What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-17 compared with 2021-02-18 · 170 added, 229 removed, 1558 unchanged (20% of the section changed)

Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

Reports of BKD, LLP, Independent Registered Public Accounting Firm ( BKD, LLP , Fort Wayne, Indiana , Auditor Firm ID:

Consolidated Statements of Financial Condition

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates 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 matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

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

Allowance for Loan and Lease Losses

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The primary reason for our determination that the allowance for loan losses is a critical audit matter is that auditing the estimated allowance for loan losses involved significant judgment and high degree of subjectivity, due to the number of relevant assumptions and the nature of the qualitative factor adjustments.

Additionally, there was high level of complexity involved in the implementation of ASU No.

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

Measurement of Credit Losses on Financial Instruments .

Areas that contained subjectivity in evaluating management’s estimate, included evaluating management’s assessment of current and expected economic conditions and other environmental factors, evaluating assumptions utilized in determining cohort loss rates, probability of default and loss given default, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan grades.

Our audit procedures related to the estimated allowance for loan losses, both at initial adoption of ASU No.

2016-13 and at December 31, 2020, included:

Our audit procedures related to the estimated allowance for loan losses at December 31, 2021, included:

• Testing the design and operating effectiveness of internal controls, including those related to technology, over the ALLL, 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 ALLL balance as a whole including attending internal Company Credit Policy Committee meetings and Audit Committee discussions and analysis.

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Commercial and agricultural 918,712 1,186,118

Solar 348,302 292,604

Auto and light truck 603,775 542,369

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( 114,209 ) ( 82,240 )

Accumulated other comprehensive income 18,371 5,172

Accumulated other comprehensive (loss) income ( 9,861 ) 18,371

Total shareholders’ equity 916,255 886,845

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Net interest income 236,638 225,820 223,866

Provision for credit losses 36,001 15,833 19,462

(Recovery of) provision for credit losses* ( 4,303 ) 36,001 15,833

Net interest income after provision for credit losses 240,941 189,819 208,033

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Equipment rental 16,647 23,380 30,741

Gains (losses) on investment securities available-for-sale 279 — ( 345 )

(Losses) gains on investment securities available-for-sale ( 680 ) 279 —

Other 12,560 11,949 13,019

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Diluted net income per common share $ 4.70 $ 3.17 $ 3.57

* ASU 2016-13 adopted during 2020 therefore 2019 provision amount reflects the incurred method.

The accompanying notes are a part of the consolidated financial statements.

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Other comprehensive income (loss):

Unrealized appreciation (depreciation) of investment securities available-for-sale 17,666 20,875 ( 9,073 )

Reclassification adjustment for realized (gains) losses included in net income ( 279 ) — 345

Unrealized (depreciation) appreciation of investment securities available-for-sale ( 37,867 ) 17,666 20,875

Reclassification adjustment for realized losses (gains) included in net income 680 ( 279 ) —

Income tax effect 8,955 ( 4,188 ) ( 5,027 )

Other comprehensive income (loss), net of tax 13,199 15,848 ( 6,626 )

Other comprehensive (loss) income, net of tax ( 28,232 ) 13,199 15,848

Comprehensive income 90,325 94,660 107,863

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Net income — — 91,960 — — 91,960 55 92,015

Other comprehensive loss — — — — ( 6,626 ) ( 6,626 ) — ( 6,626 )

Other comprehensive income — — — — 15,848 15,848 — 15,848

Issuance of 51,533 common shares under

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Contributions from noncontrolling interests — — — — — — 18,934 18,934

Distributions to noncontrolling interests — — — — — — ( 138 ) ( 138 )

Balance at December 31, 2019 $ — $ 436,538 $ 463,269 $ ( 76,702 ) $ 5,172 $ 828,277 $ 20,359 $ 848,636

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Balance at December 31, 2020 $ — $ 436,538 $ 514,176 $ ( 82,240 ) $ 18,371 $ 886,845 $ 43,825 $ 930,670

Cumulative-effect adjustment — — ( 2,552 ) — — ( 2,552 ) — ( 2,552 )

Balance at January 1, 2020, adjusted — 436,538 460,717 ( 76,702 ) 5,172 825,725 20,359 846,084

Net income — — 118,534 — — 118,534 23 118,557

Other comprehensive income — — — — 13,199 13,199 — 13,199

Other comprehensive loss — — — — ( 28,232 ) ( 28,232 ) — ( 28,232 )

Issuance of 63,527 common shares under

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

Provision for credit losses 36,001 15,833 19,462

(Recovery of) provision for credit losses ( 4,303 ) 36,001 15,833

Depreciation of premises and equipment 5,093 5,673 5,786

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Amortization of mortgage servicing rights 2,117 2,361 1,312

Mortgage servicing rights impairments 812 — —

Mortgage servicing rights (recoveries) impairments ( 812 ) 812 —

Amortization of right of use assets 3,095 2,842 3,046

Deferred income taxes 15,396 ( 24,160 ) ( 5,730 )

(Gains) losses on investment securities available-for-sale ( 279 ) — 345

Losses (gains) on investment securities available-for-sale 680 ( 279 ) —

Originations of loans held for sale, net of principal collected ( 261,559 ) ( 330,990 ) ( 145,097 )

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1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services.

1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients in Indiana, Michigan and Florida.

1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients.

The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements.

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Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.

Effective Janaury 1, 2019, as part of the new leasing standard, only those costs incurred as a direct result of closing a lease transaction are capitalized.

All existing deferrals will continue to be amortized over the estimated life of the lease while all new incremental direct costs are expensed immediately.

Accrued interest is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition and is excluded from the calculation of the allowance for credit losses.

