FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2021~~March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _______ to _______

~~Commission File Number 0-17071~~

FIRST MERCHANTS CORPORATION

(Exact name of registrant as specified in its charter)

~~Indiana 35-1544218~~

~~(State or other jurisdiction of (I.R.S.~~


Indiana
(State or other jurisdiction of incorporation)
001-41342			35-1544218
(Commission File Number)			(IRS Employer ~~incorporation or organization)~~ Identification No.)

200 East Jackson Street, Muncie, IN 47305-2814

(Address of principal executive offices) (Zip code)

(Registrant’s telephone number, including area code): (765) 747-1500

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.125 stated value per share	FRME	The Nasdaq ~~Global Select~~Stock Market LLC
Depositary Shares, each representing a 1/100th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series A	FRMEP	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 4, 2021,~~May 3, 2022, there were ~~54,163,660~~59,462,227 outstanding common shares of the registrant.

Table of Contents

TABLE OF CONTENTS

FIRST MERCHANTS CORPORATION


		Page No.
Glossary of Defined Terms		3

Part I. Financial Information
Item 1.	Financial Statements:
	Consolidated Condensed Balance Sheets	4
	Consolidated Condensed Statements of Income	5
	Consolidated Condensed Statements of Comprehensive Income (Loss)	6
	Consolidated Condensed Statements of Stockholders' Equity	7
	Consolidated Condensed Statements of Cash Flows	98
	Notes to Consolidated Condensed Financial Statements	109
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4236
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5950
Item 4.	Controls and Procedures	6051

Part II. Other Information
Item 1.	Legal Proceedings	6152
Item 1A.	Risk Factors	6152
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6152
Item 3.	Defaults Upon Senior Securities	6152
Item 4.	Mine Safety Disclosures	6152
Item 5.	Other Information	6152
Item 6.	Exhibits	6253

Signatures		6354

Table of Contents

GLOSSARY OF DEFINED TERMS

FIRST MERCHANTS CORPORATION




2021 CAA			The 2021 Consolidated Appropriations Act, signed into law on December 27, 2020, which included the Economic Aid to Hard-Hit-Small Businesses, Nonprofits, and Venues Act, amending the CARES Act.
ACL			Allowance for Credit Losses
Ameribor			The American interbank offered rate, a potential replacement for LIBOR, is a benchmark interest rate calculated as a volume-weighted average of the daily transactions in overnight unsecured loans on the American Financial Exchange, LLC, a self-regulated electronic exchange for direct lending by American banks and financial institutions.
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Bank			First Merchants Bank, a wholly-owned subsidiary of the Corporation
~~CAA~~			~~The 2021 Consolidated Appropriations Act, signed into law on December 27, 2020, which included the Economic Aid to Hard-Hit-Small Businesses, Nonprofits, and Venues Act, amending the CARES Act.~~
CARES Act			Coronavirus Aid, Relief and Economic Security Act
CECL			~~Current expected credit losses~~ FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, adopted by the Corporation on January 1, 2021.
CET1			Common Equity Tier 1




Corporation			First Merchants Corporation
COVID or COVID-19			2019 novel coronavirus disease, which was declared a pandemic by the World Health Organization on March 11, 2020.
~~Durbin Amendment~~			An amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires interchange fees for certain electronic debit transactions be “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
~~Economic Impact Payments~~			~~Economic stimulus payments of up to $1,200 per adult and $500 per child, subject to eligibility requirements and certain limitations, as established under the CARES Act and distributed by the IRS.~~
ESPP			Employee Stock Purchase Plan
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
FHLB			Federal Home Loan Bank
FOMC			Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System.
FTE			Fully taxable equivalent
GAAP			U.S. Generally Accepted Accounting Principles
Hoosier			Hoosier Trust Company, which was acquired by the Bank on April 1, 2021.
IRS			Internal Revenue Service



OREO			Other real estate owned
PPP			Paycheck Protection Program, which was established by the CARES Act and implemented by the Small Business Administration to provide small business loans.
~~PPPL Facility~~			Paycheck Protection Program Liquidity Facility, which was established by the Federal Reserve to provide funds to eligible financial institutions, such as the Bank, for purposes of making loans under the PPP.
RSA			Restricted Stock Awards

TEFRA			Tax Equity and Fiscal Responsibility Act

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

CONSOLIDATED CONDENSED BALANCE SHEETS

June 30,
2021 December 31,
2020
(Unaudited)
ASSETS
Cash and cash equivalents $ 167,596 $ 192,896
Interest-bearing deposits 438,863 392,305
Investment securities available for sale 2,426,900 1,919,119
Investment securities held to maturity, net of allowance for credit losses of $245 and $0 (fair value of $1,760,847 and $1,280,293) 1,721,414 1,227,668
Loans held for sale 18,582 3,966
Loans 9,121,250 9,243,174
Less: Allowance for credit losses - loans 1
(199,775) (130,648)
Net loans 8,921,475 9,112,526
Premises and equipment 103,822 111,062
Federal Home Loan Bank stock 28,736 28,736
Interest receivable 54,173 53,948
Goodwill 545,385 543,918
Other intangibles 28,401 28,975
Cash surrender value of life insurance 294,462 292,745
Other real estate owned 601 940
Tax asset, deferred and receivable 36,924 12,340
Other assets 135,763 146,066
TOTAL ASSETS $ 14,923,097 $ 14,067,210
LIABILITIES
Deposits:
Noninterest-bearing $ 2,479,853 $ 2,298,138
Interest-bearing 9,723,547 9,063,472
Total Deposits 12,203,400 11,361,610
Borrowings:
Securities sold under repurchase agreements 146,904 177,102
Federal Home Loan Bank advances 334,243 389,430
Subordinated debentures and other borrowings 118,498 118,380
Total Borrowings 599,645 684,912
Interest payable 2,929 3,287
Other liabilities 245,323 141,756
Total Liabilities 13,051,297 12,191,565
COMMITMENTS AND CONTINGENT LIABILITIES 0 0
STOCKHOLDERS' EQUITY
Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value:
Authorized - 600 shares
Issued and outstanding - 125 shares 125 125
Common Stock, $0.125 stated value:
Authorized - 100,000,000 shares
Issued and outstanding - 53,972,386 and 53,922,359 shares 6,747 6,740
Additional paid-in capital 1,009,182 1,005,366
Retained earnings 795,666 788,578
Accumulated other comprehensive income 60,080 74,836
Total Stockholders' Equity 1,871,800 1,875,645
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,923,097 $ 14,067,210

1 Beginning January 1, 2021, the amount is based on the current expected credit loss methodology. Prior to January 1, 2021, the amount is based on the incurred loss methodology. See additional details in NOTE 1. GENERAL of these Notes to Consolidated Condensed Financial Statement.


	March 31, 2022		December 31, 2021
	(Unaudited)
ASSETS
Cash and due from banks	$	148,277	$	167,146
Interest-bearing deposits	395,262		474,154
Investment securities available for sale	2,164,197		2,344,551
Investment securities held to maturity, net of allowance for credit losses of $245 and $245 (fair value of $2,145,994 and $2,202,503)	2,325,066		2,179,802
Loans held for sale	3,938		11,187
Loans	9,356,241		9,241,861
Less: Allowance for credit losses - loans	(195,984)		(195,397)
Net loans	9,160,257		9,046,464
Premises and equipment	105,883		105,655
Federal Home Loan Bank stock	26,422		28,736
Interest receivable	56,081		57,187

Goodwill	545,385		545,385
Other intangibles	24,109		25,475
Cash surrender value of life insurance	291,881		291,041
Other real estate owned	6,271		558
Tax asset, deferred and receivable	73,422		35,641
Other assets	138,807		140,167
TOTAL ASSETS	$	15,465,258	$	15,453,149
LIABILITIES
Deposits:
Noninterest-bearing	$	2,745,235	$	2,709,646
Interest-bearing	10,160,718		10,022,931
Total Deposits	12,905,953		12,732,577
Borrowings:

Securities sold under repurchase agreements	169,697		181,577
Federal Home Loan Bank advances	308,960		334,055
Subordinated debentures and other borrowings	118,677		118,618
Total Borrowings	597,334		634,250
Interest payable	3,589		2,762
Other liabilities	150,749		170,989
Total Liabilities	13,657,625		13,540,578
COMMITMENTS AND CONTINGENT LIABILITIES	0		0
STOCKHOLDERS' EQUITY




Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value:
Authorized - 600 shares
Issued and outstanding - 125 shares	125		125
Common Stock, $0.125 stated value:
Authorized - 100,000,000 shares
Issued and outstanding - 53,424,823 and 53,410,411 shares	6,678		6,676
Additional paid-in capital	987,404		985,818
Retained earnings	897,818		864,839
Accumulated other comprehensive income (loss)	(84,392)		55,113
Total Stockholders' Equity	1,807,633		1,912,571
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	15,465,258	$	15,453,149

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
INTEREST INCOME	INTEREST INCOME									INTEREST INCOME
Loans receivable:	Loans receivable:									Loans receivable:
Taxable	Taxable	$	87,002	$	87,312	$	172,107	$	183,964	Taxable	$	79,075	$	85,105
Tax exempt	Tax exempt	5,545		5,359		10,884		10,674		Tax exempt	5,704		5,339
Investment securities:	Investment securities:									Investment securities:
Taxable	Taxable	7,440		6,147		14,135		13,778		Taxable	8,510		6,695
Tax exempt	Tax exempt	13,071		10,019		25,456		19,354		Tax exempt	15,875		12,385

Deposits with financial institutions	Deposits with financial institutions	129		134		243		709		Deposits with financial institutions	230		114
Federal Home Loan Bank stock	Federal Home Loan Bank stock	88		281		266		580		Federal Home Loan Bank stock	146		178
Total Interest Income	Total Interest Income	113,275		109,252		223,091		229,059		Total Interest Income	109,540		109,816
INTEREST EXPENSE	INTEREST EXPENSE									INTEREST EXPENSE
Deposits	Deposits	5,823		12,707		12,023		34,455		Deposits	4,294		6,200
Federal funds purchased	Federal funds purchased	2		2		4		113		Federal funds purchased	—		2
Securities sold under repurchase agreements	Securities sold under repurchase agreements	75		92		162		444		Securities sold under repurchase agreements	89		87
Federal Home Loan Bank advances	Federal Home Loan Bank advances	1,452		1,794		2,894		3,568		Federal Home Loan Bank advances	1,218		1,442
Subordinated debentures and other borrowings	Subordinated debentures and other borrowings	1,659		1,639		3,316		3,584		Subordinated debentures and other borrowings	1,659		1,657
Total Interest Expense	Total Interest Expense	9,011		16,234		18,399		42,164		Total Interest Expense	7,260		9,388
NET INTEREST INCOME	NET INTEREST INCOME	104,264		93,018		204,692		186,895		NET INTEREST INCOME	102,280		100,428
Provision for credit losses - loans	Provision for credit losses - loans	0		21,895		0		41,647		Provision for credit losses - loans	—		—
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	104,264		71,123		204,692		145,248		NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	102,280		100,428
OTHER INCOME	OTHER INCOME									OTHER INCOME
Service charges on deposit accounts	Service charges on deposit accounts	5,596		4,312		10,860		10,282		Service charges on deposit accounts	6,419		5,264
Fiduciary and wealth management fees	Fiduciary and wealth management fees	7,510		5,601		13,932		11,586		Fiduciary and wealth management fees	7,332		6,422
Card payment fees	Card payment fees	4,159		6,097		8,526		12,004		Card payment fees	5,723		4,367
Net gains and fees on sales of loans	Net gains and fees on sales of loans	8,325		3,674		12,311		7,037		Net gains and fees on sales of loans	2,199		3,986
Derivative hedge fees	Derivative hedge fees	943		1,042		1,260		2,981		Derivative hedge fees	918		317
Other customer fees	Other customer fees	368		333		736		731		Other customer fees	410		368
Increase in cash surrender value of life insurance	Increase in cash surrender value of life insurance	1,205		1,231		2,394		2,591		Increase in cash surrender value of life insurance	1,176		1,189
Gains on life insurance benefits	Gains on life insurance benefits	0		95		147		95		Gains on life insurance benefits	520		147
Net realized gains on sales of available for sale securities	Net realized gains on sales of available for sale securities	1,761		3,068		3,560		7,680		Net realized gains on sales of available for sale securities	566		1,799
Other income	Other income	1,017		1,028		1,249		1,293		Other income	634		232
Total Other Income	Total Other Income	30,884		26,481		54,975		56,280		Total Other Income	25,897		24,091
OTHER EXPENSES	OTHER EXPENSES									OTHER EXPENSES
Salaries and employee benefits	Salaries and employee benefits	42,438		35,698		81,249		74,941		Salaries and employee benefits	42,519		38,811
Net occupancy	Net occupancy	5,615		5,447		12,106		11,248		Net occupancy	6,187		6,491
Equipment	Equipment	4,848		4,489		9,878		8,833		Equipment	5,080		5,030
Marketing	Marketing	1,122		2,092		2,246		3,535		Marketing	736		1,124
Outside data processing fees	Outside data processing fees	4,698		2,618		8,942		6,817		Outside data processing fees	4,363		4,244
Printing and office supplies	Printing and office supplies	313		279		596		666		Printing and office supplies	345		283
Intangible asset amortization	Intangible asset amortization	1,464		1,511		2,821		3,025		Intangible asset amortization	1,366		1,357
FDIC assessments	FDIC assessments	1,461		1,472		2,829		2,995		FDIC assessments	2,192		1,368
Other real estate owned and foreclosure expenses	Other real estate owned and foreclosure expenses	178		684		912		1,189		Other real estate owned and foreclosure expenses	564		734
Professional and other outside services	Professional and other outside services	2,976		1,553		5,519		3,811		Professional and other outside services	2,953		2,543
Other expenses	Other expenses	4,182		4,146		8,295		9,100		Other expenses	6,020		4,113
Total Other Expenses	Total Other Expenses	69,295		59,989		135,393		126,160		Total Other Expenses	72,325		66,098
INCOME BEFORE INCOME TAX	INCOME BEFORE INCOME TAX	65,853		37,615		124,274		75,368		INCOME BEFORE INCOME TAX	55,852		58,421
Income tax expense	Income tax expense	10,294		4,623		19,246		8,113		Income tax expense	7,266		8,952
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	55,559	$	32,992	$	105,028	$	67,255	NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	48,586	$	49,469

Per Share Data:	Per Share Data:									Per Share Data:
Basic Net Income Available to Common Stockholders	Basic Net Income Available to Common Stockholders	$	1.03	$	0.62	$	1.95	$	1.24	Basic Net Income Available to Common Stockholders	$	0.91	$	0.92
Diluted Net Income Available to Common Stockholders	Diluted Net Income Available to Common Stockholders	$	1.03	$	0.62	$	1.94	$	1.24	Diluted Net Income Available to Common Stockholders	$	0.91	$	0.91
Cash Dividends Paid	Cash Dividends Paid	$	0.29	$	0.26	$	0.55	$	0.52	Cash Dividends Paid	$	0.29	$	0.26
Average Diluted Shares Outstanding (in thousands)	Average Diluted Shares Outstanding (in thousands)	54,184		53,943		54,159		54,430		Average Diluted Shares Outstanding (in thousands)	53,616		54,134

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Net income	Net income	$	55,559	$	32,992	$	105,028	$	67,255	Net income	$	48,586	$	49,469
Other comprehensive income (loss):
Other comprehensive loss:										Other comprehensive loss:
Unrealized gains/losses on securities available-for-sale:	Unrealized gains/losses on securities available-for-sale:									Unrealized gains/losses on securities available-for-sale:
Unrealized holding gain (loss) arising during the period		32,238		15,880		(15,673)		54,315
Reclassification adjustment for losses (gains) included in net income		(1,761)		(3,068)		(3,560)		(7,680)
Unrealized holding loss arising during the period										Unrealized holding loss arising during the period	(176,567)		(47,911)
Reclassification adjustment for gains included in net income										Reclassification adjustment for gains included in net income	(566)		(1,799)
Tax effect	Tax effect	(6,400)		(2,691)		4,039		(9,793)		Tax effect	37,199		10,439
Net of tax	Net of tax	24,077		10,121		(15,194)		36,842		Net of tax	(139,934)		(39,271)

Unrealized gain/loss on cash flow hedges:	Unrealized gain/loss on cash flow hedges:									Unrealized gain/loss on cash flow hedges:
Unrealized holding gain (loss) arising during the period		(16)		(145)		42		(1,459)
Reclassification adjustment for losses (gains) included in net income		260		231		513		357
Unrealized holding gain arising during the period										Unrealized holding gain arising during the period	303		58
Reclassification adjustment for gains included in net income										Reclassification adjustment for gains included in net income	241		252
Tax effect	Tax effect	(51)		(18)		(117)		231		Tax effect	(115)		(65)
Net of tax	Net of tax	193		68		438		(871)		Net of tax	429		245

Total other comprehensive income (loss), net of tax		24,270		10,189		(14,756)		35,971
Comprehensive income		$	79,829	$	43,181	$	90,272	$	103,226
Total other comprehensive loss, net of tax										Total other comprehensive loss, net of tax	(139,505)		(39,026)
Comprehensive income (loss)										Comprehensive income (loss)	$	(90,919)	$	10,443

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Three Months Ended June 30, 2021
Preferred Common Stock Additional Accumulated
Other
Shares Amount Shares Amount Paid in
Capital Retained
Earnings Comprehensive
Income Total
Balance, March 31, 2021 125 $ 125 53,953,723 $ 6,744 $ 1,007,300 $ 755,877 $ 35,810 $ 1,805,856
Comprehensive income:
Net income — — — — — 55,559 — 55,559
Other comprehensive income, net of tax — — — — — — 24,270 24,270
Cash dividends on common stock ($.29 per share) — — — — — (15,770) — (15,770)
Share-based compensation — — 375 — 1,208 — — 1,208
Stock issued under employee benefit plans — — 4,185 1 161 — — 162
Stock issued under dividend reinvestment and
stock purchase plan — — 11,103 2 486 — — 488
Stock options exercised — — 3,000 — 27 — — 27
Balances, June 30, 2021 125 $ 125 53,972,386 $ 6,747 $ 1,009,182 $ 795,666 $ 60,080 $ 1,871,800

Three Months Ended June 30, 2020
Preferred Common Stock Additional Accumulated
Other
Shares Amount Shares Amount Paid in
Capital Retained
Earnings Comprehensive
Income Total
Balances, March 31, 2020 125 $ 125 53,754,137 $ 6,719 $ 1,000,942 $ 716,518 $ 53,656 $ 1,777,960
Comprehensive income:
Net income — — — — — 32,992 — 32,992
Other comprehensive income, net of tax — — — — — — 10,189 10,189
Cash dividends on common stock ($.26 per share) — — — — — (14,071) — (14,071)
Share-based compensation — — 5,259 1 1,212 — — 1,213
Stock issued under employee benefit plans — — 11,511 1 308 — — 309
Stock issued under dividend reinvestment and
stock purchase plan — — 15,897 2 433 — — 435
Stock options exercised — — 9,000 1 75 — — 76
Restricted shares withheld for taxes — — (304) — (8) — — (8)
Balances, June 30. 2020 125 $ 125 53,795,500 $ 6,724 $ 1,002,962 $ 735,439 $ 63,845 $ 1,809,095

~~See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.~~


	Three Months Ended March 31, 2022
	Preferred			Common Stock			Additional				Accumulated Other
	Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Income (Loss)		Total
Balances, December 31, 2021	125	$	125	53,410,411	$	6,676	$	985,818	$	864,839	$	55,113	$	1,912,571
Comprehensive loss:
Net income	—	—		—	—		—		48,586		—		48,586
Other comprehensive loss, net of tax	—	—		—	—		—		—		(139,505)		(139,505)
Cash dividends on common stock ($.29 per share)	—	—		—	—		—		(15,607)		—		(15,607)



Share-based compensation	—	—		1,200	—		1,100		—		—		1,100

Stock issued under dividend reinvestment and stock purchase plan	—	—		10,639	2		469		—		—		471
Stock options exercised	—	—		3,000	—		37		—		—		37
Restricted shares withheld for taxes	—	—		(427)	—		(20)		—		—		(20)
Balances, March 31, 2022	125	$	125	53,424,823	$	6,678	$	987,404	$	897,818	$	(84,392)	$	1,807,633

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

Six Months Ended June 30, 2021
Preferred Common Stock Additional Accumulated
Other
Shares Amount Shares Amount Paid in
Capital Retained
Earnings Comprehensive
Income (Loss) Total
Balances, December 31, 2020 125 $ 125 53,922,359 $ 6,740 $ 1,005,366 $ 788,578 $ 74,836 $ 1,875,645
Cumulative effect of ASC 326 adoption (68,040) (68,040)
Balance January 1, 2021 125 125 53,922,359 6,740 1,005,366 720,538 74,836 1,807,605
Comprehensive income:
Net income — — — — — 105,028 — 105,028
Other comprehensive loss, net of tax — — — — — — (14,756) (14,756)
Cash dividends on common stock ($.55 per share) — — — — — (29,900) — (29,900)
Share-based compensation — — 4,660 1 2,397 — — 2,398
Stock issued under employee benefit plans — — 8,114 1 305 — — 306
Stock issued under dividend reinvestment and
stock purchase plan — — 20,220 3 928 — — 931
Stock options exercised — — 17,300 2 196 — — 198
Restricted shares withheld for taxes — — (267) — (10) — — (10)
Balances, June 30, 2021 125 $ 125 53,972,386 $ 6,747 $ 1,009,182 $ 795,666 $ 60,080 $ 1,871,800


		Six Months Ended June 30, 2020															Three Months Ended March 31, 2021
		Preferred			Common Stock			Additional				Accumulated Other					Preferred			Common Stock			Additional				Accumulated Other
		Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Income		Total			Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Income		Total
Balances, December 31, 2019		125	$	125	55,368,482	$	6,921	$	1,054,997	$	696,520	$	27,874	$	1,786,437
Balances, December 31, 2020																Balances, December 31, 2020	125	$	125	53,922,359	$	6,740	$	1,005,366	$	788,578	$	74,836	$	1,875,645
Cumulative effect of ASC 326 adoption																Cumulative effect of ASC 326 adoption									(68,040)				(68,040)
Balances, January 1, 2021																Balances, January 1, 2021	125	$	125	53,922,359	$	6,740	$	1,005,366	$	720,538	$	74,836	$	1,807,605
Comprehensive income:	Comprehensive income:															Comprehensive income:
Net income	Net income	—	—		—	—		—		67,255		—		67,255		Net income	—	—		—	—		—		49,469		—		49,469
Other comprehensive income, net of tax		—	—		—	—		—		—		35,971		35,971
Cash dividends on common stock ($.52 per share)		—	—		—	—		—		(28,336)		—		(28,336)
Other comprehensive loss, net of tax																Other comprehensive loss, net of tax	—	—		—	—		—		—		(39,026)		(39,026)
Cash dividends on common stock ($.26 per share)																Cash dividends on common stock ($.26 per share)	—	—		—	—		—		(14,130)		—		(14,130)

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

Share-based compensation	Share-based compensation	—	—		8,591	1		2,432		—		—		2,433		Share-based compensation	—	—		4,285	1		1,189		—		—		1,190
Stock issued under employee benefit plans	Stock issued under employee benefit plans	—	—		11,511	1		308		—		—		309		Stock issued under employee benefit plans	—	—		3,929	—		144		—		—		144
Stock issued under dividend reinvestment and stock purchase plan	Stock issued under dividend reinvestment and stock purchase plan	—	—		31,607	4		859		—		—		863		Stock issued under dividend reinvestment and stock purchase plan	—	—		9,117	1		442		—		—		443
Stock options exercised	Stock options exercised	—	—		10,050	1		82		—		—		83		Stock options exercised	—	—		14,300	2		169		—		—		171
Restricted shares withheld for taxes	Restricted shares withheld for taxes	—	—		(304)	—		(8)		—		—		(8)		Restricted shares withheld for taxes	—	—		(267)	—		(10)		—		—		(10)
Balances, June 30. 2020		125	$	125	53,795,500	$	6,724	$	1,002,962	$	735,439	$	63,845	$	1,809,095
Balances, March 31, 2021																Balances, March 31, 2021	125	$	125	53,953,723	$	6,744	$	1,007,300	$	755,877	$	35,810	$	1,805,856

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)


		Six Months Ended June 30,					Three Months Ended March 31
		2021		2020			2022		2021
Cash Flow From Operating Activities:	Cash Flow From Operating Activities:					Cash Flow From Operating Activities:
Net income	Net income	$	105,028	$	67,255	Net income	$	48,586	$	49,469
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		0		41,647

Depreciation and amortization	Depreciation and amortization	5,442		5,435		Depreciation and amortization	2,668		2,748
Change in deferred taxes	Change in deferred taxes	(1,179)		(18,509)		Change in deferred taxes	(1,665)		(3,079)
Share-based compensation	Share-based compensation	2,398		2,433		Share-based compensation	1,100		1,190

Loans originated for sale	Loans originated for sale	(275,277)		(322,288)		Loans originated for sale	(63,805)		(111,558)
Proceeds from sales of loans held for sale	Proceeds from sales of loans held for sale	271,360		336,583		Proceeds from sales of loans held for sale	72,456		114,383
Gains on sales of loans held for sale	Gains on sales of loans held for sale	(10,699)		(6,159)		Gains on sales of loans held for sale	(1,402)		(3,289)

Gains on sales of securities available for sale	Gains on sales of securities available for sale	(3,560)		(7,680)		Gains on sales of securities available for sale	(566)		(1,799)

Increase in cash surrender of life insurance	Increase in cash surrender of life insurance	(2,394)		(2,591)		Increase in cash surrender of life insurance	(1,176)		(1,189)
Gains on life insurance benefits	Gains on life insurance benefits	(147)		(95)		Gains on life insurance benefits	(520)		(147)
Change in interest receivable	Change in interest receivable	(225)		(8,162)		Change in interest receivable	1,106		(714)
Change in interest payable	Change in interest payable	(358)		(1,167)		Change in interest payable	827		733
Other adjustments	Other adjustments	4,728		27,998		Other adjustments	(7,388)		6,062
Net cash provided by operating activities	Net cash provided by operating activities	95,117		114,700		Net cash provided by operating activities	50,221		52,810
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:					Cash Flows from Investing Activities:
Net change in interest-bearing deposits	Net change in interest-bearing deposits	(46,558)		(261,758)		Net change in interest-bearing deposits	78,892		(501)
Purchases of:	Purchases of:					Purchases of:
Securities available for sale	Securities available for sale	(647,206)		(341,116)		Securities available for sale	(62,164)		(597,901)
Securities held to maturity	Securities held to maturity	(618,068)		(221,711)		Securities held to maturity	(206,523)		(135,098)
Proceeds from sales of securities available for sale	Proceeds from sales of securities available for sale	72,657		167,390		Proceeds from sales of securities available for sale	35,029		48,016
Proceeds from maturities of:	Proceeds from maturities of:					Proceeds from maturities of:
Securities available for sale	Securities available for sale	151,419		135,398		Securities available for sale	37,442		80,114
Securities held to maturity	Securities held to maturity	122,397		127,380		Securities held to maturity	42,834		66,361

Change in Federal Home Loan Bank stock						Change in Federal Home Loan Bank stock	2,314		—

Net change in loans	Net change in loans	46,880		(840,804)		Net change in loans	(116,409)		(72,704)
Net cash and cash equivalents paid in acquisition		(2,933)		0

Proceeds from the sale of other real estate owned	Proceeds from the sale of other real estate owned	530		592		Proceeds from the sale of other real estate owned	174		495
Proceeds from life insurance benefits	Proceeds from life insurance benefits	824		177		Proceeds from life insurance benefits	856		315
Proceeds from mortgage portfolio loan sale		76,067		0

Other adjustments	Other adjustments	(4,484)		(5,190)		Other adjustments	(2,896)		(2,285)
Net cash used in investing activities	Net cash used in investing activities	(848,475)		(1,239,642)		Net cash used in investing activities	(190,451)		(613,188)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:					Cash Flows from Financing Activities:
Net change in :	Net change in :					Net change in :
Demand and savings deposits	Demand and savings deposits	936,290		1,419,771		Demand and savings deposits	211,458		620,609
Certificates of deposit and other time deposits	Certificates of deposit and other time deposits	(94,500)		(293,739)		Certificates of deposit and other time deposits	(38,082)		(30,439)
Borrowings	Borrowings	8,737		467,056		Borrowings	59		8,678
Repayment of borrowings	Repayment of borrowings	(94,004)		(332,595)		Repayment of borrowings	(36,975)		(30,093)
Cash dividends on common stock	Cash dividends on common stock	(29,900)		(28,336)		Cash dividends on common stock	(15,607)		(14,130)

Stock issued under employee benefit plans	Stock issued under employee benefit plans	306		309		Stock issued under employee benefit plans	—		144
Stock issued under dividend reinvestment and stock purchase plans	Stock issued under dividend reinvestment and stock purchase plans	931		863		Stock issued under dividend reinvestment and stock purchase plans	471		443
Stock options exercised	Stock options exercised	198		83		Stock options exercised	37		171

Repurchase of common stock		0		(55,912)

Net cash provided by financing activities	Net cash provided by financing activities	728,058		1,177,500		Net cash provided by financing activities	121,361		555,383
Net Change in Cash and Cash Equivalents	Net Change in Cash and Cash Equivalents	(25,300)		52,558		Net Change in Cash and Cash Equivalents	(18,869)		(4,995)
Cash and Cash Equivalents, January 1	Cash and Cash Equivalents, January 1	192,896		177,201		Cash and Cash Equivalents, January 1	167,146		192,896
Cash and Cash Equivalents, June 30		$	167,596	$	229,759
Cash and Cash Equivalents, March 31						Cash and Cash Equivalents, March 31	$	148,277	$	187,901
Additional cash flow information:	Additional cash flow information:					Additional cash flow information:
Interest paid	Interest paid	$	18,757	$	43,331	Interest paid	$	6,433	$	8,655
Income tax paid (refunded)		16,810		(300)
Income tax paid						Income tax paid	7,750		—
Loans transferred to other real estate owned	Loans transferred to other real estate owned	64		761		Loans transferred to other real estate owned	5,868		44
Fixed assets transferred to other real estate owned	Fixed assets transferred to other real estate owned	6,282		262		Fixed assets transferred to other real estate owned	—		1,167
Non-cash investing activities using trade date accounting	Non-cash investing activities using trade date accounting	104,552		13,115		Non-cash investing activities using trade date accounting	5,246		66,558

ROU assets obtained in exchange for new operating lease liabilities	ROU assets obtained in exchange for new operating lease liabilities	1,432		1,398		ROU assets obtained in exchange for new operating lease liabilities	53		386

In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired		$	4,041	$	0
Cash paid in acquisition		(3,225)		0

Liabilities assumed		$	816	$	0

See NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

NOTE 1

GENERAL

Financial Statement Preparation

The Consolidated Condensed Balance Sheet of the Corporation as of December 31, ~~2020,~~2021, has been derived from the audited consolidated balance sheet of the Corporation as of that date. Certain information and note disclosures normally included in the Corporation’s annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission. The results of operations for the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, are not necessarily indicative of the results to be expected for the year. Reclassifications have been made to prior financial statements to conform to the current financial statement presentation. These reclassifications had no effect on net income. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and fair value of financial instruments. The uncertainties related to the coronavirus disease 2019 ("COVID-19") could cause significant changes to these estimates compared to what was known at the time these financial statements were prepared.

