GERMAN AMERICAN BANCORP, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTION German American Bancorp, Inc. is a Nasdaq-listed (symbol: GABC) financial holding company based in Jasper, Indiana. German American, through its banking subsidiary German American Bank, operates 94 banking offices located throughout Indiana (central/southern), Kentucky (northern/central/western), and Ohio (central/ southwest). In Columbus, Ohio and Greater Cincinnati, the Company does business as Heartland Bank, a Division of German American Bank. The Company also owns an investment brokerage subsidiary German American Investment Services, Inc. Throughout this Management’s Discussion and Analysis, as elsewhere in this Report, when we use the term “Company” and “German American”, we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term “German American”, “Bancorp”, “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc., and the term “Bank” when we mean to refer to only the Company’s bank subsidiary. This Management’s Discussion and Analysis includes an analysis of the major components of the Company’s operations for the years 2022 through 2024 and its financial condition as of December 31, 2023 and 2024. This information should be read in conjunction with the accompanying consolidated financial statements and footnotes contained elsewhere in this Report and with the description of business included in Item 1 of this Report (including the cautionary disclosure regarding “Forward Looking Statements and Associated Risks”). Financial and other information by segment is included in Note 17 (Segment Information) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and is incorporated into this Item 7 by reference. The statements of management’s expectations and goals concerning the Company’s future operations and performance that are set forth in the following Management Overview and in other sections of this Item 7 are forward-looking statements, and readers are cautioned that these forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that is expressed or implied by any forward-looking statement. This Item 7, as well as the discussions in Item 1 (“Business”) entitled “Forward-Looking Statements and Associated Risks” and in Item 1A (“Risk Factors”) (which discussions are incorporated in this Item 7 by reference) list some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any such forward-looking statements. Any statements of management’s expectations and goals concerning the Company’s future operations and performance, and future financial condition, liquidity and capital resources that are set forth in the following Management Overview and in other sections of this Item 7 are forward-looking statements, and readers are cautioned that these forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that is expressed or implied by any forward-looking statement. This Item 7, as well as the discussions in Item 1 (“Business”) entitled “Forward-Looking Statements and Associated Risks” and in Item 1A (“Risk Factors”) (which discussions are incorporated in this Item 7 by reference) list some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any such forward-looking statements. MANAGEMENT OVERVIEW Business Developments On February 1, 2025, German American Bancorp completed its previously announced acquisition of Heartland BancCorp (“Heartland”) through the merger of Heartland with and into the Bancorp. Immediately following completion of the Heartland holding company merger, Heartland’s subsidiary bank, Heartland Bank, was merged with and into the Bancorp’s subsidiary bank, German American Bank. Heartland, headquartered in Whitehall, Ohio, operated 20 retail banking offices located in Columbus, Ohio and Greater Cincinnati. As of December 31, 2024, Heartland had total assets of approximately $1.97 billion (unaudited), total loans of approximately $1.56 billion (unaudited), and total deposits of approximately $1.75 billion (unaudited). German American Bancorp issued approximately 7.74 million shares of its common stock, and paid approximately $23.1 million in cash, in exchange for all of the issued and outstanding shares of common stock of Heartland and in cancellation of all options to acquire Heartland common stock outstanding as of the effective time of the merger. For further information regarding this merger and acquisition transaction, see Note 21 (Subsequent Events) in the Notes to the 29 Consolidated Financial Statements included in Item 8 of this Report, which Note 21 is incorporated into this Item 1 by reference. During June and July 2024, the Company undertook a partial restructuring of its securities portfolio by selling available-for-sale securities totaling approximately $375.3 million in book value, at an after-tax loss of approximately $27.2 million. The tax-equivalent yield on the bonds sold was approximately 3.12% with a duration of approximately 7 years. The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024. Effective June 1, 2024, German American Insurance, Inc. (“GAI”), a wholly-owned subsidiary of the Bank, sold substantially all of its assets to The Hilb Group of Indiana, LLC, a Delaware limited liability company (“Hilb”), for a purchase price of $40.0 million in cash. As part of the transaction, the Bank, as the parent of GAI, may receive payments for the referral of customers to Hilb, and the Company will refrain from conducting certain insurance activities, in each case, for a period of five (5) years following closing. Prior to the sale, GAI was a full-service agency offering personal and commercial insurance products. On January 1, 2022, German American Bancorp completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc. (“CUB”) through the merger of CUB with and into the Bancorp. Immediately following completion of the CUB holding company merger, CUB’s subsidiary bank, Citizen Union Bank of Shelbyville, Inc., was merged with and into the Bancorp’s subsidiary bank, German American Bank. CUB, headquartered in Shelbyville, Kentucky, operated 15 retail banking offices located in Shelby, Jefferson, Spencer, Bullitt, Oldham, Owen, Gallatin and Hardin counties in Kentucky through Citizens Union Bank of Shelbyville, Inc. As of the closing of the transaction, CUB had total assets of approximately $1.109 billion, total loans of approximately $683.8 million, and total deposits of approximately $930.5 million. German American Bancorp issued approximately 2.9 million shares of its common stock, and paid approximately $50.8 million in cash, in exchange for all of the issued and outstanding shares of common stock of CUB. For further information regarding this merger and acquisition transaction, see Note 19 (Business Combinations, Goodwill and Intangible Assets) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report. Financial Overview Net income for the year ended December 31, 2024 totaled $83,811,000, or $2.83 per share, a decline of $2,077,000, or approximately 3% on a per share basis, from the year ended December 31, 2023 net income of $85,888,000, or $2.91 per share. Net income for the year ended December 31, 2024 included merger-related transaction costs associated with the Company’s merger with Heartland that totaled approximately $1,370,000, $1,082,000 after-tax, or $0.04 per share. Net income for the year end December 31, 2024 was impacted by the sale of substantially all of the assets of GAI during the second quarter of 2024. The all-cash sale price totaled $40.0 million and resulted in an after-tax gain, net of transaction costs, of approximately $27,476,000, or $0.93 per share. GAI net income, excluding the after-tax gain, contributed approximately $767,000, or $0.03 per share, during 2024 compared with net income of $1,639,000, or $0.06 per share, during the full year of 2023. Net income for the year ended December 31, 2024 was also impacted by the securities portfolio restructuring transaction whereby available-for-sale securities totaling approximately $375.3 million in book value were sold. The approximate loss on these securities totaled $34,893,000, $27,189,000 after tax, or $0.92 per share, and was included in earnings for the second quarter of 2024. The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024. Net income for the year ended December 31, 2023 totaled $85,888,000, or $2.91 per share, an increase of $4,063,000, or approximately 5% on a per share basis, from the year ended December 31, 2022 net income of $81,825,000, or $2.78 per share. The increase in net income during 2023, compared with 2022, was primarily attributable to increased non-interest income, a decline in non-interest expenses (which was driven by higher expenses in 2022 as a result of the January 1, 2022 acquisition of CUB), and a lower provision for credit losses. The positive impact of those items was partially offset by a decline in net interest income resulting primarily from a reduced level of earning assets, which was somewhat mitigated by an improved net interest margin. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The financial condition and results of operations for the Company presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this Report, are, to a large degree, dependent upon the Company’s accounting policies. The selection of and application of these 30 policies involve estimates, judgments, and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for credit losses, the valuation of securities available for sale, income tax expense, and the valuation of goodwill and other intangible assets. ALLOWANCE FOR CREDIT LOSSES The Company maintains an allowance for credit losses to cover the estimated expected credit losses over the expected contractual life of the loan portfolio. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. A provision for credit losses is charged to operations based on management’s periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control. The Company has an established process to determine the adequacy of the allowance for credit losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on individually analyzed loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, reasonable and supportable forecasts and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover expected credit losses over the expected life of the loan portfolio. Commercial and agricultural loans are subject to a standardized grading process administered by an internal loan review function. The need for specific reserves is considered for credits when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or (d) other reasons where the ultimate collectability of the loan is in question, or the loan characteristics require special monitoring. Specific reserves on individually analyzed loans are determined by comparing the loan balance to the present value of expected cash flows or expected collateral proceeds. Allocations are also applied to categories of loans not individually analyzed but for which the rate of loss is expected to be greater than other similar type loans, including non-performing consumer or residential real estate loans. Such allocations are based on past loss experience, reasonable and supportable forecasts and information about specific borrower situations and estimated collateral values. General allocations are made for commercial and agricultural loans that are graded as substandard and special mention, but are not individually analyzed for specific reserves as well as other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on historical averages for loan losses for these portfolios along with reasonable and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and portfolio trends. Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio. Internal factors include evaluating changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; and changes in experience, ability and depth of lending management and staff. The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of the loan portfolio. Determining the appropriateness and adequacy of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio may result in significant changes in the allowance for credit losses in future periods. The Company uses a number of economic variables in its scenarios to estimate the allowance for credit losses, with the most significant drivers being unemployment rate forecast, gross domestic product and agricultural producer price index as well as qualitative adjustments. Historical loss rates from periods where the average unemployment rate, gross domestic product and agricultural producer pricing index matches the forecast range are considered when calculating the forecast period loss rate. Based on sensitivity analysis of all portfolios, a 0.050% change (slight improvement or decline on the Company’s scale) in all ten qualitative risk factors would have a $1,900,000 impact on the reserve allocation. The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgements or assumptions of qualitative loss 31 factors that were utilized at December 31, 2024 in estimation of the allowance for credit losses on loans recognized on the Consolidated Balance Sheets. SECURITIES VALUATION Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, the Company assesses whether we intend to sell, or it is more likely than not that we 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 available-for sale debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale debt securities was needed at December 31, 2024. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. As of December 31, 2024, gross unrealized gains on the securities available-for-sale portfolio totaled approximately $413,000 and gross unrealized losses totaled approximately $279,166,000. The net amount of these two items, net of applicable taxes, is included in other comprehensive income (loss). Equity securities that do not have readily determinable fair values are carried at cost, less impairment with observable price changes being recognized in earnings. INCOME TAX EXPENSE Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations presumed to occur. A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carry-back and carry-forward periods, including consideration of available tax planning strategies. Tax-related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet. No impairment to Goodwill was indicated based on year-end testing. Goodwill decreased $1,332,000 in 2024. This decrease was attributable to sale of substantially all of the assets of German American Insurance, Inc. For more information regarding goodwill and intangible assets, see Note 19 (Business Combinations, Goodwill and Intangible Assets) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Other intangible assets consist of core deposit and acquired customer relationship intangible assets. They are initially measured at fair value and then are amortized over their estimated useful lives, which range from 6 to 10 years. 32 RESULTS OF OPERATIONS NET INCOME Net income for the year ended December 31, 2024 totaled $83,811,000, or $2.83 per share, a decline of $2,077,000, or approximately 3% on a per share basis, from the year ended December 31, 2023 net income of $85,888,000, or $2.91 per share. Net income for the year ended December 31, 2024 included merger-related transaction costs associated with the Company’s merger with Heartland that totaled approximately $1,370,000, $1,082,000 after-tax, or $0.04 per share. Net income for the year end December 31, 2024 was impacted by the sale of substantially all of the assets of GAI during the second quarter of 2024. The all-cash sale price totaled $40.0 million and resulted in an after-tax gain, net of transaction costs, of approximately $27,476,000, or $0.93 per share. GAI net income, excluding the after-tax gain, contributed approximately $767,000, or $0.03 per share, during 2024 compared with net income of $1,639,000, or $0.06 per share, during the full year of 2023. Net income for the year ended December 31, 2024 was also impacted by the securities portfolio restructuring transaction whereby available-for-sale securities totaling approximately $375.3 million in book value were sold. The approximate loss on these securities totaled $34,893,000, $27,189,000 after tax, or $0.92 per share, and was included in earnings for the second quarter of 2024. The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024. Net income for the year ended December 31, 2023 totaled $85,888,000, or $2.91 per share, an increase of $4,063,000, or approximately 5% on a per share basis, from the year ended December 31, 2022 net income of $81,825,000, or $2.78 per share. The increase in net income during 2023, compared with 2022, was primarily attributable to increased non-interest income, a decline in non-interest expenses (which was driven by higher expenses in 2022 as a result of the January 1, 2022 acquisition of CUB), and a lower provision for credit losses. The positive impact of those items was partially offset by a decline in net interest income resulting primarily from a reduced level of earning assets, which was somewhat mitigated by an improved net interest margin. NET INTEREST INCOME Net interest income is the Company’s single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and borrowed funds. Several factors contribute to the determination of net interest income and net interest margin, including the volume and mix of earning assets, interest rates, and income taxes. Many factors affecting net interest income are subject to control by management policies and actions. Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws. During the year ended December 31, 2024, net interest income, on a non tax-equivalent basis, totaled $190,591,000, which was relatively stable compared to the year ended December 31, 2023 net interest income of $190,433,000. During the year ended December 31, 2023, net interest income, on a non tax-equivalent basis, totaled $190,433,000, a decline of $10,151,000, or 5%, compared to the year ended December 31, 2022 net interest income of $200,584,000. The decline in net interest income during 2023 compared with 2022 was primarily attributable to a decline in average earning assets, driven by a reduced level of deposits which was somewhat offset by an improved net interest margin resulting from the rise in market interest rates. The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets. The net interest margin for the year ended December 31, 2024 was 3.43%, compared to 3.58% in 2023 and 3.45% in 2022. The decline in the net interest margin in 2024 compared with 2023 was largely driven by an increased cost of funds and a lower level of accretion of loan discounts on acquired loans. The cost of funds increased 56 basis points year over year. The improvement in the Company’s net interest margin during 2023 compared to 2022 of 13 basis points was primarily the result of a shift in the earning assets from the securities portfolio to higher yielding loans, which was somewhat reduced by the increasing cost of deposits as a result of the higher market interest rates. The Company’s net interest margin for all periods presented was impacted by the accretion of discounts on acquired loans. Accretion of discounts on acquired loans contributed approximately 3 basis point to the net interest margin in 2024, 5 basis 33 points in 2023 and 7 basis points during 2022. Accretion of discounts on acquired loans totaled $1,507,000 during 2024, $2,814,000 during 2023, and $4,341,000 during 2022. The following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years. For tax-equivalent adjustments, an effective tax rate of 21% was used for all periods presented (1) . Average Balance Sheet (Tax-equivalent basis, dollars in thousands) Twelve Months Ended December 31, 2024 Twelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022 Principal Balance Income / Expense Yield / Rate Principal Balance Income / Expense Yield / Rate Principal Balance Income / Expense Yield / Rate ASSETS Federal Funds Sold and Other Short-term Investments $ 151,907 $ 7,697 5.07 % $ 39,452 $ 1,677 4.25 % $ 458,230 $ 5,765 1.26 % Securities: Taxable 947,884 26,586 2.80 % 890,841 20,614 2.31 % 1,015,958 20,453 2.01 % Non-taxable 586,549 20,910 3.56 % 738,769 27,656 3.74 % 844,772 29,810 3.53 % Total Loans and Leases ⁽²⁾ 4,035,670 241,344 5.98 % 3,835,157 213,195 5.56 % 3,680,708 169,593 4.61 % TOTAL INTEREST EARNING ASSETS 5,722,010 296,537 5.19 % 5,504,219 263,142 4.78 % 5,999,668 225,621 3.76 % Other Assets 556,022 578,399 559,949 Less: Allowance for Credit Losses (44,279) (44,744) (45,587) TOTAL ASSETS $ 6,233,753 $ 6,037,874 $ 6,514,030 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing Demand Deposits $ 1,720,823 $ 30,957 1.80 % $ 1,826,232 $ 28,378 1.55 % $ 2,013,969 $ 8,583 0.43 % Savings Deposits and Money Market Accounts 1,291,250 23,346 1.81 % 1,229,019 12,106 0.99 % 1,473,772 2,879 0.20 % Time Deposits 872,429 36,319 4.16 % 588,142 16,432 2.79 % 474,409 2,052 0.43 % FHLB Advances and Other Borrowings 196,480 9,830 5.00 % 210,837 9,307 4.41 % 159,029 4,828 3.04 % TOTAL INTEREST-BEARING LIABILITIES 4,080,982 100,452 2.46 % 3,854,230 66,223 1.72 % 4,121,179 18,342 0.45 % Demand Deposit Accounts 1,420,412 1,553,082 1,738,349 Other Liabilities 46,497 46,456 44,436 TOTAL LIABILITIES 5,547,891 5,453,768 5,903,964 Shareholders’ Equity 685,862 584,106 610,066 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 6,233,753 $ 6,037,874 $ 6,514,030 COST OF FUNDS 1.76 % 1.20 % 0.31 % NET INTEREST INCOME $ 196,085 $ 196,919 $ 207,279 NET INTEREST MARGIN 3.43 % 3.58 % 3.45 % (1) Effective tax rates were determined as though interest earned on the Company’s investments in municipal bonds and loans was fully taxable. (2) Loans held-for-sale and non-accruing loans have been included in average loans. Interest income on loans includes loan fees of $3,325, $4,316, and $6,972 for 2024, 2023 and 2022, respectively. 34 The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates: Net Interest Income – Rate / Volume Analysis (Tax-Equivalent basis, dollars in thousands) 2024 compared to 2023 Increase / (Decrease) Due to ⁽¹⁾ 2023 compared to 2022 Increase / (Decrease) Due to ⁽¹⁾ Volume Rate Net Volume Rate Net Interest Income: Federal Funds Sold and Other Short-term Investments $ 5,641 $ 379 $ 6,020 $ (8,748) $ 4,660 $ (4,088) Taxable Securities 1,384 4,588 5,972 (2,689) 2,849 160 Non-taxable Securities (5,478) (1,268) (6,746) (3,894) 1,741 (2,153) Loans and Leases 11,491 16,658 28,149 7,365 36,237 43,602 Total Interest Income 13,038 20,357 33,395 (7,966) 45,487 37,521 Interest Expense: Savings and Interest-bearing Demand (580) 14,399 13,819 (1,590) 30,612 29,022 Time Deposits 9,875 10,012 19,887 605 13,775 14,380 FHLB Advances and Other Borrowings (662) 1,185 523 1,871 2,608 4,479 Total Interest Expense 8,633 25,596 34,229 886 46,995 47,881 Net Interest Income $ 4,405 $ (5,239) $ (834) $ (8,852) $ (1,508) $ (10,360) (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. See the Company’s Average Balance Sheet above and the discussions under the headings “USES OF FUNDS,” “SOURCES OF FUNDS,” and “RISK MANAGEMENT – Liquidity and Interest Rate Risk Management” for further information on the Company’s net interest income, net interest margin, and interest rate sensitivity position. PROVISION FOR CREDIT LOSSES The Company provides for credit losses through regular provisions to the allowance for credit losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance. During 2024, the Company recorded a provision for credit losses of $2,775,000 compared with $2,550,000 during 2023 and $6,350,000 during 2022. During 2024, the provision for credit losses represented approximately 7 basis points of average loans. The Company realized net charge-offs of $2,104,000 or 5 basis points of average loans during 2024. During 2023, the provision for credit losses represented approximately 7 basis points of average loans. The lower provision recorded during 2023, as compared to 2022, was largely related to the resolution during the fourth quarter of 2023 of a single commercial borrowing relationship with minimal loss recognition for which the Company had established a significant reserve in previous periods. The Company realized net charge-offs of $2,953,000 or 8 basis points of average loans during 2023. During 2022, the provision for credit losses represented approximately 17 basis points of average loans. The provision for credit losses in 2022 included $6,300,000 for the Day 1 CECL addition to the allocation for credit loss related to the CUB acquisition for the non-PCD loans. The Company realized net charge-offs of $2,316,000 or 6 basis points of average loans during 2022. The provision for credit losses made during 2024 was made at a level deemed necessary by management to absorb expected losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors. Refer also to the sections entitled “CRITICAL ACCOUNTING POLICIES AND 35 ESTIMATES” and “RISK MANAGEMENT - Lending and Loan Administration” for further discussion of the provision and allowance for credit losses. NON-INTEREST INCOME During the year ended December 31, 2024, non-interest income increased $2,399,000, or 4%, compared with the year ended December 31, 2023. The year ended December 31, 2024 non-interest income was positively impacted by the net proceeds of the sale of the GAI assets that totaled approximately $38,323,000 and was negatively impacted by $34,893,000 related to the net loss recognized on the securities restructuring transaction. During the year ended December 31, 2023, non-interest income increased $1,128,000 or 2% from the year ended December 31, 2022. Non-interest Income (dollars in thousands) Years Ended December 31, % Change From Prior Year 2024 2023 2022 2023 2022 Wealth Management Fees $ 14,416 $ 11,711 $ 10,076 23 % 16 % Service Charges on Deposit Accounts 12,669 11,538 11,457 10 1 Insurance Revenues 4,384 9,596 10,020 (54) (4) Company Owned Life Insurance 2,058 1,731 2,264 19 (24) Interchange Fee Income 17,125 17,452 15,820 (2) 10 Sale of Assets of German American Insurance 38,323 — — n/m (1) n/m (1) Other Operating Income 5,419 5,830 5,116 (7) 14 Subtotal 94,394 57,858 54,753 63 6 Net Gains on Sales of Loans 3,054 2,363 3,818 29 (38) Net Gains on Securities (34,788) 40 562 (87,070) (93) TOTAL NON-INTEREST INCOME $ 62,660 $ 60,261 $ 59,133 4 2 (1) n/m = not meaningful Wealth management fees increased $2,705,000, or 23%, during 2024 compared with 2023 and increased $1,635,000, or 16%, during 2023 compared with 2022. The increase in both periods was largely attributable to continued increases in assets under management due to healthy capital markets and strong new business results, as compared to the year ended December 31, 2023. Wealth management fees increased $1,635,000, or 16%, during 2023 compared with 2022. Insurance revenues declined $5,212,000, or 54%, during 2024 compared with 2023, as a result of the sale of the assets of GAI effective June 1, 2024, with only five