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Item 8. Financial Statements and Supplementary Data

2023-03-01 compared with 2022-03-01 · 550 added, 553 removed, 1891 unchanged (37% of the section changed)

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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.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of First Merchants Corporation (the “Corporation”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended

December 31, 2022, 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, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2023, 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:

As discussed in Note 1 to the consolidated financial statements, the Corporation 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

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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.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated 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 consolidated 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 consolidated 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 consolidated 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:

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were 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.

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

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.

As described in Note 5 to the consolidated financial statements, the Corporation’s allowance for credit losses (ACL) on loans was $223.3 million at December 31, 2022.

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

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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

• Obtained an understanding of the Corporation’s process for establishing the ACL, including the selection 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

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• 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.

FORVIS, LLP (Formerly, BKD, LLP)

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

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Allowance for credit losses - loans ( 223,277 ) ( 195,397 )

( 195,397 ) ( 130,648 )

Net loans 11,780,617 9,046,464

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Total Deposits 14,382,745 12,732,577

Federal funds purchased 171,560 —

Securities sold under repurchase agreements 167,413 181,577

Federal Home Loan Bank advances 823,674 334,055

Subordinated debentures and term loans 118,618 118,380

Subordinated debentures and other borrowings 151,298 118,618

Total Borrowings 1,313,945 634,250

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Issued and outstanding - 125 shares

Preferred Stock, Series A, no par value, $ 2,500 liquidation preference:

Authorized - 10,000 non-cumulative perpetual shares

Issued and outstanding - 10,000 non-cumulative perpetual shares

Common Stock, $ 0.125 stated value:

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Retained earnings 1,012,774 864,839

Accumulated other comprehensive income 55,113 74,836

Accumulated other comprehensive income (loss) ( 239,151 ) 55,113

Total Stockholders' Equity 2,034,770 1,912,571

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,938,306 $ 15,453,149

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

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

See additional details in NOTE 1.

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

See notes to consolidated financial statements.

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Federal Home Loan Bank advances 11,417 5,672 6,973

Subordinated debentures and term loans 6,642 6,944 8,309

Subordinated debentures and other borrowings 8,009 6,642 6,944

Total Interest Expense 84,803 35,952 66,381

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NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 503,448 410,680 323,454

NON-INTEREST INCOME

Service charges on deposit accounts 28,371 23,571 20,999

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Other income 1,929 3,008 1,898

Total Other Income 109,323 109,926 86,688

OTHER EXPENSES

Total Non-Interest Income 107,941 109,323 109,926

NON-INTEREST EXPENSES

Salaries and employee benefits 206,893 166,995 155,937

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Other expenses 26,713 19,300 18,001

Total Other Expenses 279,213 263,405 246,763

Total Non-Interest Expenses 355,715 279,213 263,405

INCOME BEFORE INCOME TAX 255,674 240,790 169,975

Income tax expense 33,585 35,259 21,375

NET INCOME 222,089 205,531 148,600

Preferred stock dividends 1,406 — —

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 220,683 $ 205,531 $ 148,600

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CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands) December 31, 2022 December 31, 2021 December 31, 2020

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Total other comprehensive income (loss), net of tax ( 294,264 ) ( 19,723 ) 46,962

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

Comprehensive income (loss) $ ( 72,175 ) $ 185,808 $ 195,562

See notes to consolidated financial statements.

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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

Cumulative Preferred Stock Non-Cumulative Preferred Stock Common Stock Additional Accumulated Other

(Dollars in Thousands, Except Share Data) Shares Amount Shares Amount Shares Amount Paid in Capital Retained Earnings Comprehensive Income (Loss) Total

Balances, December 31, 2019 125 $ 125 — $ — 55,368,482 $ 6,921 $ 1,054,997 $ 696,520 $ 27,874 $ 1,786,437

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— — — — — — — ( 56,542 ) — ( 56,542 )

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

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

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

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

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

Comprehensive income

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Balances, December 31, 2021 125 $ 125 — $ — 53,410,411 $ 6,676 $ 985,818 $ 864,839 $ 55,113 $ 1,912,571

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

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

Comprehensive income

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Other comprehensive income (loss), net of tax — — — — — — — — ( 294,264 ) ( 294,264 )

Cash dividends on preferred stock ($ 140.64 per share)

— — — — — — — ( 1,406 ) — ( 1,406 )

Cash dividends on common stock ($ 1.25 per share)

— — — — — — — ( 72,748 ) — ( 72,748 )

Repurchases of common stock — — ( 646,102 ) ( 81 ) ( 25,363 ) — — ( 25,444 )

Issuance of stock related to acquisition — — 10,000 25,000 5,588,962 699 236,690 — — 262,389

Share-based compensation — — — — 118,046 15 4,637 — — 4,652

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Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses — 58,673 2,800

Provision for credit losses 16,755 — 58,673

Depreciation and amortization 11,815 10,701 11,009

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Securities held to maturity 154,689 227,255 273,229

Change in Federal Home Loan Bank stock 1,899 — —

Net change in loans ( 1,165,548 ) ( 60,581 ) ( 792,986 )

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Proceeds from mortgage portfolio loan sale — 78,159 —

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

Other adjustments ( 12,920 ) ( 11,678 ) ( 9,278 )

Net cash used in investing activities ( 446,441 ) ( 1,469,446 ) ( 1,552,025 )

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Repayment of borrowings ( 1,332,889 ) ( 96,204 ) ( 621,548 )

Cash dividends on preferred stock ( 1,406 ) — —

Cash dividends on common stock ( 72,748 ) ( 61,230 ) ( 56,542 )

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Loans transferred to other real estate owned 6,469 292 813

Fixed assets transferred to other assets 6,384 262 1,210

Fixed assets transferred to other real estate owned 1,490 6,384 262

Non-cash investing activities using trade date accounting 46,106 39,923 6,183

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Fair value of assets acquired $ 2,510,576 $ 4,041 $ —

Cash received (paid) in acquisition ( 3,225 ) — ( 15 )

Cash paid in acquisition ( 79,324 ) ( 3,225 ) —

Common stock issued 237,389 — —

Preferred stock issued 25,000 — —

Liabilities assumed $ 2,168,863 $ 816 $ —

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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.

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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.

Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income (loss).

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

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INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements.

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

LOANS HELD FOR SALE

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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.

The Corporation accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting.

All identifiable assets acquired, including loans, are recorded at fair value.

The fair value of acquired loans at the time of acquisition is based on a variety of factors including discounted expected cash flows, adjusted for estimated prepayments and credit losses.

In accordance with ASC 326, Financial Instruments – Credit Losses, the fair value adjustment is recorded as a premium or discount to the unpaid principal balance of each acquired loan.