Significant Accounting Policies

The significant accounting policies followed by the Corporation and its wholly-owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting, with the exception of the Corporation's adoption of ASC 326 as described below under the heading "Recent Accounting Changes Adopted In 2021." The Corporation revised certain accounting policies and implemented certain accounting policy elections, related to the adoption of ASC 326 which are described below.reporting. All adjustments, which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying Consolidated Condensed Financial Statements.

~~The Corporation adopted FASB Accounting Standards Update (ASU) No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ ("CECL") on January 1, 2021. CECL replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures based on historical experiences, current conditions, and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. In addition, CECL includes certain changes to the accounting for investment securities available for sale depending on whether management intends to sell the securities or believes that it is more likely than not they will be required to sell.

As of the adoption and day one measurement date of January 1, 2021, the Corporation recorded a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet of $68.0 million. The allowance increased 57 percent from December 31, 2020, or $74.1 million, because it covered expected credit losses over the life of the loan portfolio, which approximates four years, and it included an allowance on all purchased loans that were previously excluded from the allowance for loan losses calculation. CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from allowance for credit losses, which was approximately $20.5 million. An allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. The following table details the impact of the adoption of CECL on the Corporation's balance sheet as of January 1, 2021.

December 31, 2020 Impact of CECL Adoption January 1, 2021 Post-CECL Adoption
Assets:
Held to maturity securities 1,227,668 (245) 1,227,423
Loans 9,243,174 4,776 9,247,950
Allowance for credit losses - Loans (130,648) (74,055) (204,703)
Net loans 9,112,526 (69,279) 9,043,247
Tax asset, deferred and receivable 12,340 21,984 34,324
Liabilities:
Allowance for credit losses on unfunded loan commitments 0 20,500 20,500
Stockholder's Equity:
Retained Earnings 788,578 (68,040) 720,538
—

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

~~Allowance for credit losses on investment securities available for sale~~ – for investment securities available for sale in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income. Adjustments to the allowance for credit losses are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not ~~record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality.~~

~~Allowance for credit losses on investment securities held to maturity ("ACL - Investments")~~ – the ACL - Investments is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the ACL - Investments when deemed uncollectible. Adjustments to the ACL - Investments are reportedadopt any new accounting pronouncements in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on held to maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) the financial condition of the issuer, (3) historical loss rates for given bond ratings, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have generally not been significant. Furthermore, as of June 30, 2021, there were no past due principal and interest payments associated with these securities. An allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities.

~~Purchased Credit Deteriorated (“PCD”)~~ – the Corporation has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is the noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.

~~Allowance for Credit Losses - Loans ("ACL - Loans")~~ - the ACL - Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Adjustments to the ACL- Loans are reported in the income statement as a component of provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding the policies and methodology used to estimate the ACL - Loans is detailed in NOTE 4. LOANS AND ALLOWANCE of these Notes to Consolidated Condensed Financial Statements.

~~Allowance for Credit Losses – Off-Balance Sheet Credit Exposures~~ – the allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Corporation is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Corporation has the unconditional right to cancel the obligation. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. The allowance for off-balance sheet credit exposures is adjusted through the income statement as a component of provision for credit loss.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

~~Impact of COVID-19~~

On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of COVID-19 constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. 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 the Corporation operates), disrupted supply chains, and created significant volatility and disruption in financial markets. The outbreak 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. As a result of the shelter in place mandates in effect beginning early in the secondfirst quarter of 2020, commercial activity throughout our geographic footprint, as well as nationally, have decreased significantly during 2020 and 2021. These containment measures led to increased unemployment and negatively impacted consumer and business spending. Although the vaccination rate in the U.S. continues to increase and most states have reopened, commercial activity has not yet returned to the levels existing prior to the outbreak of the pandemic. Moreover, certain states and localities have recently experienced significant increases in the number of individuals diagnosed with COVID-19 as variant strains of the virus have spread, which may further complicate efforts of the medical community and federal, state and local governments to respond to the pandemic.

The continued impact of COVID-19 on the Corporation will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence. It is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be fully lifted and businesses and their employees will be able to resume normal activities. Additional information may emerge regarding new developments with COVID-19 and additional actions may be taken by federal, state and local governments to contain COVID-19 or treat its impact. Changes in the behavior of customers, businesses and their employees as a result of COVID-19 pandemic are also unknown. As a result of COVID-19 and the actions taken to contain it or reduce its impact, we may continue to experience changes in the demand for our products and services, changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. Our commercial and consumer customers are experiencing varying degrees of financial distress, which is expected to continue throughout 2021, especially if positive cases increase and economic shutdowns continue or are reinstated. These and similar factors and events may have substantial negative effects on the business, financial condition and results of operations of the Corporation and its customers.

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 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 the Paycheck Protection Program (“PPP”), a lending program administered by the Small Business Administration (“SBA”) that was 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 CARES Act and the PPP were further amended throughout 2020 in order to provide additional funding and to extend the two-year maturity for PPP loans to five years. On December 27, 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”), which amended the CARES Act to, among other things, provide additional funding for the PPP and extend the program 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 given until June 30, 2021 to process loan applications). The Bank actively participated in assisting its customers with PPP funding during all phases of the program. The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities. Loans under the program earn interest at a fixed rate of 1 percent. As of June 30, 2021, the Corporation had $415.8 million of Paycheck Protection Program ("PPP") loans compared to the December 31, 2020 balance of $667.1 million. The Bank anticipates that the majority of its remaining PPP loans will also be forgiven by the SBA in accordance with the terms of the program.

~~Guidance on Non-TDR Loan Modifications due to COVID-19~~

On March 22, 2020, a statement was issued by the Bank’s banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised on April 7, 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, the Bank has offered short-term modifications made in response to COVID-19 to borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The CAA, as described above, extended the expiration date for COVID-related loan modifications exempt from troubled debt restructuring classification until the earlier of January 1, 2022, or 60 days after the termination of the national emergency. Details of the Corporation's modifications are included in the "LOAN QUALITY" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

~~Recent Accounting Changes Adopted In 2021~~

2022. The Corporation continually monitors potential accounting pronouncements and the following pronouncements have been deemed to have the most applicability to the Corporation's financial statements:

~~FASB Accounting Standards Updates No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~

~~Summary~~ ~~- The FASB issued Accounting Standards Update (ASU) No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This new guidance replaces the previous "incurred loss" model for measuring credit losses with an "expected life of loan loss" model, referred to as the CECL model.~~

Under the CECL model, certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model, which delayed recognition until it is probable a loss had been incurred.

The Corporation developed models that satisfy the requirements of the new standard which are governed by a system of internal controls and a cross-functional working group consisting of accounting, finance, and credit administration personnel. The loan portfolio was pooled into ten loan segments with similar risk characteristics for which the probability of default/loss given default methodology was applied. The Corporation utilized a one-year economic forecast period then reverted to historical macroeconomic levels for the remaining life of the portfolio. A baseline macroeconomic scenario, along with other scenarios, were used to develop a range of estimated credit losses for which to determine the best estimate within.

The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Pursuant to the CARES Act and the related joint statement of federal banking regulators (which also became effective as of March 27, 2020), and consistent with guidance from the SEC and FASB, the Corporation elected to delay implementation of ASU No. 2016-13, which was set to expire on December 31, 2020. However, the CAA (as discussed above) extended the temporary relief from CECL compliance to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates, or January 1, 2022. The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the CAA, the Corporation elected to adopt CECL on January 1, 2021. This allows the Corporation to utilize the CECL standard for the entire year of 2021, while its 2020 financial statements were prepared under the incurred loss model.

~~FASB Accounting Standards Updates No. 2019-11 -~~ ~~Codification Improvements to (Topic 326): Financial Instruments - Credit Losses~~

~~Summary~~ - ~~The FASB issued ASU No. 2019-11,~~ ~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses~~ ~~in order to address issues raised by stakeholders during the implementation of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments.~~

Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.

The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU No. 2016-13. As discussed above, pursuant to the CARES Act, the Corporation elected to defer the adoption of CECL. Additionally, the 2021 Consolidated Appropriations Act ("CAA"), signed into law on December 27, 2020, amended the CARES Act by extending the temporary relief from CECL compliance to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates, or January 1, 2022. The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the CAA, the Corporation elected to adopt CECL on January 1, 2021. The adoption of this standard did not have a significant effect on the Corporation’s consolidated financial statements or disclosures.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

~~FASB Accounting Standards Update No. 2019-12 -~~ ~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes~~

~~Summary~~ ~~- The FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is expected to reduce cost and complexity related to the accounting for income taxes.~~

The ASU removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (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 when there are ownership changes in foreign investments; and~~

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

~~The ASU also 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~~

~~• Enacted changes in tax laws in interim periods.~~

The ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the ASU was permitted. The Corporation adopted this standard on January 1, 2021 and adoption of this standard did not have a significant effect on the Corporation's consolidated financial statements or disclosures.

New Accounting Pronouncements Not Yet Adopted

FASB Accounting Standards Updates - No. 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Summary - The FASB issued ASU No. 2020-04 to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates and move toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period.

Entities may apply this ASU as of the beginning of an interim period that includes the March 12, 2020 issuance date of the ASU, through December 31, 2022. The Corporation expects to adopt the practical expedients included in the ASU prior to December 31, 2022. The Corporation is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Corporation is assessing ASU 2020-04 and its impact on the Corporation's transition away from LIBOR for its loans and other financial instruments.

FASB Accounting Standards Updates - ~~Accounting Standards Update~~ No. 2021-01 - Reference Rate Reform (Topic 848): Scope

Summary - The FASB has published ASU 2021-01, Reference Rate Reform. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply the amendments in this Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued.

If an entity elects to apply any of the amendments in this Update for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election.

The amendments in this Update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Corporation is assessing ASU 2021-01 and its impact on the Corporation's transition away from LIBOR for its loans and other financial instruments.

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ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

FASB Accounting Standards Updates - No. 2021-08 -Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

Summary -The FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, that addresses diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination.

Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606, Revenue from Contracts with Customers, at fair value on the acquisition date.

The FASB indicates that some stakeholders indicated that it is unclear how an acquirer should evaluate whether to recognize a contract liability from a revenue contract with a customer acquired in a business combination after Topic 606 is adopted. Furthermore, it was identified that under current practice, the timing of payment (payment terms) of a revenue contract may subsequently affect the post-acquisition revenue recognized by the acquirer. To address this, the ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. Finally, the amendments in the ASU improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

For public business entities, the amendments are effective for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period or early application, and (2) prospectively to all business combinations that occur on or after the date of initial application. The Corporation is reviewing the terms of this guidance, but adoption of the standard is not expected to have a significant impact on the Corporation's financial statements or disclosures.

FASB Accounting Standards Updates - Accounting Standards Update No. 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures

Summary -The FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures, which is intended to improve the usefulness of information provided to investors about certain loan refinancings, restructurings, and writeoffs.

The amendments in the new ASU eliminate the accounting guidance for TDRs by creditors that have adopted CECL while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require that a public business entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases.

Since the Corporation adopted CECL on January 1, 2021, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Corporation is assessing ASU 2022-02 and its impact on the Corporation's disclosures. The Corporation expects to adopt this ASU in the first quarter of 2023.

NOTE 2

~~ACQUISITION~~ACQUISITIONS

Hoosier Trust Company

On April 1, 2021, the Bank acquired 100 percent of Hoosier Trust Company ("Hoosier") through a merger of Hoosier with and into the Bank. The consideration paid to shareholders of Hoosier at closing was $3,225,000 in cash. Prior to the acquisition, Hoosier was an Indiana corporate trust company, headquartered in Indianapolis, Indiana, with approximately $290 million in assets under management. Hoosier’s sole office is now being operated by the Bank as a limited service trust office.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair value on the date of the acquisition. Based on ~~preliminary valuations of~~ the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change based on the timing of the transaction, the purchase price for the Hoosier acquisition is detailed in the following table. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, information becomes available about facts and circumstances that existed as of the acquisition date, which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.


	Fair Value
Cash and cash equivalents	$	292
Other assets	35
Other liabilities	(816)
Net tangible assets acquired	(489)
Customer relationship intangible	2,247
Goodwill	1,467
Purchase price	$	3,225

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Of the total purchase price, $2,247,000 was allocated to a customer relationship intangible, which will be amortized over its estimated life of 10 years. The remaining purchase price was allocated to goodwill, which is deductible for tax purposes. Pro forma financial information of the Hoosier acquisition is not included in these disclosures as it is deemed immaterial.

Level One Bancorp, Inc.

On April 1, 2022, the Corporation acquired 100 percent of Level One Bancorp, Inc. ("Level One"). Level One, a Michigan corporation, merged with and into the Corporation (the "Merger"), whereupon the separate corporate existence of Level One ceased and the Corporation survived. Immediately following the Merger, Level One's wholly owned subsidiary, Level One Bank, merged with and into the Bank, with the Bank as the surviving bank.

Level One was headquartered in Farmington Hills, Michigan and had 17 banking centers serving the Michigan market. Pursuant to the merger agreement, each common shareholder of Level One received, for each outstanding share of Level One common stock, (a) a 0.7167 share (the "Exchange Ratio") of the Corporation's common stock, in a tax-free exchange, and (b) a cash payment of $10.17. Fractional shares of the Corporation's common stock were not issued in respect of fractional interests arising from the Exchange Ratio but were paid in cash pursuant to the merger agreement. The Corporation issued 5.6 million shares of the Corporation's common stock and paid $79.3 million in cash in exchange for all outstanding shares of Level One common stock.

Additionally, the Corporation issued 10,000 shares of newly created 7.5% non-cumulative perpetual preferred stock, with a liquidation preference of $2,500 per share, in exchange for the outstanding Level One Series B preferred stock. Likewise, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One Series B preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock (Nasdaq: FRMEP).

The combined Corporation has 126 banking centers in Indiana, Illinois, Michigan and Ohio. As of March 31, 2022, Level One had total assets of $2.4 billion, total loans of $1.7 billion and deposits of $1.9 billion. Certain fair value measurements and the purchase price allocation have not been completed due to the timing of the acquisition and the number of assets acquired and liabilities assumed. Review of the estimated

fair values of loans, investments, property and equipment, intangible assets, other assets, deposits, borrowings and other liabilities, and the evaluation of the assumed tax positions will occur during the measurement period.

NOTE 3

INVESTMENT SECURITIES

The following table summarizes the amortized cost, gross unrealized gains and losses and approximate fair value of investment securities available for sale as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at June 30, 2021
Available for sale at March 31, 2022										Available for sale at March 31, 2022
U.S. Treasury	U.S. Treasury	$	1,000	$	0	$	0	$	1,000	U.S. Treasury	$	1,964	$	—	$	5	$	1,959
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	11,502		39		0		11,541		U.S. Government-sponsored agency securities	85,494		7		6,403		79,098
State and municipal	State and municipal	1,365,211		87,152		518		1,451,845		State and municipal	1,543,969		17,890		65,326		1,496,533
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	952,720		12,937		7,371		958,286		U.S. Government-sponsored mortgage-backed securities	629,999		305		47,780		582,524
Corporate obligations	Corporate obligations	4,031		197		0		4,228		Corporate obligations	4,031		76		24		4,083

Total available for sale	Total available for sale	$	2,334,464	$	100,325	$	7,889	$	2,426,900	Total available for sale	$	2,265,457	$	18,278	$	119,538	$	2,164,197


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2020
Available for sale at December 31, 2021										Available for sale at December 31, 2021
U.S. Treasury										U.S. Treasury	$	1,000	$	—	$	1	$	999
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	$	2,380	$	50	$	0	$	2,430	U.S. Government-sponsored agency securities	96,244		437		1,545		95,136
State and municipal	State and municipal	1,168,711		89,420		246		1,257,885		State and municipal	1,495,696		81,734		898		1,576,532
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	632,267		22,505		103		654,669		U.S. Government-sponsored mortgage-backed securities	671,684		7,109		11,188		667,605
Corporate obligations	Corporate obligations	4,031		104		0		4,135		Corporate obligations	4,031		256		8		4,279

Total available for sale	Total available for sale	$	1,807,389	$	112,079	$	349	$	1,919,119	Total available for sale	$	2,268,655	$	89,536	$	13,640	$	2,344,551

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PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The following table summarizes the amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


		Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to maturity at June 30, 2021
Held to maturity at March 31, 2022														Held to maturity at March 31, 2022
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	$	60,677	$	0	$	60,677	$	1	$	715	$	59,963	U.S. Government-sponsored agency securities	$	400,126	$	—	$	400,126	$	—	$	29,998	$	370,128
State and municipal	State and municipal	863,426		245		863,181		31,276		977		893,725		State and municipal	1,082,257		245		1,082,012		5,718		105,731		982,244
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	796,056		0		796,056		12,164		2,561		805,659		U.S. Government-sponsored mortgage-backed securities	841,428		—		841,428		979		50,285		792,122
Foreign investment	Foreign investment	1,500		0		1,500		0		0		1,500		Foreign investment	1,500		—		1,500		—		—		1,500
Total held to maturity	Total held to maturity	$	1,721,659	$	245	$	1,721,414	$	43,441	$	4,253	$	1,760,847	Total held to maturity	$	2,325,311	$	245	$	2,325,066	$	6,697	$	186,014	$	2,145,994


		Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to maturity at December 31, 2020
Held to maturity at December 31, 2021														Held to maturity at December 31, 2021
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	$	31,087	$	0	$	31,087	$	10	$	113	$	30,984	U.S. Government-sponsored agency securities	$	371,457	$	—	$	371,457	$	226	$	7,268	$	364,415
State and municipal	State and municipal	619,927		0		619,927		34,978		32		654,873		State and municipal	1,057,301		245		1,057,056		29,593		2,170		1,084,724
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	575,154		0		575,154		17,889		107		592,936		U.S. Government-sponsored mortgage-backed securities	749,789		—		749,789		7,957		5,881		751,865
Foreign investment	Foreign investment	1,500		0		1,500		0		0		1,500		Foreign investment	1,500		—		1,500		—		1		1,499
Total held to maturity	Total held to maturity	$	1,227,668	$	0	$	1,227,668	$	52,877	$	252	$	1,280,293	Total held to maturity	$	2,180,047	$	245	$	2,179,802	$	37,776	$	15,320	$	2,202,503

Accrued interest on investment securities available for sale and held to maturity at March 31, 2022 and December 31, 2021 of ~~$22.9~~$26.0 million and $26.8 million, respectively, are included in the Interest Receivable line on the Corporation's Consolidated Condensed Balance Sheets. The total amount of accrued interest is excluded from the amortized cost of available for sale and held to maturity securities presented above.

In determining the allowance for credit losses on investment securities available for sale that are in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through the income statement. For investment securities available for sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Corporation did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributable to changes in interest rates, not credit quality.

The allowance for credit losses on investment securities held to maturity is a contra asset-valuation account that is deducted from the amortized cost basis of investment securities held to maturity to present the net amount expected to be collected. Investment securities held to maturity are charged off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have been insignificant. Furthermore, as of ~~June 30, 2021,~~March 31, 2022, there were no past due principal and interest payments associated with these securities. AnAt CECL adoption, an allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities. The balance of the allowance for credit losses remained unchanged at $245,000 as of March 31, 2022.

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PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

On a quarterly basis, the Corporation monitors the credit quality of investment securities held to maturity through the use of credit ratings. The following table summarizes the amortized cost of investment securities held to maturity at ~~June 30, 2021,~~March 31, 2022, aggregated by credit quality indicator.

Held to Maturity
State and municipal Other Total
Credit Rating:
Aaa $ 54,753 $ 60,677 $ 115,430
Aa1 131,246 0 131,246
Aa2 136,008 0 136,008
Aa3 96,915 0 96,915
A1 66,549 0 66,549
A2 18,962 0 18,962
A3 1,065 0 1,065
Baa2 527 0 527
Non-rated 357,401 797,556 1,154,957
Total $ 863,426 $ 858,233 $ 1,721,659

~~The following table details activity in the allowance for credit losses on investment securities held to maturity during the six months ended June 30, 2021.~~


	~~State and municipal~~
~~Allowance for Credit Losses:~~
~~Balance, December 31, 2020~~	$	0
~~Impact of adopting ASC 326~~	~~245~~
~~Provision for credit loss~~	0
~~Securities charged off~~	0
~~Recoveries on securities~~	0
~~Balance, June 30, 2021~~	$	~~245~~


	Held to Maturity
	State and municipal		Other		Total
Credit Rating:
Aaa	$	96,155	$	60,580	$	156,735
Aa1	152,330		—		152,330
Aa2	174,021		—		174,021
Aa3	130,579		—		130,579
A1	105,264		—		105,264
A2	30,114		—		30,114
A3	10,110		—		10,110

Non-rated	383,684		1,182,474		1,566,158
Total	$	1,082,257	$	1,243,054	$	2,325,311

The following tables summarize, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and length of time in a continuous unrealized loss position.


	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Investment securities available for sale at March 31, 2022
U.S. Treasury	$	1,959	$	5	$	—	$	—	$	1,959	$	5
U.S. Government-sponsored agency securities	54,473		3,775		23,869		2,628		78,342		6,403
State and municipal	887,898		62,732		16,888		2,594		904,786		65,326
U.S. Government-sponsored mortgage-backed securities	284,223		16,380		265,203		31,400		549,426		47,780
Corporate obligations	976		24		—		—		976		24
Total investment securities available for sale	$	1,229,529	$	82,916	$	305,960	$	36,622	$	1,535,489	$	119,538


		Less than 12 Months				12 Months or Longer				Total					Less than 12 Months				12 Months or Longer				Total
		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Investment securities available for sale at June 30, 2021

Investment securities available for sale at December 31, 2021														Investment securities available for sale at December 31, 2021
U.S. Treasury														U.S. Treasury	$	999	$	1	$	—	$	—	$	999	$	1
U.S. Government-sponsored agency securities														U.S. Government-sponsored agency securities	68,524		1,545		—		—		68,524		1,545
State and municipal	State and municipal	$	63,102	$	518	$	0	$	0	$	63,102	$	518	State and municipal	138,187		894		505		4		138,692		898
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	460,616		7,371		0		0		460,616		7,371		U.S. Government-sponsored mortgage-backed securities	427,687		10,791		8,324		397		436,011		11,188

Corporate obligations														Corporate obligations	992		8		—		—		992		8
Total investment securities available for sale	Total investment securities available for sale	$	523,718	$	7,889	$	0	$	0	$	523,718	$	7,889	Total investment securities available for sale	$	636,389	$	13,239	$	8,829	$	401	$	645,218	$	13,640

The following table summarizes investment securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security type and the number of securities in the portfolio for the periods indicated.

Less than 12 Months 12 Months or Longer Total
Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses
Investment securities available for sale at December 31, 2020
State and municipal $ 5,368 $ 246 $ 0 $ 0 $ 5,368 $ 246
U.S. Government-sponsored mortgage-backed securities 9,651 103 0 0 9,651 103
Total investment securities available for sale $ 15,019 $ 349 $ 0 $ 0 $ 15,019 $ 349


	Gross Unrealized Losses		Number of Securities
Investment securities available for sale at March 31, 2022
U.S. Treasury	$	5	2
U.S. Government-sponsored agency securities	6,403		13
State and municipal	65,326		585
U.S. Government-sponsored mortgage-backed securities	47,780		120
Corporate obligations	24		1
Total investment securities available for sale	$	119,538	721

1713

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PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)


	Gross Unrealized Losses		Number of Securities
Investment securities available for sale at December 31, 2021
U.S. Treasury	$	1	1
U.S. Government-sponsored agency securities	1,545		8
State and municipal	898		103
U.S. Government-sponsored mortgage-backed securities	11,188		48
Corporate obligations	8		1
Total investment securities available for sale	$	13,640	161

The unrealized losses in the Corporation’s investment portfolio were the result of changes in interest rates and not credit quality. As a result, the Corporation expects to recover the amortized cost basis over the term of the securities. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

Certain investment securities available for sale are reported in the financial statements at an amount less than their historical cost as indicated in the table below.


		June 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
Investments available for sale reported at less than historical cost:	Investments available for sale reported at less than historical cost:							Investments available for sale reported at less than historical cost:
Historical cost	Historical cost	$	531,607		$	15,368		Historical cost	$	1,655,027		$	658,858
Fair value	Fair value	523,718			15,019			Fair value	1,535,489			645,218
Gross unrealized losses	Gross unrealized losses	$	7,889		$	349		Gross unrealized losses	$	119,538		$	13,640
Percent of the Corporation's investments available for sale	Percent of the Corporation's investments available for sale	21.6		%	0.8		%	Percent of the Corporation's investments available for sale	71.0		%	27.5		%

In determining the fair value of the investment securities portfolio, the Corporation utilizes a third party for portfolio accounting services, including market value input, for those securities classified as Level 1 and Level 2 in the fair value hierarchy. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor classified these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis; and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time. Fair value of securities classified as Level 3 in the valuation hierarchy was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

~~U.S. Government-Sponsored Mortgage-Backed Securities~~

The unrealized losses on the Corporation's investment in mortgage-backed securities were a result of interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. At June 30, 2021, the mortgage-backed securities portfolio contains unrealized losses of $7.4 million on NaN securities in the available for sale portfolio. All these securities are issued by a government-sponsored entity.

~~State and Municipal Securities, U.S. Government-Sponsored Agency Securities and Corporate Obligation Securities~~

The unrealized losses on the Corporation's investments in securities of state and political subdivisions, U.S. Government-Sponsored Agency securities and corporate obligations were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. At June 30, 2021, the state and municipal securities portfolio contains unrealized losses of $518,000 on NaN securities in the available for sale portfolio.

The amortized cost and fair value of investment securities available for sale and held to maturity at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.


		Available for Sale				Held to Maturity					Available for Sale				Held to Maturity
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at June 30, 2021
Maturity Distribution at March 31, 2022										Maturity Distribution at March 31, 2022
Due in one year or less	Due in one year or less	$	1,060	$	1,067	$	8,405	$	8,461	Due in one year or less	$	6,240	$	6,189	$	7,718	$	7,737
Due after one through five years	Due after one through five years	8,850		9,176		23,079		24,351		Due after one through five years	6,106		6,128		30,156		30,777
Due after five through ten years	Due after five through ten years	90,059		95,333		147,663		152,770		Due after five through ten years	135,605		135,384		179,256		173,697
Due after ten years	Due after ten years	1,281,775		1,363,038		746,456		769,606		Due after ten years	1,487,507		1,433,972		1,266,753		1,141,661
		1,381,744		1,468,614		925,603		955,188			1,635,458		1,581,673		1,483,883		1,353,872
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	952,720		958,286		796,056		805,659		U.S. Government-sponsored mortgage-backed securities	629,999		582,524		841,428		792,122

Total investment securities	Total investment securities	$	2,334,464	$	2,426,900	$	1,721,659	$	1,760,847	Total investment securities	$	2,265,457	$	2,164,197	$	2,325,311	$	2,145,994


		Available for Sale				Held to Maturity					Available for Sale				Held to Maturity
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at December 31, 2020
Maturity Distribution at December 31, 2021										Maturity Distribution at December 31, 2021
Due in one year or less	Due in one year or less	$	1,349	$	1,353	$	9,712	$	9,755	Due in one year or less	$	6,954	$	6,965	$	6,971	$	6,995
Due after one through five years	Due after one through five years	5,545		5,764		22,241		23,190		Due after one through five years	5,097		5,309		30,272		31,946
Due after five through ten years	Due after five through ten years	70,777		75,223		115,408		121,333		Due after five through ten years	120,460		126,816		177,203		180,129
Due after ten years	Due after ten years	1,097,451		1,182,110		505,153		533,079		Due after ten years	1,464,460		1,537,856		1,215,812		1,231,568
		1,175,122		1,264,450		652,514		687,357			1,596,971		1,676,946		1,430,258		1,450,638
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	632,267		654,669		575,154		592,936		U.S. Government-sponsored mortgage-backed securities	671,684		667,605		749,789		751,865

Total investment securities	Total investment securities	$	1,807,389	$	1,919,119	$	1,227,668	$	1,280,293	Total investment securities	$	2,268,655	$	2,344,551	$	2,180,047	$	2,202,503

1814

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Securities with a carrying value of approximately ~~$877.1~~$831.8 million and ~~$890.0~~$873.2 million were pledged at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law.

The book value of securities sold under agreements to repurchase amounted to ~~$139.3~~$174.5 million at ~~June 30, 2021~~March 31, 2022 and ~~$167.3~~$175.1 million at

December 31, ~~2020.~~2021.

Gross gains and losses on the sales and redemptions of investment securities available for sale for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ are shown below.


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Sales and redemptions of investment securities available for sale:	Sales and redemptions of investment securities available for sale:									Sales and redemptions of investment securities available for sale:
Gross gains	Gross gains	$	1,822	$	3,068	$	3,898	$	7,680	Gross gains	$	578	$	2,076
Gross losses	Gross losses	61		0		338		0		Gross losses	12		277

Net gains on sales and redemptions of investment securities available for sale	Net gains on sales and redemptions of investment securities available for sale	$	1,761	$	3,068	$	3,560	$	7,680	Net gains on sales and redemptions of investment securities available for sale	$	566	$	1,799

NOTE 4

LOANS AND ALLOWANCE

Loan Portfolio and Credit Quality

The Corporation's primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. The following tables show the composition of the loan portfolio and credit quality characteristics by collateral classification, excluding loans held for sale. Loans held for sale at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, were ~~$18.6~~$3.9 million and ~~$4.0~~$11.2 million, respectively.

