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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-26 · 154 added, 252 removed, 538 unchanged (43% of the section changed)

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GABC) financial holding company based in Jasper, Indiana.

German American, through its banking subsidiary German American Bank, operates 73 banking offices in 20 contiguous southern Indiana counties and eight counties in Kentucky.

German American, through its banking subsidiary German American Bank, operates 77 banking offices in 19 contiguous southern Indiana counties and 14 counties in Kentucky.

The Company also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full line property and casualty insurance agency (German American Insurance, Inc.).

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This Item 7, as well as the discussions in Item 1 (“Business”) entitled “Forward-Looking Statements and Associated Risks” and in Item 1A (“Risk Factors”) (which discussions are incorporated in this Item 7 by reference) list some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any such forward-looking statements.

SIGNIFICANT BUSINESS DEVELOPMENTS RELATING TO COVID-19

Impact of COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public health emergency of international concern.

On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency.

The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets.

The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns.

Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending.

While quarantine and lock-down orders have been lifted and vaccination efforts are underway, COVID-19 has not yet been contained and commercial activity has not yet returned to the levels existing prior to the pandemic outbreak.

As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted.

Interest Rates

On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%.

This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020.

These reductions in interest rates and other effects of the COVID-19 outbreak are likely to negatively impact the Company’s net interest income and noninterest income.

The CARES Act and the Paycheck Protection Program

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives.

For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”).

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted.

Among other things, this legislation amended the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion.

The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act.

For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years.

The vast majority of the Company's PPP loans have two-year maturities.

PPP loans earn interest at a fixed rate of 1% and are fully guaranteed by the U.S.

On December 27, 2020, a $900 billion COVID-19 relief package, as passed by the U.S.

Congress, was signed into law as part of the 2021 Consolidated Appropriations Act (“CAA”).

In addition to providing direct stimulus payments to certain individuals, an increase in unemployment insurance benefits, an extension of the eviction moratorium, relief to the healthcare industry, and additional aid to various other businesses, the COVID-19-related provisions of the CAA also established an additional $284 billion in funding for the PPP through March 31, 2021.

The Company is also participating in this phase of the PPP.

During 2020, the Company originated loans totaling approximately $351.3 million in principal amount, on 3,070 PPP loan relationships, under this program.

The net processing fees related to the PPP, totaled approximately $12.0 million, and are being recognized over the life of the loans.

As a result of the forgiveness of PPP loans which began in the fourth quarter of 2020 for the Company, as of December 31, 2020, remaining PPP loans outstanding totaled $186.0 million with approximately $4.1 million of fees remaining deferred.

Paycheck Protection Program Liquidity Facility

To provide liquidity to small business lenders and the broader credit markets, to help stabilize the financial system, and to provide economic relief to small businesses nationwide, the Board of Governors of the Federal Reserve System (the "FRB") authorized each of the Federal Reserve Banks to participate in the Paycheck Protection Program Liquidity Facility (the “PPPL Facility”), pursuant to the Federal Reserve Act.

Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions such as the Bank to fund loans guaranteed by the SBA under the PPP.

The Bank has until March 31, 2021 to access funds under the PPPL Facility, unless otherwise further extended by the FRB and the Department of the Treasury.

The Company is continuing to assess the PPPL Facility and whether it will utilize the facility as a source of liquidity for its PPP lending.

Loan Modifications and Troubled Debt Restructurings

On April 7, 2020, the FRB, the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the FRB and OCC, the “federal banking regulators”) issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings.

Similarly, under the CARES Act, provisions were included that allow for loan modifications to not be classified as TDRs if certain criteria are met.

This TDR exemption, which was set to expire on December 31, 2020, was extended under the CAA to the earlier of (i) 60 days after the national emergency concerning the COVID-19 outbreak terminates, and (ii) January 1, 2022.

In response to requests from borrowers who have experienced pandemic-related business or personal cash flow interruptions, and in accordance with regulatory guidance, the Company has made short-term loan modifications involving both partial and full payment deferrals.

The table below shows the payment modifications that were still in effect as of December 31, 2020, with the majority of these credit relationships making full interest payments.

The outstanding loan balance subject to payment modifications as of December 31, 2020 was substantially reduced from the comparable balances as of June 30, 2020 and September 30, 2020.

% of Loan Category

(Excludes PPP Loans)

Type of Loans

(dollars in thousands) Number of Loans Outstanding Balance

As of 12/31/2020

As of 9/30/2020

Commercial & Industrial Loans 9 $ 4,311 0.8 % 1.2 %

Commercial Real Estate Loans 15 43,951 3.0 % 5.7 %

Agricultural Loans — — — % — %

Consumer Loans 9 80 n/m (1)

Residential Mortgage Loans 4 218 0.1 % 0.5 %

Total 37 $ 48,560 1.7 % 3.1 %

(1) n/m = not meaningful

Lending Exposure to Potentially Impacted Industry Segments

The Company tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure.

As a result of the COVID-19 pandemic, the Company identified loan segments that could represent a potentially higher level of credit risk, as many of these customers may have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders, travel restrictions, business limitations and shutdowns, and social distancing requirements.

At December 31, 2020, the Company had the following exposure to these potentially sensitive COVID-19 identified loan segments:

Industry Segment

(dollars in thousands) Number of Loans Outstanding Balance % of Total Loans (excludes PPP Loans) % of Industry Segment Under Deferral

Lodging / Hotels 48 $ 134,599 4.6 % 33.8 %

Student Housing 102 86,696 3.0 % — %

Retail Shopping / Strip Centers 64 91,456 3.1 % — %

Restaurants 175 46,891 1.6 % 1.2 %

Regulatory Capital

Current Expected Credit Loss (CECL) Model .

As discussed under Note 1 (Recently Adopted Accounting Guidance) in the Notes to the Consolidated Financial Statements in Item 1 of this Report, effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) No.

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

Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss model with an expected loss model referred to as the current expected credit loss (“CECL”) model.

On December 21, 2018, federal banking regulators issued a joint final rule to revise their regulatory capital rules to, among other things:

(i) address implementation of the CECL accounting standard under GAAP;

and (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects of adopting CECL.

However, in an action related to the CARES Act, federal banking regulators issued, on March 27, 2020, an interim final rule that allows banking organizations to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years.

This two-year delay is in addition to the three-year phase-in period discussed above.

The Company has elected to adopt the optional phase-in rules, which will largely delay the effects of CECL on its regulatory capital through December 31, 2021.

Beginning on January 1, 2022, we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by January 1, 2025.

Under the interim final rule, the amount of adjustments to regulatory capital that can be deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

Community Bank Leverage Ratio .

On April 6, 2020, federal banking regulators issued two interim final rules that make changes to the community bank leverage ratio (“CBLR”) framework and implementing certain directives of the CARES Act.

