What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2022-03-01 compared with 2021-03-01 · 175 added, 211 removed, 588 unchanged (40% of the section changed)

19 unchanged sentences

And, we promote a work culture of development, growth, internal promotion and career pathing.

In late 2021, we adopted a new Our Team statement:

We are a collection of dynamic colleagues with diverse experiences and perspectives who share a passion for positively impacting lives.

We are genuinely committed to attracting and engaging teammates of diverse backgrounds.

We believe in the power of inclusion and belonging.

Best Places to Work / Employer of Choice :

Winning Best Places to Work in at least three of our four operating states over the past three years, we constantly strive to be an employer of choice.

FMB will continue to participate in the Best Places to Work surveys in the four states we operate.

We constantly strive to be an employer of choice.

Onboarding, training, talent assessment and development, career conversations, development planning and a culture of pride in high performance help us achieve employer of choice status.

1 unchanged sentence

Employee Engagement :

Our biennial Employee Engagement Survey is conducted by a third party vendor for confidentiality and anonymity for increased candid feedback.

Our biennial Employee Engagement Survey is conducted by a third-party vendor for confidentiality and anonymity and for increased candid feedback.

Results show consistently strong employee engagement with over 87 percent of our employees considered to be “highly engaged.” Our response rates are high (83 percent) with the survey results providing valuable feedback that helps managers promote work satisfaction and high contribution.

Our next scheduled survey is scheduled for Summer, 2022.

Education Assistance :

2 unchanged sentences

Corporate Training :

Leveraging a blend of custom designed / internally built training programs and external development resources, First Merchants employees are trained and prepared to perform confidently with role-based training and training focused on topics such as privacy, fair banking and many other industry specific topics and regulations.

Our training completion rates are very high related to required development (99 percent completion, due only to leaves of absence) and our Learning Management System (LMS) archives all development in the Corporation.

This creates transcripts and a system to further enhance development.

Leveraging a blend of custom designed / internally built training programs and external development resources, First Merchants employees are trained and prepared to perform confidently.

Role-based training focuses on topics such as privacy, fair banking and many other industry specific topics and regulations.

Our training completion rates are very high related to required development (99 percent completion for required courses) and our Learning Management System (LMS) archives all development in the Corporation.

Diversity, Equity and Inclusion :

We believe in attracting, retaining, and promoting a diverse workforce.

2020 marked the beginning of several Diversity Equity and Inclusion ("DEI") initiatives aimed at promoting the career growth and engagement of all First Merchants employees.

Our largest employee resource group (First Women Connections) expanded as it continues to promote the careers of women in the Corporation.

The creation of a DEI Employee Council is attended by nearly 100 employees every two weeks and the formation of a DEI Steering Committee was established to provide clear direction and set priorities around our efforts to further our successes of our increasingly diverse organization.

Diversity, Equity and Inclusion ("DEI") initiatives are aimed at promoting the career growth and engagement of all First Merchants employees.

We continue that work through our highest profile employee resource groups ("ERGs"), First Women Connections and People of Color ERGs, by promoting the development and career growth of those employees.

Additionally, we have created a DEI Employee Community, which hosts bi-weekly calls that are attended by over 100 employees.

Our DEI Steering Committee provides guidance on all DEI efforts.

Talent Assessment, Succession Planning and Career Path :

Nearly 1,000 of our employees participated in our annual Calibration Process (9 Box Talent Assessment) with the goal of ensuring employees are held to the same high standards across the Corporation and to identify specific development action planning to help retain employees with high potential and performance, increase job satisfaction and high productivity.

Nearly 1,000 of our employees participated in our annual Calibration Process (9 Box Talent Assessment) with the goal of identifying specific development action plans to help retain employees with high potential and performance, increase job satisfaction and improve productivity.

Talent calibration supports succession and career planning for the Corporation.

12 unchanged sentences

Certain merger or acquisition transactions, including those involving the acquisition of a depository institution or the assumption of the deposits of any depository institution, require formal approval from various bank regulatory authorities, which will be subject to a variety of factors and considerations.

On November 4, 2021, the Corporation and Level One Bancorp, Inc., a Michigan corporation (“Level One”), entered into an Agreement and Plan of Merger, pursuant to which Level One will, subject to the terms and conditions of the merger agreement, merge with and into the Corporation (the "Merger"), whereupon the separate corporate existence of Level One will cease and the Corporation will survive.

Immediately following the Merger, Level One’s wholly owned subsidiary, Level One Bank, will be merged with and into the Bank, with the Bank as the surviving entity.

The merger agreement provides that upon the effective date of the Merger, the common shareholders of Level One will be entitled to receive, for each outstanding share of Level One common stock, (a) a 0.7167 share of the Corporation’s common stock, in a tax-free exchange, and (b) a cash payment of $10.17.

At the effective time of the merger, each share of 7.50 percent Non-Cumulative Perpetual Preferred Stock, Series B, of Level One outstanding immediately prior to such time will be converted into the right to receive one share of a newly created series of preferred stock of the Corporation having voting powers, preferences and special rights that are substantially identical to the Level One Series B preferred stock.

The Federal Reserve and the FDIC have granted approvals in connection with the transaction.

However, consummation of the Merger remains subject to the requisite approval of the holders of Level One common stock, the approval of the Indiana DFI, and satisfaction of certain customary closing conditions.

The shareholders of Level One are considering the approval of the merger agreement on March 1, 2022, and the Indiana DFI expects to meet during March 2022 to consider the matter.