The following table illustrates the composition of the Corporation’s loan portfolio by loan class for the periods indicated:


		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021

Commercial and industrial loans	Commercial and industrial loans	$	2,671,076	$	2,776,699	Commercial and industrial loans	$	2,826,660	$	2,714,565
Agricultural land, production and other loans to farmers	Agricultural land, production and other loans to farmers	235,020		281,884		Agricultural land, production and other loans to farmers	209,077		246,442
Real estate loans:	Real estate loans:					Real estate loans:
Construction	Construction	491,200		484,723		Construction	552,975		523,066
Commercial real estate, non-owner occupied	Commercial real estate, non-owner occupied	2,263,497		2,220,949		Commercial real estate, non-owner occupied	2,073,197		2,135,459
Commercial real estate, owner occupied	Commercial real estate, owner occupied	953,501		958,501		Commercial real estate, owner occupied	974,521		986,720
Residential	Residential	1,127,442		1,234,741		Residential	1,226,695		1,159,127
Home equity	Home equity	489,997		508,259		Home equity	512,641		523,754
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	130,819		129,479		Individuals' loans for household and other personal expenditures	147,593		146,092
Public finance and other commercial loans	Public finance and other commercial loans	758,698		647,939		Public finance and other commercial loans	832,882		806,636
Loans	Loans	$	9,121,250	$	9,243,174	Loans	$	9,356,241	$	9,241,861

As of ~~June 30, 2021,~~March 31, 2022, the Corporation had ~~$415.8~~$48.7 million of Paycheck Protection Program ("PPP") loans compared to the December 31, ~~2020~~2021 balance of ~~$667.1~~$106.6 million. PPP loans are included in the commercial and industrial loan class. Additional details of the PPP are included in The CARES Act and the Paycheck Protection Program sections of the "COVID-19 ~~UPDATE"~~UPDATE AND RELATED LEGISLATIVE AND REGULATORY ACTIONS" in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

Credit Quality

As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to: (i) the level of criticized commercial loans, (ii) net charge-offs, (iii) non-performing loans, (iv) covenant failures and (v) the general national and local economic conditions.

1915

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows:

•Pass - Loans that are considered to be of acceptable credit quality.

•Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation's credit position at some future date. Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification.

•Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

•Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable.

•Loss – Loans that are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted. Loans will be classified as Loss when it is neither practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The following tables summarize the risk grading of the Corporation’s loan portfolio by loan class and by year of origination for the years indicated. Consumer loans are not risk graded. For the purposes of this disclosure, the consumer loans are classified in the following manner: loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Loans that evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected are included in the applicable categories below. Commercial and industrial loan balances as of ~~June 30, 2021~~March 31, 2022 include PPP loans with an origination year of 2021 and 2020 of $48.5 million and $155,000, respectively. Commercial and industrial loan balances as of December 31, 2021 include PPP loans with an origination year of ~~$302.0~~2021 and 2020 of $100.3 million and ~~$113.8~~$6.3 million, respectively.


	March 31, 2022
	Term Loans (amortized cost basis by origination year)												Revolving loans amortized		Revolving loans converted
	2022		2021		2020		2019		2018		Prior		cost basis		to term		Total
Commercial and industrial loans
Pass	$	233,494	$	860,644	$	292,449	$	127,655	$	64,212	$	48,840	$	1,124,742	$	—	$	2,752,036
Special Mention	83		13,199		8,914		196		911		1,967		21,206		—		46,476
Substandard	68		2,665		1,883		1,664		79		1,111		20,112		—		27,582
Doubtful	—		566		—		—		—		—		—		—		566

Total Commercial and industrial loans	233,645		877,074		303,246		129,515		65,202		51,918		1,166,060		—		2,826,660
Agricultural land, production and other loans to farmers
Pass	13,604		45,415		44,372		20,250		7,270		37,478		38,054		—		206,443
Special Mention	—		—		1,543		—		—		248		89		—		1,880
Substandard	—		—		502		44		181		27		—		—		754


Total Agricultural land, production and other loans to farmers	13,604		45,415		46,417		20,294		7,451		37,753		38,143		—		209,077
Real estate loans:
Construction
Pass	93,208		234,844		169,386		25,825		958		4,681		18,879		—		547,781
Special Mention	4,398		—		—		—		—		—		—		—		4,398
Substandard	15		—		758		—		—		23		—		—		796


Total Construction	97,621		234,844		170,144		25,825		958		4,704		18,879		—		552,975
Commercial real estate, non-owner occupied
Pass	123,966		528,861		627,820		177,465		109,147		186,777		30,535		—		1,784,571
Special Mention	35,142		75,275		144,704		—		—		1,696		—		—		256,817
Substandard	—		23,502		6,819		112		1,106		270		—		—		31,809


Total Commercial real estate, non-owner occupied	159,108		627,638		779,343		177,577		110,253		188,743		30,535		—		2,073,197
Commercial real estate, owner occupied
Pass	60,735		288,076		353,021		83,799		42,142		78,463		36,565		—		942,801
Special Mention	229		5,575		7,858		798		1,518		1,965		—		—		17,943
Substandard	3,143		4,221		5,384		—		—		1,029		—		—		13,777


Total Commercial real estate, owner occupied	64,107		297,872		366,263		84,597		43,660		81,457		36,565		—		974,521
Residential
Pass	129,643		344,654		331,532		95,511		64,998		244,562		3,158		13		1,214,071
Special Mention	27		1,140		741		695		572		1,601		—		15		4,791
Substandard	—		1,276		1,541		316		1,324		3,371		5		—		7,833


Total Residential	129,670		347,070		333,814		96,522		66,894		249,534		3,163		28		1,226,695
Home equity
Pass	4,403		55,867		15,465		1,857		1,884		4,171		423,635		15		507,297
Special Mention	—		—		42		47		27		2		2,863		—		2,981
Substandard	132		345		84		—		8		171		1,623		—		2,363


Total Home Equity	4,535		56,212		15,591		1,904		1,919		4,344		428,121		15		512,641
Individuals' loans for household and other personal expenditures
Pass	19,616		57,759		20,371		9,519		8,947		6,024		24,836		—		147,072
Special Mention	13		176		113		34		83		53		47		—		519
Substandard	—		1		1		—		—		—		—		—		2


Total Individuals' loans for household and other personal expenditures	19,629		57,936		20,485		9,553		9,030		6,077		24,883		—		147,593
Public finance and other commercial loans
Pass	54,959		222,676		176,446		99,935		38,565		213,118		27,183		—		832,882




Total Public finance and other commercial loans	54,959		222,676		176,446		99,935		38,565		213,118		27,183		—		832,882
Loans	$	776,878	$	2,766,737	$	2,211,749	$	645,722	$	343,932	$	837,648	$	1,773,532	$	43	$	9,356,241

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Term Loans (amortized cost basis by origination year)
2021 2020 2019 2018 2017 Prior Revolving loans amortized cost basis Revolving loans converted to term Total
Commercial and industrial loans
Pass $ 705,017 $ 680,616 $ 220,134 $ 88,941 $ 35,001 $ 61,402 $ 764,492 $ 0 $ 2,555,603
Special Mention 8,826 31,372 963 1,214 2,315 2,299 17,494 0 64,483
Substandard 2,496 3,140 6,148 647 345 861 37,353 0 50,990
Total Commercial and industrial loans $ 716,339 $ 715,128 $ 227,245 $ 90,802 $ 37,661 $ 64,562 $ 819,339 $ 0 $ 2,671,076
Agricultural land, production and other loans to farmers
Pass 29,307 53,177 24,414 10,441 7,291 43,426 50,668 0 218,724
Special Mention 132 1,561 186 480 0 392 1,572 0 4,323
Substandard 719 1,893 137 1,732 402 3,479 3,611 0 11,973
Total Agricultural land, production and other loans to farmers $ 30,158 $ 56,631 $ 24,737 $ 12,653 $ 7,693 $ 47,297 $ 55,851 $ 0 $ 235,020
Real estate loans:
Construction
Pass 87,073 190,362 140,397 49,429 3,031 2,788 17,622 0 490,702
Special Mention 0 367 0 0 0 0 40 0 407
Substandard 0 28 0 62 0 1 0 0 91
Total Construction $ 87,073 $ 190,757 $ 140,397 $ 49,491 $ 3,031 $ 2,789 $ 17,662 $ 0 $ 491,200
Commercial real estate, non-owner occupied
Pass 320,351 829,716 276,030 181,489 134,569 177,499 28,768 0 1,948,422
Special Mention 53,576 161,095 0 10,333 0 10,098 1,250 0 236,352
Substandard 5,997 39,117 23,676 2,130 7,503 300 0 0 78,723
Total Commercial real estate, non-owner occupied $ 379,924 $ 1,029,928 $ 299,706 $ 193,952 $ 142,072 $ 187,897 $ 30,018 $ 0 $ 2,263,497
Commercial real estate, owner occupied
Pass 154,390 444,147 110,496 48,809 53,093 75,210 35,589 0 921,734
Special Mention 562 5,813 2,570 1,626 2,208 1,748 157 0 14,684
Substandard 954 11,567 0 53 2,734 1,775 0 0 17,083
Total Commercial real estate, owner occupied $ 155,906 $ 461,527 $ 113,066 $ 50,488 $ 58,035 $ 78,733 $ 35,746 $ 0 $ 953,501
Residential
Pass 162,624 411,016 124,377 86,116 67,041 258,010 3,919 34 1,113,137
Special Mention 282 1,322 219 657 60 1,152 0 0 3,692
Substandard 1,434 3,248 107 1,392 203 4,140 89 0 10,613
Total Residential $ 164,340 $ 415,586 $ 124,703 $ 88,165 $ 67,304 $ 263,302 $ 4,008 $ 34 $ 1,127,442
Home equity
Pass 24,144 20,741 2,313 2,530 1,605 4,689 430,070 171 486,263
Special Mention 0 0 0 9 0 59 1,888 0 1,956
Substandard 488 0 0 10 98 178 1,004 0 1,778
Total Home Equity $ 24,632 $ 20,741 $ 2,313 $ 2,549 $ 1,703 $ 4,926 $ 432,962 $ 171 $ 489,997
Individuals' loans for household and other personal expenditures
Pass 31,102 34,212 20,548 15,707 3,433 6,358 17,855 0 129,215
Special Mention 5 223 188 40 16 25 1,107 0 1,604
Substandard 0 0 0 0 0 0 0 0 0
Total Individuals' loans for household and other personal expenditures $ 31,107 $ 34,435 $ 20,736 $ 15,747 $ 3,449 $ 6,383 $ 18,962 $ 0 $ 130,819
Public finance and other commercial loans
Pass 172,554 189,090 101,518 39,675 108,677 133,286 13,898 0 758,698
Total Public finance and other commercial loans $ 172,554 $ 189,090 $ 101,518 $ 39,675 $ 108,677 $ 133,286 $ 13,898 $ 0 $ 758,698
Loans $ 1,762,033 $ 3,113,823 $ 1,054,421 $ 543,522 $ 429,625 $ 789,175 $ 1,428,446 $ 205 $ 9,121,250


	December 31, 2021
	Term Loans (amortized cost basis by origination year)												Revolving loans amortized		Revolving loans converted
	2021		2020		2019		2018		2017		Prior		cost basis		to term		Total
Commercial and industrial loans
Pass	$	1,019,757	$	362,372	$	144,520	$	65,165	$	21,575	$	30,420	$	990,335	$	—	$	2,634,144
Special Mention	10,559		11,088		190		730		1,930		1,825		15,026		—		41,348
Substandard	2,811		2,127		7,432		2,932		431		747		22,593		—		39,073


Total Commercial and industrial loans	1,033,127		375,587		152,142		68,827		23,936		32,992		1,027,954		—		2,714,565
Agricultural land, production and other loans to farmers
Pass	50,251		45,164		22,195		7,689		6,153		36,074		74,871		—		242,397
Special Mention	—		1,543		—		—		—		252		264		—		2,059
Substandard	524		506		108		371		—		27		450		—		1,986


Total Agricultural land, production and other loans to farmers	50,775		47,213		22,303		8,060		6,153		36,353		75,585		—		246,442
Real estate loans:
Construction
Pass	215,167		200,169		63,589		979		1,762		2,453		17,201		—		501,320
Special Mention	20,737		270		—		—		—		46		—		—		21,053
Substandard	—		693		—		—		—		—		—		—		693


Total Construction	235,904		201,132		63,589		979		1,762		2,499		17,201		—		523,066
Commercial real estate, non-owner occupied
Pass	589,296		688,406		227,332		111,971		103,400		126,837		26,779		—		1,874,021
Special Mention	68,279		149,480		—		—		—		1,723		—		—		219,482
Substandard	19,314		14,912		178		1,118		6,156		278		—		—		41,956


Total Commercial real estate, non-owner occupied	676,889		852,798		227,510		113,089		109,556		128,838		26,779		—		2,135,459
Commercial real estate, owner occupied
Pass	299,186		392,383		92,338		43,252		46,044		48,571		33,998		—		955,772
Special Mention	5,665		5,953		738		1,532		902		1,301		149		—		16,240
Substandard	7,025		5,763		—		53		113		1,754		—		—		14,708


Total Commercial real estate, owner occupied	311,876		404,099		93,076		44,837		47,059		51,626		34,147		—		986,720
Residential
Pass	349,726		353,691		103,028		69,745		55,240		210,669		2,955		73		1,145,127
Special Mention	1,034		1,394		1,456		306		172		2,106		—		—		6,468
Substandard	1,004		1,575		335		1,248		108		3,257		—		5		7,532


Total Residential	351,764		356,660		104,819		71,299		55,520		216,032		2,955		78		1,159,127
Home equity
Pass	63,845		17,556		1,977		2,127		1,250		3,432		427,437		194		517,818
Special Mention	—		85		48		—		—		24		3,451		—		3,608
Substandard	520		—		—		8		91		70		1,639		—		2,328


Total Home Equity	64,365		17,641		2,025		2,135		1,341		3,526		432,527		194		523,754
Individuals' loans for household and other personal expenditures
Pass	67,749		23,452		11,893		11,197		2,008		4,928		24,406		—		145,633
Special Mention	79		85		50		33		20		58		134		—		459



Total Individuals' loans for household and other personal expenditures	67,828		23,537		11,943		11,230		2,028		4,986		24,540		—		146,092
Public finance and other commercial loans
Pass	231,319		178,316		100,679		39,098		105,964		128,942		22,318		—		806,636




Total Public finance and other commercial loans	231,319		178,316		100,679		39,098		105,964		128,942		22,318		—		806,636
Loans	$	3,023,847	$	2,456,983	$	778,086	$	359,554	$	353,319	$	605,794	$	1,664,006	$	272	$	9,241,861

2118

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

December 31, 2020
Commercial
Pass Commercial
Special
Mention Commercial Substandard Commercial
Doubtful Commercial Loss Consumer Performing Consumer
Non-Performing Total
Commercial and industrial loans $ 2,562,077 $ 117,503 $ 97,119 $ 0 $ 0 $ 0 $ 0 $ 2,776,699
Agricultural land, production and other loans to farmers 243,991 26,835 9,885 0 0 1,173 0 281,884
Real estate Loans:
Construction 446,846 10,445 5,549 0 0 21,763 120 484,723
Commercial real estate, non-owner occupied 1,979,827 160,304 80,818 0 0 0 0 2,220,949
Commercial real estate, owner occupied 907,566 17,641 33,294 0 0 0 0 958,501
Residential 199,338 2,261 7,058 0 0 1,020,687 5,397 1,234,741
Home equity 12,714 0 989 0 0 492,999 1,557 508,259
Individuals' loans for household and other personal expenditures 0 0 0 0 0 129,440 39 129,479
Public finance and other commercial loans 647,939 0 0 0 0 0 0 647,939
Loans $ 7,000,298 $ 334,989 $ 234,712 $ 0 $ 0 $ 1,666,062 $ 7,113 $ 9,243,174

Total past due loans equaled ~~$68.4~~$51.6 million as of ~~June 30, 2021,~~March 31, 2022, a ~~$4.4~~$16.9 million ~~decrease~~increase from the total of ~~$72.8~~$34.7 million for December 31, ~~2020.~~2021. At ~~June 30, 2021,~~March 31, 2022, 30-59 Days Past Due loans totaled ~~$13.0~~$28.6 million, ~~a decrease~~an increase of ~~$6.6~~$13.6 million from December 31, ~~2020.~~2021. The primary ~~decreases~~increases were related to 2 loans, totaling $20.1 million, in commercial and industrial and non-owner-occupied commercial real estate ~~both non-owner occupied and owner occupied segments, and in home equity loans. The overall balances~~loans that were in the ~~60-89 and 90 plus Days Past Due categories remained relatively level with the~~current category at December 31, ~~2020 balances.~~2021. One of the loans is within the nursing facility industry and the other in the game manufacturing industry. The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, for the years indicated:


		June 30, 2021													March 31, 2022
		Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing			Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing
Commercial and industrial loans	Commercial and industrial loans	$	2,658,952	$	6,336	$	4,590	$	1,198	$	2,671,076	$	0	Commercial and industrial loans	$	2,807,708	$	9,181	$	5,862	$	3,909	$	2,826,660	$	1,424
Agricultural land, production and other loans to farmers	Agricultural land, production and other loans to farmers	234,432		0		0		588		235,020		0		Agricultural land, production and other loans to farmers	209,050		—		—		27		209,077		—
Real estate loans:	Real estate loans:													Real estate loans:
Construction	Construction	491,200		0		0		0		491,200		0		Construction	552,866		—		109		—		552,975		—
Commercial real estate, non-owner occupied	Commercial real estate, non-owner occupied	2,221,577		39		5,364		36,517		2,263,497		0		Commercial real estate, non-owner occupied	2,057,043		11,851		—		4,303		2,073,197		—
Commercial real estate, owner occupied	Commercial real estate, owner occupied	949,949		2,127		0		1,425		953,501		0		Commercial real estate, owner occupied	973,075		1,182		27		237		974,521		—
Residential	Residential	1,121,721		2,276		347		3,098		1,127,442		183		Residential	1,217,155		3,697		713		5,130		1,226,695		132
Home equity	Home equity	487,075		832		1,125		965		489,997		0		Home equity	507,837		2,219		999		1,586		512,641		527
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	129,214		1,397		208		0		130,819		0		Individuals' loans for household and other personal expenditures	147,071		450		70		2		147,593		2

Public finance and other commercial loans	Public finance and other commercial loans	758,698		0		0		0		758,698		0		Public finance and other commercial loans	832,882		—		—		—		832,882		—
Loans	Loans	$	9,052,818	$	13,007	$	11,634	$	43,791	$	9,121,250	$	183	Loans	$	9,304,687	$	28,580	$	7,780	$	15,194	$	9,356,241	$	2,085


		December 31, 2020													December 31, 2021
		Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing			Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing
Commercial and industrial loans	Commercial and industrial loans	$	2,761,473	$	5,866	$	6,571	$	2,789	$	2,776,699	$	594	Commercial and industrial loans	$	2,708,539	$	2,602	$	2,437	$	987	$	2,714,565	$	675
Agricultural land, production and other loans to farmers	Agricultural land, production and other loans to farmers	280,615		146		226		897		281,884		0		Agricultural land, production and other loans to farmers	246,380		36		—		26		246,442		—
Real estate loans:	Real estate loans:													Real estate loans:
Construction	Construction	484,706		0		17		0		484,723		0		Construction	522,349		717		—		—		523,066		—
Commercial real estate, non-owner occupied	Commercial real estate, non-owner occupied	2,184,681		2,525		2,109		31,634		2,220,949		0		Commercial real estate, non-owner occupied	2,124,853		3,327		—		7,279		2,135,459		—
Commercial real estate, owner occupied	Commercial real estate, owner occupied	951,561		4,854		180		1,906		958,501		0		Commercial real estate, owner occupied	985,785		643		—		292		986,720		—
Residential	Residential	1,226,779		3,269		1,429		3,264		1,234,741		133		Residential	1,148,294		3,979		4,255		2,599		1,159,127		—
Home equity	Home equity	503,596		2,644		559		1,460		508,259		19		Home equity	518,643		3,327		281		1,503		523,754		288
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	129,049		334		96		0		129,479		0		Individuals' loans for household and other personal expenditures	145,634		375		83		—		146,092		—

Public finance and other commercial loans	Public finance and other commercial loans	647,939		0		0		0		647,939		0		Public finance and other commercial loans	806,636		—		—		—		806,636		—
Loans	Loans	$	9,170,399	$	19,638	$	11,187	$	41,950	$	9,243,174	$	746	Loans	$	9,207,113	$	15,006	$	7,056	$	12,686	$	9,241,861	$	963

2219

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. ~~All~~At the time the accrual is discontinued, all unpaid accrued interest is reversed against ~~earnings when considered uncollectible and at~~earnings. Interest income accrued in prior years, if any, is charged to the ~~time accrual is discontinued.~~allowance for credit losses. Payments subsequently received on non-accrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance.

The following table summarizes the Corporation’s non-accrual loans by loan class for the periods indicated:


		June 30, 2021				December 31, 2020		March 31, 2022				December 31, 2021
		Non-Accrual Loans		Non-Accrual Loans with no Allowance for Credit Losses		Non-Accrual Loans				Non-Accrual Loans			Non-Accrual Loans with no Allowance for Credit Losses		Non-Accrual Loans		Non-Accrual Loans with no Allowance for Credit Losses
Commercial and industrial loans	Commercial and industrial loans	$	1,467	$	781	$	2,329		Commercial and industrial loans	$	8,696		$	—	$	7,598	$	263
Agricultural land, production and other loans to farmers	Agricultural land, production and other loans to farmers	682		562		1,012			Agricultural land, production and other loans to farmers	103			—		631		524
Real estate loans:	Real estate loans:								Real estate loans:
Construction	Construction	1		0		123			Construction	740			—		685		—
Commercial real estate, non-owner occupied	Commercial real estate, non-owner occupied	45,437		28,179		46,316			Commercial real estate, non-owner occupied	21,427			4,201		23,029		6,133
Commercial real estate, owner occupied	Commercial real estate, owner occupied	2,133		926		3,040			Commercial real estate, owner occupied	1,689			1,320		411		—
Residential	Residential	5,552		816		6,517			Residential	8,553			2,920		9,153		2,160
Home equity	Home equity	2,248		0		2,095			Home equity	1,490			—		1,552		—
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	36		0		39			Individuals' loans for household and other personal expenditures	—			—		3		—

Loans	Loans	$	57,556	$	31,264	$	61,471		Loans	$	42,698		$	8,441	$	43,062	$	9,080

There was 0no interest income recognized on non-accrual loans for the three ~~and six~~ months ended ~~June 30, 2021 and 2020, respectively.~~March 31, 2022 or 2021.

Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses:


		June 30, 2021											March 31, 2022
		Commercial Real Estate		Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans			Commercial Real Estate		Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans
Commercial and industrial loans	Commercial and industrial loans	$	0	$	0	$	2,106	$	2,106	$	727	Commercial and industrial loans	$	—	$	—	$	8,111	$	8,111	$	2,513
Agricultural land, production and other loans to farmers		562		0		300		862		117

Real estate loans:	Real estate loans:											Real estate loans:

Construction												Construction	—		645		—		645		32
Commercial real estate, non-owner occupied	Commercial real estate, non-owner occupied	47,834		0		0		47,834		4,943		Commercial real estate, non-owner occupied	21,919		—		—		21,919		3,190
Commercial real estate, owner occupied	Commercial real estate, owner occupied	2,942		0		0		2,942		238		Commercial real estate, owner occupied	2,351		—		—		2,351		34
Residential	Residential	0		2,981		0		2,981		334		Residential	—		4,836		—		4,836		281
Home equity	Home equity	0		408		0		408		67		Home equity	—		388		—		388		63
Individuals' loans for household and other personal expenditures		0		0		1		1		0

Loans	Loans	$	51,338	$	3,389	$	2,407	$	57,134	$	6,426	Loans	$	24,270	$	5,869	$	8,111	$	38,250	$	6,113


	December 31, 2021
	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans
Commercial and industrial loans	$	—	$	—	$	8,075	$	8,075	$	2,672
Agricultural land, production and other loans to farmers	524		—		251		775		—
Real estate loans:
Construction	—		685		—		685		82
Commercial real estate, non-owner occupied	23,652		—		—		23,652		5,510
Commercial real estate, owner occupied	1,044		—		—		1,044		—
Residential	—		4,906		—		4,906		305
Home equity	—		394		—		394		64


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

2320

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

As detailed in NOTE 1. GENERAL of these Notes to Consolidated Condensed Financial Statements, the Bank's banking regulators issued guidance in March 2020 encouraging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act had further provided that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. In accordance with that guidance, the Bank has offered short-term modifications made in response to COVID-19 to borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The Consolidated Appropriations Act, 2021 extended the expiration date for COVID-related loan modifications exempt from troubled debt restructuring classification until the earlier of January 1, 2022, or 60 days after the termination of the national emergency. Details of the Corporation's modifications are included in the "LOAN QUALITY" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

In certain loan restructuring situations, the Corporation may grant a concession to a debtor experiencing financial difficulty, resulting in a troubled debt restructuring. A concession is deemed to be granted when, as a result of the restructuring, the Corporation does not expect to collect all original amounts due, including interest accrued at the original contract rate. If the payment of principal at original maturity is primarily dependent on the value of collateral, the current value of the collateral is considered in determining whether the principal will be repaid.

The following tables summarize troubled debt restructures in the Corporation's loan portfolio that occurred during the three months ended March 31, 2022 and ~~six months ended June 30, 2021 and 2020, respectively.~~2021.


				Three Months Ended June 30, 2021								Three Months Ended March 31, 2022
		Pre- Modification Recorded Balance		Term Modification		Combination		Post - Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Term Modification		Rate Modification		Combination		Post - Modification Recorded Balance		Number of Loans

Real estate loans:	Real estate loans:										Real estate loans:

Commercial real estate, owner occupied		$	21	$	0	$	21	$	21	1

Residential	Residential	66		66		0		66		2	Residential	$	53	$	—	$	56	$	—	$	56	1

Total	Total	$	87	$	66	$	21	$	87	3	Total	$	53	$	—	$	56	$	—	$	56	1


				Three Months Ended June 30, 2020												Three Months Ended March 31, 2021
		Pre- Modification Recorded Balance		Term Modification		Rate Modification		Combination		Post - Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Term Modification		Rate Modification		Combination		Post - Modification Recorded Balance		Number of Loans
Commercial and industrial loans	Commercial and industrial loans	$	654	$	654	$	0	$	0	$	654	3	Commercial and industrial loans	$	348	$	348	$	—	$	—	$	348	2
Agricultural land, production and other loans to farmers		458		458		0		0		458		1

Real estate loans:	Real estate loans:												Real estate loans:

Commercial real estate, owner occupied		107		107		0		0		107		1

Residential	Residential	300		0		112		225		337		6	Residential	625		383		126		118		627		7

Total	Total	$	1,519	$	1,219	$	112	$	225	$	1,556	11	Total	$	973	$	731	$	126	$	118	$	975	9

Six Months Ended June 30, 2021
Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans
Commercial and industrial loans $ 348 $ 348 $ 0 $ 0 $ 348 2
Real estate loans:
Commercial real estate, owner occupied 21 0 0 21 21 1
Residential 691 449 126 118 693 9
Total $ 1,060 $ 797 $ 126 $ 139 $ 1,062 12

Six Months Ended June 30, 2020
Pre- Modification Recorded Balance Term Modification Rate Modification Combination Post - Modification Recorded Balance Number of Loans
Commercial and industrial loans $ 654 $ 654 $ 0 $ 0 $ 654 3
Agricultural land, production and other loans to farmers 458 458 0 0 458 1
Real estate loans:
Commercial real estate, owner occupied 107 107 0 0 107 1
Residential 300 0 112 225 337 6
Total $ 1,519 $ 1,219 $ 112 $ 225 $ 1,556 11

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

Loans secured by ~~1- 4 family~~ residential real estate made up 76100 percent of the post-modification balances of the troubled debt restructured loans that occurred during the three months ending ~~June 30, 2021~~March 31, 2022 and 6564 percent for the ~~six~~three months ending ~~June 30,~~March 31, 2021.

The following tables summarize troubled debt restructures that occurred during the twelve months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ that subsequently defaulted during the period indicated and remained in default at period end. For purposes of this schedule, a loan is considered in default if it is 30-days or more past due.


		Three Months Ended June 30, 2021			Six Months Ended June 30, 2021				Three Months Ended March 31, 2022
		Number of Loans	Recorded Balance		Number of Loans	Recorded Balance			Number of Loans	Recorded Balance
Commercial and industrial loans		2	$	163	2	$	163

Real estate loans:	Real estate loans:							Real estate loans:
Commercial real estate, owner occupied								Commercial real estate, owner occupied	1	$	27

Residential		2	195		2	195

Total	Total	4	$	358	4	$	358	Total	1	$	27


		Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
		Number of Loans	Recorded Balance		Number of Loans	Recorded Balance
Commercial and industrial loans		1	$	268	1	$	268

									Three Months Ended March 31, 2021
									Number of Loans	Recorded Balance

Real estate loans:								Real estate loans:

Residential								Residential	5	$	197
Home equity								Home equity	1	91
Individuals' loans for household and other personal expenditures								Individuals' loans for household and other personal expenditures	1	2
Total	Total	1	$	268	1	$	268	Total	7	$	290

Commercial troubled debt restructured loans risk graded special mention, substandard, doubtful and loss are individually evaluated for apparent loss and may result in a specific reserve allocation in the allowance for credit loss. Commercial troubled debt restructures that aren't individually evaluated for a specific reserve are included in the calculation of allowance for credit losses through the loan segment loss analysis.

