FIRST MERCHANTS CORP 10-K

ITEM 1. BUSINESS GENERAL The Corporation is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s Common Stock is traded on the Nasdaq Global Select Market under the symbol FRME. The Corporation has one full-service bank charter, First Merchants Bank, which opened for business in Muncie, Indiana, in March 1893. The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank includes 109 banking locations in Indiana, Ohio, Michigan and Illinois. In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking. Through the Bank, the Corporation offers a broad range of financial services, including accepting time, savings and demand deposits; making consumer, commercial, agri-business and real estate mortgage loans; providing personal and corporate trust services; offering full-service brokerage and private wealth management; and providing letters of credit, repurchase agreements and other corporate services. All inter-company transactions are eliminated during the preparation of consolidated financial statements. As of December 31, 2021, the Corporation had consolidated assets of $15.5 billion, consolidated deposits of $12.7 billion and stockholders’ equity of $1.9 billion. HUMAN CAPITAL As of December 31, 2021, the Corporation and its subsidiaries had 1,821 full-time equivalent employees. Our stated mission to be the most responsive, knowledgeable, and high performing bank requires a dedicated and talented team of colleagues to succeed. Our employees prepare, every day, to deliver a customer and colleague experience that grows the Corporation. We seek to attract, retain and develop a team of diverse, committed colleagues who are capable of delivering a whole-bank delivery approach. And, we promote a work culture of development, growth, internal promotion and career pathing. In late 2021, we adopted a new Our Team statement: We are a collection of dynamic colleagues with diverse experiences and perspectives who share a passion for positively impacting lives. We are genuinely committed to attracting and engaging teammates of diverse backgrounds. We believe in the power of inclusion and belonging. Best Places to Work / Employer of Choice : FMB will continue to participate in the Best Places to Work surveys in the four states we operate. We constantly strive to be an employer of choice. Onboarding, training, talent assessment and development, career conversations, development planning and a culture of pride in high performance help us achieve employer of choice status. Trust, respect, integrity and commitment are at the core of our success. Employee Engagement : Our biennial Employee Engagement Survey is conducted by a third-party vendor for confidentiality and anonymity and for increased candid feedback. Results show consistently strong employee engagement with over 87 percent of our employees considered to be “highly engaged.” Our response rates are high (83 percent) with the survey results providing valuable feedback that helps managers promote work satisfaction and high contribution. Our next scheduled survey is scheduled for Summer, 2022. Education Assistance : First Merchants offers an education assistance program that supports full- and part-time colleagues as they seek degree programs that will help them advance their careers. From 2018-2021, 181 employees participated in the Education Assistance program with a total investment of approximately $776,000. Corporate Training : Leveraging a blend of custom designed / internally built training programs and external development resources, First Merchants employees are trained and prepared to perform confidently. Role-based training focuses on topics such as privacy, fair banking and many other industry specific topics and regulations. Our training completion rates are very high related to required development (99 percent completion for required courses) and our Learning Management System (LMS) archives all development in the Corporation. Diversity, Equity and Inclusion : We believe in attracting, retaining, and promoting a diverse workforce. Diversity, Equity and Inclusion ("DEI") initiatives are aimed at promoting the career growth and engagement of all First Merchants employees. We continue that work through our highest profile employee resource groups ("ERGs"), First Women Connections and People of Color ERGs, by promoting the development and career growth of those employees. Additionally, we have created a DEI Employee Community, which hosts bi-weekly calls that are attended by over 100 employees. Our DEI Steering Committee provides guidance on all DEI efforts. Talent Assessment, Succession Planning and Career Path : Nearly 1,000 of our employees participated in our annual Calibration Process (9 Box Talent Assessment) with the goal of identifying specific development action plans to help retain employees with high potential and performance, increase job satisfaction and improve productivity. Talent calibration supports succession and career planning for the Corporation. 5 Table of Contents PART I: ITEM 1. BUSINESS AVAILABLE INFORMATION The Corporation makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available on its website at https://www.firstmerchants.com without charge, as soon as reasonably practicable, after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Corporation. Those filings are accessible on the SEC’s website at http://www.sec.gov. ACQUISITION AND DIVESTITURE POLICY The Corporation anticipates that it will continue its policy of geographic expansion of its banking business through the acquisition of banks whose operations are consistent with its banking philosophy. Management routinely explores opportunities to acquire financial institutions and other financial services-related businesses and to enter into strategic alliances to expand the scope of its services and its customer base. Future acquisitions and divestitures will be driven by a disciplined financial evaluation process and will be consistent with the Corporation's strategy of community banking, client relationships and consistent quality earnings. As with previous acquisitions, the consideration paid in future acquisitions may be in the form of cash or First Merchants common stock, or a combination thereof. The amount and structure of such consideration is based on reasonable growth, synergies and economies of scale and a thorough analysis of the impact on both long- and short-term financial results. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per share may occur in connection with any future transaction. The Corporation's ability to engage in certain merger or acquisition transactions, whether or not any regulatory approval is required, will be dependent upon the Corporation's bank regulators' views at the time as to the capital levels, quality of management and the Corporation's overall condition and their assessment of a variety of other factors. Certain merger or acquisition transactions, including those involving the acquisition of a depository institution or the assumption of the deposits of any depository institution, require formal approval from various bank regulatory authorities, which will be subject to a variety of factors and considerations. On November 4, 2021, the Corporation and Level One Bancorp, Inc., a Michigan corporation (“Level One”), entered into an Agreement and Plan of Merger, pursuant to which Level One will, subject to the terms and conditions of the merger agreement, merge with and into the Corporation (the "Merger"), whereupon the separate corporate existence of Level One will cease and the Corporation will survive. Immediately following the Merger, Level One’s wholly owned subsidiary, Level One Bank, will be merged with and into the Bank, with the Bank as the surviving entity. The merger agreement provides that upon the effective date of the Merger, the common shareholders of Level One will be entitled to receive, for each outstanding share of Level One common stock, (a) a 0.7167 share of the Corporation’s common stock, in a tax-free exchange, and (b) a cash payment of $10.17. At the effective time of the merger, each share of 7.50 percent Non-Cumulative Perpetual Preferred Stock, Series B, of Level One outstanding immediately prior to such time will be converted into the right to receive one share of a newly created series of preferred stock of the Corporation having voting powers, preferences and special rights that are substantially identical to the Level One Series B preferred stock. The Federal Reserve and the FDIC have granted approvals in connection with the transaction. However, consummation of the Merger remains subject to the requisite approval of the holders of Level One common stock, the approval of the Indiana DFI, and satisfaction of certain customary closing conditions. The shareholders of Level One are considering the approval of the merger agreement on March 1, 2022, and the Indiana DFI expects to meet during March 2022 to consider the matter. The parties are diligently pursuing satisfaction of the other closing conditions and expect the closing to occur by early second quarter of 2022, subject to satisfaction of those conditions. On April 1, 2021, the Bank acquired 100 percent of Hoosier Trust Company ("Hoosier") through a merger of Hoosier with and into the Bank. The consideration paid to shareholders of Hoosier at closing was $3,225,000 in cash. Details of the Hoosier acquisition can be found in NOTE 2. ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. On September 1, 2019, the Corporation acquired 100 percent of MBT. 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. COMPETITION The Bank is located in Indiana, Ohio, Michigan and Illinois counties where other financial services companies provide similar banking services. The Bank faces substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have more financial resources. Such competitors primarily include national, regional and internet banks within the various markets in which the Bank operates, though the Bank also competes with smaller community banks that seek to offer similar service levels. The Bank also faces competition from many other types of institutions, including, without limitation savings and loans associations, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry continues to become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can operate as affiliates under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to enter and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our nonbank competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer broader range of products and services as well as better pricing for those products and services than we can. Finally, the Bank's competitors may choose to offer lower loan interest rates and pay higher deposit rates. The Bank believes that the most important criteria to their targeted clients when selecting a bank is the customer's desire to receive exceptional and personal customer service while being able to enjoy convenient access to a broad array of financial products. Additionally, when presented with a choice, the Bank believes that many of their targeted clients prefer to deal with an institution that favors local decision making as opposed to where many important decisions regarding a client's financial affairs are made outside the local community. 6 Table of Contents PART I: ITEM 1. BUSINESS REGULATION AND SUPERVISION OF FIRST MERCHANTS CORPORATION AND SUBSIDIARIES The Corporation and its subsidiaries are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Significant elements of the laws and regulations applicable to the Corporation and its subsidiaries are described below. The description is qualified in its entirety by reference to the full text of the statues, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Corporation and its subsidiaries could have a material effect on the Corporation's business, financial condition or results of operations. Bank Holding Company Regulation The Corporation is registered as a bank holding company and has elected to be a financial holding company. It is subject to the supervision of, and regulation by the Board of Governors of the Federal Reserve under the BHC Act, as amended. Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to the Bank. Thus, it is the policy of the Federal Reserve that a bank holding company should stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. Additionally, under the FDICIA, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become “undercapitalized” (as defined in the FDICIA section of this Form 10-K) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency. Under the BHC Act, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the determination that such activity constitutes a serious risk to the financial stability of any bank subsidiary. The BHC Act requires the Corporation to obtain the prior approval of the Federal Reserve before: • acquiring direct or indirect control or ownership of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company will directly or indirectly own or control more than 5 percent of the voting shares of the bank or bank holding company; • merging or consolidating with another bank holding company; or • acquiring substantially all of the assets of any bank. The BHC Act generally prohibits bank holding companies that have not become financial holding companies from (i) engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries, and (ii) acquiring or retaining direct or indirect control of any company engaged in the activities other than those activities determined by the Federal Reserve to be closely related to banking or managing or controlling banks. Capital Adequacy Guidelines for Bank Holding Companies (Basel III) The Corporation and the Bank are subject to certain risk-based capital and leverage ratio requirements under the Basel III capital rules adopted by United States banking regulators. These rules implement the Basel III international regulatory capital standards in the United States, as well as certain provisions of the Dodd-Frank Act. The Basel III rules require the Corporation and the Bank to maintain minimum ratios of common equity tier 1 capital (“CET1”), tier 1 capital, and total capital to total risk-weighted assets, and of tier 1 capital to average total assets, all of which are calculated as defined in the regulations. Basel III specifies that CET1 consists of common stock instruments (that meet the Basel III eligibility criteria), retained earnings, accumulated other comprehensive income and CET1 minority interest. Basel III also defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1, and not to the other components of capital. Tier 1 capital consists of CET1 and "Additional Tier 1 Capital" instruments meeting the specified requirements of Basel III. Under Basel III, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a capital conservation buffer of 2.50 percent above the adequately capitalized CET1, tier 1 and total capital to risk-weighted assets ratios. Specifically, Basel III requires the Corporation and the Bank to maintain: • a minimum ratio of CET1 to risk-weighted assets of a least 4.5 percent, plus the 2.5 percent capital conservation buffer effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0 percent; • a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0 percent, plus the 2.5 percent capital conservation buffer effectively resulting in a minimum Tier 1 capital ratio of 8.5 percent; • a minimum ratio of total capital (Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0 percent, plus the 2.5 percent capital conservation buffer effectively resulting in a minimum total capital ratio of 10.5 percent; and • a minimum leverage ratio of 4.0 percent, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets. Basel III also provides for a “countercyclical capital buffer” that is applicable to only certain covered institutions and is not expected to have any current applicability to the Corporation or the Bank. The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with risk-weighted capital ratios above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall. 7 Table of Contents PART I: ITEM 1. BUSINESS Basel III provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1. Under Basel III, the Corporation and the Bank made a one-time election to filter out certain AOCI components. Basel III permits banks with less than $15 billion in assets to continue to treat trust preferred securities as Tier 1 capital. This treatment is permanently grandfathered as Tier 1 capital even if the Corporation should ever exceed $15 billion in assets due to organic growth but not following certain mergers or acquisitions. As a result, while the Corporation’s total assets exceeded $15 million as of December 31, 2021, the Corporation has continued to treat its trust preferred securities as Tier 1 capital as of such date. However, under certain amendments to the “transition rules” of Basel III, if a bank holding company that held less than $15 billion of assets as of December 31, 2009 (which would include the Corporation) acquires a bank holding company with under $15 billion in assets at the time of acquisition (which would include Level One), and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization’s