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Item 8. Financial Statements and Supplementary Data

2022-03-01 compared with 2021-03-01 · 926 added, 918 removed, 1518 unchanged (55% of the section changed)

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Merchants Corporation (Corporation) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

We have audited the accompanying consolidated balance sheets of First Merchants Corporation (the “Corporation”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Corporation's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2021, expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2022, expressed an unqualified opinion.

Change in Accounting Principle

As discussed in Note 1 of the consolidated financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Accounting Standards Topic 326:

Financial Instruments - Credit Losses.

The adoption of new credit loss standard and its subsequent application is also communicated as a critical audit matter.

Basis for Opinion

These financial statements are the responsibility of the Corporation’s management.

Our responsibility is to express an opinion on the Corporation's financial statements based on our audits.

Our responsibility is to express an opinion on the Corporation’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

As described in Note 5 to the consolidated financial statements, the Corporation’s consolidated allowance for loan and lease losses (ALLL) was $130.6 million at December 31, 2020.

The ALLL is an estimate of probable credit losses related to specifically identified loans and for losses inherent in the portfolio that have been incurred as of the balance sheet date.

The determination of the ALLL requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates, risk grading loans, identifying loan impairments, among others.

As disclosed by management, different assumptions and conditions could result in a materially different amount for the ALLL.

We identified the valuation of the ALLL as a critical audit matter.

Auditing the allowance for loan losses involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades.

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

As described in Note 5 to the consolidated financial statements, the Corporation’s allowance for credit losses (ACL) on loans was $195.4 million as of December 31, 2021.

The ACL is an estimate of current expected credit losses in the loan portfolio.

The determination of the ACL requires significant judgment reflecting the Corporation’s best estimate of expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate.

We identified the valuation of the ACL as a critical audit matter.

Auditing the ACL involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic forecasts and conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific allowances associated with loans individually evaluated and assessing the appropriateness of loan grades.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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The primary procedures we performed to address this critical audit matter included:

Testing the design and operating effectiveness of controls, including those related to technology, over the Corporation’s ALLL including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of a loss rate, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans including purchased loans that have experienced further credit deterioration and management’s review controls over the ALLL balance as a whole including attending internal Corporation credit quality discussions and analysis;

• Testing of completeness and accuracy of the information utilized in the ALLL;

• Testing the model’s computational accuracy;

• Evaluating the qualitative adjustment to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions;

• Testing the internal loan review functions and evaluating the accuracy of loan grades;

• Evaluating the appropriateness of loan grades and assessing the reasonableness of specific reserves on impaired loans;

• Evaluating the overall reasonableness of assumptions used by considering the past performance of the Corporation and evaluating to trends identified within peer groups;

• Reviewing subsequent events and considering whether they support or contradict the Corporation’s assessment;

• Evaluating loan modifications made under Section 4013 of the CARES Act.

• Obtained an understanding of the Corporation’s process for establishing the ACL, including the implementation of models and the qualitative factor adjustments of the ACL

• Testing the design and operating effectiveness of internal controls, including those related to technology, over the ACL, the establishment of qualitative adjustments for current and expected conditions, grading and risk classification of loans and establishment of specific reserves on individually evaluated loans and management’s review controls over the ACL balance as a whole including attending internal Corporation Credit Policy Committee meetings and Audit Committee discussions and analysis.

• Testing clerical and computational accuracy of the formulas within the calculation.

• Testing of completeness and accuracy of the information and reports utilized in the ACL, including reports used in management review controls over the ACL.

• Performed reviews of individual credit files to evaluate the reasonableness of loan credit risk ratings

• Tested internally prepared loan reviews to evaluate the reasonableness of loan credit risk ratings

• Evaluated the qualitative adjustments to the ACL including assessing the basis for adjustments and the reasonableness of the significant assumptions

• Evaluating the forecast adjustment, including assessing that it is reasonable and supportable

• Tested the reasonableness of specific reserves on individually reviewed loans

• Evaluated credit quality trends in delinquencies, non-accruals, charge-offs and loan risk ratings

• Evaluated the overall reasonableness of the ACL and evaluated trends identified within peer groups

• Identifying fields in the various loan systems that defined the loan pools and tested the design and operating effectiveness of internal controls surrounding the input and maintenance of those fields.

We have served as the Corporation’s auditor since at least 1982;

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(Dollars in Thousands, Except Share Data) 2021 2020

Cash and cash equivalents $ 192,896 $ 177,201

Cash and due from banks $ 167,146 $ 192,896

Interest-bearing deposits 474,154 392,305

Investment securities available for sale 2,344,551 1,919,119

Investment securities held to maturity (fair value of $ 1,280,293 and $ 827,566 )

Investment securities held to maturity, net of allowance for credit losses of $ 245 and $ 0 (fair value of $ 2,202,503 and $ 1,280,293 )

2,179,802 1,227,668

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Loans 9,241,861 9,243,174

Allowance for loan losses ( 130,648 ) ( 80,284 )

Allowance for credit losses - loans 1

( 195,397 ) ( 130,648 )

Net loans 9,046,464 9,112,526

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Total Deposits 12,732,577 11,361,610

Federal funds purchased — 55,000

Securities sold under repurchase agreements 181,577 177,102

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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,453,149 $ 14,067,210

1 Beginning January 1, 2021, the amount is based on the current expected credit loss methodology.

Prior to January 1, 2021, the amount is based on the incurred loss methodology.

See additional details in NOTE 1.

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements.

See notes to consolidated financial statements.

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NET INTEREST INCOME 410,680 382,127 356,660

Provision for loan losses 58,673 2,800 7,227

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 323,454 353,860 331,630

Provision for credit losses - loans — 58,673 2,800

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 410,680 323,454 353,860

Service charges on deposit accounts 23,571 20,999 22,951

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Net income $ 205,531 $ 148,600 $ 164,460

Other comprehensive income (loss) net of tax:

Unrealized holding gain (loss) on securities available for sale arising during the period,

net of tax of $ 15,554 , $ 12,946 , and $ 3,174

58,513 48,703 ( 13,872 )

Unrealized gain (loss) on cash flow hedges arising during the period, net of tax of $ 311 , $ 226 , and $ 52

( 1,169 ) ( 846 ) 437

Reclassification adjustment for net gains included in net income, net of tax of $ 2,308 , $ 857 , and $ 797

( 8,681 ) ( 3,224 ) ( 3,002 )

Defined benefit pension plans, net of tax of $ 452 , $ 1,239 , and $ 1,001

Net gain (loss) arising during period ( 1,767 ) 4,579 ( 1,435 )

Amortization of prior service cost 66 84 ( 16 )

46,962 49,296 ( 17,888 )

Other comprehensive income (loss):

Unrealized gains/losses on securities available-for-sale:

Unrealized holding gain (loss) arising during the period ( 30,042 ) 74,067 61,649

Reclassification adjustment for losses (gains) included in net income ( 5,674 ) ( 11,895 ) ( 4,415 )

Tax effect 7,502 ( 13,056 ) ( 12,019 )

Net of tax ( 28,214 ) 49,116 45,215

Unrealized gain/loss on cash flow hedges:

Unrealized holding gain (loss) arising during the period 138 ( 1,480 ) ( 1,072 )

Reclassification adjustment for losses (gains) included in net income 1,044 906 334

Tax effect ( 248 ) 121 156

Net of tax 934 ( 453 ) ( 582 )

Defined benefit pension plans:

Net gain (loss) arising during the period 9,482 ( 2,237 ) 5,796

Reclassification adjustment for amortization of prior service cost 84 84 106

Tax effect ( 2,009 ) 452 ( 1,239 )

Net of tax 7,557 ( 1,701 ) 4,663

Total other comprehensive income (loss), net of tax ( 19,723 ) 46,962 49,296

Comprehensive income $ 185,808 $ 195,562 $ 213,756

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— — — — — ( 51,276 ) — ( 51,276 )

Reclassification adjustment under ASU 2018-02 — — — — — 626 ( 626 ) —

Issuance of common stock related to acquisitions — — 6,383,806 798 229,128 — — 229,926

Repurchases of common stock — — ( 516,016 ) ( 65 ) ( 18,976 ) — — ( 19,041 )

Share-based compensation — — 116,572 15 4,100 — — 4,115

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— — — — — ( 56,542 ) — ( 56,542 )

Issuance of common stock related to acquisitions — — 6,383,806 798 229,128 — — 229,926

Repurchases of common stock — — ( 1,634,437 ) ( 204 ) ( 55,708 ) — — ( 55,912 )

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Balances, December 31, 2020 125 $ 125 53,922,359 $ 6,740 $ 1,005,366 $ 788,578 $ 74,836 $ 1,875,645

Cumulative effect of ASC 326 adoption — — — — — ( 68,040 ) — ( 68,040 )

Balance, January 1, 2021 125 $ 125 53,922,359 $ 6,740 $ 1,005,366 $ 720,538 $ 74,836 $ 1,807,605

Comprehensive income

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Securities held to maturity 227,255 273,229 130,502

Redemption (Purchase) of Federal Reserve and Federal Home Loan Bank stock — — ( 763 )

Net change in loans ( 60,581 ) ( 792,986 ) ( 512,364 )

Net cash and cash equivalents received in acquisition — 10,207 —

Net cash and cash equivalents received (paid) in acquisition ( 2,933 ) — 10,207

Proceeds from the sale of other real estate owned 706 8,655 2,060

Proceeds from life insurance benefits 8,764 601 815

Proceeds from mortgage portfolio loan sale 78,159 — —

Other investing activities ( 11,678 ) ( 9,278 ) ( 8,564 )

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Stock options exercised 198 115 144

Restricted shares withheld for taxes ( 980 ) ( 1,680 ) ( 1,902 )

Repurchase of common stock ( 25,444 ) ( 55,912 ) ( 19,041 )

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Non-cash investing activities using trade date accounting 39,923 6,183 —

Investments transferred from held to maturity to available for sale in accordance with ASU 2017-12 — — 30,794

ROU assets obtained in exchange for new operating lease liabilities 2,700 1,601 23,529

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Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and fair value of financial instruments.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and fair value of financial instruments.

Reclassifications have been made to prior financial statements to conform to the current financial statement presentation.

The uncertainties related to COVID-19 could cause significant changes to these estimates compared to what was known at the time these financial statements were prepared.

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Results of operations of the acquired business are included in the income statement from the date of acquisition.

Details of the Corporation's acquisitions are included in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

CASH AND CASH EQUIVALENTS

Cash on hand, cash items in process of collection, cash held at various banks and federal funds sold are included in cash and cash equivalents and have a maturity of less than three months.

Cash on hand, cash items in process of collection and non-interest bearing cash held at various banks are included in cash and cash equivalents and have a maturity of less than three months.

The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage.

Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on cash and cash equivalents.

INTEREST-BEARING DEPOSITS

Interest-bearing cash held at various banks and the Federal Reserve Bank and federal funds sold are included in interest-bearing deposits and have a maturity of less than three months.

The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage.

Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on interest-bearing deposits.

INVESTMENT SECURITIES

Held to maturity securities are carried at amortized cost when the Corporation has the positive intent and ability to hold them until maturity.

Available for sale securities are recorded at fair value on a recurring basis with the unrealized gains and losses, net of applicable income taxes, recorded in other comprehensive income.

Available for sale securities are recorded at fair value on a recurring basis with the unrealized gains and losses, net of applicable income taxes, recorded in other comprehensive income (loss).

Realized gains and losses are recorded in earnings and the prior fair value adjustments are reclassified within stockholders' equity.

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Amortization of premiums and accretion of discounts are amortized to their earliest call date and are recorded as interest income from securities.

Available for sale and held to maturity securities are evaluated for 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.

Details of the Corporation's investment securities portfolio are included in NOTE 4.

INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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(table dollar amounts in thousands, except share data)

For held to maturity securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES AVAILABLE FOR SALE

For investment securities available for sale 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 income.

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, 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 are recognized in other comprehensive income.

Adjustments to the allowance for credit losses 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.

Details of the Corporation's allowance for credit losses on investment securities available for sale are included in NOTE 4.

INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements.

ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES HELD TO MATURITY ("ACL - INVESTMENTS")

The ACL - Investments 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 ACL - Investments when deemed uncollectible.

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

The Corporation measures expected credit losses on held to maturity debt securities 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.

With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) the financial condition of the issuer, (3) historical loss rates for given bond ratings, 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 generally not been significant.

An allowance for credit losses of $ 245,000 was recorded on 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.

Details of the Corporation's ACL - Investments are included in NOTE 4.

INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements.

The Corporation adopted CECL on January 1, 2021 and the impact at adoption is described below under the heading "RECENT ACCOUNTING CHANGES ADOPTED IN 2021."

LOANS HELD FOR SALE

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When the interest accrual is discontinued, all unpaid accrued interest is reversed against earnings when considered uncollectible.

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

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

Interest income is subsequently recognized only to the extent cash payments are received and the loan is returned to accruing status.

Certain non-accrual, substantially delinquent and renegotiated loans classified as troubled debt restructures may be considered to be impaired in accordance with ASC 310, Receivables .

Under ASC 310-10, a loan is impaired when, based on current information or events, it is probable all amounts due (principal and interest) according to the contractual terms of the loan agreement are uncollectible.

Renegotiated consumer loans classified as troubled debt restructures are considered to be impaired.

In applying the provisions of ASC 310-10, the Corporation considers all other investments in one-to-four family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment.

Impaired loans are carried at the fair value of collateral if the loan is collateral dependent, or the present value of estimated future cash flows using the loan’s existing rate.

A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses.

Loan losses are charged against the allowance when management believes the uncollectability of the loan is confirmed.

The valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

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.

In accordance with such guidance, the Bank has offered short-term modifications made in response to COVID-19 to 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 are insignificant.

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 until the earlier of January 1, 2022, or 60 days after the termination of the national emergency.

Details of the Corporation's modifications are included 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.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) established the Paycheck Protection Program (“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 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 commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses which limit the exposure to changes in customer credit quality.

Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.

PURCHASED LOANS

Loans acquired in a business combination with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be purchased credit impaired.

Evidence of credit quality deterioration as of purchase dates may include information such as past-due and nonaccrual status, borrower credit risk grade and recent loan to value percentages.

Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30).

These loans are initially measured at fair value based upon expected cash flows without anticipation of prepayments and includes estimated future credit losses expected to be incurred over the life of the loans.

As a result, related discounts are recognized subsequently through accretion based on the expected cash flows of the acquired loans.

For purposes of applying ASC 310-30, loans acquired in business combinations are individually evaluated for the initial fair value measurement.

Accordingly, allowances for credit losses related to these loans are not carried over at the acquisition date.

The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable portion of the fair value discount or premium.

The accretable portion of the fair value discount or premium is the difference between the expected cash flows and the net present value of expected cash flows, with such difference accreted into income over the term of the loans.

Acquired loans not accounted for under ASC 310-30 are accounted for under ASC 310-20, which allows the fair value adjustment to be accreted into income over the remaining life of the loans.

Details of the Corporation's loan portfolio are included in NOTE 5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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(table dollar amounts in thousands, except share data)

ALLOWANCE FOR LOAN LOSSES

The Corporation's allowance for loan losses is maintained to absorb losses inherent in the loan portfolio and is based on ongoing, quarterly assessments of the probable losses inherent in the loan portfolio.

The allowance is increased by the provision for loan losses, which is charged against current operating results.

Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

The Corporation’s strategy for credit risk management includes 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 regional geographic and industry levels, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality.

The Corporation’s methodology for assessing the appropriateness of the allowance consists of three key elements – the determination of the appropriate reserves for impaired loans accounted for under ASC 310-10, probable losses estimated from historical loss rates, and probable losses resulting from economic, environmental, qualitative or other deterioration above and beyond what is reflected in the first two components of the allowance.

Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation.

Loans individually evaluated for impairment are those deemed impaired in accordance with ASC 310-10, including commercial relationships greater than $ 500,000 that exhibit well defined credit weaknesses.