Acquired loans are classified into two categories:

loans with more than insignificant credit deterioration (“PCD”) since origination, and loans with insignificant credit deterioration (“non-PCD”) since origination.

Factors considered when determining whether a loan has a more-than-insignificant deterioration since origination include, but are not limited to, the materiality of the credit, risk grade, delinquency, nonperforming status, bankruptcies, and other qualitative factors.

The net premium or discount on PCD loans is adjusted by the Corporation’s allowance for credit losses on loans, which is recorded at the time of acquisition.

The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using an effective yield method.

The net premium or discount on non-PCD loans, that includes credit and non-credit components, is accreted or amortized into interest income over the remaining life of the loan using an effective yield method.

Additionally, non-PCD loans have an allowance for credit loss established on acquisition date, which is recognized in the current period provision for credit loss expense.

In the event of prepayment, unamortized discounts or premiums on PCD and non-PCD loans are recognized in interest income.

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

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

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

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

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

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

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

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

The Corporation’s strategy for credit risk management included credit policies and underwriting criteria for all loans, as well as an overall credit limit for each customer significantly below legal lending limits.

The strategy also emphasized diversification on regional geographic and industry levels, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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.

Key factors include assumptions on the expected rates of return on plan assets, discount rates and health care costs and trends.

The Corporation considers market conditions, including changes in investment returns and interest rates in making these assumptions.

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

PREMISES AND EQUIPMENT

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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.

FHLB stock is carried at cost and is classified as a restricted security.

Both cash and stock dividends are reported as income.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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 acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

Intangible assets with definite useful lives are subject to amortization and relate to core deposits, customer relationships and non-compete agreements.

These intangible assets 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.

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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

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

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

DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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.

Securities sold under repurchase agreements are reflected as secured borrowings in the Corporation's 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.

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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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Fiduciary activities :

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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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

SHARE-BASED COMPENSATION

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

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

Income tax expense in the Consolidated Statements of Income is the total of the current year income tax due or refundable and changes 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.

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INCOME TAX of these Notes to Consolidated Financial Statements.

NET INCOME PER SHARE

NET INCOME PER COMMON 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.

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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

IMPACT OF COVID-19

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.

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

RECENT ACCOUNTING CHANGES ADOPTED IN 2022

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.

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

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

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

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

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

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

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

Stockholder's Equity:

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

FASB Accounting Standards Updates No.

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.

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

2022-06 - Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848

Summary - The FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

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

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

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

• Exception to the incremental approach for intraperiod tax allocation;

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

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

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

• Franchise taxes that are partially based on income;

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

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

• Enacted changes in tax laws in interim periods.

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

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

Early adoption of the ASU was permitted.

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

2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 , that extended the period of time preparers can utilize the reference rate reform relief guidance.

The amendments in ASU No.

2022-06 were effective for all entities upon issuance.

In 2020, the FASB issued Accounting Standards Update No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published.

In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

3 unchanged sentences

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:

The following pronouncements and releases have been deemed to have the most applicability to the Corporation's financial statements and will be adopted after December 31, 2022:

FASB Accounting Standards Updates - No.

8 unchanged sentences

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.

Originally, an entity could 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.

With the issuance of ASU 2022-06 - Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 , the sunset date for adoption of ASU 2020-04 was extended from December 31, 2022 to December 31, 2024.

The Corporation expects to adopt the practical expedients included in this ASU in 2023 as it transitions its loans and other financial instruments to another reference rate.

FASB Accounting Standards Updates - No.

5 unchanged sentences

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.

Originally, the amendments in this Update did 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).

With the issuance of ASU 2022-06 - Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 , the sunset date for adoption of ASU 2021-01 was extended from December 31, 2022 to December 31, 2024.

The Corporation expects to adopt the practical expedients included in this ASU in 2023 as it transitions its loans and other financial instruments to another reference rate.

FASB Accounting Standards Updates - No.

13 unchanged sentences

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.

The Corporation adopted this guidance on January 1, 2023, but adoption of the standard did not have a significant impact on the Corporation's financial statements or disclosures.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

FASB Accounting Standards Updates - No.

2022-02 —Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures

Summary - The FASB issued ASU No.

2022-02, Financial Instruments—Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , to improve the usefulness of information provided to investors about certain loan refinancings, restructurings, and writeoffs.

Troubled Debt Restructurings ("TDR") by Creditors That Have Adopted CECL

During the FASB’s post-implementation review of the credit losses standard, including a May 2021 roundtable, investors and other stakeholders questioned the relevance of the TDR designation and the usefulness of disclosures about those modifications.

Some noted that measurement of expected losses under the CECL model already incorporates losses realized from restructurings that are TDRs and that relevant information for investors would be better conveyed through enhanced disclosures about certain modifications.

The amendments in the new ASU eliminate the accounting guidance for TDRs by creditors that have adopted CECL while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty.

Vintage Disclosures - Gross Writeoffs

The disclosure of gross writeoff information by year of origination was cited by numerous investors as an essential input to their analysis.

To address this feedback, the amendments in the new ASU require that a public business entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases.

For entities that have adopted the amendments in ASU 2016-13, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Corporation adopted this Update on January 1, 2023.

Level One Bancorp, Inc.

On April 1, 2022, the Corporation acquired 100 percent of Level One Bancorp, Inc.

("Level One").

Level One, a Michigan corporation, merged with and into the Corporation (the "Merger"), whereupon the separate corporate existence of Level One ceased and the Corporation survived.

Immediately following the Merger, Level One's wholly owned subsidiary, Level One Bank, merged with and into the Bank, with the Bank as the surviving bank.

Level One was headquartered in Farmington Hills, Michigan and had 17 banking centers serving the Michigan market.

Pursuant to the merger agreement, each common shareholder of Level One received, for each outstanding share of Level One common stock held, (a) a 0.7167 share of the Corporation's common stock, and (b) a cash payment of $ 10.17 .

The Corporation issued 5.6 million shares of the Corporation's common stock and paid $ 79.3 million in cash, in exchange for all outstanding shares of Level One common stock.

Additionally, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $ 2,500 per share, in exchange for the outstanding Level One Series B preferred stock.