call report for the period in which the transaction occurred, the resulting organization must begin reflecting its trust preferred securities as Tier 2 capital at such time. As a result, following the consummation of the pending merger with Level One, the Corporation would begin reflecting all of its trust preferred securities as Tier 2 capital in the period the transaction closes. Basel III permits banks with less than $250 billion in assets to choose to continue excluding unrealized gains and losses on certain securities holdings for purposes of calculating regulatory capital. The rules limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of CET1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. Historically, the regulation and monitoring of a bank and bank holding company's liquidity has been addressed as a supervisory matter, without minimum required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, is now required by regulation. One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25 percent of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are expected to incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. However, the federal banking agencies have not proposed rules implementing the Basel III liquidity framework and have not determined to what extent they will apply to U.S. banks that are not large, internationally active banks. In April 2020, federal banking regulators modified the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to neutralize the regulatory capital effects of participating in the program by allowing PPP loans to receive a zero percent risk weight for purposes of determining risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios. At December 31, 2021, risk-weighted assets included $106.6 million of PPP loans at a zero risk weight. See “- COVID-19 and Related Legislative and Regulatory Actions” below for additional information on the PPP. The following are the Corporation’s regulatory capital ratios as of December 31, 2021: Corporation Basel III Minimum Capital Required Total risk-based capital to risk-weighted assets 13.92 % 10.50 % Tier 1 capital to risk-weighted assets 12.09 % 8.50 % Common equity tier 1 capital to risk-weighted assets 11.68 % 7.00 % Tier 1 capital to average assets 9.30 % 4.00 % Impact of CECL Implementation on Regulatory Capital As discussed in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, the FASB issued the “current expected credit losses” (“CECL”) accounting standard in 2016 to address concerns relating to the ability to record credit losses that are expected, but do not yet meet the “probable” threshold by replacing the current “incurred loss” model for recognizing credit losses with an “expected life of loan loss” model referred to as the CECL model. While the original implementation date of the CECL model was January 1, 2020, the CARES Act and a related joint statement of federal banking regulators provided financial institutions with optional temporary relief from having to comply with implementation of the CECL standard. This temporary relief was set to expire on December 31, 2020. However, the 2021 Consolidated Appropriations Act (the “2021 CAA”), which was signed into law on December 27, 2020, amended the CARES Act by extending the temporary relief from CECL compliance to, effectively, January 1, 2022. The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the 2021 CAA, the Corporation elected to adopt CECL on January 1, 2021. This allowed the Corporation to utilize the CECL standard for the entire year of 2021, while its 2019 and 2020 financial statements were prepared under the incurred loss model. 8 Table of Contents PART I: ITEM 1. BUSINESS As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced. Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available. While the 2021 CAA provided for a further extension of the mandatory adoption of CECL until January 1, 2022, the federal banking regulators elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects. Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the CARES Act. As a result, because implementation of the CECL standard was delayed by the Corporation until January 1, 2021, it began phasing in the cumulative effect of the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition period that began on January 1, 2021. Under that phase-in schedule, the cumulative effect of the adoption will be fully reflected in regulatory capital on January 1, 2024. Bank Regulation The Bank is subject to the primary regulatory oversight, supervision and examination of the FDIC and the Indiana DFI. These agencies have the authority to issue cease-and-desist orders if they determine that activities of the Bank regularly represent an unsafe and unsound banking practice or a violation of law. Federal law extensively regulates various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things, to make deposited funds available within specified time periods. The Consumer Financial Protection Bureau (“CFPB”), an independent federal agency created under the Dodd-Frank Act, was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, primarily with authority over banks and their affiliates with assets of more than $10 billion. The quarter ended December 31, 2019 was the fourth consecutive quarter that the Bank reported assets exceeding $10 billion. As a result, effective as of the beginning of the second quarter of 2020, the Bank and its affiliates became subject to CFPB supervisory and enforcement authority. See “- Dodd-Frank Wall Street Reform and Consumer Protection Act” and “- Consumer Financial Protection” below for additional information. Bank Capital Requirements Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies including, in the case of both the Bank and the Corporation, the Basel III requirements discussed above under “- Capital Adequacy Guidelines for Bank Holding Companies (Basel III)” and, in the case of the Bank, the “prompt corrective action” requirements discussed below under “- FDIC Improvement Act of 1991 (FDICIA).” Under the regulations, a capital category is assigned to the regulated entity, which is largely determined by four ratios that are calculated according to the applicable regulations: total risk-based capital, tier 1 risk-based capital, common equity tier 1 capital, and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from “well capitalized” to “critically undercapitalized”. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total, tier 1 and common equity tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the regulations. Banks with lower capital levels are deemed to be “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized”, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is in an unsafe or unsound practice. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. FDIC Improvement Act of 1991 (FDICIA) The FDICIA requires, among other things, federal bank regulatory authorities to take “prompt corrective action” with respect to banks, which do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC has adopted regulations to implement the prompt corrective action provisions of FDICIA. The "prompt corrective action" regulations require the following for well capitalized status: • a minimum CET1 risk-based capital ratio of a least 6.5 percent; • a minimum tier 1 risk-based capital ratio of at least 8.0 percent; • a minimum total risk-based capital ratio of at least 10.0 percent; and • a minimum leverage ratio of 5.0 percent. The FDICIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. A bank’s compliance with such plan is required to be guaranteed by the bank’s parent holding company. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. “Significantly undercapitalized” banks are subject to various requirements and restrictions, including an order by the FDIC to sell sufficient voting stock to become "adequately capitalized", requirements to reduce total assets and cease receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. “Critically undercapitalized” institutions may not, beginning 60 days after becoming “critically undercapitalized,” make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any transaction outside the ordinary course of business. In addition, “critically undercapitalized” institutions are subject to appointment of a receiver or conservator. 