LAKELAND FINANCIAL CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in 2024 was $93.5 million, a decrease of 0.3%, from $93.8 million in 2023. Net income for 2023 was 9.7% lower than $103.8 million in 2022. Diluted net income per common share was $3.63 in 2024, $3.65 in 2023 and $4.04 in 2022. Return on average total assets was 1.40% in 2024, versus 1.45% in 2023 and 1.62% in 2022. Return on average total equity was 14.12% in 2024, versus 15.93% in 2023 and 17.40% in 2022. The dividend payout ratio, with respect to diluted earnings per share, was 52.89% in 2024, versus 50.41% in 2023 and 39.60% in 2022. The average equity to average assets ratio was 9.94% in 2024, compared to 9.11% in 2023 and 9.28% in 2022. Net income in 2024 as compared to 2023 was positively impacted by a $7.0 million increase in noninterest income and a $5.6 million decrease in noninterest expense. Offsetting these positive contributions to net income were an increase to the provision for credit losses of $10.9 million, an increase to income tax expense of $1.6 million, and a decrease to net interest income of $356,000. Pretax pre-provision earnings, which is a non-GAAP measure, were $128.4 million for the year ended December 31, 2024, an increase of $12.3 million, or 10.5%, compared to $116.2 million for the year ended December 31, 2023. Net income in 2023 as compared to 2022 was negatively impacted by a $20.5 million increase in noninterest expense and a $5.9 million decrease in net interest income. Offsetting these negative effects on net income were an $8.0 million increase in noninterest income and a $3.5 million decrease in provision for credit losses. Total assets were $6.678 billion as of December 31, 2024, versus $6.524 billion as of December 31, 2023, an increase of $154.3 million or 2.4%. Balance sheet expansion in 2024 was driven by loan growth of $201.4 million, or 4.1%. Offsetting the loan growth was a decrease in investments securities of $58.7 million, or 5.0%. Deposits increased by $180.4 million, or 3.2%, during 2024 to fund the balance sheet expansion. CRITICAL ACCOUNTING POLICIES Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for credit losses. Allowance for Credit Losses The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control. The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the facts and circumstances of watch list credits, which includes the security position of the borrower, in determining the appropriate level of the credit loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision. The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for credit losses that generally includes consideration of changes in the nature and volume of the loan portfolio and overall portfolio quality, along with current and forecasted economic conditions that may affect borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. To determine the specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as 32 Table of Contents the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, an appropriate level of general allowance is determined by portfolio segment using a probability of default-loss given default ("PD/LGD") model, subject to a floor. A default can be triggered by one of several different asset quality factors, including past due status, nonaccrual status, material modification to a borrower experiencing financial difficulty or if the loan has had a charge off. This PD is then combined with a LGD derived from historical charge off data to construct a default rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee’s Summary of Economic Projections, and other environmental factors based on the risks present for each portfolio segment. These environmental factors include consideration of the following: levels of, and trends in, delinquencies and nonperforming loans; trends in volume and terms of loans; changes in collateral strength; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are subject to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover expected losses inherent in the loan portfolio. The Company's allowance for credit losses balance was comprised of 32% specific reserves and 68% general reserves at December 31, 2024, compared to 11% specific reserves and 89% general reserves at December 31, 2023. The increase in specific reserves was driven by a large commercial credit with a balance of $43.3 million being placed on nonaccrual during 2024. Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independently of each other and a consensus is reached by credit administration and the loan officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate it should be evaluated on an individual basis. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) the sufficiency of the customer’s cash flow or net worth to repay the loan; (b) the adequacy of the discounted value of collateral relative to the loan balance; (c) whether the loan has been criticized in a regulatory examination; (d) whether the loan is nonperforming; (e) any other reasons the ultimate collectability of the loan may be in question; or (f) any unique loan characteristics that require special monitoring. Allocations are also applied to categories of loans considered not to be individually analyzed, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. These general pooled loan allocations are performed for portfolio segments of commercial and industrial; commercial real estate, multi-family, and construction; agri-business and agricultural; other commercial loans; and consumer 1-4 family mortgage and other consumer loans. General allocations of the allowance are determined by a historical loss rate based on the calculation of each pool’s probability of default-loss given default, subject to a floor. The length of the historical period for each pool is based on the average life of the pool. The historical loss rates are supplemented with consideration of economic conditions and portfolio trends. Due to the imprecise nature of estimating the allowance for credit losses, the Company’s allowance for credit losses includes an unallocated component. The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of potential expected losses that may not be fully reflected in other allocations. As a practical expedient, the Company has elected to state accrued interest separately from loan principal balances on the consolidated balance sheet. Additionally, when a loan is placed on non-accrual, interest payments are reversed through interest income. For off balance sheet credit exposures outlined in the ASU at 326-20-30-11, it is the Company’s position that nearly all of the unfunded amounts on lines of credit are unconditionally cancellable, and therefore not subject to having a liability recorded. The allowance is inherently uncertain as it represents the Company’s expectation of the future collectability of loans in its portfolio; actual collections may be greater than or less than expectations. Actual collections may be impacted by wider economic conditions such as changes in the competitive environment or in the levels of business investment or consumer spending, or by the quality of borrowers’ management teams and the success of their strategy execution. Borrowers’ ability to repay may also change due to the effects of government monetary or fiscal policy, which could affect the level of demand for borrowers’ products or services or the borrowers' ability to service their debt payments in the future. The Company’s allowance for credit losses is subject to changes in the inputs to the model, including the following: the number of delinquent loans, nonaccrual loans, material modification due to a borrower experiencing financial difficulty, or charge offs; the levels of charge offs and recoveries; projected unemployment rates and other economic indicators; the 33 Table of Contents Company’s collateral position on adversely classified loans; or management’s qualitative judgment of the implication of trends in its loan portfolio or in the broader economy. RESULTS OF OPERATIONS Overview In 2024, the Company continued to expand its balance sheet organically, achieving average loan growth of 4.7% and average deposit growth of 4.1% in its geographic footprint of northern Indiana and in central Indiana in the Indianapolis market. The Company had 54 branches as of December 31, 2024. The Company’s net interest income remained stable during the year, declining by less than 1%. However, net interest margin declined from 3.31% in 2023 to 3.18% in 2024. The combined effects of the 2022-2023 monetary policy tightening cycle, increased market competition for deposits and a deposit mix shift from noninterest bearing demand accounts to interest bearing deposit products drove funding costs higher and net interest margin compression in 2023. The rise in deposit costs peaked in the second quarter of 2024 and began to decline in the second half of 2024 as the Federal Reserve Bank started to ease rates. An increase to noninterest income of 14.0% and a decrease in noninterest expense of 4.3% contributed positively to net income. An increase in nonperforming loans of $40.7 million drove provision expense higher in 2024. Provision expense increased by $10.9 million, or 186.3%, primarily related to the downgrade of one commercial borrower to nonperforming status in the second quarter of 2024. The allowance coverage ratio increased to 1.68% from 1.46% at December 31, 2024 and 2023, respectively, primarily as a result of the elevated provision. Individually analyzed and watch list loans as a percentage of total loans increased to 4.13% at December 31, 2024 from 3.72% at December 31, 2023, remaining near the historic low of 3.42%. Fee based lines of business including wealth advisory fees and brokerage fees anchored growth in adjusted core noninterest income, a non-GAAP financial measure that excludes the impact of certain non-routine operating events, increasing by 7.6% and 4.1%, respectively. The growth in adjusted core noninterest expense, a non-GAAP financial measure that excludes the impact of certain non-routine operating events, reflects the Company's continued investment in its people, technology, and physical infrastructure. The outlook for 2025 includes plans for continued organic balance sheet growth, disciplined credit philosophy with proactive management of loan portfolio challenges, continued investments in human and technological capital, a significant investment in the downtown Warsaw campus headquarters to establish the Lake City Bank Innovation and Technology Center, and continued expansion of our branch network with a new office scheduled to open in the Indianapolis market in 2025. 