Likewise, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One Series B preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock (Nasdaq:

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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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

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

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

Cash and due from banks $ 217,104

Investment securities available for sale 370,071

Investment securities held to maturity 587

Loans held for sale 7,951

Loans 1,627,423

Allowance for credit losses - loans ( 16,599 )

Premises and equipment 11,848

Federal Home Loan Bank stock 11,688

Interest receivable 7,188

Cash surrender value of life insurance 30,143

Tax asset, deferred and receivable 16,223

Other assets 41,690

Deposits ( 1,930,790 )

Securities sold under repurchase agreements ( 1,521 )

Federal Home Loan Bank advances ( 160,043 )

Subordinated debentures ( 32,631 )

Interest payable ( 1,065 )

Other liabilities ( 42,813 )

Net tangible assets acquired 156,454

Other intangibles 18,642

Goodwill 166,617

Purchase price $ 341,713

The Corporation performed an evaluation of the loan portfolio in which there were loans that, at acquisition, had more than an insignificant amount of credit quality deterioration and were classified as purchased credit deteriorated ("PCD").

Details of the PCD loans are included in NOTE 5.

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

Of the total purchase price, $ 18.6 million has been allocated to other intangible assets.

Approximately $ 17.2 million was allocated to a core deposit intangible, which will be amortized over its estimated life of 10 years.

Approximately $ 1.4 million was allocated to a non-compete intangible, which will be amortized over its estimated life of 2 years.

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

Hoosier Trust Company

5 unchanged sentences

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.

Cash and cash equivalents $ 292

Cash and due from banks $ 292

Other assets 35

6 unchanged sentences

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

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

Level One Bancorp, Inc.

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

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

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

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

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

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

In addition, the Corporation expects to issue 10,000 shares of a newly created 7.5 % non-cumulative perpetual preferred stock, with a liquidation preference of $ 2,500 per share, in exchange for the outstanding Level One Series B preferred stock.

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

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

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

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

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

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

For additional details, see the "HIGHLIGHTS FOR 2021" section of Management's Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

Pro Forma Financial Information

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

The following schedule includes pro forma results for the year ended December 31, 2022 and 2021 as if the Level One acquisition occurred as of the beginning of the periods presented.

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

December 31, 2022 Year Ended

December 31, 2021

Total revenue (net interest income plus other income) $ 654,313 $ 621,946

Net Income $ 221,631 $ 237,031

Net income available to common shareholders $ 219,756 $ 235,156

Earnings per share:

Basic $ 3.72 $ 3.96

Diluted $ 3.70 $ 3.95

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

The pro forma information includes operating revenue of $ 56.9 million from Level One since the date of acquisition, and $ 12.5 million, net of tax, of acquisition-related expenses.

The pro forma information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of January 1, 2022 and 2021, nor is it intended to be a projection of future results.

CASH AND CASH EQUIVALENTS AND INTEREST-BEARING DEPOSITS

16 unchanged sentences

Total available for sale $ 2,273,347 $ 439 $ 297,125 $ 1,976,661

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Cost Gross Unrealized

1 unchanged sentence

Available for sale at December 31, 2021

Treasury $ 1,000 $ — $ 1 $ 999

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

20 unchanged sentences

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

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.

Accrued interest on investment securities available for sale and held to maturity of $ 29.5 million and $ 26.8 million is included in the Interest Receivable line on the Corporation's Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021, respectively.

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

10 unchanged sentences

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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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.

10 unchanged sentences

Furthermore, as of December 31, 2022, 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.

At CECL adoption, 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 balance of the allowance for credit losses on investment securities remained unchanged at $ 245,000 as of December 31, 2022.

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.

The following table summarizes the amortized cost of investment securities held to maturity at December 31, 2022, aggregated by credit quality indicator.

Held to Maturity

8 unchanged sentences

A3 10,117 — 10,117

Baa2 265 — 265

Non-rated 381,425 1,099,237 1,480,662

Total $ 1,117,552 $ 1,169,820 $ 2,287,372

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

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, 2022 and December 31, 2021, 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.

9 unchanged sentences

Investment securities available for sale at December 31, 2021

Treasury $ 999 $ 1 $ — $ — $ 999 $ 1

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

State and municipal 138,187 894 505 4 138,692 898

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

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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Losses Number of Securities

8 unchanged sentences

Investment securities available for sale at December 31, 2021

Treasury $ 1 1

Government-sponsored agency securities 1,545 8

State and municipal 898 103

Government-sponsored mortgage-backed securities 11,188 48

Corporate obligations 8 1

Total investment securities available for sale $ 13,640 161

9 unchanged sentences

Percent of the Corporation's investments available for sale 96.7 % 27.5 %

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.

5 unchanged sentences

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The amortized cost and fair value of investment securities available for sale and held to maturity at December 31, 2022 and December 31, 2021, by contractual maturity are shown below.

11 unchanged sentences

Total Investment Securities $ 2,273,347 $ 1,976,661 $ 2,287,372 $ 1,907,865

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

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 $ 941.3 million and $ 873.2 million were pledged at December 31, 2022 and 2021, 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 $ 196.7 million at December 31, 2022 and $ 175.1 million at

2 unchanged sentences

2022 2021 2020

Sales and Redemptions of Available for Sale Securities:

Sales and redemptions of investment securities available for sale:

Gross gains $ 1,264 $ 6,502 $ 12,097

Gross losses 70 828 202

Net gains of sales and redemptions of investment securities available for sale $ 1,194 $ 5,674 $ 11,895

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

18 unchanged sentences

Loans $ 12,003,894 $ 9,241,861

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.

The Level One acquisition added $ 1.6 billion in loans at acquisition, which included $ 43.5 million of Paycheck Protection Program ("PPP") loans.

Additional details of the Level One acquisition are included in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

As of December 31, 2022, the Corporation had $ 4.7 million of PPP loans compared to the December 31, 2021 balance of $ 106.6 million.

Additional details of the PPP are included in NOTE 1.

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

26 unchanged sentences

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.

Commercial and industrial loan balances as of December 31, 2022 include PPP loans with an origination year of 2021 and 2020 of $ 4.6 million and $ 102,000 , respectively.

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

December 31, 2022

Term Loans (amortized cost basis by origination year)

46 unchanged sentences

December 31, 2021

Pass Commercial

Mention Commercial Substandard Commercial

Doubtful Commercial Loss Consumer Performing Consumer

Non-Performing Total

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

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

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

Substandard — 693 — — — — — — 693

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

Commercial real estate, non-owner occupied

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

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

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

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

Commercial real estate, owner occupied

Residential 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

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

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

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

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

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

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

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

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

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

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

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

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

Individuals' loans for household and other personal expenditures

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

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

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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Total past due loans equaled $ 51.0 million as of December 31, 2022, a $ 16.3 million increase from the total of $ 34.7 million for December 31, 2021.

At December 31, 2022, 30-59 Days Past Due loans totaled $ 29.1 million, an increase of $ 14.0 million from December 31, 2021.

The primary increases were in commercial real estate owner and non-owner occupied and residential portfolios.