Effective January 1, 2019, as part of the new leasing standard, only those costs incurred as a direct result of closing a lease transaction are capitalized.

All existing deferrals will continue to be amortized over the estimated life of the lease while all new initial direct costs are expensed immediately.

Accrued interest is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition.

The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection.

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The Company chose to apply this relief to eligible loan and lease modifications.

At December 31, 2020, loan and lease modification balances related to the COVID-19 pandemic were $ 129 million.

At December 31, 2021 and December 31, 2020, loan and lease modification balances related to the COVID-19 pandemic were $ 0 million and $ 129 million, respectively.

The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights.

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These assets are amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received.

Gains and losses on the sale of MSRs are recognized in Noninterest Income on the Statements of Income in the period in which such rights are sold.

The balance of MSRs is located in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition and the gains and losses on the sale of MSRs are recognized in Noninterest Income on the Consolidated Statements of Income in the period in which such rights are sold.

MSRs are evaluated for impairment at each reporting date.

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To ensure that the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.

The Company categorizes its loan portfolios into eight segments based on similar risk characteristics.

The Company categorizes its loan portfolios into nine segments based on similar risk characteristics.

Loans within each segment are collectively evaluated using either:

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Forecast adjustments are added via basis points for the cohort methodology.

For the PD/LGD methodology, adjustments to the probability of default factor is applied through forecast adjustments to the PD factor used as the baseline transition matrix runout, thus impacting the historical loss ratio.

For the PD/LGD methodology, adjustments to the probability of default factor are applied through forecast adjustments to the PD factor used as the baseline transition matrix runout, thus impacting the historical loss ratio.

The Company developed its reasonable and supportable forecasts using relevant data including, but not limited to, growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation, and other factors associated with credit losses on the financial statements.

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Rent expense and variable lease costs are included in Net Occupancy Expense on the Consolidated Statements of Income.

Included in variable lease costs are leases with rent escalations based on recent financial indices, such as the Consumer Price Index, where the Company estimates future rent increases and records the actual difference to variable costs.

Included in variable lease costs are leases with rent escalations based on recent financial indices, such as the Consumer Price Index, where the Company initially measures lease payments using the index on the commencement date and records future changes in rent payments resulting from changes in the index to variable costs in the period the changes occur.

Certain leases require the Company to pay common area maintenance, real estate taxes, insurance and other operating expenses associated with the leases premises.

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During the first quarter of 2020, management determined that the deterioration in general economic conditions as a result of the COVID-19 pandemic and responses thereto represented a triggering event prompting an evaluation of goodwill impairment.

Based on the analyses performed each quarter of 2020, the Company determined that goodwill was no t impaired.

Partnership Investments — The partnerships in which the Company has investments account for their investments at fair value.

As a result, the Company’s investments in these partnerships reflect the underlying fair value of the partnerships’ investments.

The Company accounts for its investments in partnerships for which it owns three percent or more of the partnership on the equity method.

The Company accounts for its investments in partnerships of which it owns less than three percent at fair value less impairment.

The Company performed impairment analyses in each quarter of 2020.

In 2021, management determined conditions no longer represented a triggering event requiring quarterly analyses and returned to its historical practice of evaluating goodwill during the fourth quarter of the year.

Based on the analyses performed each quarter of 2020 and the fourth quarter of 2021, the Company determined that goodwill was no t impaired.

Partnership Investments — The Company accounts for its investments in partnerships for which it owns less than fifty percent and has the ability to exercise significant influence over the partnership on the equity method.

The Company accounts for its investments in partnerships for which it does not have the ability to exercise significant influence at fair value less impairment, if any or cost less any impairment if the fair value is not readily determinable.

The Company has elected to use the practical expedient to estimate fair value of an investment in an investment company using the net asset value of its partnership interest.

The Company uses the hypothetical liquidation book value (HLBV) method for equity investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership interests.

The HLBV method is commonly applied to equity investments in the renewable energy industry, where cash percentages vary at different points in time and are not directly linked to an investor’s ownership percentage.

The HLBV method is commonly applied to equity investments in the renewable energy industry, where the economic benefits corresponding to an equity investment may vary at different points in time and/or are not directly linked to an investor’s ownership percentage.

A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities.

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Interest and penalties on income tax uncertainties are classified within Income Tax Expense on the Consolidated Statements of Income.

Net Income Per Common Share — Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding.

Diluted earnings per common 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, stock warrants and nonvested stock-based compensation awards.

Net Income Per Common Share — Earnings per share is computed using the two-class method.

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, excluding participating securities.

Diluted earnings per common share is computed by using the weighted-average number of shares determined for the basic earnings per share calculation plus the dilutive effect of stock compensation using the treasure stock method.

Stock-Based Employee Compensation — The Company recognizes stock-based compensation as compensation cost on the Consolidated Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of grant.

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Note 2 — Recent Accounting Pronouncements

Nonrefundable Fees and Other Costs:

In October 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2020-08 “Codification Improvements to Subtopic 310-20, Receivables–Nonrefundable Fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period.

The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early application is not permitted.

All entities should apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities.

The Company adopted ASU 2020-08 as of January 1, 2021 and it did not have a material impact on its accounting and disclosures.

Presentation of Financial Statements:

In August 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2021-06 “Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946):

Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.” This ASU amends the SEC sections of the Codification related to Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update to Statistical Disclosures for Bank and Savings and Loan Registrants.

The guidance is effective upon its addition to the FASB codification.

The adoption of ASU 2021-06 did not have a material impact on its disclosures.

Reference Rate Reform:

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The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

The Company is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR.

The Company is continuing to assess ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

Partnership Investments and Derivatives:

In January 2020, the FASB issued ASU No.

