 $ 34,075 $ 11,189 $ 33,980 $ 12,486,027 $ 172 Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in the prior year, if any, is charged to the allowance for credit losses. Payments subsequently received on non-accrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance. The following table summarizes the Corporation’s non-accrual loans by loan class as of the dates indicated: December 31, 2024 December 31, 2023 Nonaccrual Loans Nonaccrual Loans with no Allowance for Credit Losses Nonaccrual Loans Nonaccrual Loans with no Allowance for Credit Losses Commercial and industrial loans $ 8,090 $ 4,937 $ 9,050 $ 1,015 Agricultural land, production and other loans to farmers 75 — 58 — Real estate loans: Construction 24,629 22,650 520 — Commercial real estate, non-owner occupied 12,118 10,153 11,932 11,095 Commercial real estate, owner occupied 2,440 1,904 3,041 2,257 Residential 21,491 — 25,140 — Home equity 4,924 — 3,820 — Individuals' loans for household and other personal expenditures 6 — 19 — Loans $ 73,773 $ 39,644 $ 53,580 $ 14,367 75 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. There was no interest income recognized on non-accrual loans for the twelve months ended December 31, 2024 and 2023. Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. The following tables present the amortized cost basis of collateral dependent loans by loan class and their respective collateral type, which are individually evaluated to determine expected credit losses, for December 31, 2024 and 2023. The total collateral dependent loans for December 31, 2024 increased $ 24.1 million from December 31, 2023. The primary changes were related to an increase of $ 22.6 million and $ 10.1 million, respectively, in the construction and commercial real estate, non-owner occupied loan classes, which was offset by a decrease of $ 8.6 million in the commercial and industrial loan class. December 31, 2024 Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans Commercial and industrial loans $ — $ — $ 23,455 $ 23,455 $ 7,803 Real estate loans: Construction — 22,652 — 22,652 — Commercial real estate, non-owner occupied 27,583 — — 27,583 4,295 Commercial real estate, owner occupied 9,748 — — 9,748 — Residential — 1,174 — 1,174 189 Home equity — 201 — 201 25 Loans $ 37,331 $ 24,027 $ 23,455 $ 84,813 $ 12,312 December 31, 2023 Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans Commercial and industrial loans $ — $ — $ 32,029 $ 32,029 $ 11,474 Real estate loans: Construction — 7 — 7 — Commercial real estate, non-owner occupied 17,516 — — 17,516 35 Commercial real estate, owner occupied 9,452 — — 9,452 — Residential — 1,439 — 1,439 230 Home equity — 223 — 223 30 Loans $ 26,968 $ 1,669 $ 32,029 $ 60,666 $ 11,769 76 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) In certain situations, the Corporation may modify the terms of a loan to a debtor experiencing financial difficulty. The modifications may include principal forgiveness, interest rate reductions, payment delays, term extensions or combinations of the above. The following table presents the amortized cost basis of loans at December 31, 2024 and 2023 that were both experiencing financial difficulty and modified during the year ended December 31, 2024 and 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below. Year Ended December 31, 2024 Loan Modifications Made to Borrowers Experiencing Financial Difficulty Payment Delay Term Extension Interest Rate Reduction Combination Payment Delay & Term Extension Combination Interest Rate Reduction & Term Extension Combination Interest Rate Reduction, Term Extension, & Payment Delay % of Total Class of Financing Receivable Commercial and industrial loans $ 11,073 $ 19,152 $ 246 $ — $ 68 $ — 0.74 % Agricultural land, production and other loans to farmers 2,230 — — — — — 0.87 % Real estate loans: Construction — 2,393 — 22,000 — — 3.08 % Commercial real estate, non-owner occupied — 18,933 — — — — 0.83 % Commercial real estate, owner occupied — 6,133 — — — — 0.53 % Residential 2,509 340 — 683 43 532 0.17 % Home equity — 61 — 161 — — 0.03 % Total $ 15,812 $ 47,012 $ 246 $ 22,844 $ 111 $ 532 Year Ended December 31, 2023 Loan Modifications Made to Borrowers Experiencing Financial Difficulty Payment Delay Term Extension Combination Payment Delay & Term Extension Combination Interest Rate Reduction & Term Extension % of Total Class of Financing Receivable Commercial and industrial loans $ 857 $ 16,572 $ — $ 231 0.48 % Agricultural land, production and other loans to farmers — 58 — — 0.02 % Real estate loans: Construction — 11 — — — % Commercial real estate, non-owner occupied — 11,823 — 7,657 0.81 % Commercial real estate, owner occupied 5,540 10,123 — 71 1.35 % Residential — 129 469 — 0.03 % Home equity — 63 — 29 0.01 % Total $ 6,397 $ 38,779 $ 469 $ 7,988 77 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the year ended December 31, 2024 and 2023. Year Ended December 31, 2024 Financial Effect of Loan Modifications Payment Delay Term Extension Interest Rate Reduction Combination Payment Delay & Term Extension Combination Interest Rate Reduction & Term Extension Combination Interest Rate Reduction, Term Extension, & Payment Delay Commercial and industrial loans Provided payment deferrals with weighted average delayed amounts of $ 180,000 . Extended loans by a weighted average of 8 months. Reduced the weighted average contractual interest rate from 9.00 % to 8.00 %. Reduced the weighted average contractual interest rate from 10.24 % to 7.90 %. Extended loans by a weighted average of 67 months. Agricultural land, production and other loans to farmers Provided payment deferrals with weighted average delayed amounts of $ 17,000 . Real estate loans: Construction Extended loans by a weighted average of 6 months. Provided payment deferrals with weighted average delayed amounts of $ 475,000 . Extended loans by a weighted average of 2 months. Commercial real estate, non-owner occupied Extended loans by a weighted average of 16 months. Commercial real estate, owner occupied Extended loans by a weighted average of 12 months. Residential Provided payment deferrals with weighted average delayed amounts of $ 23,000 . Extended loans by a weighted average of 11 months. Provided payment deferrals with weighted average delayed amounts of $ 8,000 . Extended loans by a weighted average of 152 months. Reduced the weighted average contractual interest rate from 8.00 % to 6.00 %. Extended loans by a weighted average of 120 months. Reduced the weighted average contractual interest rate from 5.74 % to 4.02 %. Extended loans by a weighted average of 90 months. Provided payment deferrals with weighted average delayed amounts of $ 13,000 . Home equity Extended loans by a weighted average of 5 months. Provided payment deferrals with weighted average delayed amounts of $ 7,800 . Extended loans by a weighted average of 60 months. 78 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Year Ended December 31, 2023 Financial Effect of Loan Modifications Payment Delay Term Extension Combination Payment Delay & Term Extension Combination Interest Rate Reduction & Term Extension Commercial and industrial loans Provided payment deferrals with weighted average delayed amounts of $ 24,000 . Extended loans by a weighted average of 10 months. Reduced the weighted average contractual interest rate from 9.67 % to 7.39 %. Extended loans by a weighted average of 13 months. Agricultural land, production and other loans to farmers Extended loans by a weighted average of 144 months. Real estate loans: Construction Extended loans by a weighted average of 24 months. Commercial real estate, non-owner occupied Extended loans by a weighted average of 11 months. Reduced the weighted average contractual interest rate from 8.57 % to 7.89 %. Extended loans by a weighted average of 34 months. Commercial real estate, owner occupied Provided payment deferrals with weighted average delayed amounts of $ 4.5 million. Extended loans by a weighted average of 6 months. Reduced the weighted average contractual interest rate from 10.25 % to 6.61 %. Extended loans by a weighted average of 114 months. Residential Extended loans by a weighted average of 6 months. Provided payment deferrals with weighted average delayed amounts of $ 3,400 . Extended loans by a weighted average of 3 months. Home equity Extended loans by a weighted average of 7 months. Reduced the weighted average contractual interest rate from 9.25 % to 7.25 %. Extended loans by a weighted average of 240 months. 79 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The Corporation closely monitors the performance of financial difficulty modifications to understand the effectiveness of its efforts. The following tables present the performance of financial difficulty modifications in the twelve months following modification. Year Ended December 31, 2024 Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Commercial and industrial loans $ 26,208 $ 2,858 $ — $ 1,473 $ 30,539 Agricultural land, production and other loans to farmers 2,230 — — — 2,230 Real estate loans: Construction 2,393 — 22,000 — 24,393 Commercial real estate, non-owner occupied 10,253 — — 8,680 18,933 Commercial real estate, owner occupied 2,560 3,573 — — 6,133 Residential 2,046 237 365 1,459 4,107 Home equity 222 — — — 222 Total $ 45,912 $ 6,668 $ 22,365 $ 11,612 $ 86,557 Year Ended December 31, 2023 Current 60-89 Days Past Due Total Commercial and industrial loans $ 17,660 $ — $ 17,660 Agricultural land, production and other loans to farmers 58 — 58 Real estate loans: Construction 11 — 11 Commercial real estate, non-owner occupied 19,480 — 19,480 Commercial real estate, owner occupied 15,734 — 15,734 Residential 473 125 598 Home equity 92 — 92 Total $ 53,508 $ 125 $ 53,633 Allowance for Credit Losses on Loans The ACL - Loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over the contractual term. The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge-offs for loans, net of recoveries. Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Loans are charged off against the allowance when the collectibility of the loan is unlikely. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. The allowance represents the Corporation’s best estimate of current expected credit losses on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The current expected credit loss (“CECL”) calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the ACL - Loans is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date. In calculating the ACL - Loans, the loan portfolio was pooled into ten loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Corporation analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. The expected credit losses are measured over the life of each loan segment utilizing the Probability of Default / Loss Given Default methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates. The Corporation sub-segmented certain commercial portfolios by risk level and certain consumer portfolios by delinquency status where appropriate. The Corporation utilized a four-quarter reasonable and supportable economic forecast period followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the loans. Econometric modeling was performed using historical default rates and a selection of economic forecast scenarios published by Moody’s to develop a range of estimated credit losses for which to determine the best credit loss estimate within. Macroeconomic factors utilized in the modeling process include the national unemployment rate, BBB US corporate index, CRE price index and the home price index. 