FIRST MERCHANTS CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm To the Stockholders, Board of Directors and Audit Committee First Merchants Corporation Muncie, Indiana Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of First Merchants Corporation (the “Corporation”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2022, expressed an unqualified opinion. Change in Accounting Principle As discussed in Note 1 of the consolidated financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Accounting Standards Topic 326: Financial Instruments - Credit Losses. The adoption of new credit loss standard and its subsequent application is also communicated as a critical audit matter. Basis for Opinion These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses As described in Note 5 to the consolidated financial statements, the Corporation’s allowance for credit losses (ACL) on loans was $195.4 million as of December 31, 2021. The ACL is an estimate of current expected credit losses in the loan portfolio. The determination of the ACL requires significant judgment reflecting the Corporation’s best estimate of expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. We identified the valuation of the ACL as a critical audit matter. Auditing the ACL involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic forecasts and conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific allowances associated with loans individually evaluated and assessing the appropriateness of loan grades. 53 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM How We Addressed the Matter in Our Audit The primary procedures we performed to address this critical audit matter included: • Obtained an understanding of the Corporation’s process for establishing the ACL, including the implementation of models and the qualitative factor adjustments of the ACL • Testing the design and operating effectiveness of internal controls, including those related to technology, over the ACL, the establishment of qualitative adjustments for current and expected conditions, grading and risk classification of loans and establishment of specific reserves on individually evaluated loans and management’s review controls over the ACL balance as a whole including attending internal Corporation Credit Policy Committee meetings and Audit Committee discussions and analysis. • Testing clerical and computational accuracy of the formulas within the calculation. • Testing of completeness and accuracy of the information and reports utilized in the ACL, including reports used in management review controls over the ACL. • Performed reviews of individual credit files to evaluate the reasonableness of loan credit risk ratings • Tested internally prepared loan reviews to evaluate the reasonableness of loan credit risk ratings • Evaluated the qualitative adjustments to the ACL including assessing the basis for adjustments and the reasonableness of the significant assumptions • Evaluating the forecast adjustment, including assessing that it is reasonable and supportable • Tested the reasonableness of specific reserves on individually reviewed loans • Evaluated credit quality trends in delinquencies, non-accruals, charge-offs and loan risk ratings • Evaluated the overall reasonableness of the ACL and evaluated trends identified within peer groups • Identifying fields in the various loan systems that defined the loan pools and tested the design and operating effectiveness of internal controls surrounding the input and maintenance of those fields. BKD, LLP We have served as the Corporation’s auditor since at least 1982; however, an earlier year cannot be reliably determined. Indianapolis, Indiana March 1, 2022 54 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS December 31, December 31, (Dollars in Thousands, Except Share Data) 2021 2020 ASSETS Cash and due from banks $ 167,146 $ 192,896 Interest-bearing deposits 474,154 392,305 Investment securities available for sale 2,344,551 1,919,119 Investment securities held to maturity, net of allowance for credit losses of $ 245 and $ 0 (fair value of $ 2,202,503 and $ 1,280,293 ) 2,179,802 1,227,668 Loans held for sale 11,187 3,966 Loans 9,241,861 9,243,174 Less: Allowance for credit losses - loans 1 ( 195,397 ) ( 130,648 ) Net loans 9,046,464 9,112,526 Premises and equipment 105,655 111,062 Federal Home Loan Bank stock 28,736 28,736 Interest receivable 57,187 53,948 Other intangibles 25,475 28,975 Goodwill 545,385 543,918 Cash surrender value of life insurance 291,041 292,745 Other real estate owned 558 940 Tax asset, deferred and receivable 35,641 12,340 Other assets 140,167 146,066 TOTAL ASSETS $ 15,453,149 $ 14,067,210 LIABILITIES Deposits: Noninterest-bearing $ 2,709,646 $ 2,298,138 Interest-bearing 10,022,931 9,063,472 Total Deposits 12,732,577 11,361,610 Borrowings: Securities sold under repurchase agreements 181,577 177,102 Federal Home Loan Bank advances 334,055 389,430 Subordinated debentures and term loans 118,618 118,380 Total Borrowings 634,250 684,912 Interest payable 2,762 3,287 Other liabilities 170,989 141,756 Total Liabilities 13,540,578 12,191,565 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Cumulative Preferred Stock, $ 1,000 par value, $ 1,000 liquidation value: Authorized - 600 shares Issued and outstanding - 125 shares 125 125 Common Stock, $ 0.125 stated value: Authorized - 100,000,000 shares Issued and outstanding - 53,410,411 and 53,922,359 shares 6,676 6,740 Additional paid-in capital 985,818 1,005,366 Retained earnings 864,839 788,578 Accumulated other comprehensive income 55,113 74,836 Total Stockholders' Equity 1,912,571 1,875,645 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,453,149 $ 14,067,210 1 Beginning January 1, 2021, the amount is based on the current expected credit loss methodology. Prior to January 1, 2021, the amount is based on the incurred loss methodology. See additional details in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements. See notes to consolidated financial statements. 55 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Share Data) December 31, 2021 December 31, 2020 December 31, 2019 INTEREST INCOME Loans receivable: Taxable $ 338,009 $ 358,264 $ 382,772 Tax-exempt 22,110 21,483 17,568 Investment securities: Taxable 29,951 24,440 27,815 Tax-exempt 55,331 42,341 31,655 Deposits with financial institutions 634 938 4,225 Federal Home Loan Bank stock 597 1,042 1,370 Total Interest Income 446,632 448,508 465,405 INTEREST EXPENSE Deposits 23,319 51,740 91,585 Federal funds purchased 5 120 251 Securities sold under repurchase agreements 314 604 1,424 Federal Home Loan Bank advances 5,672 6,973 7,176 Subordinated debentures and term loans 6,642 6,944 8,309 Total Interest Expense 35,952 66,381 108,745 NET INTEREST INCOME 410,680 382,127 356,660 Provision for credit losses - loans — 58,673 2,800 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 410,680 323,454 353,860 OTHER INCOME Service charges on deposit accounts 23,571 20,999 22,951 Fiduciary and wealth management fees 28,362 23,747 17,562 Card payment fees 16,619 19,502 20,243 Net gains and fees on sales of loans 19,689 18,271 7,891 Derivative hedge fees 3,850 6,977 5,357 Other customer fees 1,490 1,497 1,664 Increase in cash surrender value of life insurance 4,873 5,040 4,518 Gains on life insurance benefits 2,187 100 19 Net realized gains on sales of available for sale securities 5,674 11,895 4,415 Other income 3,008 1,898 2,068 Total Other Income 109,323 109,926 86,688 OTHER EXPENSES Salaries and employee benefits 166,995 155,937 144,037 Net occupancy 23,326 26,756 19,584 Equipment 19,401 19,344 16,218 Marketing 5,762 6,609 6,650 Outside data processing fees 18,317 14,432 16,476 Printing and office supplies 1,217 1,304 1,445 Intangible asset amortization 5,747 5,987 5,994 FDIC assessments 6,243 5,804 717 Other real estate owned and foreclosure expenses 992 330 2,428 Professional and other outside services 11,913 8,901 15,410 Other expenses 19,300 18,001 17,804 Total Other Expenses 279,213 263,405 246,763 INCOME BEFORE INCOME TAX 240,790 169,975 193,785 Income tax expense 35,259 21,375 29,325 NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 205,531 $ 148,600 164,460 NET INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE DATA: Basic $ 3.82 $ 2.75 $ 3.20 Diluted $ 3.81 $ 2.74 $ 3.19 See notes to consolidated financial statements. 56 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) December 31, 2021 December 31, 2020 December 31, 2019 Net income $ 205,531 $ 148,600 $ 164,460 Other comprehensive income (loss): Unrealized gains/losses on securities available-for-sale: Unrealized holding gain (loss) arising during the period ( 30,042 ) 74,067 61,649 Reclassification adjustment for losses (gains) included in net income ( 5,674 ) ( 11,895 ) ( 4,415 ) Tax effect 7,502 ( 13,056 ) ( 12,019 ) Net of tax ( 28,214 ) 49,116 45,215 Unrealized gain/loss on cash flow hedges: Unrealized holding gain (loss) arising during the period 138 ( 1,480 ) ( 1,072 ) Reclassification adjustment for losses (gains) included in net income 1,044 906 334 Tax effect ( 248 ) 121 156 Net of tax 934 ( 453 ) ( 582 ) Defined benefit pension plans: Net gain (loss) arising during the period 9,482 ( 2,237 ) 5,796 Reclassification adjustment for amortization of prior service cost 84 84 106 Tax effect ( 2,009 ) 452 ( 1,239 ) Net of tax 7,557 ( 1,701 ) 4,663 Total other comprehensive income (loss), net of tax ( 19,723 ) 46,962 49,296 Comprehensive income $ 185,808 $ 195,562 $ 213,756 See NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 57 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Preferred Common Stock (Dollars in Thousands, Except Share Data) Shares Amount Shares Amount Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balances, December 31, 2018 125 $ 125 49,349,800 $ 6,169 $ 840,052 $ 583,336 $ ( 21,422 ) $ 1,408,260 Comprehensive income Net income — — — — — 164,460 — 164,460 Other comprehensive income (loss), net of tax — — — — — — 49,296 49,296 Cash dividends on common stock ($ 1.00 per share) — — — — — ( 51,276 ) — ( 51,276 ) Issuance of common stock related to acquisitions — — 6,383,806 798 229,128 — — 229,926 Repurchases of common stock — — ( 516,016 ) ( 65 ) ( 18,976 ) — — ( 19,041 ) Share-based compensation — — 116,572 15 4,100 — — 4,115 Stock issued under employee benefit plans — — 21,521 3 699 — — 702 Stock issued under dividend reinvestment and stock purchase plan — — 38,942 5 1,526 — — 1,531 Stock options exercised — — 16,950 2 142 — — 144 Restricted shares withheld for taxes — — ( 43,093 ) ( 6 ) ( 1,674 ) — — ( 1,680 ) Balances, December 31, 2019 125 $ 125 55,368,482 $ 6,921 $ 1,054,997 $ 696,520 $ 27,874 $ 1,786,437 Comprehensive income Net income — — — — — 148,600 — 148,600 Other comprehensive income (loss), net of tax — — — — — — 46,962 46,962 Cash dividends on common stock ($ 1.04 per share) — — — — — ( 56,542 ) — ( 56,542 ) Repurchases of common stock — — ( 1,634,437 ) ( 204 ) ( 55,708 ) — — ( 55,912 ) Share-based compensation — — 128,292 16 4,584 — — 4,600 Stock issued under employee benefit plans — — 25,423 3 636 — — 639 Stock issued under dividend reinvestment and stock purchase plan — — 60,806 8 1,718 — — 1,726 Stock options exercised — — 13,550 2 113 — — 115 Restricted shares withheld for taxes — — ( 39,757 ) ( 6 ) ( 974 ) — — ( 980 ) Balances, December 31, 2020 125 $ 125 53,922,359 $ 6,740 $ 1,005,366 $ 788,578 $ 74,836 $ 1,875,645 Cumulative effect of ASC 326 adoption — — — — — ( 68,040 ) — ( 68,040 ) Balance, January 1, 2021 125 $ 125 53,922,359 $ 6,740 $ 1,005,366 $ 720,538 $ 74,836 $ 1,807,605 Comprehensive income Net income — — — — — 205,531 — 205,531 Other comprehensive income (loss), net of tax — — — — — — ( 19,723 ) ( 19,723 ) Cash dividends on common stock ($ 1.13 per share) — — — — — ( 61,230 ) — ( 61,230 ) Repurchases of common stock — — ( 646,102 ) ( 81 ) ( 25,363 ) — — ( 25,444 ) Share-based compensation — — 94,510 12 4,750 — — 4,762 Stock issued under employee benefit plans — — 16,507 2 603 — — 605 Stock issued under dividend reinvestment and stock purchase plan — — 43,861 5 1,875 — — 1,880 Stock options exercised — — 17,300 2 196 — — 198 Restricted shares withheld for taxes — — ( 38,024 ) ( 4 ) ( 1,609 ) — — ( 1,613 ) Balances, December 31, 2021 125 $ 125 53,410,411 $ 6,676 $ 985,818 $ 864,839 $ 55,113 $ 1,912,571 See notes to consolidated financial statements. 58 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, December 31, December 31, (Dollars in Thousands) 2021 2020 2019 Cash Flow From Operating Activities: Net income $ 205,531 $ 148,600 $ 164,460 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses — 58,673 2,800 Depreciation and amortization 10,701 11,009 9,383 Change in deferred taxes 6,983 ( 9,735 ) 4,965 Share-based compensation 4,762 4,600 4,115 Loans originated for sale ( 548,742 ) ( 591,057 ) ( 511,407 ) Proceeds from sales of loans held for sale 557,744 611,945 513,357 Gains on sales of loans held for sale ( 16,223 ) ( 15,817 ) ( 6,209 ) Gains on sales of securities available for sale ( 5,674 ) ( 11,895 ) ( 4,415 ) Increase in cash surrender of life insurance ( 4,873 ) ( 5,040 ) ( 4,518 ) Gains on life insurance benefits ( 2,187 ) ( 100 ) ( 19 ) Change in interest receivable ( 3,239 ) ( 5,047 ) ( 4,659 ) Change in interest payable ( 525 ) ( 3,467 ) 1,090 Other adjustments 3,124 11,162 7,784 Net cash provided by operating activities 207,382 203,831 176,727 Cash Flows from Investing Activities: Net change in interest-bearing deposits ( 81,849 ) ( 274,042 ) 199,928 Purchases of: Securities available for sale ( 931,368 ) ( 613,117 ) ( 676,791 ) Securities held to maturity ( 1,156,621 ) ( 699,095 ) ( 423,385 ) Proceeds from sales of securities available for sale 181,333 231,391 132,837 Proceeds from maturities of: Securities available for sale 279,367 322,617 138,356 Securities held to maturity 227,255 273,229 130,502 Net change in loans ( 60,581 ) ( 792,986 ) ( 512,364 ) Net cash and cash equivalents received (paid) in acquisition ( 2,933 ) — 10,207 Proceeds from the sale of other real estate owned 706 8,655 2,060 Proceeds from life insurance benefits 8,764 601 815 Proceeds from mortgage portfolio loan sale 78,159 — — Other investing activities ( 11,678 ) ( 9,278 ) ( 8,564 ) Net cash used in investing activities ( 1,469,446 ) ( 1,552,025 ) ( 1,006,399 ) Cash Flows from Financing Activities: Net change in : Demand and savings deposits 1,556,127 2,336,120 883,524 Certificates of deposit and other time deposits ( 185,160 ) ( 814,466 ) 95,913 Borrowings 45,542 573,757 599,298 Repayment of borrowings ( 96,204 ) ( 621,548 ) ( 643,169 ) Cash dividends on common stock ( 61,230 ) ( 56,542 ) ( 51,276 ) Stock issued under employee benefit plans 605 639 702 Stock issued under dividend reinvestment and stock purchase plans 1,880 1,726 1,531 Stock options exercised 198 115 144 Repurchase of common stock ( 25,444 ) ( 55,912 ) ( 19,041 ) Net cash provided by financing activities 1,236,314 1,363,889 867,626 Net Change in Cash and Cash Equivalents ( 25,750 ) 15,695 37,954 Cash and Cash Equivalents, January 1 192,896 177,201 139,247 Cash and Cash Equivalents, December 31 $ 167,146 $ 192,896 $ 177,201 Additional cash flow information: Interest paid $ 36,477 $ 69,848 $ 107,598 Income tax paid 31,168 33,201 23,588 Loans transferred to other real estate owned 292 813 7,031 Fixed assets transferred to other assets 6,384 262 1,210 Non-cash investing activities using trade date accounting 39,923 6,183 — ROU assets obtained in exchange for new operating lease liabilities 2,700 1,601 23,529 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED In conjunction with the acquisitions, liabilities were assumed as follows: December 31, 2021 December 31, 2020 December 31, 2019 Fair value of assets acquired $ 4,041 $ — $ 1,451,287 Cash received (paid) in acquisition ( 3,225 ) — ( 15 ) Less: Common stock issued — — 229,926 Liabilities assumed $ 816 $ — $ 1,221,346 See notes to consolidated financial statements. 59 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FINANCIAL STATEMENT PREPARATION The accounting and reporting policies of the Corporation and the Bank, conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and fair value of financial instruments. Reclassifications have been made to prior financial statements to conform to the current financial statement presentation. The uncertainties related to COVID-19 could cause significant changes to these estimates compared to what was known at the time these financial statements were prepared. The Corporation is a financial holding company whose principal activity is the ownership and management of the Bank and operates in a single significant business segment. The Bank provides full banking services under an Indiana state-charter. Additionally, the Bank operates as First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank generates commercial, mortgage, and consumer loans and receives deposits from customers located primarily in central and northern Indiana, northeast Illinois, central Ohio and southeast Michigan counties. The Bank’s loans are generally secured by specific items of collateral, including real property, consumer assets and business assets. A brief description of current accounting practices and current valuation methodologies are presented below. CONSOLIDATION The consolidation of the Corporation's financial statements include the accounts of the Corporation and all its subsidiaries, after elimination of all material intercompany transactions. BUSINESS COMBINATIONS Business combinations are accounted for under the acquisition method of accounting. Under the acquisition method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition. Details of the Corporation's acquisitions are included in NOTE 2. ACQUISITIONS of these Notes to Consolidated Financial Statements. CASH AND CASH EQUIVALENTS Cash on hand, cash items in process of collection and non-interest bearing cash held at various banks are included in cash and cash equivalents and have a maturity of less than three months. The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on cash and cash equivalents. INTEREST-BEARING DEPOSITS Interest-bearing cash held at various banks and the Federal Reserve Bank and federal funds sold are included in interest-bearing deposits and have a maturity of less than three months. The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on interest-bearing deposits. INVESTMENT SECURITIES Held to maturity securities are carried at amortized cost when the Corporation has the positive intent and ability to hold them until maturity. Available for sale securities are recorded at fair value on a recurring basis with the unrealized gains and losses, net of applicable income taxes, recorded in other comprehensive income (loss). Realized gains and losses are recorded in earnings and the prior fair value adjustments are reclassified within stockholders' equity. Gains and losses on sales of securities are determined on the specific-identification method. Amortization of premiums and accretion of discounts are amortized to their earliest call date and are recorded as interest income from securities. Details of the Corporation's investment securities portfolio are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. 