2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” These amendments, among other things, clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

The amendments also clarify that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early application is permitted, including early adoption in an interim period.

An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date.

The Company adopted ASU 2020-01 on January 1, 2021 and it did not have a material impact on its accounting and disclosures.

Income Taxes:

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.” These amendments remove specific exceptions to the general principles in Topic 740 in GAAP.

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

exception to the incremental approach for intraperiod tax allocation;

exceptions to accounting for basis differences where there are ownership changes in foreign investments;

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

It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for:

franchise taxes that are partially based on income;

transactions with a government that result in a step up in the tax basis of goodwill;

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

and enacts changes in tax laws in interim periods.

The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted.

The Company adopted ASU 2019-12 on January 1, 2021 and it did not have a material impact on its accounting and disclosures.

Measurement of Credit Losses on Financial Instruments:

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments (CECL).” The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date.

ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.

The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses.

The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

The FASB issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original ASU.

These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019), ASU 2019-10 (issued November 2019), ASU 2019-11 (issued November 2019), ASU 2020-02 (issued February 2020) and ASU 2020-03 (issued March 2020).

ASU 2016-13 and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

This amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective.

As previously disclosed, the Company formed a cross-functional team to work through its implementation plan.

The Company’s cross-functional team completed the assessment and documentation of processes, internal controls, data and model validation testing, parallel testing, qualitative factors and forecast periods as well as model development.

The Company implemented a third-party software solution to assist in the application of the new standard including portfolio segmentation according to shared risk characteristics and modeling methodologies.

The Company had finalized the formal review and approval process and the results of its CECL estimate as of year-end 2019 but elected to delay its adoption of ASU 2016-13, as approved by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, until December 31, 2020.

Upon adoption of ASU 2016-13, the Company recognized a one-time cumulative effect adjustment decreasing retained earnings as of January 1, 2020 by $ 2.55 million, net of deferred taxes of $ 0.81 million.

Upon adopting ASU 2016-13, the Company did not record an allowance as of January 1, 2020 with respect to its available-for-sale debt securities as the majority of these securities are government agency-backed securities for which the risk of loss is minimal.

The adoption of ASU 2016-13 did not have a significant impact on the Company’s regulatory capital ratios.

The accounting policies stated in Note 1 relating to the allowance for credit losses on available-for-sale investment securities, loans and leases and unfunded loan commitments reflect the current accounting policies required by ASU 2016-13.

Disclosures relating to prior year accounting policies can be found in the 2019 Annual Report on Form 10 - K .

The main drivers of the adjustment to retained earnings are summarized in the following table.

(Dollar in thousands) Pre-ASC 326 Adoption

December 31, 2019 Impact of ASC 326

Adoption As Reported Under

January 1, 2020

Allowance for credit losses

Commercial and agricultural $ 23,671 $ ( 655 ) $ 23,016

Auto and light truck 14,400 ( 1,303 ) 13,097

Medium and heavy duty truck 4,612 2,414 7,026

Aircraft 31,058 484 31,542

Construction equipment 14,120 372 14,492

Commercial real estate 18,350 ( 649 ) 17,701

Residential real estate and home equity 3,609 1,688 5,297

Consumer 1,434 233 1,667

Total allowance for credit losses on loans and leases 111,254 2,584 113,838

Accrued expenses and other liabilities (unfunded loan commitments) 3,172 777 3,949

Total allowance for credit losses $ 114,426 $ 3,361 $ 117,787

The Company continues to implement its transition plan towards cessation of LIBOR and the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR.

The Company expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and ASU 2021-01, as applicable, and does not expect such adoption to have a material impact on its accounting and disclosures.

The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.

Note 3 — Investment Securities Available-For-Sale

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The unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.

The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable equity securities.

The following table shows the gross realized gains and losses from the available-for-sale debt securities portfolio.

Realized gains and losses of all securities are computed using the specific identification cost basis.

(Dollars in thousands) 2021 2020 2019

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Gross realized losses ( 901 ) ( 6 ) —

Net realized gains (losses) $ 279 $ — $ ( 345 )

Net realized (losses) gains $ ( 680 ) $ 279 $ —

At December 31, 2021 and 2020, investment securities with carrying values of $ 351.13 million and $ 338.68 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.

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At December 31, 2021 and 2020, net deferred loan and lease (fees) costs were $( 0.09 ) million and $( 3.73 ) million, respectively.

At December 31, 2020, there were $ 6.37 million in deferred loan fees related to Paycheck Protection Program (PPP) loans.

At December 31, 2021 and 2020, there were $ 2.71 million and $ 6.37 million, respectively, in deferred loan fees related to Paycheck Protection Program (PPP) loans.

Accrued interest receivable on loans and leases at December 31, 2021 and 2020 was $ 12.94 million and $ 16.39 million, respectively.

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Risk mitigants include appropriate underwriting and monitoring and, when appropriate, government guarantees, including SBA and FSA.

This portfolio sector also includes solar loans which are not local market credits, and PPP loans, which are fully guaranteed by the SBA.

Total PPP loan originations during 2020 amounted to $ 597.45 million.

As of December 31, 2020, PPP loan balances were $ 351.56 million which is net of an unearned discount of $ 6.37 million.

This portfolio sector also includes PPP loans, which are fully guaranteed by the SBA.

Total PPP loan originations during 2021 and 2020 amounted to $ 261.46 million and $ 597.45 million, respectively.

As of December 31, 2021 and 2020, PPP loan balances were $ 73.08 million and $ 351.56 million, respectively, which is net of an unearned discount of $ 2.71 million and $ 6.37 million, respectively.

Solar – loans are for the purpose of financing solar related projects and may include construction draw notes, operating loans, letters of credit and may entail a tax equity structure.

