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 September 30, ~~2020~~2021

☐ 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. 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	Nasdaq Global Select Market

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 ~~November 2, 2020,~~October 29, 2021, there were ~~54,257,996~~53,917,147 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	6
	Consolidated Condensed Statements of Stockholders' Equity	7
	Consolidated Condensed Statements of Cash Flows	9
	Notes to Consolidated Condensed Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6159
Item 4.	Controls and Procedures	6260

Part II. Other Information
Item 1.	Legal Proceedings	6361
Item 1A.	Risk Factors	6361
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6461
Item 3.	Defaults Upon Senior Securities	6461
Item 4.	Mine Safety Disclosures	6461
Item 5.	Other Information	6461
Item 6.	Exhibits	6562

Signatures		6663

Table of Contents

GLOSSARY OF DEFINED TERMS

FIRST MERCHANTS CORPORATION




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
CET1			Common Equity Tier 1


~~CMT~~			~~Constant Maturity Treasury~~

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


~~MBT~~			~~MBT Financial Corp., which was acquired by the Corporation on September 1, 2019~~
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.~~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


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Cash and cash equivalents	Cash and cash equivalents	$	164,632	$	177,201	Cash and cash equivalents	$	169,261	$	192,896
Interest-bearing deposits	Interest-bearing deposits	273,936		118,263		Interest-bearing deposits	369,447		392,305
Investment securities available for sale	Investment securities available for sale	1,824,160		1,790,025		Investment securities available for sale	2,374,578		1,919,119
Investment securities held to maturity (fair value of $1,152,518 and $827,566)		1,109,126		806,038
Investment securities held to maturity, net of allowance for credit losses of $245 and $0 (fair value of $2,086,555 and $1,280,293)						Investment securities held to maturity, net of allowance for credit losses of $245 and $0 (fair value of $2,086,555 and $1,280,293)	2,070,938		1,227,668
Loans held for sale	Loans held for sale	3,183		9,037		Loans held for sale	5,990		3,966
Loans, net of allowance for loan losses of $126,726 and $80,284		9,117,107		8,379,026
Loans						Loans	9,041,576		9,243,174
Less: Allowance for credit losses - loans 1						Less: Allowance for credit losses - loans 1	(199,972)		(130,648)
Net loans						Net loans	8,841,604		9,112,526
Premises and equipment	Premises and equipment	112,959		113,055		Premises and equipment	104,814		111,062
Federal Home Loan Bank stock	Federal Home Loan Bank stock	28,736		28,736		Federal Home Loan Bank stock	28,736		28,736
Interest receivable	Interest receivable	52,992		48,901		Interest receivable	53,079		53,948

Goodwill	Goodwill	543,918		543,918		Goodwill	545,385		543,918
Other intangibles	Other intangibles	30,451		34,962		Other intangibles	26,938		28,975
Cash surrender value of life insurance	Cash surrender value of life insurance	291,543		288,206		Cash surrender value of life insurance	291,825		292,745
Other real estate owned	Other real estate owned	6,942		7,527		Other real estate owned	698		940
Tax asset, deferred and receivable	Tax asset, deferred and receivable	21,762		12,165		Tax asset, deferred and receivable	39,504		12,340
Other assets	Other assets	155,903		100,194		Other assets	137,928		146,066
TOTAL ASSETS	TOTAL ASSETS	$	13,737,350	$	12,457,254	TOTAL ASSETS	$	15,060,725	$	14,067,210
LIABILITIES	LIABILITIES					LIABILITIES
Deposits:	Deposits:					Deposits:
Noninterest-bearing	Noninterest-bearing	$	2,187,607	$	1,736,396	Noninterest-bearing	$	2,554,323	$	2,298,138
Interest-bearing	Interest-bearing	8,718,546		8,103,560		Interest-bearing	9,794,366		9,063,472
Total Deposits	Total Deposits	10,906,153		9,839,956		Total Deposits	12,348,689		11,361,610
Borrowings:	Borrowings:					Borrowings:
Federal funds purchased		80,000		55,000

Securities sold under repurchase agreements	Securities sold under repurchase agreements	187,732		187,946		Securities sold under repurchase agreements	183,589		177,102
Federal Home Loan Bank advances	Federal Home Loan Bank advances	399,522		351,072		Federal Home Loan Bank advances	334,149		389,430
Subordinated debentures and other borrowings	Subordinated debentures and other borrowings	118,320		138,685		Subordinated debentures and other borrowings	118,558		118,380
Total Borrowings	Total Borrowings	785,574		732,703		Total Borrowings	636,296		684,912
Interest payable	Interest payable	5,038		6,754		Interest payable	3,736		3,287
Other liabilities	Other liabilities	206,929		91,404		Other liabilities	203,914		141,756
Total Liabilities	Total Liabilities	11,903,694		10,670,817		Total Liabilities	13,192,635		12,191,565
COMMITMENTS AND CONTINGENT LIABILITIES	COMMITMENTS AND CONTINGENT LIABILITIES					COMMITMENTS AND CONTINGENT LIABILITIES	0		0
STOCKHOLDERS' EQUITY	STOCKHOLDERS' EQUITY					STOCKHOLDERS' EQUITY

Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value:	Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value:					Cumulative Preferred Stock, $1,000 par value, $1,000 liquidation value:
Authorized - 600 shares	Authorized - 600 shares					Authorized - 600 shares
Issued and outstanding - 125 shares	Issued and outstanding - 125 shares	125		125		Issued and outstanding - 125 shares	125		125
Common Stock, $0.125 stated value:	Common Stock, $0.125 stated value:					Common Stock, $0.125 stated value:
Authorized - 100,000,000 shares	Authorized - 100,000,000 shares					Authorized - 100,000,000 shares
Issued and outstanding - 53,891,733 and 55,368,482 shares		6,736		6,921
Issued and outstanding - 53,510,745 and 53,922,359 shares						Issued and outstanding - 53,510,745 and 53,922,359 shares	6,689		6,740
Additional paid-in capital	Additional paid-in capital	1,003,777		1,054,997		Additional paid-in capital	988,659		1,005,366
Retained earnings	Retained earnings	757,550		696,520		Retained earnings	832,728		788,578
Accumulated other comprehensive income	Accumulated other comprehensive income	65,468		27,874		Accumulated other comprehensive income	39,889		74,836
Total Stockholders' Equity	Total Stockholders' Equity	1,833,656		1,786,437		Total Stockholders' Equity	1,868,090		1,875,645
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	13,737,350	$	12,457,254	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	15,060,725	$	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.

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 September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
INTEREST INCOME	INTEREST INCOME									INTEREST INCOME
Loans receivable:	Loans receivable:									Loans receivable:
Taxable	Taxable	$	84,162	$	96,850	$	268,126	$	280,155	Taxable	$	85,319	$	84,162	$	257,426	$	268,126
Tax exempt	Tax exempt	5,395		4,500		16,069		12,897		Tax exempt	5,591		5,395		16,475		16,069
Investment securities:	Investment securities:									Investment securities:
Taxable	Taxable	5,399		6,729		19,177		19,822		Taxable	7,788		5,399		21,923		19,177
Tax exempt	Tax exempt	10,931		8,335		30,285		22,660		Tax exempt	14,464		10,931		39,920		30,285

Deposits with financial institutions	Deposits with financial institutions	90		1,363		799		3,022		Deposits with financial institutions	218		90		461		799
Federal Home Loan Bank stock	Federal Home Loan Bank stock	248		355		828		1,028		Federal Home Loan Bank stock	168		248		434		828
Total Interest Income	Total Interest Income	106,225		118,132		335,284		339,584		Total Interest Income	113,548		106,225		336,639		335,284
INTEREST EXPENSE	INTEREST EXPENSE									INTEREST EXPENSE
Deposits	Deposits	9,776		24,830		44,231		67,511		Deposits	5,707		9,776		17,730		44,231
Federal funds purchased	Federal funds purchased	5		15		118		225		Federal funds purchased	—		5		4		118
Securities sold under repurchase agreements	Securities sold under repurchase agreements	83		385		527		1,057		Securities sold under repurchase agreements	77		83		239		527
Federal Home Loan Bank advances	Federal Home Loan Bank advances	1,749		1,894		5,317		5,400		Federal Home Loan Bank advances	1,389		1,749		4,283		5,317
Subordinated debentures and other borrowings	Subordinated debentures and other borrowings	1,691		2,076		5,275		6,315		Subordinated debentures and other borrowings	1,660		1,691		4,976		5,275
Total Interest Expense	Total Interest Expense	13,304		29,200		55,468		80,508		Total Interest Expense	8,833		13,304		27,232		55,468
NET INTEREST INCOME	NET INTEREST INCOME	92,921		88,932		279,816		259,076		NET INTEREST INCOME	104,715		92,921		309,407		279,816
Provision for loan losses		12,544		600		54,191		2,300
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		80,377		88,332		225,625		256,776
Provision for credit losses - loans										Provision for credit losses - loans	—		12,544		—		54,191
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES										NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	104,715		80,377		309,407		225,625
OTHER INCOME	OTHER INCOME									OTHER INCOME
Service charges on deposit accounts	Service charges on deposit accounts	5,209		6,107		15,491		16,639		Service charges on deposit accounts	6,249		5,209		17,109		15,491
Fiduciary and wealth management fees	Fiduciary and wealth management fees	5,910		4,429		17,496		12,178		Fiduciary and wealth management fees	7,352		5,910		21,284		17,496
Card payment fees	Card payment fees	3,996		5,158		16,000		14,813		Card payment fees	4,156		3,996		12,682		16,000
Net gains and fees on sales of loans	Net gains and fees on sales of loans	5,841		2,227		12,878		5,258		Net gains and fees on sales of loans	3,955		5,841		16,266		12,878
Derivative hedge fees	Derivative hedge fees	1,715		1,684		4,696		3,952		Derivative hedge fees	1,028		1,715		2,288		4,696
Other customer fees	Other customer fees	372		450		1,103		1,230		Other customer fees	393		372		1,129		1,103
Increase in cash surrender value of life insurance	Increase in cash surrender value of life insurance	1,170		1,144		3,761		3,060		Increase in cash surrender value of life insurance	1,198		1,170		3,592		3,761
Gains on life insurance benefits	Gains on life insurance benefits	1		0		96		19		Gains on life insurance benefits	1,270		1		1,417		96
Net realized gains on sales of available for sale securities	Net realized gains on sales of available for sale securities	1,817		393		9,497		3,376		Net realized gains on sales of available for sale securities	1,756		1,817		5,316		9,497
Other income	Other income	132		524		1,425		1,918		Other income	1,144		132		2,393		1,425
Total Other Income	Total Other Income	26,163		22,116		82,443		62,443		Total Other Income	28,501		26,163		83,476		82,443
OTHER EXPENSES	OTHER EXPENSES									OTHER EXPENSES
Salaries and employee benefits	Salaries and employee benefits	39,187		38,942		114,128		104,679		Salaries and employee benefits	43,314		39,187		124,563		114,128
Net occupancy	Net occupancy	5,855		4,777		17,103		14,273		Net occupancy	5,576		5,855		17,682		17,103
Equipment	Equipment	4,956		4,030		13,789		11,789		Equipment	4,529		4,956		14,407		13,789
Marketing	Marketing	1,311		1,332		4,846		5,158		Marketing	1,676		1,311		3,922		4,846
Outside data processing fees	Outside data processing fees	3,776		4,435		10,593		12,048		Outside data processing fees	4,794		3,776		13,736		10,593
Printing and office supplies	Printing and office supplies	331		312		997		961		Printing and office supplies	265		331		861		997
Intangible asset amortization	Intangible asset amortization	1,486		1,356		4,511		4,404		Intangible asset amortization	1,463		1,486		4,284		4,511
FDIC assessments	FDIC assessments	1,249		(668)		4,244		717		FDIC assessments	1,552		1,249		4,381		4,244
Other real estate owned and foreclosure expenses	Other real estate owned and foreclosure expenses	717		294		1,906		2,362		Other real estate owned and foreclosure expenses	(91)		717		821		1,906
Professional and other outside services	Professional and other outside services	2,254		8,251		6,065		12,511		Professional and other outside services	2,767		2,254		8,286		6,065
Other expenses	Other expenses	3,587		4,293		12,687		12,660		Other expenses	5,539		3,587		13,834		12,687
Total Other Expenses	Total Other Expenses	64,709		67,354		190,869		181,562		Total Other Expenses	71,384		64,709		206,777		190,869
INCOME BEFORE INCOME TAX	INCOME BEFORE INCOME TAX	41,831		43,094		117,199		137,657		INCOME BEFORE INCOME TAX	61,832		41,831		186,106		117,199
Income tax expense	Income tax expense	5,621		6,337		13,734		21,027		Income tax expense	9,062		5,621		28,308		13,734
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	36,210	$	36,757	$	103,465	$	116,630	NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	52,770	$	36,210	$	157,798	$	103,465