Any allowances for impaired loans are measured based on the fair value of the underlying collateral, if collateral dependent, or the present value of expected future cash flows discounted at the loan’s effective interest rate.

The Corporation evaluates the collectability of principal when assessing the need for a loss accrual.

Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

The historical allocation for commercial loans graded pass are established by loan segments using loss rates based on the Corporation’s migration analysis.

This migration analysis shows the loss rates for each segment of loans based on the loan grades at the beginning of the twelve month period.

This loss rate is then applied to the current portfolio of loans in each respective loan segment.

Homogenous loans, such as consumer installment and residential mortgage loans, are not individually risk graded.

Reserves are established for each segment of loans using loss rates based on charge-offs for the same period as the migration analysis used for commercial loans.

In addition to the specific reserves and historical loss components of the allowance, consideration is given to various environmental factors to help ensure that losses inherent in the portfolio are reflected in the allowance for loan losses.

Factors which management considers in the analysis include the effects of the national and local economies, trends in loan growth and charge-off rates, changes in mix, concentration of loans in specific industries, asset quality trends (delinquencies, charge-offs and non-accrual loans), risk management and loan administration, changes in the internal lending policies and credit standards, examination results from bank regulatory agencies and the Corporation’s internal loan review.

Effective January 1, 2021, the Corporation adopted ASU 2016-13, Financial Instruments - Measurement of Current Expected Credit Losses on Financial Instruments ("CECL"), which will modify the accounting for the allowance for loan losses from an incurred loss model to an expected loss model, as discussed more fully below under the heading "NEW ACCOUNTING PRONOUNCEMENTS AND SEC RELEASES NOT YET ADOPTED" of this NOTE 1.

Pension benefits are provided to the Corporation’s employees.

Its accounting policies related to pensions and other post retirement benefits reflect the guidance in ASC 715, Compensation – Retirement Benefits.

PURCHASED CREDIT DETERIORATED ("PCD") LOANS

The Corporation has purchased loans, some of which have experienced more than insignificant credit deterioration since origination.

PCD loans are recorded at the amount paid.

An allowance for credit losses is determined using the same methodology as other loans held for investment.

The initial allowance for credit losses determined on a collective basis is allocated to individual loans.

The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis.

The difference between the initial amortized cost basis and the par value of the loan is the noncredit discount or premium, which is amortized into interest income over the life of the loan.

Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.

ALLOWANCE FOR CREDIT LOSSES - LOANS ("ACL - Loans")

The ACL - Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term.

Loans are charged off against the allowance when the uncollectibility of the loan is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

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

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

Further information regarding the policies and methodology used to estimate the ACL - Loans is detailed in NOTE 5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements.

The Corporation adopted CECL on January 1, 2021 and the impact at adoption is described below under the heading "RECENT ACCOUNTING CHANGES ADOPTED IN 2021."

ALLOWANCE FOR LOAN LOSSES (prior to January 1, 2021 CECL adoption)

The Corporation's allowance for loan losses was maintained to absorb losses inherent in the loan portfolio and was based on ongoing, quarterly assessments of the probable losses inherent in the loan portfolio.

The allowance was increased by the provision for loan losses, which was charged against current operating results.

Loan losses were charged against the allowance when management believed the uncollectability of a loan was confirmed.

Subsequent recoveries, if any, were credited to the allowance.

The Corporation’s strategy for credit risk management included 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 emphasized diversification on regional geographic and industry levels, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality.

The Corporation’s methodology for assessing the appropriateness of the allowance consisted of three key elements – the determination of the appropriate reserves for impaired loans accounted for under ASC 310-10, probable losses estimated from historical loss rates, and probable losses resulting from economic, environmental, qualitative or other deterioration above and beyond what were reflected in the first two components of the allowance.

Where appropriate, reserves were allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation.

Loans individually evaluated for impairment were those deemed impaired in accordance with ASC 310-10, including commercial relationships greater than $500,000 that exhibited well defined credit weaknesses.

Any allowances for impaired loans were measured based on the fair value of the underlying collateral, if collateral dependent, or the present value of expected future cash flows discounted at the loan’s effective interest rate.

The Corporation evaluated the collectability of principal when assessing the need for a loss accrual.

Historical loss rates were applied to other commercial loans not subject to specific reserve allocations.

The historical allocation for commercial loans graded pass were established by loan segments using loss rates based on the Corporation’s migration analysis.

This migration analysis showed the loss rates for each segment of loans based on the loan grades at the beginning of the twelve month period.

This loss rate was then applied to the current portfolio of loans in each respective loan segment.

Homogenous loans, such as consumer installment and residential mortgage loans, were not individually risk graded.

Reserves were established for each segment of loans using loss rates based on charge-offs for the same period as the migration analysis used for commercial loans.

In addition to the specific reserves and historical loss components of the allowance, consideration was given to various environmental factors to help ensure that losses inherent in the portfolio were reflected in the allowance for loan losses.

Factors which management considered in the analysis included the effects of the national and local economies, trends in loan growth and charge-off rates, changes in mix, concentration of loans in specific industries, asset quality trends (delinquencies, charge-offs and non-accrual loans), risk management and loan administration, changes in the internal lending policies and credit standards, examination results from bank regulatory agencies and the Corporation’s internal loan review.

The Corporation has defined-benefit pension plans, including non-qualified plans for certain employees, former employees and former non-employee directors.

In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan.

No additional pension benefits have been earned by any employees who had not met certain requirements as of March 1, 2005.

The benefits are based primarily on years of service and employees’ pay near retirement.

The Corporation's accounting policies related to pensions and other post retirement benefits reflect the guidance in ASC 715, Compensation – Retirement Benefits.

The Corporation does not consolidate the assets and liabilities associated with the pension plan.

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PENSION AND OTHER POST RETIREMENT BENEFIT PLANS of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

PREMISES AND EQUIPMENT

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Gains and losses on dispositions are included in current operations.

Details of the Corporation's premises and equipment are included in NOTE 6.

PREMISES AND EQUIPMENT of these Notes to Consolidated Financial Statements.

The Corporation leases certain land and premises from third parties and all are classified as operating leases.

Effective January 1, 2019, operating leases are included in Other Assets and Other Liabilities on the Corporation's Consolidated Balance Sheets and lease expense for lease payments is recognized on a straight-line basis over the lease term.

Operating leases are included in Other Assets and Other Liabilities on the Corporation's Consolidated Balance Sheets and lease expense for lease payments is recognized on a straight-line basis over the lease term.

Right of Use ("ROU") assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the term.

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Leases are accounted for at the individual level.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Details of the Corporation's leases are included in NOTE 9.

LEASES of these Notes to Consolidated Financial Statements.

FEDERAL HOME LOAN BANK STOCK ("FHLB")

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Intangible assets are periodically evaluated as to the recoverability of their carrying value.

Details of the Corporation's other intangible assets are included in NOTE 8.

OTHER INTANGIBLES of these Notes to Consolidated Financial Statements.

Goodwill is maintained by applying the provisions of ASC 350, Intangibles – Goodwill and Other .

For purchase acquisitions, the Corporation is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors.

In addition, the determination of the useful lives for which an intangible asset will be amortized is subjective.

For acquisitions, assets acquired, including identified intangible assets, and the liabilities assumed are required to be recorded at their fair value.

These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors.

In addition, the determination of the useful lives over which the intangible asset will be amortized is subjective.

Under ASC 350, 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, indicating that the carrying value may not be recoverable.

The Corporation completed its most recent annual goodwill impairment test as of October 1, 2021 and concluded, based on current events and circumstances goodwill is not impaired.

Details of the Corporation's goodwill impairment test are included in NOTE 8.

Details of the Corporation's goodwill are included in NOTE 7.

GOODWILL of these Notes to Consolidated Financial Statements.

BANK OWNED LIFE INSURANCE ("BOLI")

BOLI has been purchased on certain employees and directors of the Corporation to offset a portion of the employee benefit costs.

BOLI policies have been purchased, as well as obtained through acquisitions, on certain current and former employees and directors of the Corporation to offset a portion of the employee benefit costs.

The Corporation records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

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The key criterion for hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Derivatives that qualify for the hedge accounting treatment are designated as either:

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The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820, Fair Value Measurements and Disclosures ), resulting in some volatility in earnings each period.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Details of the Corporation's derivative instruments are included in NOTE 12.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES of these Notes to Consolidated Financial Statements.

SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

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Securities sold under repurchase agreements are reflected as secured borrowings in the consolidated balance sheets at the amount of cash received in connection with each transaction.

Details of the Corporation's repurchase agreements are included in NOTE 11.

BORROWINGS of these Notes to Consolidated Financial Statements.

ALLOWANCE FOR CREDIT LOSSES - OFF-BALANCE SHEET CREDIT EXPOSURES

The allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Corporation is exposed to credit risk resulting from a contractual obligation to extend credit.

No allowance is recognized if the Corporation has the unconditional right to cancel the obligation.

Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit.

For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance sheet exposure.

The likelihood and expected amount of funding are based on historical utilization rates.

The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment.

The allowance for off-balance sheet credit exposures is adjusted through the income statement as a component of provision for credit loss.

Further information regarding the policies and methodology used to estimate the allowance for credit losses on off-balance sheet credit exposures is detailed in NOTE 5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements.

The Corporation adopted CECL on January 1, 2021 and the impact at adoption is described below under the heading "RECENT ACCOUNTING CHANGES ADOPTED IN 2021."

REVENUE RECOGNITION

Revenue recognition guidance was adopted by the Corporation on January 1, 2018.

ASU 2014-09 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

Revenue recognition guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

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Service charges on deposits are withdrawn from the customer's account balance.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Fiduciary activities :

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SHARE-BASED COMPENSATION

Stock option and restriced stock award plans are maintained by the Corporation.

Stock option and restricted stock award plans are maintained by the Corporation.

The compensation costs are recognized for stock options and restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant.

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The market price of the Corporation’s common stock at the date of grant is used for restricted stock awards.

Compensation expense is recognized over the appropriate service period, which is generally two or three years .

Compensation expense is recognized over the appropriate service period, which is generally two to five years .

Details of the Corporation's share-based compensation are included in NOTE 17.

SHARE-BASED COMPENSATION of these Notes to Consolidated Financial Statements.

Income tax expense in the consolidated statements of income is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

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federal, state and local income tax examinations by tax authorities for tax years before 2018.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The Corporation adopted the provisions of the ASC 740, Income Taxes , which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The Corporation accounts for income taxes under the provisions of ASC 740, Income Taxes , which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

As a result of the implementation of ASC 740, the Corporation did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

Per the guidance in ASC 740, the Corporation has not identified any uncertain tax positions that it believes should be recognized in the financial statements.

The Corporation reviews income tax expense and the carrying value of deferred tax assets and liabilities quarterly;

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The Corporation's policy is to recognize interest and penalties related to unrecognized tax benefits, if any, as a component of income tax expense.

Details of the Corporation's income taxes are included in NOTE 19.

INCOME TAX of these Notes to Consolidated Financial Statements.

NET INCOME PER SHARE

Net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding.

Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options and non-vested restricted stock.

Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding.

Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive.

Details of the Corporation's net income per share are included in NOTE 20.

NET INCOME PER SHARE of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

IMPACT OF COVID-19

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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.

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 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.

The CARES Act, as amended by the 2021 Consolidated Appropriations Act (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.

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 new developments with 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 are also unknown.

As a result of COVID-19 and the actions taken to contain it or reduce its impact, the Corporation may continue to 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.

Commercial and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into 2022, especially if positive cases increase and economic shutdowns are reinstated.

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.

RECENT ACCOUNTING CHANGES ADOPTED IN 2021

FASB Accounting Standards Updates No.

2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Summary - The FASB issued Accounting Standards Update (ASU) No.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which reduces complexity for the accounting for costs of implementing a cloud computing service arrangement.

This standard aligns the accounting for implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software.

The ASU aligns the following requirements for capitalizing implementation costs:

• Those incurred in a hosting arrangement that is a service contract, and

• Those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

For calendar-year public companies, the changes were effective for fiscal years beginning after December 15, 2019.

The Corporation adopted the standard in the first quarter of 2020 and adoption of the standard did not have a significant effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Updates No.

2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

Summary - The FASB issued ASU No.

2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, that applies to all employers that sponsor defined benefit pension or other postretirement plans.

The amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

Disclosure Requirements Deleted

• The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.

• The amount and timing of plan assets expected to be returned to the employer.

• Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.

• For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Disclosure Requirements Added

• An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:

• The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets, and

• The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

2018-14 is effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities.

Early adoption is permitted for all entities.

The Corporation adopted the standard in the first quarter of 2020 and adoption of the standard did not have a significant effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Updates No.

2018-13 - Fair Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

Summary - The FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.

2018-13 modifies the disclosure requirements on fair value measurements in Topic 820.

Certain disclosure requirements related to transfers between Level 1 and Level 2 of the fair value hierarchy and Level 3 valuation process were removed from Topic 820.

Disclosures were also added to Topic 820 for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate "at a minimum" from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.

The amendments in ASU No.

2018-13 were effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty were applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

All other amendments were applied retrospectively to all periods presented upon their effective date.

Early adoption was permitted.

An entity was permitted to early adopt any removed or modified disclosures upon issuance of ASU No.

2018-13 and delay adoption of the additional disclosures until their effective date.

The Corporation adopted the standard in the first quarter of 2020 and adoption of the standard did not have a significant effect on the Corporation’s disclosures.

FASB Accounting Standards Updates No.

2017-04 - Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment.

Summary - The FASB issued ASU No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill, which simplifies how an entity is required to test goodwill for impairment.

To simplify the subsequent measurement of goodwill, the ASU eliminates Step 2 from the goodwill impairment test.

The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.

An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value;

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.

The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test.

An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary.

The amendments were applied on a prospective basis.

The Corporation adopted ASU No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill, January 1, 2020 and assessed the recent economic impact and market conditions from the COVID-19 pandemic.

At September 30, 2020 and December 31, 2020, the Corporation performed a goodwill impairment test which included various valuation considerations including comparable peer data, precedent transaction comparables, discounted cash flow analysis, overall financial performance, share price of the Corporation's common stock and other factors.

The testing resulted in a conclusion that it was not more likely than not that the fair value of the Corporation had declined below its carrying value;

therefore, goodwill was not impaired at September 30, 2020 or December 31, 2020.

Goodwill assessments are highly sensitive to economic projections and the related assumptions used by management.

In the event of a prolonged economic downturn or further deterioration in the economic outlook, continued assessments of our goodwill balance will likely be required in future periods.

Details of the goodwill impairment test are included in NOTE 8.

GOODWILL of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Guidance on Non-TDR Loan Modifications due to COVID-19

1601 et seq.) terminates.

In accordance with such guidance, the Bank has offered short-term modifications made in response to COVID-19 to 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 are insignificant.

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.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

The Corporation continually monitors potential accounting pronouncement and SEC release changes.

The following pronouncements and releases have been deemed to have the most applicability to the Corporation's financial statements:

FASB Accounting Standards Updates No.

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

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Measurement of Credit Losses on Financial Instruments .

This new guidance was issued to address concerns that current generally accepted accounting principles ("GAAP") restricts 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 Current Expected Credit Loss ("CECL") model.

This new guidance replaced the previous “incurred loss” model for recognizing credit losses with an “expected life of loan loss” model referred to as the Current Expected Credit Loss ("CECL") model.

Under the CECL model, certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected.

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This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter.

This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred.

The change could materially affect how the allowance for loan losses is determined and cause a charge/credit to earnings through the provision for loan losses.

Such could create volatility in earnings and could adversely affect the financial condition of the Corporation.

This differs significantly from the “incurred loss” model required under current GAAP, which delayed recognition until it is probable a loss has been incurred.

The Corporation developed models that satisfy the requirements of the new standard which are governed by a system of internal controls and a cross-functional working group consisting of accounting, finance, and credit administration personnel.

The loan portfolio was pooled into ten loan segments with similar risk characteristics for which the probability of default/loss given default methodology was applied.

