FIRST MERCHANTS CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm To the Stockholders, Board of Directors and Audit Committee First Merchants Corporation Muncie, Indiana Opinion on the 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 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. Basis for Opinion These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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 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 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 $223.3 million at December 31, 2022. The ACL is an estimate of current expected credit losses in the loan portfolio. The determination of the ACL requires significant judgment reflecting the Corporation’s best estimate of expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. We identified the valuation of the ACL as a critical audit matter. Auditing the ACL involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic forecasts and conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific allowances associated with loans individually evaluated and assessing the appropriateness of loan grades. 55 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM How We Addressed the Matter in Our Audit The primary procedures we performed to address this critical audit matter included: • Obtained an understanding of the Corporation’s process for establishing the ACL, including the 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 • Testing clerical and computational accuracy of the formulas within the calculation. • Testing of completeness and accuracy of the information and reports utilized in the ACL, including reports used in management review controls over the ACL. • Performed reviews of individual credit files to evaluate the reasonableness of loan credit risk ratings. • Tested internally prepared loan reviews to evaluate the reasonableness of loan credit risk ratings • Evaluated the qualitative adjustments to the ACL including assessing the basis for adjustments and the reasonableness of the significant assumptions • Evaluating the forecast adjustment, including assessing that it is reasonable and supportable • Tested the reasonableness of specific reserves on individually reviewed loans • Evaluated credit quality trends in delinquencies, non-accruals, charge-offs and loan risk ratings • Evaluated the overall reasonableness of the ACL and evaluated trends identified within peer groups. • Identifying fields in the various loan systems that defined the loan pools and tested the design and operating effectiveness of internal controls surrounding the input and maintenance of those fields. FORVIS, LLP (Formerly, BKD, LLP) We have served as the Corporation’s auditor since at least 1982; however, an earlier year cannot be reliably determined. Indianapolis, Indiana March 1, 2023 56 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS December 31, December 31, (Dollars in Thousands, Except Share Data) 2022 2021 ASSETS Cash and due from banks $ 122,594 $ 167,146 Interest-bearing deposits 126,061 474,154 Investment securities available for sale 1,976,661 2,344,551 Investment securities held to maturity, net of allowance for credit losses of $ 245 and $ 245 (fair value of $ 1,907,865 and $ 2,202,503 ) 2,287,127 2,179,802 Loans held for sale 9,094 11,187 Loans 12,003,894 9,241,861 Less: Allowance for credit losses - loans ( 223,277 ) ( 195,397 ) Net loans 11,780,617 9,046,464 Premises and equipment 117,118 105,655 Federal Home Loan Bank stock 38,525 28,736 Interest receivable 85,070 57,187 Other intangibles 35,842 25,475 Goodwill 712,002 545,385 Cash surrender value of life insurance 308,311 291,041 Other real estate owned 6,431 558 Tax asset, deferred and receivable 111,222 35,641 Other assets 221,631 140,167 TOTAL ASSETS $ 17,938,306 $ 15,453,149 LIABILITIES Deposits: Noninterest-bearing $ 3,173,417 $ 2,709,646 Interest-bearing 11,209,328 10,022,931 Total Deposits 14,382,745 12,732,577 Borrowings: 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 other borrowings 151,298 118,618 Total Borrowings 1,313,945 634,250 Interest payable 7,530 2,762 Other liabilities 199,316 170,989 Total Liabilities 15,903,536 13,540,578 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Cumulative Preferred Stock, $ 1,000 par value, $ 1,000 liquidation value: Authorized - 600 shares Issued and outstanding - 125 shares 125 125 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 25,000 — Common Stock, $ 0.125 stated value: Authorized - 100,000,000 shares Issued and outstanding - 59,170,583 and 53,410,411 shares 7,396 6,676 Additional paid-in capital 1,228,626 985,818 Retained earnings 1,012,774 864,839 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 See notes to consolidated financial statements. 57 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Share Data) December 31, 2022 December 31, 2021 December 31, 2020 INTEREST INCOME Loans receivable: Taxable $ 470,468 $ 338,009 $ 358,264 Tax-exempt 25,124 22,110 21,483 Investment securities: Taxable 38,354 29,951 24,440 Tax-exempt 67,381 55,331 42,341 Deposits with financial institutions 2,503 634 938 Federal Home Loan Bank stock 1,176 597 1,042 Total Interest Income 605,006 446,632 448,508 INTEREST EXPENSE Deposits 62,939 23,319 51,740 Federal funds purchased 1,302 5 120 Securities sold under repurchase agreements 1,136 314 604 Federal Home Loan Bank advances 11,417 5,672 6,973 Subordinated debentures and other borrowings 8,009 6,642 6,944 Total Interest Expense 84,803 35,952 66,381 NET INTEREST INCOME 520,203 410,680 382,127 Provision for credit losses - loans 16,755 — 58,673 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 Fiduciary and wealth management fees 29,688 28,362 23,747 Card payment fees 20,207 16,619 19,502 Net gains and fees on sales of loans 10,055 19,689 18,271 Derivative hedge fees 3,388 3,850 6,977 Other customer fees 1,935 1,490 1,497 Increase in cash surrender value of life insurance 5,210 4,873 5,040 Gains on life insurance benefits 5,964 2,187 100 Net realized gains on sales of available for sale securities 1,194 5,674 11,895 Other income 1,929 3,008 1,898 Total Non-Interest Income 107,941 109,323 109,926 NON-INTEREST EXPENSES Salaries and employee benefits 206,893 166,995 155,937 Net occupancy 26,211 23,326 26,756 Equipment 23,945 19,401 19,344 Marketing 7,708 5,762 6,609 Outside data processing fees 21,682 18,317 14,432 Printing and office supplies 1,588 1,217 1,304 Intangible asset amortization 8,275 5,747 5,987 FDIC assessments 10,235 6,243 5,804 Other real estate owned and foreclosure expenses 823 992 330 Professional and other outside services 21,642 11,913 8,901 Other expenses 26,713 19,300 18,001 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 NET INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE DATA: Basic $ 3.83 $ 3.82 $ 2.75 Diluted $ 3.81 $ 3.81 $ 2.74 See notes to consolidated financial statements. 58 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in Thousands) December 31, 2022 December 31, 2021 December 31, 2020 Net income $ 222,089 $ 205,531 $ 148,600 Other comprehensive income (loss): Unrealized gains/losses on securities available-for-sale: Unrealized holding gain (loss) arising during the period ( 371,299 ) ( 30,042 ) 74,067 Reclassification adjustment for losses (gains) included in net income ( 1,194 ) ( 5,674 ) ( 11,895 ) Tax effect 78,224 7,502 ( 13,056 ) Net of tax ( 294,269 ) ( 28,214 ) 49,116 Unrealized gain/loss on cash flow hedges: Unrealized holding gain (loss) arising during the period 479 138 ( 1,480 ) Reclassification adjustment for losses (gains) included in net income 521 1,044 906 Tax effect ( 210 ) ( 248 ) 121 Net of tax 790 934 ( 453 ) Defined benefit pension plans: Net gain (loss) arising during the period ( 1,076 ) 9,482 ( 2,237 ) Reclassification adjustment for amortization of prior service cost 82 84 84 Tax effect 209 ( 2,009 ) 452 Net of tax ( 785 ) 7,557 ( 1,701 ) Total other comprehensive income (loss), net of tax ( 294,264 ) ( 19,723 ) 46,962 Comprehensive income (loss) $ ( 72,175 ) $ 185,808 $ 195,562 See notes to consolidated financial statements. 59 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 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 Comprehensive income Net income — — — — — — — 148,600 — 148,600 Other comprehensive income (loss), net of tax — — — — — — — — 46,962 46,962 Cash dividends on common stock ($ 1.04 per share) — — — — — — — ( 56,542 ) — ( 56,542 ) Repurchases of common stock — — — — ( 1,634,437 ) ( 204 ) ( 55,708 ) — — ( 55,912 ) Share-based compensation — — — — 128,292 16 4,584 — — 4,600 Stock issued under employee benefit plans — — — — 25,423 3 636 — — 639 Stock issued under dividend reinvestment and stock purchase plan — — — — 60,806 8 1,718 — — 1,726 Stock options exercised — — — — 13,550 2 113 — — 115 Restricted shares withheld for taxes — — — — ( 39,757 ) ( 6 ) ( 974 ) — — ( 980 ) Balances, December 31, 2020 125 $ 125 — $ — 53,922,359 $ 6,740 $ 1,005,366 $ 788,578 $ 74,836 $ 1,875,645 Cumulative effect of ASC 326 adoption — — — — — — — ( 68,040 ) — ( 68,040 ) Balance, January 1, 2021 125 $ 125 — $ — 53,922,359 $ 6,740 $ 1,005,366 $ 720,538 $ 74,836 $ 1,807,605 Comprehensive income Net income — — — — — — — 205,531 — 205,531 Other comprehensive income (loss), net of tax — — — — — — — — ( 19,723 ) ( 19,723 ) Cash dividends on common stock ($ 1.13 per share) — — — — — — — ( 61,230 ) — ( 61,230 ) Repurchases of common stock — — — — ( 646,102 ) ( 81 ) ( 25,363 ) — — ( 25,444 ) Share-based compensation — — — — 94,510 12 4,750 — — 4,762 Stock issued under employee benefit plans — — — — 16,507 2 603 — — 605 Stock issued under dividend reinvestment and stock purchase plan — — — — 43,861 5 1,875 — — 1,880 Stock options exercised — — — — 17,300 2 196 — — 198 Restricted shares withheld for taxes — — — — ( 38,024 ) ( 4 ) ( 1,609 ) — — ( 1,613 ) Balances, December 31, 2021 125 $ 125 — $ — 53,410,411 $ 6,676 $ 985,818 $ 864,839 $ 55,113 $ 1,912,571 Comprehensive income Net income — — — — — — — 222,089 — 222,089 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 ) 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 Stock issued under employee benefit plans — — — — 20,267 3 703 — — 706 Stock issued under dividend reinvestment and stock purchase plan — — — — 50,559 6 2,050 — — 2,056 Stock options exercised — — — — 22,000 3 355 — — 358 Restricted shares withheld for taxes — — — — ( 39,662 ) ( 6 ) ( 1,627 ) — — ( 1,633 ) Balances, December 31, 2022 125 $ 125 10,000 $ 25,000 59,170,583 $ 7,396 $ 1,228,626 $ 1,012,774 $ ( 239,151 ) $ 2,034,770 See notes to consolidated financial statements. 60 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, December 31, December 31, (Dollars in Thousands) 2022 2021 2020 Cash Flow From Operating Activities: Net income $ 222,089 $ 205,531 $ 148,600 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 16,755 — 58,673 Depreciation and amortization 11,815 10,701 11,009 Change in deferred taxes 9,065 6,983 ( 9,735 ) Share-based compensation 4,652 4,762 4,600 Loans originated for sale ( 251,306 ) ( 548,742 ) ( 591,057 ) Proceeds from sales of loans held for sale 265,723 557,744 611,945 Gains on sales of loans held for sale ( 4,373 ) ( 16,223 ) ( 15,817 ) Gains on sales of securities available for sale ( 1,194 ) ( 5,674 ) ( 11,895 ) Increase in cash surrender of life insurance ( 5,210 ) ( 4,873 ) ( 5,040 ) Gains on life insurance benefits ( 5,964 ) ( 2,187 ) ( 100 ) Change in interest receivable ( 20,695 ) ( 3,239 ) ( 5,047 ) Change in interest payable 3,703 ( 525 ) ( 3,467 ) Other adjustments 22,985 3,124 11,162 Net cash provided by operating activities 268,045 207,382 203,831 Cash Flows from Investing Activities: Net change in interest-bearing deposits 348,093 ( 81,849 ) ( 274,042 ) Purchases of: Securities available for sale ( 451,203 ) ( 931,368 ) ( 613,117 ) Securities held to maturity ( 292,493 ) ( 1,156,621 ) ( 699,095 ) Proceeds from sales of securities available for sale 606,873 181,333 231,391 Proceeds from maturities of: Securities available for sale 201,846 279,367 322,617 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 ) Net cash and cash equivalents received (paid) in acquisition 137,780 ( 2,933 ) — Proceeds from the sale of other real estate owned 496 706 8,655 Proceeds from life insurance benefits 24,047 8,764 601 Proceeds from mortgage portfolio loan sale — 78,159 — Other adjustments ( 12,920 ) ( 11,678 ) ( 9,278 ) Net cash used in investing activities ( 446,441 ) ( 1,469,446 ) ( 1,552,025 ) Cash Flows from Financing Activities: Net change in : Demand and savings deposits ( 513,496 ) 1,556,127 2,336,120 Certificates of deposit and other time deposits 232,874 ( 185,160 ) ( 814,466 ) Borrowings 1,818,389 45,542 573,757 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 ) Stock issued under employee benefit plans 706 605 639 Stock issued under dividend reinvestment and stock purchase plans 2,056 1,880 1,726 Stock options exercised 358 198 115 Repurchase of common stock — ( 25,444 ) ( 55,912 ) Net cash provided by financing activities 133,844 1,236,314 1,363,889 Net Change in Cash and Cash Equivalents ( 44,552 ) ( 25,750 ) 15,695 Cash and Cash Equivalents, January 1 167,146 192,896 177,201 Cash and Cash Equivalents, December 31 $ 122,594 $ 167,146 $ 192,896 Additional cash flow information: Interest paid $ 80,035 $ 36,477 $ 69,848 Income tax paid 13,819 31,168 33,201 Loans transferred to other real estate owned 6,469 292 813 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 ROU assets obtained in exchange for new operating lease liabilities 10,516 2,700 1,601 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED In conjunction with the acquisitions, liabilities were assumed as follows: December 31, 2022 December 31, 2021 December 31, 2020 Fair value of assets acquired $ 2,510,576 $ 4,041 $ — Cash paid in acquisition ( 79,324 ) ( 3,225 ) — Less: Common stock issued 237,389 — — Less: Preferred stock issued 25,000 — — Liabilities assumed $ 2,168,863 $ 816 $ — See notes to consolidated financial statements. 