Under the existing CBLR framework, which became effective as of January 1, 2020, community banks and holding companies (which

would include the Bank and the Company) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework.

The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings.

The first of the April 2020 interim final rules provided that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework.

It also established a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.

The second interim final rule provided a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement.

It established a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains the two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

The federal banking regulators adopted the two interim rules as final, without any changes, on October 9, 2020.

Notwithstanding these changes, the Company intends to continue with the existing layered ratio structure.

Under either framework, the Company and the Bank would be considered well-capitalized under the applicable guidelines.

PPP Loans and PPPL Facility .

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.

Specifically, the agencies clarified that banking organizations, including the Company and the Bank, are permitted to assign a zero percent risk weight to PPP loans for purposes of determining risk-weighted assets and risk-based capital ratios.

Additionally, in order to facilitate use of the PPPL Facility, the agencies further clarified that, for purposes of determining leverage ratios, a banking organization is permitted to exclude from total average assets PPP loans that have been pledged as collateral for a PPPL Facility.

MANAGEMENT OVERVIEW

Net income for the year ended December 31, 2021 totaled $84,137,000, or $3.17 per share, an increase of $21,927,000, or approximately 35% on a per share basis, from the year ended December 31, 2020 net income of $62,210,000, or $2.34 per share.

The Company adopted ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326) ("CECL") on January 1, 2020.

As a result, the Company recognized a one-time cumulative adjustment to the allowance for credit losses of $15.7 million.

The increase was primarily related to the Company's acquired loan portfolio which totaled approximately $851.1 million at the time of adoption.

The net income growth during 2021 compared with 2020 was driven by a number of factors including improved net interest income, lower provision for credit losses and increased non-interest revenue which was partially offset by a modestly higher level of non-interest expense.

Net income for the year ended December 31, 2020 totaled $62,210,000, or $2.34 per share, an increase of $2,988,000, or approximately 2% on a per share basis, from the year ended December 31, 2019 net income of $59,222,000, or $2.29 per share.

Net income for both 2018 and 2019 was impacted by merger and acquisition activity.

The year ended December 31, 2019 included acquisition-related expenses of approximately $3,360,000 (approximately $2,594,000 or $0.10 per share, on an after tax basis).

The year ended December 31, 2018 included acquisition-related expenses of approximately $4,592,000 (approximately $3,526,000 or $0.15 per share, on an after tax basis).

As previously disclosed, in March 2021, the Company commenced an operating optimization plan, pursuant to which its banking subsidiary, German American Bank, would consolidate seven branch offices and implement various staff reductions during 2021.

In making its decision to consolidate these branches, which were generally integrated with other nearby bank branches, the Company considered, among other factors, the operating costs of the branches, certain physical limitations impacting the bank facilities, and their proximity to other branch locations.

In addition, the Company’s evaluation of the branch

consolidations and the reductions in staff also took into consideration the numbers and types of transactions being conducted by its customers and the increased usage of online and mobile banking.

Also as part of the operating optimization plan, in September 2021, German American Bank sold its two branches located in Lexington, Kentucky to The Home Savings and Loan Company of Kenton, Ohio (“HSLC”).

HSLC assumed approximately $17.6 million in total deposits and purchased approximately $17.8 million in total loans as part of the sale.

On January 1, 2022, the Company completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc.

(“CUB”) through the merger of CUB with and into the Company.

Immediately following completion of the CUB holding company merger, CUB's subsidiary bank, Citizen Union Bank of Shelbyville, Inc., was merged with and into the Company’s subsidiary bank, German American Bank.

CUB, headquartered in Shelbyville, Kentucky operated 15 retail banking offices located in Shelby, Jefferson, Spencer, Bullitt, Oldham, Owen, Gallatin and Hardin counties in Kentucky through Citizens Union Bank of Shelbyville, Inc.

As of the closing of the transaction, CUB had total assets of approximately $1.109 billion, total loans of approximately $683.8 million, and total deposits of approximately $930.5 million.

The Company issued approximately 2.9 million shares of its common stock, and paid approximately $50.8 million in cash, in exchange for all of the issued and outstanding shares of common stock of CUB.

For further information regarding this merger and acquisition transaction, see Note 20 (Subsequent Events) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

On July 1, 2019, the Company completed the acquisition of Citizens First Corporation (“Citizens First”) through the merger of Citizens First with and into the Company.

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The Company issued approximately 1.7 million shares of its common stock, and paid approximately $15.5 million in cash, in exchange for all of the issued and outstanding shares of common stock of Citizens First.

On October 15, 2018, the Company completed the acquisition of First Security, Inc.

("First Security") through the merger of First Security with and into the Company.

Immediately following completion of the First Security holding company merger, First Security’s subsidiary bank, First Security Bank, Inc., was merged with and into the Company’s subsidiary bank, German American Bank.

First Security, based in Owensboro, Kentucky, operated 11 retail banking offices, through First Security Bank, Inc., in Owensboro, Bowling Green, Franklin and Lexington, Kentucky and in Evansville and Newburgh, Indiana.

As of the closing of the transaction, First Security had total assets of approximately $553.2 million, total loans of approximately $390.1 million, and total deposits of approximately $424.4 million.

The Company issued approximately 2.0 million shares of

its common stock, and paid approximately $31.2 million in cash, in exchange for all of the issued and outstanding shares of common stock of First Security and in cancellation of all outstanding options to acquire First Security common stock.

On May 18, 2018, German American Bank completed the acquisition of five branch locations of First Financial Bancorp (formerly branch locations of Mainsource Financial Group, Inc.

prior to its merger with First Financial Bancorp on April 1, 2018) and certain related assets, and the assumption by German American Bank of certain related liabilities.

Four of the branches are located in Columbus, Indiana, and one in Greensburg, Indiana.

German American Bank acquired approximately $175.7 million in deposits and approximately $116.3 million in loans associated with the five bank branches.

The premium paid on deposits by German American Bank was approximately $7.4 million.

The premium was subject to adjustment to reflect increases or decreases in the deposit balances during the six month period following the closing date.

In January 2019, an adjustment of approximately $0.1 million in additional premium was paid by German American Bank as a result of the change in deposits during the six month measurement period.

German American Bank also had the ability, under certain circumstances, to put loans back to First Financial Bancorp’s bank subsidiary during such six month period.

During the fourth quarter of 2018, approximately $1.3 million of loans were put back by German American Bank.

For further information regarding these merger and acquisition transactions, see Note 18 (Business Combinations) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

For further information regarding this merger and acquisition transaction, see Note 18 (Business Combinations) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

COVID-19 PANDEMIC BUSINESS UPDATE

The novel coronavirus disease 2019 (COVID-19) pandemic continued to impact our operations during 2021.