Collateral in a multi-state area includes tangible assets of the borrower, assignment of intangible assets including power purchase agreements, and pledges of permits and licenses.

Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains.

Auto and light truck – loans are secured by vehicles and borrowers are nationwide.

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Risks in both these segments include economic risks and collateral risks, principally used vehicle values.

The bus segment is secured primarily by shuttle busses and motor coaches.

Specialty vehicle loans are also of longer duration, generally six years but up to 104 months for new motor coaches.

The bus segment is secured primarily by shuttle buses and motor coaches, the step van segment is secured by step vans and the funeral car segment is secured by hearses and limousines.

Risks include lack of well-established mechanisms for disposition of collateral, such as auctions that are key to disposition of autos.

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Total commercial and agricultural 238,194 124,141 64,411 57,604 34,549 20,668 379,145 — 918,712

Grades 1-6 159,244 42,073 81,593 18,979 34,889 3,780 — — $ 340,558

Grades 7-12 — 1,138 5,882 724 — — — — 7,744

Total Solar 159,244 43,211 87,475 19,703 34,889 3,780 — — 348,302

Auto and light truck

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Total consumer $ 58,903 $ 24,414 $ 17,074 $ 8,314 $ 2,296 $ 701 $ 21,378 $ — $ 133,080

The following table shows the amortized cost of loans and leases, segregated by portfolio segment, with delinquency aging and nonaccrual status.

(Dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due and Accruing Total Accruing Loans Nonaccrual Total Financing Receivables

December 31, 2020

The following table shows the amortized cost of loans and leases, segregated by portfolio segment, credit quality rating and year of origination as of December 31, 2020.

Term Loans and Leases by Origination Year

(Dollars in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Revolving Loans Converted to Term Total

Commercial and agricultural

Grades 1-6 $ 525,816 $ 103,120 $ 114,251 $ 56,007 $ 22,023 $ 19,790 $ 291,990 $ — $ 1,132,997

Grades 7-12 6,788 1,699 4,726 3,507 1,200 2,134 33,067 — 53,121

Total commercial and agricultural 532,604 104,819 118,977 59,514 23,223 21,924 325,057 — 1,186,118

Grades 1-6 141,089 90,435 20,160 36,909 4,011 — — — $ 292,604

Grades 7-12 — — — — — — — — —

Total Solar 141,089 90,435 20,160 36,909 4,011 — — — 292,604

Auto and light truck

Grades 1-6 248,932 141,841 52,749 24,101 4,210 608 — — 472,441

Grades 7-12 19,113 27,136 12,796 8,612 2,250 21 — — 69,928

Total auto and light truck 268,045 168,977 65,545 32,713 6,460 629 — — 542,369

Medium and heavy duty truck

Aircraft 860,632 — — — 860,632 828 861,460

Grades 1-6 92,698 88,314 44,205 31,773 15,644 4,840 — — 277,474

Grades 7-12 — 978 — — 632 88 — — 1,698

Total medium and heavy duty truck 92,698 89,292 44,205 31,773 16,276 4,928 — — 279,172

Grades 1-6 429,283 153,358 93,042 95,457 43,972 20,966 6,370 — 842,448

Grades 7-12 11,519 2,561 479 596 2,187 1,670 — — 19,012

Total aircraft 440,802 155,919 93,521 96,053 46,159 22,636 6,370 — 861,460

Construction equipment

Grades 1-6 311,174 180,550 96,320 42,713 12,624 5,722 17,502 737 667,342

Grades 7-12 17,518 13,743 10,642 398 237 85 2,988 1,935 47,546

Total construction equipment 328,692 194,293 106,962 43,111 12,861 5,807 20,490 2,672 714,888

Commercial real estate

Grades 1-6 190,725 204,477 173,847 175,009 69,022 122,762 373 — 936,215

Grades 7-12 9,518 7,990 5,173 6,684 1,762 2,522 — — 33,649

Total commercial real estate 200,243 212,467 179,020 181,693 70,784 125,284 373 — 969,864

Residential real estate and home equity

508,532 782 239 108 509,661 1,718 511,379

Consumer 130,458 504 101 7 131,070 377 131,447

Total $ 5,424,982 $ 2,973 $ 843 $ 115 $ 5,428,913 $ 60,388 $ 5,489,301

Performing 133,829 65,690 18,194 22,929 41,847 86,106 135,255 5,703 509,553

Nonperforming — — 21 14 — 1,435 247 109 1,826

Total residential real estate and home equity 133,829 65,690 18,215 22,943 41,847 87,541 135,502 5,812 511,379

Performing 43,824 34,409 18,904 7,005 2,259 793 23,869 — 131,063

Nonperforming 2 99 78 36 8 2 159 — 384

Total consumer $ 43,826 $ 34,508 $ 18,982 $ 7,041 $ 2,267 $ 795 $ 24,028 $ — $ 131,447

The following table shows the amortized cost of loans and leases, segregated by portfolio segment, with delinquency aging and nonaccrual status.

(Dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due and Accruing Total Accruing Loans Nonaccrual Total Financing Receivables

December 31, 2021

Commercial and agricultural $ 916,659 $ — $ — $ — $ 916,659 $ 2,053 $ 918,712

Solar 348,302 — — — 348,302 — 348,302

Auto and light truck 579,605 — — — 579,605 24,170 603,775

4 unchanged sentences

Residential real estate and home equity 498,854 212 54 245 499,365 1,225 500,590

528,844 561 152 257 529,814 2,189 532,003

Consumer 132,464 332 30 4 132,830 250 133,080

Total $ 5,301,658 $ 2,987 $ 2,614 $ 249 $ 5,307,508 $ 38,706 $ 5,346,214

Interest income for the years ended December 31, 2020, 2019, and 2018, would have increased by approximately $ 3.49 million, $ 0.69 million, and $ 2.18 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

The following table shows impaired loans and leases, segregated by portfolio segment, and the corresponding allowance for impaired loans and leases.

(Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance

December 31, 2020

With no related allowance recorded:

Commercial and agricultural $ 1,180,151 $ 34 $ — $ — $ 1,180,185 $ 5,933 $ 1,186,118

Auto and light truck 853 853 —

Medium and heavy duty truck 1,074 1,074 —

Aircraft 875 875 —

Construction equipment 615 615 —

Commercial real estate 1,487 1,487 —

Residential real estate and home equity — — —

Consumer — — —

Total with no related allowance recorded 5,122 5,122 —

With an allowance recorded:

Commercial and agricultural 10,366 10,366 3,003

Solar 292,604 — — — 292,604 — 292,604

Auto and light truck 504,659 560 205 — 505,424 36,945 542,369

4 unchanged sentences

Residential real estate and home equity

508,532 782 239 108 509,661 1,718 511,379

Consumer 130,458 504 101 7 131,070 377 131,447

Total with an allowance recorded 11,717 11,719 3,225

Total impaired loans $ 16,839 $ 16,841 $ 3,225

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by portfolio segment, for the years ending December 31, 2019 and 2018.

Total $ 5,424,982 $ 2,973 $ 843 $ 115 $ 5,428,913 $ 60,388 $ 5,489,301

Interest income for the years ended December 31, 2021, 2020, and 2019, would have increased by approximately $ 2.62 million, $ 3.49 million, and $ 0.69 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by portfolio segment, for the year ending December 31, 2019.

(Dollars in thousands) Average

Investment Interest

Income Average

Investment Interest

Commercial and agricultural $ 5,983 $ 242

12 unchanged sentences

The TDRs during 2020 were the result of issues that predated the COVID-19 pandemic.

There were two modifications during 2020, one modification during 2019, and no modifications during 2018 that resulted in an interest rate reduction below market rate.

There was one modification during 2021, two modification during 2020, and one modification during 2019 that resulted in an interest rate reduction below market rate.

Consequently, the financial impact of the modifications was immaterial.

3 unchanged sentences

Commercial and agricultural — $ — — $ — 1 $ 9,901

Solar — — — — — —

Auto and light truck — — — — — —

8 unchanged sentences

Commercial and agricultural — — — — 1 465

Solar — — — — — —

Auto and light truck — — — — — —

7 unchanged sentences

Total TDR modifications 1 $ 5,729 2 $ 10,733 2 $ 10,366

There was one nonperforming commercial and agricultural TDR with a recorded investment of $ 0.41 million which had a payment default within the twelve months following modification for the year ended December 31, 2020, one nonperforming auto and light truck TDR with a recorded investment of $ 0.00 million which had a payment default within the twelve months following modification for the year ended December 31, 2019, and no TDRs which had a payment default within the twelve months following modification during the year ended December 31, 2018.

There were no TDRs which had payment defaults within the twelve months following modification for the year ended December 31, 2021, one nonperforming commercial and agriculture TDR with a recorded investment of $ 0.41 million which had a payment default within the twelve months following modification for the year ended December 31, 2020, and one nonperforming auto and light truck TDR with a recorded investment of $ 0.00 million which had a payment default within the twelve months following modification during the year ended December 31, 2019.

The classification between nonperforming and performing is shown at the time of modification.

7 unchanged sentences

Allowance for Loan and Lease Losses

The methodology used to estimate the appropriate level of the allowance for loan and lease losses is described in Note 1, under the heading “Allowance for Credit Losses.” The allowance for loan and lease losses at December 31, 2020, represents the Company’s current estimate of lifetime credit losses inherent in the loan and lease portfolio.

The methodology used to estimate the appropriate level of the allowance for loan and lease losses is described in Note 1, under the heading “Allowance for Credit Losses.” The allowance for loan and lease losses at December 31, 2021 and 2020, represents the Company’s current estimate of lifetime credit losses inherent in the loan and lease portfolio.

The following table shows the changes in the allowance for loan and lease losses, segregated by portfolio segment, for each of the three years ended December 31.

(Dollars in thousands) Commercial and agricultural Auto and light truck Medium and heavy duty truck Aircraft Construction equipment Commercial real estate Residential real estate and home equity Consumer Total

(Dollars in thousands) Commercial and agricultural Solar Auto and light truck Medium

heavy duty truck Aircraft Construction equipment Commercial real estate Residential real estate and home equity Consumer Total

Balance, beginning of year $ 16,680 $ 5,549 $ 28,926 $ 6,400 $ 34,053 $ 19,166 $ 22,758 $ 5,374 $ 1,748 $ 140,654

Impact of ASC 326 adoption ( 655 ) ( 1,303 ) 2,414 484 372 ( 649 ) 1,688 233 2,584

Adjusted balance, beginning of year 23,016 13,097 7,026 31,542 14,492 17,701 5,297 1,667 113,838

Charge-offs 2,930 — 7,797 — — 856 — 228 712 12,523

Recoveries 812 — 1,316 — 687 473 19 16 341 3,664

Net charge-offs 240 6,608 ( 3 ) ( 945 ) 2,675 ( 21 ) 41 590 9,185

Net charge-offs (recoveries) 2,118 — 6,481 — ( 687 ) 383 ( 19 ) 212 371 8,859

Provision (recovery of provision) 847 1,036 ( 2,821 ) ( 385 ) ( 1,112 ) 890 ( 3,086 ) ( 78 ) 406 ( 4,303 )

1 unchanged sentence

Balance, beginning of year $ 20,926 $ 2,745 $ 14,400 $ 4,612 $ 31,058 $ 14,120 $ 18,350 $ 3,609 $ 1,434 $ 111,254

Impact of ASC 326 adoption ( 939 ) 284 ( 1,303 ) 2,414 484 372 ( 649 ) 1,688 233 2,584

Adjusted balance, beginning of year 19,987 3,029 13,097 7,026 31,542 14,492 17,701 5,297 1,667 113,838

Charge-offs 903 — 7,107 15 855 4,090 37 74 893 13,974

9 unchanged sentences

Balance, end of year $ 20,926 $ 2,745 $ 14,400 $ 4,612 $ 31,058 $ 14,120 $ 18,350 $ 3,609 $ 1,434 $ 111,254

The allowance for loan and lease losses increased year-over-year in 2020 for most portfolio segments due to downward migration in credit quality and increased risk as a result of the pandemic.

The impact of adopting ASC 326 is also noted for each loan segment.

The allowance for loan and lease losses decreased year-over-year in 2021 for most portfolio segments due to improvements in credit quality, attributable in large part to government stimulus payments which provided much needed relief to our customers during the pandemic.

The 2020 allowance includes the impact of adopting ASC 326 for each loan segment.

Generally, a decrease in the allowance upon adoption was related to shorter duration assets in the loan class and likewise, an increase was generally due to longer duration assets.

Commercial and agricultural – loan growth was due primarily to PPP loans which have minimal credit risk.

The decline in the allowance was principally due to the impact of the short duration lines of credit driving lower reserves and minimal reserves for PPP loans.

Auto and light truck – allowance increased as a result of the significant impact the pandemic had on the portfolio, which includes the particularly hard-hit bus industry.

The increase related to credit deterioration was somewhat offset by a lower allowance for the auto rental industry due to the short average duration of the loans.

Loan balances declined somewhat year-over-year.

Medium and heavy duty truck – allowance decrease was principally attributable to credit quality metrics continuing to be relatively strong therefore a recovery of provision was recognized during the period.

Aircraft – the allowance was principally impacted by loan growth.

The Company has historically carried a higher allowance in this portfolio due to volatility.

The higher allowance during the period was due to charge-offs impacting the loss history and the long duration assets.

Construction equipment – allowance increase was mainly driven by exposure to mining and frac sand industries.

While the total Company exposure is limited, the impact of lower oil prices on this portfolio was relevant.

Commercial real estate – allowance increase was a result of loan growth and exposure to industries hardest hit by the pandemic, i.e.

hotels and accommodations and, to a lesser extent, retail and office buildings.

The Company’s exposure to these industries is limited, but the impact was noticeable in this asset class.

Residential real estate and home equity – increased allowance as a result of longer asset duration.

Consumer – segment saw an increase in allowance due to portfolio mix and duration.

Commercial and agricultural – loans declined year-over-year due to PPP debt forgiveness partially offset by modest loan growth in our core businesses.

The decline in the allowance was principally due to improved credit quality as reflected by lower special attention loan balances.

Solar – allowance increased due to loan growth.

Credit quality is stable to improving.

Auto and light truck – allowance decreased as a result of charge-offs and lower outstanding loan balances in the higher risk bus segment of the portfolio, which was significantly impacted by the pandemic.

The decline in balances in the bus segment was more than offset by increases in the auto rental and leasing segments, which carry lower loss ratios.

Medium and heavy duty truck – allowance decrease was principally attributable to a decrease in portfolio outstanding balances.

Credit quality metrics continued to be relatively strong for this portfolio.

Aircraft – the allowance was principally impacted by improved credit quality metrics and strengthening collateral values somewhat offset by loan growth and heightened economic concerns related to foreign loans.

The Company has historically carried a higher allowance in this portfolio due to risk volatility.

Construction equipment – allowance increase was driven by loan growth.

Commercial real estate – allowance decrease was a result of declines in outstanding loan balances and also qualitative adjustments to the loss ratios for the hotel segment which was hard hit by the pandemic but is currently performing better than anticipated.

Residential real estate and home equity – decreased allowance due to decline in loan balances.

Consumer – segment saw an increase in allowance due to forecast adjustments and slight loan growth.

Economic Outlook

As of December 31, 2020, the COVID-19 pandemic created extraordinary circumstances affecting the loan and lease portfolios.

The forecast considers global and domestic economic effects from the ongoing pandemic as well as the potential impact of U.S.

monetary and fiscal policy, including the recently passed Coronavirus Response and Relief Supplemental Appropriations Act, which may impact clients;

particularly those who will benefit from a second round of paycheck protection program funds or targeted funds for struggling industry sectors such as transportation.

The Company’s assumption was that the economic slowdown will have an adverse impact on the loan and lease portfolio over the next two years.

GDP is expected to grow throughout 2021 but is not expected to return to pre-pandemic levels until 2022.

Likewise, unemployment is not likely to get back to pre-shutdown levels until 2022.

As of December 31, 2021, the most significant economic factors impacting our loan portfolios are the pandemic and the Omicron COVID variant surge, ongoing supply chain disruptions, and increasing inflation.

The forecast considers global and domestic economic effects from the pandemic as well as other key economic factors such as unemployment and inflation which may impact our clients.

The Company’s assumption was that economic growth will slow in 2022 and 2023 and inflation will remain above the 2% Federal Reserve target rate resulting in an adverse impact on the loan and lease portfolio over the next two years.

As a result of the unprecedented economic uncertainty caused by the COVID-19 pandemic, the Company’s future loss estimates may vary considerably from the December 31, 2021 assumptions.

6 unchanged sentences

Adjusted balance, beginning of year 4,499 3,949 3,075

Provision (recovery of provision) 550 97 25

(Recovery of) provision ( 303 ) 550 97

Balance, end of year $ 4,196 $ 4,499 $ 3,172

Note 6 — Lease Investments

As a lessor, the Company’s loan and lease portfolio includes direct finance leases, which are included in commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Consolidated Statements of Financial Condition.

As a lessor, the Company’s loan and lease portfolio includes direct finance leases, which are included in Commercial and agricultural, Solar, Auto and light truck, Medium and heavy duty truck, Aircraft, and Construction equipment on the Consolidated Statements of Financial Condition.

The Company also finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases, which are included in Equipment Owned Under Operating Leases, net, on the Consolidated Statements of Financial Condition.

32 unchanged sentences

Depreciation expense 13,694 20,203 25,128

Income related to reimbursements from lessees for personal property tax on operating leased equipment for the years ended December 31, 2020 and December 31, 2019 were $ 0.61 million and $ 0.73 million.

respectively.

Expense related to personal property tax payments on operating leased equipment for the year ended December 31, 2020 and December 31, 2019 were $ 0.61 million and $ 0.73 million, respectively.

During the year ended December 31, 2020, the Company recorded impairment charges of $ 0.68 million.

The impairment charges were recorded as a result of the annual review of operating lease residual values and was recognized in Depreciation - Leased Equipment on the Consolidated Statements of Income.

Income related to reimbursements from lessees for personal property tax on operating leased equipment for the years ended December 31, 2021, 2020 and 2019 were $ 0.46 million, $ 0.61 million and $ 0.73 million, respectively.

Expense related to personal property tax payments on operating leased equipment for the year ended December 31, 2021, 2020 and 2019 were $ 0.46 million, $ 0.61 million and $ 0.73 million, respectively.

During the year ended December 31, 2021, the Company did not record any impairment charges.

Impairment charges, if any, are recorded as a result of the annual review of operating lease residual values and are recognized in Depreciation - Leased Equipment on the Consolidated Statements of Income.

Note 7 — Premises and Equipment

8 unchanged sentences

Depreciation and amortization of properties and equipment totaled $ 5.09 million in 2021, $ 5.67 million in 2020, and $ 5.79 million in 2019.

During 2020, 2019 and 2018, the Company recorded long-lived asset impairment charges totaling zero , zero and $ 100,000 , respectively.

The impairment charges were recorded as a result of appraisals on buildings and were recognized in Other Expense on the Consolidated Statements of Income.

Note 8 — Mortgage Servicing Rights

11 unchanged sentences

Balance at beginning of year ( 812 ) —

Impairment charges ( 812 ) —

Impairment recoveries (charges) 812 ( 812 )

Balance at end of year $ — $ ( 812 )

39 unchanged sentences

Total long-term debt and mandatorily redeemable securities $ 71,251 $ 81,864

Annual maturities of long-term debt outstanding at December 31, 2020, for the next five years and thereafter beginning in 2021, are as follows (in thousands):

and $ 60,485 .

Annual maturities of long-term debt outstanding at December 31, 2021, for the next five years and thereafter beginning in 2022, are as follows:

$ 5.29 million;

$ 2.51 million;

$ 11.65 million;

$ 0.61 million;

$ 10.50 million;

and $ 40.69 million.

At December 31, 2021, the Federal Home Loan Bank borrowings represented a source of funding for community economic development activities, agricultural loans and general funding for the bank and consisted of 16 fixed rate notes with maturities ranging from 2022 to 2030.

7 unchanged sentences

Federal funds purchased $ — — % $ — — %

Security repurchase agreements 143,564 0.08 120,459 0.23

Securities sold under agreements to repurchase 194,727 0.05 143,564 0.08

Commercial paper 3,967 0.04 4,766 0.13

54 unchanged sentences

Earnings per common share is computed using the two-class method.

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities.

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities.

Participating securities include non-vested restricted stock awards.

18 unchanged sentences

(Dollars in thousands) 2021 2020 Affected Line Item in the Statements of Income

Realized gains included in net income $ 279 $ — Gains (losses) on investment securities available-for-sale

Realized (losses) gains included in net income $ ( 680 ) $ 279 (Losses) gains on investment securities available-for-sale

( 680 ) 279 Income before income taxes

86 unchanged sentences

State 1,190 ( 2,295 ) ( 595 )

Deferred tax liability remeasurement — — ( 875 )

Total deferred 15,396 ( 24,160 ) ( 5,730 )

8 unchanged sentences

State taxes, net of federal income tax benefit 4,563 2.9 3,424 3.2 4,064 3.4

Deferred tax liability remeasurement — — — — ( 875 ) ( 0.8 )

Other ( 388 ) ( 0.2 ) ( 437 ) ( 0.4 ) ( 605 ) ( 0.5 )

Total $ 36,328 23.5 % $ 24,880 23.4 % $ 28,139 23.4 %

The tax expense related to gains (losses) on investment securities available-for-sale for the years 2020, 2019, and 2018 was approximately $ 67,000 , $ 0 , and $( 83,000 ), respectively.

The tax expense related to (losses) gains on investment securities available-for-sale for the years 2021, 2020, and 2019 was approximately $( 164,000 ), $ 67,000 , and $ 0 , respectively.

The following table shows the composition of deferred tax assets and liabilities as of December 31, 2021 and 2020.

6 unchanged sentences

Capitalized loan costs 15 893

Mortgage servicing 173 —

Net unrealized losses on securities available-for-sale 3,128 —

Other 1,015 851

6 unchanged sentences

Net unrealized gains on securities available-for-sale — 5,827

Mortgage servicing — 394

Capitalized loan costs — 1,207

Prepaid expenses 334 297

Other 713 634

2 unchanged sentences

No valuation allowance for deferred tax assets was recorded at December 31, 2021 and 2020 as the Company believes it is more likely than not that all of the deferred tax assets will be realized.