The parties are diligently pursuing satisfaction of the other closing conditions and expect the closing to occur by early second quarter of 2022, subject to satisfaction of those conditions.

On April 1, 2021, the Bank acquired 100 percent of Hoosier Trust Company ("Hoosier") through a merger of Hoosier with and into the Bank.

The consideration paid to shareholders of Hoosier at closing was $3,225,000 in cash.

Details of the Hoosier acquisition can be found in NOTE 2.

ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

On September 1, 2019, the Corporation acquired 100 percent of MBT.

2 unchanged sentences

The Corporation issued approximately 6.4 million shares of common stock, which was valued at approximately $229.9 million.

Details of the MBT acquisition can be found in NOTE 2.

ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

On November 21, 2016, the Corporation purchased 495,112 shares, or 12.1 percent, of IAB's outstanding common stock from an IAB shareholder for $19.8 million, or $40.00 per share.

On July 14, 2017, the Corporation acquired the remaining shares of IAB common stock.

IAB was headquartered in Fort Wayne, Indiana and had 16 banking centers serving the Fort Wayne market.

Pursuant to the merger agreement, each IAB shareholder received 1.653 shares of the Corporation's common stock for each outstanding share of IAB common stock held.

The Corporation issued approximately 6.0 million shares of common stock.

The transaction value for the remaining shares of common stock, not owned by the Corporation, was approximately $238.8 million, resulting in a total purchase price of $258.6 million.

On May 19, 2017, the Corporation acquired 100 percent of Arlington Bank.

Arlington Bank was headquartered in Columbus, Ohio and had 3 banking centers serving the Columbus, Ohio market.

Pursuant to the merger agreement, each Arlington Bank shareholder received 2.7245 shares of the Corporation's common stock for each outstanding share of Arlington Bank common stock held.

The Corporation issued approximately 2.1 million shares of common stock, which was valued at approximately $82.6 million.

The Bank is located in Indiana, Ohio, Michigan and Illinois counties where other financial services companies provide similar banking services.

2 unchanged sentences

The Bank also faces competition from many other types of institutions, including, without limitation savings and loans associations, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries.

The financial services industry is becoming even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.

The financial services industry continues to become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.

Banks, securities firms and insurance companies can operate as affiliates under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.

45 unchanged sentences

Basel III permits banks with less than $15 billion in assets to continue to treat trust preferred securities as Tier 1 capital.

This treatment is permanently grandfathered as Tier 1 capital even if the Corporation should ever exceed $15 billion in assets due to organic growth.

Should the Corporation exceed $15 billion in assets as the result of a merger or acquisition, then the Tier 1 treatment of its outstanding trust preferred securities will be phased out, but those securities will still be treated as Tier 2 capital.

This treatment is permanently grandfathered as Tier 1 capital even if the Corporation should ever exceed $15 billion in assets due to organic growth but not following certain mergers or acquisitions.

As a result, while the Corporation’s total assets exceeded $15 million as of December 31, 2021, the Corporation has continued to treat its trust preferred securities as Tier 1 capital as of such date.

However, under certain amendments to the “transition rules” of Basel III, if a bank holding company that held less than $15 billion of assets as of December 31, 2009 (which would include the Corporation) acquires a bank holding company with under $15 billion in assets at the time of acquisition (which would include Level One), and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization’s call report for the period in which the transaction occurred, the resulting organization must begin reflecting its trust preferred securities as Tier 2 capital at such time.

As a result, following the consummation of the pending merger with Level One, the Corporation would begin reflecting all of its trust preferred securities as Tier 2 capital in the period the transaction closes.

Basel III permits banks with less than $250 billion in assets to choose to continue excluding unrealized gains and losses on certain securities holdings for purposes of calculating regulatory capital.

2 unchanged sentences

The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, is now required by regulation.

One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario.

One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25 percent of its expected total cash outflow) under an acute liquidity stress scenario.

The other test, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon.

3 unchanged sentences

banks that are not large, internationally active banks.

On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to neutralize the regulatory capital effects of participating in the program.

The interim final rule, which became effective April 13, 2020, clarifies that PPP loans receive a zero percent risk weight for purposes of determining risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios.

In April 2020, federal banking regulators modified the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to neutralize the regulatory capital effects of participating in the program by allowing PPP loans to receive a zero percent risk weight for purposes of determining risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios.

At December 31, 2021, risk-weighted assets included $106.6 million of PPP loans at a zero risk weight.

Additionally, in order to facilitate use of the Paycheck Protection Program Liquidity Facility, which provides Federal Reserve Bank loans to eligible financial institutions such as the Bank to fund PPP loans (the “PPPL Facility”), the agencies clarified that banking organizations, including the Corporation and the Bank, are allowed to neutralize the regulatory effects of PPP covered loans on the risk-based capital ratios, as well as PPP covered loans pledged under the PPPL Facility on the leverage capital ratios.

At December 31, 2020, the Corporation did not have an outstanding balance with the PPPL Facility;

therefore, there were no adjustments to the leverage ratio for PPP loans.

See “- COVID-19, The CARES Act and Related Legislative and Regulatory Actions” below for additional information.

See “- COVID-19 and Related Legislative and Regulatory Actions” below for additional information on the PPP.

The following are the Corporation’s regulatory capital ratios as of December 31, 2021:

6 unchanged sentences

As discussed in NOTE 1.