80 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) 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. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other factors, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending, investment, collection and other relevant management staff, (vi) changes in the volume and severity of past due financial assets, the volume of the nonaccrual assets, and the volume and severity of adversely classified or graded assets, (vii) the value of underlying collateral for loans that are not collateral dependent, and (viii) other environmental factors of a borrower such as regulatory, legal and technological considerations, as well as competition and changes in the economic and business conditions that affect the collectability of financial assets. At CECL adoption, the Corporation established certain qualitative factors that were expected to correlate to losses within the loan portfolio. During a scheduled review of qualitative factors in 2023, the Corporation determined there had not been significant evidence of correlation to losses for the qualitative factors that included i) changes in experience, ability and depth of lending management and staff; ii) changes in lending policies and procedures; iii) changes in the quality of the credit review function; iv) portfolio mix and growth; and v) industry concentration. The Corporation decided to refine these qualitative factors in order to improve our ability to assess related risk and enhance our ability to correlate to losses. The Corporation’s evaluation of the qualitative approach resulted in an insignificant change to the ACL – Loans estimate. In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other factors. A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis. The risk characteristics of the Corporation’s portfolio segments are as follows: Commercial Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Corporation monitors commercial real estate loans based on collateral and risk grade criteria, as well as the levels of owner-occupied versus non-owner occupied loans. Construction Construction loans are underwritten utilizing a combination of tools and techniques including feasibility and market studies, independent appraisals and appraisal reviews, absorption and interest rate sensitivity analysis as well as the financial analysis of the developer and all guarantors. Construction loans are monitored by either in house or third party inspectors limiting advances to a percentage of costs or stabilized project value. These loans frequently involve the disbursement of significant funds with the repayment dependent upon the successful completion and, where necessary, the future stabilization of the project. The predominant inherent risk of this portfolio is associated with the borrower’s ability to successfully complete a project on time, within budget and stabilize the projected as originally projected. Consumer and Residential With respect to residential loans that are secured by 1-4 family residences, which are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans, such as small installment loans and certain lines of credit, are unsecured. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers and can also be impacted by changes in property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. The ACL - Loans decreased $ 12.2 million during the year ended December 31, 2024. The allowance decreased primarily due to $ 49.4 million of net charge-offs during the year ended December 31, 2024. The increase in net charge-offs was primarily related to two commercial relationships that accounted for $ 42.7 million of charge-offs. One borrower experienced a sudden change in revenue from the cancellation and inability to renegotiate their contracts with the U.S. Government. 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. The Corporation does not believe these charge-offs are indicative of the portfolio as a whole. 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. 81 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables summarize changes in the ACL - Loans by loan segment for the years ended December 31, 2024, 2023 and 2022: Year Ended December 31, 2024 Commercial Commercial Real Estate Construction Consumer & Residential Total Allowance for credit losses - loans Balances, December 31, 2023 $ 97,348 $ 44,048 $ 24,823 $ 38,715 $ 204,934 Provision for credit losses - loans 44,455 7,167 ( 15,039 ) 617 37,200 Recoveries on loans 3,153 236 — 1,477 4,866 Loans charged off ( 50,199 ) ( 352 ) — ( 3,692 ) ( 54,243 ) Balances. December 31, 2024 $ 94,757 $ 51,099 $ 9,784 $ 37,117 $ 192,757 Year Ended December 31, 2023 Commercial Commercial Real Estate Construction Consumer & Residential Total Allowance for credit losses - loans Balances, December 31, 2022 $ 102,216 $ 46,839 $ 28,955 $ 45,267 $ 223,277 Provision for credit losses - loans 17,401 ( 2,735 ) ( 4,132 ) ( 3,234 ) 7,300 Recoveries on loans 995 60 — 1,341 2,396 Loans charged off ( 23,264 ) ( 116 ) — ( 4,659 ) ( 28,039 ) Balances. December 31, 2023 $ 97,348 $ 44,048 $ 24,823 $ 38,715 $ 204,934 Year Ended December 31, 2022 Commercial Commercial Real Estate Construction Consumer & Residential Total Allowance for credit losses - loans Balances, December 31, 2021 $ 69,935 $ 60,665 $ 20,206 $ 44,591 $ 195,397 Provision for credit losses - loans 16,697 ( 20,425 ) 6,367 ( 2,639 ) — CECL Day 1 non-PCD provision for credit losses - loans 2,957 5,539 871 4,588 13,955 CECL Day 1 PCD ACL - loans 12,970 2,981 648 — 16,599 Recoveries on loans 872 1,096 863 1,096 3,927 Loans charged off ( 1,215 ) ( 3,017 ) — ( 2,369 ) ( 6,601 ) Balances. December 31, 2022 $ 102,216 $ 46,839 $ 28,955 $ 45,267 $ 223,277 Off-Balance Sheet Arrangements, Commitments And Contingencies In the normal course of business, the Corporation has entered into off-balance sheet financial instruments which include commitments to extend credit and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, and thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing for their cash flows. Other typical lines of credit are related to home equity loans granted to customers. Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require a fee. Standby letters of credit are generally issued on behalf of an applicant (the Corporation’s customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. The standby letter of credit would permit the beneficiary to obtain payment from the Corporation under certain prescribed circumstances. Subsequently, the Corporation would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit. The Corporation typically follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is typically evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property. The contractual amounts of these commitments are not reflected in the consolidated financial statements and only amounts drawn upon would be reflected in the future. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should the Corporation’s customers default on their resulting obligation to the Corporation, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments. Financial instruments with off-balance sheet risk were as follows: December 31, 2024 December 31, 2023 Amounts of commitments: Loan commitments to extend credit $ 5,006,085 $ 5,025,790 Standby letters of credit $ 71,271 $ 65,580 82 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The Corporation maintains an accrual for credit losses on off-balance sheet commitments using the CECL methodology. Reserves for unfunded commitments declined by $ 1.5 million and $ 3.8 million during the years ended December 31, 2024 and 2023, respectively. This reserve level remains appropriate and is reported in Other Liabilities as of December 31, 2024 in the Consolidated Balance Sheets. The following table details activity in the ACL for off-balance sheet commitments: 2024 2023 Balance, January 1 $ 19,500 $ 23,300 Provision for credit losses - unfunded commitments ( 1,500 ) ( 3,800 ) Balance, December 31 $ 18,000 $ 19,500 NOTE 6 PREMISES AND EQUIPMENT The following table summarizes the Corporation’s premises and equipment as of December 31, 2024 and 2023: 2024 2023 Cost at December 31: Land $ 24,785 $ 25,655 Buildings and Leasehold Improvements 185,741 186,444 Equipment 153,011 148,258 Total Cost 363,537 360,357 Accumulated Depreciation and Amortization ( 233,794 ) ( 226,461 ) Net $ 129,743 $ 133,896 First Merchants Corporation sold five Illinois branches in the fourth quarter of 2024 which resulted in reductions to premises and equipment of $ 3.2 million. Details regarding the branch sale are discussed in NOTE 2. ACQUISITIONS AND DIVESTITURES of these Notes to Consolidated Financial Statements. The Corporation is committed under various non-cancelable lease contracts for certain subsidiary office facilities and equipment. Details regarding the lease contracts are discussed in NOTE 8. LEASES of these Notes to Consolidated Financial Statements. NOTE 7 GOODWILL AND OTHER INTANGIBLES The Corporation’s goodwill was $ 712.0 million for the years ended December 31, 2024 and 2023. 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. For additional details related to impairment testing, see the “GOODWILL” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. The carrying basis and accumulated amortization of recognized core deposit and other intangibles are noted below. 2024 2023 Gross carrying amount $ 123,285 $ 123,285 Accumulated amortization ( 103,457 ) ( 96,186 ) Total core deposit and other intangibles $ 19,828 $ 27,099 The core deposit intangibles and other intangibles are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of two to ten years . Amortization expense for the years ended December 31, 2024, 2023 and 2022, was $ 7.3 million, $ 8.7 million and $ 8.3 million, respectively. 