While uncertainty remains as to the future effects of the pandemic, an improving business climate, supported by unprecedented fiscal stimulus, an accommodative Federal Reserve, and modest increases in COVID-19 vaccination rates, has helped to mitigate the negative impacts of the pandemic on our financial condition and results of operations, despite the challenges presented by very low interest rates, muted loan growth, and excess liquidity.

CARES Act and the Paycheck Protection Program

As previously disclosed, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law in March 2020, providing an approximately $2 trillion stimulus package that included direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives.

For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), a lending program administered by the Small Business Administration (“SBA”) that is intended to incentivize participants to retain their employees by providing them with loans that are fully guaranteed by the U.S.

government and subject to forgiveness if program guidelines are met.

The PPP was later extended and modified by the Paycheck Protection Program and Health Care Enhancement Act in April 2020 and the Paycheck Protection Program Flexibility Act in June 2020, with PPP funding under this initial round expiring on August 8, 2020.

In December 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was signed into law as part of the Consolidated Appropriations Act, 2021 (the “CAA”).

In addition to direct stimulus payments and other aid, this Act provided for a second round of PPP loans through March 31, 2021.

Under the American Rescue Plan Act of 2021 and the PPP Extension Act of 2021, which were both enacted during March 2021, additional funds were provided for the program and the deadline for applying for PPP loans was extended through May 31, 2021 (with the SBA having been given until June 30, 2021 to process loan applications).

The Company actively participated in both rounds of the PPP, lending funds primarily to its existing loan and/or deposit customers.

The PPP loans carry an interest rate of 1.00% and included a processing fee that varied depending on the balance of the loan at origination (which fee is recognized over the life of the loan).

The vast majority of the Company’s PPP loans made during 2020 had two-year maturities, while PPP loans made during 2021 have five-year maturities.

Under the first round of the PPP (i.e., the 2020 round), the Company originated loans totaling approximately $351.3 million in principal amount, with approximately $12.0 million of related net processing fees on 3,070 PPP loan relationships.

As of December 31, 2021, $349.2 million of those first round PPP loans had been forgiven by the SBA and repaid to the Company pursuant to the terms of the program or repaid by customers, with approximately $12.0 million in net processing fees having been recognized by the Company.

Under the second round of the PPP (i.e., the 2021 round), the Company originated loans totaling approximately $157.0 million in principal amount, with approximately $9.0 million of related net processing fees, on 2,601 PPP loan relationships.

As of December 31, 2021, $138.8 million of second round PPP loans had been forgiven by the SBA and repaid to the Company, with $8.1 million in net processing fees having been recognized by the Company.

As a result of the forgiveness of the first and second round PPP loans, $20.3 million of total PPP loans remain outstanding as of December 31, 2021, with approximately $0.9 million of net fees remaining deferred on that date.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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During the year ended December 31, 2021, net interest income totaled $160,830,000, representing an increase of $5,587,000, or 4%, from the year ended December 31, 2020 net interest income of $155,243,000.

The increased level of net interest income during 2020 compared with 2019 was largely attributable to a higher level of average earning assets resulting from acquisition of Citizens First on July 1, 2019, significant deposit growth during 2020 and participation in the PPP.

The increase in net interest income during 2021 compared with 2020 was largely attributable to an increase in average earning assets, a higher level of fees recognized related to PPP loans which were partially offset by a lower level of accretion of loan discounts on acquired loans, and a decreased level of interest expense on interest bearing liabilities related to lower interest rates.

During the year ended December 31, 2020, net interest income totaled $155,243,000, representing an increase of $10,018,000, or 7%, from the year ended December 31, 2019 net interest income of $145,225,000.

The increased level of net interest income during 2020 compared with 2019 was largely attributable to a higher level of average earning assets resulting from the acquisition of Citizens First on July 1, 2019, significant deposit growth during 2020 and participation in the PPP.

In addition, the recognition of fees related to PPP loans also contributed to higher levels of net interest income, but was partially mitigated by a lower level of accretion of discounts on acquired loans.

Fees recognized on PPP loans through net interest income during 2020 totaled $7,981,000.

Accretion of discounts on acquired loans totaled $5,769,000 during 2020 compared with $8,559,000 during 2019.

The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets.

The tax equivalent net interest margin for the year ended December 31, 2020 was 3.63% compared to 3.92% in 2019.

The tax equivalent yield on earning assets totaled 4.07% during 2020 compared to 4.75% in 2019, while the cost of funds (expressed as a percentage of average earning assets) totaled 0.44% during 2020 compared to 0.83% in 2019.

Historically low market interest rates impacted the Company's net interest margin.

Lower market interest rates have negatively impacted earning asset yields during 2020, with these declines being partially mitigated by a lower cost of funds.

Also contributing to the lower net interest margin has been excess liquidity the Company has carried on the balance sheet that resulted from significant deposit growth during 2020 and somewhat muted loan growth.

The Company's net interest margin was impacted by fees recognized as a part of the PPP and accretion of loan discounts on acquired loans.

The fees recognized related to the PPP contributed approximately 18 basis points to the net interest margin in 2020.

Accretion of loan discounts on acquired loans contributed approximately 13 basis points to the net interest margin in 2020 and 23 basis points in 2019.

During the year ended December 31, 2019, net interest income increased $30,615,000, or 27%, compared with the year ended December 31, 2018.

The increased level of net interest income during 2019 compared with 2018 was driven primarily by a higher level of average earning assets resulting from the previously discussed merger and acquisition activity and improvement in the tax equivalent net interest margin.

The tax equivalent net interest margin for the year ended December 31, 2019 was 3.92% compared to 3.75% in 2018.

The tax equivalent yield on earning assets totaled 4.75% during 2019 compared to 4.36% in 2018, while the cost of funds totaled 0.83% during 2019 compared to 0.61% in 2018.

The improvement in the net interest margin during 2019 compared to 2018 was related to improved earning asset yields partially offset by an increased cost of funds largely related to higher short-term market interest rates during much of 2019 compared with 2018.

Also positively impacting the net interest margin was an increased level of accretion of loan discounts and recoveries on acquired loans.

Accretion of loan discounts and recoveries on acquired loans contributed approximately 23 basis points to the net interest margin during 2019 and 8 basis points in 2018.

The net interest margin for the year ended December 31, 2021 was 3.31% compared to 3.63% in 2020 and 3.92% in 2019.

Historically low market interest rates impacted the Company's net interest margin in both 2021 and 2020.

Lower market interest rates have negatively impacted earning asset yields during 2021 and 2020, with these declines being partially mitigated by a lower cost of funds.

The Company’s net interest margin in 2021 and 2020 has been impacted by fees recognized as a part of the PPP and impacted in all periods presented by the accretion of discounts on acquired loans.