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, the FASB issued the “current expected credit losses” (“CECL”) accounting standard in 2016 to address concerns relating to the ability to record credit losses that are expected, but do not yet meet the “probable” threshold by replacing the current “incurred loss” model for recognizing credit losses with an “expected life of loan loss” model referred to as the CECL model.

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, the FASB issued the “current expected credit losses” (“CECL”) accounting standard in 2016 to address concerns relating to the ability to record credit losses that are expected, but do not yet meet the “probable” threshold by replacing the current “incurred loss” model for recognizing credit losses with an “expected life of loan loss” model referred to as the CECL model.

While the original implementation date of the CECL model was January 1, 2020, the CARES Act and a related joint statement of federal banking regulators provided financial institutions with optional temporary relief from having to comply with implementation of the CECL standard.

This temporary relief was set to expire on December 31, 2020.

However, the 2021 Consolidated Appropriations Act (the “CAA”), which was signed into law on December 27, 2020, amended the CARES Act by extending the temporary relief from CECL compliance to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022.

The Corporation had elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the CAA, the Corporation has elected to further delay adoption of CECL to January 1, 2021.

This will allow the Corporation to utilize the CECL standard for the entire year of adoption.

As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allows banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced.

Banking organizations can elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years.

This two-year delay is in addition to the three-year transition period that federal banking regulators had already made available.

While the Corporation has elected to delay implementation of ASU No.

2016-13 as described above, it expects to take advantage of the additional time permitted by this interim final rule, which will largely delay the effects of CECL on its regulatory capital through December 31, 2022.

Beginning on January 1, 2023, the Corporation will be required to phase in 25 percent of the previously deferred estimated capital impact of CECL, with an additional 25 percent to be phased in at the beginning of each subsequent year until fully phased in by January 1, 2026.

Under the interim final rule, the amount of adjustments to regulatory capital that can be deferred until the phase-in period includes both the initial impact of our adoption of CECL, and 25 percent of subsequent changes in our allowance for credit losses during each quarter following implementation of CECL until December 31, 2022.

However, the 2021 Consolidated Appropriations Act (the “2021 CAA”), which was signed into law on December 27, 2020, amended the CARES Act by extending the temporary relief from CECL compliance to, effectively, January 1, 2022.

The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the 2021 CAA, the Corporation elected to adopt CECL on January 1, 2021.

This allowed the Corporation to utilize the CECL standard for the entire year of 2021, while its 2019 and 2020 financial statements were prepared under the incurred loss model.

As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced.

Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years.

This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available.

While the 2021 CAA provided for a further extension of the mandatory adoption of CECL until January 1, 2022, the federal banking regulators elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects.

Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the CARES Act.

As a result, because implementation of the CECL standard was delayed by the Corporation until January 1, 2021, it began phasing 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 will be fully reflected in regulatory capital on January 1, 2024.

Bank Regulation

142 unchanged sentences

Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

COVID-19, The CARES Act and Related Legislative and Regulatory Actions

Impact of COVID-19

COVID-19 and Related Legislative and Regulatory Actions

On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of COVID-19 constituted a public health emergency of international concern.

On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency.

The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which the Corporation operates), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets.

The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns.

As a result of the shelter in place mandates in effect beginning early in the second quarter of 2020, commercial activity throughout our geographic footprint, as well as nationally, decreased significantly during 2020.

Most states have reopened, albeit under limited capacities and under other social distancing restrictions;

however, commercial activity has not returned to the levels existing prior to the outbreak of the pandemic.

Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending.

As a result, the demand for the Corporation’s products and services has been, and will continue to be, significantly impacted.

The continued impact of COVID-19 on the Corporation will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence.

It is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be fully lifted and businesses and their employees will be able to resume normal activities.

Additional information may emerge regarding the severity of COVID-19 and additional actions may be taken by federal, state and local governments to contain COVID-19 or treat its impact.

Changes in the behavior of customers, businesses and their employees as a result of COVID-19 pandemic, including social distancing practices, even after formal restrictions have been lifted and vaccination rates have increased, are also unknown.

As a result of COVID-19 and the actions taken to contain it or reduce its impact, we may experience changes in the demand for our products and services, changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms.

Our commercial and consumer customers are experiencing varying degrees of financial distress, which is expected to continue in 2021, especially if positive cases increase and economic shutdowns continue.

These and similar factors and events may have substantial negative effects on the business, financial condition and results of operations of the Corporation and its customers.

While we expect nearly every industry to have some impact from COVID-19, some industries will be impacted more than others.

In particular, senior living, hotel and accommodations, and restaurants and food service have been the most affected by COVID-19 and account for approximately 7 percent of total loans.

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position.

Additionally, in response to the COVID-19 pandemic, we have taken a number of actions to offer various forms of support to our customers, employees and communities that have experienced impacts from this development.

The Corporation contributed approximately $1 million to non-profit organizations in our communities on the front lines of fighting the COVID-19 pandemic.

In response to social distancing protocols, we have modified office locations by installing protective barriers, required the use of personal protective equipment and incurred additional cleaning and janitorial expense to disinfect banking centers and office locations, which cost $1.5 million.

Additionally, we have enhanced mobile and online services, such as increased mobile deposit limits, to allow more transactions to be completed outside the banking centers.

We have also provided customer alerts focused on COVID-19 scams and fraud education and prevention.

The CARES Act and the Paycheck Protection Program

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives.

For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”).

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted.

Among other things, this legislation amends the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion.

The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the Flexibility Act), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act.

For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years.