Per Share Data:	Per Share Data:									Per Share Data:
Basic Net Income Available to Common Stockholders	Basic Net Income Available to Common Stockholders	$	0.67	$	0.71	$	1.91	$	2.33	Basic Net Income Available to Common Stockholders	$	0.98	$	0.67	$	2.93	$	1.91
Diluted Net Income Available to Common Stockholders	Diluted Net Income Available to Common Stockholders	$	0.67	$	0.71	$	1.91	$	2.32	Diluted Net Income Available to Common Stockholders	$	0.98	$	0.67	$	2.92	$	1.91
Cash Dividends Paid	Cash Dividends Paid	$	0.26	$	0.26	$	0.78	$	0.74	Cash Dividends Paid	$	0.29	$	0.26	$	0.84	$	0.78
Average Diluted Shares Outstanding (in thousands)	Average Diluted Shares Outstanding (in thousands)	53,971		51,570		54,278		50,227		Average Diluted Shares Outstanding (in thousands)	53,960		53,971		54,093		54,278

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

(Unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Net income $ 36,210 $ 36,757 $ 103,465 $ 116,630
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale arising during the period, net of tax of $749, $3,034, $12,156, and $13,436 2,819 11,415 45,729 50,545
Unrealized gain (loss) on cash flow hedges arising during the period, net of tax of $1, $37, $305, and $267 7 (141) (1,146) (1,003)
Reclassification adjustment for net gains included in net income, net of tax of $320, $61, $1,857, and $657 (1,203) (228) (6,989) (2,472)
Total other comprehensive income, net of tax 1,623 11,046 37,594 47,070
Comprehensive income $ 37,833 $ 47,803 $ 141,059 $ 163,700


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	52,770	$	36,210	$	157,798	$	103,465
Other comprehensive income (loss):
Unrealized gains/losses on securities available-for-sale:
Unrealized holding gain (loss) arising during the period	(24,048)		3,568		(39,721)		57,885
Reclassification adjustment for losses (gains) included in net income	(1,756)		(1,817)		(5,316)		(9,497)
Tax effect	5,419		(367)		9,458		(10,162)
Net of tax	(20,385)		1,384		(35,579)		38,226

Unrealized gain/loss on cash flow hedges:
Unrealized holding gain (loss) arising during the period	(20)		8		22		(1,451)
Reclassification adjustment for losses (gains) included in net income	266		294		779		651
Tax effect	(52)		(63)		(169)		168
Net of tax	194		239		632		(632)






Total other comprehensive income (loss), net of tax	(20,191)		1,623		(34,947)		37,594
Comprehensive income	$	32,579	$	37,833	$	122,851	$	141,059

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 September 30, 2020
Preferred Common Stock Additional Accumulated
Other
Shares Amount Shares Amount Paid in
Capital Retained
Earnings Comprehensive
Income Total
Balances, June 30, 2020 125 $ 125 53,795,500 $ 6,724 $ 1,002,962 $ 735,439 $ 63,845 $ 1,809,095
Comprehensive income:
Net income — — — — — 36,210 — 36,210
Other comprehensive income, net of tax — — — — — — 1,623 1,623
Cash dividends on common stock ($.26 per share) — — — — — (14,099) — (14,099)
Share-based compensation — — 107,929 14 1,121 — — 1,135
Stock issued under employee benefit plans — — 7,128 1 150 — — 151
Stock issued under dividend reinvestment and
stock purchase plan — — 17,541 2 428 — — 430
Restricted shares withheld for taxes — — (36,365) (5) (884) — — (889)
Balances, September 30, 2020 125 $ 125 53,891,733 $ 6,736 $ 1,003,777 $ 757,550 $ 65,468 $ 1,833,656