9 Table of Contents PART I: ITEM 1. BUSINESS As of December 31, 2021, the Bank was “well capitalized” based on the “prompt corrective action” ratios described above. It should be noted that a bank’s capital category is determined solely for the purpose of applying the FDIC’s “prompt corrective action” regulations and that the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance changes. Although most of the required regulations of the Dodd-Frank Act have been promulgated and implemented (or are being implemented over time), there are additional regulations yet to be finalized by the authorized federal agencies. The changes resulting from the Dodd-Frank Act have impacted the profitability of the Corporation’s business activities, required changes to certain business practices, and imposed more stringent capital, liquidity and leverage requirements, and, when fully implemented, may further adversely affect our business. Among other things, the Dodd-Frank Act has resulted, and in the future will likely result, in: • increases to the cost of the Corporation’s operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, including higher deposit insurance premiums; • limitations on the Corporation’s ability to raise additional capital through the use of trust preferred securities, as new issuances of these securities may no longer be included as Tier 1 capital; • reduced flexibility for the Corporation to generate or originate certain revenue-producing assets based on increased regulatory capital standards; • limitations on the Corporation’s ability to expand consumer product and service offerings due to stricter consumer protection laws and regulations; and • as the Corporation's assets now exceed $10 billion, compliance with the Durbin Amendment has resulted in a material reduction of interchange fee income paid by merchants when debit cards are used as payment. The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”), which was enacted in May 2018, repealed or modified several provisions of the Dodd-Frank Act. In particular, the asset threshold at which banks are subject to annual company-run stress tests were increased from $10 billion to $250 billion under the Economic Growth Act. As a result, the Corporation and the Bank will not be subject to the Dodd-Frank Act stress testing requirements. The Corporation’s management continues to take the steps necessary to minimize the adverse impact of the Dodd-Frank Act on its business, financial condition and results of operation. Durbin Amendment Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are "reasonable and proportional" to the costs incurred by issuers for processing such transactions. Interchange fees, or "swipe" fees, are charges that merchants pay the Bank and other card-issuing banks for processing electronic payment transactions. Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. An upward adjustment of no more than 1 cent to the issuer's debit card interchange fee is allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. As the Corporation's assets exceeded $10 billion, compliance with the Durbin Amendment began July 1, 2020. For the last six months of 2020, compliance with the Durbin Amendment resulted in a material reduction of interchange fee income paid by merchants when debit cards were used as a source of payment. Volcker Rule The Volcker Rule, which was adopted under the Dodd-Frank Act, places certain limitations on the trading activity of insured depository institutions and their affiliates subject to certain exceptions. The restricted trading activity includes purchasing or selling certain types of securities or instruments in order to benefit from short-term price movements or to realize short-term profits. Exceptions to the Volcker Rule include trading in certain U.S. Government or other municipal securities and trading conducted (i) in certain capacities as a broker or other agent, or as a fiduciary on behalf of customers, (ii) to satisfy a debt previously contracted, (iii) pursuant to repurchase and securities lending agreements, and (iv) in risk-mitigating hedging activities. The Volcker Rule also prohibits banking institutions from having an ownership interest in a hedge fund or private equity fund. A banking entity that engages in proprietary trading (which excludes the exceptions discussed above) or covered fund-related activities or investments, and has total consolidated assets of more than $10 billion for two years, must implement and maintain a compliance program that meets certain minimum requirements and must also maintain certain documentation with respect to covered fund activities, in each case, as described in the Volcker Rule. While the Corporation’s total consolidated assets first exceeded $10 billion during the quarter ended March 31, 2019, the Volcker Rule has not had, and is not expected to have, a material impact on the Corporation or the Bank. 10 Table of Contents PART I: ITEM 1. BUSINESS Deposit Insurance The Bank’s deposit accounts are currently insured by the Deposit Insurance Fund of the FDIC. The insurance benefit generally covers up to a maximum of $250,000 per separately insured depositor. As an FDIC-insured bank, the Bank is subject to deposit insurance premiums and assessments to maintain the Deposit Insurance Fund. The Bank’s deposit insurance premium assessment rate depends on the asset and supervisory categories to which it is assigned. The FDIC has authority to raise or lower assessment rates on insured banks in order to achieve statutorily required reserve ratios in the Deposit Insurance Fund and to impose special additional assessments. Deposit insurance assessments are based on average consolidated total assets minus average tangible equity. Under the FDIC's risk-based assessment system, insured institutions with a least $10 billion in assets, such as the Bank, are assessed on the basis of a scoring system that combine the institution's regulatory ratings and certain financial measures. The scoring system assesses risk measures to produce two scores, a performance score and a loss severity score, that will be combined and converted to an initial assessment rate. The performance score measures an institution's financial performance and its ability to withstand stress. The loss severity score quantifies the relative magnitude of potential losses to the FDIC in the event of an institution's failure. Once the performance and loss severity scores are calculated, those scores are converted to a total score. An institution with a total score of 30 or less will pay the minimum base assessment rate, and an institution with a total score of 90 or more will pay the maximum initial base assessment rate. For total scores between 30 and 90, initial base assessment rates will rise at an increasing rate as the total score increases. The FDIC may also terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Dividend Limitations The Corporation's principal source of funds for dividend payments to shareholders is dividends received from the Bank. Banking regulations limit the maximum amount of dividends that a bank may pay without requesting prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the bank’s retained income (as defined under the regulations) for the current year plus those for the previous two years, subject to the capital requirements described above. 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. Brokered Deposits Under FDIC regulations, no FDIC-insured depository institution can accept brokered deposits unless it (i) is well capitalized, or (ii) is adequately capitalized and received a waiver from the FDIC. In addition, these regulations prohibit any depository institution that is not well capitalized from (a) paying an interest rate on deposits in excess of 75 basis points over certain prevailing market rates or (b) offering “pass through” deposit insurance on certain employee benefit plan accounts unless it provides certain notice to affected depositors. The Corporation and the Bank were well capitalized as of December 31, 2021. Consumer Financial Protection The Bank is subject to a number of federal and state consumer protection laws that govern its relationship with customers. These laws include, but are not limited to: • the Equal Credit Opportunity Act (prohibiting discrimination on the basis of race, religion or other prohibited factors in the extension of credit); • the Fair Credit Reporting Act (governing the provision of consumer information to credit reporting agencies and the use of consumer information); • the Truth-In-Lending Act (governing disclosures of credit terms to consumer borrowers); • the Truth-in-Savings Act (which requires disclosure of deposit terms to consumers); • the Electronic Funds Transfer Act (governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services); • the Fair Debt Collection Act (governing the manner in which consumer debts may be collected by collection agencies); • the Right to Financial Privacy Act (which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records); • the Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home mortgage and refinanced loans; and • the respective state-law counterparts to the above laws, as applicable, as well as state usury laws and laws regarding unfair and deceptive acts and practices. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also result in the Corporation’s failure to obtain any required bank regulatory approval for merger or acquisition transactions that it may wish to pursue or prohibition from engaging in such transactions even if approval is not required. The CFPB, an independent federal agency created under the Dodd-Frank Act, was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, primarily with authority over banks and their affiliates with assets of more than $10 billion. As stated previously, with its assets having exceeded $10 billion for four consecutive quarters, the Bank and its affiliates became subject to CFPB supervisory and enforcement authority effective as of the beginning of the second quarter of 2020. 11 Table of Contents PART I: ITEM 1. BUSINESS The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the Equal Credit Opportunity Act and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations. Community Reinvestment Act The Community Reinvestment Act of 1977 (the “CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The applicable federal regulators regularly conduct CRA examinations to assess the performance of financial institutions and assign one of four ratings to the institution’s records of meeting the credit needs of its community. These ratings are outstanding, satisfactory, needs to improve or substantial noncompliance. During its last examination, a rating of satisfactory was received by the Bank. Financial Privacy The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal banking agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Anti-Money Laundering and the USA Patriot Act A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The Bank Secrecy Act (the “BSA”) requires financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, and mandates that every bank have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA. In addition, banks are required to adopt a customer identification program as part of its BSA compliance program, and are required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA. The Bank is also required to (1) identify and verify, subject to certain exceptions, the identity of the beneficial owners of all legal entity customers at the time a new account is opened, and (2) include, in its anti-money laundering program, risk-based procedures for conducting ongoing customer due diligence, which are to include procedures that: (a) assist in understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (b) require ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Office of Foreign Assets Control Regulation The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others which are administered by the U.S. Treasury Department Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. 12 Table of Contents PART I: ITEM 1. BUSINESS COVID-19 and Related Legislative and Regulatory Actions On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of COVID-19 constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. In the two years since then, the pandemic has dramatically impacted global health and the economic environment, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, and market volatility. In response, the U.S. Congress, through the enactment of the CARES Act in March 2020, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide emergency economic relief measures including, among others, the following: Paycheck Protection Program . The CARES Act established the PPP, which is administered by the Small Business Administration (“SBA”), to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the pandemic. The Bank actively participated in assisting its customers with PPP funding during all phases of the program. The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities. Loans under the program earn interest at a fixed rate of 1 percent. As of December 31, 2021, the Corporation had $106.6 million of PPP loans outstanding compared to the December 31, 2020 balance of $667.1 million. The Corporation will continue to monitor legislative, regulatory, and supervisory developments related to the PPP. However, it anticipates that the majority of the Bank’s remaining PPP loans will be forgiven by the SBA in accordance with the terms of the program. Loan Modifications and Troubled Debt Restructures . The CARES Act, as amended by the 2021 CAA, allowed banks to suspend requirements under GAAP, effectively, through January 1, 2022, for certain loan modifications related to the COVID-19 pandemic. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 or offer other borrower friendly options. In accordance with such guidance, the Bank made various short-term modifications for borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that were insignificant. Regulatory Capital . The CARES Act, the 2021 CAA, and certain actions by federal banking regulators resulted in modifications to, or delays in implementation of, various regulatory capital rules applicable to banking organizations. See “- Capital Adequacy Guidelines for Bank Holding Companies (Basel III)” above for additional information. Additional Matters The Corporation and the Bank are subject to the Federal Reserve Act, which restricts financial transactions between banks and affiliated companies. The statute limits credit transactions between banks, affiliated companies and its executive officers and its affiliates. The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices. It also restricts the types of collateral security permitted in connection with the bank’s extension of credit to an affiliate. Additionally, all transactions with an affiliate must be on terms substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated parties. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign, and by the monetary and fiscal policies of the United States Government and its various agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States Government obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against financial institution deposits, and restricting certain borrowings by financial institutions and their subsidiaries. The monetary policies of the Federal Reserve have had a significant effect on the operating results of the Bank in the past and are expected to continue to do so in the future. Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry, the Corporation or the Bank would be affected. 13 Table of Contents PART I: ITEM 1. BUSINESS STATISTICAL DATA The following tables set forth statistical data on the Corporation and its subsidiaries. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The daily average balance sheet amounts, the related interest income or interest expense, and average rates earned or paid are presented in the following table: Average Balance Interest Income / Expense Average Rate Average Balance Interest Income / Expense Average Rate Average Balance Interest Income / Expense Average Rate (Dollars in Thousands) 2021 2020 2019 Assets: Interest-bearing deposits $ 521,637 $ 634 0.12 % $ 319,686 $ 938 0.29 % $ 211,683 $ 4,225 2.00 % Federal Home Loan Bank stock 28,736 597 2.08 28,736 1,042 3.63 25,645 1,370 5.34 Investment Securities: (1) Taxable 1,751,910 29,951 1.71 1,282,827 24,440 1.91 1,101,247 27,815 2.53 Tax-exempt (2) 2,106,180 70,039 3.33 1,440,913 53,596 3.72 987,006 40,070 4.06 Total investment securities 3,858,090 99,990 2.59 2,723,740 78,036 2.87 2,088,253 67,885 3.25 Loans held for sale 19,190 747 3.89 18,559 781 4.21 18,402 780 4.24 Loans: (3) Commercial (6) 6,818,968 276,368 4.05 6,755,215 286,773 4.25 5,631,146 306,139 5.44 Real estate mortgage 916,314 34,783 3.80 889,083 40,002 4.50 811,188 37,782 4.66 Installment 683,925 26,111 3.82 718,815 30,708 4.27 701,459 38,071 5.43 Tax-exempt (2) 732,253 27,987 3.82 669,483 27,194 4.06 527,995 22,238 4.21 Total loans 9,170,650 365,996 3.99 9,051,155 385,458 4.26 7,690,190 405,010 5.27 Total earning assets 13,579,113 467,217 3.44 % 12,123,317 465,474 3.84 % 10,015,771 478,490 4.78 % Total non-earning assets 1,251,284 1,342,952 1,075,549 Total Assets $ 14,830,397 $ 13,466,269 $ 11,091,320 Liabilities: Interest-bearing deposits: Interest-bearing deposit accounts $ 4,769,482 $ 14,512 0.30 % $ 4,009,566 $ 20,239 0.50 % $ 3,070,861 $ 33,921 1.10 % Money market deposit