Fees recognized on PPP loans through net interest income totaled $12,196,000 during 2021 and $7,978,000 during 2020.

The fees recognized related to the PPP contributed approximately 24 basis points to the net interest margin in 2021 and 18 basis points in 2020.

Accretion of discounts on acquired loans contributed approximately 7 basis points to the net interest margin during 2021, 13 basis points during 2020 and 23 basis points in 2019.

Accretion of discounts on acquired loans totaled $3,476,000 during 2021, $5,769,000 during 2020 and $8,559,000 during 2019.

The following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years.

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Total Loans and Leases ⁽²⁾ 3,072,302 139,378 4.54 % 3,185,542 151,946 4.77 % 2,899,939 152,836 5.27 %

3,185,542 151,946 4.77 % 2,899,939 152,836 5.27 % 2,339,089 112,437 4.81 %

TOTAL INTEREST EARNING ASSETS 5,015,633 175,332 3.50 % 4,370,809 177,815 4.07 % 3,778,562 179,364 4.75 %

Other Assets 397,147 398,102 366,171

Allowance for Loan Losses (39,905) (16,198) (15,650)

Allowance for Credit Losses (43,073) (39,905) (16,198)

TOTAL ASSETS $ 5,369,707 $ 4,729,006 $ 4,128,535

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2021 compared to 2020

Increase / (Decrease) Due to (1)

2019 compared to 2018

Increase / (Decrease) Due to ⁽¹⁾ 2020 compared to 2019

Increase / (Decrease) Due to ⁽¹⁾

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The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance.

During 2020, the provision for credit losses totaled $17,550,000 under the CECL methodology compared with a $5,325,000 provision for loan losses during 2019 under the incurred loss model and $2,070,000 during 2018.

During 2021, the Company recorded a negative provision for credit losses of $6,500,000 compared with a provision for credit losses of $17,550,000 during 2020 and a $5,325,000 provision for loan losses during 2019 under the incurred loss model.

During 2021, the negative provision for credit losses represented approximately 21 basis points of average loans.

The negative provision for credit losses in 2021 was largely due to declines in certain adversely criticized assets and improvement in certain pandemic-related stressed sectors for which the Company had provided significant levels of allowance for credit losses during 2020.

The Company realized net charge-offs of $3,342,000 or 11 basis points of average loans during 2021.

During 2020, the provision for credit losses represented approximately 55 basis points of average loans.

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The Company realized net charge-offs of $2,622,000 or 8 basis points of average loans outstanding during 2020.

During 2019, the provision for loan losses represented approximately 18 basis points of average loans.

The increased level of provision during 2019 was largely related to an increased level of net charge-offs during 2019 compared with 2018.

The Company realized net charge-offs of $4,870,000 or 17 basis points of average loans outstanding during 2019.

The increase in net charge-offs during 2019 was primarily attributable to partial charge-offs on two adversely classified commercial lending relationship in the second half of 2019.

The provision for credit losses made during 2020 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

The provision for credit losses made during 2021 was made at a level deemed necessary by management to absorb expected losses in the loan portfolio.

A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

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Trust and investment product fees increased $727,000, or 10%, during 2020 compared with 2019.

The increase in both years was primarily attributable to fees generated from increased assets under management in the Company's wealth management group.

The increase in both years was largely attributable to increased assets under management in the Company's wealth management group.

Service charges on deposit accounts increased $389,000, or 5%, during 2021 compared with 2020.

Service charges on deposit accounts declined $1,384,000, or 16%, during 2020 compared with 2019.

The decline during 2020 compared with 2019 was largely related to the economic impacts of the COVID-19 pandemic and resulting change in deposit customer activity, partially mitigated by the acquisition of Citizens First.

Service charges on deposit accounts increased $1,674,000, or 24%, during 2019 compared with 2018.

The increase during 2019 compared with 2018 was positively impacted by the acquisition activity completed during 2018 and 2019.

Insurance revenues were relatively unchanged comparing 2020 to 2019.

Insurance revenues increased $610,000, or 7%, during 2019 compared with 2018.

The increase during 2019 was attributable to increased commercial insurance revenue and personal insurance revenue as well as increased contingency revenue.

Company owned life insurance revenue increased $302,000, or 15%, during 2020, compared with 2019.

The increase was largely related to death benefits received from life insurance policies.

Company owned life insurance revenue declined $778,000, or 34%, during 2021 compared with 2020.

Company owned life insurance revenue increased $302,000, or 15%, during 2020 compared with 2019.

The increase was largely related to death benefits received from life insurance policies during 2019 with additional increases resulting from the acquisitions completed during 2018 and 2019.

The variance in both periods was largely related to death benefits received from life insurance policies during 2020.

Interchange fees increased $2,587,000, or 25%, during 2021 compared to 2020.

The increase during 2020 compared with 2019 was largely attributable to the acquisition of Citizens First and increased card utilization by customers.

The increased level of fees during 2021 compared with 2020 was due to increased economic activity and increased card utilization by customers.

Interchange fees increased $1,079,000, or 11%, during 2020 compared to 2019.

The increase during 2019 was largely attributable to increased card utilization by customers and the acquisition activity completed during 2018 and 2019.

The increase during 2020 compared with 2019 was largely attributable to the acquisition of Citizens First and increased card utilization by customers.

Other operating income increased $3,603,000, or 106%, during 2021 compared with 2020.

The increase during 2021 was largely attributable to the net gain of approximately $1.4 million related to the sale of the two branch office locations in Lexington, Kentucky and approximately $863,000 of fair value adjustments and higher transaction fees associated with interest rate swap transactions with loan customers.

Also contributing to the increase in 2021, was the donation of a building and accompanying real estate to a local municipality in one of the Company’s market areas.

The estimated fair value of the property was approximately $575,000 greater than the book value which increased other operating income.

A corresponding contribution expense of $800,000 was recognized in advertising and promotion expense of the Company’s income statement related to the donation of the building and real estate.

Net gains on sales of loans declined $1,641,000, or 17%, during 2021 compared with the 2020.

The decline in 2021 compared with 2020 was generally attributable to a lower level of fair value adjustments on commitments to sell loans and a modestly lower level of loans sold, which were partially offset by higher pricing levels on loans sold.

Net gains on sales of loans increased $5,275,000, or 114%, during 2020 compared with 2019.

The increase in the net gains on sales of loans during 2020 compared with 2019 was generally attributable to a higher sales volume and higher pricing levels on loans sold.

Net gains on sales of loans increased $1,629,000, or 54%, during 2019 compared with 2018.

The increase in the net gains on sales of loans during 2019 compared with 2018 was largely attributable to the higher volume of loans sold.

Loan sales for 2020, 2019, and 2018 totaled $316.4 million, $185.4 million, and $135.3 million, respectively.