At December 31, 2022, 60-89 Days Past Due loans totaled $ 5.9 million, a decrease of $ 1.1 million from December 31, 2021.

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 primary decreases were in commercial and industrial loans and residential portfolios, offset by an increase in the home equity portfolio.

At December 31, 2022, 90 Days or More Past Due loans totaled $ 16.0 million, an increase of $ 3.3 million from December 31, 2021.

The primary increases were in the commercial and industrial and residential portfolios, offset by a decrease in the non-owner occupied commercial real estate portfolio.

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

29 unchanged sentences

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

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.

5 unchanged sentences

December 31, 2022 December 31, 2021

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

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

Commercial and industrial loans $ 3,292 $ 481 $ 7,598 $ 263

8 unchanged sentences

Loans $ 42,324 $ 4,247 $ 43,062 $ 9,080

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due.

There was no interest income recognized on non-accrual loans for the twelve months ended December 31, 2022 and 2021, respectively.

5 unchanged sentences

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:

The following tables present the amortized cost basis of collateral dependent loans by loan class and their respective collateral type, which are individually evaluated to determine expected credit losses, for December 31, 2022 and 2021.

The increase in collateral dependent loans of $ 38.8 million between 2022 and 2021, which is mostly in the commercial and industrial loan class, is primarily related to loans from the acquisition of Level One.

December 31, 2022

1 unchanged sentence

Commercial and industrial loans $ — $ — $ 42,101 $ 42,101 $ 8,367

Real estate loans:

Construction — 10 — 10 1

Commercial real estate, non-owner occupied 26,534 — — 26,534 2,064

Commercial real estate, owner occupied 6,986 — — 6,986 776

Residential — 2,382 — 2,382 260

Home equity — 289 — 289 44

Loans $ 33,520 $ 2,681 $ 42,101 $ 78,302 $ 11,512

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 —

6 unchanged sentences

Loans $ 25,220 $ 5,985 $ 8,326 $ 39,531 $ 8,633

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.

1 unchanged sentence

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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The following tables summarize troubled debt restructures in the Corporation's loan portfolio that occurred during the twelve months ended December 31, 2022 and 2021, respectively.

Twelve Months Ended December 31, 2022

Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans

Pre- Modification Recorded Balance Term Modification Rate Modification Post - Modification Recorded Balance Number of Loans

Commercial and industrial loans $ 61 $ 62 $ — $ 62 1

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 53 — 56 56 1

3 unchanged sentences

Commercial and industrial loans $ 348 $ 348 $ — $ — $ 348 2

Agricultural land, production and other loans to farmers 458 458 — — 458 1

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

Home Equity 332 237 95 — 332 3

Individuals' loans for household and other personal expenditures 19 19 — — 19 2

Total $ 14,028 $ 13,802 $ 142 $ 139 $ 14,083 15

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.

Loans in the commercial and industrial and residential loan classes made up 52.5 percent and 47.5 percent, respectively, of the post-modification balances of the troubled debt restructured loans that occurred during the twelve months ending December 31, 2022.

During the twelve months ended December 31, 2021, commercial real estate, non owner occupied made up 92.1 percent of the post-modification balance of the troubled debt restructured loans that occurred in the period.

The following table summarizes troubled debt restructures that occurred during the twelve months ended December 31, 2021, that subsequently defaulted during the period indicated and remained in default at period end.

For purposes of this schedule, a loan is considered in default if it is 30-days or more past due.

Twelve Months Ended December 31, 2021

Number of Loans Recorded Balance

Real estate loans:

Residential 5 $ 475

Total 5 $ 475

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

None of the troubled debt restructures that occurred during the twelve months ended December 31, 2022 resulted in a subsequent default that remained in default at period end.

Twelve Months Ended December 31, 2021

Number of Loans Recorded Balance

Commercial and industrial loans 2 $ 585

Real estate loans:

Residential 5 $ 475

Home equity 1 93

Total 5 $ 475

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.

Commercial troubled debt restructures that are not 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.

2 unchanged sentences

Consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $ 2.6 million and $ 4.2 million at December 31, 2022 and December 31, 2021, respectively.

Purchased Credit Deteriorated Loans

The Corporation acquired Level One on April 1, 2022 and performed an evaluation of the loan portfolio in which there were loans that, at acquisition, had more than an insignificant amount of credit quality deterioration.

The carrying amount of those loans is shown in the table below:

Purchase price of loans at acquisition $ 41,347

CECL Day 1 PCD ACL 16,599

Par value of acquired loans at acquisition $ 57,946

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Allowance for Credit Losses on Loans

19 unchanged sentences

These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor.

The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending management and staff, and (vi) other environmental factors such as regulatory, legal and technological considerations, as well as competition.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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 of a borrower such as regulatory, legal and technological considerations, as well as competition.

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.

5 unchanged sentences

No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the Small Business Administration ("SBA").

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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

18 unchanged sentences

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:

The allowance for credit losses increased $ 27.9 million during the twelve months ended December 31, 2022.

The allowance increased primarily due to $ 16.6 million of allowance for credit losses on PCD loans acquired in the Level One acquisition established through accounting adjustments on the acquisition date.

In addition, a provision of $ 14.0 million was recorded to establish an allowance for credit losses on non-PCD loans acquired in the Level One acquisition.

The allowance also had net charge offs of $ 2.7 million for the twelve months ended December, 31 2022.

The following tables summarize changes in the allowance for credit losses by loan segment for the twelve months ended December 31, 2022 and 2021:

Twelve Months Ended December 31, 2022

Commercial Commercial Real Estate Construction Consumer & Residential Total

Allowance for credit losses

Balances, December 31, 2021 $ 69,935 $ 60,665 $ 20,206 $ 44,591 $ 195,397

Provision for credit losses 16,697 ( 20,425 ) 6,367 ( 2,639 ) —

CECL Day 1 non-PCD provision for credit losses 2,957 5,539 871 4,588 13,955

CECL Day 1 PCD ACL 12,970 2,981 648 — 16,599

Recoveries on loans 872 1,096 863 1,096 3,927

Loans charged off ( 1,215 ) ( 3,017 ) — ( 2,369 ) ( 6,601 )

December 31, 2022 $ 102,216 $ 46,839 $ 28,955 $ 45,267 $ 223,277

Twelve Months Ended December 31, 2021

Commercial Commercial Real Estate Construction Consumer Residential Consumer & Residential Total

8 unchanged sentences

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

December 31, 2021 $ 69,935 $ 60,665 $ 20,206 $ — $ — $ 44,591 $ 195,397

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

5 unchanged sentences

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:

The following table summarizes changes in the allowance for loan losses by loan segment for the twelve months ended December 31, 2020:

Twelve Months Ended December 31, 2020

7 unchanged sentences

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

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

Balance Recorded

Investment Related

Impaired loans with no related allowance:

Commercial and industrial loans $ 1,059 $ 991 $ —

Real estate Loans:

Commercial real estate, non-owner occupied 4,958 4,694 —

Commercial real estate, owner occupied 2,125 1,310 —

Residential 957 816 —

Individuals' loans for household and other personal expenditures 2 2 —

Total $ 9,101 $ 7,813 $ —

Impaired loans with related allowance:

Commercial and industrial loans $ 268 $ 268 $ 223

Agricultural land, production and other loans to farmers 640 562 3

Real estate Loans:

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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

The following table summarizes the average recorded investment and interest income recognized by loan class for the period indicated:

Twelve Months Ended December 31, 2020

19 unchanged sentences

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

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

11 unchanged sentences

Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

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.