60 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES AVAILABLE FOR SALE For investment securities available for sale in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income. Adjustments to the allowance for credit losses are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality. Details of the Corporation's allowance for credit losses on investment securities available for sale are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES HELD TO MATURITY ("ACL - INVESTMENTS") The ACL - Investments is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the ACL - Investments when deemed uncollectible. Adjustments to the ACL - Investments are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on held to maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) the financial condition of the issuer, (3) historical loss rates for given bond ratings, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have generally not been significant. An allowance for credit losses of $ 245,000 was recorded on state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. Details of the Corporation's ACL - Investments are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. The Corporation adopted CECL on January 1, 2021 and the impact at adoption is described below under the heading "RECENT ACCOUNTING CHANGES ADOPTED IN 2021." LOANS HELD FOR SALE Loans originated and with an intent to sell are classified as held for sale and are carried at the principal amount outstanding. The carrying amount approximates fair value due to the short duration between origination and the date of sale. LOANS The Corporation’s loan portfolio is carried at the principal amount outstanding, net of unearned income and principal charge-offs. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Interest income is accrued on the principal balances of loans. The accrual of interest is discontinued on a loan when, in management’s opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed against earnings when considered uncollectible. Interest income accrued in the prior year, if any, is charged to the allowance for credit losses. Interest income is subsequently recognized only to the extent cash payments are received and the loan is returned to accruing status. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) established the Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”), to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the pandemic. The Bank actively participated in assisting its customers with PPP funding during all phases of the program. The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities. Loans under the program earn interest at a fixed rate of 1 percent. As of December 31, 2021, the Corporation had $ 106.6 million of PPP loans compared to the December 31, 2020 balance of $ 667.1 million. The Corporation will continue to monitor legislative, regulatory, and supervisory developments related to the PPP. However, it anticipates that the majority of the Bank’s remaining PPP loans will be forgiven by the SBA in accordance with the terms of the program. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses which limit the exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value. Details of the Corporation's loan portfolio are included in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. 61 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) PURCHASED CREDIT DETERIORATED ("PCD") LOANS The Corporation has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is the noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. ALLOWANCE FOR CREDIT LOSSES - LOANS ("ACL - Loans") The ACL - Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Adjustments to the ACL - Loans are reported in the income statement as a component of provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding the policies and methodology used to estimate the ACL - Loans is detailed in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. The Corporation adopted CECL on January 1, 2021 and the impact at adoption is described below under the heading "RECENT ACCOUNTING CHANGES ADOPTED IN 2021." ALLOWANCE FOR LOAN LOSSES (prior to January 1, 2021 CECL adoption) The Corporation's allowance for loan losses was maintained to absorb losses inherent in the loan portfolio and was based on ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The allowance was increased by the provision for loan losses, which was charged against current operating results. Loan losses were charged against the allowance when management believed the uncollectability of a loan was confirmed. Subsequent recoveries, if any, were credited to the allowance. The Corporation’s strategy for credit risk management included credit policies and underwriting criteria for all loans, as well as an overall credit limit for each customer significantly below legal lending limits. The strategy also emphasized diversification on regional geographic and industry levels, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality. The Corporation’s methodology for assessing the appropriateness of the allowance consisted of three key elements – the determination of the appropriate reserves for impaired loans accounted for under ASC 310-10, probable losses estimated from historical loss rates, and probable losses resulting from economic, environmental, qualitative or other deterioration above and beyond what were reflected in the first two components of the allowance. Where appropriate, reserves were allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation. Loans individually evaluated for impairment were those deemed impaired in accordance with ASC 310-10, including commercial relationships greater than $500,000 that exhibited well defined credit weaknesses. Any allowances for impaired loans were measured based on the fair value of the underlying collateral, if collateral dependent, or the present value of expected future cash flows discounted at the loan’s effective interest rate. The Corporation evaluated the collectability of principal when assessing the need for a loss accrual. Historical loss rates were applied to other commercial loans not subject to specific reserve allocations. The historical allocation for commercial loans graded pass were established by loan segments using loss rates based on the Corporation’s migration analysis. This migration analysis showed the loss rates for each segment of loans based on the loan grades at the beginning of the twelve month period. This loss rate was then applied to the current portfolio of loans in each respective loan segment. Homogenous loans, such as consumer installment and residential mortgage loans, were not individually risk graded. Reserves were established for each segment of loans using loss rates based on charge-offs for the same period as the migration analysis used for commercial loans. In addition to the specific reserves and historical loss components of the allowance, consideration was given to various environmental factors to help ensure that losses inherent in the portfolio were reflected in the allowance for loan losses. Factors which management considered in the analysis included the effects of the national and local economies, trends in loan growth and charge-off rates, changes in mix, concentration of loans in specific industries, asset quality trends (delinquencies, charge-offs and non-accrual loans), risk management and loan administration, changes in the internal lending policies and credit standards, examination results from bank regulatory agencies and the Corporation’s internal loan review. PENSION The Corporation has defined-benefit pension plans, including non-qualified plans for certain employees, former employees and former non-employee directors. In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan. No additional pension benefits have been earned by any employees who had not met certain requirements as of March 1, 2005. The benefits are based primarily on years of service and employees’ pay near retirement. The Corporation's accounting policies related to pensions and other post retirement benefits reflect the guidance in ASC 715, Compensation – Retirement Benefits. The Corporation does not consolidate the assets and liabilities associated with the pension plan. Instead, the Corporation recognizes the funded status of the plan in the consolidated balance sheets. The measurement of the funded status and the annual pension expense involves actuarial and economic assumptions. Various statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liabilities related to the plans. Key factors include assumptions on the expected rates of return on plan assets, discount rates, expected rates of salary increases and health care costs and trends. The Corporation considers market conditions, including changes in investment returns and interest rates in making these assumptions. The primary assumptions used in determining the Corporation’s pension and post retirement benefit obligations and related expenses are presented in NOTE 18. PENSION AND OTHER POST RETIREMENT BENEFIT PLANS of these Notes to Consolidated Financial Statements. 62 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) PREMISES AND EQUIPMENT Premises and equipment is carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line and declining balance methods based on the estimated useful lives of the assets ranging from three to forty years . Maintenance and repairs are expensed as incurred, while major additions and improvements, which extend the useful life, are capitalized. Gains and losses on dispositions are included in current operations. Details of the Corporation's premises and equipment are included in NOTE 6. PREMISES AND EQUIPMENT of these Notes to Consolidated Financial Statements. LEASES The Corporation leases certain land and premises from third parties and all are classified as operating leases. Operating leases are included in Other Assets and Other Liabilities on the Corporation's Consolidated Balance Sheets and lease expense for lease payments is recognized on a straight-line basis over the lease term. Right of Use ("ROU") assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the term. An ROU asset represents the right to use the underlying asset for the lease term and also includes any direct costs and payments made prior to lease commencement and excludes lease incentives. When an implicit rate is not available, an incremental borrowing rate based on the information available at commencement date is used in determining the present value of the lease payments. A lease term may include an option to extend or terminate the lease when it is reasonably certain the option will be exercised. Short-term leases of twelve months or less are excluded from accounting guidance; as a result, the lease payments are recognized on a straight-line basis over the lease term and the leases are not reflected on the Corporation's Consolidated Balance Sheets. Renewal and termination options are considered when determining short-term leases. Leases are accounted for at the individual level. Details of the Corporation's leases are included in NOTE 9. LEASES of these Notes to Consolidated Financial Statements. FEDERAL HOME LOAN BANK STOCK ("FHLB") FHLB stock is a required investment for institutions that are members of the FHLB. The Bank is a member of the FHLB of Indianapolis. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. INTANGIBLE ASSETS Intangible assets that are subject to amortization, including core deposit intangibles, are being amortized on both the straight-line and accelerated basis over two to ten years . Intangible assets are periodically evaluated as to the recoverability of their carrying value. Details of the Corporation's other intangible assets are included in NOTE 8. OTHER INTANGIBLES of these Notes to Consolidated Financial Statements. GOODWILL Goodwill is maintained by applying the provisions of ASC 350, Intangibles – Goodwill and Other . For acquisitions, assets acquired, including identified intangible assets, and the liabilities assumed are required to be recorded at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. In addition, the determination of the useful lives over which the intangible asset will be amortized is subjective. Under ASC 350, the Corporation is required to evaluate goodwill for impairment on an annual basis, as well as on an interim basis, if events or changes indicate that the asset may be impaired, indicating that the carrying value may not be recoverable. The Corporation completed its most recent annual goodwill impairment test as of October 1, 2021 and concluded, based on current events and circumstances goodwill is not impaired. Details of the Corporation's goodwill are included in NOTE 7. GOODWILL of these Notes to Consolidated Financial Statements. BANK OWNED LIFE INSURANCE ("BOLI") BOLI policies have been purchased, as well as obtained through acquisitions, on certain current and former employees and directors of the Corporation to offset a portion of the employee benefit costs. The Corporation records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Changes in cash surrender values and death benefits received in excess of cash surrender values are reported in non-interest income. A corporate policy is in place with defined thresholds that limit the amount of credit, interest rate and liquidity risk inherent in a BOLI portfolio. The Corporation actively monitors the overall portfolio performance along with the credit quality of the insurance carriers and the credit quality and yield of the underlying investments. OTHER REAL ESTATE OWNED ("OREO") OREO consists of assets acquired through, or in lieu of, loan foreclosure and are held for sale. They are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in other real estate owned and foreclosure expenses. DERIVATIVE INSTRUMENTS Derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets, are carried at fair value of the derivatives and reflects the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information. As part of the asset/liability management program, the Corporation will utilize, from time to time, interest rate floors, caps or swaps to reduce its sensitivity to interest rate fluctuations. Changes in the fair values of derivatives are reported in the consolidated statements of operations or AOCI depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis. 63 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Derivatives that qualify for the hedge accounting treatment are designated as either: (1) a hedge of the fair value of the recognized asset or liability, or of an unrecognized firm commitment (a fair value hedge); or (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). To date, the Corporation has only entered into a cash flow hedge. For cash flow hedges, changes in the fair values of the derivative instruments are reported in AOCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in AOCI are reflected in the consolidated statements of income in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, the Corporation establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized in the consolidated statements of income. The Corporation excludes the time value expiration of the hedge when measuring ineffectiveness. The Corporation offers interest rate derivative products (e.g. interest rate swaps) to certain of its high-quality commercial borrowers. This product allows customers to enter into an agreement with the Corporation to swap their variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the risk of changes in the borrower’s interest rate or market price risk. The extension of credit incurred through the execution of these derivative products is subject to the same approvals and rigorous underwriting standards as the related traditional credit product. The Corporation limits its risk exposure to these products by entering into a mirror-image, offsetting swap agreement with a separate, well-capitalized and rated counterparty previously approved by the Credit and Asset Liability Committee. By using these interest rate swap arrangements, the Corporation is also better insulated from the interest rate risk associated with underwriting fixed-rate loans. These derivative contracts are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging , and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the customer and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820, Fair Value Measurements and Disclosures ), resulting in some volatility in earnings each period. Details of the Corporation's derivative instruments are included in NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES of these Notes to Consolidated Financial Statements. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements represent securities the Corporation routinely sells to certain treasury management customers and then repurchases these securities the next day. Securities sold under repurchase agreements are reflected as secured borrowings in the consolidated balance sheets at the amount of cash received in connection with each transaction. Details of the Corporation's repurchase agreements are included in NOTE 11. BORROWINGS of these Notes to Consolidated Financial Statements. ALLOWANCE FOR CREDIT LOSSES - OFF-BALANCE SHEET CREDIT EXPOSURES The allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Corporation is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Corporation has the unconditional right to cancel the obligation. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. The allowance for off-balance sheet credit exposures is adjusted through the income statement as a component of provision for credit loss. Further information regarding the policies and methodology used to estimate the allowance for credit losses on off-balance sheet credit exposures is detailed in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. The Corporation adopted CECL on January 1, 2021 and the impact at adoption is described below under the heading "RECENT ACCOUNTING CHANGES ADOPTED IN 2021." REVENUE RECOGNITION Revenue recognition guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Corporation's revenue-generating transactions are not subject to ASU 2014-09, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the disclosures. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. Descriptions of revenue-generating activities that are within the scope of ASU 2014-09, which are presented in our income statements are as follows: Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed, which is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned monthly, representing the period which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. 