LAKELAND FINANCIAL CORP (LKFN)

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

OVERVIEW

Net income in the first three months of 2026 was $26.5 million, which increased $6.4 million, or 31.8%, from $20.1 million for the comparable period of 2025. Diluted earnings per common share was $1.04 in the first three months of 2026, an increase of 33.3% from $0.78 in the comparable period of 2025. The increase in net income for 2026 was primarily due to an increase to net interest income of $3.9 million, or 7.4%, an increase in noninterest income of $2.0 million, or 18.3%, and a decrease in the provision for credit losses of $4.8 million, or 70.6%. Offsetting these positive contributions was an increase in noninterest expense of $2.4 million, or 7.3%, and an increase to income tax expense of $1.9 million, or 46.3%. Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $34.6 million in the first three months of 2026, an increase of $3.5 million, or 11.3%, compared to $31.0 million for the comparable period of 2025.

Return on average total equity was 13.89% in the first three months of 2026 versus 11.70% in the comparable period of 2025. Return on average total assets was 1.52% in the first three months of 2026 versus 1.20% for the comparable period of 2025. The Company's average equity to average assets ratio was 10.91% in the first three months of 2026 versus 10.29% in the comparable period of 2025.

The Company’s tangible common equity to tangible assets ratio, which is a non-GAAP financial measure, was 10.53% at March 31, 2026, compared to 10.09% at March 31, 2025 and 10.86% at December 31, 2025. Unrealized losses from available-for-sale investment securities were $154.5 million at March 31, 2026, compared to $188.3 million at March 31, 2025 and $143.3 million at December 31, 2025. 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 12.20% at March 31, 2026, compared to 12.19% at March 31, 2025 and 12.45% at December 31, 2025.

Total assets were $7.084 billion as of March 31, 2026 versus $6.990 billion as of December 31, 2025, an increase of $93.7 million, or 1.3%. Balance sheet expansion was driven by increases to total loans, net of the allowance for credit losses, which increased $98.1 million, or 1.8%, and cash and cash equivalents, which increased $10.0 million, or 7.1%. These increases were offset by a decrease to available-for-sale securities of $25.1 million, or 2.4% The balance sheet expansion from December 31, 2025 to March 31, 2026 was funded by an increase in total deposits of $216.9 million, or 3.6%, and was offset by a decrease in borrowings of $116.0 million, or 63.0%. Total equity decreased $13.5 million, or 1.8%, from $762.5 million at December 31, 2025 to $749.0 million at March 31, 2026. The decrease to total equity was primarily attributable to an increase in treasury stock of $19.3 million, or 53.8%, driven by the Company's utilization of the share repurchase program, and a decrease in accumulated other comprehensive income (loss) of $8.5 million, contributed further to the decline in total equity. Offsetting these reductions to total equity was an increase in retained earnings of $13.3 million, or 1.7%, primarily as a result of net income of $26.5 million less dividends declared and paid of $13.2 million. The combined effect of the repurchase activity under the share repurchase program and dividends paid during the quarter represented a total return of capital to Company shareholders of $32.4 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, 2025.

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.

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RESULTS OF OPERATIONS

Overview

Selected income statement information for the three months ended March 31, 2026 and 2025 is presented in the following table:

(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 cycle of monetary policy tightening from 2022 and 2023 and demonstrates the Company's longer-term trend in 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.

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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.

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Net Income

Net income was $26.5 million in the first three months of 2026, which increased $6.4 million, or 31.8%, from $20.1 million for the comparable period of 2025. Diluted earnings per common share was $1.04 in the first three months of 2026, an increase of 33.3% from $0.78 in the comparable period of 2025. The increase in net income for the first three months of 2026 was primarily due to an increase to net interest income of $3.9 million, or 7.4%, an increase to noninterest income of $2.0 million, or 18.3%, and a decrease in the provision for credit losses of $4.8 million, or 70.6%. Offsetting these positive contributions was an increase in noninterest expense of $2.4 million, or 7.3%, and an increase to income tax expense of $1.9 million, or 46.3%.

Net Interest Income

The following tables set forth consolidated information regarding average balances and rates:

[[GREPCENT_TABLE]]
[["","","Three Months Ended March 31,"],["","","2026","","2025"],["(fully tax equivalent basis, d

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

OVERVIEW

Net income in 2025 was $103.4 million, an increase of 10.6%, from $93.5 million in 2024. Net income for 2024 was less than 1% lower compared to $93.8 million in 2023.

Diluted net income per common share was $4.01 in 2025, $3.63 in 2024 and $3.65 in 2023. Return on average total assets was 1.50% in 2025, versus 1.40% in 2024 and 1.45% in 2023. Return on average total equity was 14.40% in 2025, versus 14.12% in 2024 and 15.93% in 2023. The dividend payout ratio, with respect to diluted earnings per share, was 49.88% in 2025, versus 52.89% in 2024 and 50.41% in 2023. The average equity to average assets ratio was 10.44% in 2025, compared to 9.94% in 2024 and 9.11% in 2023.

Net income in 2025 as compared to 2024 was positively impacted by a $24.3 million increase to net interest income and a decrease in the provision for credit losses of $5.0 million. Offsetting these positive contributions was a decrease in noninterest income of $8.9 million and an increase in noninterest expense of $6.5 million. Pretax pre-provision earnings, a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense, were $137.4 million for the year ended December 31, 2025, an increase of $8.9 million, or 7.0%, compared to $128.4 million for the year ended December 31, 2024.

Net income in 2024 as compared to 2023 was positively impacted by a $7.0 million increase in noninterest income and a $5.6 million decrease in noninterest expense. Offsetting these positive contributions to net income were an increase to the provision for credit losses of $10.9 million, an increase to income tax expense of $1.6 million, and a decrease to net interest income of $356,000. Pretax pre-provision earnings were $128.4 million for the year ended December 31, 2024, an increase of $12.3 million, or 10.5%, compared to $116.2 million for the year ended December 31, 2023.

Total assets were $6.990 billion as of December 31, 2025, versus $6.678 billion as of December 31, 2024, an increase of $311.6 million or 4.7%. Balance sheet expansion in 2025 was driven by loan growth net of the allowance for credit losses of $274.4 million, or 5.5%, and an increase in available-for-sale securities of $60.6 million, or 6.1%. Deposits increased by $72.4 million, or 1.2%, during 2025, to fund the balance sheet expansion. Borrowings outstanding at December 31, 2025, were $184.2 million, compared to no borrowings outstanding at December 31, 2024.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for credit losses.

Allowance for Credit Losses

The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the credit loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.

The level of credit loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the facts and circumstances of watch list credits, which includes the security position of the borrower, in determining the appropriate level of the credit loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision.

The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for credit losses that

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generally includes consideration of changes in the nature and volume of the loan portfolio and overall portfolio quality, along with current and forecasted economic conditions that may affect borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. To determine the specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, an appropriate level of general allowance is determined by portfolio segment using a probability of default-loss given default ("PD/LGD") model, subject to a floor. A default can be triggered by one of several different asset quality factors, including past due status, nonaccrual status, material modification to a borrower experiencing financial difficulty or if the loan has had a charge off. This PD is then combined with a LGD derived from historical charge off data to construct a default rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee’s Summary of Economic Projections, and other environmental factors based on the risks present for each portfolio segment. These environmental factors include consideration of the following: levels of, and trends in, delinquencies and nonperforming loans; trends in volume and terms of loans; changes in collateral strength; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are subject to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and pooled. These two components represent the total allowance for credit losses deemed adequate to cover expected losses inherent in the loan portfolio. The Company's allowance for credit losses balance was comprised of 12% specific allocations and 88% pooled allocations at December 31, 2025, compared to 32% specific allocations and 68% pooled allocations at December 31, 2024. The decrease in specific allocations was driven by a previously disclosed nonperforming commercial credit that was specifically allocated for within in the allowance for credit losses in 2024 and partially charged off in 2025.

Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independently of each other and a consensus is reached by credit administration and the loan officer. Specific allocations are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate it should be analyzed on an individual basis. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) the sufficiency of the customer’s cash flow or net worth to repay the loan; (b) the adequacy of the discounted value of collateral relative to the loan balance; (c) whether the loan has been criticized in a regulatory examination; (d) whether the loan is nonperforming; (e) any other reasons the ultimate collectability of the loan may be in question; or (f) any unique loan characteristics that require special monitoring.

Allocations are also applied to categories of loans considered not to be individually analyzed, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. These general pooled loan allocations are performed for portfolio segments of commercial and industrial; commercial real estate, multi-family, and construction; agri-business and agricultural; other commercial loans; and consumer 1-4 family mortgage and other consumer loans. Pooled allocations of the allowance are determined by a historical loss rate based on the calculation of each pool’s probability of default-loss given default, subject to a floor. The length of the historical period for each pool is based on the average life of the pool. The historical loss rates are supplemented with consideration of economic conditions and portfolio trends.

Due to the imprecise nature of estimating the allowance for credit losses, the Company’s allowance for credit losses includes an unallocated component. The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of potential expected losses that may not be fully reflected in other allocations. As a practical expedient, the Company has elected to state accrued interest separately from loan principal balances on the consolidated balance sheet. Additionally, when a loan is placed on non-accrual, interest payments are reversed through interest income.

For off balance sheet credit exposures outlined in the ASU at 326-20-30-11, it is the Company’s position that nearly all of the unfunded amounts on lines of credit are unconditionally cancellable, and therefore not subject to having a liability recorded.

The allowance is inherently uncertain as it represents the Company’s expectation of the future collectability of loans in its portfolio; actual collections may be greater than or less than expectations. Actual collections may be impacted by wider economic conditions such as changes in the competitive environment or in the levels of business investment or consumer spending, or by the quality of borrowers’ management teams and the success of their strategy execution. Borrowers’ ability to

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repay may also change due to the effects of government monetary or fiscal policy, which could affect the level of demand for borrowers’ products or services or the borrowers' ability to service their debt payments in the future.

The Company’s allowance for credit losses is subject to changes in the inputs to the model, including the following: the number of delinquent loans, nonaccrual loans, material modification due to a borrower experiencing financial difficulty, or charge offs; the levels of charge offs and recoveries; projected unemployment rates and other economic indicators; the Company’s collateral position on adversely classified loans; or management’s qualitative judgment of the implication of trends in its loan portfolio or in the broader economy.

RESULTS OF OPERATIONS

Overview

In 2025, the Company continued to expand its balance sheet organically, achieving average loan growth of 3.7% and average deposit growth of 3.5% in its geographic footprint of northern Indiana and in the Indianapolis market. The Company had 55 branches as of December 31, 2025. The Company’s increase in net interest income of $24.3 million, or 12.4%, was primarily responsible for the $9.9 million, or 10.6%, increase to net income. Net interest margin expansion was the key driver for the increase in net interest income, which increased by 27 basis points from 3.18% in 2024 to 3.45% in 2025. Deposit costs, which peaked in the second quarter of 2024 and began to contract during the second half of that year, continued to decline further as a result of continued monetary policy easing by the FOMC and favorable deposit repricing. Additionally, the provision for credit losses decreased by $5.0 million, which further contributed to the increase in net income. Offsetting these positive contributions was a decrease to noninterest income of $8.9 million and an increase to noninterest expense of $6.5 million.

Provision expense was elevated in 2024 as compared to 2025 a result of specific allocations that were recorded related to the previously disclosed downgrade of a $43.3 million commercial relationship to nonperforming status. While provision expense in 2025 was partially driven by additional specific allocations that were recorded for this credit, the Company reached a settlement of the matter and recognized a net charge off of $27.8 million during 2025. As a result, the allowance coverage ratio decreased from 1.68% at December 31, 2024 to 1.28% at December 31, 2025. Individually analyzed and watch list loans as a percentage of total loans returned to near historic lows of 3.42% at December 31, 2025, as compared to 4.13% at December 31, 2024.

Fee based lines of business, including wealth advisory fees investment brokerage fees, service charges on deposit accounts, loan and service fees, and interest rate swap fee income anchored 2025 growth in adjusted core noninterest income, a non-GAAP financial measure that excludes the impact of certain non-routine operating events. Adjusted core noninterest income increased by 2.4% and 7.6% for 2025 and 2024, respectively. The growth in adjusted core noninterest expense, a non-GAAP financial measure that excludes the impact of certain non-routine operating events, reflects the Company's continued investment in its people, technology, and physical infrastructure. The outlook for 2026 includes plans for continued organic balance sheet growth, disciplined credit philosophy with proactive management of loan portfolio challenges, continued investments in human and technological capital, completion of the Lake City Bank Innovation and Technology Center which represents a significant investment in the downtown Warsaw campus headquarters, and expansion of our branch network into Boone County, Indiana, with a new office scheduled to open in Whitestown in 2026. Beyond 2026, the Company plans to accelerate plans for branch development with locations in Indianapolis, South Bend, Fort Wayne and Elkhart identified for expansion over the next several years as the Company seeks to become a recognized Midwest leader in community banking.

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Selected income statement information for the years ended December 31, 2025, 2024, and 2023 is presented in the following table.

(1)Non-GAAP financial measure. Calculated by excluding the effects of the 2024 net gain on Visa shares, legal accrual, and additional wire fraud loss recovery and the 2023 wire fraud loss and related recoveries and adjustments to salary and benefits. Management believes this is an important measure that helps management and investors understand the Company’s core business performance for these periods. See reconciliation on the following pages.

(2)Noninterest expense (c)/(Net interest income (a) plus Noninterest income (b)).

(3)Non-GAAP financial measure. Calculated by subtracting intangible assets, net of deferred tax, from total assets and total equity. Management believes this is an important measure because it is useful for planning and forecasting purposes. See reconciliation on the following pages.

(4)Non-GAAP financial measure. Calculated by removing the fair market value adjustment impact of the available-for-sale investment securities portfolio included in accumulated other comprehensive income/loss ("AOCI") from tangible equity and tangible assets. Management believes this is an important measure because it provides better comparability to periods preceding the significant rise in prevailing interest rates. See reconciliation on the following pages.

(5)Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. Management believes this is an important measure because it may enable investors to identify the trends in the Company's earnings exclusive of the effects of tax and provision expense, which may vary significantly from period to period. See reconciliation on the following pages.

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The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the company's financial performance. Reconciliations of these non-GAAP financial measures is provided in the following tables (dollars in thousands, except per share data).

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The impact of the net gain on Visa shares, legal accrual, wire fraud loss and associated insurance and loss recoveries and adjustments to salaries and benefits is presented below. Management considers these measures of core financial performance to be meaningful to understanding the Company’s business performance for these periods (dollars in thousands, except per share data).

(1)In 2023, long-term, incentive-based compensation accruals were reduced as a result of the wire fraud loss and associated insurance and loss recoveries.

(2)Core operational profitability was $4.1 million lower than reported net income of $93.5 million and $7.8 million higher than reported net income of $93.8 million for the years ended December 31, 2024 and 2023, respectively.