6 unchanged sentences

Standby letters of credit $ 40,784 $ 34,613

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.

The adoption of the CECL methodology for measuring credit losses on January 1, 2021, 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.

The Level One acquisition was responsible for an additional $ 2.8 million of provision for credit losses associated with off-balance sheet commitments, resulting in a total allowance for credit losses on off-balance sheet commitments of $ 23.3 million.

This reserve level remains appropriate and is reported in Other Liabilities as of December 31, 2022 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

Balance, January 1 $ 20,500 $ 20,500

CECL Day 1 unfunded commitments provision for credit losses 2,800 —

Balance, December 31 $ 23,300 $ 20,500

PREMISES AND EQUIPMENT

7 unchanged sentences

Net $ 117,118 $ 105,655

The Level One acquisition on April 1, 2022 resulted in additions to premises and equipment of $ 11.8 million.

Details regarding the acquisition are discussed in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

The Corporation is committed under various non-cancelable lease contracts for certain subsidiary office facilities and equipment.

5 unchanged sentences

Goodwill is recorded on the acquisition date of an entity.

The Hoosier acquisition on April, 1, 2021 resulted in $ 1,467,000 of goodwill.

Details regarding the Hoosier acquisition are discussed in NOTE 2.

The Corporation has one year after the acquisition date, the measurement period, to record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

The Level One acquisition on April 1, 2022 resulted in $ 166.6 million of goodwill.

In addition, the Hoosier acquisition on April, 1, 2021 resulted in $ 1.5 million of goodwill.

Details regarding the Level One and Hoosier acquisitions 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.

As of October 1, 2022 and October 1, 2021, the Corporation performed its annual goodwill impairment testing and in each valuation, the fair value exceeded the Corporation's carrying value;

therefore, it was concluded goodwill was not impaired as of either date.

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.

4 unchanged sentences

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.

The Corporation has one year after the acquisition date, the measurement period, to record subsequent adjustments to these intangibles for provisional amounts recorded at the acquisition date.

The Level One acquisition on April 1, 2022 resulted in a core deposit intangible of $ 17.2 million and other intangibles, consisting of non-compete intangibles, of $ 1.4 million.

In addition, the Hoosier acquisition on April 1, 2021 resulted in a customer relationship intangible of $ 2.2 million.

Details regarding the Level One and Hoosier acquisitions are discussed in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

64 unchanged sentences

Total deposits $ 14,382,745 $ 12,732,577

Deposits increased $ 1.7 billion from December 31, 2021.

The Level One acquisition contributed $ 1.9 billion of deposits as of the acquisition date, resulting in an organic deposit decline of $ 280.6 million, or 2.2 percent.

Details regarding the acquisition are discussed in NOTE 2.

ACQUISITIONS of these Notes to Consolidated Financial Statements.

The majority of the organic deposit decline was due to decreases in non-maturity deposits of $ 513.5 million, which was offset by increases in maturity deposits of $ 232.9 million when compared to December 31, 2021.

Higher interest rates have resulted in customers migrating funds from non-maturity products into maturity time deposit products.

At December 31, 2022 and 2021, deposits exceeding the FDIC's Standard Maximum Deposit Insurance Amount of $250,000 were $ 8.1 billion and $ 7.6 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, 2022, the contractual maturities of time deposits are summarized as follows:

4 unchanged sentences

December 31, 2022 December 31, 2021

Federal funds purchased $ 171,560 $ —

Securities sold under repurchase agreements $ 167,413 $ 181,577

Federal Home Loan Bank advances 823,674 334,055

Subordinated debentures and term loans 118,618 118,380

Subordinated debentures and other borrowings 151,298 118,618

Total Borrowings $ 1,313,945 $ 634,250

The Level One acquisition contributed to the increase in borrowings due to the assumption of $ 160.0 million of Federal Home Loan Bank advances and $ 32.6 million of subordinated debentures.

Additional details regarding the acquisition are discussed within NOTE 2.

ACQUISITIONS of the these Notes to Consolidated Financial Statements.

Securities sold under repurchase agreements consist of obligations of the Bank to other parties and are secured by U.S.

16 unchanged sentences

Maturities in Years Ending December 31:

Securities Sold

Federal Funds Purchased Securities Sold

Under Repurchase Agreements Federal Home

5 unchanged sentences

2026 — — 97 —

2027 — — 200,096 —

After 2027 — — 78,190 152,012

8 unchanged sentences

• 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.

At December 31, 2022 and 2021, the Corporation had $ 41.7 million of subordinated debentures issued to FMC Trust II, a wholly-owned statutory business trust.

FMC Trust II was formed in July 2007 for purposes of issuing trust preferred securities to investors.

At that time, it simultaneously issued and sold its common securities to the Corporation, which constituted all of the issued and outstanding common securities of FMC Trust II.

The subordinated debentures, which were purchased with the proceeds of the sale of the trust’s capital securities, are the sole assets of FMC Trust II and are fully and unconditionally guaranteed by the Corporation.

The subordinated debentures and the trust preferred securities bear interest at a variable rate equal to three-month LIBOR plus 1.56 percent, with interest and dividend payments being made on a quarterly basis.

The interest rate at December 31, 2022 and 2021 was 6.33 percent and 1.76 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.

The trust preferred securities are currently redeemable at par and without penalty, subject to the Corporation having first redeemed the related subordinated debentures, with the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies.

The trust preferred securities and the subordinated debentures of FMC Trust II will mature on September 15, 2037.

The Corporation continues to hold all outstanding common securities of FMC Trust II.

See “Replacement of LIBOR Benchmark” below for information relating to changes impacting the interest and dividends payable upon the trust preferred securities and subordinated debentures after June 30, 2023.

• Ameriana Capital Trust I.

At December 31, 2022 and 2021, the Corporation had $ 10.3 million of subordinated debentures issued to 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.