For all consumer loan modifications, an evaluation to identify if a troubled debt restructure has occurred is performed prior to making the modification. Any subsequent deterioration is addressed through the charge-off process or through a specific reserve allocation included in the allowance for credit loss. Consumer troubled debt restructures that are not individually evaluated for a specific reserve are included in the calculation of the allowance for credit losses through the loan segment loss analysis. Consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process ~~totaled $3.2~~ totaled $3.9 million and ~~$492,000~~$3.3 million at ~~June 30,~~March 31, 2022 and 2021, ~~and June 30, 2020,~~ respectively.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Allowance for Credit Losses on Loans

The Allowance for Credit Losses on Loans ("ACL - Loans") is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over the contractual term. The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge offs for loans, net or recoveries. Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

The allowance represents the Corporation’s best estimate of current expected credit losses on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The current expected credit loss ("CECL") calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the allowance for credit losses is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

In calculating the allowance for credit losses, the loan portfolio was pooled into ten loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Corporation analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

The expected credit losses are measured over the life of each loan segment utilizing the Probability of Default / Loss Given Default methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates.

The Corporation sub-segmented certain commercial portfolios by risk level and certain consumer portfolios by delinquency status where appropriate. The Corporation utilized a four-quarter reasonable and supportable economic forecast period followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the loans. Econometric modeling was performed using historical default rates and a selection of economic forecast scenarios published by Moody’s to develop a range of estimated credit losses for which to determine the best credit loss estimate within. Macroeconomic factors utilized in the modeling process include the national unemployment rate, BBB US corporate index, CRE price index and the home price index.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

The Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending management and staff, and (vi) other environmental factors such as regulatory, legal and technological considerations, as well as competition.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis.

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

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

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

Commercial

Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Corporation monitors commercial real estate loans based on collateral and risk grade criteria, as well as the levels of owner-occupied versus non-owner occupied loans.

Construction

Construction loans are underwritten utilizing a combination of tools and techniques including feasibility and market studies, independent appraisals and appraisal reviews, absorption and interest rate sensitivity analysis as well as the financial analysis of the developer and all guarantors. Construction loans are monitored by either in house or third party inspectors limiting advances to a percentage of costs or stabilized project value. These loans frequently involve the disbursement of significant funds with the repayment dependent upon the successful completion and, where necessary, the future stabilization of the project. The predominant inherent risk of this portfolio is associated with the borrower's ability to successfully complete a project on time, within budget and stabilize the projected as originally projected.

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences, which are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans, such as small installment loans and certain lines of credit, are unsecured. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers and can also be impacted by changes in property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

The following tables summarize changes in the allowance for credit losses by loan segment for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021:


		Three Months Ended June 30, 2021						Three Months Ended March 31, 2022
		Commercial		Commercial Real Estate		Construction			Consumer & Residential		Total			Commercial		Commercial Real Estate		Construction		Consumer & Residential		Total
Allowance for credit losses	Allowance for credit losses												Allowance for credit losses
Balances, March 31, 2021		$	65,722	$	70,861	$	20,182		$	44,317	$	201,082
Balances, December 31, 2021													Balances, December 31, 2021	$	69,935	$	60,665	$	20,206	$	44,591	$	195,397

Provision for credit losses	Provision for credit losses	(1,898)		2,842		(3,106)			2,162		0		Provision for credit losses	7,571		(8,250)		554		125		—

Recoveries on loans	Recoveries on loans	152		33		1			226		412		Recoveries on loans	139		707		—		206		1,052
Loans charged off	Loans charged off	(295)		(1,035)		0			(389)		(1,719)		Loans charged off	(8)		(122)		—		(335)		(465)
Balances, June 30, 2021		$	63,681	$	72,701	$	17,077		$	46,316	$	199,775
Balances, March 31, 2022													Balances, March 31, 2022	$	77,637	$	53,000	$	20,760	$	44,587	$	195,984

Six Months Ended June 30, 2021
Commercial Commercial Real Estate Construction Consumer Residential Consumer & Residential Total
Allowance for credit losses
Balances, December 31, 2020 $ 47,115 $ 51,070 $ 0 $ 9,648 $ 22,815 $ 0 $ 130,648
Credit risk reclassifications 0 (10,284) 10,284 (9,648) (22,815) 32,463 0
Balances, December 31, 2020 after reclassifications 47,115 40,786 10,284 0 0 32,463 130,648
Impact of adopting ASC 326 20,024 34,925 8,805 0 0 10,301 74,055
Balances, January 1, 2021 Post-ASC 326 adoption 67,139 75,711 19,089 0 0 42,764 204,703
Provision for credit losses (2,830) 1,141 (2,011) 0 0 3,700 0
Recoveries on loans 340 197 1 0 0 568 1,106
Loans charged off (968) (4,348) (2) 0 0 (716) (6,034)
Balances, June 30, 2021 $ 63,681 $ 72,701 $ 17,077 $ 0 $ 0 $ 46,316 $ 199,775

~~Allowance for Loan Losses under prior GAAP ("Incurred Loss Model")~~

~~Prior to the adoption of ASU No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ ~~on January 1, 2021, the Corporation maintained an allowance for loan losses in accordance with the incurred loss model as disclosed in the Corporation's 2020 Annual Report on Form 10-K.~~

~~The following tables summarize changes in the allowance for loan losses by loan segment for the three and six months ended June 30, 2020:~~

Three Months Ended June 30, 2020
Commercial Commercial
Real Estate Consumer Residential Total
Allowance for loan losses:
Balances, March 31, 2020 $ 38,431 $ 37,907 $ 5,752 $ 17,364 $ 99,454
Provision for losses 6,240 8,945 2,783 3,927 21,895
Recoveries on loans 106 107 56 48 317
Loans charged off (99) (41) (146) (261) (547)
Balances, June 30, 2020 $ 44,678 $ 46,918 $ 8,445 $ 21,078 $ 121,119

Six Months Ended June 30, 2020
Commercial Commercial
Real Estate Consumer Residential Total
Allowance for loan losses:
Balances, December 31, 2019 $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284
Provision for losses 11,941 18,139 4,707 6,860 41,647
Recoveries on loans 549 225 98 118 990
Loans charged off (714) (224) (395) (469) (1,802)
Balances, June 30, 2020 $ 44,678 $ 46,918 $ 8,445 $ 21,078 $ 121,119


	Three Months Ended March 31, 2021
	Commercial		Commercial Real Estate		Construction		Consumer		Residential		Consumer & Residential		Total
Allowance for credit losses
Balances, December 31, 2020	$	47,115	$	51,070	$	—	$	9,648	$	22,815	$	—	$	130,648
Credit risk reclassifications	—		(10,284)		10,284		(9,648)		(22,815)		32,463		—
Balances, December 31, 2020 after reclassifications	47,115		40,786		10,284		—		—		32,463		130,648
Impact of adopting ASC 326	20,024		34,925		8,805		—		—		10,301		74,055
Balances, January 1, 2021 Post-ASC 326 adoption	67,139		75,711		19,089		—		—		42,764		204,703
Provision for credit losses	(932)		(1,701)		1,095		—		—		1,538		—

Recoveries on loans	188		164		—		—		—		342		694
Loans charged off	(673)		(3,313)		(2)		—		—		(327)		(4,315)
Balances, March 31, 2021	$	65,722	$	70,861	$	20,182	$	—	$	—	$	44,317	$	201,082

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

~~The table below shows the Corporation’s allowance for loan losses under the incurred loss model and loan portfolio by loan segment as of December 31, 2020.~~
December 31, 2020
Commercial Commercial
Real Estate Consumer Residential Total
Allowance Balances:
Individually evaluated for impairment $ 223 $ 12,246 $ 0 $ 432 $ 12,901
Collectively evaluated for impairment 46,892 38,824 9,648 22,383 117,747
Total Allowance for Loan Losses $ 47,115 $ 51,070 $ 9,648 $ 22,815 $ 130,648
Loan Balances:
Individually evaluated for impairment $ 1,258 $ 51,605 $ 2 $ 3,291 $ 56,156
Collectively evaluated for impairment 3,505,863 3,805,808 129,477 1,739,709 9,180,857
Loans acquired with deteriorated credit quality 577 5,584 — 0 6,161
Loans $ 3,507,698 $ 3,862,997 $ 129,479 $ 1,743,000 $ 9,243,174

The following tables show the composition of the Corporation’s impaired loans, related allowance under the incurred loss model and interest income recognized while impaired by loan class as of the periods indicated:

December 31, 2020
Unpaid
Principal
Balance Recorded
Investment Related
Allowance
Impaired loans with no related allowance:
Commercial and industrial loans $ 1,059 $ 991 $ —
Real estate Loans:
Commercial real estate, non-owner occupied 4,958 4,694 —
Commercial real estate, owner occupied 2,125 1,310 —
Residential 957 816 —
Individuals' loans for household and other personal expenditures 2 2 —
Total $ 9,101 $ 7,813 $ —
Impaired loans with related allowance:
Commercial and industrial loans $ 268 $ 268 $ 223
Agricultural land, production and other loans to farmers 640 562 3
Real estate Loans:
Commercial real estate, non-owner occupied 44,016 43,715 11,686
Commercial real estate, owner occupied 2,061 1,323 557
Residential 2,041 2,014 352
Home equity 487 461 80
Total $ 49,513 $ 48,343 $ 12,901
Total Impaired Loans $ 58,614 $ 56,156 $ 12,901

Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
Average
Recorded Investment Interest
Income Recognized Average
Recorded Investment Interest
Income Recognized
Impaired loans with no related allowance:
Commercial and industrial loans $ 5,008 $ 0 $ 5,008 $ 0
Real estate Loans:
Commercial and farmland 7,637 37 7,910 75
Residential 59 1 59 2
Individuals' loans for household and other personal expenditures 3 0 3 0
Total $ 12,707 $ 38 $ 12,980 $ 77
Impaired loans with related allowance:
Commercial and industrial loans $ 10,304 $ 0 $ 10,304 $ 0
Real estate Loans:
Commercial and farmland 18,910 0 19,156 0
Residential 3,020 19 3,032 38
Home equity 387 3 390 6
Total $ 32,621 $ 22 $ 32,882 $ 44
Total Impaired Loans $ 45,328 $ 60 $ 45,862 $ 121

2823

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PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Off-Balance Sheet Arrangements, Commitments And Contingencies

In the normal course of business, the Corporation has entered into off-balance sheet financial instruments which include commitments to extend credit and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial ~~concerns~~customers that use lines of credit to supplement their treasury management functions, and thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing for their cash flows. Other typical lines of credit are related to home equity loans granted to customers. Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require a fee.

Standby letters of credit are generally issued on behalf of an applicant (the Corporation’s customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. The standby letter of credit would permit the beneficiary to obtain payment from the Corporation under certain prescribed circumstances. Subsequently, the Corporation would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Corporation typically follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is typically evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and only amounts drawn upon would be reflected in the future. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should the Corporation’s customers default on their resulting obligation to the Corporation, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments.

Financial instruments with off-balance sheet risk were as follows:


		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Amounts of commitments:	Amounts of commitments:					Amounts of commitments:
Loan commitments to extend credit	Loan commitments to extend credit	$	3,884,912	$	3,443,514	Loan commitments to extend credit	$	3,958,844	$	3,917,215
Standby letters of credit	Standby letters of credit	$	32,505	$	29,555	Standby letters of credit	$	31,854	$	34,613

The adoption of the CECL methodology for measuring credit losses ~~as discussed more fully~~on January 1, 2021 resulted in ~~the Allowance for Credit Loss on Loans section of this Note, and in NOTE 1. GENERAL of these Notes to Consolidated Condensed Financial Statements, increased the opening balance of our~~an accrual for off-balance sheet commitments at adoption byof $20.5 million. This reserve level remains appropriate and is reported in Other Liabilities as of ~~June 30, 2021~~March 31, 2022 in the ~~CONSOLIDATED CONDENSED BALANCE SHEETS.~~Consolidated Condensed Balance Sheets.

The following table details activity in the allowance for credit losses on off-balance sheet commitments:


	Three Months Ended ~~June 30, 2021~~March 31, 2022
Balances, ~~March~~December 31, 2021	$	20,500

Provision for credit losses	0—
Balances, ~~June 30, 2021~~March 31, 2022	$	20,500

NOTE 5

GOODWILL

Goodwill is recorded on the acquisition date of an entity. The Hoosier acquisition on April, 1, 2021 resulted in $1,467,000 of goodwill. Details regarding the Hoosier acquisition are discussed in NOTE 2. ~~ACQUISITION~~ACQUISITIONS of these Notes to Consolidated Condensed Financial Statements.


		2021		2020			2022		2021
Balance, January 1	Balance, January 1	$	543,918	$	543,918	Balance, January 1	$	545,385	$	543,918
Goodwill acquired	Goodwill acquired	1,467		0		Goodwill acquired	—		1,467

Balance, June 30		$	545,385	$	543,918
Balance, March 31						Balance, March 31	$	545,385	$	545,385

2924

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PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

NOTE 6

OTHER INTANGIBLES

Core deposit intangibles and other intangibles are recorded on the acquisition date of an entity. The Hoosier acquisition on April 1, 2021 resulted in a customer relationship intangible of $2,247,000. Details regarding the Hoosier acquisition are discussed in NOTE 2. ~~ACQUISITION~~ACQUISITIONS of these Notes to Consolidated Condensed Financial Statements. The carrying basis and accumulated amortization of recognized core deposit intangibles and other intangibles are noted below.


		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Gross carrying amount	Gross carrying amount	$	102,396	$	102,396	Gross carrying amount	$	104,643	$	102,396

Other intangibles acquired	Other intangibles acquired	2,247		0		Other intangibles acquired	—		2,247

Accumulated amortization	Accumulated amortization	(76,242)		(73,421)		Accumulated amortization	(80,534)		(79,168)

Total core deposit and other intangibles	Total core deposit and other intangibles	$	28,401	$	28,975	Total core deposit and other intangibles	$	24,109	$	25,475

The core deposit intangibles and other intangibles are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of two years to ten years. Intangible ~~asset~~ amortization expense for each of the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and March 31, 2021 was ~~$1.5 million and $2.8 million, respectively, compared to $1.5 million and $3.0 million for the three and six months ended June 30, 2020, respectively.~~$1.4 million. Estimated future amortization expense is summarized as follows:


		Amortization Expense			Amortization Expense
2021		$	2,927
2022	2022	5,402		2022	$	4,036
2023	2023	5,145		2023	5,145
2024	2024	4,510		2024	4,510
2025	2025	3,754		2025	3,754
After 2025		6,663
2026				2026	2,948
After 2026				After 2026	3,716
		$	28,401		$	24,109

NOTE 7

DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash payments principally related to certain variable-rate liabilities. The Corporation also has derivatives that are a result of a service the Corporation provides to certain qualifying customers, and, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. The Corporation manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its net risk exposure resulting from such transactions.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

Cash Flow Hedges of Interest Rate Risk

The Corporation’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of fixed amounts to a counterparty in exchange for the Corporation receiving variable payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of ~~June 30, 2021 and~~March 31, 2022 the Corporation had 3 interest rate swaps with a notional amount of $36.0 million that were designated as cash flow hedges. As of December 31, ~~2020,~~2021, the Corporation had 4 interest rate swaps with a notional amount of $60.0 million that were designated as cash flow hedges. A $24.0 million interest rate swap, which was used to hedge the variable cash outflows (Ameribor-based) associated with a brokered deposit, matured in the first quarter of 2022.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During ~~2021,~~2022, $26.0 million of the interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with existing trust preferred securities when the outflows converted from a fixed rate to variable rate in September 2012. In addition, $10.0 million of interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with one Federal Home Loan Bank ~~advances. Finally, the remaining $24.0 million of interest rate swaps were used to hedge the variable cash outflows (Ameribor-based) associated with a brokered deposit. The~~advance.The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Corporation did not recognize any ineffectiveness.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Corporation's variable-rate liabilities. During the next twelve months, the Corporation expects to reclassify ~~$1.0 million~~$307,000 from accumulated other comprehensive income (loss) to interest expense.

Non-designated Hedges

The Corporation does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers. The Corporation executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Corporation executes with a third party, such that the Corporation minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. ~~As of June 30, 2021~~At March 31, 2022 and December 31, ~~2020,~~2021, the notional amount of customer-facing swaps was approximately $1.0 ~~billion and $985.0 million, respectively.~~billion. These amounts are offset with third party counterparties, as described above.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Corporation’s derivative financial instruments, as well as their classification on the Balance Sheet, as of ~~June 30, 2021,~~March 31, 2022, and December 31, ~~2020.~~2021.

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

June 30, 2021

December 31, 2020

June 30, 2021

December 31, 2020

March 31, 2022

December 31, 2021

March 31, 2022

December 31, 2021

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Derivatives designated as hedging instruments:

Interest rate contracts

Other Assets

Other Liabilities

1,464

Other Liabilities

2,018

Interest rate contracts

Other Assets

—

Other Assets

—

Other Liabilities

292

Other Liabilities

835

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

51,845

Other Assets

74,335

Other Liabilities

51,845

Other Liabilities

74,335

Interest rate contracts

Other Assets

34,995

Other Assets

41,133

Other Liabilities

34,995

Other Liabilities

41,133

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


Derivatives in Cash Flow Hedging Relationships	Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)								Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)
		Three Months Ended				Six Months Ended					Three Months Ended
		June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020			March 31, 2022		March 31, 2021
Interest Rate Products	Interest Rate Products	$	(16)	$	(145)	$	42	$	(1,459)	Interest Rate Products	$	303	$	58

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

Effect of Derivative Instruments on the Income Statement

The Corporation did not recognize any gains or losses from derivative financial instruments in the Consolidated Condensed Statements of Income for the three ~~and six~~ months ended ~~June 30, 2021 and 2020.~~March 31, 2022 or 2021.

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

Derivatives Designated as
Hedging Instruments under
FASB ASC 815-10

Location of Gain (Loss)
Recognized Income on
Derivative

Amount of Gain (Loss) Reclassed from Other Comprehensive Income into Income (Effective Portion)

Derivatives Designated as
Hedging Instruments under
FASB ASC 815-10

Location of Gain (Loss)
Recognized Income on
Derivative

Amount of Gain (Loss) Reclassed from Other Comprehensive Income into Income (Effective Portion)

Three Months Ended
June 30, 2021

Three Months Ended
June 30, 2020

Three Months Ended
March 31, 2022

Three Months Ended
March 31, 2021

Interest rate contracts

Interest Expense

(260)

(231)

Interest rate contracts

Interest Expense

(241)

(252)

Derivatives Designated as
Hedging Instruments under
FASB ASC 815-10 Location of Gain (Loss)
Recognized Income on
Derivative Amount of Gain (Loss) Reclassed from Other Comprehensive Income into Income (Effective Portion)
Six Months Ended
June 30, 2021 Six Months Ended
June 30, 2020
Interest rate contracts Interest Expense $ (513) $ (357)

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The Corporation’s exposure to credit risk occurs because of nonperformance by its counterparties. The counterparties approved by the Corporation are usually financial institutions, which are well capitalized and have credit ratings through Moody’s and/or Standard & Poor’s at or above investment grade. The Corporation’s control of such risk is through quarterly financial reviews, comparing mark-to-market values with policy limitations, credit ratings and collateral pledging.

Credit-risk-related Contingent Features

The Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well or adequately capitalized institution, then the Corporation could be required to terminate or fully collateralize all outstanding derivative contracts. Additionally, the Corporation has agreements with certain of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. As of ~~June 30, 2021,~~March 31, 2022, the termination value of derivatives in a net liability position related to these agreements was ~~$47.8~~$20.3 million. As of ~~June 30, 2021,~~March 31, 2022, the Corporation has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of ~~$62.8~~$24.8 million. While the Corporation did not breach any of these provisions as of ~~June 30, 2021,~~March 31, 2022, if it had, the Corporation could have been required to settle its obligations under the agreements at their termination value.

NOTE 8

DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

The Corporation used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value in any new circumstances.

As defined in ASC 820, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. It represents an exit price at the measurement date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value. The Corporation values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market for the asset or liability (i.e., the market where the asset could be sold or the liability transferred at a price that maximizes the amount to be received for the asset or minimizes the amount to be paid to transfer the liability).

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are those assumptions which market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Corporation. Unobservable inputs are assumptions based on the Corporation’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs for which there is little or no market activity (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

the lowest level input that is significant to the fair value measurement in its entirety. The Corporation considers an input to be significant if it drives 10 percent or more of the total fair value of a particular asset or liability.

RECURRING MEASUREMENTS

Assets and liabilities are considered to be measured at fair value on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a minimum on the measurement date. Assets and liabilities are considered to be measured at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements which require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The fair value of assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any additional changes in fair value subsequent to the transfer considered to be realized or unrealized gains or losses.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the

accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Investment Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. ~~The Corporation currently has no securities classified within~~ Level 1 ~~of the hierarchy.~~securities include U.S. Treasury securities. Where significant observable inputs, other than Level 1 quoted prices, are available, securities are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. ~~treasury securities,~~ government-sponsored agency and mortgage-backed securities, state and municipal securities and corporate obligations securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include state and municipal securities, U.S. government-sponsored agency and mortgage-backed securities and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

Interest Rate Derivative Agreements

See information regarding the Corporation’s interest rate derivative products in NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at ~~June 30, 2021,~~March 31, 2022, and December 31, ~~2020.~~2021.


				Fair Value Measurements Using:									Fair Value Measurements Using:
June 30, 2021		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2022										March 31, 2022	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:	Available for sale securities:									Available for sale securities:
U.S. Treasury	U.S. Treasury	$	1,000	$	0	$	1,000	$	0	U.S. Treasury	$	1,959	$	1,959	$	—	$	—
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	11,541		0		11,541		0		U.S. Government-sponsored agency securities	79,098		—		79,098		—
State and municipal	State and municipal	1,451,845		0		1,446,085		5,760		State and municipal	1,496,533		—		1,487,656		8,877
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	958,286		0		958,282		4		U.S. Government-sponsored mortgage-backed securities	582,524		—		582,520		4
Corporate obligations	Corporate obligations	4,228		0		4,197		31		Corporate obligations	4,083		—		4,052		31
Interest rate swap asset	Interest rate swap asset	51,845		0		51,845		0		Interest rate swap asset	34,995		—		34,995		—
Interest rate swap liability	Interest rate swap liability	53,309		0		53,309		0		Interest rate swap liability	35,287		—		35,287		—


				Fair Value Measurements Using:									Fair Value Measurements Using:
December 31, 2020		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2021										December 31, 2021	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:	Available for sale securities:									Available for sale securities:

U.S. Treasury										U.S. Treasury	$	999	$	999	$	—	$	—
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	$	2,430	$	0	$	2,430	$	0	U.S. Government-sponsored agency securities	95,136		—		95,136		—
State and municipal	State and municipal	1,257,885		0		1,255,441		2,444		State and municipal	1,576,532		—		1,571,076		5,456
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	654,669		0		654,665		4		U.S. Government-sponsored mortgage-backed securities	667,605		—		667,601		4

Corporate obligations	Corporate obligations	4,135		0		4,104		31		Corporate obligations	4,279		—		4,248		31

Interest rate swap asset	Interest rate swap asset	74,335		0		74,335		0		Interest rate swap asset	41,133		—		41,133		—
Interest rate swap liability	Interest rate swap liability	76,353		0		76,353		0		Interest rate swap liability	41,968		—		41,968		—

3328

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

~~There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or~~

~~liabilities held at June 30, 2021 or December 31, 2020.~~

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying

balance sheets using significant unobservable Level 3 inputs for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.


		Available for Sale Securities									Available for Sale Securities
		Three Months Ended				Six Months Ended					Three Months Ended
		June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020			March 31, 2022		March 31, 2021
Balance at beginning of the period	Balance at beginning of the period	$	2,146	$	2,528	$	2,479	$	2,892	Balance at beginning of the period	$	5,491	$	2,479

Included in other comprehensive income	Included in other comprehensive income	412		(30)		353		(50)		Included in other comprehensive income	(493)		(60)
Purchases, issuances and settlements	Purchases, issuances and settlements	3,241		0		3,241		0		Purchases, issuances and settlements	4,100		—

Principal payments	Principal payments	(4)		2		(278)		(342)		Principal payments	(186)		(273)
Ending balance	Ending balance	$	5,795	$	2,500	$	5,795	$	2,500	Ending balance	$	8,912	$	2,146

There were no gains or losses included in earnings that were attributable to the changes in unrealized gains or losses related to assets or

liabilities held at March 31, 2022 or December 31, 2021.

Transfers Between Levels

There were no transfers in or out of Level 3 for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.

Nonrecurring Measurements

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy ~~for June 30, 2021,~~at March 31, 2022, and December 31, ~~2020.~~2021.

Fair Value Measurements Using
June 30, 2021 Fair Value Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant Unobservable
Inputs
(Level 3)
Collateral dependent loans $ 43,292 $ 0 $ 0 $ 43,292
Other real estate owned 167 0 0 167


			Fair Value Measurements Using
March 31, 2022	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans	$	24,657	$	—	$	—	$	24,657

Fair Value Measurements Using
December 31, 2020 Fair Value Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant Unobservable
Inputs
(Level 3)
Impaired loans (collateral dependent) $ 37,250 $ 0 $ 0 $ 37,250
Other real estate owned 544 0 0 544


			Fair Value Measurements Using
December 31, 2021	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent loans	$	24,491	$	—	$	—	$	24,491
Other real estate owned	96		—		—		96

~~Impaired~~Collateral Dependent Loans ~~(collateral dependent)~~and Other Real Estate Owned

Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimatingDetermining fair value ~~of the collateral~~ for collateral dependent ~~loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method~~loans and other real estate requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of the loan is confirmed. During 2020 and 2021, certain impaired loans were partially charged off or re-evaluated. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

~~Other Real Estate Owned~~

~~The fair value for impaired loans and other real estate owned is measured based on the value of the collateral securing those loans or real estate and is determined using several methods.~~ The fair value of real estate is generally ~~determined~~ based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a ~~discounted~~ cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings ~~and/~~and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

~~June 30, 2021~~March 31, 2022

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted-Average)

State and municipal securities

~~5,760~~8,877

Discounted cash flow

Maturity/Call date

1 month to 15 years

US Muni BQ curve

A- to BBB--

Discount rate

~~.75%~~0.4% - 4%4.0%

Weighted-average coupon

%2.2%

Corporate obligations and U.S. Government-sponsored mortgage-backed securities

Discounted cash flow

Risk free rate

3 month LIBOR

plus premium for illiquidity

plus 200bps

Weighted-average coupon

~~Collateral dependent~~Impaired loans (collateral dependent)

~~43,292~~24,657

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

0% - 10%

Weighted-average discount by loan balance

%3.6%

~~Other real estate owned~~

~~167~~

~~Appraisals~~

~~Discount to reflect current market conditions~~

~~0% - 72%~~

~~Weighted-average discount of other real estate owned balance~~

~~39%~~

December 31, ~~2020~~2021

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted-Average)

State and municipal securities

~~2,444~~5,456

Discounted cash flow

Maturity/Call date

1 month to 15 years

US Muni BQ curve

A- to BBB-

Discount rate

~~1.50%~~0.75% - 4%

Weighted-average coupon

%3.7%

Corporate obligations and U.S Government-sponsored mortgage-backed securities

Discounted cash flow

Risk free rate

3 month LIBOR

plus premium for illiquidity

plus 200bps

Weighted-average coupon

Impaired loans (collateral dependent)

~~37,250~~24,491

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

0% - 10%

Weighted-average discount by loan balance

6%5.5%

Other real estate owned

~~544~~96

Appraisals

Discount to reflect current market conditions

0% - ~~30%~~44%

Weighted-average discount of other real estate owned balance

~~26%~~43.5%

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

State and Municipal Securities, Corporate Obligations and U.S. Government-sponsored Mortgage-Backed Securities

The significant unobservable inputs used in the fair value measurement of the Corporation's state and municipal securities, corporate obligations and U.S. Government-sponsored mortgage-backed securities are premiums for unrated securities and marketability discounts. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, changes in either of those inputs will not affect the other input.

3530

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Fair Value of Financial Instruments

The following table presents estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at ~~June 30, 2021,~~March 31, 2022, and December 31, ~~2020.~~2021.