The Corporation utilized a one-year economic forecast period then reverted to historical macroeconomic levels for the remaining life of the portfolio.

A baseline macroeconomic scenario, along with other scenarios, was used to develop a range of estimated credit losses for which to determine the best estimate within.

The Corporation utilized a one-year reasonable and supportable economic forecast followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the portfolio.

A baseline macroeconomic scenario, along with other scenarios, were used to develop a range of estimated credit losses for which to determine the best estimate within.

The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

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However, the CAA (as discussed above) extended 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 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 a result of the Corporation’s election, its 2020 financial statements have been prepared under the existing incurred loss model.

As of the adoption and day one measurement date of January 1, 2021, the Corporation recorded a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet.

The allowance increased 57 percent from December 31, 2020 because it covered expected credit losses over the life of the loan portfolio, which approximates four years , and it included an allowance on all purchased loans that were previously excluded from the allowance for loan losses calculation.

CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from allowance for credit losses, which was approximately $ 21 million.

Also as required by CECL, the Corporation reviewed the held-to-maturity debt securities portfolio and determined the expected losses were immaterial.

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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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(table dollar amounts in thousands, except share data)

The allowance for credit losses - loans increased 57 percent from December 31, 2020, or $ 74.1 million, because it covered expected credit losses over the life of the loan portfolio, which approximates four years, and it included an allowance on all purchased loans that were previously excluded from the allowance for loan loss calculation.

CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from the allowance for credit losses, which was approximately $ 20.5 million.

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 following table details the impact of the adoption of CECL on the Corporation's balance sheet as of January 1, 2021.

December 31, 2020 Impact of CECL Adoption January 1, 2021 Post-CECL Adoption

Held to maturity securities $ 1,227,668 $ ( 245 ) $ 1,227,423

Loans 9,243,174 4,776 9,247,950

Allowance for credit losses - loans ( 130,648 ) ( 74,055 ) ( 204,703 )

Net loans 9,112,526 ( 69,279 ) 9,043,247

Tax asset, deferred and receivable 12,340 21,984 34,324

Allowance for credit losses on unfunded loan commitments — 20,500 20,500

Stockholder's Equity:

Retained Earnings 788,578 ( 68,040 ) 720,538

FASB Accounting Standards Updates No.

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Measurement of Credit Losses of Financial Instruments.

Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries.

Among other narrow-scope improvements, the new ASU clarified guidance around how to report expected recoveries.

“Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered.

While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets).

In response to this question, the ASU permits organizations to record expected recoveries on PCD assets.

In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.

The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU No.

As discussed above, pursuant to the CARES Act, the Corporation elected to defer the adoption of CECL.

Additionally, the 2021 Consolidated Appropriations Act ("CAA"), 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 is not expecting adoption of the standard to have a significant effect on the Corporation’s consolidated financial statements or disclosures.

In response to this question, the ASU permitted organizations to record expected recoveries on PCD assets.

In addition to other narrow technical improvements, the ASU also reinforced existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.

The ASU includes effective dates and transition requirements that vary depending on whether or not an entity adopted ASU No.

As discussed above, pursuant to the CARES Act, the Corporation elected to defer the adoption of CECL Additionally, the 2021 CAA, signed into law on December 27, 2020, amended the CARES Act by extending the temporary relief from CECL compliance to 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 adopted CECL on January 1, 2021.

The adoption of this standard did not have a significant effect on the Corporation’s consolidated financial statements or disclosures.

FASB Accounting Standards Update No.

2019-12 - Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes

Summary - The FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, which is expected to reduce cost and complexity related to the accounting for income taxes.

The ASU removed specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP).

It eliminated the need for an organization to analyze whether the following apply in a given period:

• Exception to the incremental approach for intraperiod tax allocation;

• Exceptions to accounting for basis differences when there are ownership changes in foreign investments;

• Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

The ASU also improved financial statement preparers’ application of income tax-related guidance and simplifies GAAP for:

• Franchise taxes that are partially based on income;

• Transactions with a government that result in a step up in the tax basis of goodwill

• Separate financial statements of legal entities that are not subject to tax;

• Enacted changes in tax laws in interim periods.

The ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.

For public business entities, the ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption of the ASU was permitted.

The Corporation adopted this standard on January 1, 2021 and adoption of this standard did not have a significant effect on the Corporation's consolidated financial statements or disclosures.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

The Corporation continually monitors potential accounting pronouncement and SEC release changes.

The following pronouncements and releases have been deemed to have the most applicability to the Corporation's financial statements:

FASB Accounting Standards Updates - No.

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The Corporation is assessing ASU 2020-04 and its impact on the Corporation's transition away from LIBOR for its loans and other financial instruments.

Hoosier Trust Company

On November 9, 2020, the Corporation announced the signing of a definitive agreement by which the Bank would acquire Hoosier Trust Company ("Hoosier") through a merger of Hoosier with and into the Bank.

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

Closing of the acquisition remains subject to required regulatory approval and is expected in the second quarter of 2021.

MBT Financial Corp.

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

MBT, a Michigan corporation, merged with and into the Corporation, whereupon the separate corporate existence of MBT ceased and the Corporation survived.

Immediately following the merger, MBT's wholly-owned subsidiary, Monroe Bank & Trust, merged with and into the Bank, with the Bank continuing as the surviving bank.

MBT was headquartered in Monroe, Michigan and had 20 banking centers serving the Monroe market.

Pursuant to the merger agreement, each MBT shareholder received 0.275 shares of the Corporation's common stock for each outstanding share of MBT common stock held.

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

The Corporation engaged in this transaction with the expectation that it would be accretive to income and add a new market area in Michigan that has a demographic profile consistent with many of the current Indiana and Ohio markets served by the Bank.

Goodwill resulted from this transaction due to the expected synergies and economies of scale.

FASB Accounting Standards Updates - No.

2021-01 - Reference Rate Reform (Topic 848):

Summary - The FASB has published ASU 2021-01, Reference Rate Reform.

ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply the amendments in this Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued.

If an entity elects to apply any of the amendments in this Update for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election.

The amendments in this Update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022).

The Corporation is assessing ASU 2021-01 and its impact on the Corporation's transition away from LIBOR for its loans and other financial instruments.

FASB Accounting Standards Updates - No.

2021-08 - Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

Summary - The FASB issued ASU No.

2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , that addresses diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination.

Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606 , Revenue from Contracts with Customers , at fair value on the acquisition date.

The FASB indicates that some stakeholders indicated that it is unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after Topic 606 is adopted.

Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer.

To address this, the ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

Finally, the amendments in the ASU improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

For public business entities, the amendments are effective for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years.

For all other entities, the amendments are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years.

The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments.

Early adoption of the amendments is permitted, including adoption in an interim period.

An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period or early application, and (2) prospectively to all business combinations that occur on or after the date of initial application.

The Corporation is reviewing the terms of this guidance, but adoption of the standard is not expected to have a significant impact on the Corporation's financial statements or disclosures.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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(table dollar amounts in thousands, except share data)

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition.

Based on valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change based on the timing of the transaction, the purchase price for the MBT acquisition is detailed in the following table.

Hoosier Trust Company

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.

Prior to the acquisition, Hoosier was an Indiana corporate trust company, headquartered in Indianapolis, Indiana, with approximately $ 290 million in assets under management.

Hoosier’s sole office is now being operated by the Bank as a limited service trust office.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair value on the date of the acquisition.

Based on the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change based on the timing of the transaction, the purchase price for the Hoosier acquisition is detailed in the following table.

If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, information becomes available about facts and circumstances that existed as of the acquisition date, which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.

Cash and cash equivalents $ 292

Interest-bearing time deposits 281,228

Investment securities 212,235

Loans 732,578

Premises and equipment 21,664

Federal Home Loan Bank stock 4,148

Interest receivable 3,361

Cash surrender value of life insurance 59,545

Tax asset, deferred and receivable 5,205

Other assets 35

Deposits ( 1,105,926 )

Securities sold under repurchase agreements ( 94,760 )

Federal Home Loan Bank advances ( 10,853 )

Other liabilities ( 816 )

Net tangible assets acquired ( 489 )

Core deposit intangible 16,527

Customer relationship intangible 2,247

Goodwill 1,467

Purchase price $ 3,225

Of the total purchase price, $ 16,527,000 was allocated to a core deposit intangible, which will be amortized over its estimated life of 10 years.

The remaining purchase price was allocated to goodwill, which is not deductible for tax purposes.

Acquired loan data for MBT is included in the following table:

Fair Value of Acquired Loans at Acquisition Date Gross Contractual Amounts Receivable at Acquisition Date Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected

Acquired receivables subject to ASC 310-30 $ 3,531 $ 6,840 $ 2,733

Acquired receivables not subject to ASC 310-30 $ 729,047 $ 907,210 $ 14,722

Purchased loans with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for under ASC 310-30, Loans Acquired with Deteriorated Credit Quality .

The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.

Pro Forma Financial Information

The results of operations of MBT have been included in the Corporation's consolidated financial statements since the acquisition date.

The following schedule includes pro forma results for the year ended December 31, 2019, as if the MBT acquisition occurred as of the beginning of the period presented.

December 31, 2019

Total revenue (net interest income plus other income) $ 474,891

Net income available to common shareholders $ 161,228

Earnings per share:

Diluted $ 2.88

The pro forma information includes adjustments for interest income on loans and investments, interest expense on deposits and borrowings, premises expense for banking centers acquired and amortization of intangibles arising from the transaction and the related income tax effects.

The pro forma information for the year ended December 31, 2019 includes operating revenue from MBT of $ 19.7 million since the date of acquisition.

Additionally, $ 19.7 million, net of tax, of non-recurring expenses directly attributable to the MBT acquisition were included in the year ended December 31, 2019 pro forma information.

The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, or intended to be a projection of future results.

Of the total purchase price, $ 2,247,000 was allocated to a customer relationship intangible, which will be amortized over its estimated life of 10 years.

The remaining purchase price was allocated to goodwill, which is deductible for tax purposes.

Pro forma financial information of the Hoosier acquisition is not included in these disclosures as it is deemed immaterial.

Level One Bancorp, Inc.

On November 4, 2021, the Corporation and Level One Bancorp, Inc., a Michigan corporation ("Level One"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), 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 bank.

Subject to the terms and conditions of the Merger Agreement, upon the Merger becoming effective, the common shareholders of Level One will be entitled to received, for each outstanding share of Level One common stock, (a) a 0.7167 share (the "Exchange Ratio") of the Corporation's common stock, in a tax-free exchange, and (b) a cash payment of $ 10.17 .

The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization, or similar transactions, or as otherwise described in the Merger Agreement.

Fractional shares of the Corporation's common stock will not be issued in respect of fractional interests arising from the Exchange Ratio but will be paid in cash pursuant to the Merger Agreement.

Based on the number of shares of Level One common stock currently outstanding, the Corporation expects to issue approximately 5.5 million shares of its common stock, and pay approximately $ 77.7 million in cash, in exchange for all the issued and outstanding shares of Level One common stock.

In addition, the Corporation expects to issue 10,000 shares of a newly created 7.5 % 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.

Based on the closing price of the Corporation's common stock on November 3, 2021, of $ 43.50 per share, the implied value for a share of Level One common stock is $ 41.35 .

The aggregate transaction value is estimated at approximately $ 323.5 million.

The Boards of Directors of both the Corporation and Level One have approved the Merger Agreement.

The members of the Board of Directors of Level One have entered into a Voting Agreement pursuant to which each of them has agreed to vote their shares of Level One common stock in favor of the Merger.

The Corporation has filed a Registration Statement on Form S-4 with the SEC in connection with the proposed Merger, including a Proxy Statement for Level One and Prospectus for the Corporation which have been submitted to the Level One common shareholders for their consideration at a meeting to be held on March 1, 2022.

Consummation of the Merger remains subject to certain other closing conditions set forth in the Merger Agreement.

For additional details, see the "HIGHLIGHTS FOR 2021" 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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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(table dollar amounts in thousands, except share data)

CASH AND CASH EQUIVALENTS

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents.

As of December 31, 2020, cash and cash equivalents is defined to include cash on hand, deposits in other institutions and federal funds sold.

At December 31, 2020, the Corporation’s interest-bearing cash accounts and noninterest-bearing transaction deposits held at other institutions exceeded the $250,000 federally insured limits by approximately $ 384,234,000 .

CASH AND CASH EQUIVALENTS AND INTEREST-BEARING DEPOSITS

At December 31, 2021, the Corporation’s non-interest bearing deposits, included in cash and cash equivalents, and interest-bearing deposits held at other institutions exceeded the $250,000 federally insured limits by approximately $ 208,437,000 .

Each correspondent bank’s financial performance and market rating are reviewed on a quarterly basis to ensure the Corporation has deposits only at institutions providing minimal risk for those exceeding the federally insured limits.

1 unchanged sentence

The Corporation has historically been required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank.

However, the Federal Reserve announced on March 15, 2020 that in order to support the flow of credit to households and businesses, reserve requirement ratios would move to zero effective March 26, 2020;

therefore, the Corporation did not have a reserve requirement at December 31, 2020.

However, the Federal Reserve announced on March 15, 2020 that in order to support the flow of credit to households and businesses during the COVID-19 pandemic, reserve requirement ratios would move to zero effective March 26, 2020.

The reserve requirement ratios remained at zero as of December 31, 2021.

INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of the Corporation's 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 as of December 31, 2021 and December 31, 2020.

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

Government-sponsored agency securities 31,087 10 113 30,984

State and municipal 619,927 34,978 32 654,873

Government-sponsored mortgage-backed securities 575,154 17,889 107 592,936

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

Cost Gross Unrealized

Gains Gross Unrealized

Available for sale at December 31, 2020

4 unchanged sentences

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

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 as of December 31, 2021 and December 31, 2020.

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

The change in unrealized gains/losses from December 31, 2019 to December 31, 2020 is primarily due to the changes in interest rates.

longer term points on the yield curve have declined since year-end which increases the fair value of securities held in the portfolio.

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

State and municipal 619,927 — 619,927 34,978 32 654,873

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

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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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(table dollar amounts in thousands, except share data)

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

Less than 12 Months 12 Months or Longer Total

Temporarily Impaired Available for Sale Securities at December 31, 2020

Accrued interest on investment securities available for sale and held to maturity of $ 26.8 million are included in the Interest Receivable line on the Corporation's CONSOLIDATED BALANCE SHEETS.

The total amount of accrued interest is excluded from the amortized cost of available for sale and held to maturity securities presented above.

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.

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.

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.

On a quarterly basis, the Corporation monitors the credit quality of investment securities held to maturity through the use of credit ratings.

The following table summarizes the amortized cost of investment securities held to maturity at December 31, 2021, aggregated by credit quality.

Held to Maturity

State and municipal Other Total

Credit Rating:

Aaa $ 90,290 $ 60,579 $ 150,869

Aa1 152,666 — 152,666

Aa2 175,755 — 175,755

Aa3 130,640 — 130,640

A1 88,281 — 88,281

A2 27,364 — 27,364

A3 10,108 — 10,108

Baa2 265 — 265

Non-rated 381,932 1,062,167 1,444,099

Total $ 1,057,301 $ 1,122,746 $ 2,180,047

The following table details activity in the allowance for credit losses on investment securities held to maturity during the twelve months ended December 31, 2021.

State and municipal

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

Allowance for Credit Losses:

Balance, December 31, 2020 $ —

Impact of adopting ASC 326 245

Provision for credit loss —

Securities charged off —

Recoveries on securities —

Balance, December 31, 2021 $ 245

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The following tables summarize, as of December 31, 2021 and December 31, 2020, investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and length of time in a continuous unrealized loss position.