		Three Months Ended September 30, 2019															Three Months Ended September 30, 2021
		Preferred			Common Stock			Additional				Accumulated Other					Preferred			Common Stock			Additional				Accumulated Other
		Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Loss		Total			Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Income		Total
Balances, June 30, 2019		125	$	125	49,456,594	$	6,182	$	841,365	$	639,362	$	14,602	$	1,501,636

Balance, June 30, 2021																Balance, June 30, 2021	125	$	125	53,972,386	$	6,747	$	1,009,182	$	795,666	$	60,080	$	1,871,800
Comprehensive income:	Comprehensive income:															Comprehensive income:
Net income	Net income	—	—		—	—		—		36,757		—		36,757		Net income	—	—		—	—		—		52,770		—		52,770
Other comprehensive income, net of tax	Other comprehensive income, net of tax	—	—		—	—		—		—		11,046		11,046		Other comprehensive income, net of tax	—	—		—	—		—		—		(20,191)		(20,191)
Cash dividends on common stock ($.26 per share)		—	—		—	—		—		(12,946)		—		(12,946)
Issuance of common stock related to acquisition		—	—		6,383,806	798		229,128		—		—		229,926
Cash dividends on common stock ($.29 per share)																Cash dividends on common stock ($.29 per share)	—	—		—	—		—		(15,708)		—		(15,708)

Repurchases of common stock	Repurchases of common stock	—	—		(516,016)	(65)		(18,976)		—		—		(19,041)		Repurchases of common stock	—	—		(529,498)	(66)		(20,741)		—		—		(20,807)

Share-based compensation	Share-based compensation	—	—		4,405	0		1,062		—		—		1,062		Share-based compensation	—	—		89,600	11		1,206		—		—		1,217
Stock issued under employee benefit plans	Stock issued under employee benefit plans	—	—		4,870	1		155		—		—		156		Stock issued under employee benefit plans	—	—		3,892	1		138		—		—		139
Stock issued under dividend reinvestment and stock purchase plan	Stock issued under dividend reinvestment and stock purchase plan	—	—		10,263	1		399		—		—		400		Stock issued under dividend reinvestment and stock purchase plan	—	—		12,102	1		473		—		—		474
Stock options exercised		—	—		1,750	1		15		—		—		16

Balances, September 30, 2019		125	$	125	55,345,672	$	6,918	$	1,053,148	$	663,173	$	25,648	$	1,749,012
Restricted shares withheld for taxes																Restricted shares withheld for taxes	—	—		(37,737)	(5)		(1,599)		—		—		(1,604)
Balances, September 30, 2021																Balances, September 30, 2021	125	$	125	53,510,745	$	6,689	$	988,659	$	832,728	$	39,889	$	1,868,090


	Three Months Ended September 30, 2020
	Preferred			Common Stock			Additional				Accumulated Other
	Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Income		Total
Balances, June 30, 2020	125	$	125	53,795,500	$	6,724	$	1,002,962	$	735,439	$	63,845	$	1,809,095
Comprehensive income:
Net income	—	—		—	—		—		36,210		—		36,210
Other comprehensive income, net of tax	—	—		—	—		—		—		1,623		1,623
Cash dividends on common stock ($.26 per share)	—	—		—	—		—		(14,099)		—		(14,099)



Share-based compensation	—	—		107,929	14		1,121		—		—		1,135
Stock issued under employee benefit plans	—	—		7,128	1		150		—		—		151
Stock issued under dividend reinvestment and stock purchase plan	—	—		17,541	2		428		—		—		430

Restricted shares withheld for taxes	—	—		(36,365)	(5)		(884)		—		—		(889)
Balances, September 30. 2020	125	$	125	53,891,733	$	6,736	$	1,003,777	$	757,550	$	65,468	$	1,833,656

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)

Nine Months Ended September 30, 2020
Preferred Common Stock Additional Accumulated
Other
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
Comprehensive income:
Net income — — — — — 103,465 — 103,465
Other comprehensive income, net of tax — — — — — — 37,594 37,594
Cash dividends on common stock ($.78 per share) — — — — — (42,435) — (42,435)
Repurchases of common stock — — (1,634,437) (204) (55,708) — — (55,912)
Share-based compensation — — 116,520 15 3,553 — — 3,568
Stock issued under employee benefit plans — — 18,639 2 458 — — 460
Stock issued under dividend reinvestment and
stock purchase plan — — 49,148 6 1,287 — — 1,293
Stock options exercised — — 10,050 1 82 — — 83
Restricted shares withheld for taxes — — (36,669) (5) (892) — — (897)
Balances, September 30, 2020 125 $ 125 53,891,733 $ 6,736 $ 1,003,777 $ 757,550 $ 65,468 $ 1,833,656