61 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FINANCIAL STATEMENT PREPARATION The accounting and reporting policies of the Corporation and the Bank, conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and fair value of financial instruments. Reclassifications have been made to prior financial statements to conform to the current financial statement presentation. The Corporation is a financial holding company whose principal activity is the ownership and management of the Bank and operates in a single significant business segment. The Bank provides full banking services under an Indiana state-charter. Additionally, the Bank operates as First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank generates commercial, mortgage, and consumer loans and receives deposits from customers located primarily in central and northern Indiana, northeast Illinois, central Ohio and southeast Michigan counties. The Bank’s loans are generally secured by specific items of collateral, including real property, consumer assets and business assets. A brief description of current accounting practices and current valuation methodologies are presented below. CONSOLIDATION The consolidation of the Corporation's financial statements include the accounts of the Corporation and all its subsidiaries, after elimination of all material intercompany transactions. BUSINESS COMBINATIONS Business combinations are accounted for under the acquisition method of accounting. Under the acquisition method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition. Details of the Corporation's acquisitions are included in NOTE 2. ACQUISITIONS of these Notes to Consolidated Financial Statements. CASH AND CASH EQUIVALENTS Cash on hand, cash items in process of collection and non-interest bearing cash held at various banks are included in cash and cash equivalents and have a maturity of less than three months. The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on cash and cash equivalents. INTEREST-BEARING DEPOSITS Interest-bearing cash held at various banks and the Federal Reserve Bank and federal funds sold are included in interest-bearing deposits and have a maturity of less than three months. The Corporation maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes there is not significant credit risk on interest-bearing deposits. INVESTMENT SECURITIES Held to maturity securities are carried at amortized cost when the Corporation has the positive intent and ability to hold them until maturity. Available for sale securities are recorded at fair value on a recurring basis with the unrealized gains and losses, net of applicable income taxes, recorded in other comprehensive income (loss). Realized gains and losses are recorded in earnings and the prior fair value adjustments are reclassified within stockholders' equity. Gains and losses on sales of securities are determined on the specific-identification method. Amortization of premiums and accretion of discounts are amortized to their earliest call date and are recorded as interest income from securities. Details of the Corporation's investment securities portfolio are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. 62 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES AVAILABLE FOR SALE For investment securities available for sale in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income (loss). Adjustments to the allowance for credit losses are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality. Details of the Corporation's allowance for credit losses on investment securities available for sale are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. ALLOWANCE FOR CREDIT LOSSES ON INVESTMENT SECURITIES HELD TO MATURITY ("ACL - INVESTMENTS") The ACL - Investments is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the ACL - Investments when deemed uncollectible. Adjustments to the ACL - Investments are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on held to maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) the financial condition of the issuer, (3) historical loss rates for given bond ratings, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have generally not been significant. An allowance for credit losses of $ 245,000 was recorded on state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. Details of the Corporation's ACL - Investments are included in NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. LOANS HELD FOR SALE Loans originated and with an intent to sell are classified as held for sale and are carried at the principal amount outstanding. The carrying amount approximates fair value due to the short duration between origination and the date of sale. LOANS The Corporation’s loan portfolio is carried at the principal amount outstanding, net of unearned income and principal charge-offs. Loan origination fees, net of direct loan origination costs, and commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. Interest income is accrued on the principal balances of loans. The accrual of interest is discontinued on a loan when, in management’s opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed against earnings when considered uncollectible. Interest income accrued in the prior year, if any, is charged to the allowance for credit losses. Interest income is subsequently recognized only to the extent cash payments are received and the loan is returned to accruing status. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) established the Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”), to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the pandemic. The Bank actively participated in assisting its customers with PPP funding during all phases of the program. The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities. Loans under the program earn interest at a fixed rate of 1 percent. As of December 31, 2022, the Corporation had $ 4.7 million of PPP loans compared to the December 31, 2021 balance of $ 106.6 million. The Corporation will continue to monitor legislative, regulatory, and supervisory developments related to the PPP. However, it anticipates that the majority of the Bank’s remaining PPP loans will be forgiven by the SBA in accordance with the terms of the program. Loan commitments and letters-of-credit generally have short-term, variable-rate features and contain clauses which limit the exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value. Details of the Corporation's loan portfolio are included in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. 63 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) PURCHASED CREDIT DETERIORATED ("PCD") LOANS The Corporation 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") The ACL - Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Adjustments to the ACL - Loans are reported in the income statement as a component of provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding the policies and methodology used to estimate the ACL - Loans is detailed in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. PENSION The Corporation has defined-benefit pension plans, including non-qualified plans for certain employees, former employees and former non-employee directors. In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan. No additional pension benefits have been earned by any employees who had not met certain requirements as of March 1, 2005. The benefits are based primarily on years of service and employees’ pay near retirement. The Corporation's accounting policies related to pensions and other post retirement benefits reflect the guidance in ASC 715, Compensation – Retirement Benefits. The Corporation does not consolidate the assets and liabilities associated with the pension plan. Instead, the Corporation recognizes the funded status of the plan in the Consolidated Balance Sheets. The measurement of the funded status and the annual pension expense involves actuarial and economic assumptions. Various statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liabilities related to the plans. Key factors include assumptions on the expected rates of return on plan assets, discount rates and health care costs and trends. The Corporation considers market conditions, including changes in investment returns and interest rates in making these assumptions. The primary assumptions used in determining the Corporation’s pension and post retirement benefit obligations and related expenses are presented in NOTE 18. PENSION AND OTHER POST RETIREMENT BENEFIT PLANS of these Notes to Consolidated Financial Statements. PREMISES AND EQUIPMENT Premises and equipment is carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line and declining balance methods based on the estimated useful lives of the assets ranging from three to forty years . Maintenance and repairs are expensed as incurred, while major additions and improvements, which extend the useful life, are capitalized. Gains and losses on dispositions are included in current operations. Details of the Corporation's premises and equipment are included in NOTE 6. PREMISES AND EQUIPMENT of these Notes to Consolidated Financial Statements. LEASES The Corporation leases certain land and premises from third parties and all are classified as operating leases. Operating leases are included in Other Assets and Other Liabilities on the Corporation's Consolidated Balance Sheets and lease expense for lease payments is recognized on a straight-line basis over the lease term. Right of Use ("ROU") assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the term. An ROU asset represents the right to use the underlying asset for the lease term and also includes any direct costs and payments made prior to lease commencement and excludes lease incentives. When an implicit rate is not available, an incremental borrowing rate based on the information available at commencement date is used in determining the present value of the lease payments. A lease term may include an option to extend or terminate the lease when it is reasonably certain the option will be exercised. Short-term leases of twelve months or less are excluded from accounting guidance; as a result, the lease payments are recognized on a straight-line basis over the lease term and the leases are not reflected on the Corporation's Consolidated Balance Sheets. Renewal and termination options are considered when determining short-term leases. Leases are accounted for at the individual level. Details of the Corporation's leases are included in NOTE 9. LEASES of these Notes to Consolidated Financial Statements. FEDERAL HOME LOAN BANK STOCK ("FHLB") FHLB stock is a required investment for institutions that are members of the FHLB. The Bank is a member of the FHLB of Indianapolis. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and is classified as a restricted security. Both cash and stock dividends are reported as income. 64 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) INTANGIBLE ASSETS 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. Details of the Corporation's other intangible assets are included in NOTE 8. OTHER INTANGIBLES of these Notes to Consolidated Financial Statements. GOODWILL Goodwill is maintained by applying the provisions of ASC 350, Intangibles – Goodwill and Other . For acquisitions, assets acquired, including identified intangible assets, and the liabilities assumed are required to be recorded at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. In addition, the determination of the useful lives over which the intangible asset will be amortized is subjective. Under ASC 350, the Corporation is required to evaluate goodwill for impairment on an annual basis, as well as on an interim basis, if events or changes indicate that the asset may be impaired, indicating that the carrying value may not be recoverable. The Corporation completed its most recent annual goodwill impairment test as of October 1, 2022 and concluded, based on current events and circumstances goodwill is not impaired. Details of the Corporation's goodwill are included in NOTE 7. GOODWILL of these Notes to Consolidated Financial Statements. BANK OWNED LIFE INSURANCE ("BOLI") BOLI policies have been purchased, as well as obtained through acquisitions, on certain current and former employees and directors of the Corporation to offset a portion of the employee benefit costs. The Corporation records the life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Changes in cash surrender values and death benefits received in excess of cash surrender values are reported in non-interest income. A corporate policy is in place with defined thresholds that limit the amount of credit, interest rate and liquidity risk inherent in a BOLI portfolio. The Corporation actively monitors the overall portfolio performance along with the credit quality of the insurance carriers and the credit quality and yield of the underlying investments. OTHER REAL ESTATE OWNED ("OREO") OREO consists of assets acquired through, or in lieu of, loan foreclosure and are held for sale. They are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in other real estate owned and foreclosure expenses. DERIVATIVE INSTRUMENTS Derivative instruments, which are recorded as assets or liabilities in the Consolidated Balance Sheets, are carried at fair value of the derivatives and reflects the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information. As part of the asset/liability management program, the Corporation will utilize, from time to time, interest rate floors, caps or swaps to reduce its sensitivity to interest rate fluctuations. Changes in the fair values of derivatives are reported in the consolidated statements of operations or AOCI depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis. Derivatives that qualify for the hedge accounting treatment are designated as either: (1) a hedge of the fair value of the recognized asset or liability, or of an unrecognized firm commitment (a fair value hedge); or (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). To date, the Corporation has only entered into a cash flow hedge. For cash flow hedges, changes in the fair values of the derivative instruments are reported in AOCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in AOCI are reflected in the Consolidated Statements of Income in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, the Corporation establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized in the Consolidated Statements of Income. The Corporation excludes the time value expiration of the hedge when measuring ineffectiveness. The Corporation offers interest rate derivative products (e.g. interest rate swaps) to certain of its high-quality commercial borrowers. This product allows customers to enter into an agreement with the Corporation to swap their variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the risk of changes in the borrower’s interest rate or market price risk. The extension of credit incurred through the execution of these derivative products is subject to the same approvals and rigorous underwriting standards as the related traditional credit product. The Corporation limits its risk exposure to these products by entering into a mirror-image, offsetting swap agreement with a separate, well-capitalized and rated counterparty previously approved by the Credit and Asset Liability Committee. By using these interest rate swap arrangements, the Corporation is also better insulated from the interest rate risk associated with underwriting fixed-rate loans. These derivative contracts are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging , and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the customer and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820, Fair Value Measurements and Disclosures ), resulting in some volatility in earnings each period. Details of the Corporation's derivative instruments are included in NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements. 