34 Table of Contents Selecte d income statement information for the years ended December 31, 2024, 2023 and 2022 is presented in the following table. (dollars in thousands, except per share data) 2024 2023 2022 Income Statement Summary: Net interest income (a) $ 196,679 $ 197,035 $ 202,887 Provision for credit losses 16,750 5,850 9,375 Noninterest income (b) 56,844 49,858 41,862 Adjusted Core Noninterest Income (1) 46,848 43,558 41,862 Noninterest expense (c) 125,084 130,710 110,210 Adjusted Core Noninterest Expense (1) 120,547 114,049 110,210 Other Data: Efficiency ratio (2) 49.34 % 52.94 % 45.03 % Adjusted Core Efficiency Ratio (1) 49.49 47.40 45.03 Dilutive EPS $ 3.63 $ 3.65 $ 4.04 Total equity 683,911 649,793 568,887 Tangible capital ratio (3) 10.19 % 9.91 % 8.79 % Adjusted tangible capital ratio (4) 12.37 11.99 11.38 Net charge offs to average loans 0.05 0.13 0.10 Net interest margin 3.18 3.31 3.40 Noninterest income to total revenue 22.42 20.19 17.10 Pretax Pre-Provision Earnings (5) $ 128,439 $ 116,183 $ 134,539 (1) Non-GAAP financial measure. Calculated by excluding the effects of the 2024 net gain on Visa shares, legal accrual, and additional wire fraud loss recovery and the 2023 wire fraud loss and related recoveries and adjustments to salary and benefits. Management believes this is an important measure that helps management and investors understand the Company’s core business performance for these periods. See reconciliation on the following pages. (2) Noninterest expense (c)/(Net interest income (a) plus Noninterest income (b)). (3) Non-GAAP financial measure. Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity. Management believes this is an important measure because it is useful for planning and forecasting purposes. See reconciliation on the following pages. (4) Non-GAAP financial measure. Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio included in accumulated other comprehensive income/loss ("AOCI") from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to periods preceding the significant rise in prevailing interest rates. See reconciliation on the following pages. (5) Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period. See reconciliation on the following pages. 35 Table of Contents The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the company's financial performance. Reconciliations of these non-GAAP financial measures is provided below. Year Ended (dollars in thousands, except per share data) Dec. 31, 2024 Dec. 31, 2023 Dec. 31, 2022 Total Equity $ 683,911 $ 649,793 $ 568,887 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 1,167 Tangible Common Equity 680,108 645,990 565,084 Market Value Adjustment in AOCI 165,932 154,460 188,154 Adjusted Tangible Common Equity 846,040 800,450 753,238 Assets $ 6,678,374 $ 6,524,029 $ 6,432,371 Less: Goodwill (4,970) (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 1,167 Tangible Assets 6,674,571 6,520,226 6,428,568 Market Value Adjustment in AOCI 165,932 154,460 188,154 Adjusted Tangible Assets 6,840,503 6,674,686 6,616,722 Ending Common Shares Issued 25,689,730 25,614,585 25,536,026 Tangible Book Value Per Common Share $ 26.47 $ 25.22 $ 22.13 Tangible Common Equity/Tangible Assets 10.19 % 9.91 % 8.79 % Adjusted Tangible Common Equity/Adjusted Tangible Assets 12.37 11.99 11.38 Net Interest Income $ 196,679 $ 197,035 $ 202,887 Plus: Noninterest Income 56,844 49,858 41,862 Minus: Noninterest Expense (125,084) (130,710) (110,210) Pretax Pre-Provision Earnings $ 128,439 $ 116,183 $ 134,539 36 Table of Contents The impact of the net gain on Visa shares, legal accrual, wire fraud loss and associated insurance and loss recoveries and adjustments to salaries and benefits is presented below. Management considers these measures of core financial performance to be meaningful to understanding the Company’s business performance for these periods. Year Ended (dollars in thousands, except per share data) Dec. 31, 2024 Dec. 31, 2023 Dec. 31, 2022 Noninterest Income $ 56,844 $ 49,858 $ 41,862 Less: Net (Gain) on Visa Shares (8,996) 0 0 Less: Insurance and Loss Recoveries (1,000) (6,300) 0 Adjusted Core Noninterest Income $ 46,848 $ 43,558 $ 41,862 Noninterest Expense $ 125,084 $ 130,710 $ 110,210 Less: Legal Accrual (4,537) 0 0 Less: Wire Fraud Loss 0 (18,058) 0 Plus: Salaries and Employee Benefits (1) 0 1,397 0 Adjusted Core Noninterest Expense $ 120,547 $ 114,049 $ 110,210 Earnings Before Income Taxes $ 111,689 $ 110,333 $ 125,164 Adjusted Core Impact: Noninterest Income (9,996) (6,300) 0 Noninterest Expense 4,537 16,661 0 Total Adjusted Core Impact (5,459) 10,361 0 Adjusted Earnings Before Income Taxes 106,230 120,694 125,164 Tax Effect (16,853) (19,119) (21,347) Core Operational Profitability (2) $ 89,377 $ 101,575 $ 103,817 Diluted Earnings Per Share $ 3.63 $ 3.65 $ 4.04 Impact of Wire Fraud Loss, Net of Recoveries (0.16) 0.30 0.00 Core Operational Diluted Earnings Per Common Share $ 3.47 $ 3.95 $ 4.04 Adjusted Core Efficiency Ratio 49.49 % 47.40 % 45.03 % (1) In 2023, long-term, incentive-based compensation accruals were reduced as a result of the wire fraud loss and associated insurance and loss recoveries. (2) Core operational profitability was $4.1 million lower and $7.8 million higher than reported net income for the years ended December 31, 2024 and 2023, respectively. 37 Table of Contents Net Income Net income was $93.5 million in 2024, a decrease of $289,000, versus net income of $93.8 million in 2023. The decrease in net income from 2023 to 2024 was driven by an increase in provision expense of $10.9 million, or 186.3%, an increase in income tax expense of $1.6 million, or 9.9%, and a decrease in net interest income of $356,000. Offsetting these items were an increase in noninterest income of $7.0 million, or 14.0%, and a decrease to noninterest expense of $5.6 million, or 4.3%. Pretax pre-provision earnings were $128.4 million for the year ended December 31, 2024, an increase of $12.3 million, or 10.5%, compared to $116.2 million for the year ended December 31, 2023. The increase to noninterest income in 2024 was primarily driven by the net gains on the exchange and sale of Visa shares previously held at a cost basis of $0 since 2008. In the second quarter of 2024, Visa Inc. announced the commencement of an exchange offer for Visa Class B-1 common stock. The Company accepted the exchange offer and tendered its Visa Class B-1 common stock in exchange for a combination of Visa Class C and Visa Class B-2 common stock. After entering the exchange, the Company redeemed its Visa Class C common shares and sold its Visa Class B-2 shares in the secondary market. The Company recognized $9.0 million in net gains from these transactions. Other items contributing to the increase in noninterest income were a $1.0 million insurance recovery, a $1.4 million, or 15.3% increase, in wealth advisory fees, a $1.1 million, or 34.4% increase, in bank owned life insurance income, and a $370,000 increase in mortgage banking income. The decrease to noninterest expense in 2024 was driven by lower miscellaneous expenses for losses incurred in 2023 and was partially offset by a $4.5 million legal accrual recorded in the second quarter of 2024 related to resolution of a previously disclosed legal matter. Net income was $93.8 million in 2023, a decrease of $10.1 million, or 9.7%, versus net income of $103.8 million in 2022. The decrease in net income from 2022 to 2023 was driven by an increase in noninterest expense of $20.5 million, or 18.6%, and a decrease in net interest income of $5.9 million, or 2.9%. Offsetting these decreases were an increase in noninterest income of $8.0 million, or 19.1%, and a decrease in the provision for credit losses of $3.5 million, or 37.6%. Core operational profitability, a non-GAAP financial measure that excludes the impact of certain non-routine operating events, was $89.4 million for the year ended December 31, 2024, a decrease of 12.0%, or $12.2 million, compared to $101.6 million for the year ended December 31, 2023. Core operational diluted earnings per common share, a non-GAAP financial measure, were $3.47 for the year ended December 31, 2024, a decrease of 12.2% from $3.95 for the prior year. 38 Table of Contents Net Interest Income The following table presents a three-year average balance sheet and, for each major asset and liability category, its related interest income and yield or its expense and rate for the years ended December 31, 2024, 2023 and 2022. THREE YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS 2024 2023 2022 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Average Balance Interest Income Yield (1)/ Rate Earning Assets Loans: Taxable (1)(2) $ 5,002,373 $ 335,639 6.71 % $ 4,755,341 $ 304,130 6.40 % $ 4,391,590 $ 202,004 4.60 % Tax exempt (2) 37,033 2,632 7.11 58,337 4,839 8.29 35,576 2,094 5.89 Investments: (2) Securities 1,134,979 31,940 2.81 1,184,659 33,907 2.86 1,432,287 38,882 2.71 Short-term investments 2,789 132 4.73 2,425 109 4.49 2,266 30 1.32 Interest bearing deposits 151,324 7,499 4.96 113,463 5,594 4.93 261,444 2,184 0.84 Total earning assets $ 6,328,498 $ 377,842 5.97 % $ 6,114,225 $ 348,579 5.70 % $ 6,123,163 $ 245,194 4.00 % Less: Allowance for credit losses (78,186) (72,222) (67,717) Nonearning Assets Cash and due from banks 66,208 70,941 72,302 Premises and equipment 59,105 58,633 58,894 Other nonearning assets 287,093 293,403 240,937 Total assets $ 6,662,718 $ 6,464,980 $ 6,427,579 Interest Bearing Liabilities Savings deposits $ 284,934 $ 184 0.06 % $ 347,009 $ 246 0.07 % $ 419,997 $ 327 0.08 % Interest bearing checking accounts 3,281,615 129,073 3.93 2,909,464 107,471 3.69 2,689,572 31,182 1.16 Time deposits: In denominations under $100,000 217,667 7,623 3.50 202,904 5,106 2.52 185,215 1,289 0.70 In denominations over $100,000 794,003 35,879 4.52 669,545 24,968 3.73 579,797 3,483 0.60 Miscellaneous short-term borrowings 66,334 3,720 5.61 166,821 8,441 5.06 6,559 272 4.15 Long-term borrowings 0 0 0.00 0 0 0.00 32,055 127 0.40 Total interest bearing liabilities $ 4,644,553 $ 176,479 3.80 % $ 4,295,743 $ 146,232 3.40 % $ 3,913,195 $ 36,680 0.94 % Noninterest Bearing Liabilities Demand deposits 1,257,806 1,475,306 1,842,777 Other liabilities 98,272 105,264 75,120 Stockholders' Equity 662,087 588,667 596,487 Total liabilities and