		Nine Months Ended September 30, 2019															Nine Months Ended September 30, 2021
		Preferred			Common Stock			Additional				Accumulated Other					Preferred			Common Stock			Additional				Accumulated Other
		Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Loss		Total			Shares	Amount		Shares	Amount		Paid in Capital		Retained Earnings		Comprehensive Income (Loss)		Total
Balances, December 31, 2018		125	$	125	49,349,800	$	6,169	$	840,052	$	583,336	$	(21,422)	$	1,408,260
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)
Balance January 1, 2021																Balance 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	—	—		—	—		—		116,630		—		116,630		Net income	—	—		—	—		—		157,798		—		157,798
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—	—		—		—		47,070		47,070		Other comprehensive loss, net of tax	—	—		—	—		—		—		(34,947)		(34,947)
Cash dividends on common stock ($.74 per share)		—	—		—	—		—		(36,793)		—		(36,793)
Issuance of common stock related to acquisition		—	—		6,383,806	798		229,128		—		—		229,926
Repurchase of common stock		—	—		(516,016)	(65)		(18,976)		—		—		(19,041)
Cash dividends on common stock ($.84 per share)																Cash dividends on common stock ($.84 per share)	—	—		—	—		—		(45,608)		—		(45,608)

Repurchases of common stock																Repurchases of common stock	—	—		(529,498)	(66)		(20,741)		—		—		(20,807)

Share-based compensation	Share-based compensation	—	—		113,043	14		2,873		—		—		2,887		Share-based compensation	—	—		94,260	12		3,603		—		—		3,615
Stock issued under employee benefit plans	Stock issued under employee benefit plans	—	—		16,117	2		516		—		—		518		Stock issued under employee benefit plans	—	—		12,006	2		443		—		—		445
Stock issued under dividend reinvestment and stock purchase plan	Stock issued under dividend reinvestment and stock purchase plan	—	—		28,949	3		1,106		—		—		1,109		Stock issued under dividend reinvestment and stock purchase plan	—	—		32,322	4		1,401		—		—		1,405
Stock options exercised	Stock options exercised	—	—		12,950	2		119		—		—		121		Stock options exercised	—	—		17,300	2		196		—		—		198
Restricted shares withheld for taxes	Restricted shares withheld for taxes	—	—		(42,977)	(5)		(1,670)		—		—		(1,675)		Restricted shares withheld for taxes	—	—		(38,004)	(5)		(1,609)		—		—		(1,614)
Balances, September 30, 2019		125	$	125	55,345,672	$	6,918	$	1,053,148	$	663,173	$	25,648	$	1,749,012
Balances, September 30, 2021																Balances, September 30, 2021	125	$	125	53,510,745	$	6,689	$	988,659	$	832,728	$	39,889	$	1,868,090



	Nine Months Ended September 30, 2020
	Preferred			Common Stock			Additional				Accumulated Other
	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
Comprehensive income:
Net income	—	—		—	—		—		103,465		—		103,465
Other comprehensive income, net of tax	—	—		—	—		—		—		37,594		37,594
Cash dividends on common stock ($.78 per share)	—	—		—	—		—		(42,435)		—		(42,435)

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

Share-based compensation	—	—		116,520	15		3,553		—		—		3,568
Stock issued under employee benefit plans	—	—		18,639	2		458		—		—		460
Stock issued under dividend reinvestment and stock purchase plan	—	—		49,148	6		1,287		—		—		1,293
Stock options exercised	—	—		10,050	1		82		—		—		83
Restricted shares withheld for taxes	—	—		(36,669)	(5)		(892)		—		—		(897)
Balances, September 30. 2020	125	$	125	53,891,733	$	6,736	$	1,003,777	$	757,550	$	65,468	$	1,833,656

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)

Nine Months Ended
September 30, 2020 September 30, 2019
Cash Flow From Operating Activities:
Net income $ 103,465 $ 116,630
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 54,191 2,300
Depreciation and amortization 8,214 6,737
Change in deferred taxes (17,015) (1,097)
Share-based compensation 3,568 2,887
Loans originated for sale (477,877) (361,054)
Proceeds from sales of loans held for sale 494,945 362,084
Gains on sales of loans held for sale (11,214) (4,162)
Gains on sales of securities available for sale (9,497) (3,376)
Increase in cash surrender of life insurance (3,761) (3,060)
Gains on life insurance benefits (96) (19)
Change in interest receivable (4,091) (1,681)
Change in interest payable (1,716) 2,191
Other adjustments 6,111 18,149
Net cash provided by operating activities 145,227 136,529
Cash Flows from Investing Activities:
Net change in interest-bearing deposits (155,673) 88,090
Purchases of:
Securities available for sale (355,407) (435,804)
Securities held to maturity (507,091) (397,166)
Proceeds from sales of securities available for sale 206,704 102,840
Proceeds from maturities of:
Securities available for sale 230,673 89,603
Securities held to maturity 201,272 67,791
Net change in loans (793,033) (352,716)
Net cash and cash equivalents received in acquisition 0 10,207
Proceeds from the sale of other real estate owned 959 1,571
Proceeds from life insurance benefits 520 816
Other adjustments (8,380) (6,064)
Net cash used in investing activities (1,179,456) (830,832)
Cash Flows from Financing Activities:
Net change in :
Demand and savings deposits 1,651,095 729,495
Certificates of deposit and other time deposits (584,898) 175,437
Borrowings 563,697 535,239
Repayment of borrowings (510,826) (626,971)
Cash dividends on common stock (42,435) (36,793)
Stock issued under employee benefit plans 460 518
Stock issued under dividend reinvestment and stock purchase plans 1,293 1,109
Stock options exercised 83 121
Restricted shares withheld for taxes (897) (1,675)
Repurchase of common stock (55,912) (19,041)
Net cash provided by financing activities 1,021,660 757,439
Net Change in Cash and Cash Equivalents (12,569) 63,136
Cash and Cash Equivalents, January 1 177,201 139,247
Cash and Cash Equivalents, September 30
$ 164,632 $ 202,383
Additional cash flow information:
Interest paid $ 57,184 $ 78,260
Income tax paid (refunded) 32,367 19,335
Loans transferred to other real estate owned 761 6,902
Fixed assets transferred to other real estate owned 262 965
Non-cash investing activities using trade date accounting 66,205 13,893
ROU assets obtained in exchange for new operating lease liabilities 1,406 23,496
In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 0 $ 1,450,741
Cash paid in acquisition 0 (15)
Less: Common stock issued 0 229,926
Liabilities assumed $ 0 $ 1,220,800