				June 30, 2021									March 31, 2022
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
		Carrying Amount		(Level 1)		(Level 2)		(Level 3)			Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Assets:	Assets:									Assets:
Cash and cash equivalents	Cash and cash equivalents	$	167,596	$	167,596	$	0	$	0	Cash and cash equivalents	$	148,277	$	148,277	$	—	$	—
Interest-bearing deposits	Interest-bearing deposits	438,863		438,863		0		0		Interest-bearing deposits	395,262		395,262		—		—
Investment securities available for sale	Investment securities available for sale	2,426,900		0		2,421,105		5,795		Investment securities available for sale	2,164,197		1,959		2,153,326		8,912
Investment securities held to maturity	Investment securities held to maturity	1,721,414		0		1,745,282		15,565		Investment securities held to maturity	2,325,066		—		2,132,711		13,283
Loans held for sale	Loans held for sale	18,582		0		18,582		0		Loans held for sale	3,938		—		3,938		—
Loans, net	Loans, net	8,921,475		0		0		8,976,919		Loans, net	9,160,257		—		—		8,969,530
Federal Home Loan Bank stock	Federal Home Loan Bank stock	28,736		0		28,736		0		Federal Home Loan Bank stock	26,422		—		26,422		—
Interest rate swap asset	Interest rate swap asset	51,845		0		51,845		0		Interest rate swap asset	34,995		—		34,995		—
Interest receivable	Interest receivable	54,173		0		54,173		0		Interest receivable	56,081		—		56,081		—
Liabilities:	Liabilities:									Liabilities:
Deposits	Deposits	$	12,203,400	$	11,419,155	$	782,802	$	0	Deposits	$	12,905,953	$	12,250,450	$	646,951	$	—
Borrowings:	Borrowings:									Borrowings:

Securities sold under repurchase agreements	Securities sold under repurchase agreements	146,904		0		146,900		0		Securities sold under repurchase agreements	169,697		—		169,679		—
Federal Home Loan Bank advances	Federal Home Loan Bank advances	334,243		0		340,783		0		Federal Home Loan Bank advances	308,960		—		307,288		—
Subordinated debentures and other borrowings	Subordinated debentures and other borrowings	118,498		0		107,751		0		Subordinated debentures and other borrowings	118,677		—		111,691		—
Interest rate swap liability	Interest rate swap liability	53,309		0		53,309		0		Interest rate swap liability	35,287		—		35,287		—
Interest payable	Interest payable	2,929		0		2,929		0		Interest payable	3,589		—		3,589		—


				December 31, 2020									December 31, 2021
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
		Carrying Amount		(Level 1)		(Level 2)		(Level 3)			Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Assets:	Assets:									Assets:
Cash and cash equivalents	Cash and cash equivalents	$	192,896	$	192,896	$	0	$	0	Cash and cash equivalents	$	167,146	$	167,146	$	—	$	—
Interest-bearing deposits	Interest-bearing deposits	392,305		392,305		0		0		Interest-bearing deposits	474,154		474,154		—		—
Investment securities available for sale	Investment securities available for sale	1,919,119		0		1,916,640		2,479		Investment securities available for sale	2,344,551		999		2,338,061		5,491
Investment securities held to maturity	Investment securities held to maturity	1,227,668		0		1,260,815		19,478		Investment securities held to maturity	2,179,802		—		2,188,600		13,903
Loans held for sale	Loans held for sale	3,966		0		3,966		0		Loans held for sale	11,187		—		11,187		—
Loans, net	Loans, net	9,112,526		0		0		9,191,628		Loans, net	9,046,464		—		—		9,068,319
Federal Home Loan Bank stock	Federal Home Loan Bank stock	28,736		0		28,736		0		Federal Home Loan Bank stock	28,736		—		28,736		—
Interest rate swap asset	Interest rate swap asset	74,335		0		74,335		0		Interest rate swap asset	41,133		—		41,133		—
Interest receivable	Interest receivable	53,948		0		53,948		0		Interest receivable	57,187		—		57,187		—
Liabilities:	Liabilities:									Liabilities:
Deposits	Deposits	$	11,361,610	$	10,482,865	$	878,257	$	0	Deposits	$	12,732,577	$	12,038,992	$	690,089	$	—
Borrowings:	Borrowings:									Borrowings:

Securities sold under repurchase agreements	Securities sold under repurchase agreements	177,102		0		177,097		0		Securities sold under repurchase agreements	181,577		—		181,572		—
Federal Home Loan Bank advances	Federal Home Loan Bank advances	389,430		0		399,991		0		Federal Home Loan Bank advances	334,055		—		337,005		—
Subordinated debentures and other borrowings	Subordinated debentures and other borrowings	118,380		0		108,439		0		Subordinated debentures and other borrowings	118,618		—		107,892		—
Interest rate swap liability	Interest rate swap liability	76,353		0		76,353		0		Interest rate swap liability	41,968		—		41,968		—
Interest payable	Interest payable	3,287		0		3,287		0		Interest payable	2,762		—		2,762		—

3631

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ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

NOTE 9

TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were:

June 30, 2021
Remaining Contractual Maturity of the Agreements
Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total
U.S. Government-sponsored mortgage-backed securities $ 145,249 $ 800 $ 0 $ 855 $ 146,904


	March 31, 2022
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater Than 90 Days		Total
U.S. Government-sponsored mortgage-backed securities	$	169,697	$	—	$	—	$	—	$	169,697

December 31, 2020
Remaining Contractual Maturity of the Agreements
Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 Days Total
U.S. Government-sponsored mortgage-backed securities $ 175,449 $ 0 $ 1,653 $ 0 $ 177,102


	December 31, 2021
	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater Than 90 Days		Total
U.S. Government-sponsored mortgage-backed securities	$	181,577	$	—	$	—	$	—	$	181,577

NOTE 10

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, as of ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:


											Accumulated Other Comprehensive Income (Loss)
											Unrealized Gains (Losses) on Securities Available for Sale		Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains (Losses) on Defined Benefit Plans		Total
Balance at December 31, 2021										Balance at December 31, 2021	$	59,774	$	(660)	$	(4,001)	$	55,113
Other comprehensive income (loss) before reclassifications										Other comprehensive income (loss) before reclassifications	(139,487)		239		—		(139,248)
Amounts reclassified from accumulated other comprehensive income										Amounts reclassified from accumulated other comprehensive income	(447)		190		—		(257)
Period change										Period change	(139,934)		429		—		(139,505)

Balance at March 31, 2022										Balance at March 31, 2022	$	(80,160)	$	(231)	$	(4,001)	$	(84,392)
		Accumulated Other Comprehensive Income (Loss)
		Unrealized Gains (Losses) on Securities Available for Sale		Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains (Losses) on Defined Benefit Plans		Total
Balance at December 31, 2020	Balance at December 31, 2020	$	87,988	$	(1,594)	$	(11,558)	$	74,836	Balance at December 31, 2020	$	87,988	$	(1,594)	$	(11,558)	$	74,836
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	(12,382)		33		0		(12,349)		Other comprehensive income (loss) before reclassifications	(37,850)		46		—		(37,804)
Amounts reclassified from accumulated other comprehensive income	Amounts reclassified from accumulated other comprehensive income	(2,812)		405		0		(2,407)		Amounts reclassified from accumulated other comprehensive income	(1,421)		199		—		(1,222)
Period change	Period change	(15,194)		438		0		(14,756)		Period change	(39,271)		245		—		(39,026)

Balance at June 30, 2021		$	72,794	$	(1,156)	$	(11,558)	$	60,080

Balance at December 31, 2019		$	38,872	$	(1,141)	$	(9,857)	$	27,874
Other comprehensive income (loss) before reclassifications		42,909		(1,153)		0		41,756
Amounts reclassified from accumulated other comprehensive income		(6,067)		282		0		(5,785)
Period change		36,842		(871)		0		35,971

Balance at June 30, 2020		$	75,714	$	(2,012)	$	(9,857)	$	63,845
Balance at March 31, 2021										Balance at March 31, 2021	$	48,717	$	(1,349)	$	(11,558)	$	35,810

3732

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PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Condensed Statements of Income for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.


		Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended June 30,						Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended March 31,
Details about Accumulated Other Comprehensive Income (Loss) Components	Details about Accumulated Other Comprehensive Income (Loss) Components	2021		2020		Affected Line Item in the Statements of Income	Details about Accumulated Other Comprehensive Income (Loss) Components	2022		2021		Affected Line Item in the Statements of Income
Unrealized gains (losses) on available for sale securities (1)	Unrealized gains (losses) on available for sale securities (1)						Unrealized gains (losses) on available for sale securities (1)
Realized securities gains reclassified into income	Realized securities gains reclassified into income	$	1,761	$	3,068	Other income - net realized gains on sales of available for sale securities	Realized securities gains reclassified into income	$	566	$	1,799	Other income - net realized gains on sales of available for sale securities
Related income tax expense	Related income tax expense	(370)		(644)		Income tax expense	Related income tax expense	(119)		(378)		Income tax expense
		$	1,391	$	2,424			$	447	$	1,421

Unrealized gains (losses) on cash flow hedges (2)	Unrealized gains (losses) on cash flow hedges (2)						Unrealized gains (losses) on cash flow hedges (2)
Interest rate contracts	Interest rate contracts	$	(260)	$	(231)	Interest expense - subordinated debentures and term loans	Interest rate contracts	$	(241)	$	(252)	Interest expense - subordinated debentures and term loans
Related income tax benefit	Related income tax benefit	55		49		Income tax expense	Related income tax benefit	51		53		Income tax expense
		$	(205)	$	(182)			$	(190)	$	(199)

Total reclassifications for the period, net of tax	Total reclassifications for the period, net of tax	$	1,186	$	2,242		Total reclassifications for the period, net of tax	$	257	$	1,222

Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Six Months Ended June 30,
Details about Accumulated Other Comprehensive Income (Loss) Components 2021 2020 Affected Line Item in the Statements of Income
Unrealized gains (losses) on available for sale securities (1)
Realized securities gains reclassified into income $ 3,560 $ 7,680 Other income - net realized gains on sales of available for sale securities
Related income tax expense (748) (1,613) Income tax expense
$ 2,812 $ 6,067
Unrealized gains (losses) on cash flow hedges (2)
Interest rate contracts $ (513) $ (357) Interest expense - subordinated debentures and term loans
Related income tax benefit 108 75 Income tax expense
$ (405) $ (282)
Total reclassifications for the period, net of tax $ 2,407 $ 5,785

(1) For additional detail related to unrealized gains (losses) on available for sale securities and related amounts reclassified from accumulated other comprehensive income see NOTE 3. INVESTMENT SECURITIES of these Notes to Consolidated Condensed Financial Statements.

(2) For additional detail related to unrealized gains (losses) on cash flow hedges and related amounts reclassified from accumulated other comprehensive income see NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.

NOTE 11

SHARE-BASED COMPENSATION

Stock options and RSAs have been issued to directors, officers and other management employees under the Corporation's 2009 Long-term Equity Incentive Plan, the 2019 Long-term Equity Incentive Plan, and the Equity Compensation Plan for Non-Employee Directors. The stock options, which have a ten year life, become 100 percent vested based on time ranging from one year to two years and are fully exercisable when vested. Option exercise prices equal the Corporation's common stock closing price on NASDAQ on the date of grant. The RSAs issued to employees and non-employee directors provide for the issuance of shares of the Corporation's common stock at no cost to the holder and generally vest after 3three years. The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited. For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited. The RSAs for employees and non-employee directors are either immediately vested at retirement, disability or death, or, continue to vest after retirement, disability or death, depending on the plan under which the shares were granted.

The Corporation’s 2019 ESPP provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings. Awards are valued at

fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 was ~~$1,208,000 and $2,398,000, respectively,~~$1.1 million compared to ~~$1,214,000 and $2,433,000, respectively,~~$1.2 million for the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2021. Share-based compensation has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Condensed Statements of Income.

Share-based compensation expense recognized in the Consolidated Condensed Statements of Income is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 0.5 percent for the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, based on historical experience.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Stock and ESPP Options	Stock and ESPP Options									Stock and ESPP Options
Pre-tax compensation expense	Pre-tax compensation expense	$	40	$	12	$	115	$	53	Pre-tax compensation expense	$	29	$	75
Income tax expense (benefit)	Income tax expense (benefit)	(20)		(29)		(92)		(29)		Income tax expense (benefit)	(17)		(72)
Stock and ESPP option expense, net of income taxes	Stock and ESPP option expense, net of income taxes	$	20	$	(17)	$	23	$	24	Stock and ESPP option expense, net of income taxes	$	12	$	3
Restricted Stock Awards	Restricted Stock Awards									Restricted Stock Awards
Pre-tax compensation expense	Pre-tax compensation expense	$	1,168	$	1,202	$	2,283	$	2,380	Pre-tax compensation expense	$	1,071	$	1,115
Income tax expense (benefit)	Income tax expense (benefit)	(246)		(236)		(483)		(493)		Income tax expense (benefit)	(226)		(237)
Restricted stock awards expense, net of income taxes	Restricted stock awards expense, net of income taxes	$	922	$	966	$	1,800	$	1,887	Restricted stock awards expense, net of income taxes	$	845	$	878
Total Share-Based Compensation	Total Share-Based Compensation									Total Share-Based Compensation
Pre-tax compensation expense	Pre-tax compensation expense	$	1,208	$	1,214	$	2,398	$	2,433	Pre-tax compensation expense	$	1,100	$	1,190
Income tax expense (benefit)	Income tax expense (benefit)	(266)		(265)		(575)		(522)		Income tax expense (benefit)	(243)		(309)
Total share-based compensation expense, net of income taxes	Total share-based compensation expense, net of income taxes	$	942	$	949	$	1,823	$	1,911	Total share-based compensation expense, net of income taxes	$	857	$	881

AsThe grant date fair value of ~~June 30, 2021,~~ESPP options was estimated to be approximately $28,000 at the beginning of the January 1, 2022 quarterly offering period. The ESPP options vested during the three months ending March 31, 2022, leaving no unrecognized compensation expense related to ~~RSAs was $7.5 million and is expected to be recognized over a weighted-average period of 1.79 years. The Corporation did 0t have any unrecognized compensation expense related to stock~~unvested ESPP options ~~as of June 30, 2021.~~at March 31, 2022.

Stock option activity under the Corporation's stock option plans as of ~~June 30, 2021~~March 31, 2022 and changes during the ~~six~~three months ended ~~June 30, 2021,~~March 31, 2022, were as follows:

Number of
Shares Weighted-Average Exercise Price Weighted Average Remaining
Contractual Term
(in Years) Aggregate
Intrinsic
Value
Outstanding at January 1, 2021 45,800 $ 15.00
Exercised (17,300) $ 11.46
Outstanding June 30, 2021 28,500 $ 17.14 2.00 $ 699,060
Vested and Expected to Vest at June 30, 2021 28,500 $ 17.14 2.00 $ 699,060
Exercisable at June 30, 2021 28,500 $ 17.14 2.00 $ 699,060


	Number of Shares	Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2022	28,500	$	17.14

Exercised	(3,000)	$	12.46

Outstanding March 31, 2022	25,500	$	17.69	1.37	$	609,645
Vested and Expected to Vest at March 31, 2022	25,500	$	17.69	1.37	$	609,645
Exercisable at March 31, 2022	25,500	$	17.69	1.37	$	609,645

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of the first ~~six~~three months of ~~2021~~2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on ~~June 30, 2021.~~March 31, 2022. The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock.

The aggregate intrinsic value of stock options exercised during the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021 was $91,000 and ~~2020 was $559,000 and $197,000,~~$453,000, respectively. Cash receipts of stock options exercised during this same period were ~~$198,000~~$37,000 and ~~$83,000,~~$171,000, respectively.

The following table summarizes information on unvested RSAs outstanding as of March 31, 2022:


	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2022	411,259	$	35.86
Granted	5,666	$	41.77
Vested	(1,200)	$	38.96
Forfeited	(2,850)	$	36.78
Unvested RSAs at March 31, 2022	412,875	$	35.92

As of March 31, 2022, unrecognized compensation expense related to RSAs was $7.5 million and is expected to be recognized over a weighted-average period of 1.68 years. The Corporation did not have any unrecognized compensation expense related to stock options as of March 31, 2022.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

~~The following table summarizes information on unvested RSAs outstanding as of June 30, 2021:~~

Number of Shares Weighted-Average
Grant Date Fair Value
Unvested RSAs at January 1, 2021 357,883 $ 36.30
Granted 77,216 $ 42.52
Vested (4,660) $ 42.14
Forfeited (5,050) $ 36.56
Unvested RSAs at June 30, 2021 425,389 $ 37.36

The grant date fair value of ESPP options was estimated to be approximately $40,000 at the beginning of the April 1, 2021 quarterly offering period. The ESPP options vested during the three months ending June 30, 2021, leaving 0 unrecognized compensation expense related to unvested ESPP options at June 30, 2021.

NOTE 12

INCOME TAX

The following table summarizes the major components creating differences between income taxes at the federal statutory and the effective tax rate recorded in the consolidated statements of income for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2021			2020			2021			2020				2022			2021

Reconciliation of Federal Statutory to Actual Tax Expense:	Reconciliation of Federal Statutory to Actual Tax Expense:													Reconciliation of Federal Statutory to Actual Tax Expense:
Federal statutory income tax at 21%	Federal statutory income tax at 21%	$	13,830		$	7,899		$	26,098		$	15,827		Federal statutory income tax at 21%	$	11,729		$	12,268
Tax-exempt interest income	Tax-exempt interest income	(3,893)			(3,199)			(7,599)			(6,221)			Tax-exempt interest income	(4,520)			(3,706)

Share-based compensation	Share-based compensation	(13)			(6)			(72)			(6)			Share-based compensation	(12)			(59)
Tax-exempt earnings and gains on life insurance	Tax-exempt earnings and gains on life insurance	(253)			(278)			(534)			(564)			Tax-exempt earnings and gains on life insurance	(354)			(281)
Tax credits	Tax credits	(77)			(89)			(150)			(150)			Tax credits	(87)			(73)
CARES Act - NOL carryback rate differential		0			0			0			(1,178)

State Income Tax	State Income Tax	872			164			1,574			250			State Income Tax	495			702
Other	Other	(172)			132			(71)			155			Other	15			101
Actual Tax Expense	Actual Tax Expense	$	10,294		$	4,623		$	19,246		$	8,113		Actual Tax Expense	$	7,266		$	8,952

Effective Tax Rate	Effective Tax Rate	15.6		%	12.3		%	15.5		%	10.8		%	Effective Tax Rate	13.0		%	15.3		%

NOTE 13

NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average shares outstanding during the reporting period. Diluted net income per share is computed by dividing net income by the combination of the weighted-average shares outstanding during the reporting period and all potentially dilutive common shares. Potentially dilutive common shares include stock options and RSAs issued under the Corporation's share-based compensation plans. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive.

The following table reconciles basic and diluted net income per share for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.


		Three Months Ended June 30,											Three Months Ended March 31,
		2021					2020						2022					2021
		Net Income		Weighted-Average Shares	Per Share Amount		Net Income		Weighted-Average Shares	Per Share Amount			Net Income		Weighted-Average Shares	Per Share Amount		Net Income		Weighted-Average Shares	Per Share Amount
Net income available to common stockholders	Net income available to common stockholders	$	55,559	53,956,296	$	1.03	$	32,992	53,762,913	$	0.62	Net income available to common stockholders	$	48,586	53,412,762	$	0.91	$	49,469	53,930,200	$	0.92
Effect of potentially dilutive stock options and restricted stock awards	Effect of potentially dilutive stock options and restricted stock awards			228,128					179,654			Effect of potentially dilutive stock options and restricted stock awards			203,106					203,422
Diluted net income per share	Diluted net income per share	$	55,559	54,184,424	$	1.03	$	32,992	53,942,567	$	0.62	Diluted net income per share	$	48,586	53,615,868	$	0.91	$	49,469	54,133,622	$	0.91

Six Months Ended June 30,
2021 2020
Net Income Weighted-Average Shares Per Share
Amount Net Income Weighted-Average Shares Per Share
Amount
Net income available to common stockholders $ 105,028 53,943,248 $ 1.95 $ 67,255 54,247,493 $ 1.24
Effect of potentially dilutive stock options and restricted stock awards 216,084 182,026
Diluted net income per share $ 105,028 54,159,332 $ 1.94 $ 67,255 54,429,519 $ 1.24

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS~~

~~(table dollar amounts in thousands, except share data)~~

~~(Unaudited)~~

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ there were 0no stock options with an option price greater than the average market price of the common shares.

NOTE 14

GENERAL LITIGATION AND REGULATORY EXAMINATIONS

~~See Item 1. LEGAL PROCEEDINGS~~The Corporation is subject to claims and lawsuits that arise primarily in ~~Part II of this Form 10-Q for information relating to certain pending litigation. There are no other pending legal proceedings, other than litigation incidental to~~ the ordinary ~~business~~course of business. Additionally, the ~~Corporation or its subsidiaries, of a material nature to which the Corporation or its subsidiaries is a party or of which any of their properties are subject. The~~ Corporation is also subject to periodic examinations by various regulatory agencies. It is the general opinion of management that the disposition or ultimate resolution of any such routine litigation or regulatory examinations will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Corporation.

4135

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

From time to time, we include forward-looking statements in our oral and written communication. We may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, in other written materials and in oral statements made by senior management to analysts, investors, representatives of the media and others. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of these safe harbor provisions. Forward-looking statements can often be identified by the use of words like “believe”, “continue”, “pattern”, “estimate”, “project”, “intend”, “anticipate”, “expect” and similar expressions or future or conditional verbs such as “will”, “would”, “should”, “could”, “might”, “can”, “may”, or similar expressions. These forward-looking statements include:

•statements of the Corporation's goals, intentions and expectations;

•statements regarding the Corporation's business plan and growth strategies;

•statements regarding the asset quality of the Corporation's loan and investment portfolios; and

•estimates of the Corporation's risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events:

•our ability to achieve the expected cost savings, synergies and other anticipated benefits from our merger transaction with Level One Bancorp, Inc. (see BUSINESS SUMMARY below for details);

•fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations and expense expectations;

•adverse changes in the economy, which might affect our business prospects and could cause credit-related losses and expenses;

•the severity and duration of the COVID-19 pandemic and its impact on general economic and financial market conditions and our business, results of operations, and financial condition;

•adverse developments in our loan and investment portfolios;

•our participation as a lender in the PPP;

•competitive factors in the banking industry, such as the trend towards consolidation in our market;

•changes in the banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like our affiliate bank;

•acquisitions of other businesses by us and integration of such acquired businesses;

•our ability to implement and comply with the Settlement Agreement and Agreed Order entered into with the United States Department of Justice ("DOJ") related to our fair lending practices;

•changes in market, economic, operational, liquidity, credit and interest rate risks associated with our business; and

•the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our anticipated future results.

BUSINESS SUMMARY

First Merchants Corporation (the “Corporation”) is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s common stock is traded on the Nasdaq’s Global Select Market System under the symbol FRME. The Corporation conducts its banking operations through First Merchants Bank (the “Bank”), a wholly-owned subsidiary that opened for business in Muncie, Indiana, in March 1893. The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank includes 109 banking locations in Indiana, Ohio, Michigan and Illinois. In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

On April 1, 2022, the Corporation acquired Level One Bancorp, Inc., a Michigan corporation (“Level One”), through the merger of Level One with and into the Corporation, with the Corporation as the surviving entity (the “Merger”). Immediately following the Merger, Level One’s wholly owned subsidiary, Level One Bank, merged with and into the Bank, with the Bank as the surviving bank. Level One was headquartered in Farmington Hills, Michigan and had 17 banking centers serving the Michigan market. As of March 31, 2022, Level One had total assets of $2.4 billion, total loans of $1.7 billion and deposits of $1.9 billion. Following the acquisition, the Corporation has 126 banking centers in the states identified above. For additional information on the Merger, see NOTE 2. ACQUISITIONS – Level One Bancorp, Inc. of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Through the Bank, the Corporation offers a broad range of financial services, including accepting time, savings and demand deposits; making consumer, commercial, agri-business, public finance and real estate mortgage loans; providing personal and corporate trust services; offering full-service brokerage and private wealth management; and providing letters of credit, repurchase agreements and other corporate services.

HIGHLIGHTS FOR THE FIRST QUARTER OF 2022

•Net income available to stockholders for the three months ended March 31, 2022 was $48.6 million compared to $49.5 million for the three months ended March 31, 2021.

•Earnings per fully diluted common share for the first quarter of 2022 totaled $0.91, which was the same amount as the first quarter of 2021.

•Earnings per fully diluted common share for the first quarter of 2022, excluding income on Paycheck Protection Program (“PPP”) loans, totaled $0.88 compared to $0.78 in the first quarter of 2021 and $0.84 in the fourth quarter of 2021. See non-GAAP reconciliation in the "Results of Operations" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

•The Corporation experienced organic loan growth of $165.0 million, or 7.2 percent, during the first quarter of 2022, which when offset by a $57.9 million decline in PPP loans (following forgiveness by the Small Business Administration), resulted in net loan growth of $107.1 million.

•As of March 31, 2022, the Corporation had $12.9 billion in total deposits, representing a $173.4 million increase from December 31, 2021, or 5.4 percent on an annualized basis.

•Net interest income for the three months ended March 31, 2022 totaled $102.3 million, an increase of $1.9 million over net interest income for the three months ended March 31, 2021 of $100.4 million.

COVID-19 UPDATE AND RELATED LEGISLATIVE ACTION

The COVID-19 pandemic continued to impact the Corporation’s operations during the three months ended March 31, 2022. In the two years since the World Health Organization declared COVID-19 a global pandemic, it has dramatically impacted global health and the economic environment, including millions of confirmed cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply chain challenges, regulatory challenges, and market volatility. In response, the U.S. Congress, through the enactment of the CARES Act in March 2020, and the federal banking agencies, through rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide emergency economic relief measures.

The CARES Act established the PPP, which is administered by the Small Business Administration (“SBA”), to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during the pandemic. The Bank actively participated in assisting its customers with PPP funding during all phases of the program. The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities. Loans under the program earn interest at a fixed rate of 1 percent. As of March 31, 2022, the Corporation had $48.7 million of PPP loans outstanding compared to the December 31, 2021 balance of $106.6 million. The Corporation will continue to monitor legislative, regulatory, and supervisory developments related to the PPP. However, it anticipates that the majority of the Bank’s remaining PPP loans will be forgiven by the SBA in accordance with the terms of the program.

CRITICAL ACCOUNTING POLICIES

Generally accepted accounting principles are complex and require us to apply significant judgments to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply those principles where actual measurement is not possible or practical. For a complete discussion of our significant accounting policies, see “Notes to the Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. ~~The uncertainties related to COVID-19 could cause significant changes to these estimates compared to what was known at the time these financial statements were prepared.~~

We believe there have been no significant changes during the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020, with the exception of the adoption of Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL") on January 1, 2021. ~~Certain accounting policies were revised and certain accounting policy elections were implemented, related to the adoption of CECL.~~

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Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CECL replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures based on historical experiences, current conditions, and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. In addition, CECL includes certain changes to the accounting for investment securities available for sale depending on whether management intends to sell the securities or believes that it is more likely than not they will be required to sell. See NOTE 1. GENERAL, NOTE 3. INVESTMENT SECURITIES and NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q for details of the accounting policy changes related to the adoption of CECL.

~~BUSINESS SUMMARY~~

First Merchants Corporation (the “Corporation”) is a financial holding company headquartered in Muncie, Indiana and was organized in September 1982. The Corporation’s Common Stock is traded on NASDAQ’s Global Select Market System under the symbol FRME. The Corporation has one full-service bank charter, First Merchants Bank (the “Bank”), which opened for business in Muncie, Indiana, in March 1893. The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank). The Bank includes 109 banking locations in Indiana, Illinois, Ohio and Michigan. In addition to its traditional branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers. The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

Through the Bank, the Corporation offers a broad range of financial services, including accepting time, savings and demand deposits; making consumer, commercial, agri-business and real estate mortgage loans; providing personal and corporate trust services; offering full-service brokerage and private wealth management; and providing letters of credit, repurchase agreements and other corporate services.

~~COVID-19 UPDATE~~

The COVID-19 pandemic continued to impact the Corporation’s operations during the three and six months ended June 30, 2021. With certain states and localities having recently experienced significant increases in the number of individuals diagnosed with COVID-19 as variant strains of the virus have spread, uncertainty remains about the ultimate duration of the pandemic and the timing and strength of the economic recovery. As the pandemic has evolved, we have continued to support our customers by providing assistance to those affected by the pandemic, including by working with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19 and by originating loans under the Paycheck Protection Program (“PPP”).

~~The CARES Act and the Paycheck Protection Program~~

As previously reported, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law in March 2020, establishing the PPP, a lending program administered by the Small Business Administration (“SBA”) that was intended to incentivize small businesses, eligible nonprofits and certain others 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 ability of borrowers to apply for loans under the PPP ended on May 31, 2021, with the SBA having until June 30, 2021 to process loan applications.

The Bank actively participated in assisting its customers with PPP funding during all phases of the program. The vast majority of the Bank’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities. Loans under the program earn interest at a fixed rate of 1 percent. As of June 30, 2021, the Bank had over 3,200 PPP loans representing $415.8 million, which is net of $12.3 million of deferred processing fee income and costs. The weighted-average deferred processing fee on PPP loans was approximately 3.99 percent and is recognized over the term of the loan. As of June 30, 2021, $595.7 million of the Bank’s PPP loans had been forgiven by the SBA. The Bank anticipates that the majority of its remaining PPP loans will also be forgiven by the SBA in accordance with the terms of the program. If a loan is forgiven by the SBA or paid off by the borrower prior to maturity, any unamortized portion of the fee will be recognized immediately. During the three and six months ended June 30, 2021, the Corporation recognized interest income on PPP loans of $1.6 million and $3.2 million, respectively, compared to $1.8 million for both the three and six months ended June 30, 2020. Additionally, PPP loan related deferred processing fee income of $8.2 million and $15.7 million was recorded during the three and six month ended June 30, 2021, respectively, compared to $2.9 million for both the three and six months ended June 30, 2020. PPP deferred processing fee income is recorded as a yield adjustment.

~~Loan Modifications and Troubled Debt Restructures~~

As previously reported, the Bank's banking regulators issued guidance in March 2020 encouraging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act had further provided that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. In accordance with that guidance, the Bank has offered short-term modifications made in response to COVID-19 to borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. With the enactment of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was signed into law as part of the Consolidated Appropriations Act, 2021 (the “CAA”), the CARES Act was amended to, among other things, extend the expiration date for COVID-related loan modifications exempt from troubled debt restructuring classification until the earlier of January 1, 2022, or 60 days after the termination of the national emergency. As of June 30, 2021, $40.3 million in loan balances remained in deferral. Details of the modifications are included in the "LOAN QUALITY" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~CECL Implementation~~

~~Accounting Standards Update No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit losses on Financial Instruments~~ ("CECL") had an original adoption date of January 1, 2020, which included a day 1 measurement date of January 1, 2020. Pursuant to the CARES Act, which created an optional deferral of the CECL adoption date, and the related joint statement of federal banking regulators (which also became effective in March 2020), and consistent with guidance from the SEC and FASB, the Corporation elected to delay implementation of ASU No. 2016-13, the optional deferral of which was set to expire on December 31, 2020. However, the CAA amended the CARES Act by extending the temporary relief from CECL compliance to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates, or January 1, 2022. The Corporation elected to delay implementation of CECL following the approval of the CARES Act and, with the enactment of the CAA, the Corporation elected to delay adoption of CECL to January 1, 2021. As a result of the Corporation’s election, its 2020 financial statements have been prepared under the incurred loss model and its 2021 financial statements have been prepared under the CECL model.

~~Regulatory Capital~~

As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced. Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available. While the CAA provided for a further extension of the mandatory adoption of CECL to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates, or January 1, 2022, the federal banking regulators have elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects. Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the CARES Act.

As discussed above, the Corporation elected to delay implementation of ASU No. 2016-13 until January 1, 2021 and, as a result, will recognize the implementation effects of CECL on its regulatory capital over a three-year transition period. Beginning on January 1, 2021, the Corporation phased in 25 percent of the deferred capital impact of CECL, with an additional 25 percent to be phased in at the beginning of the following three years, resulting in the impact being fully phased in on January 1, 2024.

