LAKELAND FINANCIAL CORP 10-Q

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income in the first three months of 2025 was $20.1 million, which decreased $3.3 million , or 14.2%, from $23.4 million for the comparable period of 2024 . Diluted income per common share was $0.78 in the first three months of 2025 , a decrease of 14.3% from $0.91 in the comparable period of 2024 . The decrease in net income for 2025 was primarily due to an increase in the provision for credit losses of $5.3 million, or 347.4%, an increase in noninterest expense of $2.1 million, or 6.7%, and a decrease in noninterest income of $1.7 million, or 13.4%. Offsetting these effects was an increase to net interest income of $5.5 million, or 11.5%. Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $31.0 million in the first three months of 2025 , an increase of $1.7 million , or 5.9%, compared to $29.3 million for the comparable period of 2024 . Annualized return on average total equity was 11.70% in the first three months of 2025 versus 14.59% in the comparable period of 2024 . Annualized return on average total assets was 1.20% in the first three months of 2025 versus 1.44% for the comparable period of 2024 . The Company's average equity to average assets ratio was 10.29% in the first three months of 2025 versus 9.84% in the comparable period of 2024 . The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 10.09% at March 31, 2025, compared to 9.80% at March 31, 2024 and 10.19% at December 31, 2024. Unrealized losses from available-for-sale investment securities were $188.3 million at March 31, 2025, compared to $189.9 million at March 31, 2024 and $191.1 million at December 31, 2024. When excluding the impact of accumulated other comprehensive income (loss) ("AOCI") on tangible common equity and tangible assets, the Company's adjusted tangible common equity to adjusted tangible assets ratio, which is a non-GAAP financial measure, was 12.19% at March 31, 2025, compared to 12.03% at March 31, 2024 and 12.37% at December 31, 2024. Total assets were $6.851 billion as of March 31, 2025 versus $6.678 billion as of December 31, 2024, an increase of $172.8 million, or 2.6% . Balance sheet expansion was driven by increases to t otal loans, net of the allowance for credit losses, which increased $98.8 million, or 2.0%, cash and cash equivalents, which increased $67.0 million, or 39.8%, and available-for-sale securities, which increased $9.4 million, or 1.0%. Funding the balance sheet expansion between December 31, 2024 and March 31, 2025 were total deposits, which increased $59.2 million, or 1.0%, and total borrowings, which increased $108.2 million. Total equity increased $10.6 million, or 1.5%, from $683.9 million at December 31, 2024 to $694.5 million at March 31, 2025. Retained earnings increased $7.2 million, or 1.0%, primarily as a result of net income of $20.1 million and reduced by dividends declared and paid of $12.8 million. CRITICAL ACCOUNTING POLICIES The Company’s accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2024. 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. See “Note 4 – Allowance for Credit Losses and Credit Quality” for more information on this critical accounting policy. 35 Table of Contents RESULTS OF OPERATIONS Overview Selected income statement information for the three months ended March 31, 2025 and 2024 is presented in the following table: Three Months Ended March 31, (dollars in thousands) 2025 2024 Income Statement Summary: Net interest income (A) $ 52,875 $ 47,416 Provision for credit losses 6,800 1,520 Noninterest income (B) 10,928 12,612 Noninterest expense (C) 32,763 30,705 Other Data: Efficiency ratio (1) 51.35 % 51.15 % Diluted EPS $ 0.78 $ 0.91 Average Equity/Average Assets 10.29 % 9.84 % Tangible capital ratio (2) 10.09 9.80 Adjusted tangible capital ratio (3) 12.19 12.03 Net charge-offs to average loans 0.03 0.03 Net interest margin 3.40 3.15 Noninterest income to total revenue 17.13 21.01 Pretax pre-provision earnings (4) $ 31,040 $ 29,323 (1) Noninterest expense (C) / (Net interest income (A) + Noninterest income (B)) = Efficiency Ratio (2) Non-GAAP financial measure. Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity. Management believes this is an important measure because it is useful for planning and forecasting purposes. See reconciliation on the following pages. (3) 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 recent significant rise in prevailing interest rates and demonstrates long-term trends capital strength. See reconciliation on the following pages. (4) 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. 36 Table of Contents The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the Company's financial performance. Tangible common equity, adjusted tangible common equity, tangible assets, adjusted tangible assets, tangible book value per common share, tangible common equity to tangible assets, adjusted tangible common equity to adjusted tangible assets, and pretax pre-provision earnings are non-GAAP financial measures calculated based on GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets from the calculation of equity, net of deferred tax. Tangible assets are calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets, net of deferred tax. Adjusted tangible assets and adjusted tangible common equity remove the fair market value adjustment impact of the available-for-sale investment securities portfolio in accumulated other comprehensive income (loss) ("AOCI"). Tangible book value per common share is calculated by dividing tangible common equity by the number of shares outstanding less true treasury stock. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. However, management considers these measures of the company’s value meaningful to understanding of the company’s financial information and performance. A reconciliation of these non-GAAP financial measures is provided below. As of and For The Three Months Ended March 31, (dollars in thousands, except per share data) 2025 2024 Total Equity $ 694,509 $ 647,009 Less: Goodwill (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 Tangible Common Equity (A) 690,706 643,206 Market Value Adjustment in AOCI 163,879 166,189 Adjusted Tangible Common Equity (C) 854,585 809,395 Total Assets $ 6,851,178 $ 6,566,861 Less: Goodwill (4,970) (4,970) Plus: Deferred Tax Assets Related to Goodwill 1,167 1,167 Tangible Assets (B) 6,847,375 6,563,058 Market Value Adjustment in AOCI 163,879 166,189 Adjusted Tangible Assets (D) 7,011,254 6,729,247 Ending Common Shares Issued (E) 25,727,393 25,677,399 Tangible Book Value per Common Share (A/E) $ 26.85 $ 25.05 Tangible Capital Ratio (A/B) 10.09 % 9.80 % Adjusted Tangible Capital Ratio (C/D) 12.19 % 12.03 % Net Interest Income $ 52,875 $ 47,416 Plus: Noninterest Income 10,928 12,612 Minus: Noninterest Expense (32,763) (30,705) Pretax Pre-Provision Earnings $ 31,040 $ 29,323 37 Table of Contents Adjusted core noninterest income, adjusted earnings before income taxes, core operational profitability, core operational diluted earnings per common share and adjusted core efficiency ratio are non-GAAP financial measures calculated based on GAAP amounts. These adjusted amounts are calculated by excluding the impact of insurance recoveries related to the 2023 wire fraud loss for the periods presented below. Management considers these measures of financial performance to be meaningful to understanding the company’s core business performance for these periods. A reconciliation of these non-GAAP financial measures is provided below. Three Months Ended (dollars in thousands, except per share data) Mar. 31, 2025 Mar. 31, 2024 Noninterest Income $ 10,928 $ 12,612 Less: Insurance Recovery 0 (1,000) Adjusted Core Noninterest Income $ 10,928 $ 11,612 Earnings Before Income Taxes $ 24,240 $ 27,803 Adjusted Core Impact: Noninterest Income 0 (1,000) Total Adjusted Core Impact 0 (1,000) Adjusted Earnings Before Income Taxes 24,240 26,803 Tax Effect (4,155) (4,153) Core Operational Profitability (1) $ 20,085 $ 22,650 Diluted Earnings Per Common Share $ 0.78 $ 0.91 Impact of Adjusted Core Items 0.00 (0.03) Core Operational Diluted Earnings Per Common Share $ 0.78 $ 0.88 Adjusted Core Efficiency Ratio 51.35 % 52.02 % (1) Core operational profitability was $751,000 lower than reported net income for the three months ended March 31, 2024. Net Income Net income was $20.1 million in the first three months of 2025, which decreased $3.3 million , or 14.2%, from $23.4 million for the comparable period of 2024 . Diluted income per common share was $0.78 in the first three months of 2025 , a decrease of 14.3% from $0.91 in the comparable period of 2024 . The decrease in net income for the first three months of 2025 was primarily due to an increase in the provision for credit losses of $5.3 million, or 347.4%, an increase in noninterest expense of $2.1 million, or 6.7%, and a decrease to noninterest income of $1.7 million, or 13.4%. Offsetting these effects was an increase to net interest income of $5.5 million, or 11.5%. 38 Table of Contents N et Interest Income The following tables set forth consolidated information regarding average balances and rates: Three Months Ended March 31, 2025 2024 (fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/ Rate Average Balance Interest Yield (1)/ Rate Earning Assets Loans: Taxable (2)(3) $ 5,160,031 $ 81,740 6.42 % $ 4,916,943 $ 82,042 6.71 % Tax exempt (1) 25,887 361 5.66 54,077 1,118 8.31 Investments: Securities (1) 1,136,404 8,338 2.98 1,158,503 8,035 2.79 Short-term investments 2,964 28 3.83 2,710 33 4.90 Interest bearing deposits 105,518 1,096 4.21 84,696 1,073 5.10 Total earning assets $ 6,430,804 $ 91,563 5.77 % $ 6,216,929 $ 92,301 5.97 % Less: Allowance for credit losses (87,477) (72,433) Nonearning Assets Cash and due from banks 71,004 68,584 Premises and equipment 60,523 57,883 Other nonearning assets 288,116 283,505 Total assets $ 6,762,970 $ 6,554,468 Interest Bearing Liabilities Savings deposits $ 283,888 $ 42 0.06 % $ 295,650 $ 49 0.07 % Interest bearing checking accounts 3,486,447 28,075 3.27 3,046,958 30,365 4.01 Time deposits: In denominations under $100,000 212,934 1,832 3.49 224,139 1,918 3.44 In denominations over $100,000 633,112 6,509 4.17 789,581 8,832 4.50 Miscellaneous short-term borrowings 99,830 1,122 4.56 175,809 2,454 5.61 Long-term borrowings and subordinated debentures 254 0 0.00 — — 0.00 Total interest bearing liabilities $ 4,716,465 $ 37,580 3.23 % $ 4,532,137 $ 43,618 3.87 % Noninterest Bearing Liabilities Demand deposits 1,258,344 1,274,103 Other liabilities 92,108 103,221 Stockholders' Equity 696,053 645,007 Total liabilities and stockholders' equity $ 6,762,970 $ 6,554,468 Interest Margin Recap Interest income/average earning assets 91,563 5.77 % 92,301 5.97 % Interest expense/average earning assets 37,580 2.37 43,618 2.82 Net interest income and margin $ 53,983 3.40 % $ 48,683 3.15 % (1) 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 Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.1 million and $1.3 million for the three-month periods ended March 31, 2025 and March 31, 2024, respectively. (2) Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended March 31, 2025 and 2024 , are included as taxable loan interest income. (3) Nonaccrual loans are included in the average balance of taxable loans. 39 Table of Contents Net interest income, on a fully tax equivalent basis, increased $5.3 million, or 10.9%, to $54.0 million for the three months ended March 31, 2025, compared to $48.7 million for the first three months of 2024 . The increase in net interest income on a fully tax equivalent basis was driven by a decrease in deposit interest expense of $4.7 million , or 11.4% , from $41.2 million to $36.5 million . Borrowings expense declined by $1.3 million, or 54.3%. Securities interest income contributed further to the increase in fully tax equivalent net interest income, increasing by $303,000 , or 3.8% . A decline in loan interest income negatively impacted fully tax equivalent net interest income, decreasing $1.1 million, or 1.3%, from $83.2 million to $82.1 million between the two periods. Total average earning assets were $6.431 billion for the three months ended March 31, 2025, an increase of $213.9 million, or 3.4%, compared to $6.217 billion for the three months ended March 31, 2024 . Average loans outstanding drove the increase to total average earning assets, increasing $214.9 million, or 4.3%, to $5.186 billion from $4.971 billion for the three months ended March 31, 2025 and 2024, respectively . Offsetting this increase was a decrease to average investment securities of $22.1 million, or 1.9%, to $1.136 billion from $1.159 billion between the respective periods . Total average interest bearing liabilities were $4.716 billion for the three months ended March 31, 2025, an increase of $184.3 million, or 4.1%, from $4.532 billion for the three months ended March 31, 2024. This increase was driven by increased interest bearing deposits of $260.1 million, or 6.0%, from $4.356 billion for the three months ended March 31, 2024 to $4.616 billion for the three months ended March 31, 2025. Offsetting the increase to average interest bearing deposits was a decrease in total average borrowings of $75.7 million, or 43.1%, to $100.1 million from $175.8 million for the three months ended March 31, 2025 and 2024 , respectively. Noninterest bearing demand deposits decreased $15.8 million, or 1.2%, to $1.258 billion from $1.274 billion between the two periods. The tax equivalent net interest margin was 3.40% for the three months ended March 31, 2025, compared to 3.15% during the first three months of 2024, representing a 25 basis point expansion between the two periods. The net interest margin increase was primarily driven by a decrease to interest expense as a percentage of average earning assets, which decreased to 2.37% for the three months ended March 31, 2025 , down from 2.82% for the comparable period of 2024, for a decrease of 45 basis points. This decline was attributable to a decrease in the rate for total interest bearing liabilities of 64 basis points from 3.87% to 3.23% between the respective periods. This decrease was driven by reduced costs associated with the repricing of the Company's interest bearing deposits as a result of monetary policy easing from the Federal Reserve Bank. The decrease in interest expense for interest bearing deposits was a result of a decrease in the average rate for interest bearing deposits of 60 basis points, from 3.80% to 3.20%. Offsetting the decrease in average rate was an increase in average interest bearing deposits of $260.1 million , or 6.0% , from $4.356 billion for the three months ended March 31, 2024 to $4.616 billion for the three months ended March 31, 2025. The decline provided by the reduction in interest expense as a percentage of average earning assets was amplified further by reduced borrowings expense as compared to the prior year. The Company anticipates the cost of funds would continue to respond favorably to any further monetary policy easing by the Federal Reserve Bank. The improvement in interest expense as a percentage of average earning assets was offset by a 20 basis point decrease in interest income as a percentage of average earning assets, which declined fro m 5.97% to 5.77%. This decrease was attributable to a decline in average loan yields, which decreased 31 basis to 6.42% for the three months ended March 31, 2025, down from 6.73% for the comparable period of 2024. Offsetting the impact the decline in average yield had on interest income as a percentage of average earning assets was an increase in average loans of $214.9 million , or 4.3% , to $5.186 billion from $4.971 billion between the respective periods. The Company expects that any continued easing of monetary policy by the Federal Reserve Bank, which commenced in September 