The Bank has actively participated in assisting its customers with applications for resources through the program.

PPP loans earn interest at a fixed rate of 1 percent and primarily have a two-year term.

The Bank anticipates that the majority of these loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program.

Under the terms of the PPP, the loans are fully guaranteed by the SBA.

As discussed below under “The 2021 Consolidated Appropriations Act ("CAA"),” an additional $284 billion in funding has been made available under the PPP, with authority to make loans under the program being extended through March 31, 2021.

During 2021, the Bank plans to offer additional PPP loans as authorized under the CAA.

In the two years since then, the pandemic has dramatically impacted global health and the economic environment, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, and market volatility.

In response, the U.S.

Congress, through the enactment of the CARES Act in March 2020, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide emergency economic relief measures including, among others, the following:

Paycheck Protection Program .

The CARES Act established the PPP, which is administered by the Small Business Administration (“SBA”), to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the pandemic.

The Bank actively participated in assisting its customers with PPP funding during all phases of the program.

The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities.

Loans under the program earn interest at a fixed rate of 1 percent.

As of December 31, 2021, the Corporation had $106.6 million of PPP loans outstanding compared to the December 31, 2020 balance of $667.1 million.

The Corporation will continue to monitor legislative, regulatory, and supervisory developments related to the PPP.

However, it anticipates that the majority of the Bank’s remaining PPP loans will be forgiven by the SBA in accordance with the terms of the program.

Loan Modifications and Troubled Debt Restructures .

On March 22, 2020, a statement was issued by the Bank's banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the "Interagency Statement") that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C.

1601 et seq.) terminates.

The Interagency Statement was subsequently revised on April 7, 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations.

As provided under the CAA (see below), qualified loan modifications will continue to be exempt from classification as a troubled debt restructure until the earlier of 60 days after the national emergency termination date or January 1, 2022.

In accordance with such guidance, the Bank has offered and will continue to offer short-term modifications made in response to COVID-19 to borrowers who were current and otherwise not past due.

These have included and will continue to include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

The CARES Act, as amended by the 2021 CAA, allowed banks to suspend requirements under GAAP, effectively, through January 1, 2022, for certain loan modifications related to the COVID-19 pandemic.

The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 or offer other borrower friendly options.

In accordance with such guidance, the Bank made various short-term modifications for borrowers who were current and otherwise not past due.

These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that were insignificant.

Regulatory Capital .

The CARES Act, the CAA and certain actions by federal banking regulators have resulted in modifications to, or delays in implementation of, various regulatory capital rules applicable to banking organizations.

The CARES Act, the 2021 CAA, and certain actions by federal banking regulators resulted in modifications to, or delays in implementation of, various regulatory capital rules applicable to banking organizations.

See “- Capital Adequacy Guidelines for Bank Holding Companies (Basel III)” above for additional information.

The 2021 Consolidated Appropriations Act

On December 27, 2020, a $900 billion COVID-19 relief package, as passed by the U.S.

Congress, was signed into law as part of the 2021 Consolidated Appropriations Act (“CAA”) that provides federal government funding through the end of its 2021 fiscal year.

In addition to delivering direct stimulus payments to certain individuals, an increase in unemployment insurance benefits, an extension of the eviction moratorium, relief to the healthcare industry, and additional aid to various other businesses, the COVID-19-related provisions of the CAA provide for (i) an additional $284 billion in funding for the Paycheck Protection Program (“PPP”), through March 31, 2021, (ii) an extension of the temporary delay for implementation of the CECL accounting standard, and (iii) further suspension of the troubled debt restructure assessment and reporting requirements for financial institutions under GAAP.

Additional Matters

30 unchanged sentences

Commercial (6)

6,818,968 276,368 4.05 6,755,215 286,773 4.25 5,631,146 306,139 5.44

Real estate mortgage 916,314 34,783 3.80 889,083 40,002 4.50 811,188 37,782 4.66

4 unchanged sentences

Total earning assets 13,579,113 467,217 3.44 % 12,123,317 465,474 3.84 % 10,015,771 478,490 4.78 %

Net unrealized gain (loss) on securities available for sale 59,639 17,676 (14,790)

Allowance for loan losses (110,963) (81,000) (77,444)

Cash and cash equivalents 200,366 142,857 131,925

Premises and equipment 113,642 99,343 94,567

Other assets 1,080,268 896,673 818,432

Total non-earning assets 1,251,284 1,342,952 1,075,549

Total Assets $ 14,830,397 $ 13,466,269 $ 11,091,320

22 unchanged sentences

(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 a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2021, 2020 and 2019.

3 unchanged sentences

(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.

(6) Commercial loans included $106.6 million and $667.1 million of Paycheck Protection Program ("PPP") loans at December 31, 2021 and 2020, respectively.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

26 unchanged sentences

INVESTMENT SECURITIES

Management evaluates securities for other-than-temporary-impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining OTTI, management considers many factors, including:

(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Corporation has the intent to sell the debt security or more likely than not, will be required to sell the debt security before its anticipated recovery.

The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of OTTI recognized in the income statement depends on whether the Corporation intends to sell the security or it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis, less any recognized credit loss.

If the intent is to sell, or it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis, less any recognized credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis, less any recognized credit loss, and its fair value at the balance sheet date.

If the intent is not to sell the security and it is not more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis less any recognized credit loss, the OTTI has been separated into the amount representing the credit loss and the amount related to all other factors.

The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.

The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable income taxes.