RESULTS OF OPERATIONS

The Corporation reported ~~second~~first quarter ~~2021~~2022 net income of ~~$55.6~~$48.6 million, compared to ~~$33.0~~$49.5 million during the ~~second~~first quarter of ~~2020.~~2021. Diluted earnings per share for the ~~second~~first quarter ~~2021~~2022 totaled ~~$1.03~~$0.91 per share, compared to ~~$0.62~~$0.91 per diluted share during the same period in ~~2020. Year-to-date net income totaled $105.0 million, compared to $67.3 million during the same period in 2020. Diluted earnings~~2021.

Earnings per fully diluted common share for the ~~six months ended June 30, 2021 was $1.94 per share,~~first quarter of 2022, excluding income on PPP loans, totaled $0.88 compared to ~~$1.24 per share during~~$0.78 in the ~~same period~~first quarter of 2021 and $0.84 in ~~2020.~~the fourth quarter of 2021. See non-GAAP reconciliation at the end of the "Results of Operations" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

As of ~~June 30, 2021,~~March 31, 2022, total assets equaled ~~$14.9~~$15.5 billion, an increase of ~~$855.9~~$12.1 million ~~or 6.1 percent,~~ from December 31, ~~2020. A portion of the~~2021.

Total investment securities decreased $35.1 million from December 31, 2021. The Corporation purchased investment securities by utilizing excess liquidity ~~created~~ from deposit growth ~~resulted~~and SBA forgiveness of PPP loans. The increase from purchases was offset by a change from a net unrealized gain of $75.9 million at December 31, 2021 to a net unrealized loss of $101.3 million as of March 31, 2022 on the available for sale portfolio. The change to a net unrealized loss position was primarily due to changes in ~~an increase~~interest rates and not credit quality. Additional details of the changes in the Corporation's investment ~~in interest-bearing deposits~~securities portfolio are discussed within NOTE 3. INVESTMENT SECURITIES of ~~$46.6 million compared~~the Notes to ~~December 31, 2020. This increase was offset by a decrease in cash and cash equivalents when compared to December 31, 2020~~Consolidated Condensed Financial Statements of ~~$25.3 million.~~this Quarterly Report on Form 10-Q.

The Corporation's total loan portfolio ~~decreased $107.3~~experienced organic loan growth of $165.0 million, ~~from~~or 7.2% on an annualized basis, and when offset by a decline in PPP loans, resulted in a net increase in total loans of $107.1 million compared to December 31, ~~2020.~~2021. As of ~~June 30, 2021,~~March 31, 2022, the Corporation's PPP ~~loans, which are included~~loan portfolio, primarily in the commercial and industrial loans class, totaled ~~$415.8~~$48.7 million, a decrease of ~~$251.3~~$57.9 million from the December 31, ~~2020~~2021 balance of ~~$667.1~~$106.6 million. ~~Other~~

The loan classes that experienced the largest increases from December 31, 2021 were commercial and industrial loans, residential real estate and construction real estate. The decline in PPP loans was offset by organic loan growth in the commercial and industrial loan class of $170.0 million, resulting in a net increase of $112.1 million. Loan classes that experienced the largest decreases from December 31, ~~2020~~2021 were ~~residential~~commercial real estate (non-owner occupied) and agricultural land, production and other loans to farmers. ~~The largest loan classes that experienced an increase from December 31, 2020 were public finance and other commercial loans and commercial real estate, non-owner occupied.~~ Additional details of the changes in the Corporation's loans are discussed within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q, and the "LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Total investment securities increased $1.0 billion from December 31, 2020 as the excess liquidity from deposit growth was used to invest in the bond portfolio. Additional details of the changes in the Corporation's investment securities portfolio are discussed within NOTE 3. INVESTMENT SECURITIES of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

The Corporation’s allowance for credit losses - loans totaled ~~$199.8~~$196.0 million as of ~~June 30, 2021~~March 31, 2022 and equaled ~~2.19~~2.09 percent of total ~~loans.~~loans, compared to $195.4 million and 2.11 percent of total loans at December 31, 2021. The Corporation ~~adopted~~did not recognize any provision expense during the ~~current expected credit losses ("CECL") model for calculating~~three months ended March 31, 2022 and 2021. During the ~~allowance for credit losses on January 1,~~three months ended March 31, 2022, the Corporation recognized $587,000 of net recoveries, compared to $3.6 million of net charge-offs in the three months ended March 31, 2021. ~~CECL~~

replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the lifeNon-accrual loans totaled $42.7 million, a decrease of ~~the portfolio. The new CECL model requires the measurement~~$364,000 from December 31, 2021, resulting in a coverage ratio of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures based on historical experiences, current conditions, and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. The impact of the adoption was an increase to the Allowance for Credit Losses - Loans of $74.1 million.459.0 percent. Additional details of the ~~Allowance~~Corporation's allowance methodology and asset quality are discussed within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form ~~10-Q.~~

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~The Corporation did not recognize any provision expense during the three~~10-Q and six months ended June 30, 2021, compared to provision expense of $21.9 million and $41.6 million, respectively, during the same periods of the prior year. The provision expense taken during the three and six months ended June 30, 2020 reflected the Corporation's view of increased credit risk related to the COVID-19 pandemic. Net charge-offs in the second quarter of 2021 were $1.3 million, compared to net charge-offs of $230,000 during the same period of 2020. Net charge-offs in the six months ended June 30, 2021 were $4.9 million, compared to net charge-offs of $812,000 during the same period of 2020. Non-accrual loans totaled $57.6 million, a decrease of $3.9 million from December 31, 2020, resulting in a coverage ratio of 347.1 percent. Additional details of the Corporation's credit quality are discussed within the “LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OREO totaled $6.3 million as of March 31, 2022 and increased $5.7 million from the December 31, 2021 balance of $558,000 due to a $5.8 million student housing property that was moved into OREO during the first quarter of 2022. A loss on this project is not expected.

The Corporation's net tax asset, deferred and receivable increased ~~$24.6~~$37.8 million from December 31, ~~2020. As~~2021. The primary driver was a ~~result of the CECL adoption on January 1, 2021, the cumulative effect of adoption resulted in a deferred tax asset of $22.0 million. Additionally, the~~ decrease in unrealized gains on available for sale ~~investment~~ securities ~~resulted~~resulting in a ~~$4.0~~$37.2 million ~~decline in the deferred tax liability. Both, the~~ increase in ~~deferred tax asset from CECL adoption and the decrease in deferred tax liability related to unrealized gains on available for sale investment securities, increase~~ the net deferred tax ~~asset.~~

The Corporation previously announced a banking delivery transformation strategy, which included the consolidation of seventeen banking centers across its footprint by April 30, 2021. As those consolidations finalized in the second quarter of 2021, the fair value of the closed banking centers of $4.5 million was moved from premises and equipment to assets held for sale (recorded in other assets) while they are marketed for sale.liability.

The Corporation's other assets decreased ~~$10.3~~$1.4 million from December 31, ~~2020.~~2021. The Corporation's derivative asset (recorded in other assets) and derivative liability (recorded in other liabilities) related to interest rate contracts decreased ~~$22.5~~$6.1 million and ~~$23.0~~$6.7 million, respectively, from December 31, ~~2020.~~2021. The decreases in valuations are due to higher yield curve rates across the entire term point spectrum. The higher interest rates are the result of more directional certainty as to the ~~outcome~~FOMC’s intentions relative to target fed funds increases which heightens rate expectations across the term spectrum. Offsetting the decrease in the Corporation's derivative asset was an increase of ~~COVID, fiscal stimulus and~~$4.9 million in the ~~demand for goods and services from it.~~Corporation's investments in community redevelopment funds.

As of ~~June 30, 2021,~~March 31, 2022, total deposits equaled ~~$12.2~~$12.9 billion, an increase of ~~$841.8~~$173.4 million from December 31, ~~2020.~~2021. The Corporation experienced increases from December 31, ~~2020~~2021 in demand and savings accounts of ~~$440.5~~$101.8 million and ~~$495.8~~$109.6 million, respectively. ~~A portion of the increase is due to PPP loans that have remained on deposit, in addition to consumer Economic Impact Payments from the IRS that have also remained on deposit.~~ Offsetting these increases were decreases in certificates of deposit and brokered deposits of ~~$77.0~~$30.8 million and ~~$17.5~~$7.3 million, respectively, from December 31, ~~2020.~~2021. The low interest rate environment has resulted in customers moving funds from maturing time deposit products into non-maturity products due to similar rates offered for both products.

Total borrowings decreased ~~$85.3~~$36.9 million as of ~~June 30, 2021,~~March 31, 2022, compared to December 31, ~~2020.~~2021. Federal Home Loan Bank advances decreased ~~$55.2~~$25.1 million compared to December 31, ~~2020~~2021 as the Corporation utilized excess liquidity from deposit growth to pay off maturing advances. Additionally, securities sold under repurchase agreements decreased by ~~$30.2~~$11.9 million.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Corporation's other liabilities as of ~~June 30, 2021 increased $103.6~~March 31, 2022 decreased $20.2 million compared to December 31, 2020. As part of the CECL adoption on January 1, 2021, the Corporation recorded a $20.5 million allowance for credit losses on off-balance sheet credit exposures as a liability account representing expected credit losses over the contractual period for which the Corporation is exposed to credit risk resulting from a contractual obligation to extend credit.2021. The Corporation ~~also~~ accrued ~~$110.7~~$18.6 million of trade date accounting related to investment securities purchases as of ~~June 30, 2021, of which, the accrual was $6.2~~March 31, 2022, compared to $27.1 million as of December 31, ~~2020.~~2021. Additionally, as noted above, the derivative hedge liability decreased ~~$23.0~~$6.7 million from December 31, ~~2020.~~2021.

The Corporation continued to maintain all regulatory capital ratios in excess of the regulatory definition of “well-capitalized.” Details of the Stock Repurchase Program and regulatory capital ratios are discussed within the “CAPITAL” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~


ADJUSTED EPS EXCLUDING PAYCHECK PROTECTION PROGRAM ("PPP") - non-GAAP
(Dollars In Thousands, Except Per Share Amounts)
	March 31,		December 31,		March 31,
	2022		2021		2021
Net Income Available to Common Shareholders - GAAP	$	48,586	$	47,733	$	49,469
Adjustments:
PPP loan income	(1,884)		(3,721)		(9,243)
Tax on adjustment	462		912		2,266
Adjust Net Income Available to Common Stockholders - non-GAAP	$	47,164	$	44,924	$	42,492

Average Diluted Shares Outstanding (in thousands)	53,616		53,660		54,134

Diluted Earnings Per Share - GAAP	$	0.91	$	0.89	$	0.91
Adjustments:
PPP loan income	(0.04)		(0.07)		(0.17)
Tax on adjustment	0.01		0.02		0.04
Adjusted Diluted Earnings Per Share - non-GAAP	$	0.88	$	0.84	$	0.78

NET INTEREST INCOME

Net interest income is the most significant component of our earnings, comprising 79 percent of revenues for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations. Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from customer deposits generally cost less than wholesale funding sources. Factors such as general economic activity, Federal Reserve Board monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and the net interest income and margin.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented on an FTE basis in the tables that follow to reflect what tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. The federal statutory rate of 21 percent was used for all periods, adjusted for the TEFRA interest disallowance applicable to certain tax-exempt obligations. The FTE analysis portrays the income tax benefits associated with tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons.

Net interest margin, on a tax equivalent basis, ~~increased 3~~decreased 20 basis points to ~~3.22~~3.03 percent for the three months ended ~~June 30, 2021~~March 31, 2022 compared to ~~3.19~~3.23 percent for the same period in ~~2020.~~2021. Average earning assets for the three months ended ~~June 30, 2021~~March 31, 2022 increased ~~$1.4~~$1.2 billion compared to the same period in ~~2020,~~2021, and was primarily attributable to an increase in investment securities ~~and loans~~ of ~~$1.1 billion and $101.9 million, respectively.~~$1.2 billion. Since the beginning of the PPP in April 2020, the Bank has originated over $1.2 billion of PPP loans, which averaged ~~$620.5~~$78.0 million in the ~~second~~first quarter of 2022 and $660.7 million in the first quarter of 2021. The Corporation's organic loan growth of $730.6 million since March 31, 2021, offset the decline in PPP loans and resulted in an increase in average loans of $19.5 million. The liquidity generated from the ~~investment securities portfolio was the result~~SBA forgiveness of PPP loans, coupled with excess liquidity generated from deposit growth, ~~in deposits being used to invest~~resulted in the ~~bond portfolio.~~Corporation's utilization of the liquidity for organic loan growth and investment securities purchases.

In the ~~second~~first quarter of ~~2021,~~2022, FTE asset yields decreased 2329 basis points compared to the same period in ~~2020.~~2021. This decrease was primarily a result of the decline in the ~~Investment Portfolio yield~~loan portfolio and investment portfolio yields of 3125 and 15 basis points, respectively, compared to the same period in ~~2020.~~2021. The current year investment portfolio purchases had a lower yield than the historic yield of the portfolio. The loan portfolio, which generally has an average yield higher than the investment portfolio, was 64.9 percent of earning assets in the first quarter of 2022 compared to 70.9 percent during the same period of 2021. Average investment securities for the first quarter of 2022 were 31.5 percent of total earning assets compared to 25.5 percent for the same period in 2021. The PPP loans originated were recorded at an interest rate of only 1 percent, but the Corporation also recognized fee income of ~~$8.2~~$1.7 million during the ~~second~~first quarter of 2022 compared to $7.6 million for the same period in 2021, which is included in interest income.

The Corporation also recognized fair value accretion income on purchased loans, which is included in interest income, of ~~$2.5 million,~~$951,000, which accounted for 73 basis points of net interest margin in the ~~second~~first quarter of ~~2021.~~2022. Comparatively, the Corporation recognized ~~$3.7~~$1.8 million of accretion income for the ~~second~~first quarter of ~~2020,~~2021, or 126 basis points of net interest margin.

Interest costs decreased 33 basis points, which mitigated the decrease in asset yields and resulted in a 10 basis point FTE increase in net interest spread as compared to the same period in 2020. Interest costs have decreased as management aggressively moved deposit rates down. Interest-bearing deposits and borrowing costs for the three months ended June 30, 2021 were 0.24 percent and 1.98 percent, respectively, compared to 0.59 percent and 1.55 percent, respectively, during the same period in 2020.

Net interest margin, on a tax equivalent basis, decreased 9 basis points to 3.23 percent for six months ended June 30, 2021 compared to 3.32 percent for the same period in 2020. Average earning assets for the six months ended June 30, 2021 increased $1.6 billion compared to the same period in 2020, and was primarily attributable to an increase in investment securities and loans of $922.1 million and $406.0 million, respectively. PPP loans averaged $638.6 million in 2021. The increase in the investment securities portfolio was the result of excess liquidity generated from growth in deposits being used to invest in the bond portfolio.

In the six months ended June 30, 2021, FTE asset yields decreased 53 basis points compared to the same period in 2020. This decrease was primarily a result of the FOMC's interest rate decreases of 50 basis points on March 3, 2020 and 100 basis points on March 16, 2020 at the Committee's special meetings related to COVID-19, and the decline in one-month LIBOR from June 30, 2020 to June 30, 2021 of 6 basis points. Additionally, the yield of the Investment Portfolio decreased 32 basis points compared to the same period in 2020. The PPP loans originated were recorded at an interest rate of only 1 percent, but the Corporation also recognized fee income of $15.7 million during the six months ended June 30, 2021, which is included in interest income.

The Corporation recognized fair value accretion income on purchased loans, which is included in interest income, of $4.3 million, which accounted for 7 basis points of net interest margin in the six months ended June 30, 2021. Comparatively, the Corporation recognized $7.2 million of accretion income for the six months ended June 30, 2020, or 12 basis points of net interest margin.

Interest costs decreased 55 basis points, which mitigated the decrease in asset yields and resulted in a 2 basis point FTE increase in net interest spread as compared to the same period in 2020. Interest costs have decreased as management aggressively moved deposit rates down as wholesale funding rates declined. Interest-bearing deposits and borrowing costs for the six months ended June 30, 2021 of 0.25 percent and 1.93 percent, respectively, decreased from 0.82 percent and 1.86 percent, respectively, during the same period in 2020.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Interest costs decreased 11 basis points, which partially mitigated the decrease in asset yields and resulted in an 18 basis point FTE decrease in net interest spread as compared to the same period in 2021. Interest costs have decreased as management aggressively moved deposit rates down as wholesale funding rates declined and market conditions allowed. Interest-bearing deposits and borrowing costs for the three months ended March 31, 2022 were 0.17 percent and 1.92 percent, respectively, compared to 0.27 percent and 1.89 percent, respectively, during the same period in 2021. Average borrowings decreased $58.8 million compared to the same period in 2021 as excess liquidity was used to payoff maturing FHLB advances. Average non-interest bearing deposits increased $387.0 million and equated to 21.3 percent of total deposits, compared to 20.3 percent during the same period in 2021. This increase, combined with the decrease in interest rates on interest-bearing deposits and debt repayments, resulted in a total cost of funds of 27 basis points compared to 38 basis points during the same period in 2021.

The following tables ~~presents~~present the Corporation’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets/liabilities for the three months ended ~~June 30, 2021,~~March 31, 2022, and ~~2020.~~2021.


(Dollars in Thousands)	Three Months Ended
	March 31, 2022						March 31, 2021
	Average Balance		Interest Income / Expense		Average Rate		Average Balance		Interest Income / Expense		Average Rate
Assets:

Interest-bearing deposits	$	484,626	$	230	0.19	%	$	441,254	$	114	0.10	%
Federal Home Loan Bank stock	27,914		146		2.09		28,736		178		2.48
Investment Securities: (1)
Taxable	1,957,675		8,510		1.74		1,494,008		6,695		1.79
Tax-Exempt (2)	2,536,634		20,095		3.17		1,822,899		15,677		3.44
Total Investment Securities	4,494,309		28,605		2.55		3,316,907		22,372		2.70
Loans held for sale	4,352		40		3.68		16,139		156		3.87
Loans: (3)
Commercial	6,868,438		64,679		3.77		6,876,818		69,174		4.02
Real Estate Mortgage	924,268		7,840		3.39		975,262		9,286		3.81
Installment	711,038		6,516		3.67		674,307		6,489		3.85
Tax-Exempt (2)	747,832		7,220		3.86		693,895		6,758		3.90
Total Loans	9,255,928		86,295		3.73		9,236,421		91,863		3.98
Total Earning Assets	14,262,777		115,276		3.23	%	13,023,318		114,527		3.52	%
Total Non-Earning Assets	1,201,828						1,221,421
Total Assets	$	15,464,605					$	14,244,739
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits	$	5,027,466	$	2,408	0.19	%	$	4,616,988	$	3,709	0.32	%
Money market deposits	2,514,429		872		0.14		2,086,322		835		0.16
Savings deposits	1,867,411		441		0.09		1,660,528		476		0.11
Certificates and other time deposits	676,661		573		0.34		859,334		1,180		0.55
Total Interest-bearing Deposits	10,085,967		4,294		0.17		9,223,172		6,200		0.27
Borrowings	616,572		2,966		1.92		675,117		3,188		1.89
Total Interest-bearing Liabilities	10,702,539		7,260		0.27		9,898,289		9,388		0.38
Noninterest-bearing deposits	2,731,723						2,344,746
Other liabilities	139,120						161,272
Total Liabilities	13,573,382						12,404,307
Stockholders' Equity	1,891,223						1,840,432
Total Liabilities and Stockholders' Equity	$	15,464,605	7,260				$	14,244,739	9,388
Net Interest Income (FTE)			$	108,016					$	105,139
Net Interest Spread (FTE) (4)					2.96	%					3.14	%

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets					3.23	%					3.52	%
Interest Expense / Average Earning Assets					0.20	%					0.29	%
Net Interest Margin (FTE) (5)					3.03	%					3.23	%

(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments. Annualized amounts are computed utilizing a 30/360 day basis.
(2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2022 and 2021. These totals equal $5,736 and $4,711 for the three months ended March 31, 2022 and 2021, respectively.
(3) Non-accruing loans have been included in the average balances.
(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average interest-bearing liabilities.
(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets.

(Dollars in Thousands) Three Months Ended
June 30, 2021 June 30, 2020
Average Balance Interest
Income /
Expense Average
Rate Average Balance Interest
Income /
Expense Average
Rate
Assets:
Interest-bearing deposits $ 545,752 $ 129 0.09 % $ 378,489 $ 134 0.14 %
Federal Home Loan Bank stock 28,736 88 1.22 28,736 281 3.91
Investment Securities: (1)
Taxable 1,732,367 7,440 1.72 1,282,080 6,147 1.92
Tax-Exempt (2)
1,969,577 16,546 3.36 1,317,527 12,682 3.85
Total Investment Securities 3,701,944 23,986 2.59 2,599,607 18,829 2.90
Loans held for sale 25,039 237 3.79 12,630 131 4.15
Loans: (3)
Commercial 6,953,227 70,886 4.08 6,890,010 69,463 4.03
Real Estate Mortgage 912,662 9,488 4.16 887,257 10,122 4.56
Installment 659,515 6,391 3.88 724,165 7,596 4.20
Tax-Exempt (2)
732,081 7,019 3.84 666,548 6,784 4.07
Total Loans 9,282,524 94,021 4.05 9,180,610 94,096 4.10
Total Earning Assets 13,558,956 118,224 3.49 % 12,187,442 113,340 3.72 %
Net unrealized gain on securities available for sale 44,250 56,807
Allowance for credit losses (201,051) (106,858)
Cash and cash equivalents 171,489 303,491
Premises and equipment 107,369 113,528
Other assets 1,077,584 1,100,912
Total Assets $ 14,758,597 $ 13,655,322
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits $ 4,745,181 $ 3,560 0.30 % $ 3,951,819 $ 4,186 0.42 %
Money market deposits 2,337,143 796 0.14 1,673,104 1,696 0.41
Savings deposits 1,740,233 462 0.11 1,521,312 596 0.16
Certificates and other time deposits 812,370 1,005 0.49 1,498,002 6,229 1.66
Total Interest-bearing Deposits 9,634,927 5,823 0.24 8,644,237 12,707 0.59
Borrowings 644,702 3,188 1.98 909,258 3,527 1.55
Total Interest-bearing Liabilities 10,279,629 9,011 0.35 9,553,495 16,234 0.68
Noninterest-bearing deposits 2,490,226 2,145,672
Other liabilities 142,705 160,646
Total Liabilities 12,912,560 11,859,813
Stockholders' Equity 1,846,037 1,795,509
Total Liabilities and Stockholders' Equity $ 14,758,597 9,011 $ 13,655,322 16,234
Net Interest Income (FTE) $ 109,213 $ 97,106
Net Interest Spread (FTE) (4)
3.14 % 3.04 %
Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets 3.49 % 3.72 %
Interest Expense / Average Earning Assets 0.27 % 0.53 %
Net Interest Margin (FTE) (5)
3.22 % 3.19 %
(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments. Annualized amounts are computed utilizing a 30/360 day basis.
(2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2021 and 2020. These totals equal $4,949 and $4,088 for the three months ended June 30, 2021 and 2020, respectively.
(3) Non-accruing loans have been included in the average balances.
(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average interest-bearing liabilities.
(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets.

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PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in Thousands) Six Months Ended
June 30, 2021 June 30, 2020
Average Balance Interest
Income /
Expense Average
Rate Average Balance Interest
Income /
Expense Average
Rate
Assets:
Interest-bearing deposits $ 493,791 $ 243 0.10 % $ 269,174 $ 709 0.53 %
Federal Home Loan Bank stock 28,736 266 1.85 28,736 580 4.04
Investment Securities: (1)

Taxable 1,613,847 14,135 1.75 1,325,313 13,778 2.08
Tax-Exempt (2)
1,896,643 32,223 3.40 1,263,122 24,499 3.88
Total Investment Securities 3,510,490 46,358 2.64 2,588,435 38,277 2.96
Loans held for sale 20,572 393 3.82 14,924 324 4.34
Loans: (3)

Commercial 6,915,234 140,060 4.05 6,562,673 146,415 4.46
Real Estate Mortgage 943,830 18,774 3.98 878,956 20,524 4.67
Installment 666,870 12,880 3.86 741,889 16,701 4.50
Tax-Exempt (2)
713,094 13,777 3.86 655,149 13,511 4.12
Total Loans 9,259,600 185,884 4.01 8,853,591 197,475 4.46
Total Earning Assets 13,292,617 232,751 3.51 % 11,739,936 237,041 4.04 %
Net unrealized gain on securities available for sale 49,922 52,732
Allowance for loan losses (202,693) (94,009)
Cash and cash equivalents 168,647 231,624
Premises and equipment 109,170 113,670
Other assets 1,085,424 1,070,327
Total Assets $ 14,503,087 $ 13,114,280
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits $ 4,681,439 $ 7,269 0.31 % $ 3,770,530 $ 12,461 0.66 %
Money market deposits 2,212,425 1,631 0.15 1,604,474 5,479 0.68
Savings deposits 1,700,601 938 0.11 1,473,183 2,424 0.33
Certificates and other time deposits 835,722 2,185 0.52 1,582,322 14,091 1.78
Total Interest-bearing Deposits 9,430,187 12,023 0.25 8,430,509 34,455 0.82
Borrowings 659,826 6,376 1.93 828,721 7,709 1.86
Total Interest-bearing Liabilities 10,090,013 18,399 0.36 9,259,230 42,164 0.91
Noninterest-bearing deposits 2,417,888 1,907,582
Other liabilities 151,936 141,505
Total Liabilities 12,659,837 11,308,317
Stockholders' Equity 1,843,250 1,805,963
Total Liabilities and Stockholders' Equity $ 14,503,087 18,399 $ 13,114,280 42,164
Net Interest Income (FTE) $ 214,352 $ 194,877
Net Interest Spread (FTE) (4)
3.15 % 3.13 %
Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets 3.51 % 4.04 %
Interest Expense / Average Earning Assets 0.28 % 0.72 %
Net Interest Margin (FTE) (5)
3.23 % 3.32 %
(1) Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments. Annualized amounts are computed utilizing a 30/360 day basis.
(2) Tax-exempt securities and loans are presented on a fully taxable equivalent basis, using a marginal tax rate of 21 percent for 2021 and 2020. These totals equal $9,660 and $7,982 for the six months ended June 30, 2021 and 2020, respectively.
(3) Non-accruing loans have been included in the average balances.
(4) Net Interest Spread (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average interest-bearing liabilities.
(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

NON-INTEREST INCOME

Non-interest income totaled ~~$30.9~~$25.9 million for the quarter ended ~~June 30, 2021,~~March 31, 2022, a ~~$4.4~~$1.8 million, or ~~16.6~~7.5 percent, increase from the ~~second~~first quarter of ~~2020. Net gains and fees on sales~~2021. Customer related line items accounted for $2.3 million of ~~loans totaled $8.3 million during~~ the ~~quarter, a $4.7 million~~ increase over the same period last ~~year. Strong organic activity was enhanced by a $76.1 million portfolio mortgage loan sale that contributed a gain of $2.9 million during~~year with the ~~quarter. Additionally,~~most significant increases in service charges on deposit accounts, fiduciary and wealth management fees, ~~increased $1.9~~and card payment fees. Of the $1.4 million ~~and service charges on deposit accounts increased $1.3~~increase in card payment fees, approximately $1.1 million was the result of higher card volume incentives received in the first quarter of 2022 when compared to the ~~same period in 2020.~~

~~These increases were partially reduced by the impact on card payment fees~~first quarter of 2021. Additionally, of the ~~Durbin Amendment adoption~~$0.9 million increase in fiduciary and wealth management fees, approximately $0.5 million was organic growth, while $0.4 million was related to the April 1, 2021 acquisition of Hoosier Trust Company. Details of the Corporation's 2021 acquisition of Hoosier Trust Company can be found in NOTE 2. ACQUISITIONS of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on ~~July 1, 2020, which drove a $1.9 million~~Form 10-Q. The only decrease in ~~fees in the comparable period. Finally, net realized gains on the sales~~customer related fee income was a decline of ~~available for sale securities decreased $1.3~~$1.8 million ~~in the second quarter of 2021 when compared to the same period in 2020.~~

During the first six months of 2021, non-interest income totaled $55.0 million, a $1.3 million, or 2.3 percent decrease when compared to the same period in 2020. The largest decrease was in net realized gains on the sales of available for sale securities, which declined by $4.1 during the comparable period. Additionally, the Durbin Amendment adoption resulted in a decrease in card payment fees of $3.5 million and the interest rate environment resulted in derivative hedge fees being $1.7 million lower in the first six months of 2021 when compared to the same period in 2020.

~~These decreases were partially offset by an increases~~ in net gains and fees on sales of loans ~~and fiduciary and wealth management fees~~resulting from lower mortgage origination volume. The most significant non-customer related change was a decrease in net realized gains on sales of ~~$5.3~~available for sale securities of $1.2 million ~~and $2.3 million, respectively, when compared to~~from the ~~same period in 2020.~~first quarter of 2021.

NON-INTEREST EXPENSE

Non-interest expense totaled ~~$69.3~~$72.3 million for the ~~second~~ quarter ~~of 2021,~~ended March 31, 2022, a ~~$9.3~~$6.2 million, or ~~15.5~~9.4 percent, increase from the ~~second~~first quarter of ~~2020. Non-interest expenses~~2021. The largest increase from the comparative quarter was a $3.7 million increase in ~~the second quarter of 2020 were unusually low~~salaries and ~~reflected a $2.3 million deferral of~~employee benefits, primarily due to salary expense related to PPP loan originations, a $1.1 million reduction in bonus accruals and a $1.6 million decrease in processing fees related to the termination of a debit card rewards program. In addition to the unusually low expenses noted in 2020, salarymerit increases and incentive expenses. Additionally, other expenses increased in$1.9 million and were driven by higher customer related contingent losses, increased customer related travel and entertainment expenses, and higher mortgage servicing rights amortization. Finally, as the ~~second quarter of 2021 based upon current year financial results.~~

~~During the first six months of 2021, non-interest expense totaled $135.4~~Bank continues to grow, FDIC assessments have increased $0.8 million ~~a $9.2 million, or 7.3 percent increase~~ when compared to the ~~same period in 2020. The largest contributing factor to the current year increase is the unusually low second~~first quarter of 2020 expenses noted above. Salaries and employee benefits increased by $6.3 million in the first six months of 2021 when compared to the same period in 2020. In addition to the $3.4 million noted above from lower 2020 expenses, the remaining increase of $2.9 million was primarily due to higher salary and incentive expenses in the first six months of 2021 when compared to the same period in 2020.2021.