Loan sales totaled $266.0 million during 2021, $316.4 million during 2020 and $185.4 million during 2019.

The Company realized $2,247,000 in gains on sales of securities during 2021 compared with $4,081,000 during 2020 and $1,248,000 during 2019.

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During 2021, non-interest expense totaled $124,007,000, an increase of $6,884,000, or 6%, compared with 2020.

During 2019, non-interest expense increased $20,609,000, or 22%, compared with 2018.

The level of non-interest expenses in 2019 and 2018 was impacted by the inclusion of operating expenses related to the branch acquisition completed during the second quarter of 2018 and bank acquisitions completed in the fourth quarter of 2018 and third quarter of 2019.

Acquisition-related expenses of a non-recurring nature totaled $3,360,000 during 2019 and $4,592,000 during 2018.

The year ended December 31, 2021 included non-recurring expenses totaling $4,100,000 related to the Company’s previously discussed operating optimization plan, $3,050,000 related to a previously disclosed litigation reserve, and $735,000 of transaction-related expenses for the acquisition of Citizens Union Bancorp of Shelbyville, Inc., which was completed on January 1, 2022.

During 2020, non-interest expense totaled $117,123,000, an increase of $2,961,000, or 3%, compared with 2019.

Non-interest Expense

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TOTAL NON-INTEREST EXPENSE $ 124,007 $ 117,123 $ 114,162 6 3

Salaries and benefits were relatively stable during 2021 compared with 2020 increasing by $458,000, or less than 1%.

Salaries and benefits increased $4,227,000, or 7%, during 2020 compared with 2019.

The increase in salaries and benefits during 2020 compared with 2019 was largely attributable to an increased number of full-time equivalent employees during 2020.

Salaries and benefits increased $12,579,000, or 25%, during 2019 compared with 2018.

The increase during 2019 compared with 2018 was largely attributable to an increased number of full-time equivalent employees due primarily to the acquisition transactions completed during 2018 and 2019.

Occupancy, furniture and equipment expense increased $248,000, or 2%, during 2020 compared with 2019 and increased $2,899,000, or 27%, during 2019 compared with 2018.

The increase during 2019 compared with 2018 was primarily due to operating costs related to the acquisition activity during 2018 and 2019.

FDIC premiums increased $207,000, or 39%, during 2020 compared with 2019 and declined $500,000, or 48%, during 2019 compared with 2018.

The increase in FDIC premiums during 2020 compared with 2019 was related to a lower level of credits received from the FDIC during 2020 compared with 2019.

The decline in FDIC premiums in 2019 compared with 2018 was attributable to credits received from the FDIC in 2019.

The credits received in both 2019 and 2020 were due to the reserve ratio of the deposit insurance fund exceeding the FDIC's targeted levels.

Occupancy, furniture and equipment expense increased $807,000, or 6%, during 2021 compared with 2020.

The increase during 2021 was due to lease termination costs associated with the Company’s operating optimization plan that totaled approximately $1,411,000 during 2021.

Occupancy, furniture and equipment expense increased $248,000, or 2%, during 2020 compared with 2019.

FDIC premiums increased $679,000, or 92%, during 2021 compared with 2020 and increased $207,000, or 39%, during 2020 compared with 2019.

The increase during 2021 compared with 2020 was related to credits received from the FDIC during 2020.

There were no credits received during 2021 and a lower level of credits in 2020 compared with 2019.

The credits received in 2020 and prior years were due to the reserve ratio of the deposit insurance fund exceeding the FDIC targeted levels.

Data processing fees increased $722,000, or 10%, during 2021 compared with 2020.

The increase was related to various software costs including expenses related to the PPP loan program as well as increased data processing fees for the branch sales during 2021.

Data processing fees declined $1,038,000, or 13%, during 2020 compared with 2019.

The decline in data processing fees during 2020 compared with 2019 was largely due to acquisition related costs during 2019.

Data processing fees increased $985,000, or 14%, during 2019 compared with 2018.

The increase in data processing fees during 2019 compared with 2018 was largely related to the on-going operating costs associated with the acquisitions completed during 2018 and 2019.

Acquisition-related costs of a non-recurring nature totaled $1,235,000 during 2019 and $2,002,000 during 2018.

Professional fees increased $1,011,000, or 25%, during 2021 compared with 2020.

The increase during 2021 compared with 2020 was largely attributable to professional fees associated with the acquisition of CUB and an increase in legal fees related to non-acquisition related legal matters.

Professional fees declined $676,000, or 14%, during 2020 compared with 2019.

The decline in professional fees during 2020 compared with 2019 was largely related to higher levels of merger and acquisition related professional fees in 2019.

Professional fees declined $688,000, or 13%, during 2019 compared with 2018.

The decline in professional fees during 2019 compared with 2018 was largely related to lower levels of merger and acquisition related professional fees.

Merger and acquisition related professional fees totaled approximately $1,167,000 during 2019 and $1,738,000 during 2018.

Advertising and promotion expense increased $608,000, or 17%, during 2021 compared with 2020.

The increase during 2021 was attributable to the donation of a building and accompanying real estate to a local municipality in one of the Company’s market areas.

The estimated fair value of the property was approximately $800,000 which resulted in the increase in the contribution expense during 2021.

Advertising and promotion expense declined $641,000, or 15%, during 2020 compared with 2019.

The decline during 2020 was largely attributable to lesser marketing and sponsorship expenditures impacted by the COVID-19 pandemic.

Advertising and promotion expense increased $738,000, or 21%, in 2019 compared with 2018.

The increase in advertising and promotion expense was largely related to the entry into new markets for the Company through the merger and acquisition activity during 2018 and 2019.

Intangible amortization declined $182,000, or 5%, during 2020 compared with 2019 and increased $1,969,000, or 112%, during 2019 compared with 2018.

The increase in intangible amortization during 2019 compared with 2018 was attributable to the previously discussed acquisition transactions completed during 2018 and 2019.

Other operating expenses increased $3,407,000, or 21%, during 2021 compared with 2020 and increased $816,000, or 5% during 2020 compared with 2019.

The increase during 2021 was primarily attributable to the establishment of a settlement reserve for a lawsuit challenging the Company’s checking account practices associated with its assessment of overdraft fees for

certain debit card transactions.

Like many other financial institutions, the Company has been the subject of an overdraft fee related putative class action lawsuit since the third quarter of 2020.

This type of litigation is often time consuming and expensive to defend.

In order to avoid further costs associated with this type of litigation, the Company determined it was in its best interest to pursue a settlement of this lawsuit during the third quarter of 2021 and therefore accrued a $3,050,000 settlement reserve.

On October 21, 2021, the Company executed a settlement agreement for payment of that amount in connection with this lawsuit which remains subject to court approval.