65 PART II: ITEM 8. 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 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. BORROWINGS of these Notes to Consolidated Financial Statements. ALLOWANCE FOR CREDIT LOSSES - OFF-BALANCE SHEET CREDIT EXPOSURES The allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Corporation is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Corporation has the unconditional right to cancel the obligation. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. The allowance for off-balance sheet credit exposures is adjusted through the income statement as a component of provision for credit loss. Further information regarding the policies and methodology used to estimate the allowance for credit losses on off-balance sheet credit exposures is detailed in NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of these Notes to Consolidated Financial Statements. REVENUE RECOGNITION Revenue recognition guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Corporation's revenue-generating transactions are not subject to ASU 2014-09, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the disclosures. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. Descriptions of revenue-generating activities that are within the scope of ASU 2014-09, which are presented in our income statements are as follows: Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed, which is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned monthly, representing the period which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Fiduciary activities : This represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction-based are recognized at the point in time that the transaction is executed. Investment Brokerage Fees : The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party provider on a monthly basis based upon customer activity for the month. The fees are paid to us by the third party on a monthly basis and are recognized when received. Interchange income : The Corporation earns interchange fees from debit and credit cardholder transactions conducted through the Visa and MasterCard payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrent with the transaction processing services provided to the cardholder. Gains (Losses) on Sales of OREO : The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. TRANSFERS OF FINANCIAL ASSETS Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered, or in the case of a loan participation, a portion of the asset has been surrendered and meets the definition of a "participating interest." Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. 66 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) SHARE-BASED COMPENSATION Stock option and restricted stock award plans are maintained by the Corporation. The compensation costs are recognized for stock options and restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the appropriate service period, which is generally two to five years . Details of the Corporation's share-based compensation are included in NOTE 17. SHARE-BASED COMPENSATION of these Notes to Consolidated Financial Statements. INCOME TAX Income tax expense in the Consolidated Statements of Income is the total of the current year income tax due or refundable and 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. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Corporation files consolidated income tax returns with its subsidiaries. The Corporation is generally no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years before 2019. The Corporation accounts for income taxes under the provisions of ASC 740, Income Taxes , which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Per the guidance in ASC 740, the Corporation has not identified any uncertain tax positions that it believes should be recognized in the financial statements. The Corporation reviews income tax expense and the carrying value of deferred tax assets and liabilities quarterly; as new information becomes available, the balances are adjusted, if applicable. The Corporation's policy is to recognize interest and penalties related to unrecognized tax benefits, if any, as a component of income tax expense. Details of the Corporation's income taxes are included in NOTE 19. INCOME TAX of these Notes to Consolidated Financial Statements. NET INCOME PER 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. Diluted net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options and non-vested restricted stock awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. Details of the Corporation's net income per share are included in NOTE 20. NET INCOME PER COMMON SHARE of these Notes to Consolidated Financial Statements. RECENT ACCOUNTING CHANGES ADOPTED IN 2022 FASB Accounting Standards Updates - No. 2022-06 - Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848 Summary - The FASB issued ASU No. 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. 67 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The Corporation continually monitors potential accounting pronouncement and SEC release changes. The following pronouncements and releases have been deemed to have the most applicability to the Corporation's financial statements and will be adopted after December 31, 2022: FASB Accounting Standards Updates - No. 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary - The FASB issued ASU No. 2020-04 to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates and move toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. 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. 2021-01 - Reference Rate Reform (Topic 848): Scope Summary - The FASB has published ASU 2021-01, Reference Rate Reform. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. If an entity elects to apply any of the amendments in this Update for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election. 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. 2021-08 - Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers Summary - The FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , that addresses diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606 , Revenue from Contracts with Customers , at fair value on the acquisition date. The FASB indicates that some stakeholders indicated that it is unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after Topic 606 is adopted. Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer. To address this, the ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. Finally, the amendments in the ASU improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. For public business entities, the amendments are effective for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period or early application, and (2) prospectively to all business combinations that occur on or after the date of initial application. The Corporation 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. 68 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. NOTE 2 ACQUISITIONS 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: FRMEP). 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. 69 PART II: ITEM 8. 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. Fair Value 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 On April 1, 2021, the Bank acquired 100 percent of Hoosier Trust Company ("Hoosier") through a merger of Hoosier with and into the Bank. The consideration paid to shareholders of Hoosier at closing was $ 3,225,000 in cash. Prior to the acquisition, Hoosier was an Indiana corporate trust company, headquartered in Indianapolis, Indiana, with approximately $ 290 million in assets under management. Hoosier’s sole office is now being operated by the Bank as a limited service trust office. Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair value on the date of the acquisition. Based on the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change based on the timing of the transaction, the purchase price for the Hoosier acquisition is detailed in the following table. Fair Value Cash and due from banks $ 292 Other assets 35 Other liabilities ( 816 ) Net tangible assets acquired ( 489 ) Customer relationship intangible 2,247 Goodwill 1,467 Purchase price $ 3,225 Of the total purchase price, $ 2,247,000 was allocated to a customer relationship intangible, which will be amortized over its estimated life of 10 years. The remaining purchase price was allocated to goodwill, which is deductible for tax purposes. 70 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. Year Ended 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. NOTE 3 CASH AND CASH EQUIVALENTS AND INTEREST-BEARING DEPOSITS At December 31, 2022, the Corporation’s non-interest bearing deposits, included in cash and cash equivalents, and interest-bearing deposits held at other institutions exceeded the $250,000 federally insured limits by approximately $ 54,029,000 . Each correspondent bank’s financial performance and market rating are reviewed on a quarterly basis to ensure the Corporation has deposits only at institutions providing minimal risk for those exceeding the federally insured limits. Additionally, the Corporation had approximately $ 110,502,000 at the Federal Home Loan Bank and Federal Reserve Bank, which are government-sponsored entities not insured by the FDIC. The Corporation has historically been required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. However, the Federal Reserve announced on March 15, 2020 that in order to support the flow of credit to households and businesses during the COVID-19 pandemic, reserve requirement ratios would move to zero effective March 26, 2020. The reserve requirement ratios remained at zero as of December 31, 2022. NOTE 4 INVESTMENT SECURITIES The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale as of December 31, 2022 and December 31, 2021. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale at December 31, 2022 U.S. Treasury $ 2,501 $ — $ 42 $ 2,459 U.S. Government-sponsored agency securities 119,154 — 17,192 101,962 State and municipal 1,530,048 438 178,726 1,351,760 U.S. Government-sponsored mortgage-backed securities 608,630 1 100,358 508,273 Corporate obligations 13,014 — 807 12,207 Total available for sale $ 2,273,347 $ 439 $ 297,125 $ 1,976,661 71 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale at December 31, 2021 U.S. Treasury $ 1,000 $ — $ 1 $ 999 U.S. Government-sponsored agency securities 96,244 437 1,545 95,136 State and municipal 1,495,696 81,734 898 1,576,532 U.S. Government-sponsored mortgage-backed securities 671,684 7,109 11,188 667,605 Corporate obligations 4,031 256 8 4,279 Total available for sale $ 2,268,655 $ 89,536 $ 13,640 $ 2,344,551 The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity as of December 31, 2022 and December 31, 2021. Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized Losses Fair Value Held to maturity at December 31, 2022 U.S. Government-sponsored agency securities $ 392,246 $ — $ 392,246 $ — $ 69,147 $ 323,099 State and municipal 1,117,552 245 1,117,307 647 197,064 921,135 U.S. Government-sponsored mortgage-backed securities 776,074 — 776,074 — 113,915 662,159 Foreign investment 1,500 — 1,500 — 28 1,472 Total held to maturity $ 2,287,372 $ 245 $ 2,287,127 $ 647 $ 380,154 $ 1,907,865 Amortized Cost Allowance for Credit Losses Net Carrying Amount Gross Unrealized Gains Gross Unrealized Losses Fair Value Held to maturity at December 31, 2021 U.S. Government-sponsored agency securities $ 371,457 $ — $ 371,457 $ 226 $ 7,268 $ 364,415 State and municipal 1,057,301 245 1,057,056 29,593 2,170 1,084,724 U.S. Government-sponsored mortgage-backed securities 749,789 — 749,789 7,957 5,881 751,865 Foreign investment 1,500 — 1,500 — 1 1,499 Total held to maturity $ 2,180,047 $ 245 $ 2,179,802 $ 37,776 $ 15,320 $ 2,202,503 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. In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality. 72 PART II: ITEM 8. 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. Investment securities held to maturity are charged off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have been insignificant. Furthermore, as of December 31, 2022, there were no past due principal and interest payments associated with these 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, 2022, aggregated by credit quality indicator. Held to Maturity State and municipal Other Total Credit Rating: Aaa $ 101,076 $ 70,583 $ 171,659 Aa1 162,728 — 162,728 Aa2 185,394 — 185,394 Aa3 135,227 — 135,227 A1 131,417 — 131,417 A2 10,168 — 10,168 A3 10,117 — 10,117 Non-rated 381,425 1,099,237 1,480,662 Total $ 1,117,552 $ 1,169,820 $ 2,287,372 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. Less than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Investment securities available for sale at December 31, 2022 U.S. Treasury $ 2,459 $ 42 $ — $ — $ 2,459 $ 42 U.S. Government-sponsored agency securities 48,940 4,973 53,022 12,219 101,962 17,192 State and municipal 1,177,104 150,096 108,652 28,630 1,285,756 178,726 U.S. Government-sponsored mortgage-backed securities 182,700 16,910 325,455 83,448 508,155 100,358 Corporate obligations 12,176 807 — — 12,176 807 Total investment securities available for sale $ 1,423,379 $ 172,828 $ 487,129 $ 124,297 $ 1,910,508 $ 297,125 Less than 12 Months 12 Months or Longer Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Investment securities available for sale at December 31, 2021 U.S. Treasury $ 999 $ 1 $ — $ — $ 999 $ 1 U.S. Government-sponsored agency securities 68,524 1,545 — — 68,524 1,545 State and municipal 138,187 894 505 4 138,692 898 U.S. Government-sponsored mortgage-backed securities 427,687 10,791 8,324 397 436,011 11,188 Corporate obligations 992 8 — — 992 8 Total investment securities available for sale $ 636,389 $ 13,239 $ 8,829 $ 401 $ 645,218 $ 13,640 73 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following table 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 for the periods indicated. Gross Unrealized Losses Number of Securities Investment securities available for sale at December 31, 2022 U.S. Treasury $ 42 5 U.S. Government-sponsored agency securities 17,192 16 State and municipal 178,726 946 U.S. Government-sponsored mortgage-backed securities 100,358 177 Corporate obligations 807 10 Total investment securities available for sale $ 297,125 1,154 Gross Unrealized Losses Number of Securities Investment securities available for sale at December 31, 2021 U.S. Treasury $ 1 1 U.S. Government-sponsored agency securities 1,545 8 State and municipal 898 103 U.S. Government-sponsored mortgage-backed securities 11,188 48 Corporate obligations 8 1 Total investment securities available for sale $ 13,640 161 The unrealized losses in the Corporation’s investment portfolio were the result of changes in interest rates and not credit quality. As a result, the Corporation expects to recover the amortized cost basis over the term of the securities. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Certain investment securities available for sale are reported in the financial statements at an amount less than their historical cost as indicated in the table below. December 31, 2022 December 31, 2021 Investments available for sale reported at less than historical cost: Historical cost $ 2,207,633 $ 658,858 Fair value 1,910,508 645,218 Gross unrealized losses $ 297,125 $ 13,640 Percent of the Corporation's investments available for sale 96.7 % 27.5 % In determining the fair value of the investment securities portfolio, the Corporation utilizes a third party for portfolio accounting services, including market value input, for those securities classified as Level 1 and Level 2 in the fair value hierarchy. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor classified these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis; and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time. Fair value of securities classified as Level 3 in the valuation hierarchy was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active. 74 PART II: ITEM 8. 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. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Maturity Distribution at December 31, 2022 Due in one year or less $ 2,822 $ 2,809 $ 13,697 $ 13,749 Due after one through five years 11,694 11,265 80,697 76,453 Due after five through ten years 169,729 161,211 147,078 135,027 Due after ten years 1,480,472 1,293,103 1,269,826 1,020,477 1,664,717 1,468,388 1,511,298 1,245,706 U.S. Government-sponsored mortgage-backed securities 608,630 508,273 776,074 662,159 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 U.S. Government-sponsored mortgage-backed securities 671,684 667,605 749,789 751,865 Total Investment Securities $ 2,268,655 $ 2,344,551 $ 2,180,047 $ 2,202,503 Securities with a carrying value of approximately $ 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. The book value of securities sold under agreements to repurchase amounted to $ 196.7 million at December 31, 2022 and $ 175.1 million at December 31, 2021. Gross gains and losses on the sales and redemptions of available for sale securities for the years indicated are shown below. 2022 2021 2020 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 75 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 5 LOANS AND ALLOWANCE FOR CREDIT LOSSES The Corporation's primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. The following tables show the composition of the loan portfolio and credit quality characteristics by collateral classification, excluding loans held for sale. Loans held for sale at December 31, 2022 and December 31, 2021, were $ 9.1 million and $ 11.2 million, respectively. The following table illustrates the composition of the Corporation’s loan portfolio by loan class for the periods indicated: December 31, 2022 December 31, 2021 Commercial and industrial loans $ 3,437,126 $ 2,714,565 Agricultural land, production and other loans to farmers 241,793 246,442 Real estate loans: Construction 835,582 523,066 Commercial real estate, non-owner occupied 2,407,475 2,135,459 Commercial real estate, owner occupied 1,246,528 986,720 Residential 2,096,655 1,159,127 Home equity 630,632 523,754 Individuals' loans for household and other personal expenditures 175,211 146,092 Public finance and other commercial loans 932,892 806,636 Loans $ 12,003,894 $ 9,241,861 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. Credit Quality As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to: (i) the level of criticized commercial loans, (ii) net charge-offs, (iii) non-performing loans, (iv) covenant failures and (v) the general national and local economic conditions. The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows: • Pass - Loans that are considered to be of acceptable credit quality. • Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation's credit position at some future date. Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification. • Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. • Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable. • Loss – Loans that are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted. Loans will be classified as Loss when it is neither practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. 76 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables summarize the risk grading of the Corporation’s loan portfolio by loan class and by year of origination for the years indicated. Consumer loans are not risk graded. For the purposes of this disclosure, the consumer loans are classified in the following manner: loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Loans that evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected are included in the applicable categories below. Commercial and industrial loan balances as of December 31, 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) 2022 2021 2020 2019 2018 Prior Revolving loans amortized cost basis Revolving loans converted to term Total Commercial and industrial loans Pass $ 1,064,687 $ 531,504 $ 141,985 $ 114,999 $ 43,136 $ 45,310 $ 1,302,562 $ 5,048 $ 3,249,231 Special Mention 2,164 18,005 11,900 5,727 1,012 2,181 27,702 150 68,841 Substandard 27,512 26,571 5,531 10,606 4,674 567 43,450 143 119,054 Total Commercial and industrial loans 1,094,363 576,080 159,416 131,332 48,822 48,058 1,373,714 5,341 3,437,126 Agricultural land, production and other loans to farmers Pass 44,446 36,299 35,791 15,296 3,752 28,910 73,402 — 237,896 Special Mention 286 784 — — 281 632 — — 1,983 Substandard 178 — 490 — 94 1,152 — — 1,914 Total Agricultural land, production and other loans to farmers 44,910 37,083 36,281 15,296 4,127 30,694 73,402 — 241,793 Real estate loans: Construction Pass 366,414 301,986 117,541 11,428 857 3,224 17,167 — 818,617 Special Mention 16,922 — — — — — — — 16,922 Substandard 31 — — — — 12 — — 43 Total Construction 383,367 301,986 117,541 11,428 857 3,236 17,167 — 835,582 Commercial real estate, non-owner occupied Pass 560,146 603,254 550,605 168,701 116,859 190,264 31,196 3,803 2,224,828 Special Mention 49,439 4,026 38,268 18,785 11,546 17,992 — — 140,056 Substandard 21,123 8,128 8,026 — 4,442 872 — — 42,591 Total Commercial real estate, non-owner occupied 630,708 615,408 596,899 187,486 132,847 209,128 31,196 3,803 2,407,475 Commercial real estate, owner occupied Pass 260,725 316,665 330,441 114,015 63,816 81,286 33,123 3,378 1,203,449 Special Mention 7,744 6,125 2,245 3,481 1,210 2,984 1,328 — 25,117 Substandard 3,124 1,214 2,376 1,608 2,920 6,720 — — 17,962 Total Commercial real estate, owner occupied 271,593 324,004 335,062 119,104 67,946 90,990 34,451 3,378 1,246,528 Residential Pass 758,161 489,301 401,353 114,420 77,768 229,812 5,365 46 2,076,226 Special Mention 2,839 2,924 1,972 513 396 2,588 34 — 11,266 Substandard 1,399 1,824 1,811 805 1,468 1,741 60 55 9,163 Total Residential 762,399 494,049 405,136 115,738 79,632 234,141 5,459 101 2,096,655 Home equity Pass 40,768 75,670 14,621 1,572 1,348 3,325 486,924 281 624,509 Special Mention — — — — 115 8 3,698 — 3,821 Substandard — 79 — — 65 60 2,098 — 2,302 Total Home Equity 40,768 75,749 14,621 1,572 1,528 3,393 492,720 281 630,632 Individuals' loans for household and other personal expenditures Pass 67,883 43,639 13,025 5,389 5,830 3,775 35,091 — 174,632 Special Mention 178 134 77 33 28 17 16 — 483 Substandard 1 — 3 — 84 8 — — 96 Total Individuals' loans for household and other personal expenditures 68,062 43,773 13,105 5,422 5,942 3,800 35,107 — 175,211 Public finance and other commercial loans Pass 187,125 212,702 165,019 98,687 43,760 204,719 20,880 — 932,892 Total Public finance and other commercial loans 187,125 212,702 165,019 98,687 43,760 204,719 20,880 — 932,892 Loans $ 3,483,295 $ 2,680,834 $ 1,843,080 $ 686,065 $ 385,461 $ 828,159 $ 2,084,096 $ 12,904 $ 12,003,894 77 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) December 31, 2021 Term Loans (amortized cost basis by origination year) 2021 2020 2019 2018 2017 Prior Revolving loans amortized cost basis Revolving loans converted to term Total Commercial and industrial loans Pass $ 1,019,757 $ 362,372 $ 144,520 $ 65,165 $ 21,575 $ 30,420 $ 990,335 $ — $ 2,634,144 Special Mention 10,559 11,088 190 730 1,930 1,825 15,026 — 41,348 Substandard 2,811 2,127 7,432 2,932 431 747 22,593 — 39,073 Total Commercial and industrial loans 1,033,127 375,587 152,142 68,827 23,936 32,992 1,027,954 — 2,714,565 Agricultural land, production and other loans to farmers Pass 50,251 45,164 22,195 7,689 6,153 36,074 74,871 — 242,397 Special Mention — 1,543 — — — 252 264 — 2,059 Substandard 524 506 108 371 — 27 450 — 1,986 Total Agricultural land, production and other loans to farmers 50,775 47,213 22,303 8,060 6,153 36,353 75,585 — 246,442 Real estate loans: Construction Pass 215,167 200,169 63,589 979 1,762 2,453 17,201 — 501,320 Special Mention 20,737 270 — — — 46 — — 21,053 Substandard — 693 — — — — — — 693 Total Construction 235,904 201,132 63,589 979 1,762 2,499 17,201 — 523,066 Commercial real estate, non-owner occupied Pass 589,296 688,406 227,332 111,971 103,400 126,837 26,779 — 1,874,021 Special Mention 68,279 149,480 — — — 1,723 — — 219,482 Substandard 19,314 14,912 178 1,118 6,156 278 — — 41,956 Total Commercial real estate, non-owner occupied 676,889 852,798 227,510 113,089 109,556 128,838 26,779 — 2,135,459 Commercial real estate, owner occupied Pass 299,186 392,383 92,338 43,252 46,044 48,571 33,998 — 955,772 Special Mention 5,665 5,953 738 1,532 902 1,301 149 — 16,240 Substandard 7,025 5,763 — 53 113 1,754 — — 14,708 Total Commercial real estate, owner occupied 311,876 404,099 93,076 44,837 47,059 51,626 34,147 — 986,720 Residential Pass 349,726 353,691 103,028 69,745 55,240 210,669 2,955 73 1,145,127 Special Mention 1,034 1,394 1,456 306 172 2,106 — — 6,468 Substandard 1,004 1,575 335 1,248 108 3,257 — 5 7,532 Total Residential 351,764 356,660 104,819 71,299 55,520 216,032 2,955 78 1,159,127 Home equity Pass 63,845 17,556 1,977 2,127 1,250 3,432 427,437 194 517,818 Special Mention — 85 48 — — 24 3,451 — 3,608 Substandard 520 — — 8 91 70 1,639 — 2,328 Total Home Equity 64,365 17,641 2,025 2,135 1,341 3,526 432,527 194 523,754 Individuals' loans for household and other personal expenditures Pass 67,749 23,452 11,893 11,197 2,008 4,928 24,406 — 145,633 Special Mention 79 85 50 33 20 58 134 — 459 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 78 PART II: ITEM 8. 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 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: December 31, 2022 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due And Accruing Commercial and industrial loans $ 3,429,314 $ 4,904 $ 434 $ 2,474 $ 3,437,126 $ 1,147 Agricultural land, production and other loans to farmers 241,739 — — 54 241,793 — Real estate loans: Construction 832,716 2,436 418 12 835,582 — Commercial real estate, non-owner occupied 2,395,495 5,946 881 5,153 2,407,475 264 Commercial real estate, owner occupied 1,241,714 4,495 — 319 1,246,528 — Residential 2,079,959 8,607 2,278 5,811 2,096,655 — Home equity 624,543 2,206 1,782 2,101 630,632 326 Individuals' loans for household and other personal expenditures 174,629 343 142 97 175,211 — Public finance and other commercial loans 932,778 114 — — 932,892 — Loans $ 11,952,887 $ 29,051 $ 5,935 $ 16,021 $ 12,003,894 $ 1,737 December 31, 2021 Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Loans > 90 Days or More Past Due And Accruing Commercial and industrial loans $ 2,708,539 $ 2,602 $ 2,437 $ 987 $ 2,714,565 $ 675 Agricultural land, production and other loans to farmers 246,380 36 — 26 246,442 — Real estate loans: Construction 522,349 717 — — 523,066 — Commercial real estate, non-owner occupied 2,124,853 3,327 — 7,279 2,135,459 — Commercial real estate, owner occupied 985,785 643 — 292 986,720 — Residential 1,148,294 3,979 4,255 2,599 1,159,127 — Home equity 518,643 3,327 281 1,503 523,754 288 Individuals' loans for household and other personal expenditures 145,634 375 83 — 146,092 — Public finance and other commercial loans 806,636 — — — 806,636 — Loans $ 9,207,113 $ 15,006 $ 7,056 $ 12,686 $ 9,241,861 $ 963 Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in the prior year, if any, is charged to the allowance for credit losses. Payments subsequently received on non-accrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance. The following table summarizes the Corporation’s non-accrual loans by loan class for the periods indicated: December 31, 2022 December 31, 2021 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 Agricultural land, production and other loans to farmers 54 — 631 524 Real estate loans: Construction 12 — 685 — Commercial real estate, non-owner occupied 19,374 280 23,029 6,133 Commercial real estate, owner occupied 3,550 2,784 411 — Residential 13,685 702 9,153 2,160 Home equity 2,247 — 1,552 — Individuals' loans for household and other personal expenditures 110 — 3 — Loans $ 42,324 $ 4,247 $ 43,062 $ 9,080 79 PART II: ITEM 8. 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. Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. The following 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 Commercial Real Estate Residential Real Estate Other Total Allowance on Collateral Dependent Loans 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 — Real estate loans: Construction — 685 — 685 82 Commercial real estate, non-owner occupied 23,652 — — 23,652 5,510 Commercial real estate, owner occupied 1,044 — — 1,044 — Residential — 4,906 — 4,906 305 Home equity — 394 — 394 64 Loans $ 25,220 $ 5,985 $ 8,326 $ 39,531 $ 8,633 In certain loan restructuring situations, the Corporation may grant a concession to a debtor experiencing financial difficulty, resulting in a troubled debt restructuring. A concession is deemed to be granted when, as a result of the restructuring, the Corporation does not expect to collect all original amounts due, including interest accrued at the original contract rate. If the payment of principal at original maturity is primarily dependent on the value of collateral, the current value of the collateral is considered in determining whether the principal will be repaid. 80 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following tables summarize 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 Post - Modification Recorded Balance Number of Loans Commercial and industrial loans $ 61 $ 62 $ — $ 62 1 Real estate loans: Residential 53 — 56 56 1 Total $ 114 $ 62 $ 56 $ 118 2 Twelve Months Ended December 31, 2021 Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans Commercial and industrial loans $ 348 $ 348 $ — $ — $ 348 2 Real estate loans: Construction 16 — 16 — 16 1 Commercial real estate, non owner occupied 12,922 12,976 12,976 1 Commercial real estate, owner occupied 51 29 — 21 50 2 Residential 691 449 126 118 693 9 Total $ 14,028 $ 13,802 $ 142 $ 139 $ 14,083 15 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. 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 Real estate loans: Residential 5 $ 475 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 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. Any subsequent deterioration is addressed through the charge-off process or through a specific reserve allocation included in the allowance for credit loss. Consumer troubled debt restructures that are not individually evaluated for a specific reserve are included in the calculation of the allowance for credit losses through the loan segment loss analysis. Consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $ 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: Level One Purchase price of loans at acquisition $ 41,347 CECL Day 1 PCD ACL 16,599 Par value of acquired loans at acquisition $ 57,946 81 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Allowance for Credit Losses on Loans The Allowance for Credit Losses on Loans ("ACL - Loans") is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over the contractual term. The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge offs for loans, net or recoveries. Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. The allowance represents the Corporation’s best estimate of current expected credit losses on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The current expected credit loss ("CECL") calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the allowance for credit losses is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date. In calculating the allowance for credit losses, the loan portfolio was pooled into ten loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Corporation analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. The expected credit losses are measured over the life of each loan segment utilizing the Probability of Default / Loss Given Default methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates. The Corporation sub-segmented certain commercial portfolios by risk level and certain consumer portfolios by delinquency status where appropriate. The Corporation utilized a four-quarter reasonable and supportable economic forecast period followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the loans. Econometric modeling was performed using historical default rates and a selection of economic forecast scenarios published by Moody’s to develop a range of estimated credit losses for which to determine the best credit loss estimate within. Macroeconomic factors utilized in the modeling process include the national unemployment rate, BBB US corporate index, CRE price index and the home price index. The Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending management and staff, and (vi) other environmental factors 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. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the Small Business Administration ("SBA"). 82 PART II: ITEM 8. 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: Commercial Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Corporation monitors commercial real estate loans based on collateral and risk grade criteria, as well as the levels of owner-occupied versus non-owner occupied loans. Construction Construction loans are underwritten utilizing a combination of tools and techniques including feasibility and market studies, independent appraisals and appraisal reviews, absorption and interest rate sensitivity analysis as well as the financial analysis of the developer and all guarantors. Construction loans are monitored by either in house or third party inspectors limiting advances to a percentage of costs or stabilized project value. These loans frequently involve the disbursement of significant funds with the repayment dependent upon the successful completion and, where necessary, the future stabilization of the project. The predominant inherent risk of this portfolio is associated with the borrower's ability to successfully complete a project on time, within budget and stabilize the projected as originally projected. Consumer and Residential With respect to residential loans that are secured by 1-4 family residences, which are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans, such as small installment loans and certain lines of credit, are unsecured. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers and can also be impacted by changes in property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. The 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 ) Balances. 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 Allowance for credit losses Balances, December 31, 2020 $ 47,115 $ 51,070 $ — $ 9,648 $ 22,815 $ — $ 130,648 Credit risk reclassifications ( 10,284 ) 10,284 ( 9,648 ) ( 22,815 ) 32,463 — Balances, December 31, 2020 after reclassifications 47,115 40,786 10,284 — — 32,463 130,648 Impact of adopting ASC 326 20,024 34,925 8,805 — — 10,301 74,055 Balances, January 1, 2021 Post-ASC 326 adoption 67,139 75,711 19,089 — — 42,764 204,703 Provision for credit losses 7,921 ( 11,093 ) 1,122 — — 2,050 — Recoveries on loans 724 580 1 — — 1,273 2,578 Loans charged off ( 5,849 ) ( 4,533 ) ( 6 ) — — ( 1,496 ) ( 11,884 ) Balances. December 31, 2021 $ 69,935 $ 60,665 $ 20,206 $ — $ — $ 44,591 $ 195,397 83 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Allowance for Loan Losses under prior GAAP ("Incurred Loss Model") Prior to the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2021, the Corporation maintained an allowance for loan losses in accordance with the incurred loss model as disclosed in the Corporation's 2020 Annual Report on Form 10-K. The following 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 Commercial Commercial Real Estate Consumer Residential Total Allowance for loan losses: Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284 Provision for losses 21,930 22,174 5,996 8,573 58,673 Recoveries on loans 819 431 260 666 2,176 Loans charged off ( 8,536 ) ( 313 ) ( 643 ) ( 993 ) ( 10,485 ) Balances, December 31, 2020 $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648 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 Average Recorded Investment Interest Income Recognized Impaired loans with no related allowance: Commercial and industrial loans $ 991 $ — Real estate Loans: Commercial real estate, non-owner occupied 4,850 145 Commercial real estate, owner occupied 1,429 — Residential 840 3 Individuals' loans for household and other personal expenditures 3 — Total $ 8,113 $ 148 Impaired loans with related allowance: Commercial and industrial loans $ 267 $ — Agricultural land, production and other loans to farmers 589 — Real estate Loans: Commercial real estate, non-owner occupied 44,119 — Commercial real estate, owner occupied 1,447 — Residential 2,108 70 Home equity 473 14 Total $ 49,003 $ 84 Total Impaired Loans $ 57,116 $ 232 Off-Balance Sheet Arrangements, Commitments And Contingencies In the normal course of business, the Corporation has entered into off-balance sheet financial instruments which include commitments to extend credit and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, and thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing for their cash flows. Other typical lines of credit are related to home equity loans granted to customers. Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require a fee. Standby letters of credit are generally issued on behalf of an applicant (the Corporation’s customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. The standby letter of credit would permit the beneficiary to obtain payment from the Corporation under certain prescribed circumstances. Subsequently, the Corporation would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit. The Corporation typically follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is typically evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property. 84 PART II: ITEM 8. 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. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should the Corporation’s customers default on their resulting obligation to the Corporation, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments. Financial instruments with off-balance sheet risk were as follows: December 31, 2022 December 31, 2021 Amounts of commitments: Loan commitments to extend credit $ 4,950,724 $ 3,917,215 Standby letters of credit $ 40,784 $ 34,613 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: 2022 2021 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 NOTE 6 PREMISES AND EQUIPMENT The following table summarizes the Corporation's premises and equipment as of December 31, 2022 and 2021: 2022 2021 Cost at December 31: Land $ 25,299 $ 22,349 Buildings and Leasehold Improvements 174,895 160,410 Equipment 144,524 129,885 Total Cost 344,718 312,644 Accumulated Depreciation and Amortization ( 227,600 ) ( 206,989 ) 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. Details regarding the lease contracts are discussed in NOTE 9. LEASES of these Notes to Consolidated Financial Statements. 85 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 7 GOODWILL Goodwill is recorded on the acquisition date of an entity. The 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, 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. 2022 2021 Balance, January 1 $ 545,385 $ 543,918 Goodwill acquired 166,617 1,467 Balance, December 31 $ 712,002 $ 545,385 NOTE 8 OTHER INTANGIBLES Core deposit intangibles and other intangibles are recorded on the acquisition date of an entity. 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. The carrying basis and accumulated amortization of recognized core deposit and other intangibles are noted below. 2022 2021 Gross carrying amount $ 104,643 $ 102,396 Other intangibles acquired 18,642 2,247 Accumulated amortization ( 87,443 ) ( 79,168 ) Total core deposit and other intangibles $ 35,842 $ 25,475 The core deposit intangibles and other intangibles are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of two to ten years . Amortization expense for the years ended December 31, 2022, 2021 and 2020, was $ 8.3 million, $ 5.7 million and $ 6.0 million, respectively. Estimated future amortization expense is summarized as follows: Amortization Expense 2023 $ 8,742 2024 7,271 2025 6,028 2026 4,910 2027 3,603 After 2027 5,288 $ 35,842 86 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 9 LEASES The Corporation enters into leases for certain retail branches, office space, land and equipment. Operating leases are included in other assets and the lease liability is included in other liabilities in our balance sheets. The Corporation does not have any finance leases. Right-of-use (ROU) assets represent the Corporation's right to use an underlying asset for the lease term and lease liabilities represent the Corporation's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Corporation uses its incremental borrowing rate at commencement date in determining the present value of lease payments when the rate implicit in a lease is not known. The Corporation's incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Corporation's leases are generally for periods of five to twenty years with various renewal options. The exercise of such lease renewal options is not included in the present value of lease obligations unless it is reasonably certain that the option will be exercised. The Corporation has lease agreements which contain both lease and non-lease components such as common area maintenance charges, real estate taxes, and insurance. Non-lease components are not included in the measurement of the lease liability and are recognized in expense when incurred. The Corporation has elected not to recognize short-term leases, with original lease terms of twelve months or less, on the Corporation's balance sheet. Certain of the Corporation's lease agreements include rental payments adjusted periodically for inflation. The Corporation's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Supplemental balance sheet information related to leases is presented in the table below as of December 31, 2022 and 2021: 2022 2021 Operating lease assets $ 23,619 $ 17,818 Total lease assets $ 23,619 $ 17,818 Operating lease liabilities $ 25,316 $ 19,619 Total lease liabilities $ 25,316 $ 19,619 Weighted average remaining lease term (years) Operating leases 6.5 7.0 Weighted average discount rate Operating leases 3.1 % 3.1 % The table below presents the components of lease expense for the years ended December 31, 2022, 2021, and 2020: 2022 2021 2020 Lease Cost: Operating lease cost $ 5,233 $ 3,710 $ 3,724 Short-term lease cost 470 345 247 Variable lease cost 1,073 980 842 Sublease income $ ( 23 ) $ ( 33 ) $ ( 43 ) Total lease cost $ 6,753 $ 5,002 $ 4,770 Supplemental cash flow information related to leases is presented in the tables below. Maturity of lease liabilities Operating Leases 2023 $ 5,610 2024 5,056 2025 4,673 2026 3,265 2027 2,468 2028 and after 7,068 Total lease payments $ 28,140 Less: Present value discount 2,824 Present value of lease liabilities $ 25,316 Other Information Twelve Months Ended December 31, 2022 Twelve Months Ended December 31, 2021 Twelve Months Ended December 31, 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 5,329 $ 3,773 $ 3,629 ROU assets obtained in exchange for new operating lease liabilities $ 10,516 $ 2,700 $ 1,601 87 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 10 DEPOSITS The composition of the deposit portfolio is included in the table below for the years indicated: December 31, 2022 December 31, 2021 Demand deposits $ 8,448,797 $ 7,704,190 Savings deposits 4,657,140 4,334,802 Certificates and other time deposits of $100,000 or more 742,539 273,379 Other certificates and time deposits 468,712 389,752 Brokered deposits 65,557 30,454 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. At December 31, 2022, the contractual maturities of time deposits are summarized as follows: Certificates and Other Time Deposits 2023 $ 1,148,819 2024 96,897 2025 14,661 2026 9,819 2027 6,043 After 2027 569 $ 1,276,808 NOTE 11 BORROWINGS The following table summarizes the Corporation's borrowings as of December 31, 2022 and 2021: 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 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. Government-Sponsored Enterprise obligations. The maximum amount of outstanding agreements at any month-end during 2022 and 2021 totaled $ 218.9 million and $ 199.1 million, respectively, and the average of such agreements totaled $ 185.1 million and $ 173.8 million during 2022 and 2021, respectively. 