Less than 12 Months 12 Months or Longer Total

Investment securities available for sale at December 31, 2021

Treasury $ 999 $ 1 $ — $ — $ 999 $ 1

Government-sponsored agency securities 68,524 1,545 — — 68,524 1,545

1 unchanged sentence

Government-sponsored mortgage-backed securities 427,687 10,791 8,324 397 436,011 11,188

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

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

Corporate obligations 992 8 — — 992 8

Total investment securities available for sale $ 636,389 $ 13,239 $ 8,829 $ 401 $ 645,218 $ 13,640

Less than 12 Months 12 Months or Longer Total

Temporarily Impaired Available for Sale Securities at December 31, 2019

Investment securities available for sale 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 203,946 2,133 20,796 78 224,742 2,211

Temporarily Impaired Held to Maturity Securities at December 31, 2019

Total investment securities available for sale $ 15,019 $ 349 $ — $ — $ 15,019 $ 349

The following table summarizes investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and the number of securities in the portfolio in an unrealized loss position for the periods indicated.

Losses Number of Securities

Investment securities available for sale at December 31, 2021

Treasury $ 1 1

Government-sponsored agency securities 1,545 8

1 unchanged sentence

Government-sponsored mortgage-backed securities 11,188 48

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

Certain investments in debt securities are reported in the financial statements at amounts less than their historical cost.

The historical cost of these investments totaled $ 81,482,000 and $ 398,172,000 at December 31, 2020 and 2019, respectively.

Total fair value of these investments was $ 80,881,000 and $ 395,416,000 , which was approximately 2.6 and 15.2 percent of the Corporation's available for sale and held to maturity investment portfolio at December 31, 2020 and 2019, respectively.

The Corporation's management believes the decline in fair value for these securities was temporary.

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income during the period the OTTI is identified.

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

Corporate obligations 8 1

Total investment securities available for sale 13,640 161

Losses Number of Securities

Investment securities available for sale at December 31, 2020

State and municipal $ 246 4

Government-sponsored mortgage-backed securities $ 103 5

Total investment securities available for sale $ 349 9

The unrealized losses in the Corporation’s investment portfolio were the result of changes in interest rates and not credit quality.

As a result, the Corporation expects to recover the amortized cost basis over the term of the securities.

The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

Certain investment securities available for sale are reported in the financial statements at an amount less than their historical cost as indicated in the table below.

December 31, 2021 December 31, 2020

Investments available for sale reported at less than historical cost:

Historical cost $ 658,858 $ 15,368

Fair value 645,218 15,019

Gross unrealized losses $ 13,640 $ 349

Percent of the Corporation's investments available for sale 27.5 % 0.8 %

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor classified these securities based upon these inputs.

4 unchanged sentences

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

Government-Sponsored Mortgage-Backed Securities

The unrealized losses on the Corporation's investment in mortgage-backed securities were a result of interest rate changes.

The Corporation expects to recover the amortized cost basis over the term of the securities.

Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2020.

As noted in the table above, the mortgage-backed securities portfolio contains unrealized losses of $ 103,000 on five securities and $ 107,000 on three securities in the available for sale and held to maturity portfolios, respectively.

All these securities are issued by a government-sponsored entity.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

State and Municipal Securities and U.S.

Government-Sponsored Agency Securities

The unrealized losses on the Corporation's investments in securities of state and political subdivisions and U.S.

Government-Sponsored Agency securities were caused by interest rate increases.

The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.

Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2020.

As noted in the previous table, the state and municipal securities portfolio contains unrealized losses of $ 246,000 on four securities and $ 32,000 on two securities in the available for sale and held to maturity portfolios, respectively.

Government-Sponsored Agency securities portfolio contains no unrealized loses in the available for sale portfolio, and $ 113,000 on two securities in the held to maturity portfolio.

The amortized cost and fair value of securities available for sale and held to maturity by contractual maturity are shown below.

The amortized cost and fair value of investment securities available for sale and held to maturity at December 31, 2021 and December 31, 2020, by contractual maturity are shown below.

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Available for Sale Held to Maturity

Amortized Cost Fair Value Amortized Cost Fair Value

Maturity Distribution at December 31, 2020

Due in one year or less $ 1,349 $ 1,353 $ 9,712 $ 9,755

Due after one through five years 5,545 5,764 22,241 23,190

Due after five through ten years 70,777 75,223 115,408 121,333

Due after ten years 1,097,451 1,182,110 505,153 533,079

1,175,122 1,264,450 652,514 687,357

Government-sponsored mortgage-backed securities 632,267 654,669 575,154 592,936

Total Investment Securities $ 1,807,389 $ 1,919,119 $ 1,227,668 $ 1,280,293

Securities not due at a single maturity are shown separately.

Available for Sale Held to Maturity

8 unchanged sentences

Total Investment Securities $ 2,268,655 $ 2,344,551 $ 2,180,047 $ 2,202,503

Securities with a carrying value of approximately $ 890,025,000 , $ 503,427,000 and $ 416,155,000 were pledged at December 31, 2020, 2019 and 2018, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law.

In order to facilitate the funding of PPP loans, the Bank pledged securities to the Discount Window at the Federal Reserve Bank resulting in the increase in pledged securities at December 31, 2020 compared to December 31, 2019.

The book value of securities sold under agreements to repurchase amounted to $ 167,265,000 at December 31, 2020 and $ 182,856,000 at

Securities with a carrying value of approximately $ 873.2 million and $ 890.0 million were pledged at December 31, 2021 and 2020, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law.

In order to facilitate the funding of PPP loans, the Bank pledged securities to the Discount Window at the Federal Reserve Bank resulting in an increase in pledged securities as of December 31, 2020 compared to December 31, 2019.

Those securities remain pledged at the Federal Reserve Bank in 2021 as an alternative funding source.

The book value of securities sold under agreements to repurchase amounted to $ 175.1 million at December 31, 2021 and $ 167.3 million at

December 31, 2020.

7 unchanged sentences

(table dollar amounts in thousands, except share data)

LOANS AND ALLOWANCE

Loans are stated at the amount of unpaid principal, reduced by deferred income (net of costs).

Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding.

Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.

The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate and residential real estate, which results in portfolio diversification.

The following tables show the composition of the loan portfolio, the allowance for loan losses and credit quality characteristics by collateral classification, excluding loans held for sale.

Loans held for sale at December 31, 2020 and 2019, were $ 4.0 million and $ 9.0 million, respectively.

The following table illustrates the composition of the Corporation’s loan portfolio by loan class for the years indicated:

LOANS AND ALLOWANCE FOR CREDIT LOSSES

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.

The following tables show the composition of the loan portfolio and credit quality characteristics by collateral classification, excluding loans held for sale.

Loans held for sale at December 31, 2021 and December 31, 2020, were $ 11.2 million and $ 4.0 million, respectively.

The following table illustrates the composition of the Corporation’s loan portfolio by loan class for the periods indicated:

December 31, 2021 December 31, 2020

10 unchanged sentences

Loans $ 9,241,861 $ 9,243,174

Allowance for loan losses ( 130,648 ) ( 80,284 )

Net Loans $ 9,112,526 $ 8,379,026

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximate $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 as, in accordance with the terms of the PPP, the loans are fully guaranteed by the SBA.

As of December 31, 2020, the Bank had over 4,400 PPP loans, primarily in the commercial and industrial loan class, totaling $ 667.1 million, which is net of $ 12.5 million of deferred processing fee income and costs.

The weighted-average deferred processing fee on PPP loans was approximately 3.09 percent and is recognized over the term of the loan.

If a loan is forgiven by the SBA or paid off by the borrower prior to maturity, any unamortized portion of the fee will be recognized immediately.

During the year ended December 31, 2020, the Corporation recognized interest income on PPP loans of $ 6.2 million and $ 16.2 million of PPP loan related deferred processing fee income as a yield adjustment.

The Bank borrowed from the Paycheck Protection Program Liquidity Facility ("PPPL Facility") to supplement liquidity to fund the PPP loans in the second quarter 2020.

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

Allowance, Credit Quality and Loan Portfolio

Accounting Standards Update No.

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

Measurement of Credit losses on Financial Instruments ("CECL") had an original adoption date of January 1, 2020, which included a day 1 measurement date of January 1, 2020.

The CARES Act, passed by Congress on March 27, 2020 in response to the COVID-19 pandemic, created an optional deferral of the CECL adoption date.

Pursuant to the CARES Act and the related joint statement of federal banking regulators (which also became effective as of March 27, 2020), and consistent with guidance from the SEC and FASB, the Corporation elected to delay implementation of ASU No.

2016-13, which was set to expire on December 31, 2020.

However, the 2021 Consolidated Appropriations Act ("CAA"), 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.

As a result of the Corporation’s election, its 2020 financial statements have been prepared under the existing incurred loss model.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The Corporation maintains an allowance for loan losses to cover probable credit losses identified during its loan review process.

Management believes that the allowance for loan losses is adequate to cover probable losses inherent in the loan portfolio at December 31, 2020.

The process for determining the adequacy of the allowance for loan losses is critical to the Corporation’s financial results.

It requires management to make difficult, subjective and complex judgments to estimate the effect of uncertain matters.

The allowance for loan losses considers current factors, including economic conditions and ongoing internal and external examinations, and will increase or decrease as deemed necessary to ensure it remains adequate.

In addition, the allowance as a percentage of charge-offs and nonperforming loans will change at different points in time based on credit performance, portfolio mix and collateral values.

The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings.

The allowance is increased by provision expense and decreased by charge-offs less recoveries.

All charge-offs are approved by the Bank's senior credit officers and in accordance with established policies.

The Bank charges off a loan when a determination is made that all or a portion of the loan is uncollectible.

The amount provided for loan losses in a given period may be greater than or less than net loan losses experienced during the period, and is based on management’s judgment as to the appropriate level of the allowance for loan losses.

The determination of the provision amount is based on management’s ongoing review and evaluation of the loan portfolio, including an internally administered loan "watch" list and independent loan reviews.

The evaluation takes into consideration identified credit problems, the possibility of losses inherent in the loan portfolio that are not specifically identified and management’s judgment as to the impact of the current environment and economic conditions on the portfolio.

The allowance consists of specific impairment reserves as required by ASC 310-10-35, a component for historical losses in accordance with ASC 450 and the consideration of current environmental factors in accordance with ASC 450.

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

The historical loss allocation for loans not deemed impaired according to ASC 450 is the product of the volume of loans within the non-impaired criticized and non-criticized risk grade classifications, each segmented by call code, and the historical loss factor for each respective classification and call code segment.

The historical loss factors are based upon actual loss experience within each risk and call code classification.

The historical look back period for non-criticized loans looks to the most recent rolling-four-quarter average and aligns with the look back period for non-impaired criticized loans.

Each of the rolling four quarter periods used to obtain the average, include all charge-offs for the previous twelve-month period, therefore the historical look back period includes seven quarters.

Criticized loans are grouped based on the risk grade assigned to the loan.

Loans with a special mention grade are assigned a loss factor, and loans with a classified grade but not impaired are assigned a separate loss factor.

The loss factor computation for this allocation includes a segmented historical loss migration analysis of risk grades to charge-off.

In addition to the specific reserves and historical loss components of the allowance, consideration is given to various environmental factors to ensure that losses inherent in the portfolio are reflected in the allowance for loan losses.

Environmental factors that management reviews in the analysis include:

national and local economic trends and conditions;

trends in growth in the loan portfolio and growth in higher risk areas;

levels of, and trends in, delinquencies and non-accruals;

experience and depth of lending management and staff;

adequacy of, and adherence to, lending policies and procedures including those for underwriting;

industry concentrations of credit;

and adequacy of risk identification systems and controls through the internal loan review and internal audit processes.

In conformance with ASC 805 and ASC 820, loans purchased after December 31, 2008 are recorded at the acquisition date fair value.

Such loans are included in the allowance to the extent a specific impairment is identified that exceeds the fair value adjustment on an impaired loan or the historical loss and environmental factor analysis indicates losses inherent in a purchased portfolio exceeds the fair value adjustment on the portion of the purchased portfolio not deemed impaired.

At December 31, 2020, the allowance for loan losses was $ 130.6 million, an increase of $ 50.3 million from the December 31, 2019 balance of $ 80.3 million.

Net charge-offs for the twelve months ended December 31, 2020, were $ 8.3 million, an increase of $ 5.2 million from the same period in 2019.

The provision for loan losses for the twelve months ended December 31, 2020 was $ 58.7 million, an increase of $ 55.9 million from the same period in 2019.

The determination of the provision for loan 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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The following tables summarize changes in the allowance for loan losses by loan segment for the twelve months ended December 31, 2020, 2019, and 2018:

Twelve Months Ended December 31, 2020

Commercial Commercial Real Estate Consumer Residential Total

Allowance for loan losses:

Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284

Provision for losses 21,930 22,174 5,996 8,573 58,673

Recoveries on loans 819 431 260 666 2,176

Loans charged off ( 8,536 ) ( 313 ) ( 643 ) ( 993 ) ( 10,485 )

Balances, December 31, 2020 $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648

Twelve Months Ended December 31, 2019

Commercial Commercial Real Estate Consumer Residential Total

Allowance for loan losses:

Balances, December 31, 2018 $ 32,657 $ 29,609 $ 3,964 $ 14,322 $ 80,552

Provision for losses 733 1,555 239 273 2,800

Recoveries on loans 1,244 1,289 401 619 3,553

Loans charged off ( 1,732 ) ( 3,675 ) ( 569 ) ( 645 ) ( 6,621 )

Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284

Twelve Months Ended December 31, 2018

Commercial Commercial Real Estate Consumer Residential Total

Allowance for loan losses:

Balances, December 31, 2017 $ 30,420 $ 27,343 $ 3,732 $ 13,537 $ 75,032

Provision for losses 2,097 2,482 679 1,969 7,227

Recoveries on loans 2,456 2,525 302 993 6,276

Loans charged off ( 2,316 ) ( 2,741 ) ( 749 ) ( 2,177 ) ( 7,983 )

Balances, December 31, 2018 $ 32,657 $ 29,609 $ 3,964 $ 14,322 $ 80,552

The tables below show the Corporation’s allowance for loan losses and loan portfolio by loan segment for the years indicated.

December 31, 2020

Commercial Commercial

Real Estate Consumer Residential Total

Allowance balances:

Individually evaluated for impairment $ 223 $ 12,246 $ — $ 432 $ 12,901

Collectively evaluated for impairment 46,892 38,824 9,648 22,383 117,747

Total allowance for loan losses $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648

Loan balances:

Individually evaluated for impairment $ 1,258 $ 51,605 $ 2 $ 3,291 $ 56,156

Collectively evaluated for impairment 3,505,863 3,805,808 129,477 1,739,709 9,180,857

Loans acquired with deteriorated credit quality 577 5,584 — — 6,161

Loans $ 3,507,698 $ 3,862,997 $ 129,479 $ 1,743,000 $ 9,243,174

December 31, 2019

Commercial Commercial

Real Estate Consumer Residential Total

Allowance balances:

Individually evaluated for impairment $ — $ 231 $ — $ 458 $ 689

Collectively evaluated for impairment 32,902 28,547 4,035 14,111 79,595

Total allowance for loan losses $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284

Loan balances:

Individually evaluated for impairment $ 457 $ 8,728 $ 4 $ 2,520 $ 11,709

Collectively evaluated for impairment 2,748,681 3,821,660 135,985 1,727,966 8,434,292

Loans acquired with deteriorated credit quality 1,716 9,878 — 1,715 13,309

Loans $ 2,750,854 $ 3,840,266 $ 135,989 $ 1,732,201 $ 8,459,310

Loans individually evaluated for impairment are comprised of commercial and consumer loans deemed impaired in accordance with ASC 310-10.

This includes loans acquired with subsequent deterioration of credit quality totaling $ 1.3 million with $ 557,000 of related allowance for loan losses at December 31, 2020 and $ 2.8 million with $ 124,000 related allowance for loan losses at December 31, 2019.

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.

Additional details of the PPP are included in

the "IMPACT OF COVID-19" section of NOTE 1.

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements.

Credit Quality

As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to:

(i) the level of criticized commercial loans, (ii) net charge-offs, (iii) non-performing loans, (iv) covenant failures and (v) the general national and local economic conditions.

The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans.

All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans.

Loans with grades below pass are reviewed more frequently depending on the grade.

