FRME First Merchants Corp - 10-K

ITEM 1A. RISK FACTORS

RISK FACTORS

There are a number of factors, including those specified below, that may adversely affect the Corporation’s business, financial results or stock price. Additional risks that the Corporation currently does not know about or currently views as immaterial may also impair the Corporation’s business or adversely impact its financial results or stock price.

Operational Risks

• The Corporation’s business, results of operations and financial condition may be adversely affected by epidemics, pandemics or other infectious disease outbreaks.

An epidemic, a pandemic or any other infectious disease outbreak may result in a widespread health crisis that could adversely affect general commercial activity, the global economy (including the states and local economies in which we operate) and financial markets.

Epidemics, pandemics or other infectious disease outbreaks may result in the Corporation closing certain offices and may require us to limit how customers conduct business through our branch network. If our employees continue or are required to work remotely, the Corporation will be exposed to increased cybersecurity risks such as phishing, malware, and other cybersecurity attacks, all of which could expose us to liability and could seriously disrupt our business operations. Furthermore, the Corporation’s business operations may be disrupted due to vendors and third-party service providers being unable to work or provide services effectively during such a health crisis, including because of illness, quarantines or other government actions.

In addition, an epidemic, a pandemic or another infectious disease outbreak could significantly impact households and businesses, or cause limitations on commercial activity, increased unemployment and general economic and financial instability. An economic slow-down in, or a reversal in an economic recovery of, the regions in which we conduct our business could result in declines in loan demand and collateral values. Furthermore, negative impacts on our customers caused by such a health crisis could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans. Moreover, governmental and regulatory actions taken in response to an epidemic, a pandemic or another

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infectious disease outbreak may include decreased interest rates, which could adversely impact the Corporation’s interest margins and may lead to decreases in the Corporation’s net interest income.

The extent to which a widespread health crisis may impact the Corporation’s business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and severity of the crisis, the potential for seasonal or other resurgences, actions taken by governmental authorities and other third parties to contain and treat such epidemics, pandemics or other infectious disease outbreaks, and how quickly and to what extent normal economic and operating conditions can resume. Moreover, the effects of a widespread health crisis may heighten many of the other risks described in this “Risk Factors” section. As a result, the negative effects on the Corporation’s business, results of operations and financial condition from epidemics, pandemics or other infectious disease outbreaks could be material.

• The Corporation’s allowances for credit losses may not be adequate to cover actual losses.

The Corporation maintains allowances for credit losses for loans, off-balance sheet credit exposures, and debt securities to provide for defaults and nonperformance, which represent estimates of expected losses over the remaining contractual lives of the loan and debt security portfolios. These estimates are the result of the Corporation’s continuing evaluation of specific credit risks and loss experience, current loan and debt security portfolio quality, present economic, political and regulatory conditions, industry concentrations, reasonable and supportable forecasts for future conditions, and other factors that may indicate losses. The determination of the appropriate levels of the allowances for loan, off-balance sheet credit exposures, and debt security credit losses inherently involves a high degree of subjectivity and judgment and requires the Corporation to make estimates of current credit risks and future trends, all of which may undergo material changes. As a result, the allowances may not be adequate to cover actual losses, and future allowances for credit losses could materially and adversely affect our financial condition, results of operations, and cash flows.

The Corporation adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as amended, on January 1, 2021, which replaced the previous “incurred loss” model for measuring credit losses with an “expected life of loan loss” model, referred to as the CECL model. Consistent with rules adopted by federal banking regulators, the Corporation has elected to phase in the cumulative effect of the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition period that began on January 1, 2021. Under that phase-in schedule, the cumulative effect of the adoption was fully reflected in regulatory capital on January 1, 2024.

Adoption of the CECL methodology has substantially changed how the Corporation calculates its allowances for credit losses and the ongoing impact of the adoption is dependent on various factors, including credit quality, macroeconomic forecasts and conditions, composition of our loans and securities portfolios, and other management judgments. 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 for additional information. Material additions to the Corporation’s allowance through provision expense would materially decrease its net income. There can be no assurance that the Corporation’s monitoring procedures and policies will reduce certain lending risks or that the Corporation’s allowances for credit losses will be adequate to cover actual losses.

• The Corporation may suffer losses in its loan portfolio despite its underwriting practices.

The Corporation seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices. The Corporation’s strategy for credit risk management includes conservative credit policies and underwriting criteria for all loans, as well as an overall credit limit for each customer significantly below legal lending limits. The strategy also emphasizes diversification on a regional geographic, industry and customer level, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality. There is a continuous review of the loan portfolio, including an internally administered loan “watch” list and an independent loan review. The evaluation takes into consideration identified credit problems, as well as the possibility of losses inherent in the loan portfolio that are not specifically identified. Although the Corporation believes that its underwriting criteria are appropriate for the various kinds of loans it makes, the Corporation may incur losses on loans due to the factors previously discussed.

• The Corporation’s wholesale funding sources may prove insufficient to replace deposits or support future growth.

As part of the Corporation’s liquidity management, a number of funding sources are used, including core deposits and repayments and maturities of loans and investments. Sources also include brokered certificates of deposit, repurchase agreements, federal funds purchased and Federal Home Loan Bank (“FHLB”) advances. Negative operating results or changes in industry conditions could lead to an inability to replace these additional funding sources at maturity. The Corporation’s financial flexibility could be constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if the Corporation is required to rely more heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover the costs. In this case, the Corporation’s results of operations and financial condition would be negatively affected.