With a trust preferred structure substantially similar to that described above for FMC Trust II, the subordinated debentures held by Ameriana Capital Trust I were purchased with the proceeds of the sale of the trust’s capital securities.

The subordinated debentures and the trust preferred securities bear interest at a variable rate equal to three-month LIBOR plus 1.50 percent, with interest and dividend payments being made on a quarterly basis.

The interest rate at December 31, 2022 and 2021 was 6.27 percent and 1.70 percent, respectively.

The Corporation holds all of the outstanding common securities of Ameriana Capital Trust I.

The trust preferred securities of Ameriana Capital Trust I are currently redeemable at par and without penalty, subject to the Corporation having first redeemed the related subordinated debentures, with the prior approval of the Federal Reserve if then required under applicable capital guidelines or policies.

The trust preferred securities and the subordinated debentures of Ameriana Capital Trust I will mature in March 2036.

The Corporation continues to hold all of the outstanding common securities of Ameriana Capital Trust I.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

• First Merchants Senior Notes and Subordinated Notes.

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.

Once the rates convert to floating on October 30, 2023, the Senior Debt will have an annual floating rate equal to the three-month forward-looking term Secured Overnight Financing Rate, as administered by CME Group Benchmark Administration Limited (“CME Term SOFR”), adjusted by the relevant spread adjustment (which is 0.26161 percent for a three-month tenor), plus 2.345 percent.

The Subordinated Debt will have an annual floating rate equal to the three-month CME Term SOFR, plus the 0.26161 percent spread adjustment, plus 4.095 percent.

See “Replacement of LIBOR Benchmark” below for additional information relating to the transition from LIBOR to the Secured Overnight Financing Rate.

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.

5 unchanged sentences

As of December 31, 2022 and 2021 the Corporation was in compliance with these covenants.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

• Level One Subordinated Notes.

On April 1, 2022, the Corporation assumed certain subordinated notes in conjunction with its acquisition of Level One.

The $ 30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75 percent per annum, payable semiannually through December 18, 2024.

The notes will bear a floating interest rate equal to the of three-month CME Term SOFR plus 3.11 percent, payable quarterly, after December 18, 2024 through maturity.

The notes mature on December 18, 2029, and the Corporation has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or upon the occurrence of a Tier 2 capital event or tax event.

• Other Borrowings.

On April 1, 2022, the Corporation acquired a secured borrowing in conjunction with its acquisition of Level One.

The secured borrowing related to a certain loan participation sold by Level One that did not qualify for sales treatment.

The secured borrowing bears a fixed rate of 1.00 percent and had a balance of $ 1.2 million as of December 31, 2022.

Replacement of LIBOR Benchmark

On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law in response to the U.K.

Financial Conduct Authority, the authority regulating LIBOR, announcing that, among other things, the 1-month, 3-month, 6-month and 12-month U.S.

dollar LIBOR settings would cease to exist after June 30, 2023.

The LIBOR Act establishes a uniform national approach for replacing LIBOR in legacy contracts that do not provide for the use of a clearly defined replacement benchmark rate.

As directed by the LIBOR Act, on December 16, 2022, the Federal Reserve issued a final rule setting forth regulations to implement the LIBOR Act, including establishing benchmark replacements based on the Secured Overnight Funding Rate (“SOFR”) for contracts governed by U.S.

law that reference certain tenors of U.S.

dollar LIBOR (the overnight and one-, three-, six-, and 12-month tenors) and that do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate (“fallback provisions”) following the first London banking day after June 30, 2023.

As the subordinated debentures, the trust preferred securities, the Senior Notes and the Subordinated Notes discussed above do not have LIBOR fallback provisions, after June 30, 2023, the interest and dividends paid on those instruments will be based upon the CME Term SOFR, as the replacement benchmark, including a static spread adjustment for the appropriate tenor as provided by the LIBOR Act and related Federal Reserve regulations.

The relevant spread adjustment for a three-month tenor is 0.26161 percent.

DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

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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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Derivatives Designated as Hedges

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.

To accomplish these objectives, 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.

As of December 31, 2022 the Corporation had one interest rate swap with a notional amount of $ 10.0 million that was designated as a cash flow hedge.

As of December 31, 2021, the Corporation had four interest rate swaps with a notional amount of $ 60.0 million that were designated as cash flow hedges.

A $ 24.0 million interest rate swap, which was used to hedge the variable cash outflows (Ameribor-based) associated with a brokered deposit, matured in the first quarter of 2022.

Two interest rate swaps totaling $ 26.0 million, which 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, matured in the third quarter of 2022.

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 (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

During 2022, $ 10.0 million of interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with one Federal Home Loan Bank advance.

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.

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.

During the twelve months ended December 31, 2022 and 2021, the Corporation did not recognize any ineffectiveness.

Amounts reported in accumulated other comprehensive income (loss) 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 $ 164,000 from accumulated other comprehensive income (loss) to interest income.

The following table summarizes the Corporation's derivatives designated as hedges:

Asset Derivatives Liability Derivatives

December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021

Balance Sheet Location Fair

Value Balance Sheet Location Fair

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

Location Fair

Value Balance

Location Fair

Value Balance

Location Fair

Value Balance

Location Fair

Cash flow hedges:

Interest rate swaps on borrowings Other Assets $ 164 Other Assets $ — Other Liabilities $ — Other Liabilities $ 835

The amount of gain (loss) recognized in other comprehensive income is included in the table below for the periods indicated.

3 unchanged sentences

Interest rate products $ 479 $ 138

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.

The amount of loss reclassified from other comprehensive income into income related to cash flow hedging relationships is included in the table below for the years ended December 31, 2022, 2021 and 2020.

Derivatives Designated as Hedging

3 unchanged sentences

Interest rate contracts Interest expense $ ( 521 ) $ ( 1,044 ) $ ( 906 )

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.

The notional amount of customer-facing swaps was approximately $ 1.2 billion and $ 1.0 billion as of December 31, 2022 and December 31, 2021, respectively.

This amount is offset with third party counterparties, as described above.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.

It is the Corporation's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans.

These mortgage banking derivatives are not designated in hedge relationships.

Fair values were estimated based on changes in mortgage interest rates from the date of the commitments.

Changes in the fair value of these mortgage banking derivatives are included in net gains and fees on sales of loans.

The table below presents the fair value of the Corporation’s non-designated hedges, as well as their classification on the Balance Sheet, as of December 31, 2022, and December 31, 2021.