stockholders' equity $ 6,662,718 $ 6,464,980 $ 6,427,579 Interest Margin Recap Interest income/average earning assets 377,842 5.97 % 348,579 5.70 % 245,194 4.00 % Interest expense/average earning assets 176,479 2.79 146,232 2.39 36,680 0.60 Net interest income and margin $ 201,363 3.18 % $ 202,347 3.31 % $ 208,514 3.40 % (1) Nonaccrual loans are included in the average balance of taxable loans. (2) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility 39 Table of Contents Act of 1982 ("TEFRA") adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $4.7 million, $5.3 million and $5.6 million for the years ended December 31, 2024, 2023 and 2022, respectively. The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31. NET INTEREST INCOME – RATE/VOLUME ANALYSIS (fully tax equivalent basis, dollars in thousands) 2024 Over (Under) 2023 (1) 2023 Over (Under) 2022 (1) Attributable to Total Change Attributable to Total Change Volume Rate Volume Rate Interest Income (2) Loans: Taxable $ 16,198 $ 15,311 $ 31,509 $ 17,875 $ 84,251 $ 102,126 Tax exempt (1,585) (622) (2,207) 1,674 1,071 2,745 Investments: Securities (1,405) (562) (1,967) (7,000) 2,025 (4,975) Short-term investments 17 6 23 2 77 79 Interest bearing deposits 1,876 29 1,905 (1,863) 5,273 3,410 Total interest income 15,101 14,162 29,263 10,688 92,697 103,385 Interest Expense Savings deposits (41) (21) (62) (53) (28) (81) Interest bearing checking accounts 14,338 7,264 21,602 2,750 73,539 76,289 Time deposits: In denominations under $100,000 394 2,123 2,517 134 3,683 3,817 In denominations over $100,000 5,101 5,810 10,911 620 20,865 21,485 Miscellaneous short-term borrowings (5,551) 830 (4,721) 8,096 73 8,169 Long-term borrowings and subordinated debentures 0 0 0 (127) 0 (127) Total interest expense 14,241 16,006 30,247 11,420 98,132 109,552 Net Interest Income (tax equivalent) $ 860 $ (1,844) $ (984) $ (732) $ (5,435) $ (6,167) (1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 2024, 2023 and 2022. The changes in net interest income are created by changes in interest rates and changes in the volumes of loans, investments, deposits and borrowings. In the table above, changes attributable to volume are computed using the change in volume from the prior year multiplied by the previous year’s rate, and changes attributable to rate are computed using the change in rate from the prior year multiplied by the previous year’s volume. The change in interest or expense due to both rate and volume has been allocated between factors in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment applicable to nondeductible interest expense. Net interest income decreased by $356,000 to $196.7 million in 2024 compared to $197.0 million in 2023, primarily as a result of increased funding costs. Total interest expense increased $30.2 million, or 20.7%. Of this increase, deposit interest expense increased $35.0 million, or 25.4%, from increased rates paid for customer deposits and a shift in deposit mix from noninterest bearing deposits to interest bearing deposits. Funding costs for deposits increased 50 basis points to 2.96% during 2024, compared to 2.46% during 2023. Noninterest bearing deposits to total deposits were 22.0% at 2024 compared to 23.7% at 2023. Average noninterest bearing deposits decreased $217.5 million, or 14.7%, to $1.258 billion for 2024 as compared to $1.475 billion for 2023. Average interest bearing deposits increased $449.3 million, or 10.9%, to $4.578 billion for 2024 as compared, to $4.129 billion for 2023. Wholesale funding reliance remained low at 0.70% as of December 31, 2024 compared to 3.21% at December 31, 2023. Investment securities interest income decreased $1.8 million, or 6.0%, and contributed to the decline in net interest income during 2024. The decrease in investment securities income was driven by a decrease in average securities balances of 40 Table of Contents $49.7 million, or 4.2%, during 2024 as a result of available-for-sale investment securities sales of $7.1 million, maturities, calls and paydowns of $59.7 million, and offset by purchases of securities of $27.5 million. Realized losses of $46,000 were recognized on the securities sales during 2024. The yield on average investment securities decreased 5 basis points to 2.81% for 2024, as compared to 2.86% for 2023. Investment securities cash flows were primarily used to fund loan growth during 2024. An increase in loans interest income partially offset the negative impacts to net interest income, increasing $29.8 million, or 9.7%, to $337.8 million during 2024 compared to $308.0 million during 2023. The increase in average loans was driven by loan growth during the period as average loan balances increased $225.7 million, or 4.7%, from $4.814 billion during 2023 to $5.039 billion during 2024. Loan yields increased 29 basis points, or 4.6%, from 6.42% for 2023 to 6.71% for 2024 as a result of the higher rate environment and loan repricing opportunities. Net interest margin decreased 13 basis points to 3.18% in 2024 versus 3.31% in 2023. Net interest margin decreased to 3.31% in 2023 from 3.40% in 2022. The decrease in net interest margin between the periods was primarily driven by the effects of the dramatic tightening of monetary policy by the Federal Reserve during 2022 and 2023. The rate increases quickly bolstered loan yields due to the asset sensitive nature of the balance sheet, which drove net interest margin expansion in 2022. Net interest margin contracted in 2023 and 2024 due to the lag in deposit repricing by the Company and a shift in deposit mix from noninterest bearing demand accounts to interest bearing deposit products, as customers became more rate sensitive during the increased rate environment. The utilization of commercial and retail lines of credit increased to 41% at December 31, 2024, as compared to 39% at December 31, 2023, and down from 42% at December 31, 2022. Available lines of credit have decreased by $238.0 million to $4.548 billion at December 31, 2024, compared to $4.786 billion at December 31, 2023, or a 5.0% reduction. The increase in line usage is attributable to more normalized cash balances for our business customers as the elevated levels of commercial demand deposits have been utilized post-pandemic. Provision for Credit Losses The Company recorded a provision for credit losses of $16.8 million in 2024 compared to $5.9 million in 2023 and $9.4 million in 2022. Provision expense during 2024 was driven primarily by an increase in specific allocations from the downgrade of a $43.3 million credit to an industrial company in Northern Indiana. The relationship was placed on nonperforming status in conjunction with the downgrade, which occurred during the second quarter of 2024. The remainder of expense was driven by growth in the loan portfolio during the year. The Company’s allowance for credit losses as of December 31, 2024 was $86.0 million compared to $72.0 million as of December 31, 2023 and $72.6 million as of December 31, 2022. The allowance for credit losses represented 1.68% of total loans as of December 31, 2024, versus 1.46% at December 31, 2023 and 1.54% at December 31, 2022. Net charge offs of $2.8 million, or 0.05% of average loans, and $6.5 million, or 0.13% of average loans, were recorded in 2024 and 2023, respectively. Net charge offs for 2023 resulted primarily from the deterioration of a single commercial credit. Management believes the charge off related to this credit was an isolated instance as a result of negative impacts caused by unique circumstances from the pandemic and are not reflective of deteriorating trends in the loan portfolio. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions including the impact of the increased interest rate environment, inflation levels, and other factors that may influence the assessment of the collectability of loans. 41 Table of Contents Noninterest Income The following table presents changes in the components of noninterest income for the years ended December 31, 2024, 2023 and 2022. % Change From Prior Year (dollars in thousands) 2024 2023 2022 2024 2023 Wealth advisory fees $ 10,469 $ 9,080 $ 8,636 15.3 % 5.1 % Investment brokerage fees 1,894 1,815 2,318 4.4 (21.7) Service charges on deposit accounts 11,157 10,773 11,595 3.6 (7.1) Loan and service fees 11,832 11,750 12,214 0.7 (3.8) Merchant and interchange fee income 3,542 3,651 3,560 (3.0) 2.6 Bank owned life insurance income 4,210 3,133 432 34.4 625.2 Interest rate swap fee income 0 794 579 (100.0) 37.1 Mortgage banking income (loss) 116 (254) 633 145.7 (140.1) Net securities gains (losses) (46) (25) 21 (84.0) (219.0) Net gain on Visa Shares 8,996 0 0 100.0 0.0 Other income 4,674 9,141 1,874 (48.9) 387.8 Total noninterest income $ 56,844 $ 49,858 $ 41,862 14.0 % 19.1 % Noninterest income to total revenue 22.4 % 20.2 % 17.1 % Noninterest income increased by $7.0 million, or 14.0%, to $56.8 million for the year ended December 31, 2024, compared to $49.9 million for the prior year. The increase in noninterest income for the year ended December 31, 2024 was primarily driven by the net gain on sale of Visa shares of $9.0 million. Contributing further to the increase in noninterest income was an increase to wealth and advisory fees of $1.4 million, or 15.3%, driven by growth in customers and favorable market performance. Bank owned life insurance income increased $1.1 million, or 34.4%, due to favorable market performance of the Company's variable bank owned life insurance policies. Offsetting these increases was a $4.5 million, or 48.9%, decrease to other income. Other income was elevated during the year ended December 31, 2023 from insurance and loss recoveries of $6.3 million that were related to the 2023 wire fraud loss. Offsetting the impact of these recoveries was increased investment income from the Company's limited partnership investments and the receipt of an additional $1.0 million in insurance recoveries. Adjusted core noninterest income was $46.8 million for the year ended December 31, 2024, an increase of $3.3 million, or 7.6%, compared to $43.6 million for year ended December 31, 2023. Noninterest income was $49.9 million in 2023 versus $41.9 million in 2022, an increase of $8.0 million, or 19.1%. Adjusted core noninterest income was $43.6 million in 2023, an increase of $1.7 million, or 4.1% compared to 2022. Wealth advisory fees increased by 5.1%, or $444,000, during 2023, from $8.6 million to $9.1 million reflecting continued growth in the business and improving equity market valuations. Service charges on deposit accounts decreased by 7.1%, or $822,000, during 2023 from $11.6 million to $10.8 million due primarily to an increase to earnings allowances on business checking accounts and reduced overdraft and other deposit fees. Loan and service fees declined by 3.8%, or $464,000, during 2023 primarily due to a decline in interchange revenue due to reduced volume and spend per debit card as compared to higher trends during the pandemic. Merchant fee income improved by 2.6%, or $91,000, during 2023. 