The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The Corporation’s management has evaluated all securities with unrealized losses for OTTI as of December 31, 2020 and concluded no OTTI existed in 2020.

In determining the fair value of the investment securities portfolio, the Corporation utilizes a third party for portfolio accounting services, including market value input, for those securities classified as Level I and Level II in the fair value hierarchy.

5 unchanged sentences

Fair value of securities classified as Level 3 in the valuation hierarchy were determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of the investment securities at the dates indicated were:

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale at the dates.

Cost Gross Unrealized

Gains Gross Unrealized

Available for sale at December 31, 2021

Treasury $ 1,000 $ — $ 1 $ 999

Government-sponsored agency securities 96,244 437 1,545 95,136

3 unchanged sentences

Total available for sale $ 2,268,655 $ 89,536 $ 13,640 $ 2,344,551

Held to maturity at December 31, 2020

Cost Gross Unrealized

Gains Gross Unrealized

Available for sale at December 31, 2020

Government-sponsored agency securities $ 43,437 $ 1,571 $ — $ 45,008

1 unchanged sentence

Government-sponsored mortgage-backed securities 591,210 20,984 103 612,091

Foreign investment 1,500 — — 1,500

Total held to maturity 1,227,668 52,877 252 1,280,293

Total Investment Securities $ 3,035,057 $ 164,956 $ 601 $ 3,199,412

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Corporate obligations 4,031 104 — 4,135

Total available for sale $ 1,807,389 $ 112,079 $ 349 $ 1,919,119

Cost Gross Unrealized

Gains Gross Unrealized

Available for sale at December 31, 2019

4 unchanged sentences

Total available for sale $ 1,740,420 $ 51,816 $ 2,211 $ 1,790,025

The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity at the dates.

Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized

Gains Gross Unrealized

Held to maturity at December 31, 2021

4 unchanged sentences

Total held to maturity $ 2,180,047 $ 245 $ 2,179,802 $ 37,776 $ 15,320 $ 2,202,503

Total Investment Securities $ 2,546,458 $ 73,889 $ 2,756 $ 2,617,591

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Available for sale at December 31, 2018

Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized

Gains Gross Unrealized

Held to maturity at December 31, 2020

Government-sponsored agency securities $ 145,398 $ — $ 145,398 $ 347 $ 220 $ 145,525

1 unchanged sentence

Government-sponsored mortgage-backed securities 460,843 — 460,843 17,552 — 478,395

Corporate obligations 31 — — 31

Total available for sale 1,149,727 6,721 14,253 1,142,195

Foreign investment 1,500 — 1,500 — — 1,500

Total held to maturity $ 1,227,668 $ — $ 1,227,668 $ 52,877 $ 252 $ 1,280,293

Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized

Gains Gross Unrealized

Held to maturity at December 31, 2019

4 unchanged sentences

Total held to maturity $ 806,038 $ — $ 806,038 $ 22,073 $ 545 $ 827,566

Total Investment Securities $ 1,640,114 $ 10,292 $ 18,994 $ 1,631,412

In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement.

For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Unrealized losses that have not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss.

The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses.

Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met.

The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality.

The allowance for credit losses on investment securities held to maturity is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected.

Investment securities held to maturity are charged off against the allowance when deemed uncollectible.

Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss.

The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses.

With regard to U.S.

Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S.

government-sponsored entity and have an implicit or explicit government guarantee;

therefore, no allowance for credit losses has been recorded for these securities.

With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities.

Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have been insignificant.

Furthermore, as of December 31, 2021, there were no past due principal and interest payments associated with these securities.

An allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities.

The cost and yield for Federal Home Loan Bank stock is included in the table below.

13 unchanged sentences

Securities available for sale December 31, 2021

Treasury $ 999 0.1 % $ — — % $ — — %

Government-sponsored agency securities 1,133 1.8 % 384 2.7 % 9,911 1.4 %

7 unchanged sentences

Amount Yield (1)

Treasury $ — — % $ — — % $ 999 0.1 %

Government-sponsored agency securities 83,708 1.7 % — — % 95,136 1.6 %

24 unchanged sentences

(1) Interest yields are presented on a fully taxable equivalent basis using a 21 percent tax rate.

The following tables show the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019:

Less than 12 Months 12 Months or Longer Total

Temporarily Impaired Available for Sale Securities at December 31, 2020

State and municipal $ 5,368 $ 246 $ — $ — $ 5,368 $ 246

Government-sponsored mortgage-backed securities 9,651 103 — — 9,651 103

Total Temporarily Impaired Available for Sale Securities 15,019 349 — — 15,019 349

Temporarily Impaired Held to Maturity Securities at December 31, 2020

Government-sponsored agency securities 20,881 113 — — 20,881 113

State and municipal 3,477 32 — — 3,477 32

Government-sponsored mortgage-backed securities 41,504 107 — — 41,504 107

Total Temporarily Impaired Held to Maturity Securities 65,862 252 — — 65,862 252

Total Temporarily Impaired Investment Securities $ 80,881 $ 601 $ — $ — $ 80,881 $ 601

Less than 12 Months 12 Months or Longer Total

Temporarily Impaired Available for Sale Securities at December 31, 2019

State and municipal $ 76,273 $ 807 $ — $ — $ 76,273 $ 807

Government-sponsored mortgage-backed securities 127,673 1,326 20,796 78 148,469 1,404

Total Temporarily Impaired Available for Sale Securities 203,946 2,133 20,796 78 224,742 2,211

Temporarily Impaired Held to Maturity Securities at December 31, 2019

Government-sponsored agency securities 3,016 4 12,467 33 15,483 37

State and municipal 22,947 107 — — 22,947 107

Government-sponsored mortgage-backed securities 124,253 364 7,991 37 132,244 401

Total Temporarily Impaired Held to Maturity Securities 150,216 475 20,458 70 170,674 545

Total Temporarily Impaired Investment Securities $ 354,162 $ 2,608 $ 41,254 $ 148 $ 395,416 $ 2,756

LOAN PORTFOLIO

Loans are generated from customers primarily in Indiana, Illinois, Ohio, and Michigan and are typically secured by specific items of collateral, including real property, consumer assets, and business assets.