December 31, 2022 December 31, 2021

Notional Amount Fair Value Notional Amount Fair Value

Included in other assets:

Interest rate swaps $ 1,184,866 $ 92,652 $ 1,038,947 $ 41,133

Forward contracts related to mortgage loans to be delivered for sale 14,406 188 — —

Interest rate lock commitments 5,049 32 — —

Included in other assets $ 1,204,321 $ 92,872 $ 1,038,947 $ 41,133

Included in other liabilities:

Interest rate swaps $ 1,184,866 $ 92,652 $ 1,038,947 $ 41,133

Forward contracts related to mortgage loans to be delivered for sale 4,483 63 — —

Interest rate lock commitments 7,549 55 — —

Included in other liabilities $ 1,196,898 $ 92,770 $ 1,038,947 $ 41,133

In the normal course of business, the Corporation may decide to settle a forward contract rather than fulfill the contract.

Cash received or paid in this settlement manner is included in "Net gains and fees on sales of loans" in the Consolidated Statements of Income and is considered a cost of executing a forward contract.

The amount of gain (loss) recognized into income related to non-designated hedging instruments is included in the table below for the periods indicated.

Derivatives Not

Designated as Hedging

Instruments under

FASB ASC 815-10 Location of Gain

Recognized in

Income on Derivative Amount of Gain Recognized in Income on Derivative

2022 2021 2020

Forward contracts related to mortgage loans to be delivered for sale Net gains and fees on sales of loans $ 1,112 $ — $ —

Interest rate lock commitments Net gains and fees on sales of loans 71 — —

Total net gain recognized in income $ 1,183 $ — $ —

The Corporation’s exposure to credit risk occurs because of nonperformance by its counterparties.

2 unchanged sentences

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.

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 or 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.

As of December 31, 2022, the termination value of derivatives in a net liability position related to these agreements was $ 572,000 , which resulted in no collateral pledged to counterparties as of December 31, 2022.

While the Corporation did not breach any of these provisions as of December 31, 2022, if it had, the Corporation could have been required to settle its obligations under the agreements at their termination value.

FAIR VALUES OF FINANCIAL INSTRUMENTS

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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.

Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment and 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.

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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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1 unchanged sentence

(table dollar amounts in thousands, except share data)

Derivative Financial Agreements

See information regarding the Corporation’s derivative financial agreements in NOTE 12.

DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements.

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, 2022 and 2021.

10 unchanged sentences

Corporate obligations 12,207 — 12,176 31

Interest rate swap asset 41,133 — 41,133 —

Interest rate swap liability 41,968 — 41,968 —

Derivative assets 93,036 — 93,036 —

Derivative liabilities 92,770 — 92,770 —

Fair Value Measurements Using:

5 unchanged sentences

Government-sponsored agency securities $ 95,136 $ — $ 95,136 $ —

Treasury 999 999 — —

State and municipal 1,576,532 — 1,571,076 5,456

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Collateral dependent loans $ 55,290 — — $ 55,290

Other real estate owned $ 96 — — $ 96

Fair Value Measurements Using

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Weighted-average discount by loan balance 0 % - 10 % 1.1 %

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, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average)

27 unchanged sentences

Assets at December 31:

Cash and cash equivalents $ 167,146 $ 167,146 $ — $ —

Cash and due from banks $ 122,594 $ 122,594 $ — $ —

Interest-bearing deposits 126,061 126,061 — —

4 unchanged sentences

Federal Home Loan Bank stock 38,525 — 38,525 —

Interest rate swap asset 41,133 — 41,133 —

Derivative assets 93,036 — 93,036 —

Interest receivable 85,070 — 85,070 —

1 unchanged sentence

Deposits $ 14,382,745 $ 13,105,936 $ 1,251,017 $ —

Federal funds purchased 171,560 — 171,560 —

Securities sold under repurchase agreements 167,413 — 167,396 —

Federal Home Loan Bank advances 823,674 — 615,211 —

Subordinated debentures and term loans 118,618 — 107,892 —

Interest rate swap liability 41,968 — 41,968 —

Subordinated debentures and other borrowings 151,298 — 122,102 —

Derivative liabilities 92,770 — 92,770 —

Interest payable 7,530 — 7,530 —

3 unchanged sentences

Assets at December 31:

Cash and cash equivalents $ 192,896 $ 192,896 $ — $ —

Cash and due from banks $ 167,146 $ 167,146 $ — $ —

Interest-bearing deposits 474,154 474,154 — —

10 unchanged sentences

Federal Home Loan Bank advances 334,055 — 337,005 —

Subordinated debentures and term loans 118,380 — 108,439 —

Subordinated debentures and other borrowings 118,618 — 107,892 —

Interest rate swap liability 41,968 — 41,968 —

25 unchanged sentences

Unrealized gains (losses) on cash flow hedges (2)

Interest rate contracts $ ( 1,044 ) $ ( 906 ) $ ( 334 ) Interest expense - subordinated debentures and term loans

Interest rate contracts $ ( 521 ) $ ( 1,044 ) $ ( 906 ) Interest expense - subordinated debentures and other borrowings

Related income tax benefit (expense) 109 219 190 Income tax expense

8 unchanged sentences

(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.

DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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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.

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

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.

Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, tier 1 capital and common equity tier 1 capital, in each case, to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the regulations.

Banks with lower capital levels are deemed to be “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized”, depending on their actual levels.

The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is 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 requires the Corporation and the Bank to maintain the minimum capital and leverage ratios as defined in the regulation and as illustrated in the following table, 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).

12 unchanged sentences

Under that phase-in schedule, the cumulative effect of the adoption will be fully reflected in regulatory capital on January 1, 2024.

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

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

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

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

As a result, effective with the April 1, 2022 consummation of the Level One merger, the Corporation began reflecting all of its trust preferred securities as tier 2 capital.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

32 unchanged sentences

First Merchants Bank 1,309,685 8.88 589,994 4.00 $ 737,493 5.00 %

A reconciliation of certain non-GAAP amounts used in the determination of the above regulatory measures is detailed 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.

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.

interim final rule, which became effective April 13, 2020, clarifies that PPP loans receive a zero percent risk weight for purposes of determining

interim final rule, which became effective April 13, 2020, clarified 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.

11 unchanged sentences

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.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

4 unchanged sentences

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 .

As of December 31, 2022, the amount available for dividends from the Corporation’s subsidiaries (both banking and non-banking), without prior regulatory approval or notice, was $ 288.7 million.

Additionally, the Corporation has a Dividend Reinvestment and Stock Purchase Plan, enabling stockholders to elect to have their cash dividends on all shares automatically reinvested in additional shares of the Corporation’s common stock.

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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.

Preferred Stock

As part of the Level One acquisition, the Corporation issued 10,000 shares of a newly created 7.5 percent non-cumulative perpetual preferred stock with a liquidation preference of $ 2,500 per share, in exchange for the outstanding Level One Series B preferred stock, and as part of that exchange, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock.