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Net Income

Net income was $103.4 million in 2025, an increase of $9.9 million, versus net income of $93.5 million in 2024. The increase was driven by an increase in net interest income of $24.3 million, or 12.4%, and a reduction in provision for loan losses of $5.0 million, or 29.6%. Offsetting these items was a decrease in noninterest income of $8.9 million, or 15.6%, an increase in noninterest expense of $6.5 million, or 5.2%, and increased income tax expense of $4.0 million, or 22.0%. Pretax pre-provision earnings were $137.4 million in 2025, an increase of $8.9 million, or 7.0%, compared to $128.4 million in 2024.

Noninterest income was elevated in 2024 as compared to 2025 primarily as a result of the net gain of $9.0 million on the exchange and sale of the Company's Visa shares. Additionally, a $1.0 million insurance recovery related to the 2023 wire fraud loss was recorded in 2024. Adjusted core noninterest income, which excludes the impact of these events, was $48.0 million in 2025 as compared to $46.8 million in 2024, representing an increase of $1.1 million, or 2.4%. Noninterest expense in 2024 was impacted by the recognition of a previously disclosed legal accrual of $4.5 million. Adjusted core noninterest expense, which excludes the impact of the settlement, was $131.6 million in 2025 as compared to $120.5 million in 2024, an increase of $11.1 million, or 9.2%.

Net income was $93.5 million in 2024, a decrease of $289,000, versus net income of $93.8 million in 2023. The decrease in net income from 2023 to 2024 was driven by an increase in provision expense of $10.9 million, or 186.3%, an increase in income tax expense of $1.6 million, or 9.9%, and a decrease in net interest income of $356,000. Offsetting these items were an increase in noninterest income of $7.0 million, or 14.0%, and a decrease to noninterest expense of $5.6 million, or 4.3%. Pretax pre-provision earnings were $128.4 million for the year ended December 31, 2024, an increase of $12.3 million, or 10.5%, compared to $116.2 million for the year ended December 31, 2023.

The increase to noninterest income in 2024 was primarily driven by the aforementioned net gain of $9.0 million on the exchange and sale of Visa shares and the $1.0 million insurance recovery. Contributing further to the increase to noninterest income ware increases of $1.4 million, or 15.3%, in wealth advisory fees, $1.1 million, or 34.4%, in bank owned life insurance income, and $370,000 in mortgage banking income. The decrease to noninterest expense in 2024 was driven by lower miscellaneous expenses for losses incurred in 2023 and was partially offset by a $4.5 million legal accrual.

Core operational profitability, a non-GAAP financial measure that excludes the impact of certain aforementioned non-routine operating events, was $103.4 million for the year ended December 31, 2025, an increase $14.0 million, or 15.6%, compared to $89.4 million for the year ended December 31, 2024. Core operational profitability decreased $12.2 million, or 12.0%, in 2024 from $101.6 million in 2023. Core operational diluted earnings per common share, a non-GAAP financial measure, were $4.01 for 2025, an increase of 15.6% from $3.47 for 2024. Core operational diluted earnings per share decreased 12.2% in 2024, down from $3.95 in 2023.

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Net Interest Income

The following table presents a three-year average balance sheet and, for each major asset and liability category, its related interest income and yield or its expense and rate for the years ended December 31, 2025, 2024 and 2023.

THREE YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS

(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 $4.4 million, $4.7 million and $5.3 million for the years ended December 31, 2025, 2024 and 2023, respectively.

(2)Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 2025, 2024 and 2023, are included as taxable loan interest income.

(3)Nonaccrual loans are included in the average balance of taxable loans.

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NET INTEREST INCOME – RATE/VOLUME ANALYSIS (fully tax equivalent basis, dollars in thousands)

The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31.

(1)The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 2025, 2024 and 2023. The changes in net interest income are created by changes in interest rates and changes in the volumes of loans, investments, deposits and borrowings. In the table above, changes attributable to volume are computed using the change in volume from the prior year multiplied by the previous year’s rate, and changes attributable to rate are computed using the change in rate from the prior year multiplied by the previous year’s volume. The change in interest or expense due to both rate and volume has been allocated between factors in proportion to the relationship of the absolute dollar amounts of the change in each.

(2)Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment applicable to nondeductible interest expense.

Net interest income increased by $24.3 million to $221.0 million in 2025 compared to $196.7 million in 2024, primarily as a result of decreased costs of funds. Total interest expense decreased $23.8 million, or 13.5%. Of this decrease, deposit interest expense decreased $22.0 million, or 12.8%, from decreased rates paid for customer deposits. Funding costs for deposits decreased 46 basis points to 2.50% during 2025, compared to 2.96% during 2024. Ending noninterest bearing deposits to total deposits were 20.4% at 2025 compared to 22.0% at 2024. Average noninterest bearing deposits decreased $3.1 million, to $1.255 billion for 2025 as compared to $1.258 billion for 2024. Average interest bearing deposits increased $206.9 million, or 4.5%, to $4.785 billion for 2025 as compared to $4.578 billion for 2024. Wholesale funding reliance remained low at 0.80% as of December 31, 2025 compared to 0.70% at December 31, 2024.

Investment securities interest income increased $1.9 million, or 7.0%, and contributed to the increase in net interest income during 2025. The increase in investment securities income was driven by an increase in average securities balances of $6.2 million, or 0.5%, during 2025 as a result of available-for-sale investment securities maturities, calls and paydowns of $66.8 million, and offset by purchases of securities of $83.3 million. The yield on average investment securities increased 16 basis points to 2.97% for 2025, as compared to 2.81% for 2024. Investment securities cash flows were used to fund loan growth and reinvested in securities during 2025.

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Net interest margin increased 27 basis points to 3.45% in 2025 versus 3.18% in 2024. Net interest margin decreased to 3.18% in 2024 from 3.31% in 2023. The improvement in net interest margin between the periods was primarily driven by the effects of the continued easing of monetary policy by the FOMC, which commenced in September 2024, and resulted in favorable deposit repricing, which has outpaced the downward repricing of earning assets.

Loan interest income decreased by $723,000, or 0.2%, to $337.0 million during 2025 compared to $337.8 million during 2024. The increase in average loans was driven by loan growth during the period as average loan balances increased $184.1 million, or 3.7%, from $5.039 billion during 2024 to $5.223 billion during 2025. Loan yields decreased 25 basis points, or 3.8%, from 6.71% for 2024 to 6.46% for 2025 as a result of the lower rate environment and loan repricing.

The utilization of commercial and retail lines of credit increased to 44% at December 31, 2025, up from 41% at December 31, 2024, and 39% at December 31, 2023. Total lines of credit available have increased by $241.0 million to $4.789 billion at December 31, 2025, compared to $4.548 billion at December 31, 2024, or a 5.3% increase. The increased line utilization marks the highest utilization rate since 2019 amid an encouraging increase in borrower demand for working lines of capital.

Provision for Credit Losses

The Company recorded a provision for credit losses of $11.8 million in 2025 compared to $16.8 million in 2024 and $5.9 million in 2023. Provision expense during 2025 was partially driven by the recognition of additional specific allocations related to the downgrade of a previously disclosed commercial relationship. The remainder of provision expense was attributable to growth of the loan portfolio and a net increase in specific allocations related to other watch list credits. The Company’s allowance for credit losses as of December 31, 2025 was $69.0 million compared to $86.0 million as of December 31, 2024 and $72.0 million as of December 31, 2023. The allowance for credit losses represented 1.28% of total loans as of December 31, 2025, versus 1.68% at December 31, 2024 and 1.46% at December 31, 2023. Net charge offs of $28.8 million, or 0.55% of average loans, and $2.8 million, or 0.05% of average loans, were recorded in 2025 and 2024, respectively. Net charge offs for 2025 resulted primarily from the partial charge off of $28.6 million that was recognized during the second quarter of 2025 in conjunction with the disposition of the credit. A subsequent recovery of $800,000 was recognized during the fourth quarter of 2025 related to this credit. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions including the impact of the current rate environment, inflation levels, and other factors that may influence the assessment of the collectability of loans.