Additionally, the tax credit carryforward expires in 2040.

The following table shows a reconciliation of the beginning and ending amounts of unrecognized tax benefits.

(Dollars in thousands) 2020 2019 2018

Balance, beginning of year $ — $ — $ 1,112

Additions based on tax positions related to the current year — — —

Additions for tax positions of prior years — — —

Reductions for tax positions of prior years — — —

Reductions due to lapse in statute of limitations — — —

Settlements — — ( 1,112 )

Balance, end of year $ — $ — $ —

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was zero at December 31, 2020, 2019 and 2018.

Interest and penalties are recognized through the income tax provision.

For the years 2020, 2019 and 2018, the Company recognized approximately $ 0.00 million, $ 0.00 million and $( 0.09 ) million in interest, net of tax effect, and penalties, respectively.

There were no accrued interest and penalties at December 31, 2020, 2019 and 2018.

Additionally, the tax credit carryforward generated in 2020 was fully utilized in 2021.

Tax years that remain open and subject to audit include the federal 2018-2021 years and the Indiana 2018-2021 years.

Additionally, in 2018 the Company reached a state tax settlement for the 2015-2017 years and as a result, recorded a reduction of unrecognized tax benefits in the amount of $1.11 million.

The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.

The Tax Cuts and Jobs Act was enacted on December 22, 2017.

The Act reduced the U.S.

federal corporate tax rate from 35 % to 21 %.

At December 31, 2017, the Company had not fully completed its accounting for the tax effects of enactment of the Act and recorded a provisional benefit of $ 2.61 million which is included as a component of Income Tax Expense on the Consolidated Statements of Income related to the remeasurement of its deferred tax balance.

During the third quarter of 2018, the Company completed its accounting for the provisional amounts recognized at December 31, 2017 and recorded an additional $0.88 million benefit as provided by the SEC’s Staff Accounting Bulletin No.

118 , Income Tax Accounting Implications of the Tax Cuts and Jobs Act .

Note 18 — Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk

15 unchanged sentences

Operating lease liabilities Accrued expenses and other liabilities $ 21,364 $ 23,688

During 2019, the Company amended the lease agreement for its corporate office building by extending the lease term which resulted in an increase to its operating lease right of use assets of $ 14.65 million and an increase to its operating lease liabilities of $ 14.64 million.

The following table shows the components of operating leases expense for the year ended December 31.

4 unchanged sentences

Total operating lease cost $ 3,500 $ 3,450 $ 3,528

Gross rental expense for the year ended December 31, 2018 was $ 3.73 million.

The following table shows future minimum rental commitments for all noncancellable operating leases with an initial term longer than 12 months for the next five years and thereafter.

6 unchanged sentences

(Dollars in thousands) 2021 2020 2019

Weighted average remaining lease term 10.17 years 10.88 years

Weighted average remaining lease term 9.31 years 10.17 years 10.88 years

Weighted average discount rate 1.75 % 1.80 % 2.83 %

149 unchanged sentences

• Other government-sponsored agency securities, mortgage-backed securities and some of the actively traded REMICs and CMOs, are primarily priced using available market information including benchmark yields, prepayment speeds, spreads and volatility of similar securities.

• Inactively traded government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.

• State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems.

1 unchanged sentence

Local direct placement municipal securities, with very little market activity, are priced using an appropriate market yield curve which incorporates a credit spread assumption.

Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued using a market value approach and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.

Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued by a third party pricing agent.

Prices supplied by the independent pricing agent, as well as their pricing methodologies, are reviewed by the Company for reasonableness and to ensure such prices are aligned with market values.

On a quarterly basis, prices supplied by the pricing agent are validated by comparison to the prices obtained from other third party sources.

Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters.

11 unchanged sentences

Corporate debt securities — 23,009 — 23,009

Foreign government securities — 700 — 700

Foreign government and other securities — 598 — 598

Total debt securities available-for-sale 561,950 1,299,242 1,849 1,863,041

10 unchanged sentences

Corporate debt securities — 42,369 — 42,369

Foreign government securities — 700 — 700

Foreign government and other securities — 700 — 700

Total debt securities available-for-sale 80,285 1,115,030 2,152 1,197,467

11 unchanged sentences

Included in other comprehensive income ( 15 )

Purchases 3,100

Settlements —

41 unchanged sentences

Collateral values are reviewed quarterly and estimated using customized discounting criteria, appraisals and dealer and trade magazine quotes which are used in a market valuation approach.

In accordance with fair value measurements, only impaired loans for which a allowance for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy.

In accordance with fair value measurements, only impaired loans for which an allowance for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy.

As a result, only a portion of the Company’s impaired loans are classified in the fair value hierarchy.

115 unchanged sentences

Dividends from bank subsidiary $ 46,207 $ 46,207 $ 46,735

Rental (reimbursements to) income from subsidiaries ( 908 ) 2,505 2,613

Rental income from (reimbursements to) subsidiaries 1,873 ( 908 ) 2,505

Other 146 293 366

Investment securities and other investment (losses) gains ( 44 ) 109 ( 180 )

Investment securities and other investment gains (losses) 342 ( 44 ) 109

Total income 48,568 45,548 49,715

23 unchanged sentences

Stock-based compensation 102 94 78

Realized/unrealized investment securities and other investment losses (gains) 44 ( 109 ) 180

Realized/unrealized investment securities and other investment (gains) losses ( 342 ) 44 ( 109 )

Other 1,556 ( 103 ) 533

18 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data