accounts 2,351,803 3,203 0.14 1,769,478 7,810 0.44 1,300,064 14,111 1.09 Savings deposits 1,754,972 1,886 0.11 1,534,069 3,641 0.24 1,242,468 9,464 0.76 Certificates and other time deposits 783,733 3,718 0.47 1,346,967 20,050 1.49 1,673,292 34,089 2.04 Total interest-bearing deposits 9,659,990 23,319 0.24 8,660,080 51,740 0.60 7,286,685 91,585 1.26 Borrowings 639,791 12,633 1.97 768,238 14,641 1.91 644,729 17,160 2.66 Total interest-bearing liabilities 10,299,781 35,952 0.35 9,428,318 66,381 0.70 7,931,414 108,745 1.37 Noninterest-bearing deposits 2,516,241 2,068,026 1,495,949 Other liabilities 147,743 144,790 94,342 Total Liabilities 12,963,765 11,641,134 9,521,705 Stockholders' Equity 1,866,632 1,825,135 1,569,615 Total Liabilities and Stockholders' Equity $ 14,830,397 35,952 $ 13,466,269 66,381 $ 11,091,320 108,745 Net Interest Income (FTE) $ 431,265 $ 399,093 $ 369,745 Net Interest Spread (FTE) (4) 3.09 % 3.14 % 3.41 % Net Interest Margin (FTE): Interest Income (FTE) / Average Earning Assets 3.44 % 3.84 % 4.78 % Interest Expense / Average Earning Assets 0.26 % 0.55 % 1.09 % Net Interest Margin (FTE) (5) 3.18 % 3.29 % 3.69 % ______________________________ (1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustment. Annualized amounts are computed using a 30/360 day basis. (2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2021, 2020 and 2019. These totals equal $20,585, $16,966 and $13,085, respectively. (3) Non-accruing loans have been included in the average balances. (4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average interest-bearing liabilities. (5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets. (6) Commercial loans included $106.6 million and $667.1 million of Paycheck Protection Program ("PPP") loans at December 31, 2021 and 2020, respectively. 14 Table of Contents PART I: ITEM 1. BUSINESS ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table presents net interest income components on a tax-equivalent basis and reflects changes between periods attributable to movement in either the average balance or average interest rate for both earning assets and interest-bearing liabilities. The volume differences were computed as the difference in volume between the current and prior year multiplied by the interest rate from the prior year. The interest rate changes were computed as the difference in rate between the current and prior year multiplied by the volume from the prior year. Volume and rate variances have been allocated on the basis of the absolute relationship between volume variances and rate variances. 2021 Compared to 2020 Increase (Decrease) Due To 2020 Compared to 2019 Increase (Decrease) Due To 2019 Compared to 2018 Increase (Decrease) Due To (Dollars in Thousands, Fully Taxable Equivalent Basis) Volume Rate Total Volume Rate Total Volume Rate Total Interest Income: Interest-bearing deposits $ 412 $ (716) $ (304) $ 1,467 $ (4,754) $ (3,287) $ 2,026 $ (42) $ 1,984 Federal Home Loan Bank stock — (445) (445) 151 (479) (328) 57 79 136 Investment securities 29,977 (8,023) 21,954 18,895 (8,744) 10,151 15,799 (1,801) 13,998 Loans held for sale 26 (60) (34) 7 (6) 1 301 (61) 240 Loans 4,223 (23,651) (19,428) 65,095 (84,648) (19,553) 35,993 7,463 43,456 Totals 34,638 (32,895) 1,743 85,615 (98,631) (13,016) 54,176 5,638 59,814 Interest Expense: Interest-bearing deposit accounts 3,344 (9,071) (5,727) 8,341 (22,023) (13,682) 6,779 9,565 16,344 Money market deposit accounts 1,997 (6,604) (4,607) 3,951 (10,252) (6,301) 1,423 5,967 7,390 Savings deposits 465 (2,220) (1,755) 1,832 (7,655) (5,823) 983 3,251 4,234 Certificates and other time deposits (6,211) (10,121) (16,332) (5,896) (8,143) (14,039) 2,504 9,571 12,075 Borrowings (2,521) 513 (2,008) 2,911 (5,430) (2,519) (1,877) 1,492 (385) Totals (2,926) (27,503) (30,429) 11,139 (53,503) (42,364) 9,812 29,846 39,658 Change in net interest income (fully taxable equivalent basis) $ 37,564 $ (5,392) 32,172 $ 74,476 $ (45,128) 29,348 $ 44,364 $ (24,208) 20,156 Tax equivalent adjustment using marginal rate of 21% for 2021, 2020 and 2019 (3,619) (3,881) (2,353) Change in net interest income $ 28,553 $ 25,467 $ 17,803 INVESTMENT SECURITIES 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. 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. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis; and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time. Fair value of securities classified as Level 3 in the valuation hierarchy were determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active. The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale at the dates. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale at December 31, 2021 U.S. Treasury $ 1,000 $ — $ 1 $ 999 U.S. Government-sponsored agency securities 96,244 437 1,545 95,136 State and municipal 1,495,696 81,734 898 1,576,532 U.S. Government-sponsored mortgage-backed securities 671,684 7,109 11,188 667,605 Corporate obligations 4,031 256 8 4,279 Total available for sale $ 2,268,655 $ 89,536 $ 13,640 $ 2,344,551 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale at December 31, 2020 U.S. Government-sponsored agency securities $ 43,437 $ 1,571 $ — $ 45,008 State and municipal 1,168,711 89,420 246 1,257,885 U.S. Government-sponsored mortgage-backed securities 591,210 20,984 103 612,091 Corporate obligations 4,031 104 — 4,135 Total available for sale $ 1,807,389 $ 112,079 $ 349 $ 1,919,119 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale at December 31, 2019 U.S. Government-sponsored agency securities $ 38,529 $ 346 $ — $ 38,875 State and municipal 859,511 41,092 807 899,796 U.S. Government-sponsored mortgage-backed securities 842,349 10,378 1,404 851,323 Corporate obligations 31 — — 31 Total available for sale $ 1,740,420 $ 51,816 $ 2,211 $ 1,790,025 15 Table of Contents PART I: ITEM 1. BUSINESS The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity at the dates. Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized Losses Fair Value Held to maturity at December 31, 2021 U.S. Government-sponsored agency securities $ 371,457 $ — $ 371,457 $ 226 $ 7,268 $ 364,415 State and municipal 1,057,301 245 1,057,056 29,593 2,170 1,084,724 U.S. Government-sponsored mortgage-backed securities 749,789 — 749,789 7,957 5,881 751,865 Foreign investment 1,500 — 1,500 — 1 1,499 Total held to maturity $ 2,180,047 $ 245 $ 2,179,802 $ 37,776 $ 15,320 $ 2,202,503 Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized Losses Fair Value Held to maturity at December 31, 2020 U.S. Government-sponsored agency securities $ 145,398 $ — $ 145,398 $ 347 $ 220 $ 145,525 State and municipal 619,927 — 619,927 34,978 32 654,873 U.S. 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 Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized Losses Fair Value Held to maturity at December 31, 2019 U.S. Government-sponsored agency securities $ 15,619 $ — $ 15,619 $ 1 $ 37 $ 15,583 State and municipal 354,115 — 354,115 15,151 107 369,159 U.S. Government-sponsored mortgage-backed securities 434,804 — 434,804 6,921 401 441,324 Foreign investment 1,500 — 1,500 — — 1,500 Total held to maturity $ 806,038 $ — $ 806,038 $ 22,073 $ 545 $ 827,566 In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality. The allowance for credit losses on investment securities held to maturity is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have been insignificant. Furthermore, as of December 31, 2021, there were no past due principal and interest payments associated with these securities. An allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. 16 Table of Contents PART I: ITEM 1. BUSINESS The cost and yield for Federal Home Loan Bank stock is included in the table below. 