• The Corporation relies on dividends from its subsidiaries for its liquidity needs.

The Corporation is a separate and distinct legal entity from its bank and non-bank subsidiaries. The Corporation receives substantially all of its cash from dividends paid by its subsidiaries. These dividends are the principal source of funds to pay dividends on the Corporation’s stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that the bank subsidiaries may pay to the Corporation.

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• Acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties.

The Corporation regularly explores opportunities to acquire banks, financial institutions, or other financial services businesses or assets. The Corporation cannot predict the number, size or timing of acquisitions. Difficulty in integrating an acquired business or company may cause the Corporation not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of the Corporation’s business or the business of the acquired company, or otherwise adversely affect the Corporation’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. The Corporation may also issue equity securities in connection with acquisitions, which could cause ownership and economic dilution to current stockholders.

• The Corporation faces operational risks because the nature of the financial services business involves a high volume of transactions.

The Corporation operates in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from the Corporation’s operations, including, but not limited to, the risk of fraud by employees or persons outside of the Corporation, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements and business continuation and disaster recovery. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, the Corporation could suffer financial loss, face regulatory action and suffer damage to its reputation.

• Cyber incidents and other security breaches at the Corporation, its service providers or counterparties, or in the business community or markets may negatively impact the Corporation’s business or performance.

The increased use of, and dependence on, information management systems in order to engage with customers and conduct business necessarily creates cyber risk. Despite the significant resources and security measures used by the Corporation, the incentives for threat actors to obtain financial payment information and customer non-public information, or to conduct ransomware will continue to exist. Cyber breach statistics over the past several years evidence the targeting of numerous banking institutions and credit bureaus. Phishing attempts have also significantly increased and political conflict also presents cyber threats by nation states.

Operational risk is inherent in the Corporation’s activities and can present itself in numerous ways, including internal or external fraud, business disruptions or failures, noncompliance with applicable laws and regulations, cyber breach, or failure of third parties, among other events. The result of these could be reputational harm, financial losses, or litigation and regulatory fines for the Bank. The Corporation operates in a fashion that allows operational risk to be in line with its risk appetite. To govern, monitor and control operational risk, the Corporation maintains an Enterprise Risk Management (“ERM”) Program, which sets thresholds for risk appetite by key risk areas, such as strategic risk and operational risk. These thresholds are monitored by the Compliance and Internal Audit Departments and key metrics are reported to management and Board committees.

Use of third-party software and services also exposes the Corporation to cybersecurity risk as numerous service providers host critical data or have direct contact with our bank customers. Although the Corporation adheres to industry standard practices in conducting thorough due diligence of vendors and contract management, should a vendor experience a breach, the Bank could still suffer reputational harm, and potentially financial losses. Expanded use of cloud-based technologies and providing our customers more internet-based product offerings to continue to remain competitive will serve to increase these potential risks. The Corporation’s Third-Party Risk Management Program helps to mitigate risks posed by reliance on third and fourth parties.

To combat these ever-present cyber risks, the Corporation maintains a comprehensive Information Security Program, which includes annual risk assessments, an Incident Response Plan, and a layered control environment meant to detect, prevent, and limit unauthorized or harmful actions across our information technology environment. Standards over information security are Board-approved and various types of control testing is conducted throughout the year, both by internal parties and external ones. Findings are actioned on throughout the year and reported to various committees. The Corporation has adopted the National Institute of Standards and Technology (NIST) Cybersecurity Framework for the management and development of cyber-security controls and is an active participant in the financial sector information sharing organization structure, known as the Financial Services Information Sharing and Analysis Center.

Each year the Information Security Department conducts a cyber incident tabletop exercise for the bank’s incident response teams. The bank’s executive management team participates in the exercise every two years. The purpose of these tabletops is to simulate a cyber event and work through the event using our Incident Response Plan. This allows our incident response team to become familiar with the logistics of the plan, as well as provide feedback to improve the process and plan. External subject matter experts, such as Bank legal counsel, forensic advisors, marketing agency and insurance broker participate in these exercises.

Management has established an Information Security Committee in order to assist executive management and the Board of Directors of the Bank in fulfilling their oversight responsibilities related to information security. The Committee reports its activities, key conclusions and recommendations to the Enterprise Risk Management Committee and the Board’s Risk and Credit Policy Committee on a quarterly basis.

At the Information Security Committee, security-related policies and standards are reviewed and approved, annual risk assessment results and action plans are noted, annual penetration test reports shared, current security incidents discussed, and relevant cyber risks and trends are presented.

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The Corporation’s Board of Directors has delegated primary responsibility for oversight of cybersecurity risk to its Risk and Credit Policy Committee, with its Audit Committee also considering cyber risk as part of financial oversight. The Information Security Department provides an annual update to the Risk and Credit Policy Committee of the Board on the state of the Information Security Program. This cybersecurity “deep dive” includes review of key security incidents and review of the Information Security Policy, Information Security Program, the Incident Response Plan, and the Acceptable Use Policy. The Board is then presented with the update by the Chair of the Risk and Credit Policy Committee.

The Board considers cybersecurity risks in business strategy by getting updates on the Bank’s cybersecurity risk assessment. It assesses the experience of management personnel responsible for preventing, mitigating, detecting and remediating any cyber incidents, including the Chief Information Security Officer (“CISO”).