42 Table of Contents Noninterest Expense The following table presents changes in the components of noninterest expense for the years ended December 31, 2024, 2023 and 2022. % Change From Prior Year (dollars in thousands) 2024 2023 2022 2024 2023 Salaries and employee benefits $ 66,728 $ 59,147 $ 58,530 12.8 % 1.1 % Net occupancy expense 6,865 6,360 6,287 7.9 1.2 Equipment costs 5,612 5,632 5,763 (0.4) (2.3) Data processing fees and supplies 15,161 14,003 12,826 8.3 9.2 Corporate and business development 4,965 4,807 5,198 3.3 (7.5) FDIC insurance and other regulatory fees 3,465 3,363 1,999 3.0 68.2 Professional fees 8,950 8,583 6,483 4.3 32.4 Wire fraud loss 0 18,058 0 (100.0) 100.0 Other expense 13,338 10,757 13,124 24.0 (18.0) Total noninterest expense $ 125,084 $ 130,710 $ 110,210 (4.3) % 18.6 % Noninterest expense decreased by $5.6 million, or 4.3%, from $130.7 million to $125.1 million for the year ended December 31, 2023 and 2024, respectively. Noninterest expense during 2023 was elevated as compared to 2024 due to the wire fraud loss, which added a net $16.7 million to noninterest expense. Offsetting this impact on noninterest expense was a $7.6 million, or 12.8%, increase in salaries and employees benefits during 2024. The increase to salaries and benefits expense resulted primarily from increases to salaries and wages of $3.2 million, performance-based incentive compensation of $2.3 million , health insurance expense of $918,000, and variable deferred compensation of $950,000, which relates to the Company's variable bank owned life insurance. Other expense increased $2.6 m illion, or 24.0%, primarily due to an accrued legal accrual expense of $4.5 million. Data processing fees and supplies increased by $1.2 million, or 8.3%, from the continued investment in customer-facing and operational technology solutions. Adjusted core noninterest expense was $120.5 million for the year ended December 31, 2024, an increase of $6.5 million, or 5.7%, compared to $114.0 million for the year ended December 31, 2023. Noninterest expense increased by $20.5 million, or 18.6%, for 2023 from $110.2 million to $130.7 million. The increase to noninterest expense during the year was driven by an $18.1 million wire fraud loss that occurred during the second quarter of 2023. Contributing to the increase in noninterest expense during 2023 was an increase to professional fees expense of $2.1 million, or 32.4%, an increase to FDIC insurance and other regulatory fees of $1.4 million, or 68.2%, from increased assessments due to a blanket increase to the assessment rate used by the FDIC to calculate premiums. Data processing fees and supplies expense increased $1.2 million, or 9.2%. Offsetting these increases was a decrease in other expense of $2.4 million, or 18.0%, driven by reduced accruals related to ongoing litigation matters. Income Taxes The Company recognized income tax expense in 2024 of $18.2 million, compared to $16.6 million in 2023 and $21.3 million in 2022. The effective tax rate was 16.3% in 2024, compared to 15.0% in 2023 and 17.1% in 2022. The effective tax rate increased due to the adoption of ASU 2023-02, which changed how the Company's investment in low-income housing tax credit structures are accounted for by moving the investment write-down impact from operating revenues to income tax expense within the consolidated statements of income, as well as a reduction in the tax benefit recognized from stock-based compensation vesting of shares for plan participants. For a detailed analysis of the Company’s income taxes see "Note 12 – Income Taxes". 43 Table of Contents CERTAIN STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES We are required to provide certain statistical disclosures as a bank holding company. The following table provides certain of those disclosures. Year ended December 31, 2024 2023 2022 Return on average assets 1.40 % 1.45 % 1.62 % Return on average equity 14.12 15.93 17.40 Average equity to average assets 9.94 9.11 9.28 Dividend payout ratio 52.89 50.41 39.60 Return on average assets is computed by dividing net income by average assets for each indicated fiscal year. Average assets is computed by adding total assets as of each date during the indicated fiscal year and dividing by the number of days in the fiscal year. Return on average total equity is computed by dividing net income by average equity for each indicated fiscal year. Average equity is computed by adding the total equity attributable to the Company as of each date during the indicated fiscal year and dividing by the number of days in the fiscal year. Average equity to average assets is computed by dividing average equity by average assets for each indicated fiscal year, as calculated in accordance with the previous explanation. Dividend payout ratio is computed by dividing dividends declared per common share by earnings per diluted common share for each indicated fiscal year. Refer to the "Financial Condition - Loan Portfolio", "Financial Condition - Sources of Funds" and "Risk Management - Loan Portfolio" sections of this MD&A and to the Notes to Consolidated Financial Statements of this Form 10-K for the other required statistical disclosures. FINANCIAL CONDITION Overview Total assets of the Company were $6.678 billion as of December 31, 2024, an increase of $154.3 million, or 2.4%, when compared to $6.524 billion as of December 31, 2023. Total loans outstanding increased by $201.4 million, or 4.1%, to $5.118 billion at December 31, 2024, from $4.917 billion at December 31, 2023. Total deposits increased $180.4 million, or 3.2%, from $5.721 billion at December 31, 2023, to $5.901 billion at December 31, 2024, driven by increased public funds deposits due to the addition of new customers and offset by net brokered and retail outflows. Total cash and equivalents increased $16.4 million, to $168.2 million at December 31, 2024, from $151.8 million at December 31, 2023. Total investment securities decreased by $58.7 million, to $1.123 billion at December 31, 2024, from $1.182 billion at December 31, 2023. The decrease was attributable to a decrease in available-for-sale securities, which decreased by $60.3 million, primarily as a result of calls and paydowns of $59.7 million, a decline in fair market valuations of $16.5 million, and investment securities sales of $7.1 million, and offset by purchases of $27.5 million. Losses of $46,000 were realized from the sale of available-for-sale securities in 2024. The Company was not in a borrowed position at December 31, 2024, compared to borrowings of $50.0 million at December 31, 2023, as a result of the liquidity provided by increased deposits at period end. 44 Table of Contents Uses of Funds Investment Portfolio At year end 2024, 2023 and 2022, there were no holdings of securities of any one issuer, other than the U.S. government, government agencies and government sponsored agencies, in an amount greater than 10% of stockholders’ equity. See "Note 2 – Securities" for more information on these investments. Purchases of securities available-for-sale totaled $27.5 million in 2024, $7.2 million in 2023 and $315.3 million in 2022. Growth of the investment portfolio during 2022 served to provide an earning asset alternative for excess balance sheet liquidity stemming from increased levels of liquidity provided by government stimulus programs in response to the COVID-19 pandemic. Prior to the Federal Reserve monetary tightening cycle starting in March of 2022, the Company deployed $250.0 million of excess liquidity to the investment securities portfolio during 2022 to preserve net interest margin. Investment securities represented 16.8% of total assets on December 31, 2024 compared to 18.1% on December 31, 2023 and 20.4% on December 31, 2022. Management expects the investment securities portfolio as a percentage of assets to decrease over time and return to historical levels of approximately 12%-14% during 2014 to 2020 as the proceeds from paydowns and maturities of these investment securities provide liquidity to fund future loan growth as the balance sheet continues to grow. Securities sales totaled $7.1 million in 2024, $105.2 million in 2023 and $25.3 million in 2022. Paydowns from prepayments and scheduled payments of $59.0 million, $56.2 million and $98.8 million were received in 2024, 2023 and 2022, and the amortization of premiums, net of the accretion of discounts, was $4.8 million, $4.9 million and $6.3 million, respectively. Maturities and calls of securities totaled $695,000 , $13.6 million and $9.3 million in 2024, 2023 and 2022, respectively. No provision for allowance for credit loss was recorded in connection with the investment securities portfolio in 2024 , 2023 or 2022. The investment portfolio is managed to provide for an appropriate balance between liquidit y, credit risk and investment return and to limit the Company’s exposure to risk to an acceptable level. The longer duration of the investment security portfolio serves to balance the shorter duration of the loan portfolio. On April 1, 2022, the Company elected to transfer $151.4 million in net book value of municipal bonds from the available-for-sale securities portfolio to held-to-maturity as an overall balance sheet management strategy. The fair value of these securities transferred was $127.0 million at the time of transfer, and the unrealized loss on securities transferred from available-for-sale to held-to-maturity was $19.0 million at December 31, 2024 and will be amortized over the remaining life of the underlying security as an adjustment to yield on those securities. The weighted average yields and maturity distribution for the securities portfolio at December 31, 2024, were as follows: Within One Year After One Within Five Years After Five Years Within Ten years After Ten Years (fully tax equivalent basis, dollars in thousands) Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield U.S. government sponsor agency $ 0 0.00 % $ 4,445 1.00 % $ 0 0.00 % $ 104,990 1.58 % Mortgage-backed securities: residential 0 0.00 17,621 2.39 28,010 2.51 376,778 2.22 State and municipal securities 438 2.75 3,333 3.93 61,389 2.83 507,529 3.04 Total Securities $ 438 2.75 % $ 25,399 2.35 % $ 89,399 2.73 % $ 989,297 2.57 % The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds in the Volcker Rule. Real Estate Mortgage Loans Held-For-Sale Real estate mortgages held-for-sale increased by $542,000 to $1.7 million at December 31, 2024 from $1.2 million at December 31, 2023 as a result of fluctuations in secondary market sales activity. This asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the quantity and timing of loan sales into the secondary market. The Company generally sells almost all of the conforming mortgage loans it originates in the secondary market. Proceeds from sales totaled $20.8 million in 2024, $8.0 million in 2023 and $36.5 million in 2022. 