A description of the general characteristics of these grades is as follows:

• Pass - Loans that are considered to be of acceptable credit quality.

• Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation's credit position at some future date.

Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification.

• Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt.

They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

• Doubtful - Loans that have all of the weaknesses of those classified as Substandard.

However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable.

• Loss – Loans that are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted.

Loans will be classified as Loss when it is neither practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

The risk characteristics of the Corporation’s material portfolio segments are as follows:

Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.

The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.

Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee.

Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria.

In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences, which are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded.

Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles.

Some consumer loans, such as small installment loans and certain lines of credit, are unsecured.

Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.

Repayment on loans secured by 1-4 family residences can be impacted by changes in property values.

Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

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.

When the interest accrual is discontinued, all unpaid accrued interest is reversed against earnings when considered uncollectible.

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

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.

Payments received on impaired accruing or delinquent loans are applied to interest income as accrued.

The following table summarizes the Corporation’s non-accrual loans by loan class for the years indicated:

December 31, 2020 December 31, 2019

The following tables summarize the risk grading of the Corporation’s loan portfolio by loan class and by year of origination for the years indicated.

Consumer loans are not risk graded.

For the purposes of this disclosure, the consumer loans are classified in the following manner:

loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard.

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Loans that evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected are included in the applicable categories below.

Commercial and industrial loan balances as of December 31, 2021 with an origination year of 2021 and 2020 include PPP loans of $ 100.3 million and $ 6.3 million, respectively.

Term Loans (amortized cost basis by origination year)

2021 2020 2019 2018 2017 Prior Revolving loans amortized cost basis Revolving loans converted to term Total

Commercial and industrial loans

Pass $ 1,019,757 $ 362,372 $ 144,520 $ 65,165 $ 21,575 $ 30,420 $ 990,335 $ — $ 2,634,144

Special Mention 10,559 11,088 190 730 1,930 1,825 15,026 — 41,348

Substandard 2,811 2,127 7,432 2,932 431 747 22,593 — 39,073

Total Commercial and industrial loans 1,033,127 375,587 152,142 68,827 23,936 32,992 1,027,954 — 2,714,565

Agricultural land, production and other loans to farmers

Pass 50,251 45,164 22,195 7,689 6,153 36,074 74,871 — 242,397

Special Mention — 1,543 — — — 252 264 — 2,059

Substandard 524 506 108 371 — 27 450 — 1,986

Total Agricultural land, production and other loans to farmers 50,775 47,213 22,303 8,060 6,153 36,353 75,585 — 246,442

Real estate loans:

Construction 123 977

Pass 215,167 200,169 63,589 979 1,762 2,453 17,201 — 501,320

Special Mention 20,737 270 — — — 46 — — 21,053

Substandard — 693 — — — — — — 693

Total Construction 235,904 201,132 63,589 979 1,762 2,499 17,201 — 523,066

Commercial real estate, non-owner occupied

Pass 589,296 688,406 227,332 111,971 103,400 126,837 26,779 — 1,874,021

Special Mention 68,279 149,480 — — — 1,723 — — 219,482

Substandard 19,314 14,912 178 1,118 6,156 278 — — 41,956

Total Commercial real estate, non-owner occupied 676,889 852,798 227,510 113,089 109,556 128,838 26,779 — 2,135,459

Commercial real estate, owner occupied

Residential 6,517 5,062

Home equity 2,095 1,421

Pass 299,186 392,383 92,338 43,252 46,044 48,571 33,998 — 955,772

Special Mention 5,665 5,953 738 1,532 902 1,301 149 — 16,240

Substandard 7,025 5,763 — 53 113 1,754 — — 14,708

Total Commercial real estate, owner occupied 311,876 404,099 93,076 44,837 47,059 51,626 34,147 — 986,720

Pass 349,726 353,691 103,028 69,745 55,240 210,669 2,955 73 1,145,127

Special Mention 1,034 1,394 1,456 306 172 2,106 — — 6,468

Substandard 1,004 1,575 335 1,248 108 3,257 — 5 7,532

Total Residential 351,764 356,660 104,819 71,299 55,520 216,032 2,955 78 1,159,127

Pass 63,845 17,556 1,977 2,127 1,250 3,432 427,437 194 517,818

Special Mention — 85 48 — — 24 3,451 — 3,608

Substandard 520 — — 8 91 70 1,639 — 2,328

Total Home Equity 64,365 17,641 2,025 2,135 1,341 3,526 432,527 194 523,754

Individuals' loans for household and other personal expenditures

Total $ 61,471 $ 15,949

Impaired loans include loans deemed impaired according to the guidance set forth in ASC 310-10.

Commercial loans under $500,000 and

consumer loans, with the exception of troubled debt restructures, are not individually evaluated for impairment.

Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method for measuring the amount of impairment is utilized.

This method requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value.

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

The appraisers typically 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 cash flow analysis.

Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some 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.

Pass 67,749 23,452 11,893 11,197 2,008 4,928 24,406 — 145,633

Special Mention 79 85 50 33 20 58 134 — 459

Substandard — — — — — — — — —

Total Individuals' loans for household and other personal expenditures 67,828 23,537 11,943 11,230 2,028 4,986 24,540 — 146,092

Public finance and other commercial loans

Pass 231,319 178,316 100,679 39,098 105,964 128,942 22,318 — 806,636

Total Public finance and other commercial loans 231,319 178,316 100,679 39,098 105,964 128,942 22,318 — 806,636

Loans $ 3,023,847 $ 2,456,983 $ 778,086 $ 359,554 $ 353,319 $ 605,794 $ 1,664,006 $ 272 $ 9,241,861

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

The following tables show the composition of the Corporation’s impaired loans, related allowance and interest income recognized while impaired by loan class for the years indicated:

December 31, 2020

Unpaid Principal

Balance Recorded

Investment Related

Allowance Average Recorded Investment Interest Income Recognized

Impaired loans with no related allowance:

Pass Commercial

Mention Commercial Substandard Commercial

Doubtful Commercial Loss Consumer Performing Consumer

Non-Performing Total

Commercial and industrial loans $ 2,562,077 $ 117,503 $ 97,119 $ — $ — $ — $ — $ 2,776,699

Agricultural land, production and other loans to farmers 243,991 26,835 9,885 — — 1,173 — 281,884

Real estate loans:

Construction 446,846 10,445 5,549 — — 21,763 120 484,723

Commercial real estate, non-owner occupied 1,979,827 160,304 80,818 — — — — 2,220,949

1 unchanged sentence

Residential 199,338 2,261 7,058 — — 1,020,687 5,397 1,234,741

Home equity 12,714 — 989 — — 492,999 1,557 508,259

Individuals' loans for household and other personal expenditures — — — — — 129,440 39 129,479

Total $ 9,101 $ 7,813 $ — $ 8,113 $ 148

Impaired loans with related allowance:

Public finance and other commercial loans 647,939 — — — — — — 647,939

Loans $ 7,000,298 $ 334,989 $ 234,712 $ — $ — $ 1,666,062 $ 7,113 $ 9,243,174

Total past due loans equaled $ 34.7 million as of December 31, 2021, a $ 38.0 million decrease from the total of $ 72.8 million for December 31, 2020.

At December 31, 2021, 30-59 Days Past Due loans totaled $ 15.0 million, a decrease of $ 4.6 million from December 31, 2020.

The primary decreases were in commercial and industrial and owner-occupied commercial real estate loans.

At December 31, 2021, 60-89 Days Past Due loans totaled $ 7.1 million, a decrease of $ 4.1 million from December 31, 2020.

The primary decrease was in commercial and industrial loans and non-owner occupied commercial real estate, offset by an increase in the residential portfolio.

At December 31, 2021, 90 Days or More Past Due loans totaled $ 12.7 million, a decrease of $ 29.3 million from December 31, 2020.

The primary decrease was in non-owner occupied commercial real estate, due to the payoff of a $ 23.4 million relationship.

The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, for the years indicated:

December 31, 2021

Current 30-59 Days

Past Due 60-89 Days

Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due

Commercial and industrial loans $ 2,708,539 $ 2,602 $ 2,437 $ 987 $ 2,714,565 $ 675

1 unchanged sentence

Real estate loans:

Construction 522,349 717 — — 523,066 —

Commercial real estate, non-owner occupied 2,124,853 3,327 — 7,279 2,135,459 —

2 unchanged sentences

Home equity 518,643 3,327 281 1,503 523,754 288

Total $ 49,513 $ 48,343 $ 12,901 $ 49,003 $ 84

Total Impaired Loans $ 58,614 $ 56,156 $ 12,901 $ 57,116 $ 232

Individuals' loans for household and other personal expenditures 145,634 375 83 — 146,092 —

Public finance and other commercial loans 806,636 — — — 806,636 —

Loans $ 9,207,113 $ 15,006 $ 7,056 $ 12,686 $ 9,241,861 $ 963

December 31, 2020

Unpaid Principal

Balance Recorded

Investment Related

Allowance Average Recorded Investment Interest Income Recognized

Impaired loans with no related allowance:

Current 30-59 Days

Past Due 60-89 Days

Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due

Commercial and industrial loans $ 2,761,473 $ 5,866 $ 6,571 $ 2,789 $ 2,776,699 $ 594

5 unchanged sentences

Residential 1,226,779 3,269 1,429 3,264 1,234,741 133

Total $ 9,955 $ 7,352 $ — $ 7,924 $ 159

Impaired loans with related allowance:

Agricultural land, production and other loans to farmers $ 588 $ 585 $ 107 $ 585 $ —

Real estate loans:

Commercial real estate, owner occupied 2,060 1,324 124 1,324 —

Residential 2,070 2,044 383 2,083 63

Home equity 503,596 2,644 559 1,460 508,259 19

Individuals' loans for household and other personal expenditures 129,049 334 96 — 129,479 —

Total $ 5,139 $ 4,357 $ 689 $ 4,405 $ 75

Total Impaired Loans $ 15,094 $ 11,709 $ 689 $ 12,329 $ 234

Public finance and other commercial loans 647,939 — — — 647,939 —

Loans $ 9,170,399 $ 19,638 $ 11,187 $ 41,950 $ 9,243,174 $ 746

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

December 31, 2018

Unpaid Principal

Balance Recorded

Investment Related

Allowance Average Recorded Investment Interest Income Recognized

Impaired loans with no related allowance:

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.

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.

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.

The following table summarizes the Corporation’s non-accrual loans by loan class for the periods indicated:

December 31, 2021 December 31, 2020

Non-Accrual Loans Non-Accrual Loans with no Allowance for Credit Losses Non-Accrual Loans

Commercial and industrial loans $ 7,598 $ 263 $ 2,329

6 unchanged sentences

Home equity 1,552 — 2,095

Public finance and other commercial loans 353 353 — 353 —

Total $ 14,555 $ 11,594 $ — $ 15,824 $ 168

Impaired loans with related allowance:

Individuals' loans for household and other personal expenditures 3 — 39

Loans $ 43,062 $ 9,080 $ 61,471

There was no interest income recognized on non-accrual loans for the twelve months ended December 31, 2021 and 2020, respectively.

Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value.

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

The appraisers typically 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 cash flow analysis.

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.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses:

December 31, 2021

Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans

Commercial and industrial loans $ — $ — $ 8,075 $ 8,075 $ 2,672

Agricultural land, production and other loans to farmers 524 — 251 775 —

Real estate loans:

Construction — 685 — 685 82

Commercial real estate, non-owner occupied 23,652 — — 23,652 5,510

Commercial real estate, owner occupied 1,044 — — 1,044 —

1 unchanged sentence

Home equity — 394 — 394 64

Individuals' loans for household and other personal expenditures 18 18 1 20 1

Total $ 10,501 $ 10,431 $ 1,872 $ 10,448 $ 68

Total Impaired Loans $ 25,056 $ 22,025 $ 1,872 $ 26,272 $ 236

Impaired loans in the above tables do not include loans accounted for under ASC 310-30, or any other loan, unless deemed impaired in

accordance with ASC 310-10.

As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to:

(i) the level of criticized commercial loans, (ii) net charge-offs, (iii) non-performing loans, (iv) covenant failures and (v) the general national and local economic conditions.

The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans.

All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans.

Loans with grades below pass are reviewed more frequently depending on the grade.

A description of the general characteristics of these grades is as follows:

• Pass - Loans that are considered to be of acceptable credit quality.

• Special Mention - Loans which have a potential weaknesses that deserve management’s close attention.

If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

• Substandard - Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

• Doubtful - Loans will have all the weaknesses inherent in those classified Substandard with the added characteristics that the weakness make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

• Loss – Loans are considered uncollectible and of such little value that their continuation as bankable assets is not warranted.

This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

The following tables summarize the credit quality of the Corporation’s loan portfolio, by loan class for the years indicated.

Consumer non-performing loans include accruing consumer loans 90-days or more delinquent and consumer non-accrual loans.

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified date.

Loans that evidenced deterioration of credit quality since origination and the probability, at acquisition, that all contractually required payments would not be collected are included in the applicable categories below.

Loans $ 25,220 $ 5,985 $ 8,326 $ 39,531 $ 8,633

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

December 31, 2020

Commercial Pass Commercial Special Mention Commercial Substandard Commercial Doubtful Commercial Loss Consumer Performing Consumer

Non Performing Total

As detailed in NOTE 1.

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements, the Bank's banking regulators issued guidance in March 2020 encouraging 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 had further provided 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.

In accordance with that guidance, the Bank has offered short-term modifications made in response to COVID-19 to 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 are insignificant.

The 2021 CAA extended the expiration date for COVID-related loan modifications exempt from troubled debt restructuring classification until January 1, 2022.

At December 31, 2021, the Corporation did no t have any outstanding COVID modifications, compared to $ 120.3 million on 87 loans at December 31, 2020.

In certain loan restructuring situations, the Corporation may grant a concession to a debtor experiencing financial difficulty, resulting in a troubled debt restructuring.

A concession is deemed to be granted when, as a result of the restructuring, the Corporation does not expect to collect all original amounts due, including interest accrued at the original contract rate.

If the payment of principal at original maturity is primarily dependent on the value of collateral, the current value of the collateral is considered in determining whether the principal will be repaid.

The following tables summarize troubled debt restructures in the Corporation's loan portfolio that occurred during the twelve months ended December 31, 2021 and 2020, respectively.

Twelve Months Ended December 31, 2021

Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans

Commercial and industrial loans $ 348 $ 348 $ — $ — $ 348 2

Agricultural land, production and other loans to farmers 243,991 26,835 9,885 — — 1,173 — 281,884

Real estate loans:

3 unchanged sentences

Residential 691 449 126 118 693 9

Home equity 12,714 — 989 — — 492,999 1,557 508,259

Individuals' loans for household and other personal expenditures — — — — — 129,440 39 129,479

Public finance and other commercial loans 647,939 — — — — — — 647,939

Loans $ 7,000,298 $ 334,989 $ 234,712 $ — $ — $ 1,666,062 $ 7,113 $ 9,243,174

December 31, 2019

Commercial Pass Commercial Special Mention Commercial Substandard Commercial Doubtful Commercial Loss Consumer Performing Consumer

Non Performing Total

Total $ 14,028 $ 13,802 $ 142 $ 139 $ 14,083 15

Twelve Months Ended December 31, 2020

Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans

Commercial and industrial loans $ 654 $ 654 $ — $ — $ 654 3

2 unchanged sentences

Construction 113 — — 123 123 1

Commercial real estate, non-owner occupied 1,814,187 38,366 50,139 — — — — 1,902,692

Commercial real estate, owner occupied 107 107 — — 107 1

2 unchanged sentences

Individuals' loans for household and other personal expenditures 19 19 — — 19 2

Public finance and other commercial loans 547,114 — — — — — — 547,114

Loans $ 6,447,193 $ 147,328 $ 190,358 $ — $ — $ 1,668,247 $ 6,184 $ 8,459,310

The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, for the years indicated:

December 31, 2020

Current 30-59 Days

Past Due 90 Days or More Past Due Total Past Due Total Past due 90+ days and still accruing

Total $ 4,413 $ 3,868 $ 258 $ 347 $ 4,473 49

Loans secured by commercial real estate, non-owner occupied made up 92.1 percent of the post-modification balances of the troubled debt restructured loans that occurred during the twelve months ending December 31, 2021.