In 2022, the Board appointed Jason Sondhi to its Board of Directors. Mr. Sondhi is the Board’s cybersecurity expert. Mr. Sondhi has experience managing companies who provide endpoint detection and incident response, vulnerability scans, security information and event management, security employee training and vCISO services.

• The Corporation continually encounters technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables the financial institutions to better serve customers to reduce costs. The Corporation’s future success depends, in part, upon its ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations. The Corporation may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect the Corporation’s growth, revenue and profit. In addition, the Corporation relies upon the expertise and support of third-party service providers to help implement, maintain and/or service certain of its core technology solutions. If the Corporation cannot effectively manage these service providers, the service parties fail to materially perform, or the Corporation was to falter in any of the other noted areas, its business or performance could be negatively impacted.

• The Corporation is subject to risks and challenges related to its development and use of artificial intelligence.

The Corporation and its third-party vendors, clients, counterparties, and other market participants use and develop artificial intelligence technologies, including machine-learning and generative artificial intelligence tools, and generative artificial intelligence models. This use may expose the Corporation to various risks and potential liabilities, including: enhanced governmental or regulatory scrutiny; litigation; ethical concerns; confidentiality and security risks; intellectual property concerns over data rights and protection; heightened susceptibility to, and increased frequency and severity of, cyberattacks; inaccurate or biased algorithms or underlying datasets; and misuse or misappropriation. These factors could adversely affect our business, reputation, and financial results. In addition, poor implementation of artificial intelligence by the Corporation or its third-party service providers could subject the Corporation to additional risks that we may not adequately predict or mitigate.

Failure to strategically embrace artificial intelligence or to achieve expected effectiveness, productivity, or cost reductions from artificial intelligence adoption may result in a competitive disadvantage. We could experience a material adverse effect on our operating results, customer relationships, and growth opportunities if: we cannot offer new artificial intelligence-facilitated technologies as quickly as our competitors; our competitors develop more cost-effective solutions or product offerings; our employees do not adopt such technologies expediently; or we are unable to source necessary components, including reliable third-party technology solutions and service providers. The use of artificial intelligence solutions may also introduce operational and control risks, including potential errors in outputs, challenges in oversight and accountability, increased vulnerability to system failures or cyber incidents, and the risk that these technologies may not perform as intended under complex or unforeseen circumstances. These risks could materially disrupt our business operations and adversely affect our financial condition and reputation.

The evolving legal, regulatory, and compliance framework for artificial intelligence, both in the U.S. and internationally, may impact our ability to protect our data and intellectual property against infringing use, require changes to our artificial intelligence implementation, and increase our compliance costs and the risk of non-compliance. Although the Corporation has established governance, risk management, and control frameworks intended to oversee the use of artificial intelligence, these frameworks may not identify or mitigate all current or emerging risks associated with rapidly evolving technologies. Additionally, we may not be able to control how third-party artificial intelligence solutions we use are developed or maintained, including the source and quality of training data or the frequency and nature of model updates. We may also be unable to govern or protect the integrity of the data we input into such tools, specifically how that data is retained, reused, co-mingled with other data, or disclosed, even where we have sought protections with respect to these matters.

• The Corporation is subject to environmental liability risk associated with our Bank branches and any real estate collateral we acquire upon foreclosure.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. The costs associated with investigation and remediation activities could be substantial. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage, including damages and costs resulting from environmental contamination emanating from the property. Although we have policies and procedures to perform an environmental review before initiating foreclosure, these actions may not be sufficient to detect all potential environmental hazards.

We also have an extensive branch network, owning branch locations throughout the areas we serve that may be subject to similar environmental liability risks. Environmental laws may require us to incur substantial expenses and could materially reduce the affected property’s value or limit our ability to use or sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition or results of operations.

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• Significant legal actions could subject the Corporation to substantial uninsured liabilities.

The Corporation is from time to time subject to claims related to its operations. These claims and legal actions, including supervisory actions by the Corporation’s regulators, could involve large monetary claims and significant defense costs. To protect itself from the cost of these claims, the Corporation maintains insurance coverage in amounts and with deductibles that it believes are appropriate for its operations. However, the Corporation’s insurance coverage may not cover all claims against the Corporation or continue to be available to the Corporation at a reasonable cost. As a result, the Corporation may be exposed to substantial uninsured liabilities, which could adversely affect the Corporation’s results of operations and financial condition.

• The Corporation’s controls and procedures may fail or be circumvented.

Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our results of operations and financial condition.

• The Corporation’s methods of reducing risk exposure may not be effective.

The Corporation maintains a comprehensive risk management program designed to identify, quantify, manage, mitigate, monitor, aggregate, and report risks. However, instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, market, liquidity, operational, compliance, financial reporting and strategic risks could be less effective than anticipated. As a result, the Corporation may not be able to effectively mitigate its risk exposures in particular market environments or against particular types of risk, which could have a material adverse effect on our results of operations and financial condition.

• The Corporation’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates.