months of revenue being recognized by the Company during 2024. The year ended December 31, 2024 included $38,323,000 in net proceeds for the sale of the GAI assets. Insurance revenues declined $424,000, or 4%, during 2023 compared with 2022, which was primarily attributable to decreased contingency revenue. Contingency revenue during 2023 totaled $955,000 compared with $1,641,000 during 2022. Contingency revenue is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency. Net gains on sales of loans increased $691,000, or 29%, during the year ended December 31, 2024 compared with the year ended December 31, 2023. The increase during 2024 compared with 2023 was related to both a higher volume of loans sold and improved pricing levels. Net gains on sales of loans declined $1,455,000, or 38%, during the year ended December 31, 2023 compared with 2022. The decline during 2023 compared with 2022 was related to both a lower volume of loans sold and lower pricing levels. Loan sales totaled $130.7 million during 2024, $109.0 million during 2023, and $168.1 million during 2022. The net loss on securities during the year ended December 31, 2024 totaled $34,788,000 and was primarily related to the net loss recognized on the securities restructuring transaction previously discussed. The approximate loss on the transaction totaled $34,893,000, $27,189,000 after tax, or $0.92, per share and was included in earnings for the second quarter of 2024. The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024. The Company realized $40,000 in gains on sales of securities during 2023 compared with $562,000 during 2022. The net gains on sales of securities in 2023 and 2022 were completed as part of adjustments in allocations within the normal course of business of securities portfolio management. 36 NON-INTEREST EXPENSE During the year ended December 31, 2024, non-interest expense totaled $146,377,000, an increase of $1,880,000, or 1%, compared to the year ended December 31, 2023. The increase in non-interest expenses during the year ended 2024 was in large part the result of professional fees related to the previously mentioned GAI asset sale and the merger transaction with Heartland, which totaled approximately $2,759,000. During the year ended December 31, 2023, non-interest expense totaled $144,497,000, a decrease of $9,694,000, or 6%, compared with the year ended December 31, 2022. The 2022 non-interest expenses included approximately $12,323,000 of non-recurring acquisition-related expenses for the acquisition of CUB. Non-interest Expense (dollars in thousands) Years Ended December 31, % Change From Prior Year 2024 2023 2022 2023 2022 Salaries and Employee Benefits $ 82,257 $ 83,244 $ 84,145 (1) % (1) % Occupancy, Furniture and Equipment Expense 14,944 14,467 14,921 3 (3) FDIC Premiums 2,908 2,829 1,860 3 52 Data Processing Fees 12,243 11,112 15,406 10 (28) Professional Fees 8,147 5,575 6,295 46 (11) Advertising and Promotion 3,939 4,857 4,416 (19) 10 Intangible Amortization 2,032 2,840 3,711 (28) (23) Other Operating Expenses 19,907 19,573 23,437 2 (16) TOTAL NON-INTEREST EXPENSE $ 146,377 $ 144,497 $ 154,191 1 (6) Salaries and benefits declined $987,000, or 1%, during the year ended December 31, 2024 compared with the year ended December 31, 2023. The decline in salaries and benefits during 2024 compared with 2023 was largely related to the GAI asset sale. Salaries and benefits declined $901,000, or 1%, during the year ended December 31, 2023 compared with 2022. The decline in salaries and benefits during 2023 compared with 2022 was largely related to approximately $1,480,000 of acquisition-related salary and benefit costs of a non-recurring nature in 2022 related to the CUB acquisition. FDIC Premiums increased $79,000, or 3%, during the year ended December 31, 2024 compared with 2023. FDIC premiums increased $969,000, or 52%, during the year ended December 31, 2023 compared with 2022. The increase during 2023 compared with 2022 was primarily related to an industry-wide 2 basis point increase in the base FDIC premium assessment effective January 1, 2023. Data processing fees increased $1,131,000, or 10%, during the year ended December 31, 2024 compared with the year ended December 31, 2023. The increase during 2024 compared with 2023 was largely driven by costs associated with enhancements to the Company’s digital banking and data systems. Data processing fees declined $4,294,000, or 28%, during the year ended December 31, 2023 compared with the year ended December 31, 2022. The decline during 2023 compared with 2022 was largely driven by acquisition-related costs associated with the CUB transaction, which totaled approximately $4,982,000 during 2022. Professional fees increased $2,572,000, or 46%, during the year ended December 31, 2024 compared with 2023. The increase during 2024 compared with 2023 was attributable to the professional fees associated with the sale of assets of GAI and the merger with Heartland, which totaled $2,759,000 for the two transactions. Professional fees declined $720,000, or 11%, during the year ended December 31, 2023 compared with the year ended December 31, 2022. The decline during 2023 compared with 2022 was primarily due to merger-related professional fees associated with the CUB acquisition that totaled approximately $1,802,000 in 2022, which were partially mitigated by increased legal and other professional fees during 2023. Advertising and promotion expense declined $918,000, or 19%, during 2024 compared with 2023 as the Company employed a more targeted focus for sponsorships and contributions during 2024. Advertising and promotion expense increased $441,000, or 10%, during 2023 as compared with 2022. Intangible amortization expense consists primarily of amortization associated with the core deposit intangible of acquired deposit portfolios. Intangible amortization decreased $808,000, or 28%, during 2024 compared with 2023 and decreased $871,000, or 23%, during 2023 compared with 2022. The decreases in both years were largely related to the accelerated method for which the intangible assets are amortized. Other operating expenses increased $334,000, or 2%, during the year ended December 31, 2024 compared to the year ended December 31, 2023. Other operating expenses declined $3,864,000, or 16%, during the year ended December 31, 2023 compared to the year ended December 31, 2022. The decline during 2023 compared with 2022 was attributable to acquisition- 37 related costs that totaled approximately $3,862,000 in 2022. The acquisition-related costs were primarily vendor contract termination costs. PROVISION FOR INCOME TAXES The Company records a provision for current income taxes payable, along with a provision for deferred taxes payable in the future. Deferred taxes arise from temporary differences, which are items recorded for financial statement purposes in a different period than for income tax returns. The Company’s effective tax rate was 19.5%, 17.1%, and 17.5%, respectively, in 2024, 2023, and 2022. The increase in effective tax rate for the year ended December 31, 2024 as compared to the same period of the prior year was primarily attributable to the previously mentioned sale of GAI assets and the securities restructuring transaction. The effective tax rate in all periods presented was lower than the blended statutory rate resulting primarily from the Company’s tax-exempt investment income on securities, loans and company-owned life insurance, income tax credits generated from affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax. See Note 11 to the Company’s consolidated financial statements included in Item 8 of this Report for additional details relative to the Company’s income tax provision. CAPITAL RESOURCES As of December 31, 2024, shareholders’ equity increased by $51.5 million to $715.1 million compared with $663.6 million at year-end 2023. The increase in shareholders’ equity was primarily attributable to the increase in retained earnings of $52.0 million due to net income of $83.8 million during 2024, which was partially offset by the payment of $31.8 million in shareholder dividends. Shareholders’ equity represented 11.4% of total assets at December 31, 2024 and 10.8% of total assets at December 31, 2023. Shareholders’ equity included $183.0 million of goodwill and other intangible assets at December 31, 2024 compared to $186.7 million of goodwill and other intangible assets at December 31, 2023. The Company’s Board of Directors previously approved a plan to repurchase up to 1.0 million shares of the Company’s outstanding common stock. On a share basis, the amount of common stock subject to the new repurchase plan represented approximately 3% of the Company’s outstanding shares on the date it was approved. The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements. The Company has not repurchased any shares of common stock under the repurchase plan. The Inflation Reduction Act of 2022 (the “IRA”), among other things, imposes a 1% excise tax on the fair market value of stock repurchased by publicly traded U.S. corporations, like the Company. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures. The current risk-based capital rules, as adopted by federal banking regulators, are based upon guidelines developed by the Basel Committee on Banking Supervision and reflect various requirements of the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules require banking organizations to, among other things, maintain a minimum ratio of Total Capital to risk-weighted assets, a minimum ratio of Tier 1 Capital to risk-weighted assets, a minimum ratio of “Common Equity Tier 1 Capital” to risk-weighted assets, and a minimum leverage ratio (calculated as the ratio of Tier 1 Capital to adjusted average consolidated assets). In addition, under the Basel III Rules, in order to avoid limitations on capital distributions, including dividend payments, the Company is required to maintain a 2.5% capital conservation buffer above the adequately capitalized regulatory capital ratios. At December 31, 2024, the capital levels for the Company and its subsidiary bank remained well in excess of the minimum amounts needed for capital adequacy purposes and the Bank’s capital levels met the necessary requirements to be considered well-capitalized. 38 The table below presents the Company’s consolidated and the subsidiary bank’s capital ratios under regulatory guidelines: 12/31/2024 Ratio 12/31/2023 Ratio Minimum for Capital Adequacy Purposes ⁽¹⁾ Well-Capitalized Guidelines Total Capital (to Risk Weighted Assets) Consolidated 17.15 % 16.50 % 8.00 % N/A Bank 15.02 14.76 8.00 10.00 % Tier 1 (Core) Capital (to Risk Weighted Assets) Consolidated 15.72 % 14.97 % 6.00 % N/A Bank 14.23 14.04 6.00 8.00 % Common Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets) Consolidated 15.02 % 14.26 % 4.50 % N/A Bank 14.23 14.04 4.50 6.50 % Tier 1 Capital (to Average Assets) Consolidated 12.28 % 11.75 % 4.00 % N/A Bank 11.12 11.03 4.00 5.00 % (1) Excludes capital conservation buffer. As discussed in Note 1 (Summary of Significant Accounting Policies) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, the Company adopted the CECL accounting standard under GAAP effective January 1, 2020. The regulatory capital rules applicable to the Company provided an optional three-year phase-in period for the day-one adverse regulatory capital effects of adopting CECL. In addition, as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), banking organizations were further permitted to mitigate the estimated cumulative regulatory capital effects of CECL for up to an additional two years. As a result, on January 1, 2022, the Company began the required three-year phase-in by reflecting 25% of the previously deferred estimated capital impact of CECL in its regulatory capital. An additional 25% was phased in on each of January 1, 2023, January 1, 2024, and January 1, 2025. As of January 1, 2025, the adverse cumulative effects of adopting CECL have been fully phased into our regulatory capital. USES OF FUNDS LOANS December 31, 2024 total loans increased $155.4 million, or 4%, compared with December 31, 2023. The increase in total loans at December 31, 2024 compared with year-end 2023 was broad-based across most segments of the portfolio. Commercial and industrial loans increased $9.5 million, or 1%, commercial real estate loans grew $103.0 million, or 5%, agricultural loans increased $7.2 million, or 2%, and retail loans increased $35.6 million, or 18%. December 31, 2023 total loans increased $189.3 million, or 5%, compared with December 31, 2022. The increase in total loans at December 31, 2023 compared with year-end 2022 was broad-based across most segments of the portfolio. Commercial real estate loans increased $155.0 million, or 8%, agricultural loans grew $6.4 million, or 2%, and retail loans increased $42.9 million, or 6%. Partially offsetting these increases was a modest decline in commercial and industrial loans of $15.0 million, or 2%, as line of credit utilization remains muted. The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. As reflected in the table below, over the past several years (including 2024), the composition of the loan portfolio has remained relatively stable and diversified. 39 The portfolio is most heavily concentrated in commercial real estate loans at 54% of the portfolio in 2024, followed by commercial and industrial loans at 16% of the portfolio, and agricultural loans at 10% of the portfolio. Loan Portfolio December 31, (dollars in thousands) 2024 2023 2022 2021 2020 Commercial and Industrial Loans and Leases $ 671,038 $ 661,529 $ 676,502 $ 548,350 $ 694,437 Commercial Real Estate Loans 2,224,872 2,121,835 1,966,884 1,530,677 1,467,397 Agricultural Loans 431,037 423,803 417,413 358,150 376,186 Home Equity and Consumer Loans 448,872 407,889 377,164 307,184 297,702 Residential Mortgage Loans 357,448 362,844 350,682 263,565 256,276 Total Loans 4,133,267 3,977,900 3,788,645 3,007,926 3,091,998 Less: Unearned Income (8,365) (6,818) (3,711) (3,662) (3,926) Subtotal 4,124,902 3,971,082 3,784,934 3,004,264 3,088,072 Less: Allowance for Credit Losses (44,436) (43,765) (44,168) (37,017) (46,859) Loans, Net $ 4,080,466 $ 3,927,317 $ 3,740,766 $ 2,967,247 $ 3,041,213 Net PPP Loans (Included in Commercial and Industrial Loans above) $ — $ — $ — $ 19,450 $ 181,984 Ratio of Loans to Total Loans Commercial and Industrial Loans and Leases 16 % 17 % 18 % 18 % 23 % Commercial Real Estate Loans 54 % 53 % 52 % 51 % 47 % Agricultural Loans 10 % 11 % 11 % 12 % 12 % Home Equity and Consumer Loans 11 % 10 % 10 % 10 % 10 % Residential Mortgage Loans 9 % 9 % 9 % 9 % 8 % Total Loans 100 % 100 % 100 % 100 % 100 % The Company’s policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in southern Indiana and central and western Kentucky. Commercial extensions of credit outside this market area are generally concentrated in real estate loans within a reasonable proximity of the Company’s primary market and are granted on a selective basis. The Company’s commercial real estate portfolio is well-diversified over numerous property types. The table below provides property type detail for the most significant segments of the Company’s commercial real estate loan portfolio. December 31, 2024 December 31, 2023 % of Commercial Real Estate Portfolio % of Total Loan Portfolio % of Commercial Real Estate Portfolio % of Total Loan Portfolio Multi-Family Dwellings 20 % 11 % 21 % 11 % Retail Space 15 % 8 % 14 % 7 % 1-4 Family Investment Properties 11 % 6 % 12 % 7 % Industrial, Manufacturing, Warehousing Properties 10 % 5 % 10 % 5 % Office Real Estate 9 % 5 % 8 % 4 % Healthcare Facilities 7 % 4 % 7 % 4 % Land Development and Construction 7 % 4 % 6 % 3 % Lodging 6 % 3 % 6 % 3 % The Company’s commercial real estate (“CRE”) loan portfolio is further diversified by occupancy type, with approximately 77% of the CRE portfolio being non-owner occupied at December 31, 2024 (which is 42% of the Company’s overall loan portfolio), and 23% of the CRE portfolio being owner occupied (which is 12% of the Company’s total loan portfolio). At December 31, 2023, the Company’s commercial real estate loan portfolio was diversified by occupancy type, with approximately 77% of the CRE portfolio being non-owner occupied (which was 41% of the Company’s overall loan portfolio), and 23% of the CRE portfolio being owner occupied (which was 12% of the Company’s total loan portfolio). Commercial real estate loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Like much of the Bank’s lending activities, the underwriting standards for commercial real estate are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s 40 management possesses sound ethics and solid business acumen, our management examines market conditions and current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. As discussed above, the properties securing our commercial real estate portfolio are diverse in terms of property type, occupancy type, and geographic location. This diversity helps reduce the Bank’s exposure to adverse economic events that affect any single market or industry. Management will continue to monitor and evaluate commercial real estate loans based on collateral, geography and risk grade criteria. The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences and consumer loans) outstanding as of December 31, 2024, which, based on remaining scheduled repayments of principal, are due in the periods indicated (dollars in thousands). Within One Year One to Five Years After Five Years Total Commercial and Agricultural $ 882,308 $ 1,750,745 $ 708,605 $ 3,341,658 Interest Sensitivity Fixed Rate Variable Rate Loans Maturing After One Year $ 892,218 $ 1,567,132 INVESTMENTS The investment portfolio is a principal source for funding the Company’s loan growth and other liquidity needs of its subsidiaries. The Company’s securities portfolio primarily consists of money market securities, collateralized and uncollateralized federal agency securities, municipal obligations of state and political subdivisions, and mortgage-backed securities and collateralized mortgage obligations (MBS/CMO - Residential) issued by U.S. government agencies. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. The composition of the year-end balances in the investment portfolio is presented in Note 3 (Securities) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and in the table below: Investment Portfolio, at Amortized Cost December 31, (dollars in thousands) 2024 % 2023 % 2022 % Federal Funds Sold and Other Short-term Investments $ 119,543 6 % $ 36,525 2 % $ 41,905 2 % U.S. Treasury 110,813 6 — — 64,097 3 Obligations of State and Political Subdivisions 587,963 31 889,940 47 939,193 44 MBS/CMO 817,553 43 761,025 40 846,519 40 US Gov’t Sponsored Entities & Agencies 279,711 14 220,295 11 245,017 11 Equity Securities 353 n/m ⁽¹⁾ 353 n/m ⁽¹⁾ 353 n/m ⁽¹⁾ Total Securities Portfolio $ 1,915,936 100 % $ 1,908,138 100 % $ 2,137,084 100 % (1) n/m = not meaningful The amortized cost of investment securities, including federal funds sold and short-term investments, increased $7.8 million, or less than 1%, at year-end 2024 compared to year-end 2023 and decreased $229.0 million, or 11%, at year-end 2023. As previously discussed, during June and July 2024, the Company undertook a partial restructuring of its securities portfolio by selling available-for-sale securities totaling approximately $375.3 million in book value. The tax-equivalent yield on the bonds sold was approximately 3.12% with a duration of approximately 7 years. The proceeds from the securities sold were reinvested in the securities portfolio by the end of the third quarter of 2024. The decline in the available for sale portfolio during 2023 compared with 2022 was primarily the result of the Company’s utilization of cash flows of approximately $171 million from the securities portfolio to fund loan growth and overall modest deposit declines. The decline in 2023 was broad-based across all areas of the investment portfolio. Mortgage related securities declined $85.5 million, or 10%, obligations of state and political subdivisions declined $49.3 million, or 5%, and US treasuries declined $64 million, or 100%, as compared to 2022. As mentioned above, the Company undertook a partial restructuring of its securities portfolio in mid-2024, with the proceeds from the sales of securities being reinvested back into the securities portfolio. After the restructuring, the investment portfolio continues to be relatively balanced with agency issued mortgage related securities and collateralized and uncollateralized federal agency securities totaling $1.097 billion, or 57% of the total securities portfolio at December 31, 2024. The Company’s 41 level of obligations of state and political subdivisions decreased to $588.0 million, or 31% of the portfolio at December 31, 2024. Investment Securities, at Carrying Value (dollars in thousands) December 31, Securities Available-for-Sale 2024 2023 2022 U.S. Treasury $ 110,864 $ — $ 64,119 Obligations of State and Political Subdivisions 463,169 768,875 777,852 MBS/CMO 702,179 645,040 714,681 US Gov’t Sponsored Entities & Agencies 241,075 182,917 205,017 Total Securities $ 1,517,287 $ 1,596,832 $ 1,761,669 In 2023, the Company utilized cash flows from the available for sale portfolio to fund loan growth and an overall modest decline in deposits. This cash flow utilization drove the decline in carrying value in the available for sale portfolio from 2023 to 2022, which was slightly offset by the fair value adjustments in the portfolio due to the change in interest rates. The Company’s $1.517 billion available-for-sale investment portfolio provides an additional funding source for the liquidity needs of the Company’s subsidiaries and for asset/liability management requirements. Although management has the ability to sell these securities if the need arises, their designation as available-for-sale should not necessarily be interpreted as an indication that management anticipates such sales. The amortized cost of available-for-sale debt securities at December 31, 2024 is shown in the following table by contractual maturity. MBS/CMO - Residential securities are based on estimated average lives. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations. Maturities and Average Yields of Securities at December 31, 2024 (dollars in thousands) Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury $ 110,813 4.47 % $ — — % $ — — % $ — — % Obligations of State and Political Subdivisions 1,022 4.73 % 8,987 4.22 % 45,329 2.77 % 532,625 2.79 % MBS/CMO 18 1.10 % 1,365 2.23 % 15,766 1.83 % 800,404 2.66 % US Gov’t Sponsored Entities & Agencies 443 1.96 % 346 2.01 % 179 2.10 % 278,743 2.89 % Total Securities $ 112,296 4.46 % $ 10,698 3.89 % $ 61,274 2.53 % $ 1,611,772 2.74 % A tax-equivalent adjustment using a tax rate of 21 percent was used in the above table. CONTRACTUAL OBLIGATIONS In addition to the other uses of funds discussed previously, the Company has certain contractual obligations to make cash payments. These contractual obligations primarily consist of borrowings from the Federal Home Loan Bank (“FHLB”), junior subordinated debentures, deposits, repurchase agreements, and lease commitments for certain office facilities. A summary of these payment obligations is set forth below. Contractual and Other Obligations Payments Due In (dollars in thousands) One Year or Less Over One Year Total Deposits without Stated Maturities $ 4,412,474 $ — $ 4,412,474 Time Deposits 846,651 69,950 916,601 Federal Home Loan Bank Advances — 75,000 75,000 Other Borrowings (Subordinated Notes and Debentures) — 75,866 75,866 Federal Funds Purchased — — — Securities Sold under Repurchase Agreements 56,862 — 56,862 Lease Obligations 1,661 6,747 8,408 Total Contractual and Other Obligations $ 5,317,648 $ 227,563 $ 5,545,211 In the normal course of business, the Company makes commitments to extend credit and commitments to sell loans, which are not reflected in its consolidated financial statements. For further information about such commitments, see Note 15 42 (Commitments and Off-balance Sheet Items) in Notes to the Consolidated Financial Statements included in Item 8 of this Report. SOURCES OF FUNDS The Company’s primary source of funding is its base of core customer deposits. Core deposits consist of demand deposits, savings, interest-bearing checking, money market accounts, and certificates of deposit of less than $100,000. Other deposit sources include certificates of deposit of $100,000 or more. The deposit base remains diverse with stable and manageable exposure to uninsured and uncollateralized deposits of approximately 22% of total deposits. Other funding sources include overnight borrowings from other financial institutions and securities sold under agreement to repurchase. The membership of the Company’s affiliate bank in the Federal Home Loan Bank System provides a significant additional source for both long and short-term collateralized borrowings. In addition, the Company, as a separate and distinct corporation from its bank and other subsidiaries, also has the ability to borrow funds from other financial institutions and to raise debt or equity capital from the capital markets and other sources. The following pages contain a discussion of changes in funding sources. The table below illustrates changes between years in the average balances of all funding sources: Funding Sources - Average Balances (dollars in thousands) December 31, % Change From Prior Year 2024 2023 2022 2024 2023 Demand Deposits Non-interest-bearing $ 1,420,412 $ 1,553,082 $ 1,738,349 (9) % (11) % Interest-bearing 1,720,823 1,826,232 2,013,969 (6) (9) Savings Deposits 507,203 572,623 640,653 (11) (11) Money Market Accounts 784,047 656,396 833,119 19 (21) Other Time Deposits 334,958 257,736 262,764 30 (2) Total Core Deposits 4,767,443 4,866,069 5,488,854 (2) (11) Certificates of Deposits of $100,000 or more 537,471 330,406 211,645 63 56 FHLB Advances and Other Borrowings 196,480 210,837 159,029 (7) 33 Total Funding Sources $ 5,501,394 $ 5,407,312 $ 5,859,528 2 (8) Maturities of certificates of deposit of $100,000 or more are summarized as follows: (dollars in thousands) 3 Months Or Less 3 - 6 Months 6 - 12 Months Over 12 Months Total December 31, 2024 $ 201,917 $ 171,838 $ 173,363 $ 42,403 $ 589,521 CORE DEPOSITS The Company’s overall level of average core deposits declined approximately $98.6 million, or 2%, during 2024 compared with 2023. The Company’s overall level of average core deposits declined approximately $622.8 million, or 11%, during 2023 compared with 2022. Competitive deposit pricing in the marketplace as well as customers actively looking for yield opportunities within and outside the banking industry are contributing factors to the decline in total deposits over the course of the past year. Throughout 2023, a meaningful level of the outflow of deposits experienced during the past year