88 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Transfers Accounted For As Secured Borrowings The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of December 31, 2022 and 2021 were: December 31, 2022 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total U.S. Government-sponsored mortgage-backed securities $ 167,413 $ — $ — $ — $ 167,413 December 31, 2021 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total U.S. Government-sponsored mortgage-backed securities $ 181,577 $ — $ — $ — $ 181,577 Contractual maturities of borrowings as of December 31, 2022, are as follows: Maturities in Years Ending December 31: Federal Funds Purchased Securities Sold Under Repurchase Agreements Federal Home Loan Bank Advances Subordinated Debentures and Term Loans 2023 $ 171,560 $ 167,413 $ 460,097 $ 1,183 2024 — — 60,097 — 2025 — — 25,097 — 2026 — — 97 — 2027 — — 200,096 — After 2027 — — 78,190 152,012 ASC 805 fair value adjustments at acquisition — — — ( 1,897 ) $ 171,560 $ 167,413 $ 823,674 $ 151,298 The terms of a security agreement with the FHLB require the Corporation to pledge, as collateral for advances, qualifying first mortgage loans, investment securities and multi-family loans in an amount equal to at least 145 percent of these advances depending on the type of collateral pledged. At December 31, 2022, the outstanding FHLB advances had interest rates from 0.35 to 4.92 percent and are subject to restrictions or penalties in the event of prepayment. The total available remaining borrowing capacity from the FHLB at December 31, 2022, was $ 617.6 million. As of December 31, 2022, the Corporation had $ 95.0 million of putable advances with the FHLB. Subordinated Debentures and Term Loans. As of December 31, 2022 and 2021, subordinated debentures and term loans totaled $ 151.3 million and $ 118.6 million, respectively. • First Merchants Capital Trust II ("FMC Trust II"). 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 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. 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 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. 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. 89 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 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. The option of redemption is subject to the approval of the Federal Reserve Board. The Corporation has an option to redeem the Senior Debt in whole or in part at a redemption price equal to 100 percent of the principal amount of the redeemed Senior Notes, plus accrued and unpaid interest to the date of the redemption; provided, however, that no Subordinated Notes (as defined in the Issuing and Paying Agency Agreement) may remain outstanding subsequent to any early redemption of Senior Notes. The Subordinated Debt and the Senior Debt options to redeem begin with the interest payment date on October 30, 2023, or on any scheduled interest payment date thereafter. The Senior Debt agreement contains certain customary representations and warranties and financial and negative covenants. As of December 31, 2022 and 2021 the Corporation was in compliance with these covenants. • 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. NOTE 12 DERIVATIVE FINANCIAL INSTRUMENTS Risk Management Objective of Using Derivatives The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash payments principally related to certain variable-rate liabilities. The Corporation also has derivatives that are a result of a service the Corporation provides to certain qualifying customers, and, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. The Corporation manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net risk exposure resulting from such transactions. 90 PART II: ITEM 8. 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 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, 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 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 Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value 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. Derivatives in Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) For the Year Ended December 31, 2022 2021 Interest rate products $ 479 $ 138 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 Instruments under FASB ASC 815-10 Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Effective Portion) Amount of Gain (Loss) Reclassified from Other Comprehensive Income into Income (Effective Portion) 2022 2021 2020 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. 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 $ 1.2 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. 91 PART II: ITEM 8. 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. The counterparties approved by the Corporation are usually financial institutions, which are well capitalized and have credit ratings through Moody’s and/or Standard & Poor’s at or above investment grade. The Corporation’s control of such risk is through quarterly financial reviews, comparing mark-to-market values with policy limitations, credit ratings and collateral pledging. Credit-risk-related Contingent Features The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well 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, 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. NOTE 13 FAIR VALUES OF FINANCIAL INSTRUMENTS The Corporation used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances. 92 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability). Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs for which there is little or no market activity (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10 percent or more of the total fair value of a particular asset or liability. RECURRING MEASUREMENTS Assets and liabilities are considered to be measured at fair value on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be 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. Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy. Investment Securities Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government-sponsored agency and mortgage-backed securities, state and municipal securities and corporate obligations securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. Government-sponsored mortgage-backed securities and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active. Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3. 93 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. Fair Value Measurements Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2022 Fair Value (Level 1) (Level 2) (Level 3) Available for sale securities: U.S. Government-sponsored agency securities $ 101,962 $ — $ 101,962 $ — U.S. Treasury 2,459 2,459 — — State and municipal 1,351,760 — 1,348,356 3,404 U.S. Government-sponsored mortgage-backed securities 508,273 — 508,269 4 Corporate obligations 12,207 — 12,176 31 Derivative assets 93,036 — 93,036 — Derivative liabilities 92,770 — 92,770 — Fair Value Measurements Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 Fair Value (Level 1) (Level 2) (Level 3) Available for sale securities: U.S. Government-sponsored agency securities $ 95,136 $ — $ 95,136 $ — U.S. Treasury 999 999 — — State and municipal 1,576,532 — 1,571,076 5,456 U.S. Government-sponsored mortgage-backed securities 667,605 — 667,601 4 Corporate obligations 4,279 — 4,248 31 Interest rate swap asset 41,133 — 41,133 — Interest rate swap liability 41,968 — 41,968 — LEVEL 3 RECONCILIATION The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable Level 3 inputs for year ended December 31, 2022 and 2021. Available for Sale Securities For The Year Ended December 31, 2022 December 31, 2021 Beginning Balance $ 5,491 $ 2,479 Included in other comprehensive income ( 612 ) 227 Purchases, issuances, and settlements 5,111 3,241 Principal payments ( 6,551 ) ( 456 ) Ending balance $ 3,439 $ 5,491 There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or liabilities held at December 31, 2022 or 2021. TRANSFERS BETWEEN LEVELS There were no transfers in or out of Level 3 during 2022 or 2021. 94 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NONRECURRING MEASUREMENTS Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy for year ended December 31, 2022 and 2021. Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2022 Fair Value (Level 1) (Level 2) (Level 3) Collateral dependent loans $ 55,290 — — $ 55,290 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 Fair Value (Level 1) (Level 2) (Level 3) Collateral dependent loans $ 24,491 — — $ 24,491 Other real estate owned $ 96 — — $ 96 Collateral Dependent Loans and Other Real Estate Owned Determining fair value for collateral dependent loans and other real estate requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions. UNOBSERVABLE (LEVEL 3) INPUTS The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at December 31, 2022 and 2021. December 31, 2022 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average) State and municipal securities $ 3,404 Discounted cash flow Maturity Call Date US Muni BQ curve Discount rate Weighted-average coupon 1 month to 15 years A- to BBB 0.4 % - 4 % 3.4 % Corporate obligations and U.S. Government-sponsored mortgage backed securities $ 35 Discounted cash flow Risk free rate plus Premium for illiquidity Weighted-average coupon 3 month LIBOR plus 2 00bps 0 % Collateral dependent loans $ 55,290 Collateral based measurements Discount to reflect current market conditions and ultimate collectability Weighted-average discount by loan balance 0 % - 10 % 1.1 % December 31, 2021 Fair Value Valuation Technique Unobservable Inputs Range (Weighted-Average) State and municipal securities $ 5,456 Discounted cash flow Maturity Call Date US Muni BQ curve Discount rate Weighted-average coupon 1 month to 15 years A- to BBB- 0.75 % - 4 % 3.7 % Corporate obligations and U.S. Government-sponsored mortgage backed securities $ 35 Discounted cash flow Risk free rate plus Premium for illiquidity Weighted-average coupon 3 month LIBOR plus 2 00bps 0 % Collateral dependent loans $ 24,491 Collateral based measurements Discount to reflect current market conditions and ultimate collectability Weighted-average discount by loan balance 0 % - 10 % 5.5 % Other real estate owned $ 96 Appraisals Discount to reflect current market conditions Weighted-average discount of other real estate owned balance 0 % - 44 % 43.5 % 95 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. State and Municipal Securities, Corporate Obligations, and U.S. Government-sponsored Mortgage Backed Securities The significant unobservable inputs used in the fair value measurement of the Corporation's state and municipal securities, corporate obligations and U.S. Government-sponsored mortgage backed securities are premiums for unrated securities and marketability discounts. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, changes in either of those inputs will not affect the other input. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents estimated fair values of the Corporation's financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2022 and 2021. 