The Corporation’s accounting policies and methods are fundamental to how it records and reports its financial condition and results of operations. The Corporation’s management must exercise judgment in selecting and applying many of these accounting policies and methods, so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report the Corporation’s financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in the Corporation reporting materially different results than would have been reported under a different alternative. Certain accounting policies are critical to presenting the Corporation’s financial condition and results, and require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include: the allowances for credit losses; the valuation of investment securities; the valuation of goodwill and intangible assets; pension accounting; and the accounting related to acquisitions. Because of the uncertainty of estimates involved in these matters, the Corporation may be required to do one or more of the following: significantly increase the allowances for credit losses and/or sustain credit losses that are significantly higher than the reserve provided; recognize significant provision for impairment of its investment securities; recognize significant impairment on its goodwill and intangible assets; significantly increase its pension liability; or modify the purchase price allocation of an acquisition. As part of its function of assisting the Corporation’s Board of Directors in discharging its responsibility of ensuring all types of risk to the organization are properly being managed, mitigated and monitored by management, the Audit Committee of the Board of Directors oversees management’s accounting policies and methods. For more information, refer to 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.

• A write-down of all or part of the Corporation’s goodwill could materially reduce its net income and net worth.

At December 31, 2025, the Corporation had goodwill of $712.0 million recorded on its Consolidated Balance Sheet. Under ASC 350, Intangibles – Goodwill and Other, the Corporation is required to evaluate goodwill for impairment on an annual basis, as well as on an interim basis, if events or changes indicate that the asset may be impaired. An impairment loss must be recognized for any excess of carrying value over the fair value of goodwill. The fair value is determined based on internal valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. The resulting estimated fair value could result in material write-downs of goodwill and recording of impairment losses. Such a write-down could materially reduce the Corporation’s net income and overall net worth. The Corporation also cannot predict the occurrence of certain future events that might adversely affect the fair value of goodwill. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the effect of the economic environment on the Corporation’s customer base, or a material negative change in its relationship with significant customers.

• Changes in accounting standards could materially impact the Corporation’s financial statements.

From time to time, the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of the Corporation’s financial statements. These changes can be hard to predict and can materially impact how the Corporation records and reports its financial condition and results of operations. In some cases, the Corporation could be required to apply a new or revised standard retroactively; resulting in the restatement of prior period financial statements.

• Negative publicity could damage the Corporation’s reputation and adversely impact its business and financial results.

Reputation risk, or the risk to the Corporation’s earnings and capital from negative publicity, is inherent in the Corporation’s business. Negative publicity can result from the Corporation’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and actions taken by government regulators and community organizations in response to those activities. Negative publicity can adversely affect the Corporation’s ability to keep and attract customers and can expose the Corporation to litigation and regulatory action. Although the Corporation takes steps to minimize reputation risk in dealing with customers and other constituencies, the Corporation is inherently exposed to this risk.

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• Evolving expectations from customers, regulators, investors, and other stakeholders with respect to the Corporation’s environmental, social and governance practices may impose additional costs on the Corporation or expose it to new or additional risks.

The expectations of customers, regulators, investors, and other stakeholders related to the Corporation’s environmental, social and governance (“ESG”) practices and disclosure continue to evolve. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

• Climate change and related legislative and regulatory initiatives may materially affect the Corporation’s business and results of operations.

The global business community has continued its political and social awareness surrounding the state of the global environment and the issue of climate change. Further, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives related to climate change. At the same time, some policymakers have adopted or are considering adopting, requirements that constrain climate change initiatives. The lack of legislative or regulatory certainty surrounding climate risk management and practices make it impossible to predict how specifically climate change may impact our financial condition and results of operations. To the extent our customers experience unpredictable and more frequent weather disasters attributed to climate change, the value of real property securing the loans in our portfolios may be negatively impacted. Additionally, if insurance obtained by our borrowers is insufficient to cover any disaster-related losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, which could impact our financial condition and results of operations. Further, the effects of weather disasters attributed to climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.

• The Corporation may not be able to pay dividends in the future in accordance with past practice.

The Corporation has traditionally paid a quarterly dividend to common stockholders. The payment of dividends is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Corporation’s earnings, capital requirements, financial condition and other factors considered relevant by the Corporation’s Board of Directors.

Market and Industry Risks

• The Corporation’s business and financial results are significantly affected by general business and economic conditions.

The Corporation’s business activities and earnings are affected by general business conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and the state and local economies in which the Corporation operates. The Corporation's offices are primarily located in Indiana, Ohio and Michigan. Worsening economic conditions in our market areas could negatively impact the financial condition, results of operations and stock price of the Corporation. For example, a prolonged economic downturn, increases in unemployment, or other events that affect household and/or corporate incomes could result in deterioration of credit quality, an increase in the allowances for credit losses, or reduced demand for loan or fee-based products and services. Changes in the financial performance and condition of the Corporation’s borrowers could negatively affect repayment of those borrowers’ loans. In addition, changes in securities market conditions and monetary fluctuations could adversely affect the availability and terms of funding necessary to meet the Corporation’s liquidity needs.

• Changes in the domestic interest rate environment could affect the Corporation’s net interest income as well as the valuation of assets and liabilities.

The operations of financial institutions, such as the Corporation, are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. An institution’s net interest income is significantly affected by market rates of interest, which in turn are affected by prevailing economic conditions, by the fiscal and monetary policies of the federal government and by the policies of various regulatory agencies. In addition to affecting profitability, changes in interest rates can impact the valuation of assets and liabilities. Rate changes can also affect the ability of borrowers to meet obligations under variable or adjustable rate loans which in turn affect loss rates on those assets. Also, the demand for interest rate based products and services, including loans and deposit accounts, may decline resulting in the flow of funds away from financial institutions into direct investments. Direct investments, such as U.S. Government and corporate securities and other investment vehicles, including mutual funds, generally pay higher rates of return than financial institutions, because of the absence of federal insurance premiums and reserve requirements.