INCOME TAXES

Income tax expense for the ~~second quarter of 2021~~three months ended March 31, 2022 was ~~$10,294,000~~$7,266,000 on pre-tax net income of ~~$65,853,000.~~$55,852,000. For the same period in ~~2020,~~2021, income tax expense was ~~$4,623,000~~$8,952,000 on pre-tax net income of ~~$37,615,000.~~$58,421,000. The effective income tax ~~rates~~rate was 13.0 percent for the ~~second~~first quarter of ~~2021~~2022 and ~~2020 were 15.6~~15.3 percent ~~and 12.3 percent, respectively.~~

~~Income tax expense~~ for the ~~six months ended June 30, 2021 was $19,246,000 on pre-tax net income~~first quarter of $124,274,000. For the same period in 2020, income tax expense was $8,113,000 on pre-tax net income of $75,368,000. The effective income tax rates for the six months ended June 30, 2021 and 2020 were 15.5 percent and 10.8 percent, respectively.2021.

The lower effective income tax rate for the ~~comparative periods~~three months ended ~~June 30, 2020~~March 31, 2022 when compared to the same period ended March 31, 2021 was ~~driven by two factors. First, an abnormally high level of loan provision expense as a~~primarily the result of ~~the economic impact of the COVID-19 pandemic reduced taxable income, and when coupled with~~ an increase in tax-exempt income, the benefit of non-taxable income increased. Secondly, the CARES Act provided for the carryback of certain federal net operating losses to a prior period with a rate differential between the 2020 statutory rate of 21 percent and the rate in effect during the carryback year.interest income.

The detailed reconciliation of federal statutory to actual tax expense is shown in NOTE 12. INCOME TAX of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

CAPITAL

Stockholders' Equity

The Corporation adopted the current expected credit losses ("CECL") model for calculating the allowance for credit losses on January 1, 2021. CECL replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. As of the adoption and day one measurement date of January 1, 2021, the Corporation recorded a one-time cumulative-effect adjustment to retained earnings, net of income taxes, of $68.0 million. ~~See additional details of the Corporation's CECL adoption in NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.~~

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Stock Repurchase Program

On September 3, 2019, the Board of Directors of the Corporation approved a stock repurchase program of up to 3 million shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program was not to exceed $75 million. On a share basis, the amount of common stock subject to the repurchase program represented approximately 5 percent of the Corporation's outstanding shares. During the first quarter of 2020, the Corporation repurchased 1,634,437 of its common shares for $55.9 million at an average price of $34.21, which resulted in the aggregate investment in share repurchases of $75.0 million, the maximum allowable under the plan. As such, the September 2019 program terminated upon its own terms following the repurchases.

On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100,000,000. On a share basis, the amount of common stock subject to the repurchase program ~~represents~~represented approximately 6 percent of the Corporation's outstanding ~~shares. The~~shares at the time the program became effective. During the three months ended March 31, 2022 and 2021, the Corporation ~~has~~did not ~~made~~repurchase any ~~repurchases~~shares of its common stock pursuant to the repurchase program. As of March 31, 2022, the Corporation had approximately 2.7 million shares at an aggregate value of $74.5 million available to repurchase under the ~~January 2021 program as of June 30, 2021.~~program.

Regulatory Capital

Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by four ratios that are calculated according to the regulations: total risk-based capital, tier 1 risk-based capital, CET1, and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the

regulations. Banks with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is in an unsafe or unsound practice. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.

Basel III was effective for the Corporation on January 1, 2015 and requires the Corporation and the Bank to maintain the minimum capital and

leverage ratios as defined in the regulation and as illustrated in the table below, which capital to risk-weighted asset ratios include a 2.5 percent capital conservation buffer. Under Basel III, in order to avoid limitations on capital distributions, including dividends, the Corporation must hold a 2.5 percent capital conservation buffer above the adequately capitalized CET1 to risk-weighted assets ratio (which buffer is reflected in the required ratios below). Under Basel III, the Corporation and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of ~~June~~September 30, 2021, the Bank met all capital adequacy requirements to be considered well capitalized under the fully phased-in Basel III capital rules. There is no threshold for well capitalized status for bank holding companies.

As part of a March 27, 2020 joint statement of federal banking regulators, an interim final rule that allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was announced. Banking organizations could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay was to be in addition to the three-year transition period that federal banking regulators had already made available. While the 2021 CAA provided for a further extension of the mandatory adoption of CECL ~~to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates, or~~until January 1, 2022, the federal banking regulators ~~have~~ elected to not provide a similar extension to the two year mitigation period applicable to regulatory capital effects. Instead, the federal banking regulators require that, in order to utilize the additional two-year delay, banking organizations must have adopted the CECL standard no later than December 31, 2020, as required by the CARES Act.

~~The Corporation elected to delay~~ As a result, because implementation of ~~ASU No. 2016-13~~the CECL standard was delayed by the Corporation until January 1, 2021, ~~and, as a result, will recognize~~it began phasing in the ~~implementation effects~~cumulative effect of ~~CECL~~the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition ~~period. Beginning~~period that began on January 1, ~~2021,~~2021. Under that phase-in schedule, the ~~Corporation phased in 25 percent~~cumulative effect of the ~~deferred~~adoption will be fully reflected in regulatory capital ~~impact of CECL, with an additional 25 percent to be phased in at the beginning of the following three years, resulting in the impact being fully phased in~~ on January 1, 2024.

The Corporation's and Bank's actual and required capital ratios as of March 31, 2022 and December 31, 2021 were as follows:


					Prompt Corrective Action Thresholds
	Actual				Basel III Minimum Capital Required				Well Capitalized
March 31, 2022	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation	$	1,609,579	13.85	%	$	1,219,916	10.50	%	N/A		N/A
First Merchants Bank	1,452,024		12.46		1,224,057		10.50		$	1,165,769	10.00	%
Tier 1 capital to risk-weighted assets
First Merchants Corporation	$	1,398,332	12.04	%	$	987,551	8.50	%	N/A		N/A
First Merchants Bank	1,305,291		11.20		990,903		8.50		$	932,615	8.00	%
CET1 capital to risk-weighted assets
First Merchants Corporation	$	1,351,667	11.63	%	$	813,278	7.00	%	N/A		N/A
First Merchants Bank	1,305,291		11.20		816,038		7.00		$	757,750	6.50	%
Tier 1 capital to average assets
First Merchants Corporation	$	1,398,332	9.37	%	$	596,975	4.00	%	N/A		N/A
First Merchants Bank	1,305,291		8.76		596,300		4.00		$	745,375	5.00	%


					Prompt Corrective Action Thresholds
	Actual				Basel III Minimum Capital Required				Well Capitalized
December 31, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation	$	1,582,481	13.92	%	$	1,193,840	10.50	%	N/A		N/A
First Merchants Bank	1,453,358		12.74		1,197,515		10.50		$	1,140,490	10.00	%
Tier 1 capital to risk-weighted assets
First Merchants Corporation	$	1,374,240	12.09	%	$	966,442	8.50	%	N/A		N/A
First Merchants Bank	1,309,685		11.48		969,417		8.50		$	912,392	8.00	%
Common equity tier 1 capital to risk-weighted assets
First Merchants Corporation	$	1,327,634	11.68	%	$	795,893	7.00	%	N/A		N/A
First Merchants Bank	1,309,685		11.48		798,343		7.00		$	741,319	6.50	%
Tier 1 capital to average assets
First Merchants Corporation	$	1,374,240	9.30	%	$	590,758	4.00	%	N/A		N/A
First Merchants Bank	1,309,685		8.88		589,994		4.00		$	737,493	5.00	%

5042

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~The Corporation's and Bank's actual and required capital ratios as of June 30, 2021 and December 31, 2020 were as follows:~~

Prompt Corrective Action Thresholds
Actual Basel III Minimum Capital Required Well Capitalized
June 30, 2021 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation $ 1,531,522 14.23 % $ 1,129,766 10.50 % N/A N/A
First Merchants Bank 1,430,762 13.25 1,133,449 10.50 $ 1,079,475 10.00 %
Tier 1 capital to risk-weighted assets
First Merchants Corporation $ 1,330,832 12.37 % $ 914,572 8.50 % N/A N/A
First Merchants Bank 1,294,639 11.99 917,554 8.50 $ 863,580 8.00 %
CET1 capital to risk-weighted assets
First Merchants Corporation $ 1,284,345 11.94 % $ 753,177 7.00 % N/A N/A
First Merchants Bank 1,294,639 11.99 755,633 7.00 $ 701,659 6.50 %
Tier 1 capital to average assets
First Merchants Corporation $ 1,330,832 9.35 % $ 569,254 4.00 % N/A N/A
First Merchants Bank 1,294,639 9.11 568,398 4.00 $ 710,497 5.00 %

Prompt Corrective Action Thresholds
Actual Basel III Minimum Capital Required Well Capitalized
December 31, 2020 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation $ 1,475,551 14.36 % $ 1,079,015 10.50 % N/A N/A
First Merchants Bank 1,412,805 13.70 1,082,430 10.50 $ 1,030,886 10.00 %
Tier 1 capital to risk weighted assets
First Merchants Corporation $ 1,282,070 12.48 % $ 873,488 8.50 % N/A N/A
First Merchants Bank 1,283,922 12.45 876,253 8.50 $ 824,708 8.00 %
CET1 capital to risk-weighted assets
First Merchants Corporation $ 1,235,702 12.02 % $ 719,343 7.00 % N/A N/A
First Merchants Bank 1,283,922 12.45 721,620 7.00 $ 670,076 6.50 %
Tier 1 capital to average assets
First Merchants Corporation $ 1,282,070 9.57 % $ 536,123 4.00 % N/A N/A
First Merchants Bank 1,283,922 9.59 535,279 4.00 $ 669,098 5.00 %

On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking

organizations to allow those organizations participating in the PPP to neutralize the regulatory capital effects of participating in the program. The

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

risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios. At ~~June 30,~~March 31, 2022 and December 31, 2021, risk-weighted assets included ~~$415.8~~$48.7 million and $106.6 million, respectively, of PPP loans at a zero risk weight. Additionally, in order to facilitate use of the PPPL Facility, the agencies have clarified that banking organizations, including the Corporation and the Bank, are allowed to neutralize the regulatory effects of PPP covered loans on the risk-based capital ratios, as well as PPP covered loans pledged under the PPPL Facility on the leverage capital ratios. At June 30, 2021 and December 31, 2020, the Corporation did not have an outstanding balance with the PPPL Facility; therefore there were no adjustments to the leverage ratio for PPP loans. Access to funds under the PPPL Facility terminated on July 30, 2021, at which time the Corporation also had no outstanding balance.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Management believes that all of the ~~above~~ capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of Tier 1 capital known as CET1. Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories. Tier I regulatory capital consists primarily of total stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses.

June 30, 2021 December 31, 2020
(Dollars in thousands, except per share amounts) First Merchants Corporation First Merchants Bank First Merchants Corporation First Merchants Bank
Total Risk-Based Capital
Total Stockholders' Equity (GAAP) $ 1,871,800 $ 1,884,207 $ 1,875,645 $ 1,926,269
Adjust for Accumulated Other Comprehensive (Income) Loss (1)
(60,080) (62,659) (74,836) (77,687)
Less: Preferred Stock (125) (125) (125) (125)
Add: Qualifying Capital Securities 46,487 — 46,368 —
Less: Disallowed Goodwill and Intangible Assets (566,412) (565,965) (564,982) (564,535)
Add: Modified CECL Transition Amount 40,314 40,314 — —
Less: Disallowed Deferred Tax Assets (1,152) (1,133) — —
Total Tier 1 Capital (Regulatory) 1,330,832 1,294,639 1,282,070 1,283,922
Qualifying Subordinated Debentures 65,000 — 65,000 —
Allowance for Loan Losses Includible in Tier 2 Capital 135,690 136,123 128,481 128,883
Total Risk-Based Capital (Regulatory) $ 1,531,522 $ 1,430,762 $ 1,475,551 $ 1,412,805
Net Risk-Weighted Assets (Regulatory) $ 10,759,672 $ 10,794,750 $ 10,276,333 $ 10,308,855
Average Assets (Regulatory) $ 14,231,347 $ 14,209,945 $ 13,403,065 $ 13,381,969
Total Risk-Based Capital Ratio (Regulatory) 14.23 % 13.25 % 14.36 % 13.70 %
Tier 1 Capital to Risk-Weighted Assets 12.37 % 11.99 % 12.48 % 12.45 %
Tier 1 Capital to Average Assets 9.35 % 9.11 % 9.57 % 9.59 %
CET1 Capital Ratio
Total Tier 1 Capital (Regulatory) $ 1,330,832 $ 1,294,639 $ 1,282,070 $ 1,283,922
Less: Qualified Capital Securities (46,487) — (46,368) —
CET1 Capital (Regulatory) $ 1,284,345 $ 1,294,639 $ 1,235,702 $ 1,283,922
Net Risk-Weighted Assets (Regulatory) $ 10,759,672 $ 10,794,750 $ 10,276,333 $ 10,308,855
CET1 Capital Ratio (Regulatory) 11.94 % 11.99 % 12.02 % 12.45 %

A reconciliation of GAAP measures to regulatory measures (non-GAAP) are detailed in the following table for the periods indicated.


	March 31, 2022						December 31, 2021
(Dollars in thousands)	First Merchants Corporation			First Merchants Bank			First Merchants Corporation			First Merchants Bank
Total Risk-Based Capital
Total Stockholders' Equity (GAAP)	$	1,807,633		$	1,762,893		$	1,912,571		$	1,896,393
Adjust for Accumulated Other Comprehensive (Income) Loss (1)	84,392			82,303			(55,113)			(57,352)
Less: Preferred Stock	(125)			(125)			(125)			(125)
Add: Qualifying Capital Securities	46,665			—			46,606			—

Less: Disallowed Goodwill and Intangible Assets	(562,887)			(562,439)			(564,002)			(563,554)
Add: Modified CECL Transition Amount	23,028			23,028			34,542			34,542

Less: Disallowed Deferred Tax Assets	(374)			(369)			(239)			(219)
Total Tier 1 Capital (Regulatory)	1,398,332			1,305,291			1,374,240			1,309,685
Qualifying Subordinated Debentures	65,000			—			65,000			—
Allowance for Loan Losses Includible in Tier 2 Capital	146,247			146,733			143,241			143,673
Total Risk-Based Capital (Regulatory)	$	1,609,579		$	1,452,024		$	1,582,481		$	1,453,358

Net Risk-Weighted Assets (Regulatory)	$	11,618,250		$	11,657,685		$	11,369,907		$	11,404,902
Average Assets (Regulatory)	$	14,924,372		$	14,907,502		$	14,768,956		$	14,749,855

Total Risk-Based Capital Ratio (Regulatory)	13.85		%	12.46		%	13.92		%	12.74		%
Tier 1 Capital to Risk-Weighted Assets	12.04		%	11.20		%	12.09		%	11.48		%
Tier 1 Capital to Average Assets	9.37		%	8.76		%	9.30		%	8.88		%

CET1 Capital Ratio
Total Tier 1 Capital (Regulatory)	$	1,398,332		$	1,305,291		$	1,374,240		$	1,309,685
Less: Qualified Capital Securities	(46,665)			—			(46,606)			—


CET1 Capital (Regulatory)	$	1,351,667		$	1,305,291		$	1,327,634		$	1,309,685

Net Risk-Weighted Assets (Regulatory)	$	11,618,250		$	11,657,685		$	11,369,907		$	11,404,902
CET1 Capital Ratio (Regulatory)	11.63		%	11.20		%	11.68		%	11.48		%

(1) Includes net unrealized gains or losses on available for sale securities, net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

Additionally, management believes the following tables are also meaningful when considering performance measures of the Corporation. Non-GAAP financial measures such as tangible common equity to tangible assets, return on average tangible capital and return on average tangible assets are important measures of the strength of the Corporation's capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the

Corporation’s financial position without regard to the effects of intangible assets and preferred stock. Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

Because these measures are not defined in GAAP or federal banking regulations, they are considered non-GAAP financial measures. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

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PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The ~~Corporation had a strong capital position as evidenced by the~~Corporation's tangible common equity to tangible assets ratio ~~of 9.04~~was 8.31 percent at ~~June 30, 2021,~~March 31, 2022, and ~~9.65~~9.01 percent at December 31, ~~2020.~~

Tangible Common Equity to Tangible Assets (non-GAAP)
(Dollars in thousands, except per share amounts) June 30, 2021 December 31, 2020
Total Stockholders' Equity (GAAP) $ 1,871,800 $ 1,875,645
Less: Cumulative preferred stock (GAAP) (125) (125)
Less: Intangible assets (GAAP) (573,786) (572,893)
Tangible common equity (non-GAAP) $ 1,297,889 $ 1,302,627
Total assets (GAAP) $ 14,923,097 $ 14,067,210
Less: Intangible assets (GAAP) (573,786) (572,893)
Tangible assets (non-GAAP) $ 14,349,311 $ 13,494,317
Stockholders' Equity to Assets (GAAP) 12.54 % 13.33 %
Tangible common equity to tangible assets (non-GAAP) 9.04 % 9.65 %
Tangible common equity (non-GAAP) $ 1,297,889 $ 1,302,627
Plus: Tax Benefit of intangibles (non-GAAP) 5,432 5,989
Tangible common equity, net of tax (non-GAAP) $ 1,303,321 $ 1,308,616
Common Stock outstanding 53,972 53,922
Book Value (GAAP) $ 34.68 $ 34.78
Tangible book value - common (non-GAAP) $ 24.15 $ 24.27
2021. The decrease in tangible common equity and tangible assets is primarily due to the decline in mark-to-market values associated with our available for sale investment securities portfolio. At December 31, 2021, the available for sale portfolio had a net unrealized gain of $75.9 million compared to a net unrealized loss of $101.3 million at March 31, 2022. This decline in value is due to interest rate changes and not due to credit quality. The following table reconciles tangible equity to tangible assets and tangible book value per common share to traditional GAAP measures at March 31, 2022 and December 31, 2021


	Tangible Common Equity to Tangible Assets (non-GAAP)
(Dollars in thousands, except per share amounts)	March 31, 2022			December 31, 2021
Total Stockholders' Equity (GAAP)	$	1,807,633		$	1,912,571
Less: Cumulative preferred stock (GAAP)	(125)			(125)
Less: Intangible assets (GAAP)	(569,494)			(570,860)
Tangible common equity (non-GAAP)	$	1,238,014		$	1,341,586
Total assets (GAAP)	$	15,465,258		$	15,453,149
Less: Intangible assets (GAAP)	(569,494)			(570,860)
Tangible assets (non-GAAP)	$	14,895,764		$	14,882,289
Stockholders' Equity to Assets (GAAP)	11.69		%	12.38		%
Tangible common equity to tangible assets (non-GAAP)	8.31		%	9.01		%


Tangible common equity (non-GAAP)	$	1,238,014		$	1,341,586
Plus: Tax Benefit of intangibles (non-GAAP)	4,615			4,875
Tangible common equity, net of tax (non-GAAP)	$	1,242,629		$	1,346,461
Common Stock outstanding	53,425			53,410
Book Value (GAAP)	$	33.83		$	35.81
Tangible book value - common (non-GAAP)	$	23.26		$	25.21

The following table details and reconciles tangible earnings per share, return on tangible capital and tangible assets to traditional GAAP measures for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	2021			2020			2021			2020			(Dollars in thousands, except per share amounts)	2022			2021
Average goodwill (GAAP)	Average goodwill (GAAP)	$	546,793		$	543,919		$	545,364		$	543,919		Average goodwill (GAAP)	$	545,385		$	543,919
Average core deposit intangible (GAAP)		27,921			32,876			28,172			33,606
Average other intangibles (GAAP)														Average other intangibles (GAAP)	24,846			28,427
Average deferred tax on CDI (GAAP)	Average deferred tax on CDI (GAAP)	(5,607)			(6,815)			(5,741)			(6,972)			Average deferred tax on CDI (GAAP)	(4,755)			(5,877)
Intangible adjustment (non-GAAP)	Intangible adjustment (non-GAAP)	$	569,107		$	569,980		$	567,795		$	570,553		Intangible adjustment (non-GAAP)	$	565,476		$	566,469
Average stockholders' equity (GAAP)	Average stockholders' equity (GAAP)	$	1,846,037		$	1,795,509		$	1,843,250		$	1,805,963		Average stockholders' equity (GAAP)	$	1,891,223		$	1,840,432
Average cumulative preferred stock (GAAP)	Average cumulative preferred stock (GAAP)	(125)			(125)			(125)			(125)			Average cumulative preferred stock (GAAP)	(125)			(125)

Intangible adjustment (non-GAAP)	Intangible adjustment (non-GAAP)	(569,107)			(569,980)			(567,795)			(570,553)			Intangible adjustment (non-GAAP)	(565,476)			(566,469)
Average tangible capital (non-GAAP)	Average tangible capital (non-GAAP)	$	1,276,805		$	1,225,404		$	1,275,330		$	1,235,285		Average tangible capital (non-GAAP)	$	1,325,622		$	1,273,838
Average assets (GAAP)	Average assets (GAAP)	$	14,758,597		$	13,655,322		$	14,503,087		$	13,114,280		Average assets (GAAP)	$	15,464,605		$	14,244,739
Intangible adjustment (non-GAAP)	Intangible adjustment (non-GAAP)	(569,107)			(569,980)			(567,795)			(570,553)			Intangible adjustment (non-GAAP)	(565,476)			(566,469)
Average tangible assets (non-GAAP)	Average tangible assets (non-GAAP)	$	14,189,490		$	13,085,342		$	13,935,292		$	12,543,727		Average tangible assets (non-GAAP)	$	14,899,129		$	13,678,270
Net income available to common stockholders (GAAP)	Net income available to common stockholders (GAAP)	$	55,559		$	32,991		$	105,028		$	67,255		Net income available to common stockholders (GAAP)	$	48,586		$	49,469
CDI amortization, net of tax (GAAP)	CDI amortization, net of tax (GAAP)	1,156			1,194			2,228			2,390			CDI amortization, net of tax (GAAP)	1,079			1,072
Tangible net income available to common stockholders (non-GAAP)	Tangible net income available to common stockholders (non-GAAP)	$	56,715		$	34,185		$	107,256		$	69,645		Tangible net income available to common stockholders (non-GAAP)	$	49,665		$	50,541
Per Share Data:	Per Share Data:													Per Share Data:
Diluted net income available to common stockholders (GAAP)	Diluted net income available to common stockholders (GAAP)	$	1.03		$	0.61		$	1.94		$	1.24		Diluted net income available to common stockholders (GAAP)	$	0.91		$	0.91
Diluted tangible net income available to common stockholders (non-GAAP)	Diluted tangible net income available to common stockholders (non-GAAP)	$	1.05		$	0.63		$	1.98		$	1.28		Diluted tangible net income available to common stockholders (non-GAAP)	$	0.93		$	0.93
Ratios:	Ratios:													Ratios:
Return on average GAAP capital (ROE)	Return on average GAAP capital (ROE)	12.04		%	7.35		%	11.40		%	7.45		%	Return on average GAAP capital (ROE)	10.28		%	10.75		%
Return on average tangible capital	Return on average tangible capital	17.77		%	11.16		%	16.82		%	11.28		%	Return on average tangible capital	14.99		%	15.87		%
Return on average assets (ROA)	Return on average assets (ROA)	1.51		%	0.97		%	1.45		%	1.03		%	Return on average assets (ROA)	1.26		%	1.39		%
Return on average tangible assets	Return on average tangible assets	1.60		%	1.04		%	1.54		%	1.11		%	Return on average tangible assets	1.33		%	1.48		%

Return on average tangible capital is tangible net income available to common stockholders (annualized) expressed as a percentage of average tangible capital. Return on average tangible assets is tangible net income available to common stockholders (annualized) expressed as a percentage of average tangible assets.

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PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS

The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. Commercial loans are individually underwritten and judgmentally risk rated. They are periodically monitored and prompt corrective actions are taken on deteriorating loans. Consumer loans are typically underwritten with statistical decision-making tools and are managed throughout their life cycle on a portfolio basis.

Loan Quality

The quality of the loan portfolio and the amount of non-performing loans may increase or decrease as a result of acquisitions, organic portfolio growth, problem loan recognition and resolution through collections, sales or charge-offs. The performance of any loan can be affected by external factors such as economic conditions, or internal factors specific to a particular borrower, such as the actions of a customer's internal management.

At ~~June 30, 2021,~~March 31, 2022, non-performing loans totaled ~~$58.2~~$42.8 million, a decrease of ~~$6.5 million~~$552,000 from December 31, ~~2020. Loans not accruing interest income~~2021. Non-accrual loans totaled ~~$57.6~~$42.7 million at ~~June 30, 2021,~~March 31, 2022, a decrease of ~~$3.9 million~~$364,000 from December 31, 2020. The decrease in non-accrual loans was primarily attributed to partial charge-offs related to two loans, both of which are in the senior living sector with remaining balances, net of specific reserves, totaling $23.4 million.2021.

Other real estate owned and repossessions, totaling ~~$601,000~~$6.3 million at ~~June 30, 2021, decreased $339,000~~March 31, 2022, increased $5.7 million from December 31, ~~2020.~~2021. The increase is primarily related to a student housing property with a carrying value of $5.8 million. For other real estate owned, current appraisals are obtained to determine fair value as management continues to aggressively market these real estate assets.

According to applicable accounting guidance, loans that no longer exhibit similar risk characteristics are evaluated individually to determine if there is a need for a specific reserve. Commercial loans under $500,000 and consumer loans, with the exception of troubled debt restructures, are not individually evaluated. The determination for individual evaluation is made based on current information or events that may suggest it is probable that not all amounts due of principal and interest, according to the contractual terms of the loan agreement, will be substantially collected.

The Corporation's non-performing assets plus accruing loans 90 days or more delinquent and individually evaluated loans are presented in the table below.


(Dollars in Thousands)	(Dollars in Thousands)	June 30, 2021		December 31, 2020		(Dollars in Thousands)	March 31, 2022		December 31, 2021
Non-Performing Assets:	Non-Performing Assets:					Non-Performing Assets:
Non-accrual loans	Non-accrual loans	$	57,556	$	61,471	Non-accrual loans	$	42,698	$	43,062
Renegotiated loans	Renegotiated loans	629		3,240		Renegotiated loans	141		329
Non-performing loans (NPL)	Non-performing loans (NPL)	58,185		64,711		Non-performing loans (NPL)	42,839		43,391
OREO and Repossessions	OREO and Repossessions	601		940		OREO and Repossessions	6,271		558
Non-performing assets (NPA)	Non-performing assets (NPA)	58,786		65,651		Non-performing assets (NPA)	49,110		43,949
Loans 90-days or more delinquent and still accruing	Loans 90-days or more delinquent and still accruing	183		746		Loans 90-days or more delinquent and still accruing	2,085		963
NPAs and loans 90-days or more delinquent	NPAs and loans 90-days or more delinquent	$	58,969	$	66,397	NPAs and loans 90-days or more delinquent	$	51,195	$	44,912

The non-accrual balances in the table above include troubled debt loan restructures totaling ~~$1.4~~$12.7 million and ~~$1.7~~$13.7 million as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The total balance for both periods is primarily related to one loan that became a TDR in 2021 and has a balance of $11.8 million as of March 31, 2022.

The composition of non-performing assets plus accruing loans 90-days or more delinquent is reflected in the following table.


(Dollars in Thousands)	(Dollars in Thousands)	June 30, 2021		December 31, 2020		(Dollars in Thousands)	March 31, 2022		December 31, 2021
Non-performing assets and loans 90-days or more delinquent:	Non-performing assets and loans 90-days or more delinquent:					Non-performing assets and loans 90-days or more delinquent:
Commercial and industrial loans	Commercial and industrial loans	$	1,467	$	2,923	Commercial and industrial loans	$	10,122	$	8,273
Agricultural land, production and other loans to farmers	Agricultural land, production and other loans to farmers	682		1,012		Agricultural land, production and other loans to farmers	103		631
Real estate loans:	Real estate loans:					Real estate loans:
Construction	Construction	313		435		Construction	940		885
Commercial real estate, non-owner occupied	Commercial real estate, non-owner occupied	45,533		47,548		Commercial real estate, non-owner occupied	27,363		23,125
Commercial real estate, owner occupied	Commercial real estate, owner occupied	2,154		3,040		Commercial real estate, owner occupied	1,689		432
Residential	Residential	6,536		9,034		Residential	8,961		9,723
Home equity	Home equity	2,248		2,350		Home equity	2,017		1,840
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	36		55		Individuals' loans for household and other personal expenditures	—		3

Non-performing assets and loans 90-days or more delinquent:	Non-performing assets and loans 90-days or more delinquent:	$	58,969	$	66,397	Non-performing assets and loans 90-days or more delinquent:	$	51,195	$	44,912

5445

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On March 22, 2020, a statement was issued by the Bank’s banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructure as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The ~~Interagency Statement was subsequently revised on April 7, 2020 to clarify the interaction of the original guidance with Section 4013 of the~~ CARES Act, as ~~well as setting forth~~amended by the 2021 CAA, allowed banks to suspend requirements under GAAP, effectively, through January 1, 2022, for certain loan modifications related to the COVID-19 pandemic. The federal banking ~~regulators’ views on consumer protection considerations.~~agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 or offer other borrower friendly options. In accordance with such guidance, the Bank ~~has offered~~made various short-term modifications ~~made in response to COVID-19 to~~for borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that ~~are~~were insignificant. ~~The CAA, as described above, extended the expiration date for COVID-related loan modifications exempt from troubled debt restructuring classification until the earlier of January 1,~~At March 31, 2022, ~~or 60 days after the termination of the national emergency. The following table summarizes modifications in deferment for the periods indicated.~~

June 30, 2021 December 31, 2020
Recorded Balance Number of Loans Recorded Balance Number of Loans
Commercial and industrial loans $ 16,716 6 18,143 14
Agricultural land, production and other loans to farmers — — 10,724 2
Real estate loans:
Construction — — 21,131 5
Commercial real estate, non-owner occupied 22,239 6 65,139 10
Commercial real estate, owner occupied 138 1 2,428 6
Residential 1,047 10 1,733 20
Home equity 30 1 154 4
Individuals' loans for household and other personal expenditures 125 9 893 26
Total $ 40,295 33 120,345 120,345 87

Of the loans still in deferment at June 30, 2021, $19.4 million, or 48 percent of the balance, which were included in commercial real estate, non-owner occupied, were in the hotel industry. Of the remaining loans, $15.0 million, or 37 percent of the balance, are related to three loans in the entertainment industry. Although the Corporation ~~believes its underwriting and loan review procedures are appropriate for the various kinds of~~did not have any outstanding COVID modifications, compared to $65.1 million on 49 loans it makes, its results of operations and financial condition could be adversely affected in the event the quality of its loan portfolio declines. Deterioration in the economic environment including residential and commercial real estate values may result in increased levels of loan delinquencies and credit losses.at March 31, 2021.