83 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Estimated future amortization expense is summarized as follows: Amortization Expense 2025 $ 6,028 2026 4,910 2027 3,603 2028 2,852 2029 1,137 After 2029 1,298 $ 19,828 NOTE 8 LEASES The Corporation enters into leases for certain retail branches, office space, land and equipment. Operating leases are included in other assets and the lease liability is included in other liabilities in the Consolidated Balance Sheets. The Corporation does not have any finance leases. Right-of-use (“ROU”) assets represent the Corporation’s right to use an underlying asset for the lease term and lease liabilities represent the Corporation’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Corporation uses its incremental borrowing rate at commencement date in determining the present value of lease payments when the rate implicit in a lease is not known. The Corporation’s incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Corporation’s leases are generally for periods of five to twenty years with various renewal options. The exercise of such lease renewal options is not included in the present value of lease obligations unless it is reasonably certain that the option will be exercised. The Corporation has lease agreements which contain both lease and non-lease components such as common area maintenance charges, real estate taxes, and insurance. Non-lease components are not included in the measurement of the lease liability and are recognized in expense when incurred. The Corporation has elected not to recognize short-term leases, with original lease terms of twelve months or less, on the Corporation’s balance sheet. Certain of the Corporation’s lease agreements include rental payments adjusted periodically for inflation. The Corporation’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Supplemental balance sheet information related to leases is presented in the table below as of December 31, 2024 and 2023: 2024 2023 Operating lease assets $ 21,085 $ 18,912 Total lease assets $ 21,085 $ 18,912 Operating lease liabilities $ 23,873 $ 22,335 Total lease liabilities $ 23,873 $ 22,335 Weighted average remaining lease term (years) Operating leases 6.5 6.3 Weighted average discount rate Operating leases 3.8 % 3.2 % The table below presents the components of lease expense for the years ended December 31, 2024, 2023, and 2022: 2024 2023 2022 Lease Cost: Operating lease cost $ 5,514 $ 7,696 $ 5,233 Short-term lease cost 566 478 470 Variable lease cost 1,298 1,534 1,073 Sublease income $ ( 5 ) $ ( 16 ) $ ( 23 ) Total lease cost $ 7,373 $ 9,692 $ 6,753 The Corporation performs impairment assessments for ROU assets when events or changes in circumstances indicate their carrying values may not be recoverable. The year ended December 31, 2023 operating lease cost includes $ 2.1 million related to the abandonment of a leased office building. The recognized loss was recorded in net occupancy expense in the Consolidated Statements of Income. 84 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Supplemental cash flow information related to leases is presented in the tables below. Maturity of lease liabilities Operating Leases 2025 $ 6,181 2026 4,562 2027 3,863 2028 3,479 2029 2,434 After 2029 6,513 Total lease payments $ 27,032 Less: Present value discount 3,159 Present value of lease liabilities $ 23,873 Other Information Twelve Months Ended December 31, 2024 Twelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 5,073 $ 5,742 $ 5,329 ROU assets obtained in exchange for new operating lease liabilities $ 7,102 $ 2,253 $ 10,516 NOTE 9 QUALIFIED AFFORDABLE HOUSING INVESTMENTS The Corporation has investments in various limited partnerships that sponsor affordable housing projects. The purpose of these investments is to earn an adequate return of capital through the receipt of low income housing tax credits and to assist the Corporation in achieving goals associated with the CRA. These investments are included in other assets on the Consolidated Balance Sheet, with any unfunded commitments included in other liabilities. The investments are amortized as a component of income tax expense . Details of the accounting treatment of the Corporation’s LIHTC investments are included in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements. The following table summarizes the Corporation’s affordable housing investments as of December 31, 2024 and 2023: 2024 2023 Investment Type Investment Unfunded Commitment Investment Unfunded Commitment LIHTC $ 167,685 $ 132,226 $ 114,514 $ 96,408 The following table summarizes the amortization expense and tax credits recognized for the Corporation’s affordable housing investments for the years ended December 31, 2024, 2023 and 2022: 2024 2023 2022 Amortization expense $ 12,040 $ 6,324 $ 812 Tax credits recognized 11,782 5,327 1,055 NOTE 10 DEPOSITS The composition of the deposit portfolio is included in the table below as of the dates indicated: December 31, 2024 December 31, 2023 Demand deposits $ 7,980,061 $ 7,965,862 Savings deposits 4,522,758 4,516,433 Certificates and other time deposits of $100,000 or more 1,043,068 1,408,985 Other certificates and time deposits 692,068 849,906 Brokered certificates of deposits 283,671 80,267 Total deposits $ 14,521,626 $ 14,821,453 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. Details regarding the branch sale are discussed in NOTE 2. ACQUISITIONS AND DIVESTITURES of these Notes to Consolidated Financial Statements. At December 31, 2024 and 2023, deposits exceeding the FDIC’s Standard Maximum Deposit Insurance Amount of $250,000 were $ 8.7 billion and $ 8.6 billion, respectively. 85 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) At December 31, 2024, the contractual maturities of time deposits are summarized as follows: Certificates and Other Time Deposits 2025 $ 1,743,960 2026 85,236 2027 99,634 2028 86,322 2029 3,018 After 2029 637 $ 2,018,807 NOTE 11 BORROWINGS The following table summarizes the Corporation’s borrowings as of December 31, 2024 and 2023: December 31, 2024 December 31, 2023 Federal funds purchased $ 99,226 $ — Securities sold under repurchase agreements 142,876 157,280 Federal Home Loan Bank advances 822,554 712,852 Subordinated debentures and other borrowings 93,529 158,644 Total Borrowings $ 1,158,185 $ 1,028,776 Securities sold under repurchase agreements consist of obligations of the Bank to other parties and are secured by U.S. Government-Sponsored Enterprise obligations. The maximum amount of outstanding agreements at any month-end during 2024 and 2023 totaled $ 194.2 million and $ 242.2 million, respectively, and the average of such agreements totaled $ 136.0 million and $ 171.3 million during 2024 and 2023, respectively. Transfers Accounted For As Secured Borrowings The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of December 31, 2024 and 2023 were: December 31, 2024 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total U.S. Government-sponsored mortgage-backed securities $ 142,876 $ — $ — $ — $ 142,876 December 31, 2023 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total U.S. Government-sponsored mortgage-backed securities $ 157,280 $ — $ — $ — $ 157,280 Contractual maturities of borrowings as of December 31, 2024, are as follows: Maturities in Years Ending December 31: Federal Funds Purchased Securities Sold Under Repurchase Agreements Federal Home Loan Bank Advances Subordinated Debentures and Term Loans 2025 $ 99,226 $ 142,876 $ 95,000 $ 1,157 2026 — — 75,000 — 2027 — — 250,000 — 2028 — — 190,000 5,000 2029 — — 150,000 30,000 2030 and after — — 62,554 60,753 ASC 805 fair value adjustments at acquisition — — — ( 3,381 ) $ 99,226 $ 142,876 $ 822,554 $ 93,529 86 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) At December 31, 2024, the outstanding FHLB advances had interest rates from 1.50 to 4.94 percent and are subject to restrictions or penalties in the event of prepayment. The total available remaining borrowing capacity from the FHLB at December 31, 2024, was $ 733.1 million. As of December 31, 2024, the Corporation had $ 305.0 million of putable advances with the FHLB. Subordinated Debentures and Term Loans. As of December 31, 2024 and 2023, subordinated debentures and term loans totaled $ 93.5 million and $ 158.6 million, respectively. • First Merchants Capital Trust II (“FMC Trust II”). At December 31, 2024 and 2023, the Corporation had $ 41.7 million of subordinated debentures issued to FMC Trust II, a wholly-owned statutory business trust. FMC Trust II was formed in July 2007 for purposes of issuing trust preferred securities to investors. At that time, it simultaneously issued and sold its common securities to the Corporation, which constituted all of the issued and outstanding common securities of FMC Trust II. The subordinated debentures, which were purchased with the proceeds of the sale of the trust’s capital securities, are the sole assets of FMC Trust II and are fully and unconditionally guaranteed by the Corporation. As of December 31, 2024 and 2023, the subordinated debentures and trust preferred securities bear interest at a variable rate equal to the three-month CME Term Secured Overnight Financing Rate (“CME Term SOFR”), plus the 0.26161 percent spread adjustment. The interest rate at December 31, 2024 and 2023, was 6.18 percent and 7.21 percent, respectively. The trust preferred securities are currently redeemable at par and without penalty, subject to the Corporation having first redeemed the related subordinated debentures, with the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies. The trust preferred securities and the subordinated debentures of FMC Trust II will mature on September 15, 2037. The Corporation continues to hold all outstanding common securities of FMC Trust II. • Ameriana Capital Trust I. At December 31, 2024 and 2023, the Corporation had $ 10.3 million of subordinated debentures issued to Ameriana Capital Trust I. On December 31, 2015, the Corporation acquired Ameriana Capital Trust I in conjunction with its acquisition of Ameriana Bancorp, Inc. With a trust preferred structure substantially similar to that described above for FMC Trust II, the subordinated debentures held by Ameriana Capital Trust I were purchased with the proceeds of the sale of the trust’s capital securities. As of December 31, 2024 and 2023, the subordinated debentures and trust preferred securities bear interest at a variable rate equal to the three-month CME Term SOFR, plus the 0.26161 percent spread adjustment. The interest rate at December 31, 2024 and 2023, was 6.12 percent and 7.15 percent, respectively. The trust preferred securities of Ameriana Capital Trust I are currently redeemable at par and without penalty, subject to the Corporation having first redeemed the related subordinated debentures, with the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies. The trust preferred securities and the subordinated debentures of Ameriana Capital Trust I will mature in March 2036. The Corporation continues to hold all of the outstanding common securities of Ameriana Capital Trust I. • First Merchants Senior Notes and Subordinated Notes. On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $ 70 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 (the “Senior Debt”) and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due in 2028 in the aggregate principal amount of $ 65 million (the “Subordinated Debt”). The interest rate on the Senior Debt and Subordinated Debt remained fixed for the first ten ( 10 ) years and converted to floating on October 30, 2023. As of December 31, 2024 and 2023, the Senior Debt had an annual floating rate equal to