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Noninterest Income

The following table presents changes in the components of noninterest income for the years ended December 31, 2025, 2024 and 2023.

Noninterest income decreased by $8.9 million, or 15.6%, to $48.0 million for the year ended December 31, 2025, compared to $56.8 million for the prior year. Noninterest income was elevated during the prior year primarily due to the net gain of $9.0 million on the sale of Visa shares and a $1.0 million insurance recovery. Adjusted core noninterest income, a non-GAAP financial measure that excludes the impact of these events, increased by $1.1 million, or 2.4%, from $46.8 million for the year ended December 31, 2024.

Noninterest income for the year ended December 31, 2025 benefited from fee-based service increases to wealth advisory fees of $896,000, or 8.6%, loan and service fees of $462,000, or 3.9%, service charges on deposit accounts of $317,000, or 2.8%, and investment brokerage fees of $304,000, or 16.1%, as compared to the prior year. Wealth advisory fees growth was driven by continued client relationship expansion and increased assets under management. Commercial service fee growth was the primary contributor for the increase in loan and service fees. The expansion of investment brokerage fees was driven by increased volume and commissions on product mix. Offsetting these increases was a decrease in other income of $1.9 million, or 41.1%. The decline in other income was primarily attributable to reduced limited partnership income and the lack of insurance recovery of $1.0 million as compared to 2024.

Noninterest income increased by $7.0 million, or 14.0%, to $56.8 million for the year ended December 31, 2024, compared to $49.9 million for the prior year. The increase in noninterest income for the year ended December 31, 2024 was primarily driven by the net gain on sale of Visa shares of $9.0 million. Contributing further to the increase in noninterest income was an increase to wealth and advisory fees of $1.4 million, or 15.3%, driven by growth in customers and favorable market performance. Bank owned life insurance income increased $1.1 million, or 34.4%, due to favorable market performance of the Company's variable bank owned life insurance policies. Offsetting these increases was a $4.5 million, or 48.9%, decrease to other income. Other income was elevated during the year ended December 31, 2023 from insurance and loss recoveries of $6.3 million that were related to the 2023 wire fraud loss. Offsetting the impact of these recoveries was increased investment income from the Company's limited partnership investments and the receipt of an additional $1.0 million in insurance recoveries. Adjusted core noninterest income was $46.8 million for the year ended December 31, 2024, an increase of $3.3 million, or 7.6%, compared to $43.6 million for year ended December 31, 2023.

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Noninterest Expense

The following table presents changes in the components of noninterest expense for the years ended December 31, 2025, 2024 and 2023.

Noninterest expense increased by $6.5 million, or 5.2%, from $125.1 million to $131.6 million for the year ended December 31, 2024 and 2025, respectively. Salaries and benefits expense increased $8.6 million, or 12.8%. The primary drivers for the increase to salaries and benefits expense were increased performance-based incentive compensation accruals of $5.3 million and salaries and wages of $3.3 million. Data processing fees and supplies expense increased $1.4 million, or 9.1%, from continued investment in customer-facing and operational technology solutions, including artificial intelligence. Net occupancy expense increased $659,000, or 9.6%, from the continued expansion of the bank's branch and operational networks, with the 55th branch location opening in Westfield, Indiana, during 2025. Offsetting these increases was a decrease in professional fees of $1.3 million, or 14.0%, and other expense of $3.1 million, or 23.5%. Legal accruals of $4.5 million were incurred in 2024 that were related to a one-time matter, previously disclosed. Adjusted core noninterest expense, a non-GAAP financial measure, increased $11.1 million, or 9.2%, to $131.6 million from $120.5 million for the year ended December 31, 2025 and 2024, respectively.

Noninterest expense decreased by $5.6 million, or 4.3%, from $130.7 million to $125.1 million for the year ended December 31, 2023 and 2024, respectively. Noninterest expense during 2023 was elevated as compared to 2024 due to the wire fraud loss, which added a net $16.7 million to noninterest expense. Offsetting this impact on noninterest expense was a $7.6 million, or 12.8%, increase in salaries and employees benefits during 2024. The increase to salaries and benefits expense resulted primarily from increases to salaries and wages of $3.2 million, performance-based incentive compensation of $2.3 million, health insurance expense of $918,000, and variable deferred compensation of $950,000, which relates to the Company's variable bank owned life insurance. Other expense increased $2.6 million, or 24.0%, primarily due to an accrued legal accrual expense of $4.5 million. Data processing fees and supplies increased by $1.2 million, or 8.3%, from the continued investment in customer-facing and operational technology solutions. Adjusted core noninterest expense was $120.5 million for the year ended December 31, 2024, an increase of $6.5 million, or 5.7%, compared to $114.0 million for the year ended December 31, 2023.

Income Taxes

The Company recognized income tax expense in 2025 of $22.2 million, compared to $18.2 million in 2024 and $16.6 million in 2023. The effective tax rate was 17.7% in 2025, compared to 16.3% in 2024 and 15.0% in 2023. The effective tax rate increased due to the adoption of ASU 2023-02, which changed how the Company's investment in low-income housing tax credit structures are accounted for by moving the investment write-down impact from operating revenues to income tax expense within the consolidated statements of income, as well as a reduction in the tax benefit recognized from stock-based compensation vesting of shares for plan participants. For a detailed analysis of the Company’s income taxes see "Note 12 – Income Taxes".

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CERTAIN STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES

We are required to provide certain statistical disclosures as a bank holding company. The following table provides certain of those disclosures.

Return on average assets is computed by dividing net income by average assets for each indicated fiscal year. Average assets is computed by adding total assets as of each date during the indicated fiscal year and dividing by the number of days in the fiscal year.

Return on average total equity is computed by dividing net income by average equity for each indicated fiscal year. Average equity is computed by adding the total equity attributable to the Company as of each date during the indicated fiscal year and dividing by the number of days in the fiscal year.

Average equity to average assets is computed by dividing average equity by average assets for each indicated fiscal year, as calculated in accordance with the previous explanation.

Dividend payout ratio is computed by dividing dividends declared per common share by earnings per diluted common share for each indicated fiscal year.

Refer to the "Financial Condition - Loan Portfolio", "Financial Condition - Sources of Funds" and "Risk Management - Loan Portfolio" sections of this MD&A and to the Notes to Consolidated Financial Statements of this Form 10-K for other required statistical disclosures.

FINANCIAL CONDITION

Overview

Total assets of the Company were $6.990 billion as of December 31, 2025, an increase of $311.6 million, or 4.7%, when compared to $6.678 billion as of December 31, 2024. Total loans outstanding increased by $257.4 million, or 5.0%, to $5.375 billion at December 31, 2025, from $5.118 billion at December 31, 2024. Total deposits increased $72.4 million, or 1.2%, from $5.901 billion at December 31, 2024, to $5.973 billion at December 31, 2025, driven by increased public funds deposits due to the addition of new customers and offset by net retail and commercial outflows.