64 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Fiduciary activities : This represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction-based are recognized at the point in time that the transaction is executed. Investment Brokerage Fees : The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party provider on a monthly basis based upon customer activity for the month. The fees are paid to us by the third party on a monthly basis and are recognized when received. Interchange income : The Corporation earns interchange fees from debit and credit cardholder transactions conducted through the Visa and MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrent with the transaction processing services provided to the cardholder. Gains (Losses) on Sales of OREO : The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. TRANSFERS OF FINANCIAL ASSETS Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered, or in the case of a loan participation, a portion of the asset has been surrendered and meets the definition of a "participating interest." Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. SHARE-BASED COMPENSATION Stock option and restricted stock award plans are maintained by the Corporation. The compensation costs are recognized for stock options and restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the appropriate service period, which is generally two to five years . Details of the Corporation's share-based compensation are included in NOTE 17. SHARE-BASED COMPENSATION of these Notes to Consolidated Financial Statements. INCOME TAX Income tax expense in the consolidated statements of income is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts from the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation files consolidated income tax returns with its subsidiaries. The Corporation is generally no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years before 2018. The Corporation accounts for income taxes under the provisions of ASC 740, Income Taxes , which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Per the guidance in ASC 740, the Corporation has not identified any uncertain tax positions that it believes should be recognized in the financial statements. The Corporation reviews income tax expense and the carrying value of deferred tax assets and liabilities quarterly; as new information becomes available, the balances are adjusted, if applicable. The Corporation's policy is to recognize interest and penalties related to unrecognized tax benefits, if any, as a component of income tax expense. Details of the Corporation's income taxes are included in NOTE 19. INCOME TAX of these Notes to Consolidated Financial Statements. NET INCOME PER SHARE Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options and non-vested restricted stock awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. Details of the Corporation's net income per share are included in NOTE 20. NET INCOME PER SHARE of these Notes to Consolidated Financial Statements. 65 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) IMPACT OF COVID-19 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 SBA, to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the pandemic. The Bank actively participated in assisting its customers with PPP funding during all phases of the program. The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities. Loans under the program earn interest at a fixed rate of 1 percent. As of December 31, 2021, the Corporation had $ 106.6 million of PPP loans outstanding compared to the December 31, 2020 balance of $ 667.1 million. The Corporation will continue to monitor legislative, regulatory, and supervisory developments related to the PPP. However, it anticipates that the majority of the Bank’s remaining PPP loans will be forgiven by the SBA in accordance with the terms of the program Loan Modifications and Troubled Debt Restructures. The CARES Act, as amended by the 2021 Consolidated Appropriations Act (the "2021 CAA"), allowed banks to suspend requirements under GAAP, effectively, through January 1, 2022, for certain loan modifications related to the COVID-19 pandemic. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 or offer other borrower friendly options. In accordance with such guidance, the Bank made various short-term modifications for borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that were insignificant. The continued impact of COVID-19 on the Corporation will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence. It is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be fully lifted and businesses and their employees will be able to resume normal activities. Additional information may emerge regarding new developments with COVID-19 and additional actions may be taken by federal, state and local governments to contain COVID-19 or treat its impact. Changes in the behavior of customers, businesses and their employees as a result of COVID-19 pandemic are also unknown. As a result of COVID-19 and the actions taken to contain it or reduce its impact, the Corporation may continue to experience changes in the demand for our products and services, changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. Commercial and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into 2022, especially if positive cases increase and economic shutdowns are reinstated. These and similar factors and events may have substantial negative effects on the business, financial condition and results of operations of the Corporation and its customers. RECENT ACCOUNTING CHANGES ADOPTED IN 2021 FASB Accounting Standards Updates No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Summary - The FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . This new guidance replaced the previous “incurred loss” model for recognizing credit losses with an “expected life of loan loss” model referred to as the Current Expected Credit Loss ("CECL") model. Under the CECL model, certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delayed recognition until it is probable a loss has been incurred. The Corporation developed models that satisfy the requirements of the new standard which are governed by a system of internal controls and a cross-functional working group consisting of accounting, finance, and credit administration personnel. The loan portfolio was pooled into ten loan segments with similar risk characteristics for which the probability of default/loss given default methodology was applied. The Corporation utilized a one-year reasonable and supportable economic forecast followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the portfolio. A baseline macroeconomic scenario, along with other scenarios, were used to develop a range of estimated credit losses for which to determine the best estimate within. The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Pursuant to the CARES Act and the related joint statement of federal banking regulators (which also became effective as of March 27, 2020), and consistent with guidance from the SEC and FASB, the Corporation elected to delay implementation of ASU No. 2016-13, which was set to expire on December 31, 2020. However, the CAA (as discussed above) extended the temporary relief from CECL compliance to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates, or January 1, 2022. The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the CAA, the Corporation adopted CECL on January 1, 2021. This allowed the Corporation to utilize the CECL standard for the entire year of 2021, while its 2020 financial statements were prepared under the incurred loss model. 66 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) As of the adoption and day one measurement date of January 1, 2021, the Corporation recorded a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet of $ 68.0 million. The allowance for credit losses - loans increased 57 percent from December 31, 2020, or $ 74.1 million, because it covered expected credit losses over the life of the loan portfolio, which approximates four years, and it included an allowance on all purchased loans that were previously excluded from the allowance for loan loss calculation. CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from the allowance for credit losses, which was approximately $ 20.5 million. An allowance for credit losses of $ 245,000 was recorded on the state and municipal securities classified as held-to-maturity based on applying the long-term historical credit loss rate, as published by Moody's for similarly rated securities. The following table details the impact of the adoption of CECL on the Corporation's balance sheet as of January 1, 2021. December 31, 2020 Impact of CECL Adoption January 1, 2021 Post-CECL Adoption Assets: Held to maturity securities $ 1,227,668 $ ( 245 ) $ 1,227,423 Loans 9,243,174 4,776 9,247,950 Allowance for credit losses - loans ( 130,648 ) ( 74,055 ) ( 204,703 ) Net loans 9,112,526 ( 69,279 ) 9,043,247 Tax asset, deferred and receivable 12,340 21,984 34,324 Liabilities: Allowance for credit losses on unfunded loan commitments — 20,500 20,500 Stockholder's Equity: Retained Earnings 788,578 ( 68,040 ) 720,538 — FASB Accounting Standards Updates No. 2019-11 - Codification Improvements to (Topic 326): Financial Instruments - Credit Losses Summary - The FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses in order to address issues raised by stakeholders during the implementation of ASU No. 2016-13 , Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments. Among other narrow-scope improvements, the new ASU clarified guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permitted organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforced existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether or not an entity adopted ASU No. 2016-13. As discussed above, pursuant to the CARES Act, the Corporation elected to defer the adoption of CECL Additionally, the 2021 CAA, signed into law on December 27, 2020, amended the CARES Act by extending the temporary relief from CECL compliance to January 1, 2022. The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the 2021 CAA, the Corporation adopted CECL on January 1, 2021. The adoption of this standard did not have a significant effect on the Corporation’s consolidated financial statements or disclosures. FASB Accounting Standards Update No. 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes Summary - The FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is expected to reduce cost and complexity related to the accounting for income taxes. The ASU removed specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). It eliminated the need for an organization to analyze whether the following apply in a given period: • Exception to the incremental approach for intraperiod tax allocation; • Exceptions to accounting for basis differences when there are ownership changes in foreign investments; and • Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improved financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: • Franchise taxes that are partially based on income; • Transactions with a government that result in a step up in the tax basis of goodwill • Separate financial statements of legal entities that are not subject to tax; and • Enacted changes in tax laws in interim periods. The ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the ASU was permitted. The Corporation adopted this standard on January 1, 2021 and adoption of this standard did not have a significant effect on the Corporation's consolidated financial statements or disclosures. 67 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The Corporation continually monitors potential accounting pronouncement and SEC release changes. The following pronouncements and releases have been deemed to have the most applicability to the Corporation's financial statements: FASB Accounting Standards Updates - No. 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary - The FASB issued ASU No. 2020-04 to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates and move toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Entities may apply this ASU as of the beginning of an interim period that includes the March 12, 2020 issuance date of the ASU, through December 31, 2022. The Corporation expects to adopt the practical expedients included in the ASU prior to December 31, 2022. The Corporation is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Corporation is assessing ASU 2020-04 and its impact on the Corporation's transition away from LIBOR for its loans and other financial instruments. FASB Accounting Standards Updates - No. 2021-01 - Reference Rate Reform (Topic 848): Scope Summary - The FASB has published ASU 2021-01, Reference Rate Reform. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. If an entity elects to apply any of the amendments in this Update for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election. The amendments in this Update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Corporation is assessing ASU 2021-01 and its impact on the Corporation's transition away from LIBOR for its loans and other financial instruments. FASB Accounting Standards Updates - No. 2021-08 - Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers Summary - The FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , that addresses diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606 , Revenue from Contracts with Customers , at fair value on the acquisition date. The FASB indicates that some stakeholders indicated that it is unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after Topic 606 is adopted. Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer. To address this, the ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. Finally, the amendments in the ASU improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. For public business entities, the amendments are effective for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period or early application, and (2) prospectively to all business combinations that occur on or after the date of initial application. The Corporation is reviewing the terms of this guidance, but adoption of the standard is not expected to have a significant impact on the Corporation's financial statements or disclosures. 68 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 2 ACQUISITIONS Hoosier Trust Company On April 1, 2021, the Bank acquired 100 percent of Hoosier Trust Company ("Hoosier") through a merger of Hoosier with and into the Bank. The consideration paid to shareholders of Hoosier at closing was $ 3,225,000 in cash. Prior to the acquisition, Hoosier was an Indiana corporate trust company, headquartered in Indianapolis, Indiana, with approximately $ 290 million in assets under management. Hoosier’s sole office is now being operated by the Bank as a limited service trust office. Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair value on the date of the acquisition. Based on the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change based on the timing of the transaction, the purchase price for the Hoosier acquisition is detailed in the following table. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, information becomes available about facts and circumstances that existed as of the acquisition date, which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively. Fair Value Cash and cash equivalents $ 292 Other assets 35 Other liabilities ( 816 ) Net tangible assets acquired ( 489 ) Customer relationship intangible 2,247 Goodwill 1,467 Purchase price $ 3,225 Of the total purchase price, $ 2,247,000 was allocated to a customer relationship intangible, which will be amortized over its estimated life of 10 years. The remaining purchase price was allocated to goodwill, which is deductible for tax purposes. Pro forma financial information of the Hoosier acquisition is not included in these disclosures as it is deemed immaterial. Level One Bancorp, Inc. On November 4, 2021, the Corporation and Level One Bancorp, Inc., a Michigan corporation ("Level One"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Level One will, subject to the terms and conditions of the Merger Agreement, merge with and into the Corporation (the "Merger"), whereupon the separate corporate existence of Level One will cease and the Corporation will survive. Immediately following the Merger, Level One's wholly owned subsidiary, Level One Bank, will be merged with and into the Bank, with the Bank as the surviving bank. Subject to the terms and conditions of the Merger Agreement, upon the Merger becoming effective, the common shareholders of Level One will be entitled to received, for each outstanding share of Level One common stock, (a) a 0.7167 share (the "Exchange Ratio") of the Corporation's common stock, in a tax-free exchange, and (b) a cash payment of $ 10.17 . The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization, or similar transactions, or as otherwise described in the Merger Agreement. Fractional shares of the Corporation's common stock will not be issued in respect of fractional interests arising from the Exchange Ratio but will be paid in cash pursuant to the Merger Agreement. Based on the number of shares of Level One common stock currently outstanding, the Corporation expects to issue approximately 5.5 million shares of its common stock, and pay approximately $ 77.7 million in cash, in exchange for all the issued and outstanding shares of Level One common stock. In addition, the Corporation expects to issue 10,000 shares of a newly created 7.5 % non-cumulative perpetual preferred stock, with a liquidation preference of $ 2,500 per share, in exchange for the outstanding Level One Series B preferred stock. Based on the closing price of the Corporation's common stock on November 3, 2021, of $ 43.50 per share, the implied value for a share of Level One common stock is $ 41.35 . The aggregate transaction value is estimated at approximately $ 323.5 million. The Boards of Directors of both the Corporation and Level One have approved the Merger Agreement. The members of the Board of Directors of Level One have entered into a Voting Agreement pursuant to which each of them has agreed to vote their shares of Level One common stock in favor of the Merger. The Corporation has filed a Registration Statement on Form S-4 with the SEC in connection with the proposed Merger, including a Proxy Statement for Level One and Prospectus for the Corporation which have been submitted to the Level One common shareholders for their consideration at a meeting to be held on March 1, 2022. Consummation of the Merger remains subject to certain other closing conditions set forth in the Merger Agreement. For additional details, see the "HIGHLIGHTS FOR 2021" section of Management's Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. 69 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 3 CASH AND CASH EQUIVALENTS AND INTEREST-BEARING DEPOSITS At December 31, 2021, the Corporation’s non-interest bearing deposits, included in cash and cash equivalents, and interest-bearing deposits held at other institutions exceeded the $250,000 federally insured limits by approximately $ 208,437,000 . Each correspondent bank’s financial performance and market rating are reviewed on a quarterly basis to ensure the Corporation has deposits only at institutions providing minimal risk for those exceeding the federally insured limits. Additionally, the Corporation had approximately $ 366,281,000 at the Federal Home Loan Bank and Federal Reserve Bank, which are government-sponsored entities not insured by the FDIC. The Corporation has historically been required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. However, the Federal Reserve announced on March 15, 2020 that in order to support the flow of credit to households and businesses during the COVID-19 pandemic, reserve requirement ratios would move to zero effective March 26, 2020. The reserve requirement ratios remained at zero as of December 31, 2021. NOTE 4 INVESTMENT SECURITIES The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale as of December 31, 2021 and December 31, 2020. 