2024, would exert downward pressure on loan yields as variable rate commercial loans reprice lower; however, this decline may be countered by further reductions in deposit pricing. Provision for Credit Losses The Company recorded provision for credit losses expense of $6.8 million for the three months ended March 31, 2025, compared to provision expense of $1.5 million during the comparable period of 2024, an increase of $5.3 million, or 347.4%. Net charge-offs were $327,000 during the three month period ended March 31, 2025, compared to $312,000 during the comparable period of 2024, an increase of $15,000, or 4.8%. The increase in provision expense between the respective periods was primarily attributable to an increase in the specific reserve allocation for the previously disclosed $43.4 million nonperforming credit to an industrial company in Northern Indiana. Additional factors considered by management included key loan quality metrics, reserve coverage of nonperforming loans, economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower. Management’s overall view on current credit quality was also a factor in the determination of the provision for credit losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans. 40 Table of Contents Noninterest Income Noninterest income categories for the three months ended March 31, 2025 and 2024 are shown in the following tables: Three Months Ended March 31, (dollars in thousands) 2025 2024 Dollar Change Percent Change Wealth advisory fees $ 2,867 $ 2,455 $ 412 16.8 % Investment brokerage fees 452 522 (70) (13.4) Service charges on deposit accounts 2,774 2,691 83 3.1 Loan and service fees 2,884 2,852 32 1.1 Merchant and interchange fee income 822 863 (41) (4.8) Bank owned life insurance income 322 1,036 (714) (68.9) Mortgage banking income (loss) (51) 52 (103) (198.1) Net securities gains (losses) 0 (46) 46 100.0 Other income 858 2,187 (1,329) (60.8) Total noninterest income $ 10,928 $ 12,612 $ (1,684) (13.4) % Noninterest income to total revenue 17.13 % 21.01 % Noninterest income decreased $1.7 million, or 13.4%, to $10.9 million for the first quarter of 2025, compared to $12.6 million for the first quarter of 2024. Adjusted core noninterest income, a non-GAAP financial measure that excludes the effect of the insurance recovery recorded during the first quarter of 2024, was $11.6 million for the first quarter of 2024, a decrease of $684,000, or 5.9%, compared to $10.9 million for the first quarter of 2025. Wealth advisory fees increased $412,000, or 16.8%, driven by growth in customers and assets under management. Deposit fees increased $83,000, or 3.1%, driven primarily by growth in our treasury management services. Other income decreased $1.3 million, or 60.8%. Other income during the first quarter of 2024 benefited from a $1.0 million insurance recovery related to the wire fraud loss from 2023 and death benefits received from the Company's bank owned life insurance program. Bank owned life insurance income decreased $714,000, or 68.9%, primarily due to a reduction in the market performance of the Company's variable bank owned life insurance policies, which are tied to the equity markets. Noninterest Expense Noninterest expense categories for the three months ended March 31, 2025 and 2024 are shown in the following tables: Three Months Ended March 31, (dollars in thousands) 2025 2024 Dollar Change Percent Change Salaries and employee benefits $ 17,902 $ 16,833 $ 1,069 6.4 % Net occupancy expense 1,980 1,740 240 13.8 Equipment costs 1,382 1,412 (30) (2.1) Data processing fees and supplies 4,265 3,839 426 11.1 Corporate and business development 1,406 1,381 25 1.8 FDIC insurance and other regulatory fees 800 789 11 1.4 Professional fees 2,380 2,463 (83) (3.4) Other expense 2,648 2,248 400 17.8 Total noninterest expense $ 32,763 $ 30,705 $ 2,058 6.7 % Efficiency ratio 51.35 % 51.15 % Noninterest expense increased $2.1 million, or 6.7%, to $32.8 million for the first quarter of 2025, compared to $30.7 million during the first quarter of 2024. Salaries and benefits expense increased by $1.1 million, or 6.4%, driven by performance-based incentive compensation expense of $1.3 million and salary expense of $524,000. These increases were offset by reduced deferred compensation expense of $687,000, which moves in tandem with the market performance of the Company's variable bank owned life insurance. Data processing fees and supplies expense increased $426,000, or 11.1%, from continued investment in customer-facing and operational technology solutions. 