As a result of a widespread health crisis such as an epidemic, a pandemic or another infectious disease outbreak, the Federal Reserve may take steps to partially mitigate the adverse effects. For example, as a part of the unprecedented containment efforts and financial assistance undertaken by the U.S. Government relating to COVID-19, in March 2020, the Federal Open Market Committee (the “FOMC”) had reduced the target range for the federal funds rate to 0 percent to 0.25 percent. The Federal Reserve also initiated a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, corporate bonds and other investments, and numerous facilities to support the flow of credit to households and businesses. These activities also had the effect of suppressing long-term interest rates.

Beginning in the first half of 2022, in response to growing signs of inflation, the FOMC began increasing the federal funds benchmark rapidly and the Federal Reserve announced its intention to take actions to mitigate inflationary pressures by continuing to further reduce its purchase program. Rapid changes in interest rates make it challenging for the Bank to balance its loan and deposit portfolios, which may adversely affect the Corporation’s results of operations by reducing asset yields or spreads or having other adverse impacts on our business. As discussed above, the increased market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs, which could adversely affect our business. Conversely, decreases in interest rates could result in an acceleration of loan prepayments.

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In response to easing inflation pressures, the Federal Reserve decreased the target federal funds rate in 2024 and 2025, but uncertainty remains concerning inflation and interest rates. If the Federal Reserve were to aggressively lower the target federal funds, those lower rates could pressure our interest rate spread and may adversely affect our results of operations. On the other hand, increases in interest rates, to combat inflation or otherwise, may result in a change in the mix of the Bank’s noninterest and interest-bearing accounts. We are unable to predict changes in interest rates, which are affected by factors beyond our control, including inflation, deflation, recession, unemployment, money supply and other changes in financial markets. However, generally, if the interest rates on the Bank’s interest-bearing liabilities increase at a faster pace than the interest rates on its interest-earning assets, the result would be a reduction in net interest income and with it, a reduction in net earnings.

• Changes in the laws, regulations and policies governing banks and financial services companies could alter the Corporation’s business environment and adversely affect operations.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its fiscal and monetary policies determine in a large part the Corporation’s cost of funds for lending and investing and the return that can be earned on those loans and investments, both of which affect the Corporation’s net interest margin. Federal Reserve Board policies can also materially affect the value of financial instruments that the Corporation holds, such as debt securities. The Corporation and the Bank are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole. Congress and state legislatures and federal and state agencies continually review banking laws, regulations and policies for possible changes. After the Great Recession, efforts to promote the safety and soundness of financial institutions, financial market stability, the transparency and liquidity of financial markets, and consumer and investor protection resulted in increased regulation in the financial services industry. Regulatory agencies have intensified their examination practices and enforcement of laws and regulations. Compliance with regulations and other supervisory initiatives could increase the Corporation’s expenses and reduce revenues by limiting the types of financial services and products that the Corporation offers and/or increasing the ability of non-banks to offer competing financial services and products. See a description of recent legislation in the “REGULATION AND SUPERVISION OF FIRST MERCHANTS CORPORATION AND SUBSIDIARIES” section of Item 1. Business of this Annual Report on Form 10-K.

The banking industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in a way that cannot accurately be predicted. In addition, our financial condition and results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

Certain regulations require the Corporation to maintain certain capital ratios, such as the ratio of tier 1 capital to risk-based assets. Both the Dodd-Frank Act, which reformed the regulation of financial institutions in a comprehensive manner, and the Basel III regulatory capital reforms, which increase both the amount and quality of capital that financial institutions must hold, impact capital requirements. If the Corporation is unable to satisfy these heightened regulatory capital requirements, due to a decline in the value of the loan portfolio or otherwise, raising additional capital or disposing of assets could be required. Additional capital could be raised by selling additional shares of common stock, or securities convertible into or exchangeable for common stock, which could significantly dilute the ownership percentages of stockholders and cause the market price of our common stock to decline. Events or circumstances in the capital markets generally may increase capital costs and impair the ability to raise capital at any given time. Disposal of assets cannot guarantee disposal at prices appropriate for the disposition, and future operating results could be negatively affected.

• Our FDIC insurance premiums may increase, and special assessments could be made, which might negatively impact our results of operations.

Since the Deposit Insurance Fund is funded by premiums and assessments paid by insured banks, our FDIC insurance premium could increase in future years depending upon the FDIC’s actual loss experience, changes in the Bank’s financial condition or capital strength, and future conditions in the banking industry. See the “Deposit Insurance” section of “REGULATION AND SUPERVISION OF FIRST MERCHANTS CORPORATION AND SUBSIDIARIES” in Item 1. Business of this Annual Report on Form 10-K for additional information.

• The banking and financial services industry is highly competitive, and competitive pressures could intensify and adversely affect the Corporation’s financial results.

The Corporation operates in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. The Corporation competes with other banks, savings and loan associations, mutual savings banks, finance companies, mortgage banking companies, credit unions and investment companies. In addition, technology has lowered barriers to entry and made it possible for non-bank, financial technology companies to offer products and services traditionally provided by banks. Many of the Corporation’s competitors have fewer regulatory constraints, greater resources and lower cost structures allowing them to aggressively price their products. Such competitive pressures make it more difficult for the Corporation to attract and retain customers across its business lines. Also, the demands of adapting to industry changes in technology and systems, on which the Corporation and financial services industry are highly dependent, could present operational issues and require capital spending.