2021 2020 2019 (Dollars in Thousands) Cost Yield Cost Yield Cost Yield Federal Home Loan Bank stock $ 28,736 2.1 % $ 28,736 3.6 % $ 28,736 4.8 % Total $ 28,736 2.1 % $ 28,736 3.6 % $ 28,736 4.8 % The Corporation’s Federal Home Loan Bank stock is primarily in the Federal Home Loan Bank of Indianapolis and it continued to produce sufficient financial results to pay dividends. There were no issuers included in the investment security portfolio at December 31, 2021, 2020 or 2019 where the aggregate carrying value of any one issuer exceeded 10 percent of the Corporation's stockholders' equity at those dates. The term "issuer" excludes the U.S. Government and its sponsored agencies and corporations. The maturity distribution and average yields for the securities portfolio at December 31, 2021 were: Within 1 Year 1-5 Years 5-10 Years (Dollars in Thousands) Amount Yield (1) Amount Yield (1) Amount Yield (1) Securities available for sale December 31, 2021 U.S. Treasury $ 999 0.1 % $ — — % $ — — % U.S. Government-sponsored agency securities 1,133 1.8 % 384 2.7 % 9,911 1.4 % State and municipal 4,833 1.2 % 4,925 4.1 % 112,657 3.6 % Corporate obligations — — % — — % 4,248 5.0 % $ 6,965 1.2 % $ 5,309 4.0 % $ 126,816 3.5 % Due After Ten Years U.S. Government- Sponsored Mortgage - Backed Securities Total Amount Yield (1) Amount Yield (1) Amount Yield (1) U.S. Treasury $ — — % $ — — % $ 999 0.1 % U.S. Government-sponsored agency securities 83,708 1.7 % — — % 95,136 1.6 % State and municipal 1,454,117 3.3 % — — % 1,576,532 3.3 % U.S. Government-sponsored mortgage-backed securities — — % 667,605 2.0 % 667,605 5.0 % Corporate obligations 31 — % — — % 4,279 2.0 % $ 1,537,856 3.2 % $ 667,605 2.0 % $ 2,344,551 2.8 % Within 1 Year 1-5 Years 5-10 Years (Dollars in Thousands) Amount Yield (1) Amount Yield (1) Amount Yield (1) Securities held to maturity at December 31, 2021 U.S. Government-sponsored agency securities $ — — % $ — — % $ 90,579 1.1 % State and municipal 5,471 4.2 % 30,272 4.3 % 86,624 3.8 % Foreign investment 1,500 2.9 % — — % — — % $ 6,971 3.9 % $ 30,272 4.3 % $ 177,203 2.4 % Due After Ten Years U.S. Government- Sponsored Mortgage - Backed Securities Total Amount Yield (1) Amount Yield (1) Amount Yield (1) U.S. Government-sponsored agency securities $ 280,878 1.5 % $ — — % $ 371,457 1.4 % State and municipal 934,934 2.9 % — — % 1,057,301 3.0 % U.S. Government-sponsored mortgage-backed securities — — % 749,789 2.4 % 749,789 2.4 % Foreign investment — — % — — % 1,500 2.9 % $ 1,215,812 2.5 % $ 749,789 2.4 % $ 2,180,047 2.5 % _____________________________ (1) Interest yields are presented on a fully taxable equivalent basis using a 21 percent tax rate. 17 Table of Contents PART I: ITEM 1. BUSINESS LOAN PORTFOLIO Loans are generated from customers primarily in Indiana, Illinois, Ohio, and Michigan and are typically secured by specific items of collateral, including real property, consumer assets, and business assets. The following table shows the composition of the Corporation’s loan portfolio by collateral classification, including purchased credit deteriorated loans, for the years indicated: 2021 2020 2019 2018 2017 (Dollars in Thousands) Amount % Amount % Amount % Amount % Amount % Loans at December 31: Commercial and industrial loans $ 2,714,565 29.4 % $ 2,776,699 30.0 % $ 2,109,879 24.9 % $ 1,726,664 23.9 % $ 1,493,493 22.1 % Agricultural land, production and other loans to farmers 246,442 2.7 281,884 3.0 334,172 4.0 334,325 4.6 366,235 5.4 Real estate loans: Construction 523,066 5.7 484,723 5.2 787,568 9.3 545,729 7.5 612,219 9.1 Commercial real estate, non-owner occupied 2,135,459 23.1 2,220,949 24.0 1,902,692 22.4 1,865,544 25.9 1,617,943 24.0 Commercial real estate, owner occupied 986,720 10.7 958,501 10.4 909,695 10.8 724,637 10.0 700,270 10.4 Residential 1,159,127 12.5 1,234,741 13.4 1,143,217 13.5 966,421 13.4 962,765 14.3 Home equity 523,754 5.7 508,259 5.5 588,984 7.0 528,157 7.3 514,021 7.6 Individuals' loans for household and other personal expenditures 146,092 1.5 129,479 1.5 135,989 1.6 99,788 1.4 86,935 1.3 Public finance and other commercial loans 806,636 8.7 647,939 7.0 547,114 6.5 433,202 6.0 397,318 5.8 Loans 9,241,861 100.0 % 9,243,174 100.0 % 8,459,310 100.0 % 7,224,467 100.0 % 6,751,199 100.0 % Allowance for loan/credit losses (195,397) (130,648) (80,284) (80,552) (75,032) Net Loans $ 9,046,464 $ 9,112,526 $ 8,379,026 $ 7,143,915 $ 6,676,167 As of December 31, 2021, the Corporation had $106.6 million of Paycheck Protection Program ("PPP") loans compared to the December 31, 2020 balance of $667.1 million. PPP loans are included in the commercial and industrial loan class. Public finance and other commercial loans is primarily comprised of loans secured by states and political subdivisions in the United States. At December 31, 2021 and 2020, the remaining fair value discount on acquired loans was $10.9 million and $23.0 million, respectively. LOAN MATURITIES Presented in the table below are the maturities of loans outstanding as of December 31, 2021, by collateral classification. Also presented are the amounts due after one year, classified according to the sensitivity to changes in interest rates. The tables classify variable rate loans pursuant to the contractual repricing dates of the underlying loans, while fixed rate loans are classified by contractual maturity date. (Dollars in Thousands) Maturing Within 1 Year Maturing 1-5 Years Maturing Over 5 Years Total Commercial and industrial loans $ 2,102,726 $ 372,052 $ 239,787 $ 2,714,565 Agricultural land, production and other loans to farmers 101,606 101,633 43,203 246,442 Real estate loans: Construction 473,557 23,055 26,454 523,066 Commercial real estate, non-owner occupied 1,490,316 471,372 173,771 2,135,459 Commercial real estate, owner occupied 442,515 380,221 163,984 986,720 Residential 83,871 148,745 926,511 1,159,127 Home Equity 505,916 7,882 9,956 523,754 Individuals' loans for household and other personal expenditures 43,491 70,537 32,064 146,092 Public finance and other commercial loans 37,501 17,381 751,754 806,636 Total $ 5,281,499 $ 1,592,878 $ 2,367,484 $ 9,241,861 (Dollars in Thousands) Maturing 1-5 Years Maturing Over 5 Years Loans maturing after one year with: Fixed rate $ 1,012,172 $ 2,206,265 Variable rate 580,706 161,219 Total $ 1,592,878 $ 2,367,484 18 Table of Contents PART I: ITEM 1. BUSINESS NON-PERFORMING ASSETS The table below summarizes non-performing assets for the years indicated: December 31, December 31, December 31, December 31, December 31, (Dollars in Thousands) 2021 2020 2019 2018 2017 Non-performing assets: Non-accrual loans $ 43,062 $ 61,471 $ 15,949 $ 26,148 $ 28,724 Renegotiated loans 329 3,240 841 1,103 1,013 Non-performing loans (NPL) 43,391 64,711 16,790 27,251 29,737 OREO and Repossessions 558 940 7,527 2,179 10,373 Non-performing assets (NPA) 43,949 65,651 24,317 29,430 40,110 Loans 90-days or more delinquent and still accruing 963 746 69 1,855 924 NPAs and loans 90-days or more delinquent $ 44,912 $ 66,397 $ 24,386 $ 31,285 $ 41,034 Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. 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. At December 31, 2021, non-accrual loans totaled $43.1 million, a decrease of $18.4 million from December 31, 2020. The decrease in non-accrual loans was primarily attributed to the payoff of one senior living sector relationship totaling $23.4 million. At December 31, 2021, 2020, 2019, 2018, and 2017, non-accrual loans include assets acquired of $3.2 million, $7.9 million, $3.7 million, $0, and $4.8 million, respectively. Other real estate owned ("OREO") at December 31, 2021 decreased $558,000 from the December 31, 2020 balance of $940,000. At December 31, 2021 and 2020, OREO did not include any acquired assets. OREO did include assets that were acquired from MBT of $136,000 as of December 31, 2019. OREO did not include any assets acquired as of the years ended 2018 and 2017, respectively. Renegotiated loans are loans for which concessions are granted to the borrower due to deterioration in the financial condition of the borrower, resulting in the inability of the borrower to meet the original contractual terms of the loans. These concessions may include interest rate reductions, principal forgiveness, extensions of maturity date or other actions intended to minimize losses. Certain loans restructured may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A non-accrual loan that is restructured may remain in non-accrual for a period of approximately six months until the borrower can demonstrate their ability to meet the restructured terms. A borrower's performance prior to the restructuring, as well as after, will be considered in assessing whether the borrower can meet the new terms resulting in the loan being returned to accruing status in a shorter or longer period of time than the standard six months. If the borrower’s performance under the modified terms is not reasonably assured, the loan will remain in non-accrual. For the year ended December 31, 2021, interest income of $1.9 million was recognized on the non-accruing and renegotiated loans listed in the table above, whereas interest income of $2.2 million would have been recognized under their loan terms. In addition to the loans discussed above, management also identified commercial loans totaling $369.5 million as of December 31, 2021 that were deemed to be risk graded criticized. Comparatively, commercial loans risk graded criticized at December 31, 2020 totaled $518.0 million. A loan risk graded criticized is a loan in which there are concerns regarding the borrower’s ability to comply with the repayment terms and would include loans graded special mention or worse. See additional information regarding loan credit quality in the “LOAN QUALITY” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K and in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. 