	Nine Months Ended September 30,
	2021		2020
Cash Flow From Operating Activities:
Net income	$	157,798	$	103,465
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	—		54,191
Depreciation and amortization	8,087		8,214
Change in deferred taxes	(703)		(17,015)
Share-based compensation	3,615		3,568

Loans originated for sale	(410,858)		(477,877)
Proceeds from sales of loans held for sale	422,555		494,945
Gains on sales of loans held for sale	(13,721)		(11,214)


Gains on sales of securities available for sale	(5,316)		(9,497)

Increase in cash surrender of life insurance	(3,592)		(3,761)
Gains on life insurance benefits	(1,417)		(96)
Change in interest receivable	869		(4,091)
Change in interest payable	449		(1,716)
Other adjustments	3,761		5,214
Net cash provided by operating activities	161,527		144,330
Cash Flows from Investing Activities:
Net change in interest-bearing deposits	22,858		(155,673)
Purchases of:
Securities available for sale	(807,833)		(355,407)
Securities held to maturity	(1,017,274)		(507,091)
Proceeds from sales of securities available for sale	157,776		206,704
Proceeds from maturities of:
Securities available for sale	216,135		230,673
Securities held to maturity	170,937		201,272


Net change in loans	126,523		(793,033)
Net cash and cash equivalents paid in acquisition	(2,933)		—

Proceeds from the sale of other real estate owned	678		959
Proceeds from life insurance benefits	5,929		520
Proceeds from mortgage portfolio loan sale	76,067		—
Other adjustments	(8,121)		(8,380)
Net cash used in investing activities	(1,059,258)		(1,179,456)
Cash Flows from Financing Activities:
Net change in :
Demand and savings deposits	1,136,017		1,651,095
Certificates of deposit and other time deposits	(148,938)		(584,898)
Borrowings	45,482		563,697
Repayment of borrowings	(94,098)		(510,826)
Cash dividends on common stock	(45,608)		(42,435)


Stock issued under employee benefit plans	445		460
Stock issued under dividend reinvestment and stock purchase plans	1,405		1,293
Stock options exercised	198		83


Repurchase of common stock	(20,807)		(55,912)
Net cash provided by financing activities	874,096		1,022,557
Net Change in Cash and Cash Equivalents	(23,635)		(12,569)
Cash and Cash Equivalents, January 1	192,896		177,201
Cash and Cash Equivalents, September 30	$	169,261	$	164,632
Additional cash flow information:
Interest paid	$	26,783	$	57,184
Income tax paid	23,396		32,367
Loans transferred to other real estate owned	292		761
Fixed assets transferred to other real estate owned	6,282		262
Non-cash investing activities using trade date accounting	67,811		66,205

ROU assets obtained in exchange for new operating lease liabilities	2,591		1,406

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

Liabilities assumed	$	816	$	—

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 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. 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 Consolidated Condensed Balance Sheet of the Corporation as of December 31, ~~2019,~~2020, 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, ~~2019~~2020 filed with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, ~~2020,~~2021, 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 ~~loan~~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. 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	—		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 reported in the income statement as a component of the provision for credit loss. The Corporation measures expected credit losses on held to maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities held to maturity from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee. With regard to securities issued by states and municipalities and other investment securities held to maturity, management considers (1) issuer bond ratings, (2) the financial condition of the issuer, (3) historical loss rates for given bond ratings, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in the Corporation's portfolio have generally not been significant. Furthermore, as of September 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, ~~lowered equity market valuations,~~ and created significant volatility and disruption in financial markets. The outbreak ~~has~~ resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. As a result of the shelter in place mandates in effect beginning early in the second quarter of 2020, commercial activity throughout our geographic footprint, as well as nationally, have decreased significantly during ~~2020. Most~~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, ~~albeit under limited capacities and under other social distancing restrictions; however,~~ commercial activity has not yet returned to the levels existing prior to the outbreak of the pandemic. ~~Such measures~~Moreover, certain states and localities have ~~significantly contributed~~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 rising unemployment and negatively impacted consumer and business spending. As a result, the demand for the Corporation’s products and services has been, and will continue to be, significantly impacted.

~~Recent Accounting Changes Adopted in 2020~~

~~FASB Accounting Standards Updates No. 2018-15 -~~ ~~Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~

~~Summary -~~ ~~The FASB issued Accounting Standards Update (ASU) No. 2018-15,~~ ~~Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,~~ which reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. This standard aligns the accounting for implementation costs of hosting arrangements, regardless of whether they convey a licenserespond to the ~~hosted software. The ASU aligns the following requirements for capitalizing implementation costs:~~

•~~Those incurred in a hosting arrangement that is a service contract, and~~

•~~Those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).~~

For calendar-year public companies, the changes were effective for fiscal years beginning after December 15, 2019. The Corporation adopted the standard in the first quarter of 2020 and adoption of the standard did not have a significant effect on the Corporation’s consolidated 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)~~

~~FASB Accounting Standards Updates No. 2018-14~~ ~~- Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans~~

~~Summary -~~ ~~The FASB issued ASU No. 2018-14,~~ ~~Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,~~ that applies to all employers that sponsor defined benefit pension or other postretirement plans. The amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

~~Disclosure Requirements Deleted~~

•~~The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.~~

•~~The amount and timing of plan assets expected to be returned to the employer.~~

•~~Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.~~

•For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.