The following table shows the composition of the Corporation’s loan portfolio by collateral classification, including purchased credit impaired loans, for the years indicated:

The following table shows the composition of the Corporation’s loan portfolio by collateral classification, including purchased credit deteriorated loans, for the years indicated:

2021 2020 2019 2018 2017

12 unchanged sentences

Loans 9,241,861 100.0 % 9,243,174 100.0 % 8,459,310 100.0 % 7,224,467 100.0 % 6,751,199 100.0 %

Allowance for loan losses (130,648) (80,284) (80,552) (75,032) (66,037)

Allowance for loan/credit losses (195,397) (130,648) (80,284) (80,552) (75,032)

Net Loans $ 9,046,464 $ 9,112,526 $ 8,379,026 $ 7,143,915 $ 6,676,167

As of December 31, 2021, the Corporation had $106.6 million of Paycheck Protection Program ("PPP") loans compared to the December 31, 2020 balance of $667.1 million.

PPP loans are included in the commercial and industrial loan class.

Public finance and other commercial loans is primarily comprised of loans secured by states and political subdivisions in the United States.

The following table details gross loan balances by acquisition and the associated fair value discount as of the acquisition date.

(Dollars in Thousands)

Acquired Institution Date Gross Loan Balance Fair Value Discount

MBT September 1, 2019 $ 751,353 $ 18,775

IAB July 14, 2017 $ 749,713 $ 23,737

Arlington Bank May 19, 2017 $ 238,867 $ 6,561

At December 31, 2021 and 2020, the remaining fair value discount on acquired loans was $10.9 million and $23.0 million, respectively.

25 unchanged sentences

NON-PERFORMING ASSETS

The table below summarizes non-performing assets and loans deemed impaired in accordance with ASC 310-10 for the years indicated:

The table below summarizes non-performing assets for the years indicated:

December 31, December 31, December 31, December 31, December 31,

4 unchanged sentences

Non-performing loans (NPL) 43,391 64,711 16,790 27,251 29,737

Other real estate owned 940 7,527 2,179 10,373 8,966

OREO and Repossessions 558 940 7,527 2,179 10,373

Non-performing assets (NPA) 43,949 65,651 24,317 29,430 40,110

90 days or more delinquent and still accruing 746 69 1,855 924 112

NPAs & 90 days or more delinquent $ 66,397 $ 24,386 $ 31,285 $ 41,034 $ 43,823

Impaired loans $ 56,156 $ 11,709 $ 22,025 $ 23,211 $ 26,015

Loans 90-days or more delinquent and still accruing 963 746 69 1,855 924

NPAs and loans 90-days or more delinquent $ 44,912 $ 66,397 $ 24,386 $ 31,285 $ 41,034

Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest.

Interest previously recorded, but not deemed collectible, is reversed and charged against current income.

At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings.

Interest income accrued in the prior year, if any, is charged to the allowance for credit losses.

Payments subsequently received on non-accrual loans are applied to principal.

At December 31, 2020, non-accrual loans totaled $61.5 million, an increase of $45.5 million from December 31, 2019.

The increase in non-accrual loan balances during 2020 was primarily due to three relationships involving four non-owner occupied commercial real estate properties, in the senior and assisted living industry, moving to non-accrual.

The total reported balance of these loans was $40.0 million.

At December 31, 2020, 2019, 2018, 2017, and 2016, non-accrual loans include assets acquired during the periods of $7.9 million, $3.7 million, $0, $4.8 million, and $0, respectively.

Other real estate owned ("OREO") at December 31, 2020 decreased $6.6 million from the December 31, 2019 balance of $7.5 million.

The decrease in OREO was primarily due to the sale of a single commercial property with a carrying value of $5.9 million.

At December 31, 2020, OREO did not include any acquired assets.

At December 31, 2019, OREO included assets acquired from MBT of $136,000.

OREO did not include any assets that were acquired as of the years ended 2018, 2017 and 2016, respectively.

A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance.

At December 31, 2021, non-accrual loans totaled $43.1 million, a decrease of $18.4 million from December 31, 2020.

The decrease in non-accrual loans was primarily attributed to the payoff of one senior living sector relationship totaling $23.4 million.

At December 31, 2021, 2020, 2019, 2018, and 2017, non-accrual loans include assets acquired of $3.2 million, $7.9 million, $3.7 million, $0, and $4.8 million, respectively.

Other real estate owned ("OREO") at December 31, 2021 decreased $558,000 from the December 31, 2020 balance of $940,000.

At December 31, 2021 and 2020, OREO did not include any acquired assets.

OREO did include assets that were acquired from MBT of $136,000 as of December 31, 2019.

OREO did not include any assets acquired as of the years ended 2018 and 2017, respectively.