Total cash and equivalents decreased $26.9 million, to $141.3 million at December 31, 2025, from $168.2 million at December 31, 2024. Total investment securities increased by $62.3 million, to $1.185 billion at December 31, 2025, from $1.123 billion at December 31, 2024. The increase was attributable to an increase in available-for-sale securities, which increased by $60.6 million, primarily as a result of purchases of $83.3 million and an improvement in fair market valuations of $47.8 million. These increases were offset by maturities, calls and paydowns of $66.8 million. There were no securities sales during the year ended December 31, 2025. The Company had borrowings of $184.2 million at December 31, 2025, as compared to no borrowings outstanding at December 31, 2024. Borrowings at December 31, 2025 consisted of $183.0 million in short-term and other borrowings and $1.2 million in long-term borrowings.

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Uses of Funds

Investment Portfolio

At year end 2025, 2024 and 2023, there were no holdings of securities of any one issuer, other than the U.S. government, government agencies and government sponsored agencies, in an amount greater than 10% of stockholders’ equity. See "Note 2 – Securities" for more information on these investments.

Purchases of securities available-for-sale totaled $83.3 million in 2025, $27.5 million in 2024 and $7.2 million in 2023. Purchases in 2024 and 2025 were driven by the liquidity provided primarily by principal and interest paydowns. Cash flows from the investment securities portfolio were used to fund loan growth and reinvestments into the investment securities portfolio, and the Company anticipates receiving approximately $134.5 million of principal and interest cash flows to use for such purposes in 2026. Investment securities represented 17.0% of total assets on December 31, 2025 compared to 16.8% on December 31, 2024 and 18.1% on December 31, 2023.

There were no securities sales in 2025, as compared to sales of $7.1 million in 2024 and $105.2 million in 2023. Paydowns from prepayments and scheduled payments of $66.5 million, $59.0 million and $56.2 million were received in 2025, 2024 and 2023, and the amortization of premiums, net of the accretion of discounts, was $4.0 million, $4.8 million and $4.9 million, respectively. Maturities and calls of securities totaled $349,000, $695,000 and $13.6 million in 2025, 2024 and 2023, respectively. No provision for allowance for credit loss was recorded in connection with the investment securities portfolio in 2025, 2024 or 2023. The investment portfolio is managed to provide for an appropriate balance between liquidity, credit risk and investment return and to limit the Company’s exposure to risk to an acceptable level. The longer duration of the investment security portfolio serves to balance the shorter duration of the loan portfolio.

Securities held-to-maturity were carried at amortized cost of $133.2 million and $131.6 million at December 31, 2025 and 2024, respectively. All of the Company's securities designated as held-to-maturity were transferred from the available-for-sale classification. The net unrealized gain or loss on the transferred securities was recorded as a component of accumulated other comprehensive income (loss) at the time of the transfer and is amortized over the remaining life of the underlying securities as an adjustment to the yield on those securities. The net amount of the unrealized loss on the securities included in accumulated other comprehensive income (loss) was $17.0 million ($13.4 million, net of tax) at December 31, 2025.

The weighted average yields and maturity distribution for the securities portfolio at December 31, 2025, were as follows:

The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds in the Volcker Rule.

Real Estate Mortgage Loans Held-For-Sale

Real estate mortgages held-for-sale increased by $1.0 million to $2.7 million at December 31, 2025 from $1.7 million at December 31, 2024 as a result of fluctuations in secondary market sales activity. This asset category is subject to a high degree of variability depending on, among other factors, recent mortgage loan rates and the quantity and timing of loan sales into the secondary market. The Company generally sells almost all of the conforming mortgage loans it originates in the secondary market. Proceeds from sales totaled $17.6 million in 2025, $20.8 million in 2024 and $8.0 million in 2023.

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Loan Portfolio

The loan portfolio by class as of December 31, 2025, 2024 and 2023 was as follows:

The ratio of loans to total loans by portfolio segment as of December 31, 2025, 2024 and 2023 was as follows:

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The mix of the Company's loan portfolio consists primarily of commercial loans, and the Bank's lending focus is on the commercial sector of the Lake City Bank footprint. Owner occupied commercial real estate loans represent in many instances the buildings and factories of our commercial and industrial borrowers. Commercial and industrial loans together with owner occupied commercial real estate loans represented 43.9% and 44.1% of total loans as of December 31, 2025 and 2024, respectively. The non-owner occupied commercial real estate sector of the loan portfolio largely represents multi-family and industrial warehouse developments in the Indianapolis market with in-state developers that are well-known to the Bank. The Company has limited exposure to commercial office space borrowers, all of which are located in the Bank's Indiana markets. Loans totaling $104.2 million and $101.7 million for this sector represented 1.9% and 2.0% of total loans at December 31, 2025 and 2024, respectively. Loans to the agriculture and agri-business sector of our Indiana footprint represent a significant loan segment of the overall loan portfolio. This loan segment is well diversified with loans to corn, soybean, poultry, dairy, swine, beef and egg operations.

The residential construction and land development loans class included construction loans totaling $10.0 million and $7.6 million as of December 31, 2025 and December 31, 2024. Increases in consumer loans during 2025 resulted from an increased focus on indirect lending to consumers and adjustable rate mortgages. The Bank generally sells conforming mortgage loans, which it originates locally, into the secondary market. These loans generally represent mortgage loans that are made to clients with long-term or substantial relationships with the Bank on terms consistent with secondary market requirements. The loan classifications are based on the nature of the loans as of the loan origination date. There were no foreign loans included in the loan portfolio for the periods presented.

Repricing opportunities of the loan portfolio occur either according to predetermined float rate indices, adjustable rate schedules included in the related loan agreements or upon maturity of each principal payment. The following table indicates the scheduled maturities of the loan portfolio as of December 31, 2025:

At maturity, credits are reviewed and, if renewed, are renewed at rates and conditions that prevail at the time of maturity.

Based upon the table above, all loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 2025 amounted to $2.204 billion and $1.368 billion, respectively.

Bank Owned Life Insurance

Bank owned life insurance increased by $16.7 million to $130.0 million at December 31, 2025 and by $4.2 million to $113.3 million at December 31, 2024 from $109.1 million at December 31, 2023. The increase during 2025 was primarily driven by the purchase of $12.5 million in general hybrid account policies, which contributed additional income during 2025. Additional income was provided by improved market performance of the Bank's variable bank owned life insurance policies, which trend directionally with the performance of the broader equity markets. The increase in 2024 was due to income from traditional policies and from variable policy market performance. Bank owned life insurance investment income is used to fund the cost of term life insurance purchased by the Bank as a benefit for bank officers.

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Sources of Funds

The average daily deposits and borrowings together with the average rates paid on those deposits and borrowings for the years ended December 31, 2025, 2024 and 2023 are summarized in the following table:

Time deposits as of December 31, 2025 will mature as follows:

Deposits

Deposits by portfolio segment for December 31, 2025, 2024 and 2023 are presented below:

Total deposits increased by $72.4 million, or 1.2%, to $5.973 billion, at December 31, 2025 compared to $5.901 billion at December 31, 2024. The increase in deposits was attributable to an increase in public fund deposits. Public fund deposits increased $169.7 million, or 9.4%, and represented 33.2% and 30.7% of total deposits at December 31, 2025 and 2024, respectively. The growth in public funds was positively impacted by the addition of new public funds customers in the Lake City Bank footprint, including their operating accounts. Offsetting the increase in public funds were decreases to commercial and retail deposits. Commercial deposits decreased $89.1 million, or 3.9%, and represented 36.5% and 38.4% of total deposits at December 31, 2025 and 2024, respectively. Retail deposits decreased $17.3 million, or 1.0%, and represented 29.5% and 30.2% of total deposits at December 31, 2025 and 2024, respectively. Brokered deposits increased $9.0 million, or 21.7%, between the two periods. Core deposits represented 99.2% and 99.3% of total deposits at December 31, 2025 and 2024, respectively.