In addition, the Company recognized $1,276,000 of charges related to various fixed asset write-downs as a part of the Company’s operating optimization plans announced in March 2021.

PROVISION FOR INCOME TAXES

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As of December 31, 2021, shareholders’ equity increased by $43.8 million to $668.5 million compared with $624.7 million at year-end 2020.

The increase in shareholders' equity was in part attributable to increased retained earnings of $35.4 million due to 2020 net income of $62.2 million which was partially offset by the payment of $20.1 million in shareholder dividends and a $6.7 million charge relating to the implementation of CECL on January 1, 2020.

In addition, accumulated other comprehensive income increased $20.3 million during 2020 primarily related to the increase in value of the Company's available-for-sale securities portfolio.

Also impacting total shareholders' equity was the repurchase of common stock under the Company's share repurchase plan which totaled $5.8 million during 2020.

The increase in shareholders' equity was attributable to increased retained earnings of $61.9 million due to net income of $84.1 million during 2021 which was partially offset by the payment of $22.2 million in shareholder dividends.

Partially mitigating the increase in retained earnings was a decline in accumulated other comprehensive income of $19.9 million related to the decrease in value of the Company's available-for-sale securities portfolio.

Shareholders’ equity represented 11.9% of total assets at December 31, 2021 and 12.6% of total assets at December 31, 2020.

Shareholders’ equity included $127.6 million of goodwill and other intangible assets at December 31, 2021 compared to $130.9 million of goodwill and other intangible assets at December 31, 2020.

On January 27, 2020, the Company’s Board of Directors approved a plan to repurchase up to one million shares of the Company’s outstanding common stock.

At the time it approved the plan, the Board also terminated a similar program that had been adopted in 2001.

At the time of its termination, the Company had been authorized to purchase up to 409,184 shares of common stock under the 2001 program.

The Company repurchased 221,912 shares of common stock under the 2020 repurchase plan during 2020 at an average price of $26.09 per share.

On January 25, 2021, the Company’s Board of Directors terminated the 2020 repurchase program and approved a new plan to repurchase up to one million shares of the Company’s outstanding common stock.

On a share basis, the amount of common stock subject to the new repurchase plan represented approximately 4% of the Company’s outstanding shares on the date it was approved.

On January 25, 2021, the Company's Board of Directors approved a stock repurchase program for up to 1.0 million of its outstanding common shares.

The Company did not repurchase any shares of common stock under the repurchase plan during 2021.

On January 31, 2022, the Company’s Board of Directors terminated the 2021 repurchase program and approved a new plan to repurchase up to 1.0 million shares of the Company’s outstanding common stock.

On a share basis, the amount of common stock subject to the new repurchase plan represented approximately 3% of the Company’s outstanding shares on the date it was approved, which was inclusive of the approximately 2.9 million shares issued in conjunction with the CUB acquisition.

The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time.

The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements.

At the time of its termination, the Company had been authorized to purchase up to 778,088 shares of common stock under the 2020 repurchase plan.

The Company has not repurchased any shares of common stock under the 2022 repurchase plan.

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Ratio 12/31/2020

Ratio Minimum for Capital Adequacy Purposes (1)

Well-Capitalized Guidelines

Ratio Minimum for Capital Adequacy Purposes ⁽¹⁾ Well-Capitalized Guidelines

Total Capital (to Risk Weighted Assets)

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On March 27, 2020, in an action related to the CARES Act, the federal banking regulators announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

The Company is adopting the capital transition relief over the permissible five-year period.

Under the existing CBLR framework, which became effective as of January 1, 2020, community banks and holding companies (which would include the Bank and the Company) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework.

It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.

The second interim final rule provided a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement.

The federal banking regulators adopted the two interim rules as final, without any changes, on October 9, 2020.

Notwithstanding these changes, the Company intends to continue with the existing layered ratio structure.

Under either framework, the Company and the Bank would be considered well-capitalized under the applicable guidelines.

The interim final rule, which was finalized effective September 30, 2020, maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).

The Company elected to adopt the five-year transition option and, as a result, began the required three-year phase-in by reflecting 25% of the previously deferred estimated capital impact of CECL in its regulatory capital effective January 1, 2022.

An additional 25% is to be phased in at the beginning of each subsequent year until fully phased in by January 1, 2025.

Under the five-year transition option, the amount of adjustments to regulatory capital that could be deferred until the phase-in period began included both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

Specifically, the agencies have clarified that banking organizations, including the Company and the Bank, are permitted to assign a zero percent risk weight to PPP loans for purposes of determining risk-weighted assets and risk-based capital ratios.

USES OF FUNDS

December 31, 2021 total loans declined $84.1 million, or 3%, compared with December 31, 2020.

The decline in total loans at December 31, 2021 compared to year-end 2020 was primarily due to a decrease in PPP loans.

PPP loans, net of deferred fees, totaled $19.5 million ($20.3 million principal balance and $0.8 million of remaining net deferred fees) at December 31, 2021 compared with $182.0 million at December 31, 2020.

Excluding PPP loans, total loans increased $86.8 million, or 3%, at December 31, 2021 compared with year-end 2020.

Commercial and industrial loans increased approximately $18.5 million, or 4%, during 2021 compared with year-end 2020, commercial real estate loans increased $69.5 million, or 5%, and agricultural loans declined $17.9 million, or 5% (excluding PPP loans).

At December 31, 2021, as compared with year-end 2020, retail loans increased $16.7 million, or 3%.

December 31, 2020 total loans increased $10.0 million, or less than 1%, compared with December 31, 2019.

The increase in loans during 2020 compared with year-end 2019 was primarily the result in the Company’s participation in the PPP.

Excluding the $186.0 million in PPP loans ($182.0 million net of deferred fees) at December 31, 2020, total loans declined by $172.0 million, or 6%, during 2020 compared with year-end 2019.

The decline in total loans, excluding the PPP loans, was impacted by continued elevated pay-offs within the commercial real estate loan portfolio, reduced line utilization within the commercial loan portfolio partially attributable to the PPP loan originations during 2020, and continued pay-downs in the Company's residential and home equity loan portfolios related to the current interest rate environment.

December 31, 2019 total loans increased $350.2 million, or 13%, compared with December 31, 2018.

Loan growth during 2019 was impacted in each quarterly period by elevated large pay-offs within the agricultural and commercial loan portfolios.

The majority of the increase in outstanding loans as of December 31, 2019 compared with December 31, 2018 was attributable to the acquisition of Citizens First.

As of December 31, 2019, outstanding loans from the Citizens First acquisition totaled approximately $320.3 million.

Excluding the $182.0 million in PPP loans at December 31, 2020, total loans declined by $172.0 million, or 6%, during 2020 compared with year-end 2019.