Renegotiated loans are loans for which concessions are granted to the borrower due to deterioration in the financial condition of the borrower, resulting in the inability of the borrower to meet the original contractual terms of the loans.

1 unchanged sentence

Certain loans restructured may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms.

A non-accrual loan that is restructured may remain non-accrual for a period of approximately six months until the borrower can demonstrate their ability to meet the restructured terms.

A non-accrual loan that is restructured may remain in non-accrual for a period of approximately six months until the borrower can demonstrate their ability to meet the restructured terms.

A borrower's performance prior to the restructuring, as well as after, will be considered in assessing whether the borrower can meet the new terms resulting in the loan being returned to accruing status in a shorter or longer period of time than the standard six months.

If the borrower’s performance under the modified terms is not reasonably assured, the loan will remain non-accrual.

If the borrower’s performance under the modified terms is not reasonably assured, the loan will remain in non-accrual.

For the year ended December 31, 2021, interest income of $1.9 million was recognized on the non-accruing and renegotiated loans listed in the table above, whereas interest income of $2.2 million would have been recognized under their loan terms.

Impaired loans, which include loans accounted for under ASC 310-30, totaled $56.2 million at December 31, 2020.

A loan is deemed impaired under ASC 310 when, based on current information or events, it is probable that all amounts of principal and interest due according to the contractual terms of the loan agreement will not be collected.

A specific allowance of $12.9 million, on a subset of impaired loans totaling $48.4 million, was included in the Corporation’s December 31, 2020 allowance for loan losses.

Loss reserves for acquired loans totaled $557,000, and were included in the aforementioned specific allowance as a result of deterioration subsequent to the acquisition.

An allowable method for determining impairment is estimating the fair value of collateral on collateral dependent loans.

This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

The fair value of real estate is generally based on appraisals by qualified licensed appraisers.

The appraisers determine the value of the real estate by utilizing an income or market valuation approach.

If an appraisal is not available, the fair value may be determined by using a discounted cash flow analysis.

Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or combination of, asset appraisals, accounts receivable aging reports, inventory listings and/or customer financial statements.

Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

In addition to the impaired loans discussed above, management also identified commercial loans totaling $518.0 million as of December 31, 2020 that were deemed to be risk graded criticized, but not impaired.

Comparatively, c ommercial loans risk graded criticized but not deemed impaired at December 31, 2019 totaled $330.4 million.

These loans are not included in the table above, or the impaired loan table in the footnotes to the consolidated financial statements.

In addition to the loans discussed above, management also identified commercial loans totaling $369.5 million as of December 31, 2021 that were deemed to be risk graded criticized.

Comparatively, commercial loans risk graded criticized at December 31, 2020 totaled $518.0 million.

A loan risk graded criticized is a loan in which there are concerns regarding the borrower’s ability to comply with the repayment terms and would include loans graded special mention or worse.

See additional information regarding loan credit quality in the “LOAN QUALITY” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K and in NOTE 5.

LOANS AND ALLOWANCE of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes the loan loss experience, by collateral segment, for the years indicated:

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.

SUMMARY OF CREDIT LOSS EXPERIENCE

The following table summarizes the credit loss experience, by collateral segment, for the years indicated:

(Dollars in Thousands) 2021 2020 2019 2018 2017

Allowance for loan losses:

Allowance for credit losses:

Balances, January 1 $ 130,648 $ 80,284 $ 80,552 $ 75,032 $ 66,037

Impact of adopting ASC 326 74,055 — — — —

Balances, January 1, 2021 Post-ASC 326 adoption 204,703 80,284 80,552 75,032 66,037

Commercial (1)

2 unchanged sentences

4,533 313 3,675 2,741 1,737

Construction 6 — — — —

Consumer — 643 569 749 593

Residential — 993 645 2,177 1,315

Consumer & Residential 1,496 — — — —

Total Charge-offs 11,884 10,485 6,621 7,983 5,028

3 unchanged sentences

580 431 1,289 2,525 2,260

Construction 1 — — — —

Consumer — 260 401 302 324

Residential — 666 619 993 706

Consumer & Residential 1,273 — — — —

Total Recoveries 2,578 2,176 3,553 6,276 4,880

Net Charge-offs 9,306 8,309 3,068 1,707 148

Provisions for loan losses 58,673 2,800 7,227 9,143 5,657

Provisions for credit losses — 58,673 2,800 7,227 9,143

Balance at December 31 $ 195,397 $ 130,648 $ 80,284 $ 80,552 $ 75,032

Ratio of net charge-offs during the period to average loans outstanding during the period 0.10 % 0.09 % 0.04 % 0.02 % — %

Details of the Allowance for Loan Losses and non-performing loans are discussed within the “LOAN QUALITY" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

Presented below is an analysis of the composition of the allowance for loan losses and percent of loans in each category to total loans, by collateral segment, as of the years indicated.

In calculating the allowance for credit losses, the loan portfolio was pooled into loan segments with similar credit risk characteristics.

The Corporation pooled consumer and residential loans into one segment at adoption of CECL on January 1, 2021, but prior to adoption, consumer and residential loans were classified in separate segments.

Additionally, prior to CECL adoption, construction loans were classified within the commercial real estate segment, but after CECL adoption, construction loans were classified as a separate segment.

Details of the Allowance for Credit Losses and non-performing loans are discussed within the “LOAN QUALITY" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

Presented below is an analysis of the composition of the allowance for credit losses and percent of loans in each category to total loans, by collateral segment, as of the years indicated.