Total deposits increased by $180.4 million, or 3.2%, to $5.901 billion, at December 31, 2024 compared to $5.721 billion December 31, 2023. The increase in deposits was attributable to increases in commercial and public fund deposits.

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Commercial deposits increased $41.9 million, or 1.9% and represented 38.4% and 38.9% of total deposits at December 31, 2024 and 2023, respectively. Public fund deposits increased by $246.6 million, or 15.8% and represented 30.7% and 27.3% of total deposits at December 31, 2024 and 2023, respectively. Additionally, brokered deposits decreased $93.8 million and represented 0.7% and 2.4% of total deposits at December 31, 2024 and 2023, respectively. Retail deposits decreased $14.2 million, or 0.8% and represented 30.2% and 31.4% of total deposits at December 31, 2024 and 2023, respectively.

As previously noted, 33.2% of the Company’s deposit base is attributable to public fund entities which consist primarily of customers in the Company’s geographic footprint. A majority of public fund balances represent customers with operating accounts at the Bank. The public fund segment is a stable source of deposit funding and a focus in the treasury management area due to their business needs. A shift in funding away from public fund deposits could require the Company to execute alternative funding plans under the Contingency Funding Plan discussed in further detail under "Liquidity Risk".

FHLB Advances and Other Borrowings

During 2025, average total short-term and other borrowings decreased by $23.3 million to $43.0 million. Ending balances of short-term and other borrowings increased to $183.0 million at December 31, 2025 compared to none at December 31, 2024. At December 31, 2025, short-term borrowings consisted of a $170.0 million advance outstanding with the Federal Home Loan Bank of Indianapolis and $13.0 million was drawn on the Company's unsecured revolving credit agreement with another financial institution. Long-term borrowings outstanding at December 31, 2025 were $1.2 million. The Company's long-term borrowings were outstanding with the Federal Home Loan Bank of Indianapolis as part of the rate-subsidized Community Development Financial Institution ("CDFI") Rate Buydown Advance program to fund a low cost loan to a qualifying CDFI. The Company had no long-term borrowings outstanding during 2024.

Average short-term borrowings decreased $100.5 million from $166.8 million in 2023 compared to 2024. Average long-term borrowings were $967,000 during 2025, compared to none during 2024 and 2023.

Capital

The Company believes that a strong, appropriately managed capital position is critical to support continued growth of loans and earnings. Capital is used primarily to fund continued organic loan growth and to support dividends to shareholders. The Company had a total risk-based capital ratio of 15.92%, a Tier I risk-based capital ratio of 14.77% and a common Tier 1 risk-based capital ratio of 14.77% as of December 31, 2025. These ratios met or exceeded the Federal Reserve Bank’s "well capitalized" minimums of 10.0%, 8.0% and 6.5%, respectively. The Company also had a Tier 1 leverage ratio of 12.39% and a tangible equity ratio of 10.86%. When excluding the impact of accumulated other comprehensive income (loss) on tangible common equity, the Company's adjusted tangible common equity to adjusted tangible assets was 12.45%. See "Note 15 – Capital Requirements and Restrictions on Retained Earnings" for more information.

The ability to maintain these ratios is a function of the balance between net income, a prudent dividend policy, and the strategic yet disciplined utilization of the share repurchase plan. During 2025, the Company repurchased 337,890 shares at a weighted average price of $58.03 per share. The majority of share repurchases occurred during the fourth quarter of 2025, with 307,590 shares repurchased at a weighted average price of $58.23 per share. The Company expects to continue to use the share repurchase program for opportunistic purposes during 2026 based on guardrails that measure tangible book value dilution and earnings accretion at a range of share prices.

Total stockholders’ equity increased by 11.5% to $762.5 million as of December 31, 2025 from $683.9 million as of December 31, 2024. The Company earned $103.4 million in 2025 and $93.5 million in 2024. The Company declared cash dividends of $2.00 per share in 2025, which decreased equity by $51.4 million. The Company declared cash dividends of $1.92 per share in 2024, which decreased equity by $49.3 million. Total stockholder's equity has been impacted by declines in the market value of the Company's available-for-sale investment securities portfolio. The market value decline, resulting from FOMC's tightening of monetary policy in 2022 and 2023, has generated unrealized losses in the available-for-sale portfolio. Unrealized losses from the available-for-sale investment securities portfolio are recorded, net of tax, in accumulated other comprehensive income (loss) in the statement of stockholders' equity. Improvements in the fair value of securities as a result of the easing of monetary policy by the FOMC starting in 2024 and net defined pension plan gains positively impacted equity by $39.4 million in 2025 compared to a decrease of $11.3 million in 2024. The impact to equity due to other comprehensive income (loss) is not included in regulatory capital.

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RISK MANAGEMENT

Overview

The Company, with the oversight of the Corporate Risk Committee of the board of directors, has developed a company-wide risk management program intended to help identify, manage and mitigate the various business risks it faces. Following is a discussion addressing the risks identified as most significant to the Company – Credit, Liquidity, Interest Rate and Market Risk. Item 7A. includes additional discussion about market risk.

Credit Risk

Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Our primary credit risks result from lending and to a lesser extent, investment activities.

Investment Portfolio

The Company’s investment portfolio consists of U.S. treasuries, government or government-sponsored entity securities, and municipal bonds subject to an investment security policy that is approved annually by the board of directors. As of December 31, 2025, the Company’s investment in U.S government sponsored mortgage-backed securities represented approximately 39% of total investment securities fair value consisting of mortgage bonds issued by Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae, Fannie Mae and Freddie Mac securities are each guaranteed by their respective agencies as to principal and interest. All mortgage securities purchased by the Company in 2025 were within risk tolerances for price, prepayment, extension and original life risk characteristics contained in the Company’s investment policy. As of December 31, 2025, all mortgage-backed securities were performing in a manner consistent with management’s expectations at time of purchase. Municipal securities represented 50% of total investment securities fair value as of December 31, 2025 and were rated investment grade at the time of purchase and continue to be rated investment grade. The Company uses analytics provided by its third party portfolio advisor to evaluate and monitor credit risk for all investments on a quarterly basis. Based upon these analytics as of December 31, 2025, the securities in the combined available-for-sale and held-to-maturity portfolios had an effective duration of approximately 5.94 years. The analysis indicated a negative 6.7% change in market value in the event of a 100 basis point upward, instantaneous rate shock and a positive 6.8% change in market value in the event of a 100 basis point downward, instantaneous rate shock.

Loan Portfolio

The Company has a high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing conservative credit structures, adjusting its pricing to the perceived risk of each individual credit, diversifying the portfolio by customer, product, industry and market area and by obtaining personal loan guarantees.

There were no loan concentrations within industries that exceeded ten percent of total loans, except commercial real estate. Commercial real estate was $2.667 billion, or 49.5%, of total loans at December 31, 2025. The owner occupied commercial real estate portfolio generally represents the financing of factories and operational facilities for the Bank's commercial and industrial borrowers. The Bank’s in-house lending limit was $40.0 million and its calculated legal lending limit was $144.0 million at December 31, 2025. Manufacturing loans are included in the commercial and industrial loans total and are well diversified by industry. Agri-business and agricultural loans represented 7.6% of total loans as of December 31, 2025 and are not concentrated to any agricultural sector. Substantially all of the Bank’s commercial, industrial, agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its geographic market areas and to diverse industries. When segmenting the Bank's loan portfolio as of December 31, 2025, the largest segments are multifamily housing, agriculture, the recreational vehicle industry, and industrial commercial real estate which represented 13.6%, 8.8%, 4.5% and 4.0% of total loans, respectively.