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 The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity as of December 31, 2021 and December 31, 2020. 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 70 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Accrued interest on investment securities available for sale and held to maturity of $ 26.8 million are included in the Interest Receivable line on the Corporation's CONSOLIDATED BALANCE SHEETS. The total amount of accrued interest is excluded from the amortized cost of available for sale and held to maturity securities presented above. In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement. 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. On a quarterly basis, the Corporation monitors the credit quality of investment securities held to maturity through the use of credit ratings. The following table summarizes the amortized cost of investment securities held to maturity at December 31, 2021, aggregated by credit quality. Held to Maturity State and municipal Other Total Credit Rating: Aaa $ 90,290 $ 60,579 $ 150,869 Aa1 152,666 — 152,666 Aa2 175,755 — 175,755 Aa3 130,640 — 130,640 A1 88,281 — 88,281 A2 27,364 — 27,364 A3 10,108 — 10,108 Baa2 265 — 265 Non-rated 381,932 1,062,167 1,444,099 Total $ 1,057,301 $ 1,122,746 $ 2,180,047 The following table details activity in the allowance for credit losses on investment securities held to maturity during the twelve months ended December 31, 2021. State and municipal Allowance for Credit Losses: Balance, December 31, 2020 $ — Impact of adopting ASC 326 245 Provision for credit loss — Securities charged off — Recoveries on securities — Balance, December 31, 2021 $ 245 71 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables summarize, as of December 31, 2021 and December 31, 2020, investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and length of time in a continuous unrealized loss position. Less than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Investment securities available for sale at December 31, 2021 U.S. Treasury $ 999 $ 1 $ — $ — $ 999 $ 1 U.S. Government-sponsored agency securities 68,524 1,545 — — 68,524 1,545 State and municipal 138,187 894 505 4 138,692 898 U.S. Government-sponsored mortgage-backed securities 427,687 10,791 8,324 397 436,011 11,188 Corporate obligations 992 8 — — 992 8 Total investment securities available for sale $ 636,389 $ 13,239 $ 8,829 $ 401 $ 645,218 $ 13,640 Less than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Investment securities available for sale at December 31, 2020 State and municipal $ 5,368 $ 246 $ — $ — $ 5,368 $ 246 U.S. Government-sponsored mortgage-backed securities 9,651 103 — — 9,651 103 Total investment securities available for sale $ 15,019 $ 349 $ — $ — $ 15,019 $ 349 The following table summarizes investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and the number of securities in the portfolio in an unrealized loss position for the periods indicated. Gross Unrealized Losses Number of Securities Investment securities available for sale at December 31, 2021 U.S. Treasury $ 1 1 U.S. Government-sponsored agency securities 1,545 8 State and municipal 898 103 U.S. Government-sponsored mortgage-backed securities 11,188 48 Corporate obligations 8 1 Total investment securities available for sale 13,640 161 Gross Unrealized Losses Number of Securities Investment securities available for sale at December 31, 2020 State and municipal $ 246 4 U.S. Government-sponsored mortgage-backed securities $ 103 5 Total investment securities available for sale $ 349 9 The unrealized losses in the Corporation’s investment portfolio were the result of changes in interest rates and not credit quality. As a result, the Corporation expects to recover the amortized cost basis over the term of the securities. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Certain investment securities available for sale are reported in the financial statements at an amount less than their historical cost as indicated in the table below. December 31, 2021 December 31, 2020 Investments available for sale reported at less than historical cost: Historical cost $ 658,858 $ 15,368 Fair value 645,218 15,019 Gross unrealized losses $ 13,640 $ 349 Percent of the Corporation's investments available for sale 27.5 % 0.8 % 72 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) 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 1 and Level 2 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 was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active. The amortized cost and fair value of investment securities available for sale and held to maturity at December 31, 2021 and December 31, 2020, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Maturity Distribution at December 31, 2021 Due in one year or less $ 6,954 $ 6,965 $ 6,971 $ 6,995 Due after one through five years 5,097 5,309 30,272 31,946 Due after five through ten years 120,460 126,816 177,203 180,129 Due after ten years 1,464,460 1,537,856 1,215,812 1,231,568 1,596,971 1,676,946 1,430,258 1,450,638 U.S. Government-sponsored mortgage-backed securities 671,684 667,605 749,789 751,865 Total Investment Securities $ 2,268,655 $ 2,344,551 $ 2,180,047 $ 2,202,503 Securities with a carrying value of approximately $ 873.2 million and $ 890.0 million were pledged at December 31, 2021 and 2020, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law. In order to facilitate the funding of PPP loans, the Bank pledged securities to the Discount Window at the Federal Reserve Bank resulting in an increase in pledged securities as of December 31, 2020 compared to December 31, 2019. Those securities remain pledged at the Federal Reserve Bank in 2021 as an alternative funding source. The book value of securities sold under agreements to repurchase amounted to $ 175.1 million at December 31, 2021 and $ 167.3 million at December 31, 2020. Gross gains and losses on the sales and redemptions of available for sale securities for the years indicated are shown below. 2021 2020 2019 Sales and Redemptions of Available for Sale Securities: Gross gains $ 6,502 $ 12,097 $ 4,415 Gross losses 828 202 — 73 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 5 LOANS AND ALLOWANCE FOR CREDIT LOSSES The Corporation's primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. The following tables show the composition of the loan portfolio and credit quality characteristics by collateral classification, excluding loans held for sale. Loans held for sale at December 31, 2021 and December 31, 2020, were $ 11.2 million and $ 4.0 million, respectively. The following table illustrates the composition of the Corporation’s loan portfolio by loan class for the periods indicated: December 31, 2021 December 31, 2020 Commercial and industrial loans $ 2,714,565 $ 2,776,699 Agricultural land, production and other loans to farmers 246,442 281,884 Real estate loans: Construction 523,066 484,723 Commercial real estate, non-owner occupied 2,135,459 2,220,949 Commercial real estate, owner occupied 986,720 958,501 Residential 1,159,127 1,234,741 Home equity 523,754 508,259 Individuals' loans for household and other personal expenditures 146,092 129,479 Public finance and other commercial loans 806,636 647,939 Loans $ 9,241,861 $ 9,243,174 As of December 31, 2021, the Corporation had $ 106.6 million of Paycheck Protection Program ("PPP") loans compared to the December 31, 2020 balance of $ 667.1 million. PPP loans are included in the commercial and industrial loan class. Additional details of the PPP are included in the "IMPACT OF COVID-19" section of NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements. Credit Quality As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to: (i) the level of criticized commercial loans, (ii) net charge-offs, (iii) non-performing loans, (iv) covenant failures and (v) the general national and local economic conditions. The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows: • Pass - Loans that are considered to be of acceptable credit quality. • Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation's credit position at some future date. Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification. • Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. • Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable. • Loss – Loans that are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted. Loans will be classified as Loss when it is neither practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 74 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables summarize the risk grading of the Corporation’s loan portfolio by loan class and by year of origination for the years indicated. Consumer loans are not risk graded. For the purposes of this disclosure, the consumer loans are classified in the following manner: loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Loans that evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected are included in the applicable categories below. Commercial and industrial loan balances as of December 31, 2021 with an origination year of 2021 and 2020 include PPP loans of $ 100.3 million and $ 6.3 million, respectively. Term Loans (amortized cost basis by origination year) 2021 2020 2019 2018 2017 Prior Revolving loans amortized cost basis Revolving loans converted to term Total Commercial and industrial loans Pass $ 1,019,757 $ 362,372 $ 144,520 $ 65,165 $ 21,575 $ 30,420 $ 990,335 $ — $ 2,634,144 Special Mention 10,559 11,088 190 730 1,930 1,825 15,026 — 41,348 Substandard 2,811 2,127 7,432 2,932 431 747 22,593 — 39,073 Total Commercial and industrial loans 1,033,127 375,587 152,142 68,827 23,936 32,992 1,027,954 — 2,714,565 Agricultural land, production and other loans to farmers Pass 50,251 45,164 22,195 7,689 6,153 36,074 74,871 — 242,397 Special Mention — 1,543 — — — 252 264 — 2,059 Substandard 524 506 108 371 — 27 450 — 1,986 Total Agricultural land, production and other loans to farmers 50,775 47,213 22,303 8,060 6,153 36,353 75,585 — 246,442 Real estate loans: Construction Pass 215,167 200,169 63,589 979 1,762 2,453 17,201 — 501,320 Special Mention 20,737 270 — — — 46 — — 21,053 Substandard — 693 — — — — — — 693 Total Construction 235,904 201,132 63,589 979 1,762 2,499 17,201 — 523,066 Commercial real estate, non-owner occupied Pass 589,296 688,406 227,332 111,971 103,400 126,837 26,779 — 1,874,021 Special Mention 68,279 149,480 — — — 1,723 — — 219,482 Substandard 19,314 14,912 178 1,118 6,156 278 — — 41,956 Total Commercial real estate, non-owner occupied 676,889 852,798 227,510 113,089 109,556 128,838 26,779 — 2,135,459 Commercial real estate, owner occupied Pass 299,186 392,383 92,338 43,252 46,044 48,571 33,998 — 955,772 Special Mention 5,665 5,953 738 1,532 902 1,301 149 — 16,240 Substandard 7,025 5,763 — 53 113 1,754 — — 14,708 Total Commercial real estate, owner occupied 311,876 404,099 93,076 44,837 47,059 51,626 34,147 — 986,720 Residential Pass 349,726 353,691 103,028 69,745 55,240 210,669 2,955 73 1,145,127 Special Mention 1,034 1,394 1,456 306 172 2,106 — — 6,468 Substandard 1,004 1,575 335 1,248 108 3,257 — 5 7,532 Total Residential 351,764 356,660 104,819 71,299 55,520 216,032 2,955 78 1,159,127 Home equity Pass 63,845 17,556 1,977 2,127 1,250 3,432 427,437 194 517,818 Special Mention — 85 48 — — 24 3,451 — 3,608 Substandard 520 — — 8 91 70 1,639 — 2,328 Total Home Equity 64,365 17,641 2,025 2,135 1,341 3,526 432,527 194 523,754 Individuals' loans for household and other personal expenditures Pass 67,749 23,452 11,893 11,197 2,008 4,928 24,406 — 145,633 Special Mention 79 85 50 33 20 58 134 — 459 Substandard — — — — — — — — — Total Individuals' loans for household and other personal expenditures 67,828 23,537 11,943 11,230 2,028 4,986 24,540 — 146,092 Public finance and other commercial loans Pass 231,319 178,316 100,679 39,098 105,964 128,942 22,318 — 806,636 Total Public finance and other commercial loans 231,319 178,316 100,679 39,098 105,964 128,942 22,318 — 806,636 Loans $ 3,023,847 $ 2,456,983 $ 778,086 $ 359,554 $ 353,319 $ 605,794 $ 1,664,006 $ 272 $ 9,241,861 75 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) December 31, 2020 Commercial Pass Commercial Special Mention Commercial Substandard Commercial Doubtful Commercial Loss Consumer Performing Consumer Non-Performing Total Commercial and industrial loans $ 2,562,077 $ 117,503 $ 97,119 $ — $ — $ — $ — $ 2,776,699 Agricultural land, production and other loans to farmers 243,991 26,835 9,885 — — 1,173 — 281,884 Real estate loans: Construction 446,846 10,445 5,549 — — 21,763 120 484,723 Commercial real estate, non-owner occupied 1,979,827 160,304 80,818 — — — — 2,220,949 Commercial real estate, owner occupied 907,566 17,641 33,294 — — — — 958,501 Residential 199,338 2,261 7,058 — — 1,020,687 5,397 1,234,741 Home equity 12,714 — 989 — — 492,999 1,557 508,259 Individuals' loans for household and other personal expenditures — — — — — 129,440 39 129,479 Public finance and other commercial loans 647,939 — — — — — — 647,939 Loans $ 7,000,298 $ 334,989 $ 234,712 $ — $ — $ 1,666,062 $ 7,113 $ 9,243,174 Total past due loans equaled $ 34.7 million as of December 31, 2021, a $ 38.0 million decrease from the total of $ 72.8 million for December 31, 2020. At December 31, 2021, 30-59 Days Past Due loans totaled $ 15.0 million, a decrease of $ 4.6 million from December 31, 2020. The primary decreases were in commercial and industrial and owner-occupied commercial real estate loans. At December 31, 2021, 60-89 Days Past Due loans totaled $ 7.1 million, a decrease of $ 4.1 million from December 31, 2020. The primary decrease was in commercial and industrial loans and non-owner occupied commercial real estate, offset by an increase in the residential portfolio. At December 31, 2021, 90 Days or More Past Due loans totaled $ 12.7 million, a decrease of $ 29.3 million from December 31, 2020. The primary decrease was in non-owner occupied commercial real estate, due to the payoff of a $ 23.4 million relationship. The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, for the years indicated: December 31, 2021 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due And Accruing Commercial and industrial loans $ 2,708,539 $ 2,602 $ 2,437 $ 987 $ 2,714,565 $ 675 Agricultural land, production and other loans to farmers 246,380 36 — 26 246,442 — Real estate loans: Construction 522,349 717 — — 523,066 — Commercial real estate, non-owner occupied 2,124,853 3,327 — 7,279 2,135,459 — Commercial real estate, owner occupied 985,785 643 — 292 986,720 — Residential 1,148,294 3,979 4,255 2,599 1,159,127 — Home equity 518,643 3,327 281 1,503 523,754 288 Individuals' loans for household and other personal expenditures 145,634 375 83 — 146,092 — Public finance and other commercial loans 806,636 — — — 806,636 — Loans $ 9,207,113 $ 15,006 $ 7,056 $ 12,686 $ 9,241,861 $ 963 December 31, 2020 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due And Accruing Commercial and industrial loans $ 2,761,473 $ 5,866 $ 6,571 $ 2,789 $ 2,776,699 $ 594 Agricultural land, production and other loans to farmers 280,615 146 226 897 281,884 — Real estate loans: Construction 484,706 — 17 — 484,723 — Commercial real estate, non-owner occupied 2,184,681 2,525 2,109 31,634 2,220,949 — Commercial real estate, owner occupied 951,561 4,854 180 1,906 958,501 — Residential 1,226,779 3,269 1,429 3,264 1,234,741 133 Home equity 503,596 2,644 559 1,460 508,259 19 Individuals' loans for household and other personal expenditures 129,049 334 96 — 129,479 — Public finance and other commercial loans 647,939 — — — 647,939 — Loans $ 9,170,399 $ 19,638 $ 11,187 $ 41,950 $ 9,243,174 $ 746 76 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in the prior year, if any, is charged to the allowance for credit losses. Payments subsequently received on non-accrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance. The following table summarizes the Corporation’s non-accrual loans by loan class for the periods indicated: December 31, 2021 December 31, 2020 Non-Accrual Loans Non-Accrual Loans with no Allowance for Credit Losses Non-Accrual Loans Commercial and industrial loans $ 7,598 $ 263 $ 2,329 Agricultural land, production and other loans to farmers 631 524 1,012 Real estate loans: Construction 685 — 123 Commercial real estate, non-owner occupied 23,029 6,133 46,316 Commercial real estate, owner occupied 411 — 3,040 Residential 9,153 2,160 6,517 Home equity 1,552 — 2,095 Individuals' loans for household and other personal expenditures 3 — 39 Loans $ 43,062 $ 9,080 $ 61,471 There was no interest income recognized on non-accrual loans for the twelve months ended December 31, 2021 and 2020, respectively. Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses: December 31, 2021 Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans Commercial and industrial loans $ — $ — $ 8,075 $ 8,075 $ 2,672 Agricultural land, production and other loans to farmers 524 — 251 775 — Real estate loans: Construction — 685 — 685 82 Commercial real estate, non-owner occupied 23,652 — — 23,652 5,510 Commercial real estate, owner occupied 1,044 — — 1,044 — Residential — 4,906 — 4,906 305 Home equity — 394 — 394 64 Loans $ 25,220 $ 5,985 $ 8,326 $ 39,531 $ 8,633 77 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) As detailed in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements, the Bank's banking regulators issued guidance in March 2020 encouraging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act had further provided that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. In accordance with that guidance, the Bank has offered short-term modifications made in response to COVID-19 to borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The 2021 CAA extended the expiration date for COVID-related loan modifications exempt from troubled debt restructuring classification until January 1, 2022. At December 31, 2021, the Corporation did no t have any outstanding COVID modifications, compared to $ 120.3 million on 87 loans at December 31, 2020. In certain loan restructuring situations, the Corporation may grant a concession to a debtor experiencing financial difficulty, resulting in a troubled debt restructuring. A concession is deemed to be granted when, as a result of the restructuring, the Corporation does not expect to collect all original amounts due, including interest accrued at the original contract rate. If the payment of principal at original maturity is primarily dependent on the value of collateral, the current value of the collateral is considered in determining whether the principal will be repaid. The following tables summarize troubled debt restructures in the Corporation's loan portfolio that occurred during the twelve months ended December 31, 2021 and 2020, respectively. Twelve Months Ended December 31, 2021 Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans Commercial and industrial loans $ 348 $ 348 $ — $ — $ 348 2 Real estate loans: Construction 16 — 16 — 16 1 Commercial real estate, non owner occupied 12,922 12,976 — — 12,976 1 Commercial real estate, owner occupied 51 29 — 21 50 2 Residential 691 449 126 118 693 9 Total $ 14,028 $ 13,802 $ 142 $ 139 $ 14,083 15 Twelve Months Ended December 31, 2020 Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans Commercial and industrial loans $ 654 $ 654 $ — $ — $ 654 3 Agricultural land, production and other loans to farmers 458 458 — — 458 1 Real estate loans: Construction 113 — — 123 123 1 Commercial real estate, owner occupied 107 107 — — 107 1 Residential 2,730 2,393 163 224 2,780 38 Home Equity 332 237 95 — 332 3 Individuals' loans for household and other personal expenditures 19 19 — — 19 2 Total $ 4,413 $ 3,868 $ 258 $ 347 $ 4,473 49 Loans secured by commercial real estate, non-owner occupied made up 92.1 percent of the post-modification balances of the troubled debt restructured loans that occurred during the twelve months ending December 31, 2021. During the twelve months ended December 31, 2020, residential made up and 62.2 percent of the post-modification balance of the troubled debt restructured loans that occurred in the period. The following tables summarize troubled debt restructures that occurred during the twelve months ended December 31, 2021 and 2020, that subsequently defaulted during the period indicated and remained in default at period end. For purposes of this schedule, a loan is considered in default if it is 30-days or more past due. Twelve Months Ended December 31, 2021 Number of Loans Recorded Balance Real estate loans: Residential 5 $ 475 Total 5 $ 475 78 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Twelve Months Ended December 31, 2020 Number of Loans Recorded Balance Commercial and industrial loans 2 $ 585 Real estate loans: Residential 8 610 Home equity 1 93 Total 11 $ 1,288 Commercial troubled debt restructured loans risk graded special mention, substandard, doubtful and loss are individually evaluated for apparent loss and may result in a specific reserve allocation in the allowance for credit loss. Commercial troubled debt restructures that aren't individually evaluated for a specific reserve are included in the calculation of allowance for credit losses through the loan segment loss analysis. For all consumer loan modifications, an evaluation to identify if a troubled debt restructure has occurred is performed prior to making the modification. Any subsequent deterioration is addressed through the charge-off process or through a specific reserve allocation included in the allowance for credit loss. Consumer troubled debt restructures that are not individually evaluated for a specific reserve are included in the calculation of the allowance for credit losses through the loan segment loss analysis. Consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $ 4.2 million and $ 2.8 million at December 31, 2021 and December 31, 2020, respectively. Allowance for Credit Losses on Loans The Allowance for Credit Losses on Loans ("ACL - Loans") is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over the contractual term. The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge offs for loans, net or recoveries. Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. The allowance represents the Corporation’s best estimate of current expected credit losses on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The current expected credit loss ("CECL") calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the allowance for credit losses is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date. In calculating the allowance for credit losses, the loan portfolio was pooled into ten loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Corporation analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. The expected credit losses are measured over the life of each loan segment utilizing the Probability of Default / Loss Given Default methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates. The Corporation sub-segmented certain commercial portfolios by risk level and certain consumer portfolios by delinquency status where appropriate. The Corporation utilized a four-quarter reasonable and supportable economic forecast period followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the loans. Econometric modeling was performed using historical default rates and a selection of economic forecast scenarios published by Moody’s to develop a range of estimated credit losses for which to determine the best credit loss estimate within. Macroeconomic factors utilized in the modeling process include the national unemployment rate, BBB US corporate index, CRE price index and the home price index. The Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending management and staff, and (vi) other environmental factors such as regulatory, legal and technological considerations, as well as competition. 79 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the Small Business Administration ("SBA"). The risk characteristics of the Corporation’s portfolio segments are as follows: Commercial Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Corporation monitors commercial real estate loans based on collateral and risk grade criteria, as well as the levels of owner-occupied versus non-owner occupied loans. Construction Construction loans are underwritten utilizing a combination of tools and techniques including feasibility and market studies, independent appraisals and appraisal reviews, absorption and interest rate sensitivity analysis as well as the financial analysis of the developer and all guarantors. Construction loans are monitored by either in house or third party inspectors limiting advances to a percentage of costs or stabilized project value. These loans frequently involve the disbursement of significant funds with the repayment dependent upon the successful completion and, where necessary, the future stabilization of the project. The predominant inherent risk of this portfolio is associated with the borrower's ability to successfully complete a project on time, within budget and stabilize the projected as originally projected. Consumer and Residential With respect to residential loans that are secured by 1-4 family residences, which are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans, such as small installment loans and certain lines of credit, are unsecured. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers and can also be impacted by changes in property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. The following tables summarize changes in the allowance for credit losses by loan segment for the twelve months ended December 31, 2021: Twelve Months Ended December 31, 2021 Commercial Commercial Real Estate Construction Consumer Residential Consumer & Residential Total Allowance for credit losses Balances, December 31, 2020 $ 47,115 $ 51,070 $ — $ 9,648 $ 22,815 $ — $ 130,648 Credit risk reclassifications — ( 10,284 ) 10,284 ( 9,648 ) ( 22,815 ) 32,463 — Balances, December 31, 2020 after reclassifications 47,115 40,786 10,284 — — 32,463 130,648 Impact of adopting ASC 326 20,024 34,925 8,805 — — 10,301 74,055 Balances, January 1, 2021 Post-ASC 326 adoption 67,139 75,711 19,089 — — 42,764 204,703 Provision for credit losses 7,921 ( 11,093 ) 1,122 — — 2,050 — Recoveries on loans 724 580 1 — — 1,273 2,578 Loans charged off ( 5,849 ) ( 4,533 ) ( 6 ) — — ( 1,496 ) ( 11,884 ) Balances, December 31, 2021 $ 69,935 $ 60,665 $ 20,206 $ — $ — $ 44,591 $ 195,397 80 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Allowance for Loan Losses under prior GAAP ("Incurred Loss Model") Prior to the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2021, the Corporation maintained an allowance for loan losses in accordance with the incurred loss model as disclosed in the Corporation's 2020 Annual Report on Form 10-K. The following tables summarize changes in the allowance for loan losses by loan segment for the twelve months ended December 31, 2020 and 2019: Twelve Months Ended December 31, 2020 Commercial Commercial Real Estate Consumer Residential Total Allowance for loan losses: Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284 Provision for losses 21,930 22,174 5,996 8,573 58,673 Recoveries on loans 819 431 260 666 2,176 Loans charged off ( 8,536 ) ( 313 ) ( 643 ) ( 993 ) ( 10,485 ) Balances, December 31, 2020 $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648 Twelve Months Ended December 31, 2019 Commercial Commercial Real Estate Consumer Residential Total Allowance for loan losses: Balances, December 31, 2018 $ 32,657 $ 29,609 $ 3,964 $ 14,322 $ 80,552 Provision for losses 733 1,555 239 273 2,800 Recoveries on loans 1,244 1,289 401 619 3,553 Loans charged off ( 1,732 ) ( 3,675 ) ( 569 ) ( 645 ) ( 6,621 ) Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284 The table below shows the Corporation’s allowance for loan losses under the incurred loss model and loan portfolio by loan segment as of December 31, 2020. December 31, 2020 Commercial Commercial Real Estate Consumer Residential Total Allowance Balances: Individually evaluated for impairment $ 223 $ 12,246 $ — $ 432 $ 12,901 Collectively evaluated for impairment 46,892 38,824 9,648 22,383 117,747 Total Allowance for Loan Losses $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648 Loan Balances: Individually evaluated for impairment $ 1,258 $ 51,605 $ 2 $ 3,291 $ 56,156 Collectively evaluated for impairment 3,505,863 3,805,808 129,477 1,739,709 9,180,857 Loans acquired with deteriorated credit quality 577 5,584 — — 6,161 Loans $ 3,507,698 $ 3,862,997 $ 129,479 $ 1,743,000 $ 9,243,174 81 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables show the composition of the Corporation’s impaired loans and related allowance by loan class under the incurred loss model and the interest income recognized for the periods indicated: December 31, 2020 Unpaid Principal Balance Recorded Investment Related Allowance Impaired loans with no related allowance: Commercial and industrial loans $ 1,059 $ 991 $ — Real estate Loans: Commercial real estate, non-owner occupied 4,958 4,694 — Commercial real estate, owner occupied 2,125 1,310 — Residential 957 816 — Individuals' loans for household and other personal expenditures 2 2 — Total $ 9,101 $ 7,813 $ — Impaired loans with related allowance: Commercial and industrial loans $ 268 $ 268 $ 223 Agricultural land, production and other loans to farmers 640 562 3 Real estate Loans: Commercial real estate, non-owner occupied 44,016 43,715 11,686 Commercial real estate, owner occupied 2,061 1,323 557 Residential 2,041 2,014 352 Home equity 487 461 80 Total $ 49,513 $ 48,343 $ 12,901 Total Impaired Loans $ 58,614 $ 56,156 $ 12,901 December 31, 2019 Unpaid Principal Balance Recorded Investment Related Allowance Impaired loans with no related allowance: Commercial and industrial loans $ 320 $ 320 $ — Agricultural land, production and other loans to farmers 752 381 — Real estate loans: Construction 1,206 970 — Commercial real estate, non-owner occupied 6,202 5,299 — Commercial real estate, owner occupied 1,382 306 — Residential 93 76 — Total $ 9,955 $ 7,352 $ — Impaired loans with related allowance: Agricultural land, production and other loans to farmers 588 585 107 Real estate loans: Commercial real estate, owner occupied 2,060 1,324 124 Residential 2,070 2,044 383 Home equity 417 400 75 Individuals' loans for household and other personal expenditures 4 4 — Total $ 5,139 $ 4,357 $ 689 Total Impaired Loans $ 15,094 $ 11,709 $ 689 82 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Twelve Months Ended December 31, 2020 Average Recorded Investment Interest Income Recognized Impaired loans with no related allowance: Commercial and industrial loans $ 991 $ — Real estate Loans: Commercial real estate, non-owner occupied 4,850 145 Commercial real estate, owner occupied 1,429 — Residential 840 3 Individuals' loans for household and other personal expenditures 3 — Total $ 8,113 $ 148 Impaired loans with related allowance: Commercial and industrial loans $ 267 $ — Agricultural land, production and other loans to farmers 589 — Real estate Loans: Commercial real estate, non-owner occupied 44,119 — Commercial real estate, owner occupied 1,447 — Residential 2,108 70 Home equity 473 14 Total $ 49,003 $ 84 Total Impaired Loans $ 57,116 $ 232 Twelve Months Ended December 31, 2019 Average Recorded Investment Interest Income Recognized Impaired loans with no related allowance: Commercial and industrial loans $ 320 $ — Agricultural land, production and other loans to farmers 542 — Real estate loans: Construction 1,229 — Commercial real estate, non-owner occupied 5,399 156 Commercial real estate, owner occupied 357 — Residential 77 3 Total $ 7,924 $ 159 Impaired loans with related allowance: Agricultural land, production and other loans to farmers 585 — Real estate loans: Commercial real estate, owner occupied 1,324 — Residential 2,083 63 Home equity 409 12 Individuals' loans for household and other personal expenditures 4 — Total $ 4,405 $ 75 Total Impaired Loans $ 12,329 $ 234 83 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Off-Balance Sheet Arrangements, Commitments And Contingencies In the normal course of business, the Corporation has entered into off-balance sheet financial instruments which include commitments to extend credit and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, and thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing for their cash flows. Other typical lines of credit are related to home equity loans granted to customers. Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require a fee. Standby letters of credit are generally issued on behalf of an applicant (the Corporation’s customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. The standby letter of credit would permit the beneficiary to obtain payment from the Corporation under certain prescribed circumstances. Subsequently, the Corporation would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit. The Corporation typically follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is typically evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property. The contractual amounts of these commitments are not reflected in the consolidated financial statements and only amounts drawn upon would be reflected in the future. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should the Corporation’s customers default on their resulting obligation to the Corporation, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments. Financial instruments with off-balance sheet risk were as follows: December 31, 2021 December 31, 2020 Amounts of commitments: Loan commitments to extend credit $ 3,917,215 $ 3,443,514 Standby letters of credit $ 34,613 $ 29,555 The adoption of the CECL methodology for measuring credit losses, as discussed more fully in the Allowance for Credit Loss on Loans section of this Note, and in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements, increased the opening balance of our accrual for off-balance sheet commitments at adoption by $ 20.5 million. This reserve level remains appropriate and is reported in Other Liabilities as of December 31, 2021 in the CONSOLIDATED BALANCE SHEETS. The following table details activity in the allowance for credit losses on off-balance sheet commitments: Twelve Months Ended December 31, 2021 Balances, January 1, 2021 $ 20,500 Provision for credit losses — Balances, December 31, 2021 $ 20,500 NOTE 6 PREMISES AND EQUIPMENT The following table summarizes the Corporation's premises and equipment as of December 31, 2021 and 2020: 2021 2020 Cost at December 31: Land $ 22,349 $ 25,619 Buildings and Leasehold Improvements 160,410 163,588 Equipment 129,885 127,341 Total Cost 312,644 316,548 Accumulated Depreciation and Amortization ( 206,989 ) ( 205,486 ) Net $ 105,655 $ 111,062 The Corporation is committed under various non-cancelable lease contracts for certain subsidiary office facilities and equipment. Details regarding the lease contracts are discussed in NOTE 9. LEASES of these Notes to Consolidated Financial Statements. 84 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 7 GOODWILL Goodwill is recorded on the acquisition date of an entity. The Hoosier acquisition on April, 1, 2021 resulted in $ 1,467,000 of goodwill. Details regarding the Hoosier acquisition are discussed in NOTE 2. ACQUISITIONS of these Notes to Consolidated Financial Statements. As of October 1, 2021, the Corporation performed its annual goodwill impairment testing and in the valuation, the fair value exceeded the Corporation's carrying value; therefore, it was concluded goodwill was not impaired. As of October 1, 2020, the Corporation performed its annual goodwill impairment test which included various valuation considerations including comparable peer data, precedent transaction comparables, discounted cash flow analysis, overall financial performance, share price of the Corporation's common stock and other factors. The testing for 2020 resulted in a conclusion that it was not more likely than not that the fair value of the Corporation had declined below its carrying value and no impairment loss was recorded in 2020. For additional details related to impairment testing, see the "GOODWILL" section of Management's Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. 2021 2020 Balance, January 1 $ 543,918 $ 543,918 Goodwill acquired 1,467 — Balance, December 31 $ 545,385 $ 543,918 NOTE 8 OTHER INTANGIBLES Core deposit intangibles and other intangibles are recorded on the acquisition date of an entity. The Hoosier acquisition on April 1, 2021 resulted in a customer relationship intangible of $ 2,247,000 . Details regarding the Hoosier acquisition are discussed in NOTE 2. ACQUISITIONS of these Notes to Consolidated Financial Statements. The carrying basis and accumulated amortization of recognized core deposit and other intangibles are noted below. 