Additionally, our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in many activities for which the Corporation is engaged is intense and we may not be able to hire people and retain them. The unexpected loss of services of key personnel could have a material adverse impact on our business, financial condition and results of operations because of their customer relationships, skills, knowledge of our markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In addition, the scope and content of U.S. banking regulators’ policies on incentive compensation, as well as changes to these policies, could adversely affect our ability to hire, retain and motivate our key employees.

PART I: ITEM 1A., ITEM 1B., AND ITEM 1C.

• Changes in tax legislation could materially impact the Corporation’s business and financial results and the Corporation may have exposure to tax liabilities that are larger than it anticipates.

The tax laws applicable to our business activities, including the laws of the United States and the State governments where the Corporation has tax nexus, are subject to interpretation and may change over time. From time to time, legislative initiatives, such as corporate tax rate changes, which may impact our effective tax rate and could adversely affect our deferred tax assets or our tax positions or liabilities, may be enacted. The taxing authorities in the jurisdictions in which we operate may challenge our tax positions, which could increase our effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by earnings being higher than anticipated in jurisdictions that have higher statutory tax rates or by changes in tax laws, regulations or accounting principles. We are subject to audit and review by U.S. federal and state tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our provision for income taxes and other liabilities requires significant judgment by management. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and could have a material adverse effect on our financial results in the period or periods for which such determination is made.

• Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material effect on our operations.

Recent events relating to the failures of Silicon Valley Bank and Signature Bank in March 2023 have caused general uncertainty and concerns regarding the adequacy of liquidity in the banking sector as a whole. A financial institution’s liquidity reflects its ability to meet customer demand for loans, accommodating possible outflows in deposits and accessing alternative sources of funds when needed, while at the same time taking advantage of interest rate market opportunities. The ability to manage liquidity is fundamental to a financial institution’s business and success. The bank failures in March 2023 highlight the potential results of an insured depository institution unexpectedly having to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. Current market uncertainties and other external factors may impact the competitive landscape for deposits in the banking industry in an unpredictable manner. In addition, the elevated interest rate environment has continued to increase competition for liquidity and the premium at which liquidity is available to meet funding needs. These possible impacts may adversely affect our future operating results, including net income, and negatively impact capital.

• Regulatory requirements arising from recent events in the financial services industry, or the application of current regulations, could increase our expenses and affect our operations.

We anticipate the potential of new regulations for banks of similar size to the Bank, designed to address the recent developments in the financial services industry, which may increase our costs of doing business and reduce our profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. We also expect that another result of the recent bank failures, as well as any future bank failures, will be an increase to our FDIC insurance premiums in future years, further increasing our cost of doing business.

General Risk Factors

• A disaster, natural or otherwise, acts of terrorism and political or military actions taken by the United States or other governments could adversely affect the Corporation’s business, directly or indirectly.

Disasters (such as tornadoes, floods, and other severe weather conditions, pandemics, fires, and other catastrophic accidents or events) and terrorist activities and the impact of these occurrences cannot be predicted. Such occurrences could harm the Corporation’s operations and financial condition directly through interference with communications and through the destruction of facilities and operational, financial and management information systems and/or indirectly by adversely affecting economic and industry conditions. These events could prevent the Corporation from gathering deposits, originating loans and processing and controlling its flow of business by affecting borrowers, depositors, suppliers or other counterparties. The Corporation’s ability to mitigate the adverse impact of these occurrences would depend in part on the Corporation’s business continuity planning, the ability to anticipate any such event occurring, the preparedness of national or regional emergency responders, and continuity planning of parties the Corporation deals with.

• The Corporation’s stock price can be volatile.

The Corporation’s stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in the Corporation’s quarterly operating results; recommendations by securities analysts; significant acquisitions or business combinations; strategic partnerships, joint ventures or capital commitments; operating and stock price performance of other companies that investors deem comparable to the Corporation; new technology used or services offered by the Corporation’s competitors; news reports relating to trends, concerns and other issues in the banking and financial services industry, and changes in government regulations. General market fluctuations, industry factors and general economic and political conditions and events, including terrorist attacks, increased inflation, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause the Corporation’s stock price to decrease, regardless of the Corporation’s operating results.

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.

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:

(Dollars in Thousands, Except Share Data)

December 31,

Income Statement:

Net interest income

Provision for credit losses

Noninterest income

Noninterest expense

Net income available to common stockholders

Per Share Data:

Average diluted common shares outstanding (in thousands)

Diluted net income available to common stockholders

Cash dividends paid to common stockholders

Common dividend payout ratio (1)

Book value per share

Tangible common book value per share (2)

Performance Ratios:

Return on average assets

Return on average stockholders' equity

Return on tangible common stockholders' equity (2)

Net interest margin (FTE) (3)

Efficiency ratio (2)

Net charge-offs as % of average loans

Allowance for credit losses - loans as % of total loans

Nonperforming assets / total assets %

Balance Sheet:

Total securities

Total loans

Total assets

Total deposits

Total borrowings

Total stockholders' equity

Capital Ratios:

Total stockholders' equity to assets

Tangible common stockholders' equity to tangible assets (2)

Total risk-based capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Common equity tier 1 capital to risk-weighted assets

Tier 1 capital to average assets

(1) Cash dividends paid per common share divided by diluted net income per common share.

(2) Non-GAAP financial measures. Refer to the "Non-GAAP Financial Measures" section for reconciliations to GAAP financial measures.