~~Disclosure Requirements Added~~

•~~An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.~~pandemic.

The ~~amendments~~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 ~~clarify~~unknown. As a result of COVID-19 and the ~~disclosure requirements~~actions taken to contain it or reduce its impact, we may continue to experience changes in ~~paragraph 715-20-50-3, which state that~~ the ~~following information~~demand for ~~defined benefit pension plans should be disclosed:~~

•~~The projected benefit obligation (PBO)~~our products and ~~fair~~services, changes in the value of ~~plan assets for plans~~collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with ~~PBOs in excess~~their terms. Our commercial and consumer customers are experiencing varying degrees of ~~plan assets,~~financial distress, which is expected to continue throughout 2021, especially if positive cases increase and

•~~The accumulated benefit obligation (ABO)~~ economic shutdowns continue or are reinstated. These and ~~fair value~~similar factors and events may have substantial negative effects on the business, financial condition and results of ~~plan assets for plans with ABOs in excess~~operations of ~~plan assets.~~the Corporation and its customers.

~~ASU No. 2018-14 is effective~~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 ~~fiscal years ending after~~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 ~~15,~~27, 2020, ~~for public business entities~~the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and ~~for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities. The Corporation adopted the standard in the first quarter of 2020 and adoption~~Venues Act was signed into law as part of the ~~standard did not have a significant effect on~~Consolidated Appropriations Act, 2021 (the “CAA”), which amended the ~~Corporation’s consolidated financial statements.~~

~~FASB Accounting Standards Updates No. 2018-13 -~~ ~~Fair Value Measurement (Topic 820): Disclosure Framework - Changes~~CARES Act to, among other things, provide additional funding for the ~~Disclosure Requirements~~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 ~~Fair Value Measurement~~

~~Summary -~~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 ~~FASB issued ASU No. 2018-13,~~ ~~Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.~~ ~~ASU No. 2018-13 modifies the disclosure requirements on fair value measurements~~Bank actively participated in ~~Topic 820. Certain disclosure requirements related to transfers between Level 1 and Level 2~~assisting its customers with PPP funding during all phases of the fair value hierarchy and Level 3 valuation process were removed from Topic 820. Disclosures were also added to Topic 820 for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the endprogram. The vast majority of the ~~reporting period and~~Bank’s PPP loans made in 2020 have two-year maturities, while the ~~range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.~~

~~In addition,~~loans made in 2021 have five-year maturities. Loans under the ~~amendments eliminate "at a minimum" from the phrase “an entity shall disclose~~program earn interest at a ~~minimum” to promote the appropriate exercise~~fixed rate of ~~discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration~~1 percent. As of ~~entities and their auditors when evaluating disclosure requirements.~~

The amendments in ASU No. 2018-13 were effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty were applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments were applied retrospectively to all periods presented upon their effective date. Early adoption was permitted. An entity was permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Corporation adopted the standard in the first quarter of 2020 and adoption of the standard did not have a significant effect on the Corporation’s disclosures.

~~FASB Accounting Standards Updates No. 2017-04 -~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.~~

~~Summary -~~ ~~The FASB issued ASU No. 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill,~~ which simplifies how an entity is required to test goodwill for impairment. To simplify the subsequent measurement of goodwill, the ASU eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary.

~~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 amendments were applied on a prospective basis. The Corporation adopted ASU No. 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill,~~ ~~January 1, 2020 and assessed the recent economic impact and market conditions from the COVID-19 pandemic. At~~ September 30, 2020, the Corporation performed a goodwill impairment test which included various valuation considerations including comparable peer data, precedent transaction comparables, discounted cash flow analysis, overall financial performance, share price of the Corporation's common stock and other factors. The testing resulted in a conclusion that it was not more likely than not that the fair value of2021, the Corporation had ~~declined below~~$198.1 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 ~~carrying value; therefore, goodwill was not impaired at September 30, 2020. Goodwill assessments are highly sensitive to economic projections and~~remaining PPP loans will also be forgiven by the ~~related assumptions used by management. In~~SBA in accordance with the ~~event of a prolonged economic downturn or further deterioration in the economic outlook, continued assessments of our goodwill balance will likely be required in future periods. Details~~terms of the ~~goodwill impairment test are included in NOTE 6. GOODWILL of these Notes to Consolidated Condensed Financial Statements.~~program.

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

On March 22, 2020, a statement was issued by the ~~Bank's~~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"~~“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. AsThe CAA, as described above, extended the expiration date for COVID-related loan modifications exempt from troubled debt restructuring classification until the earlier of ~~September 30, 2020, approximately $176 million~~January 1, 2022, or 60 days after the termination of ~~loan balances remained in deferral.~~the national emergency. Details of the Corporation's modifications are included in the "LOAN ~~QUALITY/PROVISION FOR LOAN LOSSES"~~QUALITY" section of ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations ofincluded 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

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.

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

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

~~FASB Accounting Standards Update 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 was issued to address concerns that current generally accepted accounting principles (GAAP) restricts the ability to record credit losses that are expected, but do not yet meet the “probable” threshold by replacing the current “incurred loss” model for recognizing credit losses with an “expected life of loan loss” model referred to as the Current Expected Credit Loss (CECL) model.