three-month CME Term SOFR, plus the 0.26161 percent spread adjustment, plus 2.345 percent. The interest rate on the Senior Debt was 7.18 percent and 7.98 percent as of December 31, 2024 and 2023, respectively. The Corporation had an option to redeem the Subordinated Debt in whole or in part at a redemption price equal to 100 percent of the principal amount of the redeemed Subordinated Notes, plus accrued and unpaid interest to the date of the redemption. The option of redemption was subject to the approval of the Federal Reserve Board. The Corporation has an option to redeem the Senior Debt in whole or in part at a redemption price equal to 100 percent of the principal amount of the redeemed Senior Notes, plus accrued and unpaid interest to the date of the redemption; provided, however, that no Subordinated Notes (as defined in the Issuing and Paying Agency Agreement) may remain outstanding subsequent to any early redemption of Senior Notes. The Subordinated Debt and the Senior Debt options to redeem began with the interest payment date on October 30, 2023, or on any scheduled interest payment date thereafter. During the first quarter of 2024, the Corporation exercised its rights to redeem $ 40.0 million in principal and paid the debt in full on the scheduled interest payment date. Additionally, in the second quarter of 2024, the Corporation exercised its rights to redeem the remaining $ 25.0 million in principal and paid the debt on the scheduled interest payment date. Both redemptions were permitted under the optional redemptions provisions of the Subordinated Note Certificate representing the Subordinated Debt. The Senior Debt agreement contains certain customary representations and warranties and financial and negative covenants. As of December 31, 2024 and 2023 the Corporation was in compliance with these covenants. • Level One Subordinated Notes. On April 1, 2022, the Corporation assumed certain subordinated notes in conjunction with its acquisition of Level One. The $ 30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75 percent per annum, payable semiannually through December 18, 2024. The notes bear a floating interest rate equal to the three-month CME Term SOFR plus 3.11 percent, payable quarterly, after December 18, 2024 through maturity. 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. 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. • Other Borrowings. 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, has a maturity date of March 2035, and had a balance of $ 7.1 million and $ 7.3 million as of December 31, 2024 and 2023, respectively. On April 1, 2022, the Corporation acquired a secured borrowing in conjunction with its acquisition of Level One. The secured borrowing related to a certain loan participation sold by Level One that did not qualify for sales treatment. The secured borrowing bears a fixed rate of 1.00 percent and had a balance of $ 1.1 million and $ 1.2 million as of December 31, 2024 and 2023, respectively. 87 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Line of Credit. As of December 31, 2024, there was no outstanding balance on the line of credit. • U.S. Bank, N.A. On September 30, 2024, the Corporation entered into a Credit Agreement with U.S. Bank, N.A. (the “Lender”). Under the terms of the Credit Agreement, the Lender has provided the Corporation with a revolving line of credit of up to $ 75.0 million. The outstanding principal balance under the Credit Facility bears interest at a variable rate equal to the one-month Term SOFR rate plus 2.25 percent. Interest on the outstanding balance is payable quarterly, and the Credit Facility has a maturity date of September 30, 2025. Additionally, the Corporation is subject to a non-refundable facility fee equal to 0.40 percent per annum on the average daily unused amount of the Credit Facility, payable quarterly. The Credit Agreement contains customary representations, warranties and covenants. As of December 31, 2024, the Corporation's outstanding principal balance under the Credit Facility was zero and the Corporation was in compliance with all covenants. NOTE 12 DERIVATIVE FINANCIAL INSTRUMENTS Risk Management Objective of Using Derivatives The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash payments principally related to certain variable-rate liabilities. The Corporation also has derivatives that are a result of a service the Corporation provides to certain qualifying customers, and, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. The Corporation manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net risk exposure resulting from such transactions. Derivatives Designated as Hedges The Corporation’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of fixed amounts to a counterparty in exchange for the Corporation receiving variable payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of December 31, 2024 and 2023 the Corporation had no interest rate swaps or caps designated as hedges. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss). The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the twelve months ended December 31, 2024 and 2023, the Corporation did not recognize any ineffectiveness. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Corporation's variable-rate liabilities. During the next twelve months, the Corporation doesn't expect to reclassify income (loss) associated with derivatives from accumulated other comprehensive loss to interest expense. The amount of gain recognized in other comprehensive income (loss) is included in the table below for the periods indicated. Derivatives in Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion) For the Year Ended December 31, 2024 2023 Interest rate products $ — $ 179 The amount of loss reclassified from other comprehensive income (loss) into income related to cash flow hedging relationships is included in the table below for the years ended December 31, 2024, 2023 and 2022. Derivatives Designated as Hedging Instruments under FASB ASC 815-10 Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) (Effective Portion) Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) into Income (Effective Portion) 2024 2023 2022 Interest rate contracts Interest expense $ — $ ( 15 ) $ ( 521 ) 88 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Non-designated Hedges The Corporation does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers. The Corporation executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Corporation executes with a third party, such that the Corporation minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Corporation's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair value of these mortgage banking derivatives are included in net gains and fees on sales of loans. The table below presents the fair value of the Corporation’s non-designated hedges, as well as their classification on the Consolidated Balance Sheets, as of December 31, 2024 and 2023. December 31, 2024 December 31, 2023 Notional Amount Fair Value Notional Amount Fair Value Included in other assets: Interest rate swaps $ 1,386,757 $ 76,528 $ 1,355,947 $ 78,743 Forward contracts related to mortgage loans to be delivered for sale 39,142 465 15,160 469 Interest rate lock commitments 15,000 140 22,706 167 Included in other assets $ 1,440,899 $ 77,133 $ 1,393,813 $ 79,379 Included in other liabilities: Interest rate swaps $ 1,486,764 $ 76,450 $ 1,355,947 $ 78,811 Forward contracts related to mortgage loans to be delivered for sale 13,020 18 25,290 191 Interest rate lock commitments 14,457 100 1,025 6 Included in other liabilities $ 1,514,241 $ 76,568 $ 1,382,262 $ 79,008 In the normal course of business, the Corporation may decide to settle a forward contract rather than fulfill the contract. Cash received or paid in this settlement manner is included in "Net gains and fees on sales of loans" in the Consolidated Statements of Income and is considered a cost of executing a forward contract. The amount of gain (loss) recognized into income related to non-designated hedging instruments is included in the table below for the periods indicated. Derivatives Not Designated as Hedging Instruments under FASB ASC 815-10 Location of Gain (Loss) Recognized in Income on Derivative Amount of Gain (Loss) Recognized in Income on Derivative 2024 2023 2022 Forward contracts related to mortgage loans to be delivered for sale Net gains and fees on sales of loans $ 832 $ 1,138 $ 1,112 Interest rate lock commitments Net gains and fees on sales of loans ( 121 ) 185 71 Total net gain recognized in income $ 711 $ 1,323 $ 1,183 The Corporation’s exposure to credit risk occurs because of nonperformance by its counterparties. The counterparties approved by the Corporation are usually financial institutions, which are well capitalized and have credit ratings through Moody’s and/or Standard & Poor’s at or above investment grade. The Corporation’s mitigation of such risk is through quarterly financial reviews, comparing mark-to-market values with policy limitations, credit ratings and collateral pledging. Credit-risk-related Contingent Features The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well or adequately capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts. Additionally, the Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. As of December 31, 2024, the termination value of derivatives in a net liability position related to these agreements was $ 3.9 million, which resulted in no collateral pledged to counterparties as of December 31, 2024. While the Corporation did not breach any of these provisions as of December 31, 2024, if it had, the Corporation could have been required to settle its obligations under the agreements at their termination value. 89 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 13 FAIR VALUES OF FINANCIAL INSTRUMENTS The Corporation used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances. As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability). Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs for which there is little or no market activity (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10 percent or more of the total fair value of a particular asset or liability. RECURRING MEASUREMENTS Assets and liabilities are considered to be measured at fair value on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment and recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses. Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy. Investment Securities Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Corporation did not have any Level 1 securities as of December 31, 2024. Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government-sponsored agency and mortgage-backed securities, state and municipal securities and corporate obligations securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. Government-sponsored mortgage-backed securities and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active. Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3. Derivative Financial Agreements See information regarding the Corporation’s derivative financial agreements in NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements. 90 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2024 and 2023. Fair Value Measurements Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2024 Fair Value (Level 1) (Level 2) (Level 3) Available for sale securities: U.S. Government-sponsored agency securities $ 79,381 $ — $ 79,381 $ — State and municipal 863,174 — 860,793 2,381 U.S. Government-sponsored mortgage-backed securities 431,622 — 431,618 4 Corporate obligations 12,298 — 12,267 31 Derivative assets 77,133 — 77,133 — Derivative liabilities 76,568 — 76,568 — Fair Value Measurements Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2023 Fair Value (Level 1) (Level 2) (Level 3) Available for sale securities: U.S. Government-sponsored agency securities $ 95,307 $ — $ 95,307 $ — State and municipal 1,065,171 — 1,061,896 3,275 U.S. Government-sponsored mortgage-backed securities 454,815 — 454,811 4 Corporate obligations 11,819 — 11,788 31 Derivative assets 79,379 — 79,379 — Derivative liabilities 79,008 — 79,008 — LEVEL 3 RECONCILIATION The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable Level 3 inputs for year ended December 31, 2024 and 2023. Available for Sale Securities For The Year Ended December 31, 2024 December 31, 2023 Beginning Balance $ 3,310 $ 3,439 Included in other comprehensive income (loss) ( 908 ) ( 186 ) Principal payments 14 57 Ending balance $ 2,416 $ 3,310 There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or liabilities held at December 31, 2024 or 2023. TRANSFERS BETWEEN LEVELS There were no transfers in or out of Level 3 during 2024 or 2023. 91 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NONRECURRING MEASUREMENTS Following is a description of valuation methodologies used for instruments measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy at December 31, 2024 and 2023. Fair Value Measurements Using December 31, 2024 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral dependent loans $ 46,810 — — $ 46,810 Fair Value Measurements Using December 31, 2023 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral dependent loans $ 55,020 — — $ 55,020 Collateral Dependent Loans Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. UNOBSERVABLE (LEVEL 3) INPUTS The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 2024 and 2023. December 31, 2024 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average) State and municipal securities $ 2,381 Discounted cash flow Maturity/Call date 1 month to 6 years US Muni BQ curve BBB Discount rate 3.6 % - 4.7 % Weighted-average coupon 3.6 % Corporate obligations and U.S. Government-sponsored mortgage-backed securities $ 35 Discounted cash flow Risk free rate 3 month CME Term SOFR plus 26 bps plus premium for illiquidity (basis points) plus 200 bps Weighted-average coupon 0 % Collateral dependent loans $ 46,810 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 0 % - 16 % Weighted-average discount by loan balance 12.6 % 92 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) December 31, 2023 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average) State and municipal securities $ 3,275 Discounted cash flow Maturity/Call date 1 month to 15 years US Muni BQ curve BBB Discount rate 3.6 % - 4.7 % Weighted-average coupon 3.3 % Corporate obligations and U.S. Government-sponsored mortgage-backed securities $ 35 Discounted cash flow Risk free rate 3 month CME Term SOFR plus 26 bps plus premium for illiquidity (basis points) plus 200 bps Weighted-average coupon 0 % Collateral dependent loans $ 55,020 Collateral based measurements Discount to reflect current market conditions and ultimate collectability 0 % - 10 % Weighted-average discount by loan balance 4.1 % The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. State and Municipal Securities, Corporate Obligations, and U.S. Government-sponsored Mortgage Backed Securities The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal securities, corporate obligations and U.S. Government-sponsored mortgage backed securities are premiums for unrated securities and marketability discounts. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, changes in either of those inputs will not affect the other input. FAIR VALUE OF FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE The following tables present estimated fair values of the Corporation’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2024 and 2023. 2024 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Assets at December 31: Cash and due from banks $ 87,616 $ 87,616 $ — $ — $ 87,616 Interest-bearing deposits 298,891 298,891 — — 298,891 Investment securities held to maturity 2,074,220 — 1,716,647 6,873 1,723,520 Loans held for sale 18,663 — 18,663 — 18,663 Loans 12,661,602 — — 12,437,523 12,437,523 Federal Home Loan Bank stock 41,690 — 41,690 — 41,690 Interest receivable 91,829 — 91,829 — 91,829 Liabilities at December 31: Deposits 14,521,626 $ 12,502,819 $ 2,010,348 $ — 14,513,167 Borrowings: Securities sold under repurchase agreements 142,876 — 142,865 — 142,865 Federal Home Loan Bank advances 822,554 — 816,786 — 816,786 Subordinated debentures and other borrowings 93,529 — 84,108 — 84,108 Interest payable 16,102 — 16,102 — 16,102 93 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) 2023 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Assets at December 31: Cash and due from banks $ 112,649 $ 112,649 $ — $ — $ 112,649 Interest-bearing deposits 436,080 436,080 — — 436,080 Investment securities held to maturity, net 2,184,252 — 1,859,974 10,400 1,870,374 Loans held for sale 18,934 — 18,934 — 18,934 Loans 12,281,093 — — 11,958,301 11,958,301 Federal Home Loan Bank stock 41,769 — 41,769 — 41,769 Interest receivable 97,664 — 97,664 — 97,664 Liabilities at December 31: Deposits $ 14,821,453 $ 12,482,295 $ 2,329,662 $ — 14,811,957 Borrowings: Securities sold under repurchase agreements 157,280 — 157,265 — 157,265 Federal Home Loan Bank advances 712,852 — 707,377 — 707,377 Subordinated debentures and other borrowings 158,644 — 149,995 — 149,995 Interest payable 18,912 — 18,912 — 18,912 NOTE 14 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of December 31, 2024 and 2023: Accumulated Other Comprehensive Income (Loss) Unrealized Gains (Losses) on Securities Available for Sale Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Defined Benefit Plans Total Balance at December 31, 2023 $ ( 173,654 ) $ — $ ( 2,316 ) $ ( 175,970 ) Other comprehensive income (loss) before reclassifications ( 31,156 ) — 2,043 ( 29,113 ) Amounts reclassified from accumulated other comprehensive income (loss) 16,398 — — 16,398 Period change ( 14,758 ) — 2,043 ( 12,715 ) Balance at December 31, 2024 $ ( 188,412 ) $ — $ ( 273 ) $ ( 188,685 ) Balance at December 31, 2022 $ ( 234,495 ) $ 130 $ ( 4,786 ) $ ( 239,151 ) Other comprehensive income (loss) before reclassifications 55,366 ( 142 ) 2,405 57,629 Amounts reclassified from accumulated other comprehensive income (loss) 5,475 12 65 5,552 Period change 60,841 ( 130 ) 2,470 63,181 Balance at December 31, 2023 $ ( 173,654 ) $ — $ ( 2,316 ) $ ( 175,970 ) 94 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statements of Income for the years ended December 31, 2024, 2023 and 2022: Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Year Ended December 31, Details about Accumulated Other Comprehensive Income (Loss) Components 2024 2023 2022 Affected Line Item in the Statements of Income Unrealized gains (losses) on available for sale securities (1) Realized securities gains (losses) reclassified into income $ ( 20,757 ) $ ( 6,930 ) $ 1,194 Other income - net realized gains (losses) on sales of available for sale securities Related income tax benefit (expense) 4,359 1,455 ( 251 ) Income tax expense $ ( 16,398 ) $ ( 5,475 ) $ 943 Unrealized gains (losses) on cash flow hedges (2) Interest rate contracts $ — $ ( 15 ) $ ( 521 ) Interest expense - subordinated debentures and other borrowings Related income tax benefit (expense) — 3 109 Income tax expense $ — $ ( 12 ) $ ( 412 ) Unrealized gains (losses) on defined benefit plans Amortization of net loss and prior service costs $ — $ ( 82 ) $ ( 82 ) Other expenses - salaries and employee benefits Related income tax benefit (expense) — 17 17 Income tax expense $ — $ ( 65 ) $ ( 65 ) Total reclassifications for the period, net of tax $ ( 16,398 ) $ ( 5,552 ) $ 466 (1) For additional detail related to unrealized gains (losses) on available for sale securities and related amounts reclassified from accumulated other comprehensive income see NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. (2) For additional detail related to unrealized gains (losses) on cash flow hedges and related amounts reclassified from accumulated other comprehensive income see NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements. NOTE 15 REGULATORY CAPITAL AND DIVIDENDS Regulatory Capital Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. 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, 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. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity’s activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank’s operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, tier 1 capital and CET1 capital, in each case, to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the regulations. Banks with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is in an unsafe or unsound practice. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. Basel III requires the Corporation and the Bank to maintain the minimum capital and leverage ratios as defined in the regulation and as illustrated in the following table, which capital to risk-weighted asset ratios include a 2.5 percent capital conservation buffer. Under Basel III, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a 2.5 percent capital conservation buffer above the adequately capitalized CET1 to risk-weighted assets ratio (which buffer is reflected in the required ratios below). Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of December 31, 2024, the Bank met all capital adequacy requirements to be considered well capitalized under the fully phased-in Basel III capital rules. There is no threshold for well capitalized status for bank holding companies. 95 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced. Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. 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 Coronavirus Aid, Relief and Economic Security Act, or CARES Act. 