2022 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets at December 31: Cash and due from banks $ 122,594 $ 122,594 $ — $ — Interest-bearing deposits 126,061 126,061 — — Investment securities available for sale 1,976,661 2,459 1,970,763 3,439 Investment securities held to maturity 2,287,127 — 1,893,271 14,594 Loans held for sale 9,094 — 9,094 — Loans 11,780,617 — — 11,156,217 Federal Home Loan Bank stock 38,525 — 38,525 — Derivative assets 93,036 — 93,036 — Interest receivable 85,070 — 85,070 — Liabilities at December 31: Deposits $ 14,382,745 $ 13,105,936 $ 1,251,017 $ — Borrowings: 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 other borrowings 151,298 — 122,102 — Derivative liabilities 92,770 — 92,770 — Interest payable 7,530 — 7,530 — 2021 Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets at December 31: Cash and due from banks $ 167,146 $ 167,146 $ — $ — Interest-bearing deposits 474,154 474,154 — — Investment securities available for sale 2,344,551 999 2,338,061 5,491 Investment securities held to maturity 2,179,802 — 2,188,600 13,903 Loans held for sale 11,187 — 11,187 — Loans 9,046,464 — — 9,068,319 Federal Home Loan Bank stock 28,736 — 28,736 — Interest rate swap asset 41,133 — 41,133 — Interest receivable 57,187 — 57,187 — Liabilities at December 31: Deposits $ 12,732,577 $ 12,038,992 $ 690,089 $ — Borrowings: Securities sold under repurchase agreements 181,577 — 181,572 — Federal Home Loan Bank advances 334,055 — 337,005 — Subordinated debentures and other borrowings 118,618 — 107,892 — Interest rate swap liability 41,968 — 41,968 — Interest payable 2,762 — 2,762 — 96 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 14 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of December 31, 2022 and 2021: Accumulated Other Comprehensive Income (Loss) Unrealized Gains (Losses) on Securities Available for Sale Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Defined Benefit Plans Total Balance at December 31, 2021 $ 59,774 $ ( 660 ) $ ( 4,001 ) $ 55,113 Other comprehensive income before reclassifications ( 293,326 ) 378 ( 850 ) ( 293,798 ) Amounts reclassified from accumulated other comprehensive income ( 943 ) 412 65 ( 466 ) Period change ( 294,269 ) 790 ( 785 ) ( 294,264 ) Balance at December 31, 2022 $ ( 234,495 ) $ 130 $ ( 4,786 ) $ ( 239,151 ) Balance at December 31, 2020 $ 87,988 $ ( 1,594 ) $ ( 11,558 ) $ 74,836 Other comprehensive income before reclassifications ( 23,732 ) 109 7,491 ( 16,132 ) Amounts reclassified from accumulated other comprehensive income ( 4,482 ) 825 66 ( 3,591 ) Period change ( 28,214 ) 934 7,557 ( 19,723 ) Balance at December 31, 2021 $ 59,774 $ ( 660 ) $ ( 4,001 ) $ 55,113 The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020: Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Year Ended December 31, Details about Accumulated Other Comprehensive Income (Loss) Components 2022 2021 2020 Affected Line Item in the Statements of Income Unrealized gains (losses) on available for sale securities (1) Realized securities gains reclassified into income $ 1,194 $ 5,674 $ 11,895 Other income - net realized gains on sales of available for sale securities Related income tax benefit (expense) ( 251 ) ( 1,192 ) ( 2,498 ) Income tax expense $ 943 $ 4,482 $ 9,397 Unrealized gains (losses) on cash flow hedges (2) 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 $ ( 412 ) $ ( 825 ) $ ( 716 ) Unrealized gains (losses) on defined benefit plans Amortization of net loss and prior service costs $ ( 82 ) $ ( 84 ) $ ( 84 ) Other expenses - salaries and employee benefits Related income tax benefit (expense) 17 18 18 Income tax expense $ ( 65 ) $ ( 66 ) $ ( 66 ) Total reclassifications for the period, net of tax $ 466 $ 3,591 $ 8,615 (1) For additional detail related to unrealized gains (losses) on available for sale securities and related amounts reclassified from accumulated other comprehensive income see NOTE 4. INVESTMENT SECURITIES of these Notes to Consolidated Financial Statements. (2) For additional detail related to unrealized gains (losses) on cash flow hedges and related amounts reclassified from accumulated other comprehensive income see NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Financial Statements. 97 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 15 REGULATORY CAPITAL AND DIVIDENDS Regulatory Capital Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by four ratios that are calculated according to the regulations: total risk-based capital, tier 1 risk-based capital, CET1, and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from “well capitalized” to “critically undercapitalized”. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total 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). Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of December 31, 2022, the Bank met all capital adequacy requirements to be considered well capitalized under the fully phased-in Basel III capital rules. There is no threshold for well capitalized status for bank holding companies. As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced. Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available. While the 2021 CAA provided for a further extension of the mandatory adoption of CECL until January 1, 2022, the federal banking regulators elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects. Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the CARES Act. As a result, because implementation of the CECL standard was delayed by the Corporation until January 1, 2021, it began phasing in the cumulative effect of the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition period that began on January 1, 2021. Under that phase-in schedule, the cumulative effect of the adoption will be fully reflected in regulatory capital on January 1, 2024. 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. 98 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The Corporation's and Bank's actual and required capital ratios as of December 31, 2022 and December 31, 2021 were as follows: Prompt Corrective Action Thresholds Actual Basel III Minimum Capital Required Well Capitalized December 31, 2022 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital to risk-weighted assets First Merchants Corporation $ 1,882,254 13.08 % $ 1,511,230 10.50 % N/A N/A First Merchants Bank 1,822,296 12.65 1,513,064 10.50 $ 1,441,014 10.00 % Tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,558,281 10.83 % $ 1,223,377 8.50 % N/A N/A First Merchants Bank 1,641,210 11.39 1,224,862 8.50 $ 1,152,811 8.00 % Common equity tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,533,281 10.65 % $ 1,007,487 7.00 % N/A N/A First Merchants Bank 1,641,210 11.39 1,008,710 7.00 $ 936,659 6.50 % Tier 1 capital to average assets First Merchants Corporation $ 1,558,281 9.10 % $ 684,758 4.00 % N/A N/A First Merchants Bank 1,641,210 9.60 683,680 4.00 $ 854,600 5.00 % Prompt Corrective Action Thresholds Actual Basel III Minimum Capital Required Well Capitalized December 31, 2021 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital to risk-weighted assets First Merchants Corporation $ 1,582,481 13.92 % $ 1,193,840 10.50 % N/A N/A First Merchants Bank 1,453,358 12.74 1,197,515 10.50 $ 1,140,490 10.00 % Tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,374,240 12.09 % $ 966,442 8.50 % N/A N/A First Merchants Bank 1,309,685 11.48 969,417 8.50 $ 912,392 8.00 % Common equity tier 1 capital to risk-weighted assets First Merchants Corporation $ 1,327,634 11.68 % $ 795,893 7.00 % N/A N/A First Merchants Bank 1,309,685 11.48 798,343 7.00 $ 741,319 6.50 % Tier 1 capital to average assets First Merchants Corporation $ 1,374,240 9.30 % $ 590,758 4.00 % N/A N/A First Merchants Bank 1,309,685 8.88 589,994 4.00 $ 737,493 5.00 % 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. The 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. At December 31, 2022 and 2021, risk-weighted assets included $ 4.7 million and $ 106.6 million, respectively, of PPP loans at a zero risk weight. Management believes that all of the above capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of tier 1 capital known as CET1. Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories. Tier I regulatory capital consists primarily of total stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses. 99 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Dividends The Corporation's principal source of funds for dividend payments to shareholders is dividends received from the Bank. Banking regulations limit the maximum amount of dividends that a bank may pay without requesting prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the bank’s retained income (as defined under the regulations) for the current year plus those for the previous two years, subject to the capital requirements described above. As of December 31, 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. In addition, stockholders may elect to make optional cash payments up to an aggregate of $ 5,000 per quarter for the purchase of additional shares of common stock. The stock is credited to participant accounts at fair market value. Dividends are reinvested on a quarterly basis. Stockholders' Equity The Corporation adopted the current expected credit losses ("CECL") model for calculating the allowance for credit losses on January 1, 2021. CECL replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As of the adoption and day one measurement date of January 1, 2021, the Corporation recorded a one-time cumulative-effect adjustment to retained earnings, net of income taxes, of $ 68.0 million. 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 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 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. NOTE 16 LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid balances are as follows for December 31, 2022, 2021 and 2020. The amount of capitalized servicing assets is considered immaterial. 2022 2021 2020 Mortgage loan portfolios serviced for: Federal Home Loan Mortgage Corporation $ 794,222 $ 765,547 $ 514,539 Fannie Mae 54,934 60,839 69,072 Equity Bank 49,558 60,107 — Federal Home Loan Bank 27,127 32,558 51,479 Chevy Chase Mortgage Company — 85 134 Total $ 925,841 $ 919,136 $ 635,224 100 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 17 SHARE-BASED COMPENSATION Stock options and RSAs have been issued to directors, officers and other management employees under the Corporation's 2009 Long-term Equity Incentive Plan, the 2019 Long-term Equity Incentive Plan, the Level One Bancorp, Inc. 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. Option exercise prices equal the Corporation's common stock closing price on Nasdaq on the date of grant. The RSAs issued to employees and non-employee directors provide for the issuance of shares of the Corporation's common stock at no cost to the holder and generally vest after three years . The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited. For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited. The RSAs for employees and non-employee directors are either immediately vested at retirement, disability or death, or, continue to vest after retirement, disability or death, depending on the plan under which the shares were granted. The Corporation’s 2019 ESPP provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000. Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings. Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSAs and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the years ended December 31, 2022, 2021, and 2020 was $ 4.7 million, $ 4.8 million, and $ 4.6 million, respectively, and has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Statements of Income. Share-based compensation expense recognized in the Consolidated Statements of Income is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 0.5 percent for the year ended December 31, 2022, based on historical experience. The following table summarizes the components of the Corporation's share-based compensation awards recorded as an expense and the income tax benefit of such awards. 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 . 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. Years Ended December 31, 2022 2021 2020 Stock and ESPP Options Pre-tax compensation expense $ 95 $ 155 $ 96 Income tax benefit ( 74 ) ( 92 ) ( 29 ) Stock and ESPP option expense, net of income taxes $ 21 $ 63 $ 67 Restricted Stock Awards Pre-tax compensation expense $ 4,557 $ 4,607 $ 4,504 Income tax benefit ( 1,043 ) ( 855 ) ( 552 ) Restricted stock awards expense, net of income taxes $ 3,514 $ 3,752 $ 3,952 Total Share-Based Compensation: Pre-tax compensation expense $ 4,652 $ 4,762 $ 4,600 Income tax benefit ( 1,117 ) ( 947 ) ( 581 ) Total share-based compensation expense, net of income taxes $ 3,535 $ 3,815 $ 4,019 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. 101 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Stock option activity under the Corporation's stock option plans, as of December 31, 2022, and changes during the year ended December 31, 2022, were as follows: Number of Shares Weighted-Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value Outstanding at January 1, 2022 28,500 $ 17.14 Transferred Options from Level One 148,600 $ 18.84 Exercised ( 22,000 ) $ 16.28 Outstanding December 31, 2022 155,100 $ 18.89 2.47 $ 3,446,110 Vested and Expected to Vest at December 31, 2022 155,100 $ 18.89 2.47 $ 3,446,110 Exercisable at December 31, 2022 155,100 $ 18.89 2.47 $ 3,446,110 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on December 31, 2022. The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2022 and 2021 was $ 533,000 and $ 559,000 , respectively. Cash receipts of stock options exercised during 2022 and 2021 were $ 358,000 and $ 198,000 , respectively. The following table summarizes information on unvested RSAs outstanding as of December 31, 2022: Number of Shares Weighted-Average Grant Date Fair Value Unvested RSAs at January 1, 2022 411,259 $ 35.86 Granted 137,267 $ 40.66 Forfeited ( 13,775 ) $ 37.18 Vested ( 118,046 ) $ 37.35 Unvested RSAs at December 31, 2022 416,705 $ 36.97 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. NOTE 18 PENSION AND OTHER POST RETIREMENT BENEFIT PLANS The Corporation’s defined-benefit pension plans, including non-qualified plans for certain employees, former employees and former non-employee directors, cover approximately 8 percent of the Corporation’s employees. In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan. No additional pension benefits have been earned by any employees who had not attained both the age of 55 and accrued at least 10 years of vesting service as of March 1, 2005. The benefits are based primarily on years of service and employees’ pay near retirement. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. 102 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) The table below sets forth the plans’ funded status and amounts recognized in the Consolidated Balance Sheets at December 31, using measurement dates of December 31, 2022 and 2021. 