Under the CECL model, certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined and cause a charge/credit to earnings through the provision for loan losses. Such could create volatility in earnings and could adversely affect the financial condition of the Corporation.

The ASU is 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 has elected to delay implementation of ASU No. 2016-13, which would have become effective for the Corporation as of January 1, 2020. As discussed above, ASU No. 2016-13 provides for the replacement of the incurred loss model for recording the allowance for loan losses with CECL. However, as a result of the Corporation’s election, its first, second and third quarter 2020 financial statements have been prepared under the existing incurred loss model. As the temporary relief applicable to the Corporation’s compliance with CECL will end no later than December 31, 2020, the Corporation will implement CECL during the fourth quarter of 2020.

The Corporation has developed models that satisfy the requirements of the new standard which will be 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 will be applied. The Corporation intends to utilize a one-year economic forecast period then revert to historical macroeconomic levels for the remaining life of the portfolio. A baseline macroeconomic scenario, along with other scenarios, will be used to develop a range of estimated credit losses for which to determine the best estimate within.

~~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 will record a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet as of the beginning of the adoption period. If adopted with retrospective measurement to January 1, 2020, the allowance will increase by 55-65 percent from December 31, 2019 because it will cover expected credit losses over the life of the loan portfolio, which approximates four years, and it includes 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 is estimated to be approximately $18 million.

~~FASB Accounting Standards Update 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.~~

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

Summary

~~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.

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 2

ACQUISITION

~~MBT Financial Corp.~~Hoosier Trust Company

On ~~September~~April 1, ~~2019,~~2021, the ~~Corporation~~Bank acquired 100 percent of ~~MBT. MBT,~~Hoosier Trust Company ("Hoosier") through a ~~Michigan corporation, merged~~merger of Hoosier with and into the ~~Corporation, whereupon~~Bank. The consideration paid to shareholders of Hoosier at closing was $3,225,000 in cash. Prior to the ~~separate~~acquisition, Hoosier was an Indiana corporate ~~existence of MBT ceased and the Corporation survived. Immediately following the merger, MBT's wholly-owned subsidiary, Monroe Bank & Trust, merged~~trust company, headquartered in Indianapolis, Indiana, with ~~and into~~approximately $290 million in assets under management. Hoosier’s sole office is now being operated by the Bank ~~with the Bank continuing~~ as ~~the surviving bank.~~

MBT was headquartered in Monroe, Michigan and had 20 banking centers serving the Monroe market. Pursuant to the merger agreement, each MBT shareholder received 0.275 shares of the Corporation's common stock for each outstanding share of MBT common stock held. The Corporation issued approximately 6.4 million shares of common stock, which was valued at approximately $229.9 million. The Corporation engaged in this transaction with the expectation that it would be accretive to income and add a new market area in Michigan that has a demographic profile consistent with many of the current Indiana and Ohio markets served by the Bank. Goodwill resulted from this transaction due to the expected synergies and economies of scale.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

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

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

~~(Unaudited)~~

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 ~~values~~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 ~~MBT~~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	$	~~10,222~~
~~Interest-bearing time deposits~~	~~281,228~~
~~Investment securities~~	~~212,235~~

~~Loans~~	~~732,578~~
~~Premises and equipment~~	~~21,664~~
~~Federal Home Loan Bank stock~~	~~4,148~~
~~Interest receivable~~	~~3,361~~
~~Cash surrender value of life insurance~~	~~59,545~~
~~Tax asset, deferred and receivable~~	~~5,205~~292
Other assets	~~6,011~~
~~Deposits~~	~~(1,105,926)~~
~~Securities sold under repurchase agreements~~	~~(94,760)~~
~~Federal Home Loan Bank advances~~	~~(10,853)~~35
Other liabilities	~~(9,807)~~(816)
Net tangible assets acquired	~~114,851~~ (489)
~~Core deposit~~Customer relationship intangible	~~16,527~~2,247
Goodwill	~~98,563~~1,467
Purchase price	$	~~229,941~~3,225

Of the total purchase price, ~~$16,527,000~~$2,247,000 was allocated to a ~~core deposit~~customer relationship intangible, which will be amortized over its estimated life of 10 years. The remaining purchase price was allocated to goodwill, which is ~~not~~ deductible for tax purposes.

~~Acquired loan data for MBT~~ Pro forma financial information of the Hoosier acquisition is not included in ~~the following table:~~

Fair Value of Acquired Loans at Acquisition Date Gross Contractual Amounts Receivable at Acquisition Date Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30 $ 3,531 $ 6,840 $ 2,733
Acquired receivables not subject to ASC 310-30 $ 729,047 $ 907,210 $ 14,722
these disclosures as it is deemed immaterial.

Purchased loans with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for under ASC 310-30, ~~Loans Acquired with Deteriorated Credit Quality~~. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The accretable portion of the fair value discount or premium is the difference between the expected cash flows and the net present value of expected cash flows, with such difference accreted into earnings over the term of the loans.

NOTE 3

~~Pro Forma Financial Information~~

The results of operations of MBT have been included in the Corporation's consolidated financial statements since the acquisition date. The following table includes pro forma results for the year ended December 31, 2019 as if the MBT acquisition occurred as of the beginning of the period presented.

~~2019~~

~~Total revenue (net interest income plus other income)~~

~~474,891~~

~~Net income available to common shareholders~~

~~161,228~~

~~Earnings per share:~~

~~Basic~~

~~2.89~~

~~Diluted~~

~~2.88~~

~~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 pro forma information includes adjustments for interest income on loans and