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The following is a summary of nonperforming loans on an amortized cost basis as of December 31, 2025 and 2024.

Nonperforming assets of the Company include nonperforming loans (as indicated above), nonaccrual investments, other real estate owned and repossessions, the total of which amounted to $20.9 million and $56.9 million at December 31, 2025 and 2024, respectively. Nonperforming loans decreased to 0.4% of total loans at December 31, 2025 compared to 1.1% at December 31, 2024. Nonperforming loans decreased by $35.6 million during 2025, due primarily to the previously disclosed partial charge off of a nonperforming credit during 2025.

Loans for which the borrower appears to be unable or unwilling to repay its debt in full or on time, and the collateral is insufficient to cover all principal and accrued interest, will be reclassified as nonperforming to the extent they are unsecured, on or before the date when the loan becomes 90 days delinquent, with the exception of small dollar other consumer loans which are not placed on nonaccrual status since these loans are typically charged-off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued, all unpaid accrued interest is reversed and interest income is subsequently recorded only to the extent cash payments are received. Accrual status is resumed when all contractually due payments are brought current and future payments are reasonably assured.

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A loan is individually analyzed for a specific allocation within the allowance for credit losses when full payment under the original loan terms is not expected or when the amount collected is expected to differ materially from the estimate that would be arrived at under the pooled method. Allocations are evaluated in total for smaller-balance loans of similar nature not in nonaccrual status such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans including material modifications made to borrowers experiencing financial difficulty. If a loan is individually analyzed, a portion of the allowance may be specifically allocated so that the loan is reported, net, at the present value of estimated future cash flow or at the fair value of collateral if repayment is expected solely from the collateral.

The total amortized cost basis of nonperforming loans were $20.9 million, or 0.4% of total loans, at December 31, 2025 versus $56.5 million, or 1.1% of total loans, at December 31, 2024. There were 54 relationships totaling $43.0 million classified as individually analyzed as of December 31, 2025 on an amortized cost basis, versus 43 relationships totaling $78.6 million at the end of 2024. The decrease in individually analyzed loans during December 31, 2025 resulted primarily from the aforementioned partial charge off.

Renegotiated loans to borrowers experiencing financial difficulty are those loans for which the Company modifies the terms of loans for borrowers experiencing financial distress by providing the following forms of relief: forgiveness of loan principal, extension of repayment terms, reduction of interest rate or an other than insignificant payment delay. For the year ended December 31, 2025, one material loan modification with a total balance of $1.7 million with total allocations of $204,000 was made to a borrower experiencing financial difficulty. The modification was related to the previously disclosed partial charge-off with a personal guarantor of the loan. The modified note is collateralized by several of the guarantor's commercial and residential real estate properties. For the year ended December 31, 2024, there were no material modifications made to borrowers experiencing financial difficulty.

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The following is a summary of the credit loss experience for the years ended December 31, 2025, 2024 and 2023.

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The following is a summary of the allocation for credit losses as of December 31, 2025 and 2024.

At December 31, 2025, the allowance for credit losses was 1.28% of total loans outstanding, versus 1.68% of total loans outstanding at December 31, 2024. Management believes the allowance for credit losses is at a level commensurate with the overall risk exposure of the loan portfolio. The process of identifying expected credit losses is a subjective process. Therefore, the Company maintains a general allowance to cover expected credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the credit loss reserve includes the considerations below.

Loans are charged against the allowance for credit losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate for expected credit losses relating to specifically identified loans based on an analysis of the loans by management, as well as other expected credit losses inherent in the loan portfolio. The analysis takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of individual problem loans, and current and forecasted economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of qualitative and environmental allowance is determined after considering the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality, changes in collateral strength and current economic conditions that may affect the borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s practice is to establish a specific allocation within the allowance for credit losses for any assets where management has identified conditions or circumstances that indicate an asset is nonperforming. If an asset or portion thereof is classified as loss, the Company’s policy is to either establish a specific allocation for credit losses in the amount of 100% of the portion of the asset classified loss or charge off such amount.

At December 31, 2025, on the basis of management’s review of the loan portfolio, the Company had 96 credits totaling $184.0 million on the classified loan list, which includes Special Mention credits, versus 81 credits totaling $211.1 million on December 31, 2024. The decrease in the classified loan list in 2025 was primarily driven by the previously disclosed partial charge off in settlement of the troubled credit. Excluding this credit, asset quality metrics remained stable and near historical lows despite the heightened uncertainty surrounding the evolving state of US trade policy. The Company remains cautiously optimistic in regards to the credit quality of the loan portfolio given otherwise stable economic conditions within the Company's operating footprint and will continue to actively manage loan portfolio challenges. As of December 31, 2025, the Company had $134.0 million of assets classified as Special Mention, $50.0 million classified as Substandard, $74,000 classified as Doubtful and none classified as Loss as compared to $123.6 million, $44.0 million, $43.5 million and none, respectively, at December 31, 2024. The balances reported in "Note 4 – Allowance for Credit Losses and Credit Quality" include deferred fees and costs. Included in the classified loan amounts above were loans receiving modifications due to financial difficulty experienced by the borrower. One borrower in financial distress with loans totalling $1.7 million and total allocations of $204,000 received a modification for the year ended December 31, 2025. There were no modifications to borrowers experiencing financial difficulty during the year ended December 31, 2024.

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Allowance estimates are developed by management taking into account actual loss experience, subject to a floor, adjusted for current economic conditions and a reasonably supportable forecast period. The Company has regular discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company's loan portfolio based upon loan segment. In accordance with accounting guidance, the allowance is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amounts. For a more thorough discussion of the allowance for credit losses methodology see the "Critical Accounting Policies" section of this Item 2.

The allowance for credit losses decreased $17.0 million, or 19.7%, from $86.0 million at December 31, 2024 to $69.0 million at December 31, 2025, due primarily to net charge offs of $28.8 million and offset by provision expense of $11.8 million. Pooled loan allocations increased $2.2 million from $58.4 million at December 31, 2024 to $60.6 million at December 31, 2025. The unallocated component of the allowance for credit losses was $325,000 at December 31, 2025, which decreased $58,000 from $383,000 reported at December 31, 2024. The unallocated component of the allowance for credit losses incorporates the Company’s judgmental determination of expected losses that may not be fully reflected in other allocations.

The Company has experienced organic growth in total loans over the last several years with an increase in gross loans of $257.4 million, or 5.0%, from December 31, 2024 to December 31, 2025. This growth is largely concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining credit loss allocations. Management believes that it is prudent to continue to provide for credit losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions.

Watch list loans decreased $27.1 million, or 12.8%, to $184.0 million as of December 31, 2025, compared to $211.1 million at December 31, 2024. Watch list loans represented 3.4% of total loans at December 31, 2025 compared to 4.1% at December 31, 2024. The decrease in watch list loans resulted primarily from a partial charge off of the previously disclosed nonperforming credit, net with other watch list additions and removals. The Company's continued growth strategy promotes diversification among industries as well as continued focus on the enforcement of a disciplined credit culture and a conservative posture in loan work-out situations.

Liquidity Risk

Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. Liquidity is monitored and closely managed by the ALCO Committee.

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The liquidity structure is expressly detailed in the Company’s Contingency Funding Plan, which is discussed below. The Company relies on a number of different sources in order to meet these potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio. The cash flow from the securities portfolio is expected to provide approximately $134.5 million of potential contingent funding in 2026.