was captured within the Company’s wealth management group. The Company’s ability to attract core deposits continues to be influenced by competition and the interest rate environment, as well as the availability of alternative investment products. The Company has continued to see customer movement from both interest bearing and non-interest bearing transactional accounts to time deposits due primarily to a higher interest rate environment. Core deposits continue to represent a significant funding source for the Company’s operations and represented 90% of average total funding sources during 2024 compared with 90% during 2023 and 94% during 2022. Demand, savings, and money market deposits have provided a growing source of funding for the Company in each of the periods reported. Average demand, savings, and money market deposits declined 4% during 2024 and 12% in 2023. Average demand, savings, and money market deposits totaled $4.432 billion or 93% of core deposits (81% of total funding sources) in 2024 compared with $4.608 billion or 95% of core deposits (85% of total funding sources) in 2023 and $5.226 billion or 95% 43 of core deposits (89% of total funding sources) in 2022. Other time deposits consist of certificates of deposits in denominations of less than $100,000. These average deposits increased by 30% in 2024 following a decline of 2% during 2023. Other time deposits comprised 7% of core deposits in all periods presented. OTHER FUNDING SOURCES Certificates of deposits in denominations of $100,000 or more are an additional source of other funding for the Company’s bank subsidiary and are used as both long-term and short-term funding sources. On an average basis, large denomination certificates increased $207.1 million, or 63%, during 2024. This follows an increase of $118.8 million, or 56%, during 2023. Large certificate deposits comprised approximately 10% of average total funding sources in 2024 compared with 6% in 2023 and 4% in 2022. On an end of period basis, certificates of deposits in denominations of $100,000 or more increased $111.6 million, or 23%, during 2024 following an increase of $284.7 million, or 147%, during 2023. As previously discussed, customers seeking higher yield opportunities were a contributing factor to growth in this category of the Company’s funding sources. The Company had no brokered deposits as of December 31, 2024 and 2023. The Company participates in a reciprocal deposit program. Reciprocal Deposits totaled $96.8 million at December 31, 2024 and $77.9 million at December 31, 2023. FHLB advances and other borrowings represent an important source of other funding for the Company. Average borrowed funds decreased $14.4 million, or 7%, during 2024 following an increase of $51.8 million, or 33%, during 2023. Borrowings comprised approximately 4% of average total funding sources during 2024 and 2023 compared with 3% in 2022. The bank subsidiary of the Company also utilizes short-term funding sources from time to time. These sources consist of overnight federal funds purchased from other financial institutions, secured repurchase agreements that generally mature within one day of the transaction date, and secured overnight variable rate borrowings from the FHLB and the Federal Reserve Bank. These borrowings represent an important source of short-term liquidity for the Company’s bank subsidiary. The Company’s bank subsidiary is authorized by its Board to borrow up to $1.25 billion at the FHLB, but availability at December 31, 2024 was limited to approximately $470 million based on the then pledged collateral and outstanding borrowings. In addition, the Company had a borrowing capacity of approximately $595 million at the Federal Reserve Bank as of December 31, 2024, based on the then pledged collateral. The capacity for borrowings from the FHLB and the Federal Reserve Bank could be increased, in each case, by the Company pledging additional available collateral. The Company’s Asset/Liability Committee closely monitors the availability of these sources as part of its overall oversight and management of the bank subsidiary’s liquidity. Long-term debt at the Company’s bank subsidiary is in the form of FHLB advances, which are secured by the pledge of certain investment securities, residential and housing-related mortgage loans, and certain other commercial real estate loans. See Note 8 (FHLB Advances and Other Borrowings) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report for further information regarding borrowed funds. PARENT COMPANY FUNDING SOURCES The parent company is a corporation separate and distinct from its bank and other subsidiaries. For information regarding the financial condition, result of operations, and cash flows of the Company, presented on a parent-company-only basis, see Note 18 (Parent Company Financial Statements) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report. The Company uses funds at the parent company level to pay dividends to its shareholders, to acquire or make other investments in other businesses or their securities or assets, to repurchase its stock from time to time, and for other general corporate purposes. The parent company does not have access to the deposits and certain other sources of funds that are available to its bank subsidiary to support its operations. Instead, the parent company has historically derived most of its revenues from dividends paid to the parent company by its bank subsidiary. The Company’s banking subsidiary is subject to statutory restrictions on its ability to pay dividends to the parent company. See Note 9 (Shareholders’ Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which is incorporated herein by reference. The parent company has, from time-to-time, supplemented the dividends received from its subsidiaries with borrowings. For details related to borrowings, see Note 8 (FHLB Advances and Other Borrowings) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report. 44 At year-end 2024, the Company had available to it a $15 million revolving line of credit facility that will mature on September 24, 2025. Borrowings are available for general working capital purposes. Interest is payable quarterly at a floating rate based upon term SOFR rate plus a margin payable in respect of any principal amounts advanced under the revolving line of credit. There was no outstanding balance as of December 31, 2024. RISK MANAGEMENT The Company is exposed to various types of business risk on an on-going basis. These risks include credit risk, liquidity risk and interest rate risk. Various procedures are employed at the Company’s subsidiary bank to monitor and mitigate risk in the loan and investment portfolios, as well as risks associated with changes in interest rates. Following is a discussion of the Company’s philosophies and procedures to address these risks. LENDING AND LOAN ADMINISTRATION Primary responsibility and accountability for day-to-day lending activities rests with the Company’s subsidiary bank. Loan personnel at the subsidiary bank have the authority to extend credit under guidelines approved by the Bank’s board of directors. The executive loan committee serves as a vehicle for communication and for the pooling of knowledge, judgment and experience of its members. The committee provides valuable input to lending personnel, acts as an approval body, and monitors the overall quality of the Bank’s loan portfolio. The Corporate Credit Risk Management Committee comprised of members of the Company’s and its subsidiary Bank’s executive officers and board of directors, strives to ensure a consistent application of the Company’s lending policies. The Company also maintains a comprehensive risk-grading and loan review program, which includes quarterly reviews of problem loans, delinquencies and charge-offs. The purpose of this program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for credit losses. The Company maintains an allowance for credit losses to cover management’s estimate of all expected credit losses over the expected contractual life of the loan portfolio. Management estimates the required level of allowance for credit losses using past loan loss experience, information about specific borrower situations and estimated collateral values, along with reasonable and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and portfolio trends. Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio. Internal factors include evaluating changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; and changes in experience, ability and depth of lending management and staff. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The allowance for credit losses is comprised of: (a) specific reserves on individual credits; and (b) general reserves for certain loan categories and industries, and overall historical loss experience; based on performance trends in the loan portfolios, current economic conditions, and other factors that influence the level of estimated credit losses. The need for specific reserves are considered for credits when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectability of the loan is in question, or the loan characteristics require special monitoring. 