45 Table of Contents Loan Portfolio The loan portfolio by class as of December 31, 2024, 2023 and 2022 was as follows: (dollars in thousands) 2024 2023 2022 Commercial and industrial loans: Working capital lines of credit loans $ 649,609 $ 604,893 $ 650,948 Non-working capital loans 801,256 815,871 842,101 Total commercial and industrial loans 1,450,865 1,420,764 1,493,049 Commercial real estate and multi-family residential loans: Construction and land development loans 567,781 634,435 517,664 Owner occupied loans 807,090 825,464 758,091 Nonowner occupied loans 872,671 724,101 706,107 Multi-family loans 344,978 253,534 197,232 Total commercial real estate and multi-family residential loans 2,592,520 2,437,534 2,179,094 Agri-business and agricultural loans: Loans secured by farmland 156,609 162,890 201,200 Loans for agricultural production 230,787 225,874 230,888 Total agri-business and agricultural loans 387,396 388,764 432,088 Other commercial loans 95,584 120,726 113,593 Total commercial loans 4,526,365 4,367,788 4,217,824 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 259,286 258,103 212,742 Open end and junior lien loans 214,125 189,663 175,575 Residential construction and land development loans 16,818 8,421 19,249 Total consumer 1-4 family mortgage loans 490,229 456,187 407,566 Other consumer loans 104,041 96,022 88,075 Total consumer loans 594,270 552,209 495,641 Gross loans 5,120,635 4,919,997 4,713,465 Less: Allowance for credit losses (85,960) (71,972) (72,606) Net deferred loan fees (2,687) (3,463) (3,069) Loans, net $ 5,031,988 $ 4,844,562 $ 4,637,790 The ratio of loans to total loans by portfolio segment as of December 31, 2024, 2023 and 2022 was as follows: 2024 2023 2022 Commercial and industrial loans 28.33 % 28.89 % 31.68 % Commercial real estate and multi-family residential loans 50.63 49.54 46.23 Agri-business and agricultural loans 7.57 7.90 9.17 Other commercial loans 1.87 2.45 2.41 Consumer 1-4 family mortgage loans 9.57 9.27 8.64 Other consumer loans 2.03 1.95 1.87 Total Loans 100.00 % 100.00 % 100.00 % 46 Table of Contents The mix of the Company's loan portfolio consists primarily of commercial loans, and the Bank's lending focus is on the commercial sector of the Lake City Bank footprint. Owner occupied commercial real estate loans represent in many instances the buildings and factories of our commercial and industrial borrowers. Commercial and industrial loans together with owner occupied commercial real estate loans represented 44.1% and 45.7% of total loans as of December 31, 2024 and 2023, respectively. The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $101.7 million for this sector represented 2.0% of total loans at December 31, 2024. Loans to the agriculture and agri-business sector of our Indiana footprint represent a significant loan segment of the overall loan portfolio. This loan segment is well diversified with loans to corn, soybean, poultry, dairy, swine, beef and egg growers. The residential construction and land development loans class included construction loans totaling $7.6 million and $1.0 million as of December 31, 2024 and 2023. Increases in consumer loans during 2024 resulted from an increased focus on indirect lending to consumers and adjustable rate mortgages. The Bank generally sells conforming mortgage loans, which it originates locally, into the secondary market. These loans generally represent mortgage loans that are made to clients with long-term or substantial relationships with the Bank on terms consistent with secondary market requirements. The loan classifications are based on the nature of the loans as of the loan origination date. There were no foreign loans included in the loan portfolio for the periods presented. Repricing opportunities of the loan portfolio occur either according to predetermined float rate indices, adjustable rate schedules included in the related loan agreements or upon maturity of each principal payment. The following table indicates the scheduled maturities of the loan portfolio as of December 31, 2024: (dollars in thousands) Commercial and Industrial Commercial Real Estate and Multi-family Residential Agri-business and Agricultural Other Commercial Consumer 1-4 Family Mortgage Other Consumer Total Percent Within one year $ 624,284 $ 853,489 $ 139,023 $ 22,566 $ 18,688 $ 23,446 $ 1,681,496 32.84 % After one year, within five years 571,969 1,161,573 113,033 33,398 63,697 36,239 1,979,909 38.66 Over five years 201,760 575,683 135,269 39,620 406,401 44,080 1,402,813 27.40 Nonaccrual loans 52,852 1,775 71 0 1,443 276 56,417 1.10 Total loans $ 1,450,865 $ 2,592,520 $ 387,396 $ 95,584 $ 490,229 $ 104,041 $ 5,120,635 100.00 % At maturity, credits are reviewed and, if renewed, are renewed at rates and conditions that prevail at the time of maturity. Based upon the table above, all loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 2024 amounted to $2.178 billion and $1.205 billion, respectively. Bank Owned Life Insurance Bank owned life insurance increased by $4.2 million to $113.3 million at December 31, 2024 and by $707,000 to $109.1 million at December 31, 2023 from $108.4 million at December 31, 2022. The increases during 2023 and 2024 were primarily due to income from traditional policies and from improved market performance of the Bank's variable bank owned life insurance policies, which track with the performance of the equity markets. Bank owned life insurance investment income is used as an offset to the cost of life insurance purchased by the Bank as a benefit for bank officers. 47 Table of Contents Sources of Funds The average daily deposits and borrowings together with the average rates paid on those deposits and borrowings for the years ended December 31, 2024, 2023 and 2022 are summarized in the following table: 2024 2023 2022 % Balance Change From Prior Year (dollars in thousands) Balance Rate Balance Rate Balance Rate 2024 2023 Noninterest bearing demand deposits $ 1,257,806 0.00 % $ 1,475,306 0.00 % $ 1,842,777 0.00 % (14.7) % (19.9) % Savings and transaction accounts: Savings deposits 284,934 0.06 347,009 0.07 419,997 0.08 (17.9) (17.4) Interest bearing demand deposits 3,281,615 3.93 2,909,464 3.69 2,689,572 1.16 12.8 8.2 Time deposits: Deposits of $100,000 or more 794,003 4.52 669,545 3.73 579,797 0.60 18.6 15.5 Other time deposits 217,667 3.50 202,904 2.52 185,215 0.70 7.3 9.6 Total deposits 5,836,025 2.96 5,604,228 2.46 5,717,358 0.63 4.1 (2.0) FHLB advances and other borrowings 66,334 5.61 166,821 5.06 38,614 1.03 (60.2) 332.0 Total funding sources $ 5,902,359 2.99 % $ 5,771,049 2.53 % $ 5,755,972 0.64 % 2.3 % 0.3 % Time deposits as of December 31, 2024 will mature as follows: (dollars in thousands) $100,000 or more $100,000 or less Total % of Total Within three months $ 201,959 $ 79,439 $ 281,398 32.9 % Over three months, within six months 206,961 63,445 270,406 31.5 Over six months, within twelve months 137,242 31,048 168,290 19.7 Over twelve months 96,615 39,167 135,782 15.9 Total time certificates of deposit $ 642,777 $ 213,099 $ 855,876 100.0 % Deposits Deposits by portfolio segment for December 31, 2024, 2023 and 2022 are presented below: (dollars in thousands) December 31, 2024 December 31, 2023 December 31, 2022 Commercial $ 2,269,049 38.4 % $ 2,227,147 38.9 % $ 2,085,934 38.2 % Retail 1,780,726 30.2 1,794,958 31.4 1,934,787 35.4 Public fund 1,809,631 30.7 1,563,015 27.3 1,429,872 26.1 Core deposits 5,859,406 99.3 5,585,120 97.6 5,450,593 99.7 Brokered deposits 41,560 0.7 135,405 2.4 10,027 0.3 Total $ 5,900,966 100.0 % $ 5,720,525 100.0 % $ 5,460,620 100.0 % Total deposits increased by $180.4 million, or 3.2%, to $5.901 billion, at December 31, 2024 compared to $5.721 billion at December 31, 2023. The increase in deposits was attributable to increases in commercial and public fund deposits. Commercial deposits increased $41.9 million, or 1.9% and represented 38.4% and 38.9% of total deposits at December 31, 2024 and 2023, respectively. Public fund deposits increased $246.6 million, or 15.8% and represented 30.7% and 27.3% of total deposits at December 31, 2024 and 2023, respectively. Additionally, brokered deposits decreased $93.8 million, and represented 0.7% and 2.4% of total deposits at December 31, 2024 and 2023, respectively. Retail deposits decreased $14.2 million, or 0.8%, and represented 30.2% and 31.4% of deposits at December 31, 2024 and 2023, respectively. The growth in public funds was positively impacted by the addition of new public funds customers in the Lake City Bank footprint, which included the addition of their operating accounts. Total deposits increased by $259.9 million, or 4.8%, to $5.721 billion, at December 31, 2023 compared to $5.461 billion December 31, 2022. The increase in deposits was attributable to increases in commercial and public fund deposits. Commercial deposits increased $141.2 million, or 6.8% and represented 38.9% and 38.2% of total deposits at December 31, 48 Table of Contents 2023 and 2022, respectively. Public fund deposits increased by $133.1 million, or 9.3% and represented 27.3% and 26.1% of total deposits at December 31, 2023 and 2022, respectively. Additionally, brokered deposits increased $125.4 million and represented 2.4% and 0.3% of total deposits at December 31, 2023 and 2022, respectively. Retail deposits decreased $139.8 million, or 7.2% and represented 31.4% and 35.4% of total deposits at December 31, 2023 and 2022, respectively. As previously noted, 30.7% of the Company’s deposit base is attributable to public fund entities which consist primarily of customers in the Company’s geographic footprint. A majority of public fund balances represent customers with operating accounts at the Bank. The public fund segment is a stable source of deposit funding and a focus in the treasury management area due to their business needs. A shift in funding away from public fund deposits could require the Company to execute alternative funding plans under the Contingency Funding Plan discussed in further detail under "Liquidity Risk". FHLB Advances and Other Borrowings During 2024, average total short-term borrowings decreased by $100.5 million to $66.3 million. Ending balances of short-term and miscellaneous borrowings decreased to zero at December 31, 2024 compared to $50.0 million at December 31, 2023. There were no long-term borrowings outstanding during 2024 and 2023. During 2023, average total short-term borrowings increased by $160.3 million to $166.8 million. Ending balances of short-term and miscellaneous borrowings decreased to $50.0 million at December 31, 2023 compared to $297.0 million at December 31, 2022. Average total long-term borrowings decreased by $32.1 million to zero, as no long-term FHLB advances were outstanding during 2023. Capital The Company believes that a strong, appropriately managed capital position is critical to support continued growth of loans and earnings. Capital is used primarily to fund continued organic loan growth and to support dividends to shareholders. The Company had a total risk-based capital ratio of 15.90%, a Tier I risk-based capital ratio of 14.64% and a common Tier 1 risk-based capital ratio of 14.64% as of December 31, 2024. These ratios met or exceeded the Federal Reserve Bank’s "well-capitalized" minimums of 10.0%, 8.0% and 6.5%, respectively. The Company also had a Tier 1 leverage ratio of 12.15% and a tangible equity ratio of 10.19%. When excluding the impact of accumulated other comprehensive income (loss) on tangible common equity, the Company's adjusted tangible common equity to adjusted tangible assets was 12.37%. See "Note 15 – Capital Requirements and Restrictions on Retained Earnings" for more information. The ability to maintain these ratios is a function of the balance between net income and a prudent dividend policy. Total stockholders’ equity increased by 5.3% to $683.9 million as of December 31, 2024 from $649.8 million as of December 31, 2023. The Company earned $93.5 million in 2024 and $93.8 million in 2023. The Company declared cash dividends of $1.92 per share in 2024, which decreased equity by $49.3 million. The Company declared cash dividends of $1.84 per share in 2023, which decreased equity by $47.1 million. Total stockholder's equity has been impacted by declines in the market value of the Company's available-for-sale investment securities portfolio. The market value decline, resulting from higher interest rate environment, has generated unrealized losses in the available-for-sale portfolio. Unrealized losses from the available-for-sale investment securities portfolio are recorded, net of tax, in accumulated other comprehensive income (loss) in the statement of stockholders' equity. Changes in the fair value of securities and net defined pension plan gains negatively impacted equity by $11.3 million in 2024 compared to an increase of $33.7 million in 2023. The impact to equity due to other comprehensive income (loss) is not included in regulatory capital. RISK MANAGEMENT Overview The Company, with the oversight of the Corporate Risk Committee of the board of directors, has developed a company-wide risk management program intended to help identify, manage and mitigate the various business risks it faces. Following is a discussion addressing the risks identified as most significant to the Company – Credit, Liquidity, Interest Rate and Market Risk. Item 7A. includes additional discussion about market risk. Credit Risk Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Our primary credit risks result from lending and to a lesser extent, investment activities. 49 Table of Contents Investment Portfolio The Company’s investment portfolio consists of government or government-sponsored entity securities and municipal bonds subject to an investment security policy that is approved annually by the board of directors. As of December 31, 2024, the Company’s investment in U.S government sponsored mortgage-backed securities represented approximately 38% of total investment securities fair value consisting of mortgage bonds issued by Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae, Fannie Mae and Freddie Mac securities are each guaranteed by their respective agencies as to principal and interest. All mortgage securities purchased by the Company in 2024 were within risk tolerances for price, prepayment, extension and original life risk characteristics contained in the Company’s investment policy. As of December 31, 2024, all mortgage-backed securities were performing in a manner consistent with management’s expectations at time of purchase. Municipal securities represented 52% of total investment securities fair value as of December 31, 2024 and were rated investment grade at the time of purchase and continue to be rated investment grade. The Company uses analytics provided by its third party portfolio advisor to evaluate and monitor credit risk for all investments on a quarterly basis. Based upon these analytics as of December 31, 2024, the securities in the combined available-for-sale and held-to-maturity portfolios had an effective duration of approximately 5.96 years. The analysis indicated a negative 7.6% change in market value in the event of a 100 basis point upward, instantaneous rate shock and a positive 7.8% change in market value in the event of a 100 basis point downward, instantaneous rate shock. Loan Portfolio The Company has a high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing conservative credit structures, adjusting its pricing to the perceived risk of each individual credit, diversifying the portfolio by customer, product, industry and market area and by obtaining personal loan guarantees. There were no loan concentrations within industries that exceeded ten percent of total loans, except commercial real estate. Commercial real estate was $2.593 billion, or 50.6% , of total loans at December 31, 2024. The owner occupied commercial real estate portfolio generally represents the financing of factories and operational facilities for the Bank's commercial and industrial borrowers. The Company’s in-house lending limit is $40.0 million. M anufacturing loans are included in the commercial and industrial loans total and are well diversified by industry. Agri-business and agricultural loans represented 7.6% of total loans as of December 31, 2024 and are not concentrated to any agricultural sector. Substantially all of the Bank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries. When segmenting the Bank's loan portfolio as of December 31, 2024, the largest segments are multifamily housing, agriculture, industrial commercial real estate and the recreational vehicle industry which represented 13.1%, 8.7%, 4.9% and 4.2% of total loans, respectively. 50 Table of Contents The following is a summary of nonperforming loans on an amortized cost basis as of December 31, 2024 and 2023. (dollars in thousands) 2024 2023 Amount of loans outstanding, net of deferred fees, December 31, $ 5,117,948 $ 4,916,534 Commercial and industrial loans Past due accruing loans (90 days or more) 3 0 Nonaccrual loans 52,857 11,395 Subtotal nonperforming loans 52,860 11,395 Commercial real estate and multi-family residential loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans 1,775 3,247 Subtotal nonperforming loans 1,775 3,247 Agri-business and agricultural loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans 71 100 Subtotal nonperforming loans 71 100 Other commercial loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans 0 0 Subtotal nonperforming loans 0 0 Consumer 1-4 family mortgage loans Past due accruing loans (90 days or more) 26 27 Nonaccrual loans 1,439 831 Subtotal nonperforming loans 1,465 858 Other consumer loans Past due accruing loans (90 days or more) 0 0 Nonaccrual loans 275 112 Subtotal nonperforming loans 275 112 Total nonperforming loans $ 56,446 $ 15,712 Ratio: Nonperforming loans to total loans 1.10 % 0.32 % Nonperforming assets of the Company include nonperforming loans (as indicated above), nonaccrual investments, other real estate owned and repossessions, the total of which amounted to $56.9 million and $16.1 million at December 31, 2024 and 2023, respectively. Nonperforming loans increased to 1.1% of total loans at December 31, 2024 compared to 0.3% at December 31, 2023. Nonperforming loans increased by $40.7 million during 2024, due primarily to the downgrade of a $43.3 million credit to an industrial company in Northern Indiana that occurred during the second quarter of 2024. Management remains vigilant in overseeing this credit exposure and is proactively working with the borrower. Loans for which the borrower appears to be unable or unwilling to repay its debt in full or on time, and the collateral is insufficient to cover all principal and accrued interest, will be reclassified as nonperforming to the extent they are unsecured, on or before the date when the loan becomes 90 days delinquent, with the exception of small dollar other consumer loans which are not placed on nonaccrual status since these loans are typically charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued, all unpaid accrued interest is reversed and interest income is subsequently recorded only to the extent cash payments are received. Accrual status is resumed when all contractually due payments are brought current and future payments are reasonably assured. 51 Table of Contents A loan is individually analyzed when full payment under the original loan terms is not expected or when the amount collected is expected to differ materially from the estimate that would be arrived at under the pooled method. Reserves are evaluated in total for smaller-balance loans of similar nature not in nonaccrual status such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans including material modifications made to borrowers experiencing financial difficulty. If a loan is individually analyzed, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flow or at the fair value of collateral if repayment is expected solely from the collateral. Total nonperforming loans were $56.4 million, or 1.1% of total loans, at December 31, 2024 versus $15.7 million, or 0.3% of total loans, at December 31, 2023. There were 43 relationships totaling $78.6 million classified as individually analyzed as of December 31, 2024 versus 33 relationships totaling $16.1 million at the end of 2023. The increase in individually analyzed loans during 2024 resulted primarily from the downgrade of two large commercial relationships to individually analyzed status for the year ended December 31, 2024. Loans renegotiated as modifications to borrowers experiencing financial difficulty are those loans for which the Company modifies the terms of loans for borrowers experiencing financial distress by providing the following forms of relief: forgiveness of loan principal, extension of repayment terms, reduction of interest rate or an other than insignificant payment delay. For the year ended December 31, 2024, no loan modifications were made to borrowers experiencing financial difficulty. For the year ended December 31, 2023, loans to three financially distressed commercial borrowers with balances totaling $4.4 million at December 31, 2023 received such modifications. 52 Table of Contents The following is a summary of the credit loss experience for the years ended December 31, 2024, 2023 and 2022. (dollars in thousands) 2024 2023 2022 Amount of loans outstanding, net of deferred fees, December 31, $ 5,117,948 $ 4,916,534 $ 4,710,396 Average daily loans outstanding during the year ended December 31, $ 5,039,406 $ 4,813,678 $ 4,427,166 Allowance for credit losses, January 1, $ 71,972 $ 72,606 $ 67,773 Loans charged-off: Commercial and industrial loans 1,615 6,341 4,022 Commercial real estate and multi-family residential loans 840 0 597 Agri-business and agricultural loans 0 0 0 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 94 163 42 Other consumer loans 919 828 473 Total loans charged-off 3,468 7,332 5,134 Recoveries of loans previously charged-off: Commercial and industrial loans 177 180 71 Commercial real estate and multi-family residential loans 106 322 277 Agri-business and agricultural loans 0 0 0 Other commercial loans 0 0 0 Consumer 1-4 family mortgage loans 53 38 52 Other consumer loans 370 308 192 Total recoveries 706 848 592 Net loans charged-off 2,762 6,484 4,542 Provision for credit loss charged to expense 16,750 5,850 9,375 Balance, December 31, $ 85,960 $ 71,972 $ 72,606 Ratios: Net charge offs (recoveries) to average daily loans outstanding: Commercial and industrial loans 0.03 % 0.13 % 0.09 % Commercial real estate and multi-family residential loans 0.01 (0.01) 0.01 Agri-business and agricultural loans 0.00 0.00 0.00 Other commercial loans 0.00 0.00 0.00 Consumer 1-4 family mortgage loans 0.00 0.00 0.00 Other consumer loans 0.01 0.01 0.00 Total ratio of net charge offs (recoveries) 0.05 % 0.13 % 0.10 % Allowance for credit losses on loans to: Total loans 1.68 % 1.46 % 1.54 % Ratio of allowance for credit losses to nonperforming loans 152.25 % 458.01 % 424.91 % 53 Table of Contents The following is a summary of the allocation for credit losses as of December 31, 2024 and 2023. (dollars in thousands) 2024 2023 Allocated allowance for credit losses: Commercial and industrial loans $ 45,539 $ 30,338 Commercial real estate and multi-family residential loans 30,865 31,335 Agri-business and agricultural loans 3,541 4,150 Other commercial loans 743 1,129 Consumer 1-4 family mortgage loans 3,358 3,474 Other consumer loans 1,531 1,174 Total allocated allowance for credit losses 85,577 71,600 Unallocated allowance for credit losses 383 372 Total allowance for credit losses $ 85,960 $ 71,972 At December 31, 2024, the allowance for credit losses was 1.68% of total loans outstanding, versus 1.46% of total loans outstanding at December 31, 2023. Management believes the allowance for credit losses is at a level commensurate with the overall risk exposure of the loan portfolio. The process of identifying expected credit losses is a subjective process. Therefore, the Company maintains a general allowance to cover expected credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the credit loss reserve includes the considerations below. Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate for expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other expected credit losses inherent in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current and forecasted economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of qualitative and environmental allowance is determined after considering the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality, changes in collateral strength and current economic conditions that may affect the borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s practice is to establish a specific allowance for credit losses for any assets where management has identified conditions or circumstances that indicate an asset is nonperforming. If an asset or portion thereof is classified as loss, the Company’s policy is to either establish specific allocations for credit losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. At December 31, 2024, on the basis of management’s review of the loan portfolio, the Company had 81 credits totaling $211.1 million on the classified loan list, which includes Special Mention credits, versus 68 credits totaling $183.1 million on December 31, 2023. These amounts represent outstanding balances, excluding deferred fees and costs. While the increase in classified loans during 2024 could raise concerns regarding the deterioration of credit in the Company's Indiana footprint, it has not translated to broader loan quality issues in the portfolio as net charges offs for the year and watch list loans as a percentage of total loans remained near historic lows. The Company remains cautiously optimistic in regards to the credit quality of the loan portfolio given stable economic conditions within the Company's operating footprint and will continue to actively manage loan portfolio challenges. As of December 31, 2024, the Company had $123.6 million of assets classified as Special Mention , $44.0 million classified as Substandard, $43.5 million classified as Doubtful and $0 classified as Loss as compared to $143.6 million, $39.4 million, $0 and $0, respectively, at December 31, 2023. The balances reported in "Note 4 – Allowance for Credit Losses and Credit Quality" include deferred fees and costs. Included in the classified loan amounts above were loans receiving modifications due to financial difficulty experienced by the borrower. No borrowers in financial distress received a modification for the year ended December 31, 2024. For the year ended December 31, 2023, loans to three commercial borrowers totaling $4.4 million with total allocations of $2.3 million received such modifications. 54 Table of Contents Allowance estimates are developed by management taking into account actual loss experience, subject to a floor, adjusted for current economic conditions and a reasonably supportable forecast period. The Company has regular discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company's loan portfolio based upon loan segment. In accordance with accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amounts. For a more thorough discussion of the allowance for credit losses methodology see the "Critical Accounting Policies" section of this Item 2. The allowance for credit losses increased $14.0 million, or 19.4%, from $72.0 million at December 31, 2023 to $86.0 million at December 31, 2024 due primarily to provision expense of $16.8 million and offset by net charge offs of $2.8 million during 2024. Pooled loan allocations decreased $5.4 million from $63.8 million at December 31, 2023 to $58.4 million at December 31, 2024. The unallocated component of the allowance for credit losses was $383,000 at December 31, 2024, which increased nominally from $372,000 reported at December 31, 2023 . The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of expected losses that may not be fully reflected in other allocations. The Company has experienced organic growth in total loans over the last several years with an increase in gross loans of $201.4 million , or 4.1% , from December 31, 2023 to December 31, 2024. This growth is largely concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining credit loss allocations. Management believes that it is prudent to continue to provide for credit losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions. Watch list loans increased $28.1 million, or 15.3% , to $211.1 million as of December 31, 2024, compared to $183.1 million at December 31, 2023. Watch list loans represented 4.1% of total loans at December 31, 2024 compared to 3.7% at December 31, 2023. The increase in watch list loans resulted primarily from additions to the watch list from downgraded credits of approximately $107.8 million and offset by removals from upgrades and pay offs of approximately $77.6 million in addition to pay downs or charge offs of other watch list credits. The Company's continued growth strategy promotes diversification among industries as well as continued focus on the en forcement of a disciplined credit culture and a conservative posture in loan work-out situations. Liquidity Risk Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. Liquidity is monitored and closely managed by the ALCO Committee. Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The liquidity structure is expressly detailed in the Company’s Contingency Funding Plan, which is discussed below. The Company relies on a number of different sources in order to meet these potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio. The cash flow from the securities portfolio is expected to provide approximately $104.2 million of potential contingent funding in 2025. The Bank had total available sources of liquidity totaling $3.681 billion at December 31, 2024 compared to $3.407 billion at December 31, 2023. The Company has approval of $3.723 billion in secondary funding sources available as of December 31, 2024, of which $41.6 million was utilized. The Company had $395.0 million of availability in federal funds lines with thirteen correspondent banks, of which none was drawn on as of December 31, 2024. The Company has board of directors approval to borrow up to $800.0 million at the FHLB, but given the Company’s current collateral structure and outstanding borrowings as of December 31, 2024, the Company could have only borrowed up to $555.9 million under this authority. The Company has additional collateral that could be pledged to the FHLB of $179.6 million as of December 31, 2024 to generate additional liquidity. Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $1.364 billion given its current collateral structure at the Federal Reserve Bank discount window program and the terms of that facility at December 31, 2024, with no balances outstanding at December 31, 2024. The Federal Reserve Bank's Bank Term Funding Program ("BTFP") expired in March 2024, and any previously pledged collateral to this program was released. The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the IntraFi Network CDARS One-Way Buy and Insured Cash Sweep One-Way Buy programs, to access these funds when desired with settlement of funds in one to two weeks’ time. The Bank is also a member of the American Financial Exchange ("AFX") where overnight fed funds purchased can be obtained from other banks on the exchange that have approved the Bank for an 55 Table of Contents unsecured, overnight line. These funds are only available if the approving banks have an "offer" out to sell that day. As of December 31, 2024, the total amount approved for the Bank via AFX banks was $304.0 million and none was outstanding at year end. The Company h ad 90% of its securities, based upon fair market value, in the available-for-sale portfolio at December 31, 2024, allowing the Company extensive flexibility to sell securities to meet funding demands. The remaining portion of investments securities were designated as held-to-maturity. Management believes the majority of the securities in investment portfolio are of high quality and marketable. Approximately 48% of this portfolio is comprised of U.S. government agency securities or mortgage-backed securities directly or indirectly backed by the U.S. government. At December 31, 2024, 96% of municipal securities owned by the Company were AAA or AA rated with a diversified geography of state issuer. In addition, the Company has historically sold the majority of its originated mortgage loans on the secondary market to reduce interest rate risk and to create an additional source of funding. The Company has a formalized Contingency Funding Plan ("CFP"). The Board and management recognize the importance of liquidity during times of normal operations and in times of stress. The CFP was developed to ensure that the multiple liquidity sources available to the Company are readily available. All liquidity sources are tested annually. The CFP specifically considers liquidity at the Bank and the Company level. The CFP identifies the potential funding sources at the Bank level, which includes the FHLB, the Federal Reserve Bank, brokered deposits, one-way buy products via the IntraFi Network (CDARS and Insured Cash Sweeps) and Federal Funds. The CFP also addresses the Bank’s ability to liquidate its securities portfolio or other liquid assets. The CFP funding sources at the holding company level include a holding company committed line of credit that renews annually, as well as the ability to transfer securities from the investment subsidiary of the Bank to the Company. The Company’s committed line of credit has availability up to $30.0 million, of which $0 was drawn upon as of December 31, 2024. Further, the CFP identifies CFP team members and expressly details their respective roles. Potential risk scenarios are identified and the plan includes multiple scenarios, including short-term and long-term funding crisis situations. Under the long-term funding crisis, two additional scenarios are identified: a moderate risk scenario and a highly stressed scenario. The CFP details the responsibilities and the actions to be taken by the CFP team under each scenario. Quarterly reports to management and the Board under the CFP include an early warning indicator matrix and pro forma cash flows for the various scenarios. The following table discloses information on the maturity of the Company’s contractual long-term obligations as of December 31, 2024. Payments Due by Period (dollars in thousands) Total One year or less 2-3 years 4-5 years After 5 years Operating leases $ 9,105 $ 822 $ 1,602 $ 1,414 $ 5,267 Pension and SERP plans 1,885 270 552 415 648 Total contractual long-term cash obligations $ 10,990 $ 1,092 $ 2,154 $ 1,829 $ 5,915 During the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended revolving lines of credit. The Company follows the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as it follows for those loans that are recorded in its financial statements. The Company’s exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments. Off-balance sheet transactions are more fully discussed in "Note 17 – Commitments, Off-Balance Sheet Risks and Contingencies". 56 Table of Contents The following table discloses information on the maturity of the Company’s commitments. Amount of Commitment Expiration Per Period (dollars in thousands) Total Amount Committed One year or less Over one year Unused loan commitments $ 2,640,116 $ 1,504,238 $ 1,135,878 Standby letters of credit 49,558 47,984 1,574 Total commitments and letters of credit $ 2,689,674 $ 1,552,222 $ 1,137,452 Interest Rate Risk Interest rate risk is the risk that the estimated fair value of the Company’s assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that net income will be significantly reduced by interest rate changes. Interest rate risk represents the Company’s primary market risk exposure. The Company does not have material exposure to foreign currency exchange risk and does not maintain a trading portfolio. The Corporate Risk Committee of the Board annually reviews and approves the ALCO policy and the Derivatives and Hedging policy used to manage interest rate risk. These policies set guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income, but it does not necessarily indicate the effect on future net interest income. Generally, the Bank is asset sensitive due to the impact of the variable rate commercial loan portfolio on the Bank's sensitivity to market rates. During 2024, asset sensitivity declined due to a shift to shorter-term interest bearing deposit accounts, such as money market accounts and due to fixed rate loans that repriced in 2024. As a result, the Company expects net interest margin to remain relatively stable in the first 100 basis points potential declines in the federal funds rate due to a more neutral posture for balance sheet sensitivity. Deposit re-pricing in a declining interest rate environment is expected to exceed past easing cycles. Earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve Board. During 2024 the Federal Reserve Board’s Federal Open Market Committee ("FOMC") decreased the target federal funds rate a total of 100 basis points, following a combined increase of 525 basis points in 2022 and 2023. Rate decreases were implemented during late 2024 at the September, November and December FOMC meetings. The combined effect of these actions decreased the target federal funds rate to a range of 4.25% to 4.50%. The FOMC statement released for the meeting in December 2024 recognized that inflation has made progress towards the Committee’s two percent objective but remains somewhat elevated. The statement also indicated that since earlier in 2024, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. The Committee reaffirmed its dual objective relative to maximum employment and inflation targets. The updated economic projections released at the December meeting project the median federal funds rate decreasing to 3.9% in 2025 (lowering of the target federal funds rate by 50 basis points), with continued easing to 3.4% in 2026. Additionally, the longer run median forecast for the federal funds rate was increased to 3.0% as compared to 2.5% projected by the FOMC in December 2023. The combined result of the increase in the yield on earning assets, which was more than offset by an increase in the cost of funds due to continued increased competition for deposits experienced during 2024, led to a decrease in net interest margin from 3.31% for 2023 to 3.18% for 2024. The Company’s yield on earning assets increased 27 basis points during 2024 as assets repriced at higher rates primarily due to the FOMC rate increases during both 2022 and 2023 and a higher yield curve (for the middle-to-long end where the Company's earning assets would reprice) for the majority of 2024 as compared to year-end 2023. The commercial loan portfolio represents 88% of the total loan portfolio as of December 31, 2024. Approximately 66% of the commercial loan portfolio are variable rate loans which are primarily indexed to One Month Term SOFR, Prime and FHLB indices. The increase in earning asset yields was offset by an increase in the Company's funding costs, as depositors continued to seek higher interest bearing deposit products and competition for deposits remained strong throughout the industry. The rate paid on deposit accounts and purchased funds increased 40 basis points for 2024, following an increase of 179 basis points in 2023. The realized increase in the rate paid on deposit accounts and purchased funds was magnified by a decrease in the average balance of non-interest bearing demand deposit accounts for 2024 verses 2023, primarily in commercial deposit accounts. The Company anticipates that cost of funds may continue to decline if the FOMC continues to ease and that the deposit repricing may be more accelerated than variable loan repricing. Future changes in the net interest margin will be dependent upon multiple factors including further actions by the FOMC during 2025 in response to inflation, economic conditions and geopolitical concerns, the results of any of the administration’s changes to economic policy and laws, competitive pressures in the various markets served, and changes in the 57 Table of Contents structure of the balance sheet as a result of changes in customer demands for products and services. In general, we expect loans to reprice quicker than deposits in a rising and falling rate environment as quantified in the sensitivity to market rates table in Item 7A, although to a lesser degree than historically projected due to a shift from a more asset sensitive balance sheet to neutral. The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index ("CPI") coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by the Company. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds.