FIRST MERCHANTS CORP (FRME)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

From time to time, we include forward-looking statements in our oral and written communication. We may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, in other written materials and in oral statements made by senior management to analysts, investors, representatives of the media and others. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of these safe harbor provisions. Forward-looking statements can often be identified by the use of words like “believe”, “continue”, “pattern”, “estimate”, “project”, “intend”, “anticipate”, “expect” and similar expressions or future or conditional verbs such as “will”, “would”, “should”, “could”, “might”, “can”, “may”, or similar expressions. These forward-looking statements include:

•statements of the Corporation's goals, intentions and expectations;

•statements regarding the Corporation's business plan and growth strategies;

•statements regarding the asset quality of the Corporation's loan and investment portfolios; and

•estimates of the Corporation's risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events:

•fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations and expense expectations;

•adverse changes in the economy, which might affect our business prospects and could cause credit-related losses and expenses;

•the impacts of epidemics, pandemics or other infectious disease outbreaks;

•the impacts related to or resulting from recent bank failures or adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks;

•adverse developments in our loan and investment portfolios;

•competitive factors in the banking industry, such as the trend towards consolidation in our market;

•changes in the banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like our affiliate bank;

•acquisitions of other businesses by us and integration of such acquired businesses;

•changes in market, economic, operational, liquidity, credit and interest rate risks associated with our business; and

•the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our anticipated future results.

BUSINESS SUMMARY

First Merchants Corporation (the “Corporation”) is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s common stock is traded on the Nasdaq’s Global Select Market System under the symbol FRME. The Corporation conducts its banking operations through First Merchants Bank (the “Bank”), a wholly-owned subsidiary that opened for business in Muncie, Indiana in March 1893. The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank operates 126 banking locations in Indiana, Ohio, and Michigan. In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one reportable business segment, which is community banking.

Through the Bank, the Corporation offers a broad range of commercial and consumer banking services to meet the diverse needs of our customers. Our commercial banking team offers a full spectrum of debt capital, treasury management services and depository products. The consumer banking group offers a variety of consumer deposit and lending products. The mortgage banking team offers consumer mortgage solutions to assist with the purchase, refinance, construction or renovation of residential properties. Private Wealth Advisors offers personal wealth management services with expertise in investment management, private banking, fiduciary estate and financial planning.

Acquisitions

On February 1, 2026, the Corporation completed the acquisition of First Savings Financial Group, Inc., an Indiana corporation, pursuant to the Agreement and Plan of Merger, dated as of September 24, 2025, by and between the Corporation and First Savings. Immediately following the Merger, First Savings Bank, a wholly-owned subsidiary of First Savings, merged with and into the Bank with the Bank surviving the merger and continuing its corporate existence.

First Savings was headquartered in Jeffersonville, Indiana and had 16 banking centers serving the southern Indiana market. The Corporation engaged in this transaction with the objective that the transaction would be accretive to earnings and add to the existing market area in Indiana that has a demographic profile consistent with many of the current Midwest markets served by the Bank.

The Corporation acquired total assets of $2.4 billion, total loans of $1.8 billion, and total deposits of $1.7 billion. The total purchase price of approximately $243.2 million consisted primarily of equity consideration issued by the Corporation and was measured at fair value based on the Corporation’s common stock price as of the acquisition date. The purchase price also included cash paid in lieu of fractional shares. The purchase price represented the fair value of consideration transferred in accordance with ASC 805. Immediately following the acquisition of First

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PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Savings, the Corporation sold substantially all of the acquired investment securities portfolio. The sale was executed as part of the Corporation’s balance sheet repositioning strategy, with the resulting liquidity used to pay down wholesale funding following the acquisition.

For additional information regarding the acquisition, see NOTE 2. ACQUISITIONS of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The U.S. Generally Accepted Accounting Principles ("GAAP") are complex and require us to apply significant judgment in the application of accounting, reporting, and disclosure requirements. Management uses estimates and assumptions where actual amounts are not reasonably available, including assumptions based on historical experience and other factors management believes to be reasonable under the circumstances. Because of this inherent uncertainty in these estimates and assumptions, actual results could differ from those estimates, and such differences could be material to the financial condition and results of operations.

There have been no significant changes during the six months ended June 30, 2026 to the items disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2025. For a complete discussion of our significant accounting policies, see “Notes to the Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2025. However, due to the First Savings acquisition on February 1, 2026, the Corporation has expanded its discussion below of accounting practices and valuation methodologies related to business combinations, which involve significant judgment and estimation uncertainty.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting. Under this method, the acquired assets and liabilities assumed are recorded at their estimated fair values as of the acquisition date, with the excess of the purchase price over the estimated fair value of the net assets acquired recorded as goodwill. The Corporation uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates and realizable collateral values.

In connection with the acquisition, and consistent with the guidance in ASU 2025‑08, loans acquired through business combinations that meet the definition of PSL are recorded using the gross-up method. PCD loans continue to be accounted for under existing PCD guidance, which also applies the gross‑up method; however, PCD loans represent loans that experienced more‑than‑insignificant credit deterioration since origination, while PSLs did not. Under this method, the Corporation recognizes an allowance for credit losses on loans at the acquisition date, with a corresponding increase to the loan's amortized cost basis. The establishment of the ACL - Loans at acquisition did not result in a provision for credit losses or earnings impact on the acquisition date. Expected credit losses as of the acquisition date are recognized through the acquisition‑date allowance for credit losses, while the non‑credit discount reflects all other valuation factors, including differences between contractual interest rates and prevailing market rates, liquidity considerations, and other non‑credit‑related assumptions. The non‑credit discount is accreted into interest income over the remaining life of the loans using the effective interest method. Subsequent changes in expected credit losses for PSLs are recognized through the provision for credit losses in the period in which the estimate changes, consistent with the Corporation's methodology for originated loans measured at amortized cost.

The acquisition date valuations, as well as any measurement period adjustments recognized subsequent to the acquisition date, determine the amount of goodwill recorded. Measurement period adjustments are recorded if new information is obtained about facts and circumstances that existed as of the acquisition date and are reflected as adjustments to goodwill. Because these adjustments affect the fair values of acquired assets and liabilities, including loans and identifiable intangible assets, changes in these estimates could materially affect the amount of goodwill recorded.

The fair value determinations are based on valuation methodologies that incorporate management's assumptions regarding future growth rates, attrition, discount rates, and other relevant factors. In certain circumstances, third party valuation specialists are engaged to assist in the development of these fair value estimates. The valuation of acquired assets and assumed liabilities often requires a significant degree of judgment, particularly when observable market data is limited or unavailable. Changes in these estimates or in economic or market conditions could require adjustments to the carrying values of acquired assets and liabilities, including the recognition of impairment where applicable.

Results of operations of First Savings are included in the income statement from the date of acquisition. Details of the Corporation's acquisitions are included in NOTE 2. ACQUISITIONS of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

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PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The historical consolidated financial data discussed below reflects historical results of operations and financial condition and should be read in conjunction with our financial statements and related notes thereto presented in Item 8 of this Annual Report on Form 10-K. In addition to historical financial data, this discussion includes certain forward-looking statements regarding events and trends that may affect our future results. Such statements are subject to risks and uncertainties that could cause our actual results to differ materially. See our cautionary “Statement Regarding Forward-Looking Statements.” For a more complete discussion of the factors that could affect our future results, see “Risk Factors” under Item 1A of this Annual Report on Form 10-K.

OVERVIEW

The Corporation is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s common stock is traded on the Nasdaq’s Global Select Market System under the symbol FRME. The Corporation conducts its banking operations through First Merchants Bank (the “Bank”), a wholly-owned subsidiary that opened for business in Muncie, Indiana, in March 1893. The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank includes 111 banking locations in Indiana, Ohio, and Michigan. In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

Through the Bank, the Corporation offers a broad range of commercial and consumer banking services to meet the diverse needs of our customers. Our commercial banking team offers a full spectrum of debt capital, treasury management services and depository products. The consumer banking group offers a variety of consumer deposit and lending products. The mortgage banking team offers consumer mortgage solutions to assist with the purchase, refinance, construction or renovation of residential properties. Private Wealth Advisors offers personal wealth management services with expertise in investment management, private banking, fiduciary estate and financial planning.

ACQUISITION AND DIVESTITURE

On February 1, 2026, the Corporation completed the acquisition of First Savings Financial Group, Inc., an Indiana corporation (“First Savings”), pursuant to the Agreement and Plan of Merger, dated as of September 24, 2025, by and between the Corporation and First Savings (the “Merger Agreement”). Immediately following the Merger, First Savings Bank, a wholly-owned subsidiary of First Savings, merged with and into the Bank with the Bank surviving the merger and continuing its corporate existence.

First Savings was headquartered in Jeffersonville, Indiana and had 16 banking centers serving the southern Indiana market and had total assets of $2.4 billion (unaudited), total loans of $1.9 billion (unaudited), and total deposits of $1.7 billion (unaudited) as of December 31, 2025. The Corporation engaged in this transaction with the objective that the transaction would be accretive to earnings and add to the existing market area in Indiana that has a demographic profile consistent with many of the current Midwest markets served by the Bank. For the year ended December 31, 2025, the Corporation recorded merger-related expenses of $0.8 million related to the First Savings acquisition.

For additional information regarding the acquisition, see NOTE 2. ACQUISITIONS AND DIVESTITURES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. In addition, the Merger Agreement is filed as an exhibit to this Annual Report on Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

Generally accepted accounting principles require management to apply significant judgment to certain accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply those principles where actual measurement is not possible or practical. The judgments and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from estimates, which could have a material effect on the Corporation’s financial condition and results of operations. For a complete discussion of the Corporation’s significant accounting policies see NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Allowance for Credit Losses - Loans

As discussed in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, the allowance for credit losses on loans is a contra-asset valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management’s best estimate of current expected credit losses on loans considering available information obtained from internal and external sources that is relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable economic forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, the Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may either increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending management and staff, and (vi) other environmental factors such as regulatory, legal and technological considerations, as well as competition.

While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond management’s control, including the performance of the loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL HIGHLIGHTS

The table below includes certain financial data of the Corporation for the previous 3 years:

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - 2025

The Corporation reported net income available to common stockholders and diluted earnings per common share for the year ended 2025 of $224.1 million and $3.88 per diluted common share, respectively, compared to $199.5 million and $3.41 per diluted common share, respectively, for the year ended 2024.

When adjusting for certain non-recurring items, adjusted net income available to common stockholders was $224.7 million and adjusted diluted earnings per common share totaled $3.89 for the year ended 2025, compared to $203.3 million and $3.47, respectively, for the year ended 2024. These adjusted net income and earnings per share amounts are non-GAAP measures. For reconciliations of non-GAAP measures to their most comparable GAAP measures, see “NON-GAAP FINANCIAL MEASURES” within the “Results of Operations” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As of December 31, 2025, total assets equaled $19.0 billion, an increase of $713.1 million, or 3.9 percent, from December 31, 2024.