41 Table of Contents The Company's income tax expense decreased $247,000, or 5.6%, to $4.2 million in the three months ended March 31, 2025, compared to $4.4 million for the same period in 2024. The effective tax rate was 17.1% in the three months ended March 31, 2025, compared to 15.8% for the comparable period of 2024, driven by a reduction in the tax benefit recognized from stock-based compensation vesting of shares for plan participants. FINANCIAL CONDITION Overview Total assets were $6.851 billion as of March 31, 2025 versus $6.678 billion as of December 31, 2024, an increase of $172.8 million, or 2.6% . Balance sheet expansion was driven by increases to t otal loans, net of the allowance for credit losses, which increased $98.8 million, or 2.0%, cash and cash equivalents, which increased $67.0 million, or 39.8%, and available-for-sale securities, which increased $9.4 million, or 1.0%. Funding the balance sheet expansion between December 31, 2024 and March 31, 2025 were increases to total deposits, which increased $59.2 million, or 1.0%, and total borrowings, which increased $108.2 million. The increase in total deposits was driven by an increase in interest bearing deposits of $59.8 million, or 1.3%, and was offset by a decrease in noninterest bearing deposits of $549,000. Total equity increased $10.6 million, or 1.5%, from $683.9 million at December 31, 2024 to $694.5 million at March 31, 2025. Retained earnings increased $7.2 million, or 1.0%, as a result of net income of $20.1 million but was reduced by dividends declared and paid of $12.8 million. Uses of Funds Total Cash and Cash Equivalents Total cash and cash equivalents increased by $67.0 million, or 39.8%, to $235.2 million at March 31, 2025, from $168.2 million at December 31, 2024. Cash and cash equivalents include short-term investments. The fluctuation in cash and cash equivalents at March 31, 2025 was driven by an increase in cash and due from banks of $17.6 million, or 24.5%, and an increase in interest bearing short-term investment accounts of $49.4 million, or 51.2%. Investment Portfolio The amortized cost and the fair value of securities as of March 31, 2025 and December 31, 2024 were as follows: March 31, 2025 December 31, 2024 (dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Available-for-Sale U.S government sponsored agencies $ 139,872 $ 115,118 $ 137,150 $ 109,435 Mortgage-backed securities: residential 505,416 438,918 500,278 422,409 State and municipal securities 543,847 446,839 545,073 459,582 Total available-for-sale $ 1,189,135 $ 1,000,875 $ 1,182,501 $ 991,426 Held-to-Maturity State and municipal securities $ 131,979 $ 109,481 $ 131,568 $ 113,107 Total Investment Portfolio $ 1,321,114 $ 1,110,356 $ 1,314,069 $ 1,104,533 At March 31, 2025 and December 31, 2024, there were no holdings of securities of any one issuer, other than the U.S. government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity. Management is aware that the directional change in the fair value of the available-for-sale investment securities portfolio is inversely related to the directional movement of the interest rate environment, with the resulting impact being reflected in the unrealized gain (loss) of the available-for-sale investment securities portfolio. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses. Purchases of available-for-sale securities were $22.2 million in the first three months of 2025. Investment securities represented 16.5% of total assets on March 31, 2025, compared to 16.8% of total assets on December 31, 2024. The Company anticipates receiving principal and interest cash flows of approximately $82.3 million during the remainder of 2025 from the 42 Table of Contents investment securities portfolio and plans to use that liquidity to fund loan growth and to reinvest cash flows into the investment securities portfolio. Tax equivalent adjusted effective duration for the investment securities portfolio was 5.9 years at March 31, 2025 and 6.0 years at December 31, 2024. Tax equivalent adjusted effective duration of the portfolio remains elevated as compared to 4.0 years at December 31, 2019. Paydowns from prepayments and scheduled payments of $14.7 million were received in the first three months of 2025, and the amortization of premiums, net of the accretion of discounts, was $1.0 million. There were no sales of available-for-sale investment securities in the first three months of 2025. No allowance for credit losses was recognized for available-for-sale or held-to-maturity securities as of March 31, 2025 and December 31, 2024. The fair value of the available-for-sale investment securities portfolio as of March 31, 2025 included net unrealized losses of $188.3 million, compared to net unrealized losses of $191.1 million as of December 31, 2024. Unrealized losses in the available-for-sale investment securities portfolio resulted from the declines in market values of the investment securities resulting from the rise in interest rates. The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Real Estate Mortgage Loans Held-for-Sale Real estate mortgage loans held-for-sale decreased by $405,000, or 23.8%, to $1.3 million at March 31, 2025, from $1.7 million at December 31, 2024. The balance of this asset category is subject to a high degree of variability depending on, among other factors, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $3.0 million in the first three months of 2025, compared to $4.1 million in the first three months of 2024. Management expects the volume of loans originated for sale in the secondary market to increase if long-term interest rates decline from current levels. Demand for mortgage loans has been impacted by limited housing inventory and existing home owners locked in at historically low rates. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $307.6 million and $313.0 million, as of March 31, 2025 and December 31, 2024, respectively. Loan Portfolio The loan portfolio by portfolio segment as of March 31, 2025 and December 31, 2024 is summarized as follows: (dollars in thousands) March 31, 2025 December 31, 2024 Current Period Change Commercial and industrial loans $ 1,523,570 29.2 % $ 1,450,865 28.3 % $ 72,705 Commercial real estate and multi-family residential loans 2,620,817 50.2 2,592,520 50.6 28,297 Agri-business and agricultural loans 383,771 7.3 387,396 7.6 (3,625) Other commercial loans 94,927 1.8 95,584 1.9 (657) Consumer 1-4 family mortgage loans 500,195 9.6 490,229 9.6 9,966 Other consumer loans 102,254 1.9 104,041 2.0 (1,787) Subtotal, gross loans 5,225,534 100.0 % 5,120,635 100.0 % 104,899 Less: Allowance for credit losses (92,433) (85,960) (6,473) Net deferred loan fees (2,313) (2,687) 374 Loans, net $ 5,130,788 $ 5,031,988 $ 98,800 Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $98.8 million, or 2.0%, to $5.131 billion at March 31, 2025 from $5.032 billion at December 31, 2024. The increase was primarily driven by originations of loans concentrated in the commercial and industrial loans, commercial real estate and multi-family residential loans and consumer 1-4 family mortgage loans categories and was offset by paydowns in the agri-business and agricultural loans segment which traditionally experiences seasonal fluctuations in activity. 43 Table of Contents The following table summarizes the Company’s non-performing assets as of March 31, 2025 and December 31, 2024: (dollars in thousands) March 31, 2025 December 31, 2024 Nonaccrual loans $ 57,392 $ 56,431 Loans past due over 90 days and still accruing 7 28 Total nonperforming loans 57,399 56,459 Other real estate owned 284 284 Repossessions 193 143 Total nonperforming assets $ 57,876 $ 56,886 Individually analyzed loans $ 81,346 $ 78,647 Nonperforming loans to total loans 1.10 % 1.10 % Nonperforming assets to total assets 0.84 % 0.85 % Total nonperforming assets increased by $1.0 million, or 1.7%, to $57.9 million during the three month period ended March 31, 2025. The ratio of nonperforming assets to total assets decreased 1 basis point from 0.85% at December 31, 2024 to 0.84% at March 31, 2025. A loan is individually analyzed when full payment under the original loan terms is not expected. The analysis for smaller loans that are similar in nature and which are not in nonaccrual or modified status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans. 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 flows or at the fair value of collateral if repayment is expected solely from the collateral. Total individually analyzed loans increased by $2.7 million, or 3.4%, to $81.3 million at March 31, 2025 from $78.6 million at December 31, 2024. The increase to individually analyzed loans was primarily related to the downgrade of one commercial relationship to nonperforming status, and a working capital credit line increase for an unrelated relationship currently on performing status. 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 to absorb current expected credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other current expected losses 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 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. General allowance is determined after considering the following factors: application of loss percentages using a probability of default/loss given default approach subject to a floor, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. 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 applies to 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 policy 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 a loss, the Company’s policy is to either establish specified allowances for credit losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount. At March 31, 2025, the allowance for credit losses was 1.77% of total loans, an increase of 9 basis points from 1.68% at December 31, 2024. At March 31, 2025, management believed the allowance for credit losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses. The process of identifying credit losses is a subjective process. The Company has a relatively high percentage of commercial and commercial real estate loans, which are 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 relatively conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by 44 Table of Contents diversifying the portfolio by customer, product, industry and market area. The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $100.6 million for this sector represented 1.9% of total loans at March 31, 2025. Additionally, commercial real estate loans secured by multi-family residential properties and secured by non-farm non-residential properties were approximately 214.0% of the Bank's risk-based capital at March 31, 2025. As of March 31, 2025, based on management’s review of the loan portfolio, the Company had 82 credit relationships with principal balances totaling $215.6 million on the classified loan list versus 81 credit relationships with principal balances totaling $211.1 million as of December 31, 2024. As of March 31, 2025, the Company had $124.5 million of assets classified as Special Mention, $47.7 million classified as Substandard, $43.4 million classified as Doubtful and $0 classified as Loss as compared to $123.6 million, $44.0 million, $43.5 million and $0, respectively, at December 31, 2024. Watch list loans as a percentage of total loans were 4.13% as of March 31, 2025 and December 31, 2024. Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions and a reasonably supportable forecast period. The Company has annual 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 applicable accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability 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 $6.5 million, or 7.5%, from $86.0 million at December 31, 2024 to $92.4 million at March 31, 2025. The increase was a result of provision expense of $6.8 million which was offset by net charge-offs of $327,000. Provision expense recorded during the three months ended March 31, 2025 was primarily attributable an increase in the specific allocation for the previously disclosed $43.3 million nonperforming credit to an industrial company in Northern Indiana. The remainder of the increase was attributable to the downgrade of an unrelated $1.0 million unsecured credit to nonperforming status and to loan growth between the two periods. As the bulk of the Company’s lending activity is 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. Sources of Funds The Company's sources of funds include a diversified deposit base gathered throughout the Company's footprint and includes a growing mix of commercial, retail and public funds deposit accounts. While the traditional base of core deposits represents the primary source of funding for the Company, the Company has access to a robust array of other liquidity sources, including secured borrowings available from the Federal Home Loan Bank and the Federal Reserve Bank Discount Window. In addition, the Company has access to unsecured borrowing capacity through long established relationships within the brokered deposit markets, Federal Funds lines from correspondent bank partners and Insured Cash Sweep (ICS) one-way buy funds available from the Intrafi network. As of March 31, 2025, the Company had access to $3.519 billion in unused liquidity available from these aggregate sources as compared to $3.681 billion at December 31, 2024. 45 Table of Contents The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the three months ended March 31, 2025 and 2024 are summarized in the following table: Three months ended March 31, 2025 2024 (dollars in thousands) Balance Rate Balance Rate Noninterest bearing demand deposits $ 1,258,344 0.00 % $ 1,274,103 0.00 % Savings and transaction accounts: Savings deposits 283,888 0.06 295,650 0.07 Interest bearing demand deposits 3,486,447 3.27 3,046,958 4.01 Time deposits: Deposits of $100,000 or more 633,112 4.17 789,581 4.50 Other time deposits 212,934 3.49 224,139 3.44 Total deposits $ 5,874,725 2.52 % $ 5,630,431 2.94 % FHLB advances and other borrowings 100,084 4.54 175,809 5.61 Total funding sources $ 5,974,809 2.55 % $ 5,806,240 3.02 % Average total deposits were $5.875 billion for the three months ended March 31, 2025, an increase of $244.3 million, or 4.3%, from the comparable period in 2024. Average total borrowings were $100.1 million for the three months ended March 31, 2025, a decrease of $75.7 million, or 43.1%, from the comparable period in 2024. Total average deposit costs decreased 42 basis points from 2.94% for the three months ended March 31, 2024, to 2.52% for the three months ended March 31, 2025. Total average borrowing costs decreased 107 basis points from 5.61% for the three months ended March 31, 2024 to 4.54% for the three months ended March 31, 2025. As a result, total funding costs decreased by 47 basis points from 3.02% for the three months ended March 31, 2024, to 2.55% for the three months ended March 31, 2025. The decrease in funding costs between the two periods was attributable to easing of monetary policy by the Federal Reserve Bank which allowed deposit costs to reprice to lower levels and reduced the borrowings average rates. Deposits and Borrowings As of March 31, 2025, total deposits increased by $59.2 million, or 1.0%, from December 31, 2024. Core deposits, which excludes brokered deposits, decreased by $24.6 million, or 0.4%, to $5.835 billion as of March 31, 2025 from $5.859 billion as of December 31, 2024. Total brokered deposits were $125.4 million at March 31, 2025, compared to $41.6 million at December 31, 2024, an increase of $83.8 million, or 201.8%. The following table summarizes deposit composition at March 31, 2025 and December 31, 2024: (dollars in thousands) March 31, 2025 Percentage of Total December 31, 2024 Percentage of Total Current Period Change Retail $ 1,787,992 30.0 % $ 1,780,726 30.2 % $ 7,266 Commercial 2,336,910 39.2 2,269,049 38.4 67,861 Public funds 1,709,883 28.7 1,809,631 30.7 (99,748) Core deposits $ 5,834,785 97.9 % $ 5,859,406 99.3 % $ (24,621) Brokered deposits 125,409 2.1 41,560 0.7 83,849 Total deposits $ 5,960,194 100.0 % $ 5,900,966 100.0 % $ 59,228 On March 31, 2025, commercial deposits represented 39.2% of total deposits versus 38.4% at December 31, 2024. Retail deposits represented 30.0% at March 31, 2025 versus 30.2% at December 31, 2024. Public Funds deposits represented 28.7% at March 31, 2025 versus 30.7% at December 31, 2024. Brokered deposits represented 2.1% of total deposits at March 31, 2025 versus 0.7% at December 31, 2024. Commercial deposits expanded $67.9 million, or 3.0%, from $2.269 billion at December 31, 2024 to $2.337 billion at March 31, 2025; retail deposits expanded $7.3 million, or 0.4%, from $1.781 billion at December 31, 2024 to $1.788 billion at March 31, 2025; and public funds deposits contracted $99.7 million, or 5.5%, from $1.810 billion at December 31, 2024 to $1.710 billion at March 31, 2025, due to seasonal activity. 46 Table of Contents Deposits not covered by FDIC deposit insurance were 57.2% as of March 31, 2025, versus 62.1% at December 31, 2024. Deposits not covered by FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (which insures public fund deposits in Indiana), were 28.9% of total deposits as of March 31, 2025, versus 32.3% as of December 31, 2024. As of March 31, 2025 and December 31, 2024, 97.8% and 98.0% of deposit accounts had deposit balances less than $250,000, respectively. Capital As of March 31, 2025, total stockholders’ equity was $694.5 million, an increase of $10.6 million, or 1.5%, from $683.9 million at December 31, 2024. The increase to total stockholders' equity was driven by net income of $20.1 million and was reduced by dividends declared and paid of $12.8 million and an increase of $2.6 million in accumulated other comprehensive income (loss). The impact on equity for other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of March 31, 2025, the Company's capital levels remained characterized as “well-capitalized”. The actual capital amounts and ratios of the Company and the Bank as of March 31, 2025 and December 31, 2024, are presented in the table below. Capital ratios for March 31, 2025 are preliminary until the Call Report and FR Y-9C are filed. Actual Minimum Required For Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Regulations (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of March 31, 2025: Total Capital (to Risk Weighted Assets) Consolidated $ 927,157 15.77 % $ 470,433 8.00 % $ 617,443 N/A N/A N/A Bank $ 920,327 15.66 % $ 470,090 8.00 % $ 616,993 10.50 % $ 587,613 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 853,328 14.51 % $ 352,825 6.00 % $ 499,835 N/A N/A N/A Bank $ 846,552 14.41 % $ 352,568 6.00 % $ 499,471 8.50 % $ 470,090 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 853,328 14.51 % $ 264,618 4.50 % $ 411,629 N/A N/A N/A Bank $ 846,552 14.41 % $ 264,426 4.50 % $ 411,329 7.00 % $ 381,948 6.50 % Tier I Capital (to Average Assets) Consolidated $ 853,328 12.30 % $ 277,588 4.00 % $ 277,588 N/A N/A N/A Bank $ 846,552 12.21 % $ 277,430 4.00 % $ 277,430 4.00 % $ 346,787 5.00 % As of December 31, 2024: Total Capital (to Risk Weighted Assets) Consolidated $ 917,769 15.90 % $ 461,847 8.00 % $ 606,175 N/A N/A N/A Bank $ 909,232 15.76 % $ 461,612 8.00 % $ 605,866 10.50 % $ 577,015 10.00 % Tier I Capital (to Risk Weighted Assets) Consolidated $ 845,352 14.64 % $ 346,385 6.00 % $ 490,713 N/A N/A N/A Bank $ 836,845 14.50 % $ 346,209 6.00 % $ 490,463 8.50 % $ 461,612 8.00 % Common Equity Tier 1 (CET1) Consolidated $ 845,352 14.64 % $ 259,789 4.50 % $ 404,116 N/A N/A N/A Bank $ 836,845 14.50 % $ 259,657 4.50 % $ 403,911 7.00 % $ 375,060 6.50 % Tier I Capital (to Average Assets) Consolidated $ 845,352 12.15 % $ 278,369 4.00 % $ 278,369 N/A N/A N/A Bank $ 836,845 12.03 % $ 278,240 4.00 % $ 278,240 4.00 % $ 347,800 5.00 % 47 Table of Contents FORWARD-LOOKING STATEMENTS This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation: • the effects of future economic, business and market conditions and changes, particularly in our Indiana market area, including prevailing interest rates and the rate of inflation; • governmental trade, monetary and fiscal policies; • the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities; • changes in borrowers’ credit risks and payment behaviors; • the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible credit losses, our analysis of our capital position and other estimates; • the performance of our commercial real estate loan portfolio, including the effects of the elevated interest rate environment, the strength of the commercial real estate market in our Indiana markets, and recent changes in retail and office usage patterns; • risk of cybersecurity attacks that could result in damage to the Company's or third-party service providers' networks or data of the Company; • the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators; • the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; • the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets; • the effects of disruption and volatility in capital markets on the value of our investment portfolio; • changes in the prices, values and sales volumes of residential real estate; • changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages; • the impact of litigation and other claims we may be subject to from time to time; • the effects of fraud by or affecting employees, customers or third parties; • changes in the availability and cost of credit and capital in the financial markets; • changes in technology or products that may be more difficult or costly, or less effective than anticipated; • changes in accounting policies, rules and practices; • the risks related to mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; and 48 Table of Contents • the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2024, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.