19 Table of Contents PART I: ITEM 1. BUSINESS SUMMARY OF CREDIT LOSS EXPERIENCE The following table summarizes the credit loss experience, by collateral segment, for the years indicated: (Dollars in Thousands) 2021 2020 2019 2018 2017 Allowance for credit losses: Balances, January 1 $ 130,648 $ 80,284 $ 80,552 $ 75,032 $ 66,037 Impact of adopting ASC 326 74,055 — — — — Balances, January 1, 2021 Post-ASC 326 adoption 204,703 80,284 80,552 75,032 66,037 Charge-offs: Commercial (1) 5,849 8,536 1,732 2,316 1,383 Commercial real estate (2) 4,533 313 3,675 2,741 1,737 Construction 6 — — — — Consumer — 643 569 749 593 Residential — 993 645 2,177 1,315 Consumer & Residential 1,496 — — — — Total Charge-offs 11,884 10,485 6,621 7,983 5,028 Recoveries: Commercial (3) 724 819 1,244 2,456 1,590 Commercial real estate (4) 580 431 1,289 2,525 2,260 Construction 1 — — — — Consumer — 260 401 302 324 Residential — 666 619 993 706 Consumer & Residential 1,273 — — — — Total Recoveries 2,578 2,176 3,553 6,276 4,880 Net Charge-offs 9,306 8,309 3,068 1,707 148 Provisions for credit losses — 58,673 2,800 7,227 9,143 Balance at December 31 $ 195,397 $ 130,648 $ 80,284 $ 80,552 $ 75,032 Ratio of net charge-offs during the period to average loans outstanding during the period 0.10 % 0.09 % 0.04 % 0.02 % — % In calculating the allowance for credit losses, the loan portfolio was pooled into loan segments with similar credit risk characteristics. The Corporation pooled consumer and residential loans into one segment at adoption of CECL on January 1, 2021, but prior to adoption, consumer and residential loans were classified in separate segments. Additionally, prior to CECL adoption, construction loans were classified within the commercial real estate segment, but after CECL adoption, construction loans were classified as a separate segment. Details of the Allowance for Credit Losses and non-performing loans are discussed within the “LOAN QUALITY" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES Presented below is an analysis of the composition of the allowance for credit losses and percent of loans in each category to total loans, by collateral segment, as of the years indicated. 2021 2020 2019 2018 2017 (Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Balance at December 31: Commercial $ 69,935 40.8 % $ 47,115 37.9 % $ 32,902 32.5 % $ 32,657 31.1 % $ 30,420 29.8 % Commercial real estate 60,665 33.8 % 51,070 41.8 % 28,778 45.4 % 29,609 46.8 % 27,343 47.0 % Construction 20,206 5.6 % — — % — — % — — % — — % Consumer — — % 9,648 1.4 % 4,035 1.6 % 3,964 1.4 % 3,732 1.3 % Residential — — % 22,815 18.9 % 14,569 20.5 % 14,322 20.7 % 13,537 21.9 % Consumer & Residential 44,591 19.8 % — — % — — % — — % — — % Totals $ 195,397 100.0 % $ 130,648 100.0 % $ 80,284 100.0 % $ 80,552 100.0 % $ 75,032 100.0 % The primary increase in the allowance is due to the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. At December 31, 2021, two concentrations of commercial loans within a single industry (as segregated by North American Industry Classification System “NAICS code”) were in excess of 10 percent of total loans: Lessors of Residential Buildings and Dwellings and Lessors of Nonresidential Buildings. CREDIT LOSS CHARGE-OFF PROCEDURES The Corporation maintains an allowance to cover probable credit losses in its loan portfolio. The allowance is increased by the provision for credit losses and decreased by charge-offs less recoveries. All charge-offs are approved by the senior loan officers or loan committees, depending on the amount of the charge-off. and are reported to the Risk and Credit Policy Committee of the Board of Directors. Loans are charged off when a determination is made that all or a portion of a loan is uncollectible. ___________________________ (1) Category includes the charge-offs for commercial and industrial, agricultural land, production and other loans to farmers, and other commercial loans. (2) Category includes the charge-offs for commercial real estate, non-owner occupied and commercial real estate, owner occupied. (3) Category includes the recoveries for commercial and industrial, agricultural land, production and other loans to farmers, and other commercial loans. (4) Category includes the recoveries for commercial real estate, non-owner occupied and commercial real estate, owner occupied. 20 Table of Contents PART I: ITEM 1. BUSINESS PROVISION FOR CREDIT LOSSES Credit losses are a cost of doing business in the banking industry. Although management emphasizes the early detection and charge-off of loan losses, it is inevitable that certain losses, which have not been specifically identified, exist in the portfolio. Accordingly, the provision for credit losses is charged to earnings on an anticipatory basis and recognized credit losses, net of recoveries, are deducted from the established allowance. Over time, all net credit losses are charged to earnings. Based on management’s judgment as to the appropriate level of the allowance for credit losses, the amount provided in any period may be greater or less than net credit losses for the same period. In any period, the determination of the provision for credit losses is based on management’s continuing review and evaluation of the loan portfolio. The evaluation by management includes consideration of the current forecasted economic conditions, past loan loss experience, changes in the composition of the loan portfolio, reasonable and supportable economic forecasts as well as the current condition and amount of loans outstanding. See additional information in the “PROVISION EXPENSE AND ALLOWANCE FOR CREDIT LOSSES” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. DEPOSITS The average balances, interest expense and average rates on deposits for the years ended December 31, 2021, 2020 and 2019 are presented in the Part I. Item I. Business section titled "DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL" of this Annual Report on Form 10-K. As of December 31, 2021, certificates of deposit and other time deposits exceeding the FDIC insurance limit of $250,000 mature as follows: (Dollars in Thousands) Maturing 3 Months or Less Maturing 3-6 Months Maturing 6-12 Months Maturing Over 12 Months Total Uninsured certificates of deposit and other time deposits $ 26,540 $ 7,226 $ 12,452 $ 4,650 $ 50,868 Percent 52 % 14 % 25 % 9 % 100 % SHORT-TERM BORROWINGS Borrowings maturing in one year or less are included in the following table: (Dollars in Thousands) 2021 2020 2019 Balance at December 31: Federal funds purchased $ — $ — $ 55,000 Securities sold under repurchase agreements (short-term portion) 181,577 177,102 187,946 Federal Home Loan Bank advances (short-term portion) 75,097 55,097 41,370 Total short-term borrowings $ 256,674 $ 232,199 $ 284,316 Securities sold under repurchase agreements are categorized as borrowings maturing within one year and are secured by U.S. Government-Sponsored Enterprise obligations. Pertinent information with respect to borrowings maturing in one year or less is summarized below: (Dollars in Thousands) 2021 2020 2019 Weighted Average Interest Rate on Outstanding Balance at December 31: Federal funds purchased 1.4 % 0.3 % 1.4 % Securities sold under repurchase agreements (short-term portion) 0.2 % 0.2 % 0.8 % Federal Home Loan Bank advances (short-term portion) 2.1 % 1.8 % 1.8 % Total short-term borrowings 0.7 % 0.6 % 1.1 % Weighted Average Interest Rate During the Year: Federal funds purchased 0.8 % 0.9 % 2.3 % Securities sold under repurchase agreements (short-term portion) 0.2 % 0.3 % 1.0 % Federal Home Loan Bank advances (short-term portion) 2.0 % 1.9 % 1.8 % Total short-term borrowings 0.7 % 0.8 % 1.4 % Highest Amount Outstanding at Any Month End During the Year: Federal funds purchased $ — $ 80,000 $ 80,000 Securities sold under repurchase agreements (short-term portion) 199,104 197,928 191,603 Federal Home Loan Bank advances (short-term portion) 75,000 131,300 163,800 Total short-term borrowings $ 274,104 $ 409,228 $ 435,403 Average Amount Outstanding During the year: Federal funds purchased $ 617 $ 13,126 $ 10,810 Securities sold under repurchase agreements (short-term portion) 173,839 180,740 136,274 Federal Home Loan Bank advances (short-term portion) 64,356 67,408 89,677 Total short-term borrowings $ 238,812 $ 261,274 $ 236,761 21 Table of Contents PART I: ITEM 1A. AND ITEM 1B.