(3) Calculated using a marginal tax rate of 21 percent for all periods.

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.

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.

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.

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.

ADJUSTED NET INCOME AND DILUTED EARNINGS PER COMMON SHARE (NON-GAAP)

(Dollars In Thousands, Except Per Share Amounts)

Years Ended

December 31, 2025

December 31, 2024

December 31, 2023

Net income available to common stockholders (GAAP)

Adjustments:

PPP loan income

Net realized losses on sales of available for sale securities

Gain on branch sale

Acquisition-related expenses

Non-core expenses (1),(2),(3)

Tax on adjustments

Adjusted net income available to common stockholders (non-GAAP)

Average diluted common shares outstanding (in thousands)

Diluted earnings per common share (GAAP)

Adjustments:

Net realized losses on sales of available for sale securities

Gain on branch sale

Acquisition-related expenses

Non-core expenses (1),(2)

Tax on adjustments

Adjusted diluted earnings per common share (non-GAAP)

(1) Non-core expenses in 2025 included a $0.7 million reduction in the FDIC special assessment and $0.6 million of severance costs.

(2) Non-core expenses in 2024 included $2.4 million from digital platform conversion costs, $1.1 million from the FDIC special assessment, and $0.8 million of costs directly related to the branch sale.

(3) Non-core expenses in 2023 included $6.3 million from early-retirement and severance costs, $4.3 million from the FDIC special assessment, and $2.1 million from a lease termination.

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

TANGIBLE COMMON STOCKHOLDERS' EQUITY TO TANGIBLE ASSETS (NON-GAAP)

(Dollars in Thousands, Except Per Share Amounts)

December 31, 2025

December 31, 2024

Total stockholders' equity (GAAP)

Less: Preferred stock (GAAP)

Less: Intangible assets (GAAP)

Tangible common stockholders' equity (non-GAAP)

Total assets (GAAP)

Less: Intangible assets (GAAP)

Tangible assets (non-GAAP)

Stockholders' equity to assets (GAAP)

Tangible common stockholders' equity to tangible assets (non-GAAP)

Tangible common stockholders' equity (non-GAAP)

Plus: Tax benefit of intangibles (non-GAAP)

Tangible common stockholders' equity, net of tax (non-GAAP)

Common stock outstanding

Book value per common share (GAAP)

Tangible book value per common share (non-GAAP)

DILUTED TANGIBLE NET INCOME PER COMMON SHARE, RETURN ON AVERAGE TANGIBLE ASSETS AND RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS' EQUITY (NON-GAAP)

(Dollars in Thousands, Except Per Share Amounts)

December 31, 2025

December 31, 2024

December 31, 2023

Average goodwill (GAAP)

Average other intangibles (GAAP)

Average deferred tax on other intangibles (GAAP)

Intangible adjustment (non-GAAP)

Average stockholders' equity (GAAP)

Average preferred stock (GAAP)

Intangible adjustment (non-GAAP)

Average tangible common stockholders' equity (non-GAAP)

Average assets (GAAP)

Intangible adjustment (non-GAAP)

Average tangible assets (non-GAAP)

Net income available to common stockholders (GAAP)

Other intangible amortization, net of tax (GAAP)

Tangible net income available to common stockholders (non-GAAP)

Preferred stock dividend

Tangible net income (non-GAAP)

Per Share Data:

Diluted net income available to common stockholders (GAAP)

Diluted tangible net income per common share (non-GAAP)

Ratios:

Return on average stockholders' equity (GAAP)

Return on average tangible common stockholders' equity (non-GAAP)

Return on average assets (GAAP)

Return on average tangible assets (non-GAAP)

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.

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

EFFICIENCY RATIO (NON-GAAP)

(Dollars In Thousands)

Years Ended

December 31, 2025

December 31, 2024

December 31, 2023

Noninterest expense (GAAP)

Less: Intangible asset amortization

Less: Other real estate owned and foreclosure expense

Adjusted noninterest expense (non-GAAP)

Net interest income (GAAP)

Plus: Fully taxable equivalent adjustment

Net interest income on a fully taxable equivalent basis (non-GAAP)

Noninterest income (GAAP)

Less: Investment securities losses

Adjusted noninterest income (non-GAAP)

Adjusted revenue (non-GAAP)

Efficiency ratio (non-GAAP)

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 .

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.

Average Balance

Interest

Income /

Expense

Average

Rate

Average Balance

Interest

Income /

Expense

Average

Rate

Average Balance

Interest

Income /

Expense

Average

Rate

(Dollars in Thousands)

Assets:

Interest-bearing deposits

Federal Home Loan Bank stock

Investment securities: (1)

Taxable

Tax-exempt (2)

Total Investment Securities

Loans held for sale

Loans: (3)

Commercial

Real estate mortgage

HELOC and installment

Tax-exempt (2)

Total Loans

Total Earning Assets

Total Non-earning Assets

Total Assets

Liabilities:

Interest-bearing deposits:

Interest-bearing deposits

Money market deposits

Savings deposits

Certificates and other time deposits

Total Interest-bearing Deposits

Borrowings

Total Interest-bearing Liabilities

Noninterest-bearing deposits

Other liabilities

Total Liabilities

Stockholders' Equity

Total Liabilities and Stockholders' Equity

Net Interest Income (FTE)

Net Interest Spread (FTE) (4)

Net Interest Margin (FTE):

Interest Income (FTE) / Average Earning Assets

Interest Expense / Average Earning Assets

Net Interest Margin (FTE) (5)

(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.

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.

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:

Prompt Corrective Action Thresholds

Actual

Basel III Minimum Capital Required

Well Capitalized

December 31, 2025

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total risk-based capital to risk-weighted assets

First Merchants Corporation

First Merchants Bank

Tier 1 capital to risk-weighted assets

First Merchants Corporation

First Merchants Bank

Common equity tier 1 capital to risk-weighted assets

First Merchants Corporation

First Merchants Bank

Tier 1 capital to average assets

First Merchants Corporation

First Merchants Bank

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

Prompt Corrective Action Thresholds

Actual

Basel III Minimum Capital Required

Well Capitalized

December 31, 2024

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total risk-based capital to risk-weighted assets

First Merchants Corporation

First Merchants Bank

Tier 1 capital to risk-weighted assets

First Merchants Corporation

First Merchants Bank

Common equity tier 1 capital to risk-weighted assets

First Merchants Corporation

First Merchants Bank

Tier 1 capital to average assets

First Merchants Corporation

First Merchants Bank

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.

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.

December 31, 2025

December 31, 2024

(Dollars in Thousands)

First Merchants Corporation

First Merchants Bank

First Merchants Corporation

First Merchants Bank

Total Risk-Based Capital

Total Stockholders' Equity (GAAP)

Adjust for Accumulated Other Comprehensive Loss (1)

Less: Preferred Stock

Add: Qualifying Capital Securities

Less: Disallowed Goodwill and Intangible Assets

Less: Disallowed Deferred Tax Assets

Total Tier 1 Capital (Regulatory)

Qualifying Subordinated Debentures

Allowance for Credit Losses Includible in Tier 2 Capital

Total Risk-Based Capital (Regulatory)

Net Risk-Weighted Assets (Regulatory)

Average Assets (Regulatory)

Total Risk-Based Capital Ratio (Regulatory)

Tier 1 Capital to Risk-Weighted Assets (Regulatory)

Tier 1 Capital to Average Assets (Regulatory)

CET1 Capital Ratio

Total Tier 1 Capital (Regulatory)

Less: Qualified Capital Securities

CET1 Capital (Regulatory)

Net Risk-Weighted Assets (Regulatory)

CET1 Capital Ratio (Regulatory)

(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.

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.

(Dollars in Thousands)

December 31, 2025

December 31, 2024

Nonperforming assets:

Nonaccrual loans

OREO and Repossessions

Nonperforming assets

Loans 90-days or more delinquent and still accruing

Nonperforming assets and loans 90-days or more delinquent

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

(Dollars in Thousands)

December 31, 2025

December 31, 2024

Nonperforming assets and loans 90-days or more delinquent:

Commercial and industrial loans

Agricultural land, production and other loans to farmers

Real estate loans:

Construction

Commercial real estate, non-owner occupied

Commercial real estate, owner occupied

Residential

Home equity

Individual's loans for household and other personal expenditures

Nonperforming assets and loans 90-days or more delinquent

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.

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.

(Dollars in Thousands)

Allowance for credit losses - loans:

Balances, January 1

Loans charged off

Recoveries on loans

Net charge-offs

Provision for credit losses - loans

Balances, December 31

Ratio of net charge-offs during the period to average loans outstanding during the period

Ratio of allowance for credit losses - loans to nonaccrual loans

Ratio of allowance for credit losses - loans to total loans outstanding

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.

(Dollars in Thousands)

December 31, 2025

December 31, 2024

December 31, 2023

Net charge-offs:

Commercial and industrial loans

Real estate loans:

Construction

Commercial real estate, non-owner occupied

Commercial real estate, owner occupied

Residential

Home equity

Individuals loans for household and other personal expenditures

Total net charge-offs

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.

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:

Payments Due In

(Dollars in Thousands)

One Year or Less

Over One Year

Total

Deposits without stated maturity

Certificates and other time deposits

Securities sold under repurchase agreements

Federal Home Loan Bank advances

Federal Funds Purchased

Subordinated debentures and other borrowings

Total

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:

(Dollars in Thousands)

December 31, 2025

Amounts of Commitments:

Loan commitments to extend credit

Standby letters of credit

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.

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.

December 31, 2025

(Dollars in Thousands)

1-180 Days

181-365 Days

1-5 Years

Beyond 5 Years

Total

Rate-Sensitive Assets:

Interest-bearing deposits

Investment securities

Loans

Federal Home Loan Bank stock

Total rate-sensitive assets

Rate-Sensitive Liabilities:

Interest-bearing deposits

Federal funds purchased

Securities sold under repurchase agreements

Federal Home Loan Bank advances

Subordinated debentures and term loans

Total rate-sensitive liabilities

Interest rate sensitivity gap by period

Cumulative rate sensitivity gap

Cumulative rate sensitivity gap ratio

at December 31, 2025

at December 31, 2024

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.

December 31, 2025

December 31, 2024

Rising 200 basis points from base case

Rising 100 basis points from base case

Falling 100 basis points from base case

Falling 200 basis points from base case

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.

December 31,

December 31,

(Dollars in Thousands)

Deposits:

Demand deposits

Savings deposits

Certificates and other time deposits of $100,000 or less

Certificates and other time deposits of $100,000 or more

Brokered certificates of deposits

Total deposits

Federal funds purchased

Securities sold under repurchase agreements

Federal Home Loan Bank advances

Subordinated debentures and term loans

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.