During the twelve months ended December 31, 2020, residential made up and 62.2 percent of the post-modification balance of the troubled debt restructured loans that occurred in the period.

The following tables summarize troubled debt restructures that occurred during the twelve months ended December 31, 2021 and 2020, that subsequently defaulted during the period indicated and remained in default at period end.

For purposes of this schedule, a loan is considered in default if it is 30-days or more past due.

Twelve Months Ended December 31, 2021

Number of Loans Recorded Balance

Real estate loans:

Residential 5 $ 475

Total 5 $ 475

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Twelve Months Ended December 31, 2020

Number of Loans Recorded Balance

Commercial and industrial loans 2 $ 585

Agricultural land, production and other loans to farmers 280,615 146 226 897 1,269 281,884 —

Real estate loans:

Construction 484,706 — 17 — 17 484,723 —

Commercial real estate, non-owner occupied 2,184,681 2,525 2,109 31,634 36,268 2,220,949 —

Commercial real estate, owner occupied 951,561 4,854 180 1,906 6,940 958,501 —

Residential 8 610

Home equity 1 93

Individuals' loans for household and other personal expenditures 129,049 334 96 — 430 129,479 —

Public finance and other commercial loans 647,939 — — — — 647,939 —

Total 11 $ 1,288

Commercial troubled debt restructured loans risk graded special mention, substandard, doubtful and loss are individually evaluated for apparent loss and may result in a specific reserve allocation in the allowance for credit loss.

Commercial troubled debt restructures that aren't individually evaluated for a specific reserve are included in the calculation of allowance for credit losses through the loan segment loss analysis.

For all consumer loan modifications, an evaluation to identify if a troubled debt restructure has occurred is performed prior to making the modification.

Any subsequent deterioration is addressed through the charge-off process or through a specific reserve allocation included in the allowance for credit loss.

Consumer troubled debt restructures that are not individually evaluated for a specific reserve are included in the calculation of the allowance for credit losses through the loan segment loss analysis.

Consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $ 4.2 million and $ 2.8 million at December 31, 2021 and December 31, 2020, respectively.

Allowance for Credit Losses on Loans

The Allowance for Credit Losses on Loans ("ACL - Loans") is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over the contractual term.

The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge offs for loans, net or recoveries.

Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans.

Loans are charged off against the allowance when the uncollectibility of the loan is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

The allowance represents the Corporation’s best estimate of current expected credit losses on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

The current expected credit loss ("CECL") calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan.

The level of the allowance for credit losses is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

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

Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns.

In developing the loan segments, the Corporation analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

The expected credit losses are measured over the life of each loan segment utilizing the Probability of Default / Loss Given Default methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio.

This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates.

The Corporation sub-segmented certain commercial portfolios by risk level and certain consumer portfolios by delinquency status where appropriate.

The Corporation utilized a four-quarter reasonable and supportable economic forecast period followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the loans.

Econometric modeling was performed using historical default rates and a selection of economic forecast scenarios published by Moody’s to develop a range of estimated credit losses for which to determine the best credit loss estimate within.

Macroeconomic factors utilized in the modeling process include the national unemployment rate, BBB US corporate index, CRE price index and the home price index.

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 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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments.

In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.

Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral.

The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis.

No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the Small Business Administration ("SBA").

The risk characteristics of the Corporation’s portfolio segments are as follows:

Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.

The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.

Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization.

Commercial real estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

The Corporation monitors commercial real estate loans based on collateral and risk grade criteria, as well as the levels of owner-occupied versus non-owner occupied loans.

Construction loans are underwritten utilizing a combination of tools and techniques including feasibility and market studies, independent appraisals and appraisal reviews, absorption and interest rate sensitivity analysis as well as the financial analysis of the developer and all guarantors.

Construction loans are monitored by either in house or third party inspectors limiting advances to a percentage of costs or stabilized project value.

These loans frequently involve the disbursement of significant funds with the repayment dependent upon the successful completion and, where necessary, the future stabilization of the project.

The predominant inherent risk of this portfolio is associated with the borrower's ability to successfully complete a project on time, within budget and stabilize the projected as originally projected.

Consumer and Residential

Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles.

Some consumer loans, such as small installment loans and certain lines of credit, are unsecured.

Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers and can also be impacted by changes in property values.

Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The following tables summarize changes in the allowance for credit losses by loan segment for the twelve months ended December 31, 2021:

Twelve Months Ended December 31, 2021

Commercial Commercial Real Estate Construction Consumer Residential Consumer & Residential Total

Allowance for credit losses

Balances, December 31, 2020 $ 47,115 $ 51,070 $ — $ 9,648 $ 22,815 $ — $ 130,648

Credit risk reclassifications — ( 10,284 ) 10,284 ( 9,648 ) ( 22,815 ) 32,463 —

Balances, December 31, 2020 after reclassifications 47,115 40,786 10,284 — — 32,463 130,648

Impact of adopting ASC 326 20,024 34,925 8,805 — — 10,301 74,055

Balances, January 1, 2021 Post-ASC 326 adoption 67,139 75,711 19,089 — — 42,764 204,703

Provision for credit losses 7,921 ( 11,093 ) 1,122 — — 2,050 —

Recoveries on loans 724 580 1 — — 1,273 2,578

Loans charged off ( 5,849 ) ( 4,533 ) ( 6 ) — — ( 1,496 ) ( 11,884 )

Balances, December 31, 2021 $ 69,935 $ 60,665 $ 20,206 $ — $ — $ 44,591 $ 195,397

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Allowance for Loan Losses under prior GAAP ("Incurred Loss Model")

Prior to the adoption of ASU No.

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

Measurement of Credit Losses on Financial Instruments on January 1, 2021, the Corporation maintained an allowance for loan losses in accordance with the incurred loss model as disclosed in the Corporation's 2020 Annual Report on Form 10-K.

The following tables summarize changes in the allowance for loan losses by loan segment for the twelve months ended December 31, 2020 and 2019:

Twelve Months Ended December 31, 2020

Commercial Commercial

Real Estate Consumer Residential Total

Allowance for loan losses:

Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284

Provision for losses 21,930 22,174 5,996 8,573 58,673

Recoveries on loans 819 431 260 666 2,176

Loans charged off ( 8,536 ) ( 313 ) ( 643 ) ( 993 ) ( 10,485 )

Balances, December 31, 2020 $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648

Twelve Months Ended December 31, 2019

Commercial Commercial Real Estate Consumer Residential Total

Allowance for loan losses:

Balances, December 31, 2018 $ 32,657 $ 29,609 $ 3,964 $ 14,322 $ 80,552

Provision for losses 733 1,555 239 273 2,800

Recoveries on loans 1,244 1,289 401 619 3,553

Loans charged off ( 1,732 ) ( 3,675 ) ( 569 ) ( 645 ) ( 6,621 )

Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284

The table below shows the Corporation’s allowance for loan losses under the incurred loss model and loan portfolio by loan segment as of December 31, 2020.

December 31, 2020

Commercial Commercial

Real Estate Consumer Residential Total

Allowance Balances:

Individually evaluated for impairment $ 223 $ 12,246 $ — $ 432 $ 12,901

Collectively evaluated for impairment 46,892 38,824 9,648 22,383 117,747

Total Allowance for Loan Losses $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648

Loan Balances:

Individually evaluated for impairment $ 1,258 $ 51,605 $ 2 $ 3,291 $ 56,156

Collectively evaluated for impairment 3,505,863 3,805,808 129,477 1,739,709 9,180,857

Loans acquired with deteriorated credit quality 577 5,584 — — 6,161

Loans $ 3,507,698 $ 3,862,997 $ 129,479 $ 1,743,000 $ 9,243,174

2 unchanged sentences

(table dollar amounts in thousands, except share data)

The following tables show the composition of the Corporation’s impaired loans and related allowance by loan class under the incurred loss model and the interest income recognized for the periods indicated:

December 31, 2020

Current 30-59 Days

Past Due 90 Days or More Past Due Total Past Due Total Past due 90+ days and still accruing

Balance Recorded

Investment Related

Impaired loans with no related allowance:

Commercial and industrial loans $ 1,059 $ 991 $ —

Real estate Loans:

Commercial real estate, non-owner occupied 4,958 4,694 —

Commercial real estate, owner occupied 2,125 1,310 —

Residential 957 816 —

Individuals' loans for household and other personal expenditures 2 2 —

Total $ 9,101 $ 7,813 $ —

Impaired loans with related allowance:

Commercial and industrial loans $ 268 $ 268 $ 223

Agricultural land, production and other loans to farmers 640 562 3

Real estate Loans:

Construction 785,936 1,632 — — 1,632 787,568 —

Commercial real estate, non-owner occupied 44,016 43,715 11,686

2 unchanged sentences

Home equity 487 461 80

Individuals' loans for household and other personal expenditures 135,445 439 105 — 544 135,989 1

Public finance and other commercial loans 547,114 — — — — 547,114 —

Loans $ 8,432,491 $ 15,586 $ 2,965 $ 8,268 $ 26,819 $ 8,459,310 $ 69

On occasion, borrowers experience declines in income and cash flow.

As a result, these borrowers seek to reduce contractual cash outlays including debt payments.

Concurrently, in an effort to preserve and protect its earning assets, specifically troubled loans, the Corporation works to maintain its relationship with certain customers who are experiencing financial difficulty by contractually modifying the borrower's debt agreement with the Corporation.

In certain loan restructuring situations, the Corporation may grant a concession to a debtor experiencing financial difficulty, resulting in a trouble debt restructuring.

The following tables summarize troubled debt restructures in the Corporation's loan portfolio that occurred during the periods ended December 31, 2020 and 2019:

Total $ 49,513 $ 48,343 $ 12,901

Total Impaired Loans $ 58,614 $ 56,156 $ 12,901

December 31, 2019

Pre-Modification

Recorded Balance Post-Modification

Recorded Balance Number

Unpaid Principal

Balance Recorded

Investment Related

Impaired loans with no related allowance:

Commercial and industrial loans $ 320 $ 320 $ —

2 unchanged sentences

Construction 1,206 970 —

Commercial real estate, non-owner occupied 6,202 5,299 —

Commercial real estate, owner occupied 1,382 306 —

Residential 93 76 —

Home equity 332 332 3

Individuals' loans for household and other personal expenditures 19 19 2

Total $ 9,955 $ 7,352 $ —

December 31, 2019

Pre-Modification

Recorded Balance Post-Modification

Recorded Balance Number

Impaired loans with related allowance:

Agricultural land, production and other loans to farmers 588 585 107

Real estate loans:

Commercial real estate, owner occupied 2,060 1,324 124

Residential 2,070 2,044 383

Home equity 417 400 75

Individuals' loans for household and other personal expenditures 4 4 —

Total $ 5,139 $ 4,357 $ 689

Total Impaired Loans $ 15,094 $ 11,709 $ 689

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

The following tables summarize the recorded investment of troubled debt restructures as of December 31, 2020 and 2019, by modification type, that occurred during the years indicated:

December 31, 2020

Modification Rate

Modification Combination Total

Twelve Months Ended December 31, 2020

Recorded Investment Interest

Income Recognized

Impaired loans with no related allowance:

Commercial and industrial loans $ 991 $ —

Real estate Loans:

Construction — — 120 120

Commercial real estate, non-owner occupied 4,850 145

Commercial real estate, owner occupied 1,429 —

Residential 840 3

Home equity 236 93 — 329

Individuals' loans for household and other personal expenditures 3 —

Total $ 8,113 $ 148

December 31, 2019

Modification Rate

Modification Combination Total

Impaired loans with related allowance:

Commercial and industrial loans $ 267 $ —

Agricultural land, production and other loans to farmers 589 —

Real estate Loans:

Commercial real estate, non-owner occupied 44,119 —

Commercial real estate, owner occupied 1,447 —

Residential 2,108 70

1 unchanged sentence

Total $ 49,003 $ 84

Loans secured by 1- 4 family residential real estate made up 70 percent of the post-modification balances of the troubled debt restructured loans that occurred during the twelve months ending December 31, 2020.

The same classification made up 100 percent of the post-modification balance of the troubled debt restructured loans for the twelve months ending December 31, 2019.

The following tables summarize troubled debt restructures that occurred during the twelve months ended December 31, 2020 and 2019, that subsequently defaulted during the period indicated and remained in default at period end.

For purposes of this schedule, a loan is considered in default if it is 30-days or more past due.

Total Impaired Loans $ 57,116 $ 232

Twelve Months Ended December 31, 2019

Number of Loans Recorded Balance

Average Recorded Investment Interest Income Recognized

Impaired loans with no related allowance:

Commercial and industrial loans $ 320 $ —

Agricultural land, production and other loans to farmers 542 —

Real estate loans:

Construction 1,229 —

Commercial real estate, non-owner occupied 5,399 156

Commercial real estate, owner occupied 357 —

Residential 77 3

Home equity 1 93

Total $ 7,924 $ 159

Twelve Months Ended December 31, 2019

Number of Loans Recorded Balance

Impaired loans with related allowance:

Agricultural land, production and other loans to farmers 585 —

Real estate loans:

Commercial real estate, owner occupied 1,324 —

Residential 2,083 63

For potential consumer loan restructures, impairment evaluation occurs prior to modification.

Any subsequent impairment is addressed through the charge-off process or through a specific reserve.

Consumer troubled debt restructures are generally included in the general historical allowance for loan loss at the post modification balance.

Consumer non-accrual and delinquent troubled debt restructures are also considered in the calculation of the non-accrual and delinquency trend environmental allowance allocation.

Consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $ 2.8 million and $ 1.0 million at December 31, 2020 and 2019, respectively.

Commercial troubled debt restructured loans risk graded special mention, substandard, doubtful and loss are individually evaluated for impairment under ASC 310.

Any resulting specific reserves are included in the allowance for loan losses.

Commercial 30 - 89 day delinquent troubled debt restructures are included in the calculation of the delinquency trend environmental allowance allocation.

With the exception of the acquired loans excluded from the allowance for loan losses, all commercial non-impaired loans, including non-accrual and 90-days or more delinquents, are included in the ASC 450 loss estimate.

Home equity 409 12

Individuals' loans for household and other personal expenditures 4 —

Total $ 4,405 $ 75

Total Impaired Loans $ 12,329 $ 234

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A PURCHASE

Purchase Credit Impaired Loans are included in NOTE 5.

LOANS AND ALLOWANCE of these Notes to Consolidated Financial Statements.

As described in NOTE 5, purchased loans are recorded at the acquisition date fair value, which could result in a fair value discount or premium.

The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.

The outstanding balance of purchased credit impaired loans as of December 31, 2020 was $ 15.6 million which had a carrying amount of $ 9.6 million and $ 557,000 of related allowance for loan losses.

As of December 31, 2019, the outstanding balance of purchased credit impaired loans was $ 25.3 million with a carrying amount of $ 16.1 million with $ 124,000 required allowance for loan losses.

As customer cash flow expectations improve, nonaccretable yield can be reclassified to accretable yield.

The accretable amount, or income expected to be collected, and reclassifications from nonaccretable, are identified in the table below.

Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019 Twelve Months Ended December 31, 2018

Beginning balance $ 2,132 $ 2,143 $ 2,890

Additions — 576 —

Accretion ( 2,852 ) ( 2,387 ) ( 4,118 )

Reclassification from nonaccretable 1,947 1,965 3,387

Disposals ( 7 ) ( 165 ) ( 16 )

Ending balance $ 1,220 $ 2,132 $ 2,143

No loans were acquired during the period ending December 31, 2020.

The following table presents loans acquired during the period ending December 31, 2019, for which it was probable at acquisition that all contractually required payments would not be collected.

Contractually required payments receivable at acquisition date $ 6,840

Nonaccretable difference 2,733

Expected cash flows at acquisition date 4,107

Accretable difference 576

Basis in loans at acquisition date $ 3,531

Off-Balance Sheet Arrangements, Commitments And Contingencies

In the normal course of business, the Corporation has entered into off-balance sheet financial instruments which include commitments to extend credit and standby letters of credit.

Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness.

Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, and thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing for their cash flows.

Other typical lines of credit are related to home equity loans granted to customers.

Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require a fee.

Standby letters of credit are generally issued on behalf of an applicant (the Corporation’s customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary.

Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit.

The standby letter of credit would permit the beneficiary to obtain payment from the Corporation under certain prescribed circumstances.

Subsequently, the Corporation would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Corporation typically follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments.

Each customer’s creditworthiness is typically evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer.

Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and only amounts drawn upon would be reflected in the future.

Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements.

However, should the commitments be drawn upon and should the Corporation’s customers default on their resulting obligation to the Corporation, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments.

Financial instruments with off-balance sheet risk were as follows:

December 31, 2021 December 31, 2020

Amounts of commitments:

Loan commitments to extend credit $ 3,917,215 $ 3,443,514

Standby letters of credit $ 34,613 $ 29,555

The adoption of the CECL methodology for measuring credit losses, as discussed more fully in the Allowance for Credit Loss on Loans section of this Note, and in NOTE 1.

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements, increased the opening balance of our accrual for off-balance sheet commitments at adoption by $ 20.5 million.

This reserve level remains appropriate and is reported in Other Liabilities as of December 31, 2021 in the CONSOLIDATED BALANCE SHEETS.

The following table details activity in the allowance for credit losses on off-balance sheet commitments:

Twelve Months Ended December 31, 2021

Balances, January 1, 2021 $ 20,500

Provision for credit losses —

Balances, December 31, 2021 $ 20,500

PREMISES AND EQUIPMENT

7 unchanged sentences

Net $ 105,655 $ 111,062

The MBT acquisition on September 1, 2019 resulted in additions to premises and equipment of $ 21,664,000 .

Details regarding the acquisition are discussed in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

The Corporation is committed under various non-cancelable lease contracts for certain subsidiary office facilities and equipment.

5 unchanged sentences

Goodwill is recorded on the acquisition date of an entity.

During the one-year measurement period, the Corporation may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

The MBT acquisition on September, 1, 2019 resulted in

$ 98,563,000 of goodwill, which includes a measurement period adjustment of $ 719,000 recorded in the fourth quarter of 2019.

Details regarding the MBT acquisition are discussed in NOTE 2.

The Hoosier acquisition on April, 1, 2021 resulted in $ 1,467,000 of goodwill.

Details regarding the Hoosier acquisition are discussed in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

There have been no changes in goodwill since December 31, 2019, resulting in a goodwill balance of $ 543,918,000 as of December 31, 2020.

The Corporation reviews goodwill annually for impairment, or more frequently if events or circumstances indicate the carrying value might be impaired.

The impairment analysis compares the estimated fair value of the Corporation (the reporting unit) with the Corporation's net book value.

On January 1, 2020, the Corporation adopted ASU No.

2017-04, Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill .

Subsequent to the October 1, 2019 impairment test and adoption of ASU 2017-04, the Corporation experienced a decline in market capitalization as a result of a decline in the share price of the Corporation's common stock.

At March 31, 2020, June 30, 2020 and September 30, 2020, the Corporation assessed the economic impact and market conditions from the COVID-19 pandemic.

Additionally, the Corporation assessed the general uncertainty as to the full extent of the COVID-19 pandemic and its effect on economic recovery and concluded goodwill was not impaired in either period.

As of October 1, 2020, the Corporation performed its annual goodwill impairment test which included various valuation considerations including comparable peer data, precedent transaction comparables, discounted cash flow analysis, overall financial performance, share price of the Corporation's common stock and other factors.

The testing for both periods resulted in a conclusion that it was not more likely than not that the fair value of the Corporation had declined below its carrying value and no impairment loss was recorded in 2020.

In December 2020, the Corporation's stock price increased to a value higher than its carrying value and has remained at these levels.

The Corporation considers this further support the decline in stock value was considered temporary and not an indication goodwill was impaired.

Goodwill assessments are highly sensitive to economic projections and the related assumptions used by management.

In the event of a prolonged economic downturn or further deterioration in the economic outlook, continued assessments of our goodwill balance will likely be required in future periods.

The Corporation also conducted its annual goodwill impairment testing in 2019.

In the valuation, the fair value exceeded the Corporation's carrying value;

As of October 1, 2021, the Corporation performed its annual goodwill impairment testing and in the valuation, the fair value exceeded the Corporation's carrying value;

therefore, it was concluded goodwill was not impaired.

The testing for 2020 resulted in a conclusion that it was not more likely than not that the fair value of the Corporation had declined below its carrying value and no impairment loss was recorded in 2020.

For additional details related to impairment testing, see the "GOODWILL" 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.

Balance, January 1 $ 543,918 $ 543,918

Goodwill acquired 1,467 —

Measurement period adjustment $ 719

Balance, December 31 $ 545,385 $ 543,918

1 unchanged sentence

Core deposit intangibles and other intangibles are recorded on the acquisition date of an entity.

During the one-year measurement period, the Corporation may record subsequent adjustments to these intangibles for provisional amounts recorded at the acquisition date.

The MBT acquisition on September 1, 2019 resulted in a core deposit intangible of $ 16,527,000 .

Details regarding the MBT acquisition are discussed in NOTE 2.

ACQUISITION of these Notes to Consolidated Financial Statements.

The Hoosier acquisition on April 1, 2021 resulted in a customer relationship intangible of $ 2,247,000 .

Details regarding the Hoosier acquisition are discussed in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

The carrying basis and accumulated amortization of recognized core deposit and other intangibles are noted below.

Gross carrying amount $ 102,396 $ 102,396

Core deposit intangible acquired — 16,527

Other intangibles acquired 2,247 —

Accumulated amortization ( 79,168 ) ( 73,421 )

1 unchanged sentence

The core deposit intangibles and other intangibles are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of two to ten years .

Amortization expense for the years ended December 31, 2020, 2019 and 2018, was $ 5,987,000 , $ 5,994,000 and $ 6,719,000 , respectively.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Amortization expense for the years ended December 31, 2021, 2020 and 2019, was $ 5.7 million, $ 6.0 million and $ 6.0 million, respectively.

Estimated future amortization expense is summarized as follows:

1 unchanged sentence

After 2026 3,716

The Corporation adopted ASU No.

2016-02 - Leases (Topic 842) , as amended, as of January 1, 2019 for certain retail branches, office space, land and equipment.

The Corporation elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Corporation to carry forward the historical lease classification.

Operating leases are included in the operating lease right-of use ("ROU") asset, which is included in other assets and the lease liability is included in other liabilities in our balance sheets.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The Corporation enters into leases for certain retail branches, office space, land and equipment.

Operating leases are included in other assets and the lease liability is included in other liabilities in our balance sheets.

The Corporation does not have any finance leases.

ROU assets represent the Corporation's right to use an underlying asset for the lease term and lease liabilities represent the Corporation's obligation to make lease payments arising from the lease.

Right-of-use (ROU) assets represent the Corporation's right to use an underlying asset for the lease term and lease liabilities represent the Corporation's obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

1 unchanged sentence

The Corporation's incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors.

Lease terms may include options to extend or terminate the lease.

The exercise of such lease renewal options is at the Corporation's sole discretion and is not included in the present value of lease obligations unless it is reasonably certain that the option will be exercised.

The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

The Corporation's leases are generally for periods of five to twenty years with various renewal options.

The exercise of such lease renewal options is not included in the present value of lease obligations unless it is reasonably certain that the option will be exercised.

The Corporation has lease agreements which contain both lease and non-lease components such as common area maintenance charges, real estate taxes, and insurance.

Non-lease components are not included in the measurement of the lease liability and are recognized in expense when incurred.

The Corporation has elected not to recognize short-term leases, with original lease terms of twelve months or less, on the Corporation's balance sheet.

Certain of the Corporation's lease agreements include rental payments adjusted periodically for inflation.

1 unchanged sentence

Supplemental balance sheet information related to leases is presented in the table below as of December 31, 2021 and 2020:

December 31, 2020 December 31, 2019

Operating lease assets $ 17,818 $ 18,247

6 unchanged sentences

Operating leases 3.1 % 3.3 %

The table below presents the components of lease expense for the period indicated.

Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019

The table below presents the components of lease expense for the years ended December 31, 2021, 2020, and 2019:

2021 2020 2019

Operating lease cost $ 3,710 $ 3,724 $ 3,617

3 unchanged sentences

Total lease cost $ 5,002 $ 4,770 $ 4,756

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Supplemental cash flow information related to leases is presented in the tables below.

4 unchanged sentences

Present value of lease liabilities $ 19,619

Other Information Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019

Other Information Twelve Months Ended December 31, 2021 Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019

Cash paid for amounts included in the measurement of lease liabilities

1 unchanged sentence

ROU assets obtained in exchange for new operating lease liabilities $ 2,700 $ 1,601 $ 23,529

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The composition of the deposit portfolio is included in the table below for the years indicated:

7 unchanged sentences

At December 31, 2021 and 2020, deposits exceeding the FDIC's Standard Maximum Deposit Insurance Amount of $250,000 were $ 7.6 billion and $ 6.4 billion, respectively.

The Corporation experienced increases from December 31, 2019 in demand and savings accounts of $ 1.6 billion and $ 765.5 million, respectively.

The Corporation experienced increases from December 31, 2020 in demand and savings accounts of $ 883.0 million and $ 673.1 million, respectively.

A portion of the increase is due to PPP loans that have remained on deposit, in addition to consumer Economic Impact Payments from the IRS that have also remained on deposit.

5 unchanged sentences

After 2026 1,262

The following table summarizes the Corporation's borrowings as of December 31, 2021 and 2020:

December 31, 2021 December 31, 2020

Securities sold under repurchase agreements $ 181,577 $ 177,102

Federal Home Loan Bank advances 334,055 389,430

Subordinated debentures and term loans 118,618 118,380

Total Borrowings $ 634,250 $ 684,912

Securities sold under repurchase agreements consist of obligations of the Bank to other parties and are secured by U.S.

Government-Sponsored Enterprise obligations.

The maximum amount of outstanding agreements at any month-end during 2021 and 2020 totaled $ 199.1 million and $ 197.9 million, respectively, and the average of such agreements totaled $ 173.8 million and $ 180.7 million during 2021 and 2020, respectively.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Transfers Accounted For As Secured Borrowings

4 unchanged sentences

Government-sponsored mortgage-backed securities $ 181,577 $ — $ — $ — $ 181,577

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

December 31, 2020

2 unchanged sentences

Government-sponsored mortgage-backed securities $ 175,449 $ — $ 1,653 $ — $ 177,102

The following table summarizes the Corporation's borrowings as of December 31, 2020 and 2019:

December 31, 2020 December 31, 2019

Federal funds purchased $ — $ 55,000

Securities sold under repurchase agreements 177,102 187,946

Federal Home Loan Bank advances 389,430 351,072

Subordinated debentures and term loans 118,380 138,685

Total Borrowings $ 684,912 $ 732,703

Securities sold under repurchase agreements consist of obligations of the Bank to other parties and are secured by U.S.

Government-Sponsored Enterprise obligations.

The maximum amount of outstanding agreements at any month-end during 2020 and 2019 totaled $ 197.9 million and $ 191.6 million, respectively, and the average of such agreements totaled $ 180.7 million and $ 136.3 million during 2020 and 2019, respectively.

Contractual maturities of borrowings as of December 31, 2021, are as follows:

Maturities in Years Ending December 31:

Federal Funds Purchased Securities Sold

Securities Sold

Under Repurchase Agreements Federal Home

5 unchanged sentences

2025 — 25,097 —

2025 — — 25,097 —

After 2026 — 108,570 122,012

10 unchanged sentences

On August 10, 2015, the Corporation completed the cancellation of $ 5 million of subordinated debentures at a gain of $ 1.3 million.

The outstanding balance as of December 31, 2019 was $ 51.7 million.

Interest was fixed at 6.495 percent for the period from the date of issuance through September 15, 2012;

7 unchanged sentences

The Corporation holds all of the remaining outstanding common securities of FMC Trust II.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

• Ameriana Capital Trust I.

6 unchanged sentences

The Corporation holds all of the outstanding common securities of Ameriana Capital Trust I.

• Grabill Capital Trust I ("Grabill Trust").

On July 14, 2017 the Corporation acquired Grabill Trust in conjunction with its acquisition of Independent Alliance Banks, Inc.

The subordinated debentures of Grabill Trust were entered into in June 2004 for $ 10.3 million and had a maturity of July 23, 2034.

The interest rate was equal to the three-month LIBOR plus 2.60 percent, reset quarterly.

Interest was payable in January, April, July and October of each year.

IAB could not redeem the debenture prior to July 2009, and redemption was subject to the prior approval of the Board of Governors of the Federal Reserve System, as required by law or regulation.

On April 23, 2020, the Corporation redeemed $ 10.0 million of its subordinated debentures, with an interest rate of 4.41 percent, all of which were held by Grabill Trust.

As a result, Grabill Trust used the proceeds from such complete redemption to concurrently redeem all of its capital securities at an aggregate principal redemption price of $ 10.0 million.

Subsequently, Grabill Trust was dissolved.

The outstanding balance and interest rate at December 31, 2019 were $ 10.3 million and 4.53 percent, respectively.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

• On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $ 70 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $ 5 million (the "Senior Debt") and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due 2028 in the aggregate principal amount of $ 65 million (the "Subordinated Debt").

22 unchanged sentences

Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

As of December 31, 2020, the Corporation had four interest rate swaps with a notional amount of $ 60.0 million.

As of December 31, 2019, the Corporation had four interest rate swaps with a notional amount of $ 46.0 million.

A $ 10.0 million interest rate swap used to hedge the variable cash outflows associated with a Federal Home Loan Bank advance matured in the third quarter of 2020.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

As of December 31, 2021 and December 31, 2020, the Corporation had four interest rate swaps with a notional amount of $ 60.0 million that were designated as cash flow hedges.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

5 unchanged sentences

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Corporation’s variable-rate liabilities.

During the next twelve months, the Corporation expects to reclassify $ 1.0 million from accumulated other comprehensive income to interest expense.

During the next twelve months, the Corporation expects to reclassify $ 724,000 from accumulated other comprehensive income to interest expense.

Non-designated Hedges

4 unchanged sentences

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

The notional amount of customer-facing swaps was approximately $ 985.0 million and $ 692.3 million as of December 31, 2020 and December 31, 2019, respectively.

The notional amount of customer-facing swaps was approximately $ 1.0 billion and $ 985.0 million as of December 31, 2021 and December 31, 2020, respectively.

This amount is offset with third party counterparties, as described above.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Fair Values of Derivative Instruments on the Balance Sheet

19 unchanged sentences

Instruments under

FASB ASC 815-10 Location of Loss Reclassified from Accumulated Other Comprehensive Income (Effective Portion) Amount of Loss Reclassified from Other Comprehensive Income into Income (Effective Portion)

FASB ASC 815-10 Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Effective Portion) Amount of Gain (Loss) Reclassified from Other Comprehensive Income into Income (Effective Portion)

2021 2020 2019

Interest rate contracts Interest expense $ ( 1,044 ) $ ( 906 ) $ ( 334 )

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The Corporation’s exposure to credit risk occurs because of nonperformance by its counterparties.

12 unchanged sentences

it does not expand the use of fair value in any new circumstances.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants.

21 unchanged sentences

Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet.

Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be recorded at the lower of cost or fair value.

The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the

2 unchanged sentences

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.

The Corporation

currently has no securities classified within Level 1 of the hierarchy.

Where significant observable inputs, other than Level 1 quoted prices, are

available, securities are classified within Level 2 of the valuation hierarchy.

Level 1 securities include U.S.

Treasury securities.

Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy.

Level 2 securities include U.S.

Government-sponsored agency and mortgage-backed securities, state and municipal securities and corporate obligations securities.