As a result of the issuance, the Corporation had $ 25.0 million of outstanding preferred stock at December 31, 2022.

During the period ended December 31, 2022, the Corporation declared and paid dividends of $ 46.88 per share (equivalent to $ 0.4688 per depositary share) equal to $ 1.4 million.

The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations.

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 .

On a share basis, the amount of common stock subject to the repurchase program represents approximately 6 percent of the Corporation's outstanding shares at the time the program became effective.

During 2022, the Corporation did not repurchase any shares of its common stock pursuant to the repurchase program.

As of December 31, 2022, the Corporation had approximately 2.7 million shares at a maximum aggregate value of $ 74.5 million available to repurchase under the program.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted.

Among other things, the IRA imposes a new 1 percent excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S.

corporations (like the Corporation).

With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

LOAN SERVICING

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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.

2007 Stock Option 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.

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The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards.

In 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 2022, RSAs vested at a stock price higher than the grant date stock price resulting in recognition of income tax benefit at vesting of $ 86,000 .

Years Ended December 31,

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Total share-based compensation expense, net of income taxes $ 3,535 $ 3,815 $ 4,019

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.

The grant date fair value of ESPP options was estimated to be approximately $ 31,000 at the beginning of the October 1, 2022 quarterly offering period.

The ESPP options vested during the three months ending December 31, 2022, leaving no unrecognized compensation expense related to unvested ESPP options at December 31, 2022.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Outstanding at January 1, 2022 28,500 $ 17.14

Transferred Options from Level One 148,600 $ 18.84

Exercised ( 22,000 ) $ 16.28

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Unvested RSAs at December 31, 2022 416,705 $ 36.97

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.

As of December 31, 2022, unrecognized compensation expense related to RSAs was $ 8.9 million and is expected to be recognized over weighted-average period of 1.79 years.

The Corporation did no t have any unrecognized compensation expense related to stock options as of December 31, 2022.

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

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Liabilities $ 3,405 $ 4,436

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.

As of December 31, 2022, the funded status of the plans increased $ 1.5 million and the accumulated other comprehensive loss, net of tax, decreased $ 785,000 from December 31, 2021.

A primary contributing factor to these changes was the discount rate increasing by 270 basis points from 2.7 percent to 5.4 percent, which decreased the liability by $ 14.8 million.

This was offset by a $ 200,000 increase in the liability due to incorporation of new census data.

The plans' assets experienced a loss of $ 11.8 million, as compared to an expected return of $ 4.5 million.

The accumulated benefit obligation for all defined benefit plans was $ 55.8 million and $ 74.3 million at December 31, 2022 and 2021, respectively.

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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.

As of December 31, 2022 and 2021, the obligation payable under the post retirement plan was $ 2.4 million and $ 3.2 million, respectively.

Post retirement plan expense totaled $ 53,000 , $ 62,000 and $ 126,000 for 2022, 2021 and 2020, respectively.

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Federal & State Income Tax Loss Carryforward and Credits 600 747

Net Unrealized Loss on Securities Available for Sale 62,323 —

Other 2,883 3,585

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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.

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, federal income taxes may be imposed at the then applicable tax rate.

The unrecorded deferred tax liability at December 31, 2022, would have been approximately $ 5.3 million.

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

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.

NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted-average common shares outstanding during the reporting period.

Diluted net income per common share is computed by dividing net income available to common stockholders by the combination of the weighted-average common 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:

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

The following table reconciles basic and diluted net income per common share for the years indicated:

2022 2021 2020

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:

Income Available to Common Stockholders Weighted-Average Common Shares Per

Share Amount Net

Income Available to Common Stockholders Weighted-Average Common Shares Per

Share Amount Net

Income Available to Common Stockholders Weighted-Average Common Shares Per

Net income available to common stockholders $ 220,683 57,692,018 $ 3.83 $ 205,531 53,783,632 $ 3.82 $ 148,600 54,058,471 $ 2.75

Effect of potentially dilutive stock options and restricted stock awards 258,239 200,597 161,913

Diluted net income per common share $ 220,683 57,950,257 $ 3.81 $ 205,531 53,984,229 $ 3.81 $ 148,600 54,220,384 $ 2.74

As of December 31, 2022, 2021 and 2020, there were no stock options with an option price greater than the average market price of the common shares.

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December 31, 2022 December 31, 2021

Cash and cash equivalents $ 127,501 $ 59,848

Cash and due from banks $ 56,739 $ 127,501

Investment in subsidiaries 2,124,104 1,900,787

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Total assets $ 2,189,003 $ 2,040,009

Subordinated debentures and term loans $ 118,618 $ 118,380

Subordinated debentures and other borrowings $ 150,115 $ 118,618

Interest payable 979 864

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Total liabilities and stockholders' equity $ 2,189,003 $ 2,040,009

Condensed Statements of Income and Comprehensive Income

Condensed Statements of Income and Comprehensive Income (Loss)

December 31, 2022 December 31, 2021 December 31, 2020

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Net occupancy and equipment expenses 46 825 745

Other outside services 1,001 731 1,889

Professional services 263 218 303

Professional and other outside services 2,187 1,264 949

Other expenses 1,396 1,687 1,266

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Equity in undistributed income of subsidiaries 145,057 55,162 89,465

Net income 222,089 205,531 148,600

Preferred stock dividends 1,406 — —

Net income available to common stockholders $ 220,683 $ 205,531 $ 148,600

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Other comprehensive income (loss) ( 294,264 ) ( 19,723 ) 46,962

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

Comprehensive income (loss) $ ( 72,175 ) $ 185,808 $ 195,562

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Cash Flow From Investing Activities:

Net cash received in acquisition — — 78

Net cash provided by investing activities — — 78

Net cash and cash equivalents paid in acquisition ( 72,494 ) — —

Net cash used by investing activities ( 72,494 ) — —

Cash Flow From Financing Activities:

Cash dividends ( 61,230 ) ( 56,542 ) ( 51,276 )

Cash dividends on common stock ( 72,748 ) ( 61,230 ) ( 56,542 )

Cash dividends on preferred stock ( 1,406 ) — —

Repayment of borrowings — — ( 20,310 )

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Net cash used by financing activities ( 71,034 ) ( 83,991 ) ( 130,284 )

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

Net change in cash and cash equivalents ( 70,762 ) 67,653 ( 67,875 )

Cash and cash equivalents, beginning of the year 127,501 59,848 127,723

Cash and cash equivalents, end of year $ 56,739 $ 127,501 $ 59,848

GENERAL LITIGATION

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data