Cash and due from banks and interest-bearing deposits decreased $106.0 million from December 31, 2024. Total investment securities decreased $82.1 million from December 31, 2024, primarily due to $164.9 million in maturities and redemptions of available for sale securities and held to maturity securities and $10.0 million related to amortization of purchase premiums during the year ended December 31, 2025. These decreases were partially offset by $19.7 million in purchases and a $71.5 million decrease in unrealized losses within the available for sale securities portfolio. Investment securities represented 17.8 percent of total assets at December 31, 2025, compared to 18.9 percent at December 31, 2024. Additional details of the changes in the Corporation’s investment securities portfolio are discussed within NOTE 4. INVESTMENT SECURITIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s total loan portfolio grew $938.8 million, or 7.3 percent, since December 31, 2024. The composition of the loan portfolio is 76.2 percent commercial‑oriented with the largest loan classes of commercial and industrial and commercial real estate, non-owner occupied, representing 32.4 percent and 17.0 percent of the total loan portfolio, respectively. The increase was primarily driven by an increase in commercial and industrial and public finance and other commercial loans. Offsetting these increases was a decrease in individuals’ loans for household and other personal expenditures. Additional details of the changes in the Corporation’s loan portfolio are discussed within NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, and the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation’s allowance for credit losses - loans (“ACL - Loans”) totaled $195.6 million as of December 31, 2025 and equaled 1.42 percent of total loans, compared to $192.8 million and 1.50 percent of total loans at December 31, 2024. During the year ended December 31, 2025, the Corporation recognized $18.4 million of net charge-offs, or 14 basis points of average loans, compared to net charge-offs of $49.4 million, or 39 basis points of average loans, for the year ended December 31, 2024. The Corporation recorded $21.3 million of provision for credit losses during 2025 compared to $35.7 million during 2024. Nonaccrual loans as of December 31, 2025 totaled $71.8 million, a decrease of $2.0 million from December 31, 2024, primarily due to an $11.3 million, $2.1 million and $0.8 million decrease in nonaccrual balances within the commercial real estate, non-owner occupied, construction and home equity loan classes, respectively. The decrease was offset by an $8.3 million, $2.5 million and $1.3 million increase in nonaccrual balances within the residential, commercial and industrial and commercial real estate, owner occupied loan classes, respectively. The coverage ratio of ACL - Loans to nonaccrual loans is 272.5 percent at December 31, 2025. Additional details of the Corporation’s allowance methodology and asset quality are discussed within NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and within the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation’s premises and equipment decreased $8.7 million from December 31, 2024 primarily due to disposal of equipment no longer in use. Additional details of the Corporation’s disposal of fixed assets is discussed within NOTE 6. PREMISES AND EQUIPMENT of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.

The Corporation’s tax asset, deferred and receivable decreased from $92.4 million at December 31, 2024 to $78.7 million at December 31, 2025, which included the Corporation’s net deferred tax asset decreasing from $85.9 million at December 31, 2024 to $67.2 million at December 31, 2025. The $18.7 million decrease in the Corporation’s net deferred tax asset was primarily attributable to changes in temporary differences, including the impact of unrealized gains and losses on available‑for‑sale securities, as well as other balance sheet‑driven items during the year.

Other assets decreased $12.6 million from December 31, 2024 and was driven by a $28.7 million decline in the fair value of derivative instruments included in other assets from $77.1 million at December 31, 2024 to $48.5 million at December 31, 2025. The decrease in derivatives is due primarily to a decline in market interest rates. This decrease was partially offset by an increase of $10.7 million related to the Corporation’s continual investment in community redevelopment funds and an increase of $4.5 million in the prepaid pension asset due to higher returns on plan assets compared to December 31, 2024. Additional details of the Corporation’s investments in community redevelopment funds and pension plan are discussed in NOTE 9. QUALIFIED AFFORDABLE HOUSING INVESTMENTS and NOTE 18. PENSION AND OTHER POST RETIREMENT BENEFIT PLANS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Deposits increased $773.2 million, or 5.3 percent, from December 31, 2024. The majority of the organic deposit growth was due to increases in non-maturity deposits of $749.4 million. Lower interest rates have resulted in customers migrating funds from maturity time deposit products into non-maturity deposit products. Total deposits less time deposits greater than $100,000, or core deposits, represented 94.0 percent of the deposit portfolio at December 31, 2025. Noninterest bearing deposits represented 14.0 percent of the deposit portfolio at December 31, 2025, compared to 16.0 percent at December 31, 2024. The loan to deposit ratio increased to 90.3 percent at December 31, 2025, from 88.6 percent at December 31, 2024.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The average account balance within the deposit portfolio was $38,000 at December 31, 2025. Insured deposits totaled 71.4 percent of total deposits, with the State of Indiana’s Public Deposit Insurance Fund, which insures certain public deposits, providing insurance to 14.0 percent of deposits and the FDIC providing insurance to the remaining 57.4 percent. Only 28.6 percent of deposits are uninsured and our available liquidity is sufficient to cover those when considering both on balance sheet sources of liquidity and unused capacity from the Federal Reserve Discount Window, FHLB and unsecured borrowing sources.

Total borrowings decreased $158.3 million as of December 31, 2025, compared to December 31, 2024. Federal funds purchased and Federal Home Loan Bank advances declined $59.2 million and $24.0 million, respectively, compared to December 31, 2024. Brokered certificates of deposit were used to support loan growth that exceeded deposit growth, reducing the need for overnight borrowings and Federal Home Loan Bank advances compared to the prior year. Subordinated debentures and other borrowings decreased $35.9 million due to the repayment of $30.0 million of Level One subordinated notes and $5.0 million of Fixed-to-Floating Rate Senior Notes due 2028 (“Senior Debt”) during 2025. Securities sold under repurchase agreements decreased $39.1 million from December 31, 2024 as clients shifted to other deposit products. Additional details of the Corporation’s borrowings are discussed within NOTE 11. BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s other liabilities as of December 31, 2025 decreased $65.7 million from December 31, 2024, primarily due to a decrease in the derivative liabilities of $28.6 million, as a result of a decline in market interest rates, and a $23.0 million decrease in unfunded commitments related to the Corporation’s Low-Income Housing Tax Credit (“LIHTC”) partnerships.

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

RESULTS OF OPERATIONS - 2024

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

When adjusting for certain non-recurring items, adjusted net income available to common stockholders for the year ended 2024 was $203.3 million and adjusted diluted earnings per common share totaled $3.47, compared to $236.7 million and $3.98, respectively, for the year ended 2023. These adjusted net income and earnings per share amounts are non-GAAP measures. For reconciliations of non-GAAP measures to their most comparable GAAP measures, see “NON-GAAP FINANCIAL MEASURES” within the “Results of Operations” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Cash and due from banks and interest-bearing deposits decreased from December 31, 2023 by $162.2 million. Total investment securities decreased $350.7 million from December 31, 2023, primarily due to the sales of $268.5 million of investment securities during the year ended December 31, 2024. Scheduled paydowns and maturities and unrealized losses in available for sale securities decreased investment securities by $147.9 million and $18.7 million, respectively, which was offset by $94.7 million in purchases of CRA eligible securities. The investment portfolio as a percentage of total assets was 18.9 percent at December 31, 2024 compared to 20.7 percent at December 31, 2023. During 2024, the Corporation repositioned the investment securities portfolio with a primary focus of using liquidity generated from sales of securities to fund loan growth, the sale of deposits to Old Second National Bank and reinvestment in higher-yielding assets. Additional details of the changes in the Corporation’s investment securities portfolio are discussed within NOTE 4. INVESTMENT SECURITIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s total loan portfolio grew $368.1 million, or 2.9 percent, since December 31, 2023. The composition of the loan portfolio is 75.0 percent commercial oriented with the largest loan classes of commercial and industrial and commercial real estate, non-owner occupied, representing 31.9 percent and 17.7 percent of the total loan portfolio, respectively. The increase was primarily driven by an increase in commercial and industrial, public finance and other commercial loans, and residential real estate loans. Partially offsetting those increases was a decrease in construction and commercial real estate, non-owner occupied loans. Additional details of the changes in the Corporation’s loan portfolio are discussed within NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, and the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Corporation’s ACL - Loans totaled $192.8 million as of December 31, 2024 and equaled 1.50 percent of total loans, compared to $204.9 million and 1.64 percent of total loans at December 31, 2023. During the year ended December 31, 2024, the Corporation recognized $49.4 million of net charge-offs, or 39 basis points of average loans, compared to net charge-offs of $25.6 million, or 21 basis points of average loans, for the year ended December 31, 2023. The increase in net charge-offs is primarily related to two commercial and industrial relationships that accounted for $42.7 million of charge-offs during 2024. One borrower experienced a sudden change in revenue from the cancellation and inability to renegotiate their contracts with the U.S. Government. This negatively impacted the value of the borrower’s business and resulted in their inability to repay the principal and interest. The second borrower provided notification of its plans to cease operations, which resulted in their inability to repay principal and interest and a charge-off for the Corporation. The Corporation recorded $35.7 million of provision for credit losses during 2024 compared to $3.5 million during 2023. The increase in the provision for credit losses was primarily driven by the increase in net charge-offs described above. Nonaccrual loans as of December 31, 2024 totaled $73.8 million, an increase of $20.2 million from December 31, 2023, primarily due to a $24.1 million increase in nonaccrual balances within the construction loan class. The increase was partially offset by a $3.6 million decrease in nonaccrual balances within the residential loan class. The coverage ratio of ACL - Loans to nonaccrual loans is 261.3 percent at December 31, 2024. Additional details of the Corporation’s allowance methodology and asset quality are discussed within NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and within the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation’s premises and equipment decreased $4.2 million from December 31, 2023 primarily due to the sale of five Illinois branches. Additional details of the Corporation’s divestiture of assets related to the Old Second National Bank branch sale is discussed within NOTE 2. ACQUISITIONS AND DIVESTITURES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.

The Corporation’s tax asset, deferred and receivable decreased from $99.9 million at December 31, 2023 to $92.4 million at December 31, 2024. The $7.5 million decrease was a combination of the Corporation’s net deferred tax asset increasing from $84.7 million at December 31, 2023 to $85.9 million at December 31, 2024, and the income tax receivable decreasing from $15.2 million at December 31, 2023 to $6.5 million at December 31, 2024.

The Corporation’s other assets increased $64.8 million from December 31, 2023. The Corporation’s continual investment in community redevelopment funds resulted in an increase of $57.0 million when compared to December 31, 2023. Additionally, the prepaid pension asset at December 31, 2024 increased by $4.0 million compared to the same period in 2023. Additional details of the Corporation’s investments in community redevelopment funds and pension plan are discussed in NOTE 9. QUALIFIED AFFORDABLE HOUSING INVESTMENTS and NOTE 18. PENSION AND OTHER POST RETIREMENT BENEFIT PLANS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Deposits decreased $299.8 million from December 31, 2023. The decrease in deposits was primarily driven by the sale of $267.4 million of deposits related to the Illinois branch sale that closed in the fourth quarter of 2024. Total deposits excluding time deposits greater than $100,000 represented 92.8 percent of the deposit portfolio at December 31, 2024. Noninterest bearing deposits represented 16.0 percent of the deposit portfolio, down slightly from 16.9 percent as of December 31, 2023. The decline is the result of a mix shift occurring across the industry as clients moved into higher yielding deposit products.

The average account balance within the deposit portfolio was $35,000 at December 31, 2024. Insured deposits totaled 70.6 percent of total deposits, with the State of Indiana’s Public Deposit Insurance Fund, which insures certain public deposits, providing insurance to 14.0 percent of deposits and the FDIC providing insurance to the remaining 56.6 percent. Only 29.4 percent of deposits were uninsured and our available liquidity was ample to cover those when considering both on balance sheet sources of liquidity and unused capacity from the Federal Reserve Discount Window, FHLB and unsecured borrowing sources.

Total borrowings increased $129.4 million as of December 31, 2024, compared to December 31, 2023. Federal funds purchased and Federal Home Loan Bank advances increased $99.2 million and $109.7 million, respectively, compared to December 31, 2023 as the Corporation utilized borrowings to fund loan growth and supplement deposit balances in 2024. Offsetting these increases was a $65.1 million decrease in subordinated debt and other borrowings due to the Corporation exercising its rights to redeem $65.0 million in principal of subordinated debt in 2024. Additional details of the Corporation’s borrowings are discussed within NOTE 11. BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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

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

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NON-GAAP FINANCIAL MEASURES

The Corporation’s accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Corporation provides non-GAAP performance measures, which management believes are useful because they assist investors in assessing the Corporation’s performance. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the following tables.

Adjusted net income available to common stockholders and adjusted diluted earnings per common share are meaningful non-GAAP financial measures for management, as they provide a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of the Corporation’s business, because management does not consider these items to be relevant to ongoing financial performance on a per share basis.