2021 2020 Gross carrying amount $ 102,396 $ 102,396 Other intangibles acquired 2,247 — Accumulated amortization ( 79,168 ) ( 73,421 ) Total core deposit and other intangibles $ 25,475 $ 28,975 The core deposit intangibles and other intangibles are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of two to ten years . Amortization expense for the years ended December 31, 2021, 2020 and 2019, was $ 5.7 million, $ 6.0 million and $ 6.0 million, respectively. Estimated future amortization expense is summarized as follows: Amortization Expense 2022 $ 5,402 2023 5,145 2024 4,510 2025 3,754 2026 2,948 After 2026 3,716 $ 25,475 85 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 9 LEASES The Corporation enters into leases for certain retail branches, office space, land and equipment. Operating leases are included in other assets and the lease liability is included in other liabilities in our balance sheets. The Corporation does not have any finance leases. Right-of-use (ROU) assets represent the Corporation's right to use an underlying asset for the lease term and lease liabilities represent the Corporation's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Corporation uses its incremental borrowing rate at commencement date in determining the present value of lease payments when the rate implicit in a lease is not known. The Corporation's incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Corporation's leases are generally for periods of five to twenty years with various renewal options. The exercise of such lease renewal options is not included in the present value of lease obligations unless it is reasonably certain that the option will be exercised. The Corporation has lease agreements which contain both lease and non-lease components such as common area maintenance charges, real estate taxes, and insurance. Non-lease components are not included in the measurement of the lease liability and are recognized in expense when incurred. The Corporation has elected not to recognize short-term leases, with original lease terms of twelve months or less, on the Corporation's balance sheet. Certain of the Corporation's lease agreements include rental payments adjusted periodically for inflation. The Corporation's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Supplemental balance sheet information related to leases is presented in the table below as of December 31, 2021 and 2020: 2021 2020 Operating lease assets $ 17,818 $ 18,247 Total lease assets $ 17,818 $ 18,247 Operating lease liabilities $ 19,619 $ 20,058 Total lease liabilities $ 19,619 $ 20,058 Weighted average remaining lease term (years) Operating leases 7.0 8.0 Weighted average discount rate Operating leases 3.1 % 3.3 % The table below presents the components of lease expense for the years ended December 31, 2021, 2020, and 2019: 2021 2020 2019 Lease Cost: Operating lease cost $ 3,710 $ 3,724 $ 3,617 Short-term lease cost 345 247 204 Variable lease cost 980 842 948 Sublease income $ ( 33 ) $ ( 43 ) $ ( 13 ) Total lease cost $ 5,002 $ 4,770 $ 4,756 Supplemental cash flow information related to leases is presented in the tables below. Maturity of lease liabilities Operating Leases 2022 $ 3,954 2023 3,569 2024 3,464 2025 3,217 2026 1,945 2027 and after 5,913 Total lease payments $ 22,062 Less: Present value discount 2,443 Present value of lease liabilities $ 19,619 Other Information Twelve Months Ended December 31, 2021 Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 3,773 $ 3,629 $ 3,422 ROU assets obtained in exchange for new operating lease liabilities $ 2,700 $ 1,601 $ 23,529 86 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 10 DEPOSITS The composition of the deposit portfolio is included in the table below for the years indicated: December 31, 2021 December 31, 2020 Demand deposits $ 7,704,190 $ 6,821,152 Savings deposits 4,334,802 3,661,713 Certificates and other time deposits of $100,000 or more 273,379 346,194 Other certificates and time deposits 389,752 459,168 Brokered deposits 30,454 73,383 Total deposits $ 12,732,577 $ 11,361,610 At December 31, 2021 and 2020, deposits exceeding the FDIC's Standard Maximum Deposit Insurance Amount of $250,000 were $ 7.6 billion and $ 6.4 billion, respectively. The Corporation experienced increases from December 31, 2020 in demand and savings accounts of $ 883.0 million and $ 673.1 million, respectively. A portion of the increase is due to PPP loans that have remained on deposit, in addition to consumer Economic Impact Payments from the IRS that have also remained on deposit. Offsetting these increases were decreases in certificates of deposit and brokered deposits of $ 142.2 million and $ 42.9 million, respectively, from December 31, 2020. The low interest rate environment has resulted in customers migrating funds from maturing time deposit products into non-maturity products due to similar rates offered for both products. At December 31, 2021, the contractual maturities of time deposits are summarized as follows: Certificates and Other Time Deposits 2022 $ 548,203 2023 108,558 2024 15,506 2025 10,394 2026 9,662 After 2026 1,262 $ 693,585 NOTE 11 BORROWINGS The following table summarizes the Corporation's borrowings as of December 31, 2021 and 2020: December 31, 2021 December 31, 2020 Securities sold under repurchase agreements $ 181,577 $ 177,102 Federal Home Loan Bank advances 334,055 389,430 Subordinated debentures and term loans 118,618 118,380 Total Borrowings $ 634,250 $ 684,912 Securities sold under repurchase agreements consist of obligations of the Bank to other parties and are secured by U.S. Government-Sponsored Enterprise obligations. The maximum amount of outstanding agreements at any month-end during 2021 and 2020 totaled $ 199.1 million and $ 197.9 million, respectively, and the average of such agreements totaled $ 173.8 million and $ 180.7 million during 2021 and 2020, respectively. 87 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Transfers Accounted For As Secured Borrowings The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of December 31, 2021 and 2020 were: December 31, 2021 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total U.S. Government-sponsored mortgage-backed securities $ 181,577 $ — $ — $ — $ 181,577 December 31, 2020 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total U.S. Government-sponsored mortgage-backed securities $ 175,449 $ — $ 1,653 $ — $ 177,102 Contractual maturities of borrowings as of December 31, 2021, are as follows: Maturities in Years Ending December 31: Securities Sold Under Repurchase Agreements Federal Home Loan Bank Advances Subordinated Debentures and Term Loans 2022 $ 181,577 $ 75,097 $ — 2023 — 115,097 — 2024 — 10,097 — 2025 — 25,097 — 2026 — 97 — After 2026 — 108,570 122,012 ASC 805 fair value adjustments at acquisition — — ( 3,394 ) $ 181,577 $ 334,055 $ 118,618 The terms of a security agreement with the FHLB require the Corporation to pledge, as collateral for advances, qualifying first mortgage loans, investment securities and multi-family loans in an amount equal to at least 145 percent of these advances depending on the type of collateral pledged. At December 31, 2021, the outstanding FHLB advances had interest rates from 0.35 to 2.62 percent and are subject to restrictions or penalties in the event of prepayment. The total available remaining borrowing capacity from the FHLB at December 31, 2021, was $ 728.5 million. As of December 31, 2021, the Corporation had $ 125.0 million of putable advances with the FHLB. Subordinated Debentures and Term Loans. As of December 31, 2021 and 2020, subordinated debentures and term loans totaled $ 118.6 million and $ 118.4 million, respectively. • First Merchants Capital Trust II ("FMC Trust II"). The subordinated debenture was entered into on July 2, 2007 for $ 56.7 million. On August 10, 2015, the Corporation completed the cancellation of $ 5 million of subordinated debentures at a gain of $ 1.3 million. Interest was fixed at 6.495 percent for the period from the date of issuance through September 15, 2012; interest is now an annual floating rate equal to the three-month LIBOR plus 1.56 percent, reset quarterly. Interest is payable in March, June, September and December of each year. The interest rate at December 31, 2021 and 2020 was 1.76 percent and 1.78 percent, respectively. The Corporation could not redeem the debenture prior to September 15, 2012, and redemption is subject to the prior approval of the Board of Governors of the Federal Reserve System, as required by law or regulation. On March 16, 2020, the Corporation partially redeemed $ 10.0 million of its subordinated debentures, with an interest rate of 3.45 percent, all of which were held by FMC Trust II. As a result, FMC Trust II used the proceeds from such partial redemption to concurrently redeem a like amount of its capital securities at an aggregate principal redemption price of $ 10.0 million. Debentures issued by the Corporation in the principal amount of $ 41.7 million remain outstanding at December 31, 2021 with a maturity date of September 15, 2037. The Corporation holds all of the remaining outstanding common securities of FMC Trust II. • Ameriana Capital Trust I. On December 31, 2015 the Corporation acquired Ameriana Capital Trust I in conjunction with its acquisition of Ameriana Bancorp, Inc. The subordinated debentures of Ameriana Capital Trust I were entered into in March 2006 for $ 10.3 million and have a maturity of March 2036. Ameriana could not redeem the debenture prior to March 2011, and redemption is subject to the prior approval of the Board of Governors of the Federal Reserve System, as required by law or regulation. The interest rate is equal to the three-month LIBOR plus 1.50 percent, reset quarterly. Interest is payable in March, June, September and December of each year. The interest rate at December 31, 2021 and 2020 was 1.70 percent and 1.72 percent, respectively. The Corporation holds all of the outstanding common securities of Ameriana Capital Trust I. 88 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) • On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $ 70 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $ 5 million (the "Senior Debt") and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due 2028 in the aggregate principal amount of $ 65 million (the "Subordinated Debt"). The interest rate on the Senior Debt and Subordinated Debt remains fixed for the first ten ( 10 ) years and will become floating thereafter. Once the rates convert to floating on October 30, 2023, the Senior Debt will have an annual floating rate equal to the three-month LIBOR plus 2.345 percent and the Subordinated Debt will have an annual floating rate equal to the three-month LIBOR plus 4.095 percent. The Corporation has an option to redeem the Subordinated Debt in whole or in part at a redemption price equal to 100 percent of the principal amount of the redeemed Subordinated Notes, plus accrued and unpaid interest to the date of the redemption. The option of redemption is subject to the approval of the Federal Reserve Board. The Corporation has an option to redeem the Senior Debt in whole or in part at a redemption price equal to 100 percent of the principal amount of the redeemed Senior Notes, plus accrued and unpaid interest to the date of the redemption; provided, however, that no Subordinated Notes (as defined in the Issuing and Paying Agency Agreement) may remain outstanding subsequent to any early redemption of Senior Notes. The Subordinated Debt and the Senior Debt options to redeem begin with the interest payment date on October 30, 2023, or on any scheduled interest payment date thereafter. The Senior Debt agreement contains certain customary representations and warranties and financial and negative covenants. As of December 31, 2021 and 2020 the Corporation was in compliance with these covenants. NOTE 12 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Risk Management Objective of Using Derivatives The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash payments principally related to certain variable-rate liabilities. The Corporation also has derivatives that are a result of a service the Corporation provides to certain qualifying customers, and, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. The Corporation manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net risk exposure resulting from such transactions. Cash Flow Hedges of Interest Rate Risk The Corporation’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of fixed amounts to a counterparty in exchange for the Corporation receiving variable payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of December 31, 2021 and December 31, 2020, the Corporation had four interest rate swaps with a notional amount of $ 60.0 million that were designated as cash flow hedges. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2021, $ 26.0 million of the interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with existing trust preferred securities when the outflows converted from a fixed rate to variable rate in September 2012. In addition, $ 10.0 million of interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with one Federal Home Loan Bank advances. Finally, the remaining $ 24.0 million of interest rate swaps were used to hedge the variable cash outflows (Ameribor-based) associated with a brokered deposit originated in December 2020. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the years ended December 31, 2021 and 2020, the Corporation did not recognize any ineffectiveness. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Corporation’s variable-rate liabilities. During the next twelve months, the Corporation expects to reclassify $ 724,000 from accumulated other comprehensive income to interest expense. Non-designated Hedges The Corporation does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers. The Corporation executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Corporation executes with a third party, such that the Corporation minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The notional amount of customer-facing swaps was approximately $ 1.0 billion and $ 985.0 million as of December 31, 2021 and December 31, 2020, respectively. This amount is offset with third party counterparties, as described above. 89 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Fair Values of Derivative Instruments on the Balance Sheet The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the Balance Sheet as of December 31, 2021 and December 31, 2020. Asset Derivatives Liability Derivatives December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments: Interest rate contracts Other Assets $ — Other Assets $ — Other Liabilities $ 835 Other Liabilities $ 2,018 Derivatives not designated as hedging instruments: Interest rate contracts Other Assets $ 41,133 Other Assets $ 74,335 Other Liabilities $ 41,133 Other Liabilities $ 74,335 The amount of gain (loss) recognized in other comprehensive income is included in the table below for the periods indicated. Derivatives in Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) For the Year Ended December 31, 2021 2020 Interest rate products $ 138 $ ( 1,480 ) Effect of Derivative Instruments on the Income Statement The tables below present the effect of the Corporation’s derivative financial instruments on the Income Statement for the years ended December 31, 2021, 2020 and 2019. Derivatives Designated as Hedging Instruments under FASB ASC 815-10 Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Effective Portion) Amount of Gain (Loss) Reclassified from Other Comprehensive Income into Income (Effective Portion) 2021 2020 2019 Interest rate contracts Interest expense $ ( 1,044 ) $ ( 906 ) $ ( 334 ) The Corporation’s exposure to credit risk occurs because of nonperformance by its counterparties. The counterparties approved by the Corporation are usually financial institutions, which are well capitalized and have credit ratings through Moody’s and/or Standard & Poor’s, at or above investment grade. The Corporation’s control of such risk is through quarterly financial reviews, comparing mark-to-market values with policy limitations, credit ratings and collateral pledging. Credit-Risk-Related Contingent Features The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well/adequately capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts. Additionally, the Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. As of December 31, 2021, the termination value of derivatives in a net liability position related to these agreements was $ 32.6 million. As of December 31, 2021, the Corporation has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $ 50.8 million. If the Corporation had breached any of these provisions at December 31, 2021, it could have been required to settle its obligations under the agreements at their termination value. NOTE 13 FAIR VALUES OF FINANCIAL INSTRUMENTS The Corporation used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances. 90 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability). Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs for which there is little or no market activity (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10 percent or more of the total fair value of a particular asset or liability. RECURRING MEASUREMENTS Assets and liabilities are considered to be measured at fair value on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses. Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy. Investment Securities Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government-sponsored agency and mortgage-backed securities, state and municipal securities and corporate obligations securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. Government-sponsored mortgage-backed securities and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active. Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3. Interest Rate Derivative Agreements See information regarding the Corporation’s interest rate derivative products in NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES of these Notes to Consolidated Financial Statements. 91 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820-10 fair value hierarchy in which the fair value measurements fall at December 31, 2021 and 2020. Fair Value Measurements Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 Fair Value (Level 1) (Level 2) (Level 3) Available for sale securities: U.S. Government-sponsored agency securities $ 95,136 $ — $ 95,136 $ — U.S. Treasury 999 999 — — State and municipal 1,576,532 — 1,571,076 5,456 U.S. Government-sponsored mortgage-backed securities 667,605 — 667,601 4 Corporate obligations 4,279 — 4,248 31 Interest rate swap asset 41,133 — 41,133 — Interest rate swap liability 41,968 — 41,968 — Fair Value Measurements Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2020 Fair Value (Level 1) (Level 2) (Level 3) Available for sale securities: U.S. Government-sponsored agency securities $ 2,430 $ — $ 2,430 $ — State and municipal 1,257,885 — 1,255,441 2,444 U.S. Government-sponsored mortgage-backed securities 654,669 — 654,665 4 Corporate obligations 4,135 — 4,104 31 Interest rate swap asset 74,335 — 74,335 — Interest rate swap liability 76,353 — 76,353 — LEVEL 3 RECONCILIATION The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable Level 3 inputs for year ended December 31, 2021 and 2020. Available for Sale Securities For The Year Ended December 31, 2021 December 31, 2020 Beginning Balance $ 2,479 $ 2,893 Included in other comprehensive income 227 16 Purchases, issuances, and settlements 3,241 — Principal payments ( 456 ) ( 430 ) Ending balance $ 5,491 $ 2,479 There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or liabilities held at December 31, 2021 or 2020. TRANSFERS BETWEEN LEVELS There were no transfers in or out of Level 3 during 2021 or 2020. 92 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NONRECURRING MEASUREMENTS Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy for year ended December 31, 2021 and 2020. Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 Fair Value (Level 1) (Level 2) (Level 3) Collateral dependent loans $ 24,491 — — $ 24,491 Other real estate owned $ 96 — — $ 96 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2020 Fair Value (Level 1) (Level 2) (Level 3) Collateral dependent loans $ 37,250 — — $ 37,250 Other real estate owned $ 544 — — $ 544 Collateral Dependent Loans and Other Real Estate Owned Determining fair value for collateral dependent loans and other real estate requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. UNOBSERVABLE (LEVEL 3) INPUTS The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 2021 and 2020. December 31, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average) State and municipal securities $ 5,456 Discounted cash flow Maturity Call Date US Muni BQ curve Discount rate Weighted-average coupon 1 month to 15 years A- to BBB- 0.75 % - 4 % 3.7 % Corporate obligations and U.S. Government-sponsored mortgage backed securities $ 35 Discounted cash flow Risk free rate plus Premium for illiquidity Weighted-average coupon 3 month LIBOR plus 2 00bps 0 % Collateral dependent loans $ 24,491 Collateral based measurements Discount to reflect current market conditions and ultimate collectability Weighted-average discount by loan balance 0 % - 10 % 5.5 % Other real estate owned $ 96 Appraisals Discount to reflect current market conditions Weighted-average discount of other real estate owned balance 0 % - 44 % 43.5 % December 31, 2020 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average) State and municipal securities $ 2,444 Discounted cash flow Maturity Call Date US Muni BQ curve Discount rate Weighted-average coupon 1 month to 15 years A- to BBB- 1.5 % - 4 % 3.9 % Corporate obligations and U.S. Government-sponsored mortgage backed securities $ 35 Discounted cash flow Risk free rate plus Premium for illiquidity Weighted-average coupon 3 month LIBOR plus 2 00bps 0 % Collateral dependent loans $ 37,250 Collateral based measurements Discount to reflect current market conditions and ultimate collectability Weighted-average discount by loan balance 0 % - 10 % 6.0 % Other real estate owned $ 544 Appraisals Discount to reflect current market conditions Weighted-average discount of other real estate owned balance 0 % - 30 % 26.2 % 93 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. State and Municipal Securities, Corporate Obligations, and U.S. Government-sponsored Mortgage Backed Securities The significant unobservable inputs used in the fair value measurement of the Corporation's state and municipal securities, corporate obligations and U.S. Government-sponsored mortgage backed securities are premiums for unrated securities and marketability discounts. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, changes in either of those inputs will not affect the other input. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents estimated fair values of the Corporation's financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2021 and 2020. 2021 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets at December 31: Cash and cash equivalents $ 167,146 $ 167,146 $ — $ — Interest-bearing deposits 474,154 474,154 — — Investment securities available for sale 2,344,551 999 2,338,061 5,491 Investment securities held to maturity 2,179,802 — 2,188,600 13,903 Loans held for sale 11,187 — 11,187 — Loans 9,046,464 — — 9,068,319 Federal Home Loan Bank stock 28,736 — 28,736 — Interest rate swap asset 41,133 — 41,133 — Interest receivable 57,187 — 57,187 — Liabilities at December 31: Deposits $ 12,732,577 $ 12,038,992 $ 690,089 $ — Borrowings: Securities sold under repurchase agreements 181,577 — 181,572 — Federal Home Loan Bank advances 334,055 — 337,005 — Subordinated debentures and term loans 118,618 — 107,892 — Interest rate swap liability 41,968 — 41,968 — Interest payable 2,762 — 2,762 — 2020 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets at December 31: Cash and cash equivalents $ 192,896 $ 192,896 $ — $ — Interest-bearing deposits 392,305 392,305 — — Investment securities available for sale 1,919,119 — 1,916,640 2,479 Investment securities held to maturity 1,227,668 — 1,260,815 19,478 Loans held for sale 3,966 — 3,966 — Loans 9,112,526 — — 9,191,628 Federal Home Loan Bank stock 28,736 — 28,736 — Interest rate swap asset 74,335 — 74,335 — Interest receivable 53,948 — 53,948 — Liabilities at December 31: Deposits $ 11,361,610 $ 10,482,865 $ 878,257 $ — Borrowings: Securities sold under repurchase agreements 177,102 — 177,097 — Federal Home Loan Bank advances 389,430 — 399,991 — Subordinated debentures and term loans 118,380 — 108,439 — Interest rate swap liability 76,353 — 76,353 — Interest payable 3,287 — 3,287 — 94 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 14 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of December 31, 2021 and 2020: Accumulated Other Comprehensive Income (Loss) Unrealized Gains (Losses) on Securities Available for Sale Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Defined Benefit Plans Total Balance at December 31, 2020 $ 87,988 $ ( 1,594 ) $ ( 11,558 ) $ 74,836 Other comprehensive income before reclassifications ( 23,732 ) 109 7,491 ( 16,132 ) Amounts reclassified from accumulated other comprehensive income ( 4,482 ) 825 66 ( 3,591 ) Period change ( 28,214 ) 934 7,557 ( 19,723 ) Balance at December 31, 2021 $ 59,774 $ ( 660 ) $ ( 4,001 ) $ 55,113 Balance at December 31, 2019 $ 38,872 $ ( 1,141 ) $ ( 9,857 ) $ 27,874 Other comprehensive income before reclassifications 58,513 ( 1,169 ) ( 1,767 ) 55,577 Amounts reclassified from accumulated other comprehensive income ( 9,397 ) 716 66 ( 8,615 ) Period change 49,116 ( 453 ) ( 1,701 ) 46,962 Balance at December 31, 2020 $ 87,988 $ ( 1,594 ) $ ( 11,558 ) $ 74,836 The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019: Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Year Ended December 31, Details about Accumulated Other Comprehensive Income (Loss) Components 2021 2020 2019 Affected Line Item in the Statements of Income Unrealized gains (losses) on available for sale securities (1) Realized securities gains reclassified into income $ 5,674 $ 11,895 $ 4,415 Other income - net realized gains on sales of available for sale securities Related income tax benefit (expense) ( 1,192 ) ( 2,498 ) ( 927 ) Income tax expense $ 4,482 $ 9,397 $ 3,488 Unrealized gains (losses) on cash flow hedges (2) Interest rate contracts $ ( 1,044 ) $ ( 906 ) $ ( 334 ) Interest expense - subordinated debentures and term loans Related income tax benefit (expense) 219 190 70 Income tax expense $ ( 825 ) $ ( 716 ) $ ( 264 ) Unrealized gains (losses) on defined benefit plans Amortization of net loss and prior service costs $ ( 84 ) $ ( 84 ) $ ( 106 ) Other expenses - salaries and employee benefits Related income tax benefit (expense) 18 18 22 Income tax expense $ ( 66 ) $ ( 66 ) $ ( 84 ) Total reclassifications for the period, net of tax $ 3,591 $ 8,615 $ 3,140 (1) For additional detail related to unrealized gains (losses) on available for sale securities and related amounts reclassified from accumulated other comprehensive income see NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. (2) For additional detail related to unrealized gains (losses) on cash flow hedges and related amounts reclassified from accumulated other comprehensive income see NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES of these Notes to Consolidated Financial Statements. 95 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 15 REGULATORY CAPITAL AND DIVIDENDS Regulatory Capital Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by four ratios that are calculated according to the regulations: total risk-based capital, tier 1 risk-based capital, CET1, and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and 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. Basel III was effective for the Corporation on January 1, 2015 and requires the Corporation and the Bank to maintain the minimum capital and leverage ratios as defined in the regulation and as illustrated in the table below, which capital to risk-weighted asset ratios include a 2.5 percent capital conservation buffer. Under Basel III, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a 2.5 percent capital conservation buffer above the adequately capitalized CET1 to risk-weighted assets ratio (which buffer is reflected in the required ratios below). Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of December 31, 2021, the Bank met all capital adequacy requirements to be considered well capitalized under the fully phased-in Basel III capital rules. There is no threshold for well capitalized status for bank holding companies. 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. 96 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The Corporation's and Bank's actual and required capital ratios as of December 31, 2021 and December 31, 2020 were as follows: Prompt Corrective Action Thresholds Actual Basel III Minimum Capital Required Well Capitalized December 31, 2021 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital to risk-weighted assets First Merchants Corporation $ 1,582,481 13.92 % $ 1,193,840 10.50 % N/A N/A First Merchants Bank 1,453,358 12.74 1,197,515 10.50 $ 1,140,490 10.00 % Tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,374,240 12.09 % $ 966,442 8.50 % N/A N/A First Merchants Bank 1,309,685 11.48 969,417 8.50 $ 912,392 8.00 % Common equity tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,327,634 11.68 % $ 795,893 7.00 % N/A N/A First Merchants Bank 1,309,685 11.48 798,343 7.00 $ 741,319 6.50 % Tier 1 capital to average assets First Merchants Corporation $ 1,374,240 9.30 % $ 590,758 4.00 % N/A N/A First Merchants Bank 1,309,685 8.88 589,994 4.00 $ 737,493 5.00 % Prompt Corrective Action Thresholds Actual Basel III Minimum Capital Required Well Capitalized December 31, 2020 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital to risk-weighted assets First Merchants Corporation $ 1,475,551 14.36 % $ 1,079,015 10.50 % N/A N/A First Merchants Bank 1,412,805 13.70 1,082,430 10.50 $ 1,030,886 10.00 % Tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,282,070 12.48 % $ 873,488 8.50 % N/A N/A First Merchants Bank 1,283,922 12.45 876,253 8.50 $ 824,708 8.00 % Common equity tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,235,702 12.02 % $ 719,343 7.00 % N/A N/A First Merchants Bank 1,283,922 12.45 721,620 7.00 $ 670,076 6.50 % Tier 1 capital to average assets First Merchants Corporation $ 1,282,070 9.57 % $ 536,123 4.00 % N/A N/A First Merchants Bank 1,283,922 9.59 535,279 4.00 $ 669,098 5.00 % On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the PPP to neutralize the regulatory capital effects of participating in the program. The interim final rule, which became effective April 13, 2020, clarifies that PPP loans receive a zero percent risk weight for purposes of determining risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios. At December 31, 2021 and 2020, risk-weighted assets included $ 106.6 million and $ 667.1 million, respectively, of PPP loans at a zero risk weight. Management believes that all of the above capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of Tier 1 capital known as CET1. Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories. Tier I regulatory capital consists primarily of total stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses. Because these measures are not defined in GAAP, they are considered non-GAAP financial measures. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. For a reconciliation of GAAP measures to regulatory measures (non-GAAP), see additional details within the “Capital” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K. 97 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Dividends 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 . Additionally, the Corporation has a Dividend Reinvestment and Stock Purchase Plan, enabling stockholders to elect to have their cash dividends on all shares automatically reinvested in additional shares of the Corporation’s common stock. In addition, stockholders may elect to make optional cash payments up to an aggregate of $ 5,000 per quarter for the purchase of additional shares of common stock. The stock is credited to participant accounts at fair market value. Dividends are reinvested on a quarterly basis. Stockholders' Equity The Corporation adopted the current expected credit losses ("CECL") model for calculating the allowance for credit losses on January 1, 2021. CECL replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As of the adoption and day one measurement date of January 1, 2021, the Corporation recorded a one-time cumulative-effect adjustment to retained earnings, net of income taxes, of $ 68.0 million. See additional details of the Corporation's CECL adoption in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OR SIGNIFICANT ACCOUNTING POLICIES and NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. Stock Repurchase Program On September 3, 2019, the Board of Directors of the Corporation approved a stock repurchase program of up to 3 million shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program was not to exceed $ 75 million. On a share basis, the amount of common stock subject to the repurchase program represented approximately 5 percent of the Corporation's outstanding shares. During the first quarter of 2020, the Corporation repurchased 1,634,437 of its common shares for $ 55.9 million at an average price of $ 34.21 , which resulted in the aggregate investment in share repurchases to equal $ 75.0 million, the maximum allowable under the plan. As such, the September 2019 program terminated upon its own terms following the repurchases. On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $ 100,000,000 . On a share basis, the amount of common stock subject to the repurchase program represents approximately 6 percent of the Corporation's outstanding shares. During 2021, the Corporation repurchased 646,102 of its common shares for $ 25.4 million at an average price of $ 39.38 . NOTE 16 LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances are as follows for December 31, 2021, 2020 and 2019. The amount of capitalized servicing assets is considered immaterial. 2021 2020 2019 Mortgage loan portfolios serviced for: Federal Home Loan Mortgage Corporation $ 765,547 $ 514,539 $ 354,393 Fannie Mae 60,839 69,072 82,922 Equity Bank 60,107 — — Federal Home Loan Bank 32,558 51,479 76,815 Chevy Chase Mortgage Company 85 134 164 Total $ 919,136 $ 635,224 $ 514,294 98 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 17 SHARE-BASED COMPENSATION Stock options and RSAs have been issued to directors, officers and other management employees under the Corporation's 2009 Long-term Equity Incentive Plan, the 2019 Long-term Equity Incentive Plan and the Equity Compensation Plan for Non-Employee Directors. The stock options, which have a ten-year life, become 100 percent vested based on time ranging from one year to two years and are fully exercisable when vested. Option exercise prices equal the Corporation's common stock closing price on NASDAQ on the date of grant. The RSAs issued to employees and non-employee directors provide for the issuance of shares of the Corporation's common stock at no cost to the holder and generally vest after three years . The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited. For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited. The RSAs for employees and non-employee directors are either immediately vested at retirement, disability or death, or, continue to vest after retirement, disability or death, depending on the plan under which the shares were granted. The Corporation’s 2019 ESPP provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000. Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings. Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSAs and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the years ended December 31, 2021, 2020, and 2019 was $ 4.8 million, $ 4.6 million, and $ 4.1 million, respectively, and has been recognized as a component of salaries and benefits expense in the accompanying CONSOLIDATED STATEMENTS OF INCOME. Share-based compensation expense recognized in the CONSOLIDATED STATEMENTS OF INCOME is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 0.5 percent for the year ended December 31, 2021, based on historical experience. The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards. In 2021 and 2020, the Corporation had RSAs vest primarily at a stock price that was lower than the grant date stock price, which resulted in the recognition of income tax expense at vesting of $ 112,000 and $ 394,000 , respectively. For the year ended 2019, RSAs vested at a stock price higher than the grant date stock price resulting in recognition of income tax benefit at vesting of $ 363,000 . Years Ended December 31, 2021 2020 2019 Stock and ESPP Options Pre-tax compensation expense $ 155 $ 96 $ 101 Income tax benefit ( 92 ) ( 29 ) ( 70 ) Stock and ESPP option expense, net of income taxes $ 63 $ 67 $ 31 Restricted Stock Awards Pre-tax compensation expense $ 4,607 $ 4,504 $ 4,014 Income tax benefit ( 855 ) ( 552 ) ( 1,206 ) Restricted stock awards expense, net of income taxes $ 3,752 $ 3,952 $ 2,808 Total Share-Based Compensation: Pre-tax compensation expense $ 4,762 $ 4,600 $ 4,115 Income tax benefit ( 947 ) ( 581 ) ( 1,276 ) Total share-based compensation expense, net of income taxes $ 3,815 $ 4,019 $ 2,839 As of December 31, 2021, unrecognized compensation expense related to RSAs was $ 8.4 million and is expected to be recognized over weighted-average period of 1.90 years. The Corporation did no t have any unrecognized compensation expense related to stock options as of December 31, 2021. 99 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Stock option activity under the Corporation's stock option plans, as of December 31, 2021, and changes during the year ended December 31, 2021, were as follows: Number of Shares Weighted-Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value Outstanding at January 1, 2021 45,800 $ 15.00 — $ — Exercised ( 17,300 ) $ 11.46 — $ — Outstanding December 31, 2021 28,500 $ 17.14 1.50 $ 705,330 Vested and Expected to Vest at December 31, 2021 28,500 $ 17.14 1.50 $ 705,330 Exercisable at December 31, 2021 28,500 $ 17.14 1.50 $ 705,330 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of 2021 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on December 31, 2021. The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2021 and 2020 was $ 559,000 and $ 261,000 , respectively. Cash receipts of stock options exercised during 2021 and 2020 were $ 198,000 and $ 115,000 , respectively. The following table summarizes information on unvested RSAs outstanding as of December 31, 2021: Number of Shares Weighted-Average Grant Date Fair Value Unvested RSAs at January 1, 2021 357,883 $ 36.30 Granted 153,936 $ 42.49 Forfeited ( 6,050 ) $ 35.59 Vested ( 94,510 ) $ 48.27 Unvested RSAs at December 31, 2021 411,259 $ 35.86 The grant date fair value of ESPP options was estimated at the beginning of the October 1, 2021, quarterly offering period of approximately $ 25,000 . The ESPP options vested during the three months ending December 31, 2021, leaving no unrecognized compensation expense related to unvested ESPP options at December 31, 2021. NOTE 18 PENSION AND OTHER POST RETIREMENT BENEFIT PLANS The Corporation’s defined-benefit pension plans, including non-qualified plans for certain employees, former employees and former non-employee directors, cover approximately 10 percent of the Corporation’s employees. In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan. No additional pension benefits have been earned by any employees who had not attained both the age of 55 and accrued at least 10 years of vesting service as of March 1, 2005. The benefits are based primarily on years of service and employees’ pay near retirement. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. 100 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The table below sets forth the plans’ funded status and amounts recognized in the consolidated balance sheets at December 31, using measurement dates of December 31, 2021 and 2020. 2021 2020 Change in Benefit Obligation: Benefit obligation at beginning of year $ 80,786 $ 76,770 Service cost — 16 Interest cost 1,760 2,343 Actuarial (gain) loss ( 2,919 ) 6,957 Benefits paid ( 5,353 ) ( 5,300 ) Benefit obligation at end of year $ 74,274 $ 80,786 Change in Plan Assets: Fair value of plan assets at beginning of year $ 88,512 $ 85,121 Actual return on plan assets 10,786 7,925 Employer contributions 643 766 Benefits paid ( 5,353 ) ( 5,300 ) End of year 94,588 88,512 Funded status at end of year $ 20,314 $ 7,726 Assets and Liabilities Recognized in the Balance Sheets: Deferred tax asset $ 1,545 $ 3,970 Assets $ 24,750 $ 12,681 Liabilities $ 4,436 $ 4,955 As of December 31, 2021, the funded status of the plans increased $ 12.6 million and the accumulated other comprehensive loss, net of tax, decreased $ 7.6 million from December 31, 2020. The net impact of the primary contributing factors to these changes were the increased discount rate of 40 basis points from 2.3 percent to 2.7 percent, which decreased the liability by $ 3.0 million. This was offset by a $ 300,000 increase in the liability due to the mortality projection improvement scale update from MP-2020 to MP-2021. The plan's assets earned a return of $ 10.8 million, which was $ 6.5 million more than the expected return. Finally, new census data was incorporated into the current year valuation. The accumulated benefit obligation for all defined benefit plans was $ 74.3 million and $ 80.8 million at December 31, 2021 and 2020, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets consists solely of the non-qualified plans for certain employees, former employees and former non-employee directors, and is included in the table below. December 31, 2021 December 31, 2020 Projected benefit obligation $ 4,436 $ 4,955 Accumulated benefit obligation $ 4,436 $ 4,955 Fair value of plan assets $ — $ — The Corporation recognized expense under these non-qualified plans of $ 117,000 , $ 165,000 and $ 192,000 for 2021, 2020 and 2019, respectively. The following table shows the components of net periodic pension benefit cost: December 31, 2021 December 31, 2020 December 31, 2019 Service cost $ — $ 16 $ 39 Interest cost 1,760 2,343 2,975 Expected return on plan assets ( 4,246 ) ( 4,086 ) ( 4,414 ) Amortization of prior service cost 87 87 87 Amortization of net loss 305 221 404 Net periodic pension benefit cost $ ( 2,094 ) $ ( 1,419 ) $ ( 909 ) 101 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Other changes in plan assets and benefit obligations recognized in other comprehensive income: December 31, 2021 December 31, 2020 December 31, 2019 Net periodic pension benefit cost $ ( 2,094 ) $ ( 1,419 ) $ ( 909 ) Net gain (loss) 9,460 ( 3,119 ) 4,552 Amortization of net loss 305 221 404 Amortization of prior service cost 87 87 87 Total recognized in other comprehensive income (loss) 9,852 ( 2,811 ) 5,043 Total recognized in net periodic pension benefit cost and other comprehensive income (loss) $ 11,946 $ ( 1,392 ) $ 5,952 Significant assumptions include: December 31, 2021 December 31, 2020 December 31, 2019 Weighted-average Assumptions Used to Determine Benefit Obligation: Discount rate 2.70 % 2.30 % 3.20 % Rate of compensation increase for accruing active participants n/a n/a n/a Weighted-average Assumptions Used to Determine Cost: Discount rate 2.30 % 3.20 % 4.30 % Expected return on plan assets 5.00 % 5.00 % 6.00 % Rate of compensation increase for accruing active participants n/a n/a n/a At December 31, 2021 and 2020, the Corporation based its estimate of the expected long-term rate of return on analysis of the historical returns of the plans and current market information available. The plans’ investment strategies are to provide for preservation of capital with an emphasis on long-term growth without undue exposure to risk. The assets of the plans’ are invested in accordance with the plans’ Investment Policy Statement, subject to strict compliance with ERISA and any other applicable statutes. The plans’ risk management practices include semi-annual evaluations of investment managers, including reviews of compliance with investment manager guidelines and restrictions; ability to exceed performance objectives; adherence to the investment philosophy and style; and ability to exceed the performance of other investment managers. The evaluations are reviewed by management with appropriate follow-up and actions taken, as deemed necessary. The Investment Policy Statement generally allows investments in cash and cash equivalents, real estate, fixed income debt securities and equity securities, and specifically prohibits investments in derivatives, options, futures, private placements, short selling, non-marketable securities and purchases of individual non-investment grade bonds. At December 31, 2021, the maturities of the plans’ debt securities ranged from 40 days to 7.7 years, with a weighted average maturity of 3.5 years. At December 31, 2020, the maturities of the plans’ debt securities ranged from 15 days to 6.7 years, with a weighted average maturity of 3.7 years. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2021. The minimum contribution required in 2022 will likely be zero , but the Corporation may decide to make a discretionary contribution during the year. 2022 $ 5,720 2023 5,607 2024 5,366 2025 5,340 2026 5,265 After 2026 22,379 $ 49,677 Plan assets are re-balanced quarterly. At December 31, 2021 and 2020, plan assets by category are as follows: December 31, 2021 December 31, 2020 Actual Target Actual Target Cash and cash equivalents 2.5 % 3.0 % 2.7 % 3.0 % Equity securities 56.4 53.0 53.0 50.0 Debt securities 38.6 42.0 42.3 45.0 Alternative investments 2.5 2.0 2.0 2.0 100.0 % 100.0 % 100.0 % 100.0 % The Savings Plan, a Section 401(k) qualified defined contribution plan, was amended on March 1, 2005 to provide enhanced retirement benefits, including employer and matching contributions, for eligible employees of the Corporation and its subsidiaries. The Corporation matches employees’ contributions at the rate of 100 percent for the first 3 percent of base salary contributed by participants and 50 percent of the next 3 percent of base salary contributed by participants. 102 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Beginning in 2005, employees who have completed 1000 hours of service and are an active employee on the last day of the year receive an additional retirement contribution after year-end. Employees hired after January 1, 2010 do not participate in the additional retirement contribution. Effective January 1, 2013, the additional retirement contribution was fixed at 2 percent. Full vesting occurs after five years of service. The Corporation’s expense for the Savings Plan, including the additional retirement contribution, was $ 5.2 million, $ 5.1 million and $ 4.6 million for 2021, 2020 and 2019, respectively. The Corporation also maintains a post retirement benefit plan that provides health insurance benefits for a closed group of participants that came to the Corporation through the 2019 MBT acquisition. To be eligible for the post retirement plan, the participants must (1) have been hired by MBT prior to January 1, 2007, (2) be a full-time employee of the Corporation and employed by MBT prior to the acquisition, and (3) be at least 55 of age with 5 years of full-time service with MBT. The plan allowed retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65 . The retirees' premiums are determined based on their retiree class (per historical MBT guidelines) and also determined by the plan type for which the retiree is enrolled. As of December 31, 2021, the obligation payable under the post retirement plan was $ 3.2 million. Post retirement plan expense totaled $ 62,000 and $ 126,000 for 2021 and 2020, respectively. Pension Plan Assets Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis, as well as the general classification of pension plan assets pursuant to the valuation hierarchy. Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets total $ 92.0 million and $ 85.0 million as of December 31, 2021 and 2020, respectively, and include cash and cash equivalents, common stocks, mutual funds and corporate bonds and notes. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. Level 2 plan assets total $ 2.6 million and $ 3.5 million as of December 31, 2021 and 2020, respectively, and include governmental agencies, taxable municipal bonds and notes, and certificates of deposit. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. There are no assets classified within Level 3 of the hierarchy at December 31, 2021 and 2020. Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 Fair Value (Level 1) (Level 2) (Level 3) Cash & Cash Equivalents $ 2,346 $ 2,346 $ — $ — Corporate Bonds and Notes 15,726 15,726 — — Government Agency and Municipal Bonds and Notes 1,302 — 1,302 — Certificates of Deposit 1,307 — 1,307 — Party-in-Interest Investments Common Stock 2,534 2,534 — — Mutual Funds Taxable Bond 18,184 18,184 — — Large Cap Equity 28,349 28,349 — — Mid Cap Equity 13,033 13,033 — — Small Cap Equity 5,815 5,815 — — International Equity 3,602 3,602 — — Specialty Alternative Equity 2,390 2,390 — — $ 94,588 $ 91,979 $ 2,609 $ — Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2020 Fair Value (Level 1) (Level 2) (Level 3) Cash & Cash Equivalents $ 2,361 $ 2,361 $ — $ — Corporate Bonds and Notes 16,330 16,330 — — Government Agency and Municipal Bonds and Notes 2,462 — 2,462 — Certificates of Deposit 1,043 — 1,043 — Party-in-Interest Investments Common Stock 2,263 2,263 — — Mutual Funds Taxable Bond 17,676 17,676 — — Large Cap Equity 25,117 25,117 — — Mid Cap Equity 10,731 10,731 — — Small Cap Equity 4,867 4,867 — — International Equity 3,912 3,912 — — Specialty Alternative Equity 1,750 1,750 — — $ 88,512 $ 85,007 $ 3,505 $ — 103 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 19 INCOME TAX The reconciliation between income tax expense expected at the U.S. federal statutory tax rate and the reported income tax expense is summarized in the following table for years ended December 31, 2021, 2020 and 2019: 2021 2020 2019 Reconciliation of Federal Statutory to Actual Tax Expense: Federal Statutory Income Tax at 21% $ 50,566 $ 35,695 $ 40,695 Tax-exempt Interest Income ( 16,200 ) ( 13,273 ) ( 10,124 ) Stock Compensation ( 20 ) 338 ( 459 ) Earnings on Life Insurance ( 1,468 ) ( 1,079 ) ( 953 ) Tax Credits ( 354 ) ( 425 ) ( 263 ) CARES Act - NOL carryback rate differential — ( 1,178 ) — State Tax 2,697 1,122 600 Other 38 175 ( 171 ) Income Tax Expense $ 35,259 $ 21,375 $ 29,325 Effective Tax Rate 14.6 % 12.6 % 15.1 % Income tax expense consists of the following components for the years ended December 31, 2021, 2020, 2019: 2021 2020 2019 Income Tax Expense for the Year Ended December 31: Currently Payable: Federal $ 24,634 $ 28,463 $ 23,938 State 1,473 2,647 422 Deferred: Federal 7,211 ( 8,508 ) 4,726 State 1,941 ( 1,227 ) 239 Income Tax Expense $ 35,259 $ 21,375 $ 29,325 Significant components of the net deferred tax assets and liabilities resulting from temporary differences were as follows at December 31, 2021 and 2020: 2021 2020 Deferred Tax Asset at December 31: Assets: Differences in Accounting for Loan Losses $ 52,995 $ 31,850 Differences in Accounting for Loan Fees 2,016 4,328 Deferred Compensation 4,172 4,038 Federal & State Income Tax Loss Carryforward and Credits 747 2,089 Other 3,585 3,185 Total Assets 63,515 45,490 Liabilities: Differences in Depreciation Methods 5,726 6,028 Differences in Accounting for Loans and Securities 3,078 2,840 Difference in Accounting for Pensions and Other Employee Benefits 4,586 1,258 State Income Tax 1,499 1,059 Net Unrealized Gain on Securities Available for Sale 15,889 23,389 Gain on FDIC Modified Whole Bank Transaction 306 359 Other 8,108 6,209 Total Liabilities 39,192 41,142 Net Deferred Tax Asset $ 24,323 $ 4,348 104 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) As of December 31, 2021, the Corporation has approximately $ 15.2 million of state NOL carryforwards available to offset future state taxable income, which will expire beginning in 2023. These NOL carryforwards along with normal timing differences between book and tax result in total state deferred tax assets of $ 7.1 million. Management believes it is more likely than not that the benefit of these state NOL carryforwards and other state deferred tax assets will be fully realized. The Corporation has additional paid-in capital that is considered restricted resulting from the acquisitions of CFS and Ameriana of approximately $ 13.4 million and $ 11.9 million, respectively. CFS and Ameriana qualified as banks under provisions of the Internal Revenue Code which permitted them to deduct from taxable income an allowance for bad debts which differed from the provision for losses charged to income. No provision for income taxes had been provided. If in the future this portion of additional paid-in capital is distributed, or the Corporation no longer qualifies as a bank for income tax purposes, income taxes may be imposed at the then applicable tax rates. The unrecorded deferred tax liability at December 31, 2021, would have been approximately $ 5.3 million. The Corporation or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Corporation is generally no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years before 2018. Additional details regarding the Corporation's policies related to income taxes are discussed in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements. NOTE 20 NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted-average shares outstanding during the reporting period. Diluted net income per share is computed by dividing net income by the combination of the weighted-average shares outstanding during the reporting period and all potentially dilutive common shares. Potentially dilutive common shares include stock options and RSAs issued under the Corporation's share-based compensation plans. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. The following table reconciles basic and diluted net income per share for the years indicated: 2021 2020 2019 Weighted-Average Shares Weighted-Average Shares Weighted-Average Shares Basic net income per share: Net income available to common stockholders $ 205,531 53,783,632 $ 3.82 $ 148,600 54,058,471 $ 2.75 $ 164,460 51,412,133 $ 3.20 Effect of dilutive stock options and restricted stock awards 200,597 161,913 149,105 Diluted net income per share: Net income available to common stockholders $ 205,531 53,984,229 $ 3.81 $ 148,600 54,220,384 $ 2.74 $ 164,460 51,561,238 $ 3.19 As of December 31, 2021, 2020 and 2019, there were no stock options with an option price greater than the average market price of the common shares. 105 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 21 CONDENSED FINANCIAL INFORMATION (parent company only) Presented below is condensed financial information as to financial position, results of operations, and cash flows of the Corporation. Condensed Balance Sheets December 31, 2021 December 31, 2020 Assets Cash and cash equivalents $ 127,501 $ 59,848 Investment in subsidiaries 1,900,787 1,930,852 Premises and equipment 274 195 Interest receivable 2 2 Goodwill 448 448 Cash surrender value of life insurance 716 861 Other assets 10,281 12,211 Total assets $ 2,040,009 $ 2,004,417 Liabilities Subordinated debentures and term loans $ 118,618 $ 118,380 Interest payable 864 860 Other liabilities 7,956 9,532 Total liabilities 127,438 128,772 Stockholders' equity 1,912,571 1,875,645 Total liabilities and stockholders' equity $ 2,040,009 $ 2,004,417 Condensed Statements of Income and Comprehensive Income December 31, 2021 December 31, 2020 December 31, 2019 Income Dividends from subsidiaries $ 161,825 $ 70,100 $ 125,775 Other income ( 50 ) ( 62 ) 172 Total income 161,775 70,038 125,947 Expenses Interest expense 6,642 6,777 8,309 Salaries and employee benefits 3,917 3,426 3,540 Net occupancy and equipment expenses 825 745 802 Other outside services 1,001 731 1,889 Professional services 263 218 303 Other expenses 1,687 1,266 1,587 Total expenses 14,335 13,163 16,430 Income before income tax benefit and equity in undistributed income of subsidiaries 147,440 56,875 109,517 Income tax benefit 2,929 2,260 3,575 Income before equity in undistributed income of subsidiaries 150,369 59,135 113,092 Equity in undistributed income of subsidiaries 55,162 89,465 51,368 Net income available to common stockholders $ 205,531 $ 148,600 $ 164,460 Net income $ 205,531 $ 148,600 $ 164,460 Other comprehensive income (loss) ( 19,723 ) 46,962 49,296 Comprehensive income $ 185,808 $ 195,562 $ 213,756 106 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Condensed Statements of Cash Flows December 31, 2021 December 31, 2020 December 31, 2019 Cash Flow From Operating Activities: Net income $ 205,531 $ 148,600 $ 164,460 Adjustments to reconcile net income to net cash provided by operating activities Share-based compensation 1,563 1,502 1,339 Distributions in excess of (equity in undistributed) income of subsidiaries ( 55,162 ) ( 89,465 ) ( 51,368 ) Other adjustments ( 1,173 ) 1,537 ( 6,013 ) Investment in subsidiaries - operating activities 885 235 ( 268 ) Net cash provided by operating activities 151,644 62,409 108,150 Cash Flow From Investing Activities: Net cash received in acquisition — — 78 Net cash provided by investing activities — — 78 Cash Flow From Financing Activities: Cash dividends ( 61,230 ) ( 56,542 ) ( 51,276 ) Repayment of borrowings — ( 20,310 ) — Stock issued under employee benefit plans 605 639 702 Stock issued under dividend reinvestment and stock purchase plan 1,880 1,726 1,531 Stock options exercised 198 115 144 Repurchases of common stock ( 25,444 ) ( 55,912 ) ( 19,041 ) Net cash used by financing activities ( 83,991 ) ( 130,284 ) ( 67,940 ) Net change in cash 67,653 ( 67,875 ) 40,288 Cash, beginning of the year 59,848 127,723 87,435 Cash, end of year $ 127,501 $ 59,848 $ 127,723 NOTE 22 GENERAL LITIGATION The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Corporation. 107 Table of Contents PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In connection with its audits for the two most recent fiscal years ended December 31, 2021, there have been no disagreements with the Corporation’s independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure, nor have there been any changes in accountants.