The decline in total loans, excluding the PPP loans, was impacted by elevated pay-offs within the commercial real estate loan portfolio, reduced line utilization within the commercial loan portfolio partially attributable to the PPP loan originations during 2020, and continued pay-downs in the Company's residential and home equity loan portfolios related to a low interest rate environment.

The composition of the loan portfolio has remained relatively stable and diversified over the past several years, including 2021.

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US Gov't Sponsored Entities & Agencies 175,457 8 88,376 6 — n/m ⁽¹⁾

Equity Securities 353 n/m (1)

Equity Securities 353 n/m ⁽¹⁾ 353 n/m ⁽¹⁾ 353 n/m ⁽¹⁾

Total Securities Portfolio $ 2,219,268 100 % $ 1,460,304 100 % $ 879,116 100 %

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The amortized cost of investment securities, including federal funds sold and short-term investments, increased $759.0 million, or 52%, at year-end 2021 compared with year-end 2020 and increased $581.2 million, or 66%, at year-end 2020 compared with year-end 2019.

The increase during 2020 was largely attributable to increased levels of deposits during 2020.

Federal funds sold and other short-term investments increased $243.9 million as of December 31, 2020 compared with year-end 2019.

The increase as of year-end 2020 compared with year-end 2019 was largely driven by deposit growth throughout 2020 and PPP loan forgiveness activity in the fourth quarter of 2020.

The largest component in the investment portfolio continues to be in agency issued mortgage related securities and collateralized and uncollateralized federal agency securities, which totaled $623.9 million and represents 43% of the total securities portfolio at December 31, 2020.

The increase over the past two years was largely attributable to increased levels of deposits during both 2021 and 2020 in addition to PPP loan forgiveness and repayment activity over those same periods.

The investment portfolio continues to be relatively balanced with agency issued mortgage related securities and collateralized and uncollateralized federal agency securities, totaling $973.2 million, or 44% of the total securities portfolio at December 31, 2021.

The Company’s level of obligations of state and political subdivisions increased to $896.0 million or 40% of the portfolio at December 31, 2021.

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A tax-equivalent adjustment using a tax rate of 21 percent was used in the above table.

In addition to the other uses of funds discussed previously, the Company had certain long-term contractual obligations as of December 31, 2020.

These contractual obligations primarily consisted of long-term borrowings with the Federal Home Loan Bank (“FHLB”) and junior subordinated debentures, time deposits, and lease commitments for certain office facilities.

Scheduled principal payments on long-term borrowings, time deposits, and future minimum lease payments are outlined in the table below.

Contractual Obligations Payments Due By Period

(dollars in thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years

Long-term Borrowings $ 139,103 $ 8,000 $ 50,000 $ 25,000 $ 56,103

CONTRACTUAL OBLIGATIONS

In addition to the other uses of funds discussed previously, the Company has certain contractual obligations to make cash payments.

These contractual obligations primarily consist of borrowings from the Federal Home Loan Bank (“FHLB”), junior subordinated debentures, deposits, repurchase agreements, and lease commitments for certain office facilities.

A summary of these payment obligations is set forth below.

Contractual and Other Obligations Payments Due In

(dollars in thousands) One Year or Less Over One Year Total

Deposits without Stated Maturities $ 4,397,217 $ — $ 4,397,217

Time Deposits 347,099 — 347,099

Finance Lease Obligations 5,919 500 1,028 1,082 3,309

Operating Lease Commitments 6,768 1,528 2,352 1,435 1,453

Postretirement Benefit Payments 1,368 121 247 239 761

Total Contractual Obligations $ 647,610 $ 411,941 $ 127,011 $ 46,954 $ 61,704

Federal Home Loan Bank Advances — 25,000 25,000

Other Borrowings (Subordinated Notes and Debentures) — 55,804 55,804

Securities Sold under Repurchase Agreements 68,328 — 68,328

Lease Obligations 1,735 10,314 12,049

Total Contractual and Other Obligations $ 4,814,379 $ 91,118 $ 4,905,497

In the normal course of business, the Company makes commitments to extend credit and commitments to sell loans, which are not reflected in its consolidated financial statements.

For further information about such commitments, see Note 14 (Commitments and Off-balance Sheet Items) in Notes to the Consolidated Financial Statements included in Item 8 of this Report.

SOURCES OF FUNDS

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The Company’s overall level of average core deposits increased approximately $726.1 million, or 20%, during 2021 compared with 2020.

During 2020, average demand deposits (non-interest bearing and interest bearing) increased $490.3 million, average savings deposits increased $65.3 million, average money market demand deposits increased $113.7 million and average time deposits under $100,000 increased $3.6 million.

Significant deposit growth during the second quarter of 2020 was partly due to PPP loan proceeds on deposit and COVID-19 related pandemic deposit inflows combined with the closing of the Citizens First acquisition in 2019 were the primary contributors to the increased level of average core deposits during 2020 compared with 2019.

During 2021, average demand deposits (non-interest bearing and interest bearing) increased $593.9 million, average savings deposits increased $102.6 million, average money market demand deposits increased $92.0 million and average time deposits under $100,000 declined $62.3 million.

The Company’s overall level of average core deposits increased approximately $672.9 million, or 23%, during 2020 compared with 2019.

The acquisition activity which occurred during the second quarter of 2018, fourth quarter of 2018 and third quarter of 2019 was a significant contributor to the increased level of average core deposits during 2019 compared with 2018.

The increase in total average core deposits during 2021 following the increase in 2020 was largely impacted by general inflows of customers deposits generally related to the COVID-19 pandemic, participation in the PPP, stimulus payments provided by the federal government, and an increase in public funds.

The Company’s ability to attract core deposits continues to be influenced by competition and the interest rate environment, as well as the availability of alternative investment products.

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Other time deposits consist of certificates of deposits in denominations of less than $100,000.

These average deposits increased by 1% during 2020 following an increase of 38% during 2019.

These average deposits declined by 22% during 2021 following an increase of 1% during 2020.

Other time deposits comprised 5% of core deposits in 2021, 8% in 2020 and 10% in 2019.

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Certificates of deposits in denominations of $100,000 or more and brokered deposits are an additional source of other funding for the Company’s bank subsidiary.

Large denomination certificates and brokered deposits declined $106.4 million, or 28%, during 2020 following an increase of $133.2 million, or 53% during 2019.

Large denomination certificates and brokered deposits declined $92.7 million, or 33%, during 2021 following a decline of $106.4 million, or 28% during 2020.

Large certificates and brokered deposits comprised approximately 4% of average total funding sources in 2021 compared with 7% in 2020 and 11% in 2019.

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Federal Home Loan Bank advances and other borrowings represent an important source of other funding for the Company.