Non-GAAP financial measures such as tangible common stockholders’ equity, tangible assets, tangible common stockholders’ equity to tangible assets, tangible book value per common share, tangible net income available to common stockholders, diluted tangible net income per common share, return on average tangible common stockholders’ equity and return on average tangible assets are important measures of the strength of the Corporation’s capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the Corporation’s financial position without regard to the effects of intangible assets and preferred stock, but do retain the effect of accumulated other comprehensive income (loss) in stockholders’ equity. Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Return on average tangible common stockholders’ equity is tangible net income expressed as a percentage of average tangible common stockholders’ equity.  Return on average tangible assets is tangible net income expressed as a percentage of average tangible assets.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income is the most significant component of the Corporation’s earnings, comprising 80.9 percent of revenues for the year ended December 31, 2025. Net interest income and net interest margin are influenced by the volume and mix of earning assets and funding sources, as well as prevailing interest rate conditions. Other factors include accretion income on purchased loans, loan prepayment activity and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from customer deposits generally costs less than wholesale funding sources. Factors such as general economic activity, the Federal Reserve’s monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and our net interest income and net interest margin.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented on a fully taxable equivalent (“FTE”) basis in the tables that follow to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. The federal statutory rate of 21 percent was used for 2025, 2024, and 2023.

The FTE analysis portrays the income tax benefits associated with tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets. Management believes that presenting net interest margin and net interest income on an FTE basis is a standard practice in the banking industry. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons.

Net interest margin, on an FTE basis, increased 6 basis points to 3.25 percent for the year ended December 31, 2025 compared to 3.19 percent for the same period in 2024.

Average Balance Sheet

Average earning assets for the year ended December 31, 2025 increased $210.3 million compared to the same period in 2024. The increase was driven by a $686.4 million, or 5.4 percent, increase in average total loans, which reached $13.3 billion. Average commercial loans and tax-exempt loans increased $404.2 million and $216.3 million, respectively. The increase in average total loans was partially offset by a $334.6 million decline in average investment securities and a $146.0 million decline in interest-bearing deposits, consistent with the Corporation’s strategy to reallocate assets toward higher-yielding loans.

Total average deposits were essentially flat year over year at $14.8 billion for the year ended December 31, 2025 compared to the same period in 2024. Average interest-bearing deposits increased by $192.1 million, driven by increases in money market deposits, partially offset by declines in certificates and other time deposits and savings deposits. Average noninterest-bearing deposits decreased by $192.6 million, reflecting continued client migration into interest-bearing products.

Average borrowings increased $133.7 million, or 13.3 percent, for the year ended December 31, 2025 compared to the same period of 2024. This increase was primarily driven by increases of $140.7 million and $38.9 million in the average balance of FHLB advances and federal funds purchased, respectively. Partially offsetting these increases was a $35.5 million decrease in the average balance of subordinated debt, reflecting the Corporation’s redemption of $30.0 million in the first quarter of 2025 and the redemption of $5.0 million of Senior Debt in the third quarter of 2025. The increase in borrowings supported loan growth and helped manage the funding mix while prudently optimizing the Corporation’s overall cost of funds.

Interest Income/Expense and Average Yields

FTE net interest income increased $16.3 million, or 3.0 percent, for the year ended December 31, 2025 compared to the same period of 2024. The net interest margin improved to 3.25 percent from 3.19 percent, driven by a 35 basis point reduction in the cost of interest-bearing liabilities to 2.82 percent from 3.17 percent. This benefit more than offset a 19 basis point decline in asset yields to 5.50 percent, which was partially mitigated by a $3.3 million interest recovery recognized in the fourth quarter of 2025, which favorably impacted net interest margin by approximately 2 basis points.

Interest income on an FTE basis decreased $21.8 million for the year ended December 31, 2025, compared to the same period of 2024. The decrease was primarily due to lower yields on variable rate loans following the Federal Open Market Committee’s 100 basis point rate cut in the second half of 2024 and an additional 75 basis point reduction in the second half of 2025. The yield on commercial loans and tax-exempt loans decreased 55 basis points and 54 basis points, respectively, in 2025 compared to 2024.

Interest expense on deposits decreased $38.1 million, reflecting lower rates across all deposit categories. The total cost of interest-bearing liabilities decreased 35 basis points, to 2.82 percent for the year ended December 31, 2025, down from 3.17 percent for the same period in 2024. The reduction in funding costs more than offset the decline in asset yields and resulted in a 16 basis point improvement in the FTE net interest spread, which increased to 2.68 percent from 2.52 percent.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the Corporation’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets/liabilities for the years ended December 31, 2025, 2024 and 2023.

(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustment. Annualized amounts are computed using a 30/360-day basis.

(2) Tax-exempt securities and loans are presented on an FTE basis, using a marginal tax rate of 21 percent for 2025, 2024 and 2023. These totals equal $24.7 million, $23.3 million and $23.9 million, respectively.

(3) Nonaccrual loans have been included in the average balances.

(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average interest-bearing liabilities.

(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NONINTEREST INCOME

Noninterest income increased $1.4 million, or 1.1 percent, to $126.9 million for the year ended December 31, 2025 compared to 2024. The increase was primarily driven by a $20.7 million reduction in net realized losses on sales of available for sale securities, as net losses of $20.8 million were recognized in 2024. Partially offsetting this increase was the absence of a $20.0 million gain on the Illinois branch sale recognized in the fourth quarter of 2024. Additionally, customer fee-based revenues contributed positively to noninterest income growth in 2025. Service charges on deposit accounts and fiduciary and wealth management fees increased $1.7 million and $1.3 million, respectively, for the year ended December 31, 2025 compared to 2024.

Noninterest income totaled $125.6 million in 2024, an increase of $20.0 million, or 18.9 percent, from 2023. The Corporation recorded a $20.0 million gain on the Illinois branch sale during the fourth quarter of 2024. This was partially offset by a $13.8 million increase in net realized losses on sales of available for sale securities compared to 2023. Additionally, the Corporation realized higher gains on sales of mortgage loans and increased private wealth fees of $5.2 million and $3.4 million, respectively. Other income increased $3.6 million primarily related to an increase in the valuation of CRA fund investments in 2024 compared to 2023.

NONINTEREST EXPENSE

Noninterest expense increased $3.3 million, or 0.9 percent, to $382.6 million for the year ended December 31, 2025, primarily due to increases of $3.9 million in salaries and employee benefits and $1.8 million in equipment expense compared to 2024. These increases were partially offset by a decrease of $1.6 million in FDIC assessments, driven by a reduction of the special assessment accrual originally recorded in the first quarter of 2024 following the 2023 bank failures and a $1.2 million decrease in intangible assets amortization.

Noninterest expense totaled $379.3 million in 2024, a decrease of $9.0 million, or 2.3 percent from 2023. The largest decrease of $7.6 million was in salaries and employee benefits which resulted primarily from $6.3 million in charges in 2023 related to early retirement and severance costs. Other notable decreases include professional and other outside services of $1.6 million, net occupancy of $1.5 million, intangible asset amortization of $1.5 million and other real estate owned and foreclosure expenses of $1.2 million. These decreases were offset by a $2.7 million increase in equipment expense and a $2.0 million increase in outside data processing expenses as the Corporation continued to invest in customer facing digital solutions throughout 2024.

INCOME TAXES

The Corporation’s federal statutory income tax rate for 2025 was 21 percent, and its state income tax rate varies from 0 to 9.5 percent depending on the state in which the Corporation’s subsidiary entities operate. The Corporation’s effective tax rate is lower than the blended effective statutory federal and state rates primarily due to tax‑exempt income earned on municipal securities and loans, income generated by subsidiaries operating in states with no state or local income tax, income tax credits generated from investments in affordable housing projects, and tax‑exempt earnings on bank‑owned life insurance contracts.

Income tax expense totaled $33.1 million in 2025 on pre-tax income of $259.1 million, resulting in an effective tax rate of 12.8 percent. For 2024, income tax expense was $30.3 million on pre-tax income of $231.7 million, resulting in an effective tax rate of 13.1 percent. The lower effective income tax rate in 2025 compared to 2024 was primarily driven by increased income tax credits generated from investments in affordable housing projects. A detailed reconciliation of the federal statutory rate to the Corporation’s effective income tax rate is shown in NOTE 19. INCOME TAXES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Corporation’s tax asset, deferred and receivable decreased from $92.4 million at December 31, 2024 to $78.7 million at December 31, 2025. This decrease included a reduction in the Corporation’s net deferred tax asset from $85.9 million at December 31, 2024 to $67.2 million at December 31, 2025. The $18.7 million decrease in the net deferred tax asset was primarily attributable to changes in temporary differences during the year, including the impact of unrealized gains and losses on available for sale securities, as well as other balance sheet driven tax adjustments.

CAPITAL

Preferred Stock

As part of the Level One acquisition, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $2,500 per share, in exchange for the outstanding Level One Series B preferred stock, and as part of that exchange, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock. The Corporation had $25.0 million of outstanding preferred stock at December 31, 2025 and 2024. During the twelve months ended December 31, 2025 and 2024, the Corporation declared and paid dividends of $187.52 per share (equivalent to $1.88 per depositary share), totaling approximately $1.9 million, respectively. The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations.

Stock Repurchase Program

On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation’s outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100.0 million. On a share basis, the amount of common stock subject to the repurchase program represented approximately 6 percent of the Corporation’s outstanding shares at the time the program became effective. The Corporation repurchased 1,648,466 shares of its common stock pursuant to the repurchase program during 2024. As of December 31, 2024, the Corporation had approximately 1.0 million shares at an aggregate value of $18.4 million available to repurchase under the program. The stock repurchase program approved in 2021 was discontinued as of March 18, 2025.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On March 18, 2025, the Board of Directors of the Corporation approved a stock repurchase program of up to 2,927,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100.0 million. On a share basis, the amount of common stock subject to the repurchase program represented approximately 5 percent of the Corporation’s outstanding shares at the time the program became effective. The Corporation repurchased 1.2 million shares of its common stock pursuant to the repurchase program during 2025, for total consideration of $46.9 million. The average purchase price was $38.71 per share. As of December 31, 2025, approximately 1.7 million shares remained available for repurchase under the program, with an aggregate remaining authorization of $53.1 million.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1 percent excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations (like the Corporation). With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. For the twelve months ended December 31, 2025 and 2024, the Corporation recorded excise tax of $0.4 million and $0.5 million, respectively, related to its share repurchase during the period, which is reflected in stockholders’ equity as a component of additional paid-in capital.

Regulatory Capital

Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by four ratios that are calculated according to the regulations: total risk-based capital, tier 1 risk-based capital, CET1, and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity’s activities that are not part of the calculated ratios.

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, tier 1 capital, and CET 1 capital, in each case, to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the regulations. Banks with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is engaged in unsafe or unsound practices. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.

Under the fully phased-in Basel III capital rules, the Corporation and the Bank are required to maintain the minimum capital and leverage ratios, including a 2.5 percent capital conservation buffer, as illustrated in the table below. In order to avoid limitations on capital distributions, including dividends, the Corporation must maintain capital levels above these minimum requirements. The Corporation and Bank have elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of December 31, 2025, the Bank met all capital adequacy requirements to be considered well capitalized under the fully phased-in Basel III capital rules. There is no threshold for well capitalized status for bank holding companies.

The Corporation’s and Bank’s actual and required capital ratios as of December 31, 2025 and December 31, 2024 were as follows:

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $70.0 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5.0 million and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due October 30, 2028 in the aggregate principal amount of $65.0 million. The Corporation exercised its right to redeem $65.0 million of the subordinated debt on the scheduled interest payment date during the first half of 2024 and the Corporation redeemed the $5.0 million of the Senior Debt on the scheduled interest payment date of July 30, 2025.

On April 1, 2022, the Corporation assumed $30.0 million of subordinated notes in conjunction with its acquisition of Level One. On February 14, 2025, the Corporation, through its trustee, distributed notice of redemption of all $30.0 million in principal amount of its 4.75 percent Fixed-to-Floating Subordinated Notes due December 18, 2029. The Corporation exercised its right to redeem $30.0 million of the subordinated debt on the scheduled interest payment date of March 18, 2025.

Management believes the disclosed capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of tier 1 capital known as CET1. Because the Federal Reserve has long indicated that voting common stockholders’ equity (essentially tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories. Tier 1 regulatory capital consists primarily of total common stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

A reconciliation of GAAP measures to regulatory measures are detailed in the following table for the periods indicated.

(1) Includes net unrealized gains or losses on available for sale securities and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

In management’s view, certain non-GAAP financial measures, when taken together with the corresponding GAAP financial measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP financial measures and ratios in assessing our operating results, related trends, and when forecasting future periods. However, these non-GAAP financial measures should be considered in addition to, and not a substitute for or preferable to, financial measures and ratios presented in accordance with GAAP.

The Corporation’s tangible common equity measures are capital adequacy metrics that are meaningful to the Corporation, as well as analysts and investors, in assessing the Corporation’s use of equity and in facilitating period-to-period and company-to-company comparisons. The tangible common equity to tangible assets ratio was 9.38 percent at December 31, 2025, and 8.81 percent at December 31, 2024. The increase in the tangible common equity to tangible assets ratio was primarily due to tangible common equity increasing $167.7 million, or 10.8 percent, while tangible assets increased $719.2 million, or 4.1 percent, from 2024. The growth in tangible common equity was primarily due to 2025 net income earned of $226.0 million and other comprehensive income of $58.6 million partially offset by common stock repurchases totaling $46.9 million. The increase in tangible assets was mostly attributable to a $937.3 million increase in loans partially offset by decreases of $102.6 million and $102.7 million in the balance of interest bearing deposits and held to maturity investment securities, respectively.

Non-GAAP financial measures such as tangible common stockholders’ equity to tangible assets, diluted tangible net income per common share, return on average tangible assets and return on average tangible common stockholders’ equity are important measures of the strength of the Corporation's capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the Corporation’s financial position without regard to the effects of intangible assets and preferred stock, but retain the effect of accumulated other comprehensive losses in stockholders’ equity. Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

The tables within the “NON-GAAP FINANCIAL MEASURES” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations reconcile traditional GAAP measures to these non-GAAP financial measures at December 31, 2025 and December 31, 2024.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS

The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification.  Commercial loans are individually underwritten and judgmentally risk rated.  They are periodically monitored and prompt corrective actions are taken on deteriorating loans.  Consumer loans are typically underwritten with statistical decision-making tools and are managed throughout their life cycle on a portfolio basis.

Loan Quality

The quality of the loan portfolio and the amount of nonperforming loans may increase or decrease as a result of acquisitions, organic portfolio growth, problem loan recognition and resolution through collections, sales or charge-offs. The performance of any loan can be affected by external factors such as economic conditions, or internal factors specific to a particular borrower, such as the actions of a customer’s internal management.

At December 31, 2025, nonaccrual loans totaled $71.8 million, a decrease of $2.0 million from December 31, 2024, primarily due to an $11.3 million, $2.1 million and $0.8 million decrease in nonaccrual balances within the commercial real estate, non-owner occupied, construction and home equity loan classes, respectively. The decrease was offset by an $8.3 million, $2.5 million and $1.3 million increase in nonaccrual balances within the residential, commercial and industrial and commercial real estate, owner occupied loan classes, respectively

At December 31, 2025, loans 90-days or more delinquent and still accruing totaled $2.0 million, a decrease of $3.9 million from December 31, 2024.

According to applicable accounting guidance, loans that no longer exhibit similar risk characteristics are evaluated individually to determine if there is a need for a specific reserve. Commercial loans under $500,000 and consumer loans are not individually evaluated. The determination for individual evaluation is made based on current information or events that may suggest it is probable that not all amounts due of principal and interest, according to the contractual terms of the loan agreement, will be substantially collected.

The Corporation’s nonperforming assets plus accruing loans 90 days or more delinquent and individually evaluated loans are presented in the table below.

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

PROVISION EXPENSE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS

The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost based on historical experiences, current conditions and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. Additional details of the Corporation's CECL methodology and allowance calculation are discussed within NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The CECL allowance is maintained through the provision for credit losses, which is a charge against earnings. Based on management’s judgment as to the appropriate level of the allowance for credit losses, the amount provided in any period may be greater or less than net loan losses for the same period. The determination of the provision amount and the adequacy of the allowance in any period is based on management’s continuing review and evaluation of the loan portfolio, including portfolio composition, credit quality trends, and changes in economic conditions.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Corporation’s total loan balance, excluding loans held for sale, increased $937.3 million, ending December 31, 2025 at $13.8 billion. At December 31, 2025, the ACL - Loans totaled $195.6 million, which represents an increase of $2.8 million from December 31, 2024. The Corporation had $18.4 million of net charge-offs during the year ended December 31, 2025. As a percentage of loans, the ACL - Loans was 1.42 percent at December 31, 2025, compared to 1.50 percent at December 31, 2024 and 1.64 percent at December 31, 2023. The Corporation deems the current estimate for loan portfolio credit exposure as appropriate.

The Corporation’s credit loss experience is presented in the table below for the years indicated.

In 2025, the Corporation recorded $21.3 million in provision for credit losses - loans. In 2024, the Corporation recorded a $37.2 million provision for credit losses - loans, which was offset by a release in reserve of $1.5 million related to the allowance for unfunded commitments, resulting in a net provision expense for the year ended December 31, 2024 of $35.7 million.

Net charge-offs totaling $18.4 million, $49.4 million, and $25.6 million were recognized for the years ended December 31, 2025, 2024, and 2023, respectively. The distribution of the net charge-offs (recoveries) for the twelve months ended December 31, 2025, 2024, and 2023 is reflected in the following table.

Management continually evaluates the commercial loan portfolio by including consideration of specific borrower cash flow analysis and estimated collateral values, types and amounts on nonperforming loans, past and anticipated credit loss experience, changes in the composition of the loan portfolio, and the current condition and amount of loans outstanding. The determination of the provision for credit losses in any period is based on management’s continuing review and evaluation of the loan portfolio, and its judgment as to the impact of current economic conditions on the portfolio. The Corporation continues to monitor economic forecast changes, loan growth and credit quality to determine provision needs in subsequent periods.

GOODWILL

During the fourth quarter of 2025 and 2024, the Corporation performed its annual goodwill impairment testing and the fair value exceeded the Corporation’s carrying value. Based on the analysis performed, the Corporation concluded goodwill was not impaired as of December 31, 2025 and 2024.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY

Liquidity management is the process by which the Corporation ensures that adequate liquid funds are available for the holding company and its subsidiaries. These funds are necessary in order to meet financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit obligations to borrowers, paying dividends to stockholders, paying operating expenses, funding capital expenditures, and maintaining deposit reserve requirements. Liquidity is monitored and closely managed by the asset/liability committee.

The Corporation’s liquidity is dependent upon the receipt of dividends from the Bank, which is subject to certain regulatory limitations and access to other funding sources.  Liquidity of the Bank is derived primarily from core deposit growth, principal payments received on loans, the sale and maturity of investment securities, net cash provided by operating activities, and access to other funding sources.

The principal source of asset-funded liquidity is investment securities classified as available for sale, the market values of which totaled $1.4 billion at December 31, 2025, an increase of $20.6 million, or 1.5 percent, from December 31, 2024. Securities classified as held to maturity that are maturing within a short period of time can also be a source of liquidity. Securities classified as held to maturity and maturing in one year or less totaled $7.0 million at December 31, 2025. In addition, other types of assets such as cash and interest-bearing deposits with other banks, federal funds sold and loans maturing within one year are sources of liquidity.

The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. Federal funds purchased and securities sold under agreements to repurchase are considered additional sources of liquidity. In addition, FHLB advances and Federal Reserve Discount Window borrowings are utilized as a funding source. At December 31, 2025, total borrowings from the FHLB were $798.5 million and there were no outstanding borrowings from the Federal Reserve Discount Window. The Bank has pledged certain mortgage loans and investments to the FHLB and Federal Reserve. The total available remaining borrowing capacity from the FHLB and Federal Reserve at December 31, 2025 was $819.9 million and $5.3 billion, respectively.

The following table presents the Corporation’s material cash requirements from known contractual and other obligations at December 31, 2025:

For further details related to the Corporation’s deposits and borrowings, see NOTE 10. DEPOSITS and NOTE 11. BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Also, in the normal course of business, the Bank is a party to a number of other off-balance sheet activities that contain credit, market and operational risk that are not reflected in whole or in part in the consolidated financial statements. These activities primarily consist of traditional off-balance sheet credit-related financial instruments such as loan commitments and standby letters of credit.

Summarized credit-related financial instruments at December 31, 2025 are as follows:

Since many of the commitments are expected to expire unused or be only partially used, the total amount of unused commitments in the preceding table does not necessarily represent future cash requirements.

INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK

Asset/Liability management has been an important factor in the Corporation’s ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation’s liquidity and interest sensitivity positions at regular meetings to review how changes in interest rates may affect earnings.  Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation’s exposure to changes in net interest income given various rate scenarios and the economic and competitive environments.

It is the objective of the Corporation to monitor and manage risk exposure to net interest income caused by changes in interest rates.  It is the goal of the Corporation’s Asset/Liability management function to provide optimum and stable net interest income. To accomplish this, management uses two asset liability tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation Modeling are constructed, presented and monitored quarterly. Management believes that the Corporation’s liquidity and interest sensitivity position at December 31, 2025, remained adequate to meet the Corporation’s primary goal of achieving optimum interest margins while avoiding undue interest rate risk.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the Corporation’s interest rate sensitivity analysis as of December 31, 2025.

The Corporation had a cumulative negative gap of $3.9 billion in the one-year horizon at December 31, 2025, or 20.4 percent of total assets.

Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. The Corporation’s asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Corporation.

The base scenario is highly dependent on numerous assumptions embedded in the model, including assumptions related to future interest rates. While the base sensitivity analysis incorporates management’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity products, such as savings, money market, interest-bearing and demand deposits, reflect management’s best estimate of expected future behavior. Historical retention rate assumptions are applied to non-maturity deposits for modeling purposes.

The comparative rising 100 and 200 basis points and falling 100 and 200 basis points scenarios below, as of December 31, 2025 and 2024, assume further interest rate changes in addition to the base simulation discussed above. These changes are immediate and parallel changes to the base case scenario.

Results for rising 100 and 200 basis points and falling 100 and 200 basis points interest rate scenarios are listed below based upon the Corporation’s rate sensitive assets and liabilities at December 31, 2025 and 2024. The change from the base case represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.

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PART II: ITEM 7. AND ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DEPOSITS AND BORROWINGS

The table below reflects the level of deposits and borrowed funds at December 31, 2025 and 2024.

Deposits increased $773.2 million from December 31, 2024. The majority of the organic deposit growth was due to increases in non-maturity deposits of $749.4 million. Lower interest rates have resulted in customers migrating funds from maturity time deposit products into non-maturity deposit products.

Federal funds purchased decreased $59.2 million, and securities sold under repurchase agreements decreased $39.1 million from December 31, 2024, respectively. The Corporation utilized brokered certificates of deposit to support loan growth that exceeded deposit growth, reducing the need for overnight borrowings during the year ended December 31, 2025. Further discussion regarding federal funds purchased and repurchase agreements is included in NOTE 11. BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Federal Home Loan Bank advances decreased $24.0 million compared to December 31, 2024 as the Corporation utilized brokered certificates of deposit to support loan growth that exceeded deposit growth, reducing the need for Federal Home Loan Bank advances during 2025. Further discussion regarding FHLB advances is included in NOTE 11. BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “LIQUIDITY”. Additionally, the interest rate risk is included as part of the Corporation’s interest simulation discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK”.

Subordinated debentures and term loans decreased $35.9 million compared to December 31, 2024. During 2025, the Corporation exercised its right to redeem $30.0 million in principal of the Level One Subordinated Notes and $5.0 million of First Merchants Senior Debt, and paid the debt in full on the scheduled interest payment dates. Additional details regarding the subordinated debentures and other borrowings are discussed within NOTE 11. BORROWINGS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.