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 was fully reflected in regulatory capital on January 1, 2024. On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $ 70 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 million. As of December 31, 2023 the Corporation began the five years phase out (at a rate of 20 percent per year) as defined in the Basil III capital rules, which resulted in a reduction of $ 13 million in tier 2 capital. The Corporation exercised its right to redeem $ 40 million of the subordinated debt on the scheduled interest payment date during the first quarter of 2024 and redeemed the remaining $ 25.0 million during the second quarter 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. The Corporation’s and Bank’s actual and required capital ratios as of December 31, 2024 and 2023 were as follows: Prompt Corrective Action Thresholds Actual Basel III Minimum Capital Required Well Capitalized December 31, 2024 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital to risk-weighted assets First Merchants Corporation $ 2,030,362 13.31 % $ 1,601,175 10.50 % N/A N/A First Merchants Bank 1,967,738 12.89 1,602,417 10.50 $ 1,526,112 10.00 % Tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,767,468 11.59 % $ 1,296,189 8.50 % N/A N/A First Merchants Bank 1,776,738 11.64 1,297,195 8.50 $ 1,220,889 8.00 % Common equity tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,742,468 11.43 % $ 1,067,450 7.00 % N/A N/A First Merchants Bank 1,776,738 11.64 1,068,278 7.00 $ 991,973 6.50 % Tier 1 capital to average assets First Merchants Corporation $ 1,767,468 9.96 % $ 710,089 4.00 % N/A N/A First Merchants Bank 1,776,738 9.92 716,172 4.00 $ 895,215 5.00 % Prompt Corrective Action Thresholds Actual Basel III Minimum Capital Required Well Capitalized December 31, 2023 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital to risk-weighted assets First Merchants Corporation $ 2,021,124 13.67 % $ 1,552,685 10.50 % N/A N/A First Merchants Bank 1,931,810 13.06 1,553,600 10.50 $ 1,479,619 10.00 % Tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,703,626 11.52 % $ 1,256,935 8.50 % N/A N/A First Merchants Bank 1,746,299 11.80 1,257,676 8.50 $ 1,183,695 8.00 % Common equity tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,678,626 11.35 % $ 1,035,123 7.00 % N/A N/A First Merchants Bank 1,746,299 11.80 1,035,733 7.00 $ 961,752 6.50 % Tier 1 capital to average assets First Merchants Corporation $ 1,703,626 9.64 % $ 707,091 4.00 % N/A N/A First Merchants Bank 1,746,299 9.89 706,331 4.00 $ 882,913 5.00 % 96 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) A reconciliation of certain non-GAAP amounts used in the determination of the above regulatory measures is detailed within the “Capital” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. Management believes the disclosed capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. 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. Dividends The Corporation’s principal source of funds for dividend payments to shareholders is dividends received from the Bank. Banking regulations limit the maximum amount of dividends that a bank may pay without requesting prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the bank’s retained income (as defined under the regulations) for the current year plus those for the previous two years, subject to the capital requirements described above. As of December 31, 2024, the amount available for dividends from the Corporation’s subsidiaries (both banking and non-banking), without prior regulatory approval or notice, was $ 283.4 million. Additionally, the Corporation has a Dividend Reinvestment and Stock Purchase Plan, enabling stockholders to elect to have their cash dividends on all shares automatically reinvested in additional shares of the Corporation’s common stock. In addition, stockholders may elect to make optional cash payments up to an aggregate of $ 5,000 per quarter for the purchase of additional shares of common stock. The stock is credited to participant accounts at fair market value. Dividends are reinvested on a quarterly basis. Preferred Stock As part of the Level One acquisition, the Corporation issued 10,000 shares of a newly created 7.5 percent non-cumulative perpetual preferred stock with a liquidation preference of $ 2,500 per share, in exchange for the outstanding Level One Series B preferred stock, and as part of that exchange, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock. The Corporation had $ 25.0 million of outstanding preferred stock at December 31, 2024 and 2023. During the twelve months ended December 31, 2024, the Corporation declared and paid dividends of $ 187.52 per share (equivalent to $ 1.88 per depositary share), equal to $ 1.9 million. During the twelve months ended December 31, 2023, the Corporation declared and paid dividends of $ 187.52 per share (equivalent to $ 1.88 per depositary share), equal to $ 1.9 million. The Series A preferred stock qualifies as tier 1 capital for purposes of the regulatory capital calculations. Stock Repurchase Program On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation’s outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $ 100,000,000 . On a share basis, the amount of common stock subject to the repurchase program represents approximately 6 percent of the Corporation’s outstanding shares at the time the program became effective. 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 a maximum 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. In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1 percent excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations (like the Corporation). 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 the Stockholders’ Equity as a component of additional paid-in capital. NOTE 16 LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid balances are as follows for December 31, 2024 and 2023. 2024 2023 Mortgage loan portfolios serviced for: Federal Home Loan Mortgage Corporation $ 835,432 $ 809,198 Fannie Mae 758,477 780,926 Equity Bank 36,408 42,429 Federal Home Loan Bank 386,022 159,590 Total $ 2,016,339 $ 1,792,143 97 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) For certain loans, the originated loans are sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights are recorded as a servicing asset and are reported under the line item "Other Assets" in the Consolidated Balance Sheets. The associated amortization expense is included in "Other Noninterest Expense" in the Consolidated Statements of Income. Mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair value. The following table presents changes in the servicing asset during the years ended December 31, 2024 and 2023: Year Ended December 31, 2024 2023 Balance, beginning of period $ 8,157 $ 8,055 Servicing rights capitalized 4,444 3,160 Amortization of servicing rights ( 3,202 ) ( 3,058 ) Balance, end of period $ 9,399 $ 8,157 The fair value of servicing rights was $ 12.9 million and $ 11.9 million for the years ended December 31, 2024 and 2023, respectively. Fair value at December 31, 2024 was determined using weighted average discount rates ranging from 2.55 percent to 8.22 percent, Public Securities Association Prepayment Model speed (“PSA”) ranging from 0 percent to 274 percent and cost to service of $ 6 per loan. Fair value at December 31, 2023 was determined using weighted average discount rates ranging from 2.55 percent to 8.20 percent, PSA ranging from 103 percent to 555 percent, and cost to service of $ 6 per loan. NOTE 17 SHARE-BASED COMPENSATION Stock options and Restricted Stock Awards (“RSA”) have been issued to directors, officers and other management employees under the Corporation’s 2024 Long-term Equity Incentive Plan, the 2019 Long-term Equity Incentive Plan, the Level One Bancorp, Inc. 2007 Stock Option Plan and the Equity Compensation Plan for Non-Employee Directors. The stock options, which have a ten-year life, become 100 percent vested based on time ranging from one year to two years and are fully exercisable when vested. Option exercise prices equal the Corporation’s common stock closing price on Nasdaq on the date of grant. The RSAs issued to employees and non-employee directors provide for the issuance of shares of the Corporation’s common stock at no cost to the holder and generally vest after three years . The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited. For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited. The RSAs for employees and non-employee directors are either immediately vested at retirement, disability or death, or, continue to vest after retirement, disability or death, depending on the plan under which the shares were granted. The Corporation’s 2024 Employee Stock Purchase Plan (“ESPP”) provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $ 25,000 . The 2019 Employee Stock Purchase Plan expired on June 30, 2024. Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings. Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSAs and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the years ended December 31, 2024, 2023, and 2022 was $ 5.8 million, $ 5.2 million, and $ 4.7 million, respectively, and has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Statements of Income. Share-based compensation expense recognized in the Consolidated Statements of Income is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 0.05 percent for the year ended December 31, 2024, based on historical experience. 98 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following table summarizes the components of the Corporation’s share-based compensation awards recorded as an expense and the income tax benefit of such awards. In 2024, the Corporation had RSAs vest primarily at a stock price that was lower than the grant date stock price, which resulted in the recognition of income tax expense at vesting of $ 130,000 . For the years ended December 31, 2023 and 2022, the Corporation had RSAs vest primarily at a stock price that was higher than the grant date stock price, which resulted in the recognition of income tax benefit at vesting of $ 126,000 and $ 86,000 , respectively. Years Ended December 31, 2024 2023 2022 Stock and ESPP Options Pre-tax compensation expense $ 164 $ 103 $ 95 Income tax benefit ( 40 ) ( 62 ) ( 74 ) Stock and ESPP option expense, net of income taxes $ 124 $ 41 $ 21 Restricted Stock Awards Pre-tax compensation expense $ 5,654 $ 5,055 $ 4,557 Income tax benefit ( 1,058 ) ( 1,188 ) ( 1,043 ) Restricted stock awards expense, net of income taxes $ 4,596 $ 3,867 $ 3,514 Total Share-Based Compensation: Pre-tax compensation expense $ 5,818 $ 5,158 $ 4,652 Income tax benefit ( 1,098 ) ( 1,250 ) ( 1,117 ) Total share-based compensation expense, net of income taxes $ 4,720 $ 3,908 $ 3,535 The grant date fair value of ESPP options was estimated to be approximately $ 33,000 at the beginning of the October 1, 2024 quarterly offering period. The ESPP options vested during the three months ending December 31, 2024, leaving no unrecognized compensation expense related to unvested ESPP options at December 31, 2024. Stock option activity under the Corporation’s stock option plans, as of December 31, 2024, and changes during the year ended December 31, 2024, were as follows: Number of Shares Weighted-Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value Outstanding at January 1, 2024 90,075 $ 20.21 Exercised ( 49,084 ) $ 18.34 Outstanding December 31, 2024 40,991 $ 22.44 1.69 $ 715 Vested and Expected to Vest at December 31, 2024 40,991 $ 22.44 1.69 $ 715 Exercisable at December 31, 2024 40,991 $ 22.44 1.69 $ 715 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of 2024 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on December 31, 2024. The amount of aggregate intrinsic value will change based on the fair value of the Corporation’s common stock. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2024 and 2023 was $ 707,000 and $ 1.4 million, respectively. Cash receipts of stock options exercised during 2024 and 2023 were $ 900,000 and $ 1.1 million, respectively. The following table summarizes information on unvested RSAs outstanding as of December 31, 2024: Number of Shares Weighted-Average Grant Date Fair Value Unvested RSAs at January 1, 2024 452,426 $ 37.94 Granted 199,746 $ 36.07 Forfeited ( 7,850 ) $ 38.50 Vested ( 89,886 ) $ 42.79 Unvested RSAs at December 31, 2024 554,436 $ 36.47 As of December 31, 2024, unrecognized compensation expense related to RSAs was $ 10.5 million and is expected to be recognized over a weighted-average period of 1.65 years. The Corporation did no t have any unrecognized compensation expense related to stock options as of December 31, 2024. 99 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 18 PENSION AND OTHER POST RETIREMENT BENEFIT PLANS The Corporation’s defined-benefit pension plans, including non-qualified plans for certain employees, former employees and former non-employee directors, cover approximat e ly 9 percent of the Corporation’s employees. In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan. No additional pension benefits have been earned by any employees who had not attained both the age of 55 and accrued at least 10 years of vesting service as of March 1, 2005. The benefits are based primarily on years of service and employees’ pay near retirement. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. The table below sets forth the plans’ funded status and amounts recognized in the Consolidated Balance Sheets at December 31, using measurement dates of December 31, 2024 and 2023. 2024 2023 Change in Benefit Obligation: Benefit obligation at beginning of year $ 55,761 $ 55,764 Interest cost 2,632 2,876 Actuarial (gain) loss ( 2,678 ) 2,386 Benefits paid ( 7,317 ) ( 5,265 ) Benefit obligation at end of year $ 48,398 $ 55,761 Change in Plan Assets: Fair value of plan assets at beginning of year $ 82,258 $ 77,534 Actual return on plan assets 4,006 9,395 Employer contributions 588 594 Benefits paid ( 7,317 ) ( 5,265 ) End of year 79,535 82,258 Funded status at end of year $ 31,137 $ 26,497 Assets and Liabilities Recognized in the Balance Sheets: Deferred tax asset $ 505 $ 1,141 Assets $ 33,217 $ 29,262 Liabilities $ 2,081 $ 2,765 As of December 31, 2024, the funded status of the plans increased $ 4.6 million from December 31, 2023. The aggregate unrecognized loss decreased from $ 4.6 million at December 31, 2023 to $ 2.0 million at December 31, 2024. The key contributing factors to the change in the unrecognized loss were the discount rate increased by 50 basis points from 5.10 percent to 5.60 percent, which decreased the liability $ 1.7 million and the assets in the plan earned a return of $ 4.0 million, which was $ 0.1 million less than the expected return. The accumulated benefit obligation for all defined benefit plans was $ 48.4 million and $ 55.8 million at December 31, 2024 and 2023, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets consists solely of the non-qualified plans for certain employees, former employees and former non-employee directors, and is included in the table below. December 31, 2024 December 31, 2023 Projected benefit obligation $ 2,081 $ 2,765 Accumulated benefit obligation $ 2,081 $ 2,765 Fair value of plan assets $ — $ — The Corporation recognized expense under these non-qualified plans of $ 0.1 million, $ 0.2 million and $ 0.1 million for 2024, 2023 and 2022, respectively. The following table shows the components of net periodic pension benefit cost: December 31, 2024 December 31, 2023 December 31, 2022 Interest cost 2,632 2,876 1,905 Expected return on plan assets ( 4,133 ) ( 3,887 ) ( 4,544 ) Amortization of prior service cost 49 87 87 Amortization of net loss 1 80 13 Net periodic pension benefit cost $ ( 1,451 ) $ ( 844 ) $ ( 2,539 ) 100 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): December 31, 2024 December 31, 2023 December 31, 2022 Net periodic pension benefit cost $ ( 1,451 ) $ ( 844 ) $ ( 2,539 ) Net gain (loss) 2,551 3,121 ( 1,797 ) Amortization of net loss 49 80 13 Amortization of prior service cost 1 87 87 Total recognized in other comprehensive income (loss) 2,601 3,288 ( 1,697 ) Total recognized in net periodic pension benefit cost and other comprehensive income (loss) $ 4,052 $ 4,132 $ 842 Significant assumptions include: December 31, 2024 December 31, 2023 December 31, 2022 Weighted-average Assumptions Used to Determine Benefit Obligation: Discount rate 5.60 % 5.10 % 5.40 % Rate of compensation increase for accruing active participants n/a n/a n/a Weighted-average Assumptions Used to Determine Cost: Discount rate 5.10 % 5.40 % 2.70 % Expected return on plan assets 5.25 % 5.25 % 5.00 % Rate of compensation increase for accruing active participants n/a n/a n/a At December 31, 2024 and 2023, the Corporation based its estimate of the expected long-term rate of return on analysis of the historical returns of the plans and current market information available. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2024. The minimum contribution required in 2025 will likely be zero , but the Corporation may decide to make a discretionary contribution during the year. 2025 $ 5,274 2026 5,110 2027 4,832 2028 4,663 2029 4,493 After 2029 18,420 $ 42,792 The Savings Plan, a Section 401(k) qualified defined contribution plan, was amended on March 1, 2005 to provide enhanced retirement benefits, including employer and matching contributions, for eligible employees of the Corporation and its subsidiaries. The Corporation matches employees’ contributions at the rate of 100 percent for the first 3 percent of base salary contributed by participants and 50 percent of the next 3 percent of base salary contributed by participants. Beginning in 2005, employees who have completed 1000 hours of service and are an active employee on the last day of the year receive an additional retirement contribution after year-end. Employees hired after January 1, 2010 do not participate in the additional retirement contribution. Effective January 1, 2013, the additional retirement contribution was fixed at 2 percent. Full vesting occurs after five years of service. The Corporation’s expense for the Savings Plan, including the additional retirement contribution, was $ 7.0 million, $ 7.2 million and $ 6.5 million for 2024, 2023 and 2022, respectively. The Corporation also maintains a post retirement benefit plan that provides health insurance benefits for a closed group of participants that came to the Corporation through the 2019 MBT acquisition. To be eligible for the post retirement plan, the participants must (1) have been hired by MBT prior to January 1, 2007, (2) be a full-time employee of the Corporation and employed by MBT prior to the acquisition, and (3) be at least 55 years of age with 5 years of full-time service with MBT. The plan allowed retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65 . The retirees’ premiums are determined based on their retiree class (per historical MBT guidelines) and also determined by the plan type for which the retiree is enrolled. As of December 31, 2024 and 2023, the obligation payable under the post retirement plan was $ 0.3 million and $ 2.3 million, respectively. Post retirement plan expense totaled $ 32,000 , $ 44,000 and $ 53,000 for 2024, 2023 and 2022, respectively. 101 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Pension Plan Assets The plans’ investment strategies are to provide for preservation of capital with an emphasis on long-term growth without undue exposure to risk. The assets of the plans are invested in accordance with the plans’ Investment Policy Statement, subject to strict compliance with ERISA and any other applicable statutes. The plans’ risk management practices include semi-annual evaluations of investment managers, including reviews of compliance with investment manager guidelines and restrictions; ability to exceed performance objectives; adherence to the investment philosophy and style; and ability to exceed the performance of other investment managers. The evaluations are reviewed by management with appropriate follow-up and actions taken, as deemed necessary. The Investment Policy Statement generally allows investments in cash and cash equivalents, real estate, fixed income debt securities and equity securities, and specifically prohibits investments in derivatives, options, futures, private placements, short selling, non-marketable securities and purchases of individual non-investment grade bonds. Plan assets are re-balanced quarterly. At December 31, 2024 and 2023, plan assets by category are as follows: December 31, 2024 December 31, 2023 Actual Target Actual Target Cash and cash equivalents 3.3 % 3.0 % 3.0 % 3.0 % Equity securities 27.3 20.0 53.4 53.0 Debt securities 69.4 77.0 41.9 42.0 Alternative investments — — 1.7 2.0 100.0 % 100.0 % 100.0 % 100.0 % At December 31, 2024, the maturities of the plans’ debt securities ranged from 14 days to 20.4 years, with a weighted average maturity of 8.0 years. At December 31, 2023, the maturities of the plans’ debt securities ranged from 75 days to 8.2 years, with a weighted average maturity of 3.7 years. Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis, as well as the general classification of pension plan assets pursuant to the valuation hierarchy. Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets total $ 69.2 million and $ 76.8 million as of December 31, 2024 and 2023, respectively, and include cash and cash equivalents, common stocks, mutual funds and corporate bonds and notes. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. Level 2 plan assets total $ 10.3 million and $ 5.4 million as of December 31, 2024 and 2023, respectively, and include governmental agencies, taxable municipal bonds and notes, and certificates of deposit. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. There are no assets classified within Level 3 of the hierarchy at December 31, 2024 and 2023. Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2024 Fair Value (Level 1) (Level 2) (Level 3) Cash & Cash Equivalents $ 2,609 $ 2,609 $ — $ — Corporate Bonds and Notes 29,206 29,206 — — Government Agency and Municipal Bonds and Notes 10,089 — 10,089 — Certificates of Deposit 246 — 246 — Party-in-Interest Investments Common Stock 2,413 2,413 — — Mutual Funds and Exchange Traded Funds Taxable Bond 15,648 15,648 — — Large Cap Equity 11,047 11,047 — — Mid Cap Equity 3,403 3,403 — — Small Cap Equity 1,275 1,275 — — International Equity 3,599 3,599 — — $ 79,535 $ 69,200 $ 10,335 $ — 102 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2023 Fair Value (Level 1) (Level 2) (Level 3) Cash & Cash Equivalents $ 2,433 $ 2,433 $ — $ — Corporate Bonds and Notes 17,224 17,224 — — Government Agency and Municipal Bonds and Notes 5,164 — 5,164 — Certificates of Deposit 245 — 245 — Party-in-Interest Investments Common Stock 2,243 2,243 — — Mutual Funds and Exchange Traded Funds Taxable Bond 11,834 11,834 — — Large Cap Equity 24,787 24,787 — — Mid Cap Equity 9,520 9,520 — — Small Cap Equity 4,900 4,900 — — International Equity 2,494 2,494 — — Specialty Alternative Equity 1,414 1,414 — — $ 82,258 $ 76,849 $ 5,409 $ — NOTE 19 INCOME TAX The reconciliation between income tax expense expected at the U.S. federal statutory tax rate and the reported income tax expense is summarized in the following table for years ended December 31, 2024, 2023 and 2022: 2024 2023 2022 Reconciliation of Federal Statutory to Actual Tax Expense: Federal Statutory Income Tax at 21% $ 48,663 $ 54,439 $ 53,692 Tax-exempt Interest Income ( 17,509 ) ( 18,193 ) ( 19,349 ) Non-deductible FDIC Premiums 624 454 427 Earnings on Life Insurance ( 1,777 ) ( 1,753 ) ( 2,344 ) Tax Credits ( 2,018 ) ( 331 ) ( 414 ) State Tax 631 1,171 2,494 Other 1,712 ( 341 ) ( 921 ) Income Tax Expense $ 30,326 $ 35,446 $ 33,585 Effective Tax Rate 13.1 % 13.7 % 13.1 % Income tax expense consists of the following components for the years ended December 31, 2024, 2023, 2022: 2024 2023 2022 Income Tax Expense for the Year Ended December 31: Currently Payable: Federal $ 27,979 $ 29,351 $ 21,824 State 723 ( 504 ) 2,696 Deferred: Federal 1,548 4,613 8,604 State 76 1,986 461 Income Tax Expense $ 30,326 $ 35,446 $ 33,585 103 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Significant components of the net deferred tax assets and liabilities resulting from temporary differences were as follows at December 31, 2024 and 2023: 2024 2023 Deferred Tax Asset at December 31: Assets: Differences in Accounting for Credit Losses $ 51,186 $ 54,734 Differences in Accounting for Loan Fees 2,193 2,398 Deferred Compensation 3,950 4,021 Federal & State Income Tax Loss Carryforward and Credits 1,166 600 Net Unrealized Loss on Securities Available for Sale 50,084 46,161 Other 5,771 6,716 Total Assets 114,350 114,630 Liabilities: Differences in Depreciation Methods 8,801 7,439 Differences in Accounting for Loans and Securities 920 1,284 Differences in Accounting for Mortgage Servicing Rights 2,280 1,987 Difference in Accounting for Pensions and Other Employee Benefits 8,156 6,072 State Income Tax 1,416 1,428 REIT Dividend Deferral 677 2,979 Other 6,208 8,692 Total Liabilities 28,458 29,881 Net Deferred Tax Asset $ 85,892 $ 84,749 As of December 31, 2024, the Corporation has approximately $ 25.0 million of state NOL carryforwards available to offset future state taxable income, which will expire beginning in 2025. These NOL carryforwards along with normal timing differences between book and tax result in total state deferred tax assets of $ 6.7 million. Management believes it is more likely than not that the benefit of these state NOL carryforwards and other state deferred tax assets will be fully realized. The Corporation has additional paid-in capital that is considered restricted resulting from the acquisitions of CFS Bancorp, Inc. (“CFS”) and Ameriana Bancorp, Inc. (“Ameriana”) of approximately $ 13.4 million and $ 11.9 million, respectively. CFS and Ameriana qualified as banks under provisions of the Internal Revenue Code which permitted them to deduct from taxable income an allowance for bad debts which differed from the provision for losses charged to income, for which no deferred federal income tax liability has been recognized. If in the future this portion of additional paid-in capital is distributed, or the Corporation no longer qualifies as a bank for income tax purposes, federal income taxes may be imposed at the then applicable tax rate. The unrecorded deferred tax liability at December 31, 2024, would have been approximately $ 5.3 million. The Corporation or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Corporation is generally no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years before 2021. Additional details regarding the Corporation’s policies related to income taxes are discussed in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements. NOTE 20 NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing net income available to common stockholders by the weighted-average common shares outstanding during the reporting period. Diluted net income per common share is computed by dividing net income available to common stockholders by the combination of the weighted-average common shares outstanding during the reporting period and all potentially dilutive common shares. Potentially dilutive common shares include stock options and RSAs issued under the Corporation’s share-based compensation plans. Potentially dilutive common shares are excluded from the computation of diluted earnings per common share in the periods where the effect would be antidilutive. 104 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following table reconciles basic and diluted net income per common share for the years indicated: 2024 2023 2022 Net Income Available to Common Stockholders Weighted-Average Common Shares Per Share Amount Net Income Available to Common Stockholders Weighted-Average Common Shares Per Share Amount Net Income Available to Common Stockholders Weighted-Average Common Shares Per Share Amount Net income available to common stockholders $ 199,527 58,312,575 $ 3.42 $ 221,911 59,304,879 $ 3.74 $ 220,683 57,692,018 $ 3.83 Effect of potentially dilutive stock options and restricted stock awards 219,990 183,641 258,239 Diluted net income per common share $ 199,527 58,532,565 $ 3.41 $ 221,911 59,488,520 $ 3.73 $ 220,683 57,950,257 $ 3.81 RSAs excluded from the diluted average common share calculation (1) 92,175 69,421 39,830 (1) Anti-dilution occurs when the unrecognized compensation cost per share of an RSA exceeds the market price of the Corporation's stock. As of December 31, 2024, 2023 and 2022, there were no stock options with an option price greater than the average market price of the common shares. NOTE 21 CONDENSED FINANCIAL INFORMATION (parent company only) Presented below is condensed financial information as to financial position, results of operations, and cash flows of the Corporation. Condensed Balance Sheets December 31, 2024 December 31, 2023 Assets Cash and due from banks $ 66,996 $ 100,858 Investment in subsidiaries 2,315,701 2,291,788 Other assets 12,834 10,250 Total assets $ 2,395,531 $ 2,402,896 Liabilities Subordinated debentures and other borrowings $ 85,232 $ 150,174 Interest payable 329 1,383 Other liabilities 4,987 3,626 Total liabilities 90,548 155,183 Stockholders' equity 2,304,983 2,247,713 Total liabilities and stockholders' equity $ 2,395,531 $ 2,402,896 105 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Condensed Statements of Income and Comprehensive Income (Loss) December 31, 2024 December 31, 2023 December 31, 2022 Income Dividends from subsidiaries $ 180,000 $ 131,525 $ 90,500 Other income 210 16 ( 1,693 ) Total income 180,210 131,541 88,807 Expenses Interest expense 6,803 10,164 8,005 Salaries and employee benefits 4,536 4,406 3,786 Other expenses 3,640 3,695 3,629 Total expenses 14,979 18,265 15,420 Income before income tax benefit and equity in undistributed income of subsidiaries 165,231 113,276 73,387 Income tax benefit ( 3,311 ) ( 4,526 ) ( 3,645 ) Income before equity in undistributed income of subsidiaries 168,542 117,802 77,032 Equity in undistributed income of subsidiaries 32,860 105,984 145,057 Net income 201,402 223,786 222,089 Preferred stock dividends 1,875 1,875 1,406 Net income available to common stockholders $ 199,527 $ 221,911 $ 220,683 Net income $ 201,402 $ 223,786 $ 222,089 Other comprehensive income (loss) ( 12,715 ) 63,181 ( 294,264 ) Comprehensive income (loss) $ 188,687 $ 286,967 $ ( 72,175 ) Condensed Statements of Cash Flows December 31, 2024 December 31, 2023 December 31, 2022 Cash Flow From Operating Activities: Net income $ 201,402 $ 223,786 $ 222,089 Adjustments to reconcile net income to net cash provided by operating activities Share-based compensation 2,060 1,803 1,659 Equity in undistributed income of subsidiaries ( 32,860 ) ( 105,984 ) ( 145,057 ) Other adjustments ( 3,615 ) ( 2,446 ) ( 5,925 ) Net cash provided by operating activities 166,987 117,159 72,766 Cash Flow From Investing Activities: Net cash and cash equivalents paid in acquisition — — ( 72,494 ) Proceeds from business divestitures — 4,852 — Net cash provided (used) by investing activities — 4,852 ( 72,494 ) Cash Flow From Financing Activities: Cash dividends on common stock ( 81,623 ) ( 80,061 ) ( 72,748 ) Cash dividends on preferred stock ( 1,875 ) ( 1,875 ) ( 1,406 ) Borrowings Repayment of borrowings ( 65,000 ) — — Stock issued under employee benefit plans 656 754 706 Stock issued under dividend reinvestment and stock purchase plan 2,261 2,180 2,056 Stock options exercised 900 1,110 358 Repurchases of common stock ( 56,168 ) — — Net cash used by financing activities ( 200,849 ) ( 77,892 ) ( 71,034 ) Net change in cash and cash equivalents ( 33,862 ) 44,119 ( 70,762 ) Cash and cash equivalents, beginning of the year 100,858 56,739 127,501 Cash and cash equivalents, end of year $ 66,996 $ 100,858 $ 56,739 106 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 22 SEGMENT INFORMATION The Corporation has one reportable segment, community banking. The Corporation’s reportable segment is determined by the Chief Executive Officer, who is the designated chief operating decision maker (“CODM”), based upon information provided about the Corporation’s products and services offered. The CODM will evaluate the financial performance of the Corporation’s business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing the Corporation’s segment. The Corporation generates revenue primarily by providing banking services to its customers. Interest expense, provisions for credit losses and salaries and employee benefits are the significant expenses in the banking operations. The CODM evaluates performance, allocates resources and makes key operating decisions based on consolidated net income that is reported in the Consolidated Statements of Income. The measure of segment assets is reported on the Consolidated Balance Sheets as total consolidated assets. All operations are domestic. NOTE 23 GENERAL LITIGATION The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Corporation. 107 PART II: ITEM 9., ITEM 9A. AND ITEM 9B. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In connection with its audits for the two most recent fiscal years ended December 31, 2024, there have been no disagreements with the Corporation’s independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure, nor have there been any changes in accountants.