45 Allowance for Credit Losses (dollars in thousands) Years Ended December 31, 2024 2023 2022 2021 2020 Balance of Allowance for Expected Credit Losses at Beginning of Period $ 43,765 $ 44,168 $ 37,017 $ 46,859 $ 16,278 Impact of adopting ASC 326 — — — — 8,767 Impact of adopting ASC 326 - PCD loans — — — — 6,886 Loans Charged-off: Commercial and Industrial Loans and Leases 223 1,792 1,149 2,777 2,119 Commercial Real Estate Loans 308 56 79 10 36 Agricultural Loans 8 27 — — — Home Equity and Consumer Loans 2,362 1,858 1,598 1,003 942 Residential Mortgage Loans — 58 24 45 39 Total Loans Charged-off 2,901 3,791 2,850 3,835 3,136 Recoveries of Previously Charged-off Loans: Commercial and Industrial Loans and Leases 55 154 26 61 23 Commercial Real Estate Loans 83 76 24 40 129 Agricultural Loans 2 — — — — Home Equity and Consumer Loans 657 605 479 359 358 Residential Mortgage Loans — 3 5 33 4 Total Recoveries 797 838 534 493 514 Net Loans Recovered (Charged-off) (2,104) (2,953) (2,316) (3,342) (2,622) Acquisition of Citizens Union Bank of Shelbyville, KY - PCD Loans — — 3,117 — — Additions to Allowance Charged to Expense 2,775 2,550 6,350 (6,500) 17,550 Balance at End of Period $ 44,436 $ 43,765 $ 44,168 $ 37,017 $ 46,859 Net Charge-offs (Recoveries) to Average Loans Outstanding 0.05 % 0.08 % 0.06 % 0.11 % 0.08 % Provision for Credit Losses to Average Loans Outstanding 0.07 % 0.07 % 0.17 % (0.21) % 0.55 % Allowance for Credit Losses to Total Loans at Year-end 1.08 % 1.10 % 1.17 % 1.23 % 1.52 % The following table indicates the breakdown of the allowance for credit losses for the periods indicated (dollars in thousands): Years Ended December 31, 2024 2023 2022 2021 2020 Commercial and Industrial Loans and Leases $ 7,456 $ 8,267 $ 13,958 $ 9,754 $ 6,645 Commercial Real Estate Loans 25,818 25,923 21,598 19,245 29,878 Agricultural Loans 4,917 3,837 4,188 4,505 6,756 Home Equity and Consumer Loans 3,443 2,976 2,196 1,808 1,636 Residential Mortgage Loans 2,802 2,762 2,228 1,705 1,944 Unallocated — — — — — Total Allowance for Credit Losses $ 44,436 $ 43,765 $ 44,168 $ 37,017 $ 46,859 The Company’s allowance for credit losses totaled $44.4 million at December 31, 2024 compared to $43.8 million at December 31, 2023. The allowance for credit losses represented 1.08% of period-end loans at December 31, 2024 compared with 1.10% of period-end loans at December 31, 2023. The Company adopted ASU No. 2016-13, Financial instruments - Credit Losses (Topic 326) on January 1, 2020. The Company added $9.4 million to the allowance for credit losses in conjunction with the closing of the CUB acquisition on January 1, 2022 related to the CUB loan portfolio. Of the increase in allowance for credit losses for the CUB portfolio, $6.3 million was recorded through the provision for credit losses on “Day 1” under the CECL model for non-PCD loans. The Company also acquired $29.9 million in PCD loans (at time of acquisition) for which the company recorded a credit adjustment of $3.1 million which was included in the allowance for credit losses. The Company realized net charge-offs of $2,104,000, or 0.05% of average loans outstanding, during 2024 compared with $2,953,000, or 0.08% of average loans outstanding, during 2023 and $2,316,000, or 0.06% of average loans outstanding, during 2022. 46 Please see “RESULTS OF OPERATIONS - Provision for Credit Losses” and “CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Allowance for Credit Losses” for additional information regarding the allowance. NON-PERFORMING ASSETS Non-performing assets consist of: (a) non-accrual loans; (b) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; (c) loans past due 90 days or more as to principal or interest; and, (d) other real estate owned. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. Uncollected accrued interest is reversed against income at the time a loan is placed on non-accrual. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. The following table presents an analysis of the Company’s non-performing assets. Non-performing Assets December 31, (dollars in thousands) 2024 2023 2022 2021 2020 Non-accrual Loans $ 10,934 $ 9,136 $ 12,888 $ 14,602 $ 21,507 Past Due Loans (90 days or more and accruing) 188 55 1,427 156 — Total Non-performing Loans 11,122 9,191 14,315 14,758 21,507 Other Real Estate — — — — 325 Total Non-performing Assets $ 11,122 $ 9,191 $ 14,315 $ 14,758 $ 21,832 Restructured Loans $ — $ — $ — $ 104 $ 111 Non-performing Loans to Total Loans 0.27 % 0.23 % 0.38 % 0.49 % 0.70 % Allowance for Credit Losses to Non-performing Loans 399.53 % 476.17 % 308.54 % 250.83 % 217.88 % The following tables present an analysis of the Company’s non-accrual loans and loans past due 90 days or more and still accruing. Non-Accrual Loans December 31, (dollars in thousands) 2024 2023 2022 2021 2020 Commercial and Industrial Loans and Leases $ 5,018 $ 3,707 $ 7,936 $ 10,530 $ 8,133 Commercial Real Estate Loans 1,745 1,889 1,950 2,243 10,188 Agricultural Loans 765 879 1,062 1,136 1,915 Home Equity Loans 1,087 1,033 310 24 271 Consumer Loans 117 253 400 82 170 Residential Mortgage Loans 2,202 1,375 1,230 587 830 Total $ 10,934 $ 9,136 $ 12,888 $ 14,602 $ 21,507 Loans Past Due 90 Days or More & Still Accruing December 31, (dollars in thousands) 2024 2023 2022 2021 2020 Commercial and Industrial Loans and Leases $ — $ — $ 1,427 $ — $ — Commercial Real Estate Loans 183 55 — 156 — Agricultural Loans 5 — — — — Home Equity Loans — — — — — Consumer Loans — — — — — Residential Mortgage Loans — — — — — Total $ 188 $ 55 $ 1,427 $ 156 $ — Non-performing assets totaled $11.1 million, or 0.18% of total assets, at December 31, 2024 compared to $9.2 million, or 0.15% of total assets, at December 31, 2023 and compared to $14.3 million, or 0.23% of total assets, at December 31, 2022. Non-performing loans totaled $11.1 million, or 0.27% of total loans, at December 31, 2024 compared with $9.2 million, or 0.23% of total loans, at December 31, 2023 and compared with $14.3 million, or 0.38% of total loans, at December 31, 2022. 47 Total non-performing loans increased in 2024 as compared to 2023; however, there is no significant loss exposure on this increase. The decline in the level of non-performing commercial and industrial loans and leases during 2023 was primarily attributable to the resolution of a single commercial borrowing relationship with minimal loss recognition for which the Company had established a significant reserve in previous periods. For additional detail on individually analyzed loans, see Note 5 (Loans) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report. Interest income recognized on non-performing loans for 2024 was $724,000. The gross interest income that would have been recognized in 2024 on non-performing loans if the loans had been current in accordance with their original terms was $1,040,000. Loans are typically placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection. LIQUIDITY AND INTEREST RATE RISK MANAGEMENT Liquidity is a measure of the ability of the Company’s subsidiary bank to fund new loan demand, existing loan commitments and deposit withdrawals. The purpose of liquidity management is to match sources of funds with anticipated customer borrowings and withdrawals and other obligations to ensure a dependable funding base, without unduly penalizing earnings. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. The liquidity of the parent company is dependent upon the receipt of dividends from its bank subsidiary, which are subject to certain regulatory limitations explained in Note 9 (Shareholders’ Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report. The subsidiary bank’s source of funding is predominately core deposits, time deposits in excess of $100,000 and brokered certificates of deposit, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank and Federal Reserve Bank. Interest rate risk is the exposure of the Company’s financial condition to adverse changes in market interest rates. In an effort to estimate the impact of sustained interest rate movements to the Company’s earnings, the Company monitors interest rate risk through computer-assisted simulation modeling of its net interest income. The Company’s simulation modeling monitors the potential impact to net interest income under various interest rate scenarios. The Company’s objective is to actively manage its asset/liability position within a one-year interval and to limit the risk in any of the interest rate scenarios to a reasonable level of tax-equivalent net interest income within that interval. The Company’s Asset/Liability Committee monitors compliance within established guidelines of the Funds Management Policy. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk section for further discussion regarding interest rate risk. 48