Provision and Allowance for Credit Losses on Loans

The Corporation adopted FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL") on January 1, 2021. CECL replaces the previous "incurred loss" model with an "expected loss" model of measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost based on historical experiences, current conditions and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. Additional details of the the Corporation's CECL methodology and allowance calculation are discussed within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

The CECL allowance is maintained through the provision for ~~loan~~credit losses, which is a charge against earnings. Based on management’s judgment as to the appropriate level of the allowance for ~~loan~~credit losses, the amount provided in any period may be greater or less than net loan losses for the same period. The determination of the provision amount and the adequacy of the allowance in any period is based on management’s continuing review and evaluation of the loan portfolio.

The Corporation’s total loan balance ~~decreased $107.3~~ increased $107.1 million from December 31, ~~2020~~2021 to ~~$9.1~~ $9.4 billion at ~~June 30, 2021.~~March 31, 2022. PPP loans accounted for ~~$415.8~~$48.7 million of the total loan balance at ~~June 30,~~March 31, 2022 and $106.6 million at December 31, 2021. At ~~June 30, 2021,~~March 31, 2022, the allowance for credit losses totaled ~~$199.8~~$196.0 million, which represents an increase of ~~$69.1 million~~$587,000 from December 31, 2020. The allowance increase was primarily due to the day one cumulative effect adjustment related to the adoption of CECL of $74.1 million, offset by net charge-offs during the six months ended June 30, 2021 of $4.9 million.2021. As a percentage of loans, the allowance for credit losses ~~was 2.19~~was 2.09 percent at ~~June 30, 2021~~March 31, 2022 compared to ~~1.41~~2.11 percent at December 31, ~~2020.~~2021. The allowance for credit losses as a percentage of total loans less PPP loans was ~~2.29~~ 2.10 percent as of ~~June 30,~~March 31, 2022 and 2.14 percent at December 31, 2021. ~~As of June 30, 2021, $595.7 million of the Bank’s PPP loans had been forgiven by the SBA.~~ The Bank anticipates that the majority of its remaining PPP loans will also be forgiven by the SBA in accordance with the terms of the program.

The extent to which COVID-19 continues to impact the Corporation’s loan portfolio will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and severity of the pandemic, the potential for seasonal or other resurgences, actions taken by governmental authorities and other third parties to contain and treat the virus, and how quickly and to what extent normal economic and operating conditions resume. The Corporation deems the current estimate for loan portfolio credit exposure as appropriate.

There was no provision for credit losses for the three ~~and six~~ months ended ~~June 30, 2021 compared to $21.9 million~~March 31, 2022 and $41.7 million, respectively, for the same period of 2020. The provision for the first two quarters of 2020 reflected an increase in the reserve related to the estimated impact of the emerging COVID-19 pandemic on the economy2021. Net recoveries totaling $587,000 and on the credit quality of our loan portfolio. The Corporation adopted CECL effective January 1, 2021 and recorded a day one cumulative effect adjustment which increased the Allowance for Credit Losses for Loans to $204.7 million. Net charge-offs in 2021 lowered the allowance to $199.8 million as of June 30, 2021. The Corporation deems this estimate for loan portfolio credit exposure as appropriate, thus there was no provision expense in the first and second quarter of 2021.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Net~~net charge-offs totaling ~~$1.3~~$3.6 million, ~~and $4.9 million,~~ respectively, were recognized for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021. ~~Comparatively, net charge-offs totaled $230,000 and $812,000, respectively, for the same periods in 2020.~~ For the three months ended ~~June 30, 2021,~~March 31, 2022, there were no individual charge-offs greater than $500,000. For the three months ended March 31, 2022 there was one individual ~~charge-off~~recovery greater than ~~$500,000~~500,000 that totaled ~~$515,000.~~$692,000. For the ~~six~~three months ended ~~June 30,~~March 31, 2021, there were three individual charge-offs greater than $500,000 that totaled ~~$4.3~~$3.2 million. For the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, there were ~~not any~~no individual ~~charge-offs or~~ recoveries greater than $500,000. The distribution of the net charge-offs (recoveries) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ are reflected in the following table.


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
(Dollars in Thousands)	(Dollars in Thousands)	2021		2020		2021		2020		(Dollars in Thousands)	2022		2021
Net charge-offs (Recoveries):
Net charge-offs (recoveries):										Net charge-offs (recoveries):
Commercial and industrial loans	Commercial and industrial loans	$	120	$	31	$	604	$	160	Commercial and industrial loans	$	(128)	$	484
Agricultural land, production and other loans to farmers	Agricultural land, production and other loans to farmers	23		(38)		24		5		Agricultural land, production and other loans to farmers	(3)		1
Real estate loans:	Real estate loans:									Real estate loans:
Construction	Construction	(1)		—		1		(37)		Construction	—		2
Commercial real estate, non-owner occupied	Commercial real estate, non-owner occupied	984		(80)		3,495		(61)		Commercial real estate, non-owner occupied	120		2,511
Commercial real estate, owner occupied	Commercial real estate, owner occupied	18		14		656		97		Commercial real estate, owner occupied	(705)		638
Residential	Residential	(71)		38		1		31		Residential	45		72
Home equity	Home equity	208		175		43		320		Home equity	(67)		(165)
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	26		90		104		297		Individuals' loans for household and other personal expenditures	151		78

Total net charge-offs		$	1,307	$	230	$	4,928	$	812
Total net charge-offs (recoveries)										Total net charge-offs (recoveries)	$	(587)	$	3,621

Management continually evaluates the commercial loan portfolio by including consideration of specific borrower cash flow analysis and estimated collateral values, types and amounts on non-performing loans, past and anticipated ~~loan~~credit loss experience, changes in the composition of the loan portfolio, and the current condition and amount of loans outstanding. The determination of the provision for ~~loan~~credit losses in any period is based on management’s continuing review and evaluation of the loan portfolio, and its judgment as to the impact of current economic conditions on the portfolio.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY

Liquidity management is the process by which the Corporation ensures that adequate liquid funds are available for the holding company and its subsidiaries. These funds are necessary in order to meet financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit obligations to borrowers, paying dividends to stockholders, paying operating expenses, funding capital expenditures, and maintaining deposit reserve requirements. Liquidity is monitored and closely managed by the asset/liability committee.

The Corporation’s liquidity is dependent upon the receipt of dividends from the Bank, which is subject to certain regulatory limitations and access to other funding sources. Liquidity of the Bank is derived primarily from core deposit growth, principal payments received on loans, the sale and maturity of investment securities, net cash provided by operating activities, and access to other funding sources.

The principal source of asset-funded liquidity is investment securities classified as available for sale, the market values of which totaled ~~$2.4~~$2.2 billion at ~~June 30, 2021, an increase~~March 31, 2022, a decrease of ~~$507.8~~$180.4 million, or ~~26.5~~7.7 percent, from December 31, ~~2020.~~2021. Securities classified as held to maturity that are maturing within a short period of time can also be a source of liquidity. Securities classified as held to maturity and that are maturing in one year or less totaled ~~$8.4~~$7.7 million at ~~June 30, 2021.~~March 31, 2022. In addition, other types of assets such as cash and interest-bearing deposits with other banks, federal funds sold and loans maturing within one year are sources of liquidity.

The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. Federal funds purchased and securities sold under agreements to repurchase are also considered a source of liquidity. In addition, FHLB advances are utilized as a funding source. At ~~June 30, 2021,~~March 31, 2022, total borrowings from the FHLB were ~~$334.2 million~~$309.0 million. The Bank has pledged certain mortgage loans and investments to the FHLB. The total available remaining borrowing capacity from the FHLB at ~~June 30, 2021~~March 31, 2022 was ~~$762.8~~$720.9 million.

The Corporation and the Bank receive outside credit ratings from Moody's. Both the Corporation and the Bank currently have Issuer Ratings of Baa1 with a Rating Outlook of Stable. Additionally, the Bank has a Baseline Credit Assessment Rating of a3. Management considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper. Because of the Corporation's and Bank's current levels of long-term debt, management believes it could generate additional liquidity from various sources should the need arise.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

The following table presents the Corporation's material cash requirements from known contractual and other obligations at March 31, 2022:

~~The required payments related to operating leases and borrowings at June 30, 2021 are as follows:~~


																			Payments Due In
(Dollars in Thousands)	(Dollars in Thousands)	Remaining 2021		2022		2023		2024		2025		2026 and after		ASC 805 fair value adjustments at acquisition		Total		(Dollars in Thousands)	One Year or Less		Over One Year		Total
Operating leases		$	1,890	$	3,674	$	3,270	$	3,159	$	2,906	$	7,768	$	—	$	22,667

Deposits without stated maturity																		Deposits without stated maturity	$	12,250,450	$	—	$	12,250,450
Certificates and other time deposits																		Certificates and other time deposits	525,758		129,745		655,503
Securities sold under repurchase agreements	Securities sold under repurchase agreements	146,904		—		—		—		—		—		—		146,904		Securities sold under repurchase agreements	169,697		—		169,697
Federal Home Loan Bank advances	Federal Home Loan Bank advances	48		75,097		115,097		10,097		25,097		108,807		—		334,243		Federal Home Loan Bank advances	105,072		203,888		308,960
Subordinated debentures and other borrowings		—		—		—		—		—		122,012		(3,514)		118,498
Subordinated debentures and term loans																		Subordinated debentures and term loans	—		122,012		122,012
Total	Total	$	148,842	$	78,771	$	118,367	$	13,256	$	28,003	$	238,587	$	(3,514)	$	622,312	Total	$	13,050,977	$	455,645	$	13,506,622

Also, in the normal course of business, the Bank is a party to a number of other off-balance sheet activities that contain credit, market and operational risk that are not reflected in whole or in part in our consolidated financial statements. These activities primarily consist of traditional off-balance sheet credit-related financial instruments such as loan commitments and standby letters of credit.

Summarized credit-related financial instruments at ~~June 30, 2021~~March 31, 2022 are as follows:


(Dollars in Thousands)	~~June 30, 2021~~March 31, 2022
Amounts of commitments:
Loan commitments to extend credit	$	~~3,884,912~~3,958,844
Standby and commercial letters of credit	~~32,505~~31,854
	$	~~3,917,417~~3,990,698

Since many of the commitments are expected to expire unused or be only partially used, the total amount of unused commitments in the preceding table does not necessarily represent future cash requirements.

INTEREST SENSITIVITY AND DISCLOSURE ABOUT MARKET RISK

Asset/Liability management has been an important factor in the Corporation's ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation's liquidity and interest sensitivity positions at regular meetings to review how changes in interest rates may affect earnings. Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation’s exposure to changes in net interest income given various rate scenarios and the economic and competitive environments.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

It is the objective of the Corporation to monitor and manage risk exposure to net interest income caused by changes in interest rates. It is the goal of the Corporation’s Asset/Liability management function to provide optimum and stable net interest income. To accomplish this, management uses two asset liability tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation Modeling are constructed, presented and monitored quarterly. Management believes that the Corporation's liquidity and interest sensitivity position at ~~June 30, 2021,~~March 31, 2022, remained adequate to meet the Corporation’s primary goal of achieving optimum interest margins while avoiding undue interest rate risk.

Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. The Corporation's asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a twelve-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Corporation.

The base scenario is highly dependent on numerous assumptions embedded in the model, including assumptions related to future interest rates. While the base sensitivity analysis incorporates management's best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity products, such as savings, money market, interest-bearing and demand deposits, reflect management's best estimate of expected future behavior. Historical retention rate assumptions are applied to non-maturity deposits for modeling purposes.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

The comparative rising 200 basis points and falling 100 basis points scenarios below, as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, assume further interest rate changes in addition to the base simulation discussed above. These changes are immediate and parallel changes to the base case scenario. ~~In the current rate environment, many drivers are at or near historical lows due to the FOMC's rate reductions in March 2020 in response to COVID-19.~~

Results for the rising 200 basis points, and falling 100 basis points interest rate scenarios are listed below based upon the Corporation’s rate sensitive assets and liabilities at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The change from the base scenario represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.


		June 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Rising 200 basis points from base case	Rising 200 basis points from base case	2.9	%	5.9	%	Rising 200 basis points from base case	1.6	%	1.4	%
Falling 100 basis points from base case	Falling 100 basis points from base case	(0.2)	%	0.7	%	Falling 100 basis points from base case	(1.0)	%	(0.9)	%

EARNING ASSETS

The following table presents the earning asset mix as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Earning assets ~~increased~~decreased by ~~$940.8~~$9.2 million during the ~~six~~three months ended ~~June 30, 2021.~~ March 31, 2022.

Interest bearing deposits decreased $78.9 million from December 31, 2021 to March 31, 2022 as excess liquidity was used to purchase investment securities and fund loan growth.

Total investment securities ~~increased $1.0 billion~~decreased $35.1 million from December 31, ~~2020 as~~2021. The Corporation purchased investment securities by utilizing excess liquidity from deposit growth and SBA forgiveness of PPP loans. The increase from purchases was ~~used~~offset by a change from a net unrealized gain of $75.9 million at December 31, 2021 to ~~invest~~a net unrealized loss of $101.3 million as of March 31, 2022 on the available for sale portfolio. The change to a net unrealized loss position was primarily due the changes in ~~the bond portfolio.~~interest rates and not credit quality. Additional details of the changes in the Corporation's investment securities portfolio are discussed within NOTE 3. INVESTMENT SECURITIES of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

~~Loans and loans held for sale decreased $107.3~~The Corporation's total loan portfolio increased $107.1 million from December 31, ~~2020.~~2021. As of ~~June 30, 2021,~~March 31, 2022, the Corporation's PPP ~~loans, which are included~~loan portfolio, primarily in the commercial and industrial loans class, totaled ~~$415.8~~$48.7 million, a decrease of ~~$251.3~~$57.9 million from the December 31, ~~2020~~2021 balance of ~~$667.1~~$106.6 million. ~~Other~~The Corporation experienced organic loan growth of $165.0 million, or 7.2% on an annualized basis, when offset by the decline in PPP loans.

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The loan classes that experienced the largest increases from December 31, 2021 were commercial and industrial loans, residential real estate and construction real estate. The decline in PPP loans was offset by organic loan growth in the commercial and industrial loan class of $170.0 million, resulting in a net increase of $112.1 million. Loan classes that experienced the largest decreases from December 31, ~~2020~~2021 were ~~residential~~commercial real estate (non-owner occupied) and agricultural land, production and other loans to farmers. ~~The largest loan classes that experienced an increase from December 31, 2020 were public finance and other commercial loans and commercial real estate, non-owner occupied.~~ Additional details of the changes in the Corporation's ~~loan portfolio~~loans are discussed within NOTE 4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form ~~10-Q.~~10-Q, and the "LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Dollars in Thousands) June 30, 2021 December 31, 2020
Interest-bearing deposits $ 438,863 $ 392,305
Investment securities available for sale 2,426,900 1,919,119
Investment securities held to maturity, net of allowance for credit losses of $245,000 as of June 30, 2021 1,721,414 1,227,668
Loans held for sale 18,582 3,966
Loans 9,121,250 9,243,174
Federal Home Loan Bank stock 28,736 28,736
Total $ 13,755,745 $ 12,814,968

Federal Home Loan Bank Stock decreased $2.3 million, the Corporation repurchased excess stock.


(Dollars in Thousands)	March 31, 2022		December 31, 2021
Interest-bearing deposits	$	395,262	$	474,154
Investment securities available for sale	2,164,197		2,344,551
Investment securities held to maturity, net of allowance for credit losses of $245,000 and $245,000	2,325,066		2,179,802
Loans held for sale	3,938		11,187
Loans	9,356,241		9,241,861
Federal Home Loan Bank stock	26,422		28,736
Total	$	14,271,126	$	14,280,291

OTHER

The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that address is (http://www.sec.gov).

5849

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PART I: FINANCIAL INFORMATION

ITEM 3. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required under this item is included as part of Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the headings “LIQUIDITY” and “INTEREST SENSITIVITY AND DISCLOSURE ABOUT MARKET RISK”.

5950

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PART I: FINANCIAL INFORMATION

ITEM 4. CONTROLS AND PROCEDURES

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation discussed above that occurred during the Corporation’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

6051

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PART II: OTHER INFORMATION

ITEM 1., ITEM 1A., ITEM 2., ITEM 3., ITEM 4. AND ITEM 5.

(table dollar amounts in thousands, except share data)

ITEM 1. LEGAL PROCEEDINGS

On June 24, 2021, the Bank was named in a putative class action lawsuit filed in a Circuit Court in Delaware County, Indiana challenging the Bank’s checking account practices associated with its assessment of overdraft fees for certain debit card transactions. The relief sought by the plaintiff includes restitution, other monetary damages, and injunctive and declaratory relief. The plaintiff also seeks to have the case certified by the Court as a class action on behalf of all persons who are checking account holders at the Bank and who were assessed overdraft fees on certain debit card transactions. The Corporation believes the plaintiff’s claims are unfounded and intends to defend against them. At this stage of the litigation, it is not possible for the Corporation’s management to determine the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.

There are no ~~other~~ pending legal proceedings, other than litigation incidental to the ordinary business of the Corporation or its subsidiaries, of a material nature to which the Corporation or its subsidiaries is a party or of which any of their properties ~~are~~is subject. Further, there are no material legal proceedings in which any director, officer, principal shareholder, or affiliate of the Corporation, or any associate of any such director, officer or principal shareholder, is a party, or has a material interest, adverse to the Corporation or any of its subsidiaries.

None of the routine legal proceedings, individually or in the aggregate, in which the Corporation or its affiliates are involved are expected to have a material adverse impact on the financial position or the results of operations of the Corporation.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a. None

b. None

c. Issuer Purchases of Equity Securities

The following table presents information relating to our purchases of equity securities during the three months ended ~~June 30, 2021.~~March 31, 2022.

~~Period~~

Total Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number of Shares
Purchased as part of Publicly announced Plans or Programs

~~Maximum Number of Shares~~

~~that may yet be Purchased~~

~~Under the Plans or Programs~~ ~~(1)~~

~~April, 2021~~

—

~~3,333,000~~

~~May, 2021~~

—

~~3,333,000~~

~~June, 2021~~

—

~~3,333,000~~


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as part of Publicly announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs (2)
January, 2022	—	$	—	—	2,686,898
February, 2022	89	$	43.26	—	2,686,898
March, 2022	338	$	43.38	—	2,686,898
Total	427			—

(1)During the three months ended March 31, 2022, there were no shares repurchased pursuant to the Corporation's share repurchase program described in note (2) below. The share repurchases in February 2022 and March 2022 represent shares repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of the Corporation's restricted stock awards.

(2) On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100,000,000. The program does not have an expiration date. However, it may be discontinued by the Board at any time. Since commencing the program, the Corporation has repurchased a total of 646,102 shares of common stock for a total aggregate investment of $25,443,391.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

a. None

b. None

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PART II: OTHER INFORMATION

ITEM 6. EXHIBITS


Exhibit No:			Description of Exhibits:

2.1 (*)			Agreement and Plan of Merger between First Merchants Corporation and Level Onel Bancorp, Inc., dated as of November 4, 2021 (Incorporated by reference to Exhibit 2.1 of registrant's Form 8-K filed on November 4, 2021) (SEC No. 000-17071)
3.1			First Merchants Corporation Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of registrant’s Form 8-K filed on ~~May 2, 2017)~~Ma rch 24, 2022) (SEC No. 000-17071)
3.2			Bylaws of First Merchants Corporation dated August 11, 2016 (Incorporated by reference to Exhibit 3.2 of registrant’s Form 10-K filed on March 1, 2017) (SEC No. 000-17071)
4.1			First Merchants Corporation Amended and Restated Declaration of Trust of First Merchants Capital Trust II dated as of July 2, 2007 (Incorporated by reference to Exhibit 4.1 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.2			Indenture dated as of July 2, 2007 (Incorporated by reference to Exhibit 4.2 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.3			Guarantee Agreement dated as of July 2, 2007 (Incorporated by reference to Exhibit 4.3 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.4			Form of Capital Securities Certification of First Merchants Capital Trust II (Incorporated by reference to Exhibit 4.4 of registrant's Form 8-K filed on July 3, 2007) (SEC No. 000-17071)
4.5			First Merchants Corporation Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to registrant’s Prospectus filed pursuant to Rule 424(b)(3) on July 17, 2020) (SEC No. 333-229527)
4.6			Upon request, the registrant agrees to furnish supplementally to the Commission a copy of the instruments defining the rights of holders of its (a) 5.00% Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5 million and (b) 6.75% Fixed-to-Floating Rate Subordinated Notes due 2028 in aggregate principal amount of $65 million.
4.7			Deposit Agreement by and among First Merchants Corporation, Broadridge Corporate Issuer Solutions, Inc., as depositary, and holders from time to time of the depositary receipts described therein, as amended on March 30, 2022 (Incorporated by reference to Exhibit 4.1 of registrant’s Form 8-A filed on March 30, 2022) (SEC No. 001-41342)
4.8			Form of Depositary Receipt (Incorporated by reference to Exhibit 4.2 of registrant’s Form 8-A filed on March 30, 2022) (SEC No. 001-41342)
4.9			Indenture, dated as of December 18, 2019, between First Merchants Corporation (as successor to Level One Bancorp, Inc.) and Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibit 4.1 of Level One Bancorp, Inc.’s Form 8-K filed on December 19, 2019) (SEC No. 001-38458)
4.10			First Supplemental Indenture, dated as of March 31, 2022, among First Merchants Corporation, Level One Bancorp, Inc. and Wilmington Trust, National Association, as trustee (2)
4.11			Form of 4.75% Fixed-to-Floating Rate Subordinated Notes due 2029 (Incorporated by reference to Exhibit 4.2 of Level One Bancorp, Inc.’s Form 8-K filed on December 19, 2019) (SEC No. 001-38458)
10.1			Level One Bancorp, Inc. 2007 Stock Option Plan as amended and restated April 15, 2015 (Incorporated by reference to Exhibit 10.5 of Level One Bancorp, Inc.’s registration statement on Form S-1 filed March 23, 2018) (SEC No. 333-223866) (1)
10.2			Amendment to the Level One Bancorp, Inc. 2007 Stock Option Plan, dated August 29, 2017 (Incorporated by reference to Exhibit 10.6 of Level One Bancorp, Inc.’s registration statement on Form S-1 filed March 23, 2018) (SEC No. 333-223866) (1)
31.1			Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 ~~(1)~~(2)
31.2			Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 ~~(1)~~(2)
32			Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ~~(2)~~(3)
101.INS			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document ~~(1)~~(2)
101.SCH			Inline XBRL Taxonomy Extension Schema Document ~~(1)~~(2)
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document ~~(1)~~(2)
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document ~~(1)~~(2)
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document ~~(1)~~(2)
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document ~~(1)~~(2)
104			Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)

(*)			Schedules to the subject agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished to the Securities and Exchange Commission upon request.
(1)			Management contract or compensatory plan.
(2)			Filed herewith.
(3)			~~(2)~~ Furnished herewith.

6253

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			First Merchants Corporation
			(Registrant)


~~August 9, 2021~~May 10, 2022			by /s/ Mark K. Hardwick
			Mark K. Hardwick
			Chief Executive Officer
			(Principal Executive Officer)

~~August 9, 2021~~May 10, 2022			by /s/ Michele M. Kawiecki
			Michele M. Kawiecki
			Executive Vice President, Chief Financial Officer
			(Principal Financial and Accounting Officer)

6354


	June 30, 2021		December 31, 2020
	(Unaudited)
ASSETS
Cash and cash equivalents	$	167,596	$	192,896
Interest-bearing deposits	438,863		392,305
Investment securities available for sale	2,426,900		1,919,119
Investment securities held to maturity, net of allowance for credit losses of $245 and $0 (fair value of $1,760,847 and $1,280,293)	1,721,414		1,227,668
Loans held for sale	18,582		3,966
Loans	9,121,250		9,243,174
Less: Allowance for credit losses - loans 1	(199,775)		(130,648)
Net loans	8,921,475		9,112,526
Premises and equipment	103,822		111,062
Federal Home Loan Bank stock	28,736		28,736
Interest receivable	54,173		53,948

Goodwill	545,385		543,918
Other intangibles	28,401		28,975
Cash surrender value of life insurance	294,462		292,745
Other real estate owned	601		940
Tax asset, deferred and receivable	36,924		12,340
Other assets	135,763		146,066
TOTAL ASSETS	$	14,923,097	$	14,067,210
LIABILITIES
Deposits:
Noninterest-bearing	$	2,479,853	$	2,298,138
Interest-bearing	9,723,547		9,063,472
Total Deposits	12,203,400		11,361,610
Borrowings:

Securities sold under repurchase agreements	146,904		177,102
Federal Home Loan Bank advances	334,243		389,430
Subordinated debentures and other borrowings	118,498		118,380
Total Borrowings	599,645		684,912
Interest payable	2,929		3,287
Other liabilities	245,323		141,756
Total Liabilities	13,051,297		12,191,565
COMMITMENTS AND CONTINGENT LIABILITIES	0		0
STOCKHOLDERS' EQUITY




Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value:
Authorized - 600 shares
Issued and outstanding - 125 shares	125		125
Common Stock, $0.125 stated value:
Authorized - 100,000,000 shares
Issued and outstanding - 53,972,386 and 53,922,359 shares	6,747		6,740
Additional paid-in capital	1,009,182		1,005,366
Retained earnings	795,666		788,578
Accumulated other comprehensive income	60,080		74,836
Total Stockholders' Equity	1,871,800		1,875,645
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	14,923,097	$	14,067,210


	December 31, 2020	Impact of CECL Adoption	January 1, 2021 Post-CECL Adoption
Assets:
Held to maturity securities	1,227,668	(245)	1,227,423
Loans	9,243,174	4,776	9,247,950
Allowance for credit losses - Loans	(130,648)	(74,055)	(204,703)
Net loans	9,112,526	(69,279)	9,043,247
Tax asset, deferred and receivable	12,340	21,984	34,324

Liabilities:
Allowance for credit losses on unfunded loan commitments	0	20,500	20,500

Stockholder's Equity:
Retained Earnings	788,578	(68,040)	720,538
		—


	December 31, 2020
	Commercial Pass		Commercial Special Mention		Commercial Substandard		Commercial Doubtful		Commercial Loss		Consumer Performing		Consumer Non-Performing		Total
Commercial and industrial loans	$	2,562,077	$	117,503	$	97,119	$	0	$	0	$	0	$	0	$	2,776,699
Agricultural land, production and other loans to farmers	243,991		26,835		9,885		0		0		1,173		0		281,884
Real estate Loans:
Construction	446,846		10,445		5,549		0		0		21,763		120		484,723
Commercial real estate, non-owner occupied	1,979,827		160,304		80,818		0		0		0		0		2,220,949
Commercial real estate, owner occupied	907,566		17,641		33,294		0		0		0		0		958,501
Residential	199,338		2,261		7,058		0		0		1,020,687		5,397		1,234,741
Home equity	12,714		0		989		0		0		492,999		1,557		508,259
Individuals' loans for household and other personal expenditures	0		0		0		0		0		129,440		39		129,479

Public finance and other commercial loans	647,939		0		0		0		0		0		0		647,939
Loans	$	7,000,298	$	334,989	$	234,712	$	0	$	0	$	1,666,062	$	7,113	$	9,243,174


	Three Months Ended June 30, 2020
	Commercial		Commercial Real Estate		Consumer		Residential		Total
Allowance for loan losses:
Balances, March 31, 2020	$	38,431	$	37,907	$	5,752	$	17,364	$	99,454
Provision for losses	6,240		8,945		2,783		3,927		21,895
Recoveries on loans	106		107		56		48		317
Loans charged off	(99)		(41)		(146)		(261)		(547)
Balances, June 30, 2020	$	44,678	$	46,918	$	8,445	$	21,078	$	121,119


	December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance
Impaired loans with no related allowance:
Commercial and industrial loans	$	1,059	$	991	$	—

Real estate Loans:
Commercial real estate, non-owner occupied	4,958		4,694		—
Commercial real estate, owner occupied	2,125		1,310		—
Residential	957		816		—

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

Total	$	9,101	$	7,813	$	—
Impaired loans with related allowance:
Commercial and industrial loans	$	268	$	268	$	223
Agricultural land, production and other loans to farmers	640		562		3
Real estate Loans:
Commercial real estate, non-owner occupied	44,016		43,715		11,686
Commercial real estate, owner occupied	2,061		1,323		557
Residential	2,041		2,014		352
Home equity	487		461		80


Total	$	49,513	$	48,343	$	12,901
Total Impaired Loans	$	58,614	$	56,156	$	12,901


	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial and industrial loans	$	5,008	$	0	$	5,008	$	0

Real estate Loans:

Commercial and farmland	7,637		37		7,910		75
Residential	59		1		59		2

Individuals' loans for household and other personal expenditures	3		0		3		0

Total	$	12,707	$	38	$	12,980	$	77
Impaired loans with related allowance:
Commercial and industrial loans	$	10,304	$	0	$	10,304	$	0

Real estate Loans:

Commercial and farmland	18,910		0		19,156		0
Residential	3,020		19		3,032		38
Home equity	387		3		390		6


Total	$	32,621	$	22	$	32,882	$	44
Total Impaired Loans	$	45,328	$	60	$	45,862	$	121


	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2021	357,883	$	36.30
Granted	77,216	$	42.52
Vested	(4,660)	$	42.14
Forfeited	(5,050)	$	36.56
Unvested RSAs at June 30, 2021	425,389	$	37.36