2022 2021 Change in Benefit Obligation: Benefit obligation at beginning of year $ 74,274 $ 80,786 Service cost — — Interest cost 1,905 1,760 Actuarial (gain) loss ( 14,546 ) ( 2,919 ) Benefits paid ( 5,869 ) ( 5,353 ) Benefit obligation at end of year $ 55,764 $ 74,274 Change in Plan Assets: Fair value of plan assets at beginning of year $ 94,588 $ 88,512 Actual return on plan assets ( 11,799 ) 10,786 Employer contributions 614 643 Benefits paid ( 5,869 ) ( 5,353 ) End of year 77,534 94,588 Funded status at end of year $ 21,770 $ 20,314 Assets and Liabilities Recognized in the Balance Sheets: Deferred tax asset $ 1,955 $ 1,545 Assets $ 25,175 $ 24,750 Liabilities $ 3,405 $ 4,436 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. Information for pension plans with an accumulated benefit obligation in excess of plan assets consists solely of the non-qualified plans for certain employees, former employees and former non-employee directors, and is included in the table below. December 31, 2022 December 31, 2021 Projected benefit obligation $ 3,405 $ 4,436 Accumulated benefit obligation $ 3,405 $ 4,436 Fair value of plan assets $ — $ — The Corporation recognized expense under these non-qualified plans of $ 122,000 , $ 117,000 and $ 165,000 for 2022, 2021 and 2020, respectively. The following table shows the components of net periodic pension benefit cost: December 31, 2022 December 31, 2021 December 31, 2020 Service cost $ — $ — $ 16 Interest cost 1,905 1,760 2,343 Expected return on plan assets ( 4,544 ) ( 4,246 ) ( 4,086 ) Amortization of prior service cost 87 87 87 Amortization of net loss 13 305 221 Net periodic pension benefit cost $ ( 2,539 ) $ ( 2,094 ) $ ( 1,419 ) 103 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Other changes in plan assets and benefit obligations recognized in other comprehensive income: December 31, 2022 December 31, 2021 December 31, 2020 Net periodic pension benefit cost $ ( 2,539 ) $ ( 2,094 ) $ ( 1,419 ) Net gain (loss) ( 1,797 ) 9,460 ( 3,119 ) Amortization of net loss 13 305 221 Amortization of prior service cost 87 87 87 Total recognized in other comprehensive income (loss) ( 1,697 ) 9,852 ( 2,811 ) Total recognized in net periodic pension benefit cost and other comprehensive income (loss) $ 842 $ 11,946 $ ( 1,392 ) Significant assumptions include: December 31, 2022 December 31, 2021 December 31, 2020 Weighted-average Assumptions Used to Determine Benefit Obligation: Discount rate 5.40 % 2.70 % 2.30 % Rate of compensation increase for accruing active participants n/a n/a n/a Weighted-average Assumptions Used to Determine Cost: Discount rate 2.70 % 2.30 % 3.20 % Expected return on plan assets 5.00 % 5.00 % 5.00 % Rate of compensation increase for accruing active participants n/a n/a n/a At December 31, 2022 and 2021, the Corporation based its estimate of the expected long-term rate of return on analysis of the historical returns of the plans and current market information available. The plans’ investment strategies are to provide for preservation of capital with an emphasis on long-term growth without undue exposure to risk. The assets of the plans’ are invested in accordance with the plans’ Investment Policy Statement, subject to strict compliance with ERISA and any other applicable statutes. The plans’ risk management practices include semi-annual evaluations of investment managers, including reviews of compliance with investment manager guidelines and restrictions; ability to exceed performance objectives; adherence to the investment philosophy and style; and ability to exceed the performance of other investment managers. The evaluations are reviewed by management with appropriate follow-up and actions taken, as deemed necessary. The Investment Policy Statement generally allows investments in cash and cash equivalents, real estate, fixed income debt securities and equity securities, and specifically prohibits investments in derivatives, options, futures, private placements, short selling, non-marketable securities and purchases of individual non-investment grade bonds. At December 31, 2022, the maturities of the plans’ debt securities ranged from 15 days to 9.1 years, with a weighted average maturity of 3.9 years. At December 31, 2021, the maturities of the plans’ debt securities ranged from 40 days to 7.7 years, with a weighted average maturity of 3.5 years. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2022. The minimum contribution required in 2023 will likely be zero , but the Corporation may decide to make a discretionary contribution during the year. 2023 $ 5,632 2024 5,431 2025 5,352 2026 5,176 2027 4,889 After 2027 21,143 $ 47,623 Plan assets are re-balanced quarterly. At December 31, 2022 and 2021, plan assets by category are as follows: December 31, 2022 December 31, 2021 Actual Target Actual Target Cash and cash equivalents 5.9 % 3.0 % 2.5 % 3.0 % Equity securities 51.5 50.0 56.4 53.0 Debt securities 40.4 45.0 38.6 42.0 Alternative investments 2.2 2.0 2.5 2.0 100.0 % 100.0 % 100.0 % 100.0 % The Savings Plan, a Section 401(k) qualified defined contribution plan, was amended on March 1, 2005 to provide enhanced retirement benefits, including employer and matching contributions, for eligible employees of the Corporation and its subsidiaries. The Corporation matches employees’ contributions at the rate of 100 percent for the first 3 percent of base salary contributed by participants and 50 percent of the next 3 percent of base salary contributed by participants. 104 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Beginning in 2005, employees who have completed 1000 hours of service and are an active employee on the last day of the year receive an additional retirement contribution after year-end. Employees hired after January 1, 2010 do not participate in the additional retirement contribution. Effective January 1, 2013, the additional retirement contribution was fixed at 2 percent. Full vesting occurs after five years of service. The Corporation’s expense for the Savings Plan, including the additional retirement contribution, was $ 6.5 million, $ 5.2 million and $ 5.1 million for 2022, 2021 and 2020, respectively. The Corporation also maintains a post retirement benefit plan that provides health insurance benefits for a closed group of participants that came to the Corporation through the 2019 MBT acquisition. To be eligible for the post retirement plan, the participants must (1) have been hired by MBT prior to January 1, 2007, (2) be a full-time employee of the Corporation and employed by MBT prior to the acquisition, and (3) be at least 55 years 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, 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. Pension Plan Assets Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis, as well as the general classification of pension plan assets pursuant to the valuation hierarchy. Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets total $ 74.0 million and $ 92.0 million as of December 31, 2022 and 2021, respectively, and include cash and cash equivalents, common stocks, mutual funds and corporate bonds and notes. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. Level 2 plan assets total $ 3.5 million and $ 2.6 million as of December 31, 2022 and 2021, respectively, and include governmental agencies, taxable municipal bonds and notes, and certificates of deposit. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. There are no assets classified within Level 3 of the hierarchy at December 31, 2022 and 2021. Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2022 Fair Value (Level 1) (Level 2) (Level 3) Cash & Cash Equivalents $ 4,559 $ 4,559 $ — $ — Corporate Bonds and Notes 17,159 17,159 — — Government Agency and Municipal Bonds and Notes 3,010 — 3,010 — Certificates of Deposit 492 — 492 — Party-in-Interest Investments Common Stock 2,487 2,487 — — Mutual Funds Taxable Bond 10,686 10,686 — — Large Cap Equity 21,056 21,056 — — Mid Cap Equity 9,610 9,610 — — Small Cap Equity 4,419 4,419 — — International Equity 2,357 2,357 — — Specialty Alternative Equity 1,699 1,699 — — $ 77,534 $ 74,032 $ 3,502 $ — Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 Fair Value (Level 1) (Level 2) (Level 3) Cash & Cash Equivalents $ 2,346 $ 2,346 $ — $ — Corporate Bonds and Notes 15,726 15,726 — — Government Agency and Municipal Bonds and Notes 1,302 — 1,302 — Certificates of Deposit 1,307 — 1,307 — Party-in-Interest Investments Common Stock 2,534 2,534 — — Mutual Funds Taxable Bond 18,184 18,184 — — Large Cap Equity 28,349 28,349 — — Mid Cap Equity 13,033 13,033 — — Small Cap Equity 5,815 5,815 — — International Equity 3,602 3,602 — — Specialty Alternative Equity 2,390 2,390 — — $ 94,588 $ 91,979 $ 2,609 $ — 105 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 19 INCOME TAX The reconciliation between income tax expense expected at the U.S. federal statutory tax rate and the reported income tax expense is summarized in the following table for years ended December 31, 2022, 2021 and 2020: 2022 2021 2020 Reconciliation of Federal Statutory to Actual Tax Expense: Federal Statutory Income Tax at 21% $ 53,692 $ 50,566 $ 35,695 Tax-exempt Interest Income ( 19,349 ) ( 16,200 ) ( 13,273 ) Stock Compensation ( 214 ) ( 20 ) 338 Earnings on Life Insurance ( 2,344 ) ( 1,468 ) ( 1,079 ) Tax Credits ( 414 ) ( 354 ) ( 425 ) CARES Act - NOL carryback rate differential — — ( 1,178 ) State Tax 2,494 2,697 1,122 Other ( 280 ) 38 175 Income Tax Expense $ 33,585 $ 35,259 $ 21,375 Effective Tax Rate 13.1 % 14.6 % 12.6 % Income tax expense consists of the following components for the years ended December 31, 2022, 2021, 2020: 2022 2021 2020 Income Tax Expense for the Year Ended December 31: Currently Payable: Federal $ 21,824 $ 24,634 $ 28,463 State 2,696 1,473 2,647 Deferred: Federal 8,604 7,211 ( 8,508 ) State 461 1,941 ( 1,227 ) Income Tax Expense $ 33,585 $ 35,259 $ 21,375 Significant components of the net deferred tax assets and liabilities resulting from temporary differences were as follows at December 31, 2022 and 2021: 2022 2021 Deferred Tax Asset at December 31: Assets: Differences in Accounting for Loan Losses $ 61,484 $ 52,995 Differences in Accounting for Loan Fees 2,094 2,016 Deferred Compensation 3,922 4,172 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 Total Assets 133,306 63,515 Liabilities: Differences in Depreciation Methods 7,039 5,726 Differences in Accounting for Loans and Securities 1,058 3,078 Difference in Accounting for Pensions and Other Employee Benefits 3,687 4,586 State Income Tax 1,859 1,499 Net Unrealized Gain on Securities Available for Sale — 15,889 Gain on FDIC Modified Whole Bank Transaction 287 306 Other 9,919 8,108 Total Liabilities 23,849 39,192 Net Deferred Tax Asset $ 109,457 $ 24,323 106 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) As of December 31, 2022, the Corporation has approximately $ 12.2 million of state NOL carryforwards available to offset future state taxable income, which will expire beginning in 2024. These NOL carryforwards along with normal timing differences between book and tax result in total state deferred tax assets of $ 8.9 million. Management believes it is more likely than not that the benefit of these state NOL carryforwards and other state deferred tax assets will be fully realized. The Corporation has additional paid-in capital that is considered restricted resulting from the acquisitions of CFS and Ameriana of approximately $ 13.4 million and $ 11.9 million, respectively. CFS and Ameriana qualified as banks under provisions of the Internal Revenue Code which permitted them to deduct from taxable income an allowance for bad debts which differed from the provision for losses charged to income, for which no deferred federal income tax liability has been recognized. 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. The Corporation or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Corporation is generally no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years before 2019. Additional details regarding the Corporation's policies related to income taxes are discussed in NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of these Notes to Consolidated Financial Statements. NOTE 20 NET INCOME PER 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 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 Net 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 Share Amount 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. 107 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) NOTE 21 CONDENSED FINANCIAL INFORMATION (parent company only) Presented below is condensed financial information as to financial position, results of operations, and cash flows of the Corporation. Condensed Balance Sheets December 31, 2022 December 31, 2021 Assets Cash and due from banks $ 56,739 $ 127,501 Investment in subsidiaries 2,124,104 1,900,787 Premises and equipment 119 274 Interest receivable 6 2 Goodwill 448 448 Cash surrender value of life insurance 736 716 Other assets 6,851 10,281 Total assets $ 2,189,003 $ 2,040,009 Liabilities Subordinated debentures and other borrowings $ 150,115 $ 118,618 Interest payable 979 864 Other liabilities 3,139 7,956 Total liabilities 154,233 127,438 Stockholders' equity 2,034,770 1,912,571 Total liabilities and stockholders' equity $ 2,189,003 $ 2,040,009 Condensed Statements of Income and Comprehensive Income (Loss) December 31, 2022 December 31, 2021 December 31, 2020 Income Dividends from subsidiaries $ 90,500 $ 161,825 $ 70,100 Other income ( 1,693 ) ( 50 ) ( 62 ) Total income 88,807 161,775 70,038 Expenses Interest expense 8,005 6,642 6,777 Salaries and employee benefits 3,786 3,917 3,426 Net occupancy and equipment expenses 46 825 745 Professional and other outside services 2,187 1,264 949 Other expenses 1,396 1,687 1,266 Total expenses 15,420 14,335 13,163 Income before income tax benefit and equity in undistributed income of subsidiaries 73,387 147,440 56,875 Income tax benefit 3,645 2,929 2,260 Income before equity in undistributed income of subsidiaries 77,032 150,369 59,135 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 Net income $ 222,089 $ 205,531 $ 148,600 Other comprehensive income (loss) ( 294,264 ) ( 19,723 ) 46,962 Comprehensive income (loss) $ ( 72,175 ) $ 185,808 $ 195,562 108 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) Condensed Statements of Cash Flows December 31, 2022 December 31, 2021 December 31, 2020 Cash Flow From Operating Activities: Net income $ 222,089 $ 205,531 $ 148,600 Adjustments to reconcile net income to net cash provided by operating activities Share-based compensation 1,659 1,563 1,502 Distributions in excess of (equity in undistributed) income of subsidiaries ( 145,057 ) ( 55,162 ) ( 89,465 ) Other adjustments ( 6,258 ) ( 1,173 ) 1,537 Investment in subsidiaries - operating activities 333 885 235 Net cash provided by operating activities 72,766 151,644 62,409 Cash Flow From Investing Activities: 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 on common stock ( 72,748 ) ( 61,230 ) ( 56,542 ) Cash dividends on preferred stock ( 1,406 ) — — Repayment of borrowings — — ( 20,310 ) Stock issued under employee benefit plans 706 605 639 Stock issued under dividend reinvestment and stock purchase plan 2,056 1,880 1,726 Stock options exercised 358 198 115 Repurchases of common stock — ( 25,444 ) ( 55,912 ) Net cash used by financing activities ( 71,034 ) ( 83,991 ) ( 130,284 ) 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 NOTE 22 GENERAL LITIGATION The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Corporation. 109 PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (table dollar amounts in thousands, except share data) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In connection with its audits for the two most recent fiscal years ended December 31, 2022, there have been no disagreements with the Corporation’s independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure, nor have there been any changes in accountants.