The Bank had total available sources of liquidity totaling $3.526 billion at December 31, 2025 compared to $3.681 billion at December 31, 2024. The Company has approval of $3.747 billion in secondary funding sources available as of December 31, 2025, of which $221.8 million was utilized. The Company had $395.0 million of availability in federal funds lines with thirteen correspondent banks, of which none was drawn on as of December 31, 2025. The Company has board of directors approval to borrow up to $800.0 million at the FHLB, but given the Company’s current collateral structure and outstanding borrowings as of December 31, 2025, the Company could have only borrowed up to $473.6 million under this authority. The Company has additional collateral that could be pledged to the FHLB of $241.8 million as of December 31, 2025 to generate additional liquidity. Further, the Company had available capacity at the Federal Reserve Bank of Chicago of up to $1.190 billion given its current collateral structure at the Federal Reserve Bank discount window program and the terms of that facility at December 31, 2025, with no balances outstanding at December 31, 2025. The Company also has established relationships in the brokered time deposit and brokered money market sectors, as well as the IntraFi Network CDARS One-Way Buy and Insured Cash Sweep One-Way Buy programs, to access these funds when desired with settlement of funds in one to two weeks’ time. The Bank is also a member of the American Financial Exchange ("AFX") where overnight fed funds purchased can be obtained from other banks on the exchange that have approved the Bank for an unsecured, overnight line. These funds are only available if the approving banks have an "offer" out to sell that day. As of December 31, 2025, the total amount approved for the Bank via AFX banks was $312.0 million and none was outstanding at year end.

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The Company had 90% of its securities, based upon fair market value, in the available-for-sale portfolio at December 31, 2025, allowing the Company extensive flexibility to sell securities to meet funding demands. The remaining portion of investments securities were designated as held-to-maturity. Management believes the majority of the securities in investment portfolio are of high quality and marketable. Approximately 49% of this portfolio is comprised of U.S. government agency securities or mortgage-backed securities directly or indirectly backed by the U.S. government. At December 31, 2025, 93% of municipal securities owned by the Company were AAA or AA rated with a diversified geography of state issuer. In addition, the Company has historically sold the majority of its originated mortgage loans on the secondary market to reduce interest rate risk and to create an additional source of funding.

The Company has a formalized Contingency Funding Plan ("CFP"). The Board and management recognize the importance of liquidity during times of normal operations and in times of stress. The CFP was developed to ensure that the multiple liquidity sources available to the Company are readily available. All liquidity sources are tested annually. The CFP specifically considers liquidity at the Bank and the Company level. The CFP identifies the potential funding sources at the Bank level, which includes the FHLB, the Federal Reserve Bank, brokered deposits, one-way buy products via the IntraFi Network (CDARS and Insured Cash Sweeps) and Federal Funds. The CFP also addresses the Bank’s ability to liquidate its securities portfolio or other liquid assets. The CFP funding sources at the holding company level include a holding company committed line of credit that renews annually, as well as the ability to transfer securities from the investment subsidiary of the Bank to the Company. The Company’s committed line of credit has availability up to $30.0 million, of which $13.0 million was drawn upon as of December 31, 2025.

Further, the CFP identifies CFP team members and expressly details their respective roles. Potential risk scenarios are identified and the plan includes multiple scenarios, including short-term and long-term funding crisis situations. Under the long-term funding crisis, two additional scenarios are identified: a moderate risk scenario and a highly stressed scenario. The CFP details the responsibilities and the actions to be taken by the CFP team under each scenario. Quarterly reports to management and the Board under the CFP include an early warning indicator matrix and pro forma cash flows for the various scenarios.

The following table discloses information on the maturity of the Company’s contractual long-term obligations as of December 31, 2025.

During the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended revolving lines of credit. The Company follows the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as it follows for those loans that are recorded in its financial statements.

The Company’s exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments. Off-balance sheet transactions are more fully discussed in "Note 17 – Commitments, Off-Balance Sheet Risks and Contingencies".

The following table discloses information on the maturity of the Company’s commitments.

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Interest Rate Risk

Interest rate risk is the risk that the estimated fair value of the Company’s assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that net income will be significantly reduced by interest rate changes.

Interest rate risk represents the Company’s primary market risk exposure. The Company does not have material exposure to foreign currency exchange risk and does not maintain a trading portfolio. The Corporate Risk Committee of the Board annually reviews and approves the ALCO policy and the Derivatives and Hedging policy used to manage interest rate risk. These policies set guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income, but it does not necessarily indicate the effect on future net interest income. During both 2025 and 2024, the Bank demonstrated a fairly neutral balance sheet structure after a history of more asset sensitivity. Driving this was a shift to shorter-term interest bearing deposit accounts, such as money market accounts, and an increase in deposit accounts with rates directly indexed to the effective federal funds rate. As a result, the Company expects net interest margin to remain relatively stable in the first 100 basis points potential change (decrease or increase) in the federal funds rate due to the more neutral posture for balance sheet sensitivity.

Earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve Board. During 2025 the FOMC decreased the target federal funds rate a total of 75 basis points, following a decline in 2024 of 100 basis points after a combined increase of 525 basis points in 2022 and 2023. Rate decreases were implemented during late 2025 at the September, October and December FOMC meetings. The combined effect of these actions decreased the target federal funds rate to a range of 3.50% to 3.75%. The FOMC statement released for the meeting in December 2025 recognized that inflation had moved up since earlier in the year and remains somewhat elevated. The statement also indicated that the downside risks to employment had risen in recent months. The Committee reaffirmed its dual objective relative to maximum employment and inflation targets. The updated economic projections released at the December meeting project the median federal funds rate decreasing to 3.4% in 2026 (lowering of the target federal funds rate by 25 basis points), with continued easing to 3.1% in 2027. Additionally, the longer run median forecast for the federal funds rate was left unchanged at 3.0%. The combined result of the decrease in the yield on earning assets being more than offset by a decrease in the cost of funds, led to an increase in net interest margin from 3.18% for 2024 to 3.45% for 2025. The Company’s yield on earning assets decreased 18 basis points during 2025 as variable rate loans repriced at lower rates, offset by the positive tailwind of fixed/adjustable rate loans repricing at higher rates as to when they were originated. The commercial loan portfolio represents 88% of the total loan portfolio as of December 31, 2025. Approximately 67% of the commercial loan portfolio are variable rate loans which are primarily indexed to One Month Term SOFR, Prime and FHLB indices. Another factor mitigating the earning asset yield decline was the investment securities yield improving 16 basis points from 2.81% for 2024 to 2.97% for 2025. The decrease in earning asset yields was more than offset by a decrease in the Company's funding costs, primarily as result of continued easing of monetary policy by the Federal Reserve Bank. The rate paid on deposit accounts and purchased funds decreased 45 basis points for 2025, following an increase of 40 basis points in 2024. The Company anticipates that cost of funds would continue to respond favorably to any further monetary policy easing by the Federal Reserve Bank.

Future changes in the net interest margin will be dependent upon multiple factors including further actions by the FOMC during 2026 in response to inflation, economic conditions and geopolitical concerns, the results of any of the administration’s changes to economic policy and laws, competitive pressures in the various markets served, and changes in the structure of the balance sheet as a result of changes in customer demands for products and services. The market rates table in Item 7A quantifies the current sensitivity to market rates and demonstrates our more neutral balance sheet compared to a historically more asset sensitive balance sheet.

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index ("CPI") coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by the Company. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds.

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