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, government-sponsored mortgage-backed securities and corporate obligations securities.

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S.

Government-sponsored mortgage-backed securities and corporate obligations securities.

Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

5 unchanged sentences

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820-10 fair value hierarchy in which the fair value measurements fall at December 31, 2021 and 2020.

6 unchanged sentences

Government-sponsored agency securities $ 95,136 $ — $ 95,136 $ —

Treasury 999 999 — —

State and municipal 1,576,532 — 1,571,076 5,456

15 unchanged sentences

Interest rate swap liability 76,353 — 76,353 —

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

LEVEL 3 RECONCILIATION

5 unchanged sentences

Included in other comprehensive income 227 16

Purchases, issuances, and settlements 3,241 —

Principal payments ( 456 ) ( 430 )

3 unchanged sentences

There were no transfers in or out of Level 3 during 2021 or 2020.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

NONRECURRING MEASUREMENTS

5 unchanged sentences

December 31, 2021 Fair Value (Level 1) (Level 2) (Level 3)

Impaired Loans (collateral dependent) $ 37,250 — — $ 37,250

Collateral dependent loans $ 24,491 — — $ 24,491

Other real estate owned $ 96 — — $ 96

4 unchanged sentences

December 31, 2020 Fair Value (Level 1) (Level 2) (Level 3)

Impaired Loans (collateral dependent) $ 5,653 — — $ 5,653

Other real estate owned $ 194 — — $ 194

Impaired Loans (collateral dependent)

Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment.

Allowable methods for determining the amount of impairment include estimating fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized.

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

A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses.

Loan losses are charged against the allowance when management believes the uncollectability of the loan is confirmed.

During 2019 and 2020, certain impaired loans were partially charged off or re-evaluated.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Collateral dependent loans $ 37,250 — — $ 37,250

Other real estate owned $ 544 — — $ 544

The fair value for impaired loans and other real estate owned is measured based on the value of the collateral securing those loans or real estate and is determined using several methods.

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

Collateral Dependent Loans and Other Real Estate Owned

Determining fair value for collateral dependent loans and other real estate requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value.

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

The appraisers typically 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.

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

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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

UNOBSERVABLE (LEVEL 3) INPUTS

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Weighted-average coupon 3 month LIBOR

Impaired loans (collateral dependent) $ 37,250 Collateral based measurements Discount to reflect current market conditions and ultimate collectability

Collateral dependent loans $ 24,491 Collateral based measurements Discount to reflect current market conditions and ultimate collectability

Weighted-average discount by loan balance 0 % - 10 % 5.5 %

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Weighted-average coupon 3 month LIBOR

Impaired loans (collateral dependent) $ 5,653 Collateral based measurements Discount to reflect current market conditions and ultimate collectability

Collateral dependent loans $ 37,250 Collateral based measurements Discount to reflect current market conditions and ultimate collectability

Weighted-average discount by loan balance 0 % - 10 % 6.0 %

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Weighted-average discount of other real estate owned balance 0 % - 30 % 26.2 %

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

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changes in either of those inputs will not affect the other input.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

FAIR VALUE OF FINANCIAL INSTRUMENTS

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Deposits $ 12,732,577 $ 12,038,992 $ 690,089 $ —

Federal funds purchased — — — —

Securities sold under repurchase agreements 181,577 — 181,572 —

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Deposits $ 11,361,610 $ 10,482,865 $ 878,257 $ —

Federal funds purchased 55,000 — 55,000 —

Securities sold under repurchase agreements 177,102 — 177,097 —

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(table dollar amounts in thousands, except share data)

COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements.

The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments.

The Bank uses the same credit policies in making such commitments as they do for instruments that are included in the consolidated balance sheets.

Financial instruments, whose contract amount represents credit risk as of December 31, were as follows:

Amounts of commitments:

Loan commitments to extend credit $ 3,443,514 $ 3,005,064

Standby letters of credit $ 29,555 $ 30,200

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Bank evaluates each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation.

Collateral held varies, but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.

The Corporation and subsidiaries are also subject to claims and lawsuits, which arise primarily in the ordinary course of business.

It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Corporation.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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Balance at December 31, 2020 $ 87,988 $ ( 1,594 ) $ ( 11,558 ) $ 74,836

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019:

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Realized securities gains reclassified into income $ 5,674 $ 11,895 $ 4,415 Other income - net realized gains on sales of available for sale securities

Related income tax expense ( 2,498 ) ( 927 ) ( 896 ) Income tax expense

Related income tax benefit (expense) ( 1,192 ) ( 2,498 ) ( 927 ) Income tax expense

$ 4,482 $ 9,397 $ 3,488

1 unchanged sentence

Interest rate contracts $ ( 1,044 ) $ ( 906 ) $ ( 334 ) Interest expense - subordinated debentures and term loans

Related income tax benefit 190 70 99 Income tax expense

Related income tax benefit (expense) 219 190 70 Income tax expense

$ ( 825 ) $ ( 716 ) $ ( 264 )

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(1) For additional detail related to unrealized gains (losses) on available for sale securities and related amounts reclassified from accumulated other comprehensive income see NOTE 4.

INVESTMENT SECURITIES.

INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements.

(2) For additional detail related to unrealized gains (losses) on cash flow hedges and related amounts reclassified from accumulated other comprehensive income see NOTE 12.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

REGULATORY CAPITAL AND DIVIDENDS

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There is no threshold for well capitalized status for bank holding companies.

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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios.

At December 31, 2020, risk-weighted assets included $ 667.1 million of PPP loans at a zero risk weight.

Additionally, in order to facilitate use of the PPPL Facility, the agencies have 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.

At December 31, 2021 and 2020, risk-weighted assets included $ 106.6 million and $ 667.1 million, respectively, of PPP loans at a zero risk weight.

Management believes that all of the above capital ratios are meaningful measurements for evaluating the safety and soundness of the

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For a reconciliation of GAAP measures to regulatory measures (non-GAAP), see additional details within the “Capital” 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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The Corporation's principal source of funds for dividend payments to shareholders is dividends received from the Bank.

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As of December 31, 2021, the amount available for dividends from the Corporation’s subsidiaries (both banking and non-banking), without prior regulatory approval or notice, was $ 194,434,000 .

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Additionally, the Corporation has a Dividend Reinvestment and Stock Purchase Plan, enabling stockholders to elect to have their cash dividends on all shares automatically reinvested in additional shares of the Corporation’s common stock.

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Stockholders' Equity

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

Pursuant to the merger agreement, each MBT shareholder received 0.275 shares of the Corporation's common stock for each outstanding share of MBT common stock held.

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

Details regarding the MBT acquisition are discussed in NOTE 2.

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

The Corporation adopted the current expected credit losses ("CECL") model for calculating the allowance for credit losses on January 1, 2021.

CECL replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent

losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be

incurred over the life of the portfolio.

As of the adoption and day one measurement date of January 1, 2021, the Corporation recorded a one-time

cumulative-effect adjustment to retained earnings, net of income taxes, of $ 68.0 million.

See additional details of the Corporation's CECL

adoption in NOTE 1.

NATURE OF OPERATIONS AND SUMMARY OR SIGNIFICANT ACCOUNTING POLICIES and NOTE 5.

LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements.

Stock Repurchase Program

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During the first quarter of 2020, the Corporation repurchased 1,634,437 of its common shares for $ 55.9 million at an average price of $ 34.21 , which resulted in the aggregate investment in share repurchases to equal $ 75.0 million, the maximum allowable under the plan.

As such, the September 2019 program terminated upon its own terms following the repurchases.

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;

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On a share basis, the amount of common stock subject to the repurchase program represents approximately 6 percent of the Corporation's outstanding shares.

Details regarding the 2021 stock repurchase program are discussed in NOTE 27.

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

During 2021, the Corporation repurchased 646,102 of its common shares for $ 25.4 million at an

average price of $ 39.38 .

LOAN SERVICING

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Fannie Mae 60,839 69,072 82,922

Equity Bank 60,107 — —

Federal Home Loan Bank 32,558 51,479 76,815

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The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited.

For non-employee directors, the RSA's vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited.

The RSAs for employees and non-employee directors retired from the Corporation are either immediately vested at retirement, disability or death, or continue to vest after retirement, disability or death, depending on the plan under which the shares were granted.

The Corporation’s 2009 ESPP and 2019 ESPP provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions.

For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited.

The RSAs for employees and non-employee directors are either immediately vested at retirement, disability or death, or, continue to vest after retirement, disability or death, depending on the plan under which the shares were granted.

The Corporation’s 2019 ESPP provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions.

The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period.

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Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000.

The Corporation's 2009 ESPP expired on June 30, 2019.

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings.

Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award.

To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool.

Share-based compensation for the years ended December 31, 2020, 2019, and 2018 was $ 4,600,000 , $ 4,115,000 , and $ 3,592,000 , respectively, and has been recognized as a component of salaries and benefits expense in the accompanying CONSOLIDATED STATEMENTS OF INCOME.

To complete the exercise of vested stock options, RSAs and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool.

Share-based compensation for the years ended December 31, 2021, 2020, and 2019 was $ 4.8 million, $ 4.6 million, and $ 4.1 million, respectively, and has been recognized as a component of salaries and benefits expense in the accompanying CONSOLIDATED STATEMENTS OF INCOME.

Share-based compensation expense recognized in the CONSOLIDATED STATEMENTS OF INCOME is based on awards ultimately expected to vest and is reduced for estimated forfeitures.

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The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards.

In 2020, the Corporation had RSAs vest primarily at a stock price that was lower than the grant date stock price, which resulted in the recognition of income tax expense at vesting of $ 394,000 .

For the years ended 2019 and 2018, RSAs vested at a stock price higher than the grant date stock price resulting in recognition of income tax benefit at vesting of $ 363,000 and $ 448,000 , respectively.

In 2021 and 2020, the Corporation had RSAs vest primarily at a stock price that was lower than the grant date stock price, which resulted in the recognition of income tax expense at vesting of $ 112,000 and $ 394,000 , respectively.

For the year ended 2019, RSAs vested at a stock price higher than the grant date stock price resulting in recognition of income tax benefit at vesting of $ 363,000 .

Years Ended December 31,

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Total share-based compensation expense, net of income taxes $ 3,815 $ 4,019 $ 2,839

As of December 31, 2020, unrecognized compensation expense related to RSAs was $ 6,721,000 and is expected to be recognized over weighted-average period of 1.73 years.

As of December 31, 2021, unrecognized compensation expense related to RSAs was $ 8.4 million and is expected to be recognized over weighted-average period of 1.90 years.

The Corporation did no t have any unrecognized compensation expense related to stock options as of December 31, 2021.

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Benefits paid ( 5,353 ) ( 5,300 )

Net transfer in from MBT acquisition — 1,701

Benefit obligation at end of year $ 74,274 $ 80,786

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Liabilities $ 4,436 $ 4,955

As of December 31, 2020, the funded status of the plans decreased $ 625,000 and the accumulated other comprehensive loss, net of tax, increased $ 1.7 million from December 31, 2019.

The net impact of the primary contributing factors to these changes were the decreased discount rate of 90 basis points from 3.2 percent to 2.3 percent, which increased the liability by $ 6.8 million.

This was offset by a $ 700,000 reduction in the liability as the mortality projection improvement scale was updated from MP-2019 to MP-2020.

As of December 31, 2021, the funded status of the plans increased $ 12.6 million and the accumulated other comprehensive loss, net of tax, decreased $ 7.6 million from December 31, 2020.

The net impact of the primary contributing factors to these changes were the increased discount rate of 40 basis points from 2.3 percent to 2.7 percent, which decreased the liability by $ 3.0 million.

This was offset by a $ 300,000 increase in the liability due to the mortality projection improvement scale update from MP-2020 to MP-2021.

The plan's assets earned a return of $ 10.8 million, which was $ 6.5 million more than the expected return.

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federal, state and local income tax examinations by tax authorities for tax years before 2018.

Additional details regarding the Corporation's policies related to income taxes are discussed in NOTE 1.

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements.

NET INCOME PER SHARE

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(table dollar amounts in thousands, except share data)

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth certain quarterly results for the years ended December 31, 2020 and 2019:

First Second Third Fourth First Second Third Fourth

Interest income $ 119,807 $ 109,252 $ 106,225 $ 113,224 $ 108,813 $ 112,639 $ 118,132 $ 125,821

Interest expense 25,930 16,234 13,304 10,913 23,947 27,361 29,200 28,237

Net interest income 93,877 93,018 92,921 102,311 84,866 85,278 88,932 97,584

Provision for loan losses 19,752 21,895 12,544 4,482 1,200 500 600 500

Net interest income after provision for loan losses 74,125 71,123 80,377 97,829 83,666 84,778 88,332 97,084

Non-interest income 29,799 26,481 26,163 27,483 18,713 21,614 22,116 24,245

Non-interest expense 66,171 59,989 64,709 72,536 56,621 57,587 67,354 65,201

Income before income tax expense 37,753 37,615 41,831 52,776 45,758 48,805 43,094 56,128

Income tax expense 3,490 4,623 5,621 7,641 6,941 7,749 6,337 8,298

Net income available to common stockholders $ 34,263 $ 32,992 $ 36,210 $ 45,135 $ 38,817 $ 41,056 $ 36,757 $ 47,830

Basic EPS $ 0.63 $ 0.62 $ 0.67 $ 0.83 $ 0.79 $ 0.83 $ 0.71 $ 0.87

Diluted EPS $ 0.62 $ 0.62 $ 0.67 $ 0.83 $ 0.78 $ 0.83 $ 0.71 $ 0.87

Average Shares Outstanding:

Basic 54,732,073 53,762,913 53,843,508 53,899,501 49,369,024 49,432,167 51,433,227 55,348,176

Diluted 54,917,760 53,942,567 53,970,598 54,049,574 49,540,844 49,549,887 51,569,557 55,519,953

CONDENSED FINANCIAL INFORMATION (parent company only)

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December 31, 2021 December 31, 2020

Cash $ 59,848 $ 127,723

Cash and cash equivalents $ 127,501 $ 59,848

Investment in subsidiaries 1,900,787 1,930,852

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Total liabilities and stockholders' equity $ 2,040,009 $ 2,004,417

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Condensed Statements of Income and Comprehensive Income

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Comprehensive income $ 185,808 $ 195,562 $ 213,756

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Condensed Statements of Cash Flows

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Net income $ 205,531 $ 148,600 $ 164,460

Adjustments to Reconcile Net Income to Net Cash:

Adjustments to reconcile net income to net cash provided by operating activities

Share-based compensation 1,563 1,502 1,339

Distributions in excess of (equity in undistributed) income of subsidiaries ( 55,162 ) ( 89,465 ) ( 51,368 )

Net Change in:

Other assets 4,038 ( 8,944 ) 584

Other liabilities ( 1,521 ) 4,611 274

Other adjustments ( 1,173 ) 1,537 ( 6,013 )

Investment in subsidiaries - operating activities 885 235 ( 268 )

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Net cash received in acquisition — — 78

Other — — 2,189

Net cash provided by investing activities — — 78

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Stock options exercised 198 115 144

Restricted shares withheld for taxes ( 980 ) ( 1,680 ) ( 1,902 )

Repurchases of common stock ( 25,444 ) ( 55,912 ) ( 19,041 )

9 unchanged sentences

(table dollar amounts in thousands, except share data)

SUBSEQUENT EVENTS

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 $ 100,000,000 .

On a share basis, the amount of common stock subject to the repurchase program represents approximately 6 percent of the Corporation's outstanding shares.

The stock repurchases may, at the discretion of management, be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions or pursuant to a Rule 10b5-1 plan all as effected in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

The Corporation is not obligated to purchase any shares under the program, and the program may be discontinued at any time.

The actual timing, number and share price of shares purchased under the repurchase program will be determined by the Corporation at its discretion and will depend upon such factors as the

market price of the stock, general market and economic conditions and applicable legal requirements.

ITEM 9., ITEM 9A.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

1 unchanged sentence

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 8. Financial Statements and Supplementary Data