2021 2020 2019 2018 2017

3 unchanged sentences

Commercial real estate 60,665 33.8 % 51,070 41.8 % 28,778 45.4 % 29,609 46.8 % 27,343 47.0 %

Construction 20,206 5.6 % — — % — — % — — % — — %

Consumer — — % 9,648 1.4 % 4,035 1.6 % 3,964 1.4 % 3,732 1.3 %

Residential — — % 22,815 18.9 % 14,569 20.5 % 14,322 20.7 % 13,537 21.9 %

Consumer & Residential 44,591 19.8 % — — % — — % — — % — — %

Totals $ 195,397 100.0 % $ 130,648 100.0 % $ 80,284 100.0 % $ 80,552 100.0 % $ 75,032 100.0 %

The increase in the allowance was due to the increase in specific reserves and an increase in the national and local economic conditions qualitative factor, which reflects the Corporation's view of increased risk related to the COVID-19 pandemic.

The primary increase in the allowance is due to the adoption of ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326).

Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions.

1 unchanged sentence

Lessors of Residential Buildings and Dwellings and Lessors of Nonresidential Buildings.

LOAN LOSS CHARGE-OFF PROCEDURES

CREDIT LOSS CHARGE-OFF PROCEDURES

The Corporation maintains an allowance to cover probable credit losses in its loan portfolio.

The allowance is increased by the provision for loan losses and decreased by charge-offs less recoveries.

The allowance is increased by the provision for credit losses and decreased by charge-offs less recoveries.

All charge-offs are approved by the senior loan officers or loan committees, depending on the amount of the charge-off.

2 unchanged sentences

___________________________

(1) Category includes the charge-offs for commercial and industrial, agricultural production financing and other loans to farmers and other commercial loans.

(2) Category includes the charge-offs for construction, commercial and farmland.

(3) Category includes the recoveries for commercial and industrial, agricultural production financing and other loans to farmers and other commercial loans.

(4) Category includes the recoveries for construction, commercial and farmland.

PROVISION FOR LOAN LOSSES

Loan losses are a cost of doing business in the banking industry.

(1) Category includes the charge-offs for commercial and industrial, agricultural land, production and other loans to farmers, and other commercial loans.

(2) Category includes the charge-offs for commercial real estate, non-owner occupied and commercial real estate, owner occupied.

(3) Category includes the recoveries for commercial and industrial, agricultural land, production and other loans to farmers, and other commercial loans.

(4) Category includes the recoveries for commercial real estate, non-owner occupied and commercial real estate, owner occupied.

PROVISION FOR CREDIT LOSSES

Credit losses are a cost of doing business in the banking industry.

Although management emphasizes the early detection and charge-off of loan losses, it is inevitable that certain losses, which have not been specifically identified, exist in the portfolio.

Accordingly, the provision for loan losses is charged to earnings on an anticipatory basis and recognized loan losses, net of recoveries, are deducted from the established allowance.

Over time, all net loan losses are charged to earnings.

Based on management’s judgment as to the appropriate level of the allowance for loan losses, the amount provided in any period may be greater or less than net loan losses for the same period.

In any period, the determination of the provision for loan losses is based on management’s continuing review and evaluation of the loan portfolio.

The evaluation by management includes consideration of the current economic conditions, past loan loss experience, changes in the composition of the loan portfolio as well as the current condition and amount of loans outstanding.

See additional information in the “PROVISION EXPENSE AND ALLOWANCE FOR LOAN LOSSES” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

Accordingly, the provision for credit losses is charged to earnings on an anticipatory basis and recognized credit losses, net of recoveries, are deducted from the established allowance.

Over time, all net credit losses are charged to 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 credit losses for the same period.

In any period, the determination of the provision for credit losses is based on management’s continuing review and evaluation of the loan portfolio.

The evaluation by management includes consideration of the current forecasted economic conditions, past loan loss experience, changes in the composition of the loan portfolio, reasonable and supportable economic forecasts as well as the current condition and amount of loans outstanding.

See additional information in the “PROVISION EXPENSE AND ALLOWANCE FOR CREDIT LOSSES” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

The average balances, interest expense and average rates on deposits for the years ended December 31, 2021, 2020 and 2019 are presented in the Part I.

Business section titled "DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL" of this Annual Report on Form 10-K.

As of December 31, 2020, certificates of deposit and other time deposits of $100,000 or more mature as follows:

As of December 31, 2021, certificates of deposit and other time deposits exceeding the FDIC insurance limit of $250,000 mature as follows:

(Dollars in Thousands)

3 unchanged sentences

12 Months Total

Certificates of deposit and other time deposits $ 48,950 $ 90,029 $ 133,634 $ 73,581 $ 346,194

Uninsured certificates of deposit and other time deposits $ 26,540 $ 7,226 $ 12,452 $ 4,650 $ 50,868

Percent 52 % 14 % 25 % 9 % 100 %

RETURN ON EQUITY AND ASSETS

See the information regarding return on equity and assets presented within Part II:

SELECTED FINANCIAL DATA of this Annual Report on Form 10-K.

SHORT-TERM BORROWINGS

7 unchanged sentences

Securities sold under repurchase agreements are categorized as borrowings maturing within one year and are secured by U.S.

Government-Sponsored Enterprise obligations, certain municipal securities and mortgage loans.

Government-Sponsored Enterprise obligations.

Pertinent information with respect to borrowings maturing in one year or less is summarized below:

21 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business