Average borrowed funds declined $57.8 million, or 21%, during 2020 following an increase of $21.9 million, or 9%, during 2019.

Borrowings comprised approximately 5% of average total funding sources during 2020 compared with 8% in 2018 and and 9% in 2018.

Average borrowed funds declined $35.1 million, or 16%, during 2021 following a decline of $57.8 million, or 21%, during

Borrowings comprised approximately 4% of average total funding sources during 2021 compared with 5% in 2020 and 8% in 2019.

The bank subsidiary of the Company also utilizes short-term funding sources from time to time.

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Effective January 1, 2011, and as a result of the acquisition of American Community Bancorp, Inc., the Company assumed long-term debt obligations of American Community in the form of two junior subordinated debentures issued by American Community in the aggregate unpaid principal amount of approximately $8.3 million.

Effective March 1, 2016, and as a result of the acquisition of River Valley Bancorp, the Company assumed long-term debt obligations of River Valley in the form of a

junior subordinated debenture issued by River Valley in the aggregate unpaid principal amount of approximately $7.2 million.

Effective March 1, 2016, and as a result of the acquisition of River Valley Bancorp, the Company assumed long-term debt obligations of River Valley in the form of a junior subordinated debenture issued by River Valley in the aggregate unpaid principal amount of approximately $7.2 million.

Effective July 1, 2019, and as a result of the acquisition of Citizens First Bancorp, the Company assumed long-term debt obligations of Citizens First in the form of a junior subordinated debenture issued by Citizens First in the aggregate unpaid principal amount of approximately $5.2 million.

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The purpose of this program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for credit losses.

In response to requests from borrowers who had experienced pandemic-related business or personal cash flow interruptions, and in accordance with regulatory guidance, the Company began making short-term loan modifications involving both partial and full payment deferrals in April 2020.

As of December 31, 2021, the Company has just one commercial real estate loan, in the principal amount of $3.5 million, with a payment modification that is still in effect, with such credit relationship making full interest payments.

The Company tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure.

As a result of the COVID-19 pandemic, the Company identified certain loan segments that represented higher levels of credit risk, as many of the customers in these segments were expected to incur significant negative impacts to their businesses as a result of governmental stay-at-home orders and travel restrictions, limited attendance, social distancing and face mask requirements, and work-from-home and hybrid work models being used by employers.

At December 31, 2021, the Company had the following exposure to these COVID-19-impacted loan segments:

Industry Segment

(dollars in thousands) Number of Loans Outstanding Balance % of Total Loans (excludes PPP Loans) % of Industry Segment Under Deferral

Lodging / Hotels 32 $ 113,381 3.8 % 3.1 %

Retail Shopping / Strip Centers 58 89,002 3.0 % — %

Restaurants 161 62,163 2.1 % — %

The Company maintains an allowance for credit losses to cover management's estimate of all expected credit losses over the expected contractual life of the loan portfolio.

Management estimates the required level of allowance for credit losses using past loan loss experience, information about specific borrower situations and estimated collateral values, along with reasonable and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and portfolio trends.

and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and portfolio trends.

Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio.

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Balance of Allowance for Possible Losses at Beginning of Period $ 46,859 $ 16,278 $ 15,823 $ 15,694 $ 14,808

$ 16,278 $ 15,823 $ 15,694 $ 14,808 $ 14,438

Impact of adopting ASC 326 — 8,767 — — —

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The Company’s allowance for credit losses totaled $37.0 million at December 31, 2021 compared to $46.9 million at December 31, 2020.

The allowance for credit losses represented 1.52% of period-end loans at December 31, 2020 compared with 0.53% of period-end loans at December 31, 2019.

Total PPP loans included in the Commercial and Industrial Loan category totaled $186.0 million at December 31, 2020.

These loans are guaranteed by the SBA and have minimal impact on the allowance for credit losses.

The Company adopted ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326) ("CECL") on January 1, 2020.

As a result, the Company recognized a one-time cumulative adjustment to the allowance for credit losses of $15.7 million.

The increase was primarily related to the Company's acquired loan portfolio which totaled approximately $851.1 million at the time of adoption.

The increase included $6.9 million in non-accretable credit marks allocated to purchased credit deteriorated loans which were grossed up between loans and the allowance for credit losses.

Under the CECL model, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses.

The allowance for credit losses represented 1.23% of period-end loans at December 31, 2021 compared with 1.52% of period-end loans at year-end 2020.

Under the CECL model, which was adopted by the Company on January 1, 2020, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses.

As of December 31, 2021, the Company held net discounts on acquired loans of $4.9 million.

In addition, the allowance for credit losses increased during 2020 as a result of the Company recording a $17.6 million provision for credit losses while recording net charge-offs of approximately $2.6 million.

The provision for credit losses was elevated during 2020 primarily due to the developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.

The allowance for credit losses declined during 2021 as a result of the Company recording a negative $6.5 million provision for credit losses while recording modest net charge-offs.

During 2020, the allowance for credit losses increased through elevated provision for credit losses primarily due to the developments during 2020 related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.

The Company realized net charge-offs of $3,342,000, or 0.11% of average loans outstanding during 2021 compared with net charge-offs of $2,622,000, or 0.08% of average loans outstanding during 2020 and $4,870,000, or 0.17% of average loans during 2019.

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Non-performing loans totaled $14.8 million, or 0.49% of total loans at December 31, 2021 compared with $21.5 million, or 0.70% of total loans at December 31, 2020 and $14.0 million, or 0.45% of total loans at December 31, 2019.

The decline in the level of commercial real estate non-performing loans during 2021 was largely attributable to the payoff of a commercial real estate credit in the lodging industry that was placed in non-accrual status during the third quarter of 2020.

The increase in the level of non-performing assets and non-performing loans at December 31, 2020 compared with year-end 2019 was largely attributable to the gross-up of purchased credit deteriorated loans upon the adoption of the CECL standard during 2020 and a commercial real estate credit in the lodging industry that was moved to non-performing status in the third quarter of 2020.

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For additional detail on individually analyzed loans, see Note 4 in the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

This discussion doesn't include loan modifications - see the SIGNIFICANT BUSINESS DEVELOPMENTS RELATING TO COVID-19 section as they do not meet this classification of a non-performing asset.

Interest income recognized on non-performing loans for 2021 was $630,000.

The gross interest income that would have been recognized in 2020 on non-performing loans if the loans had been current in accordance with their original terms was $1.2 million.

The gross interest income that would have been recognized in 2021 on non-performing loans if the loans had been current in accordance with their original terms was $891,000.

Loans are typically placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection.

11 unchanged sentences

Quantitative and Qualitative Disclosures About Market Risk section for further discussion regarding interest rate risk.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements other than stand-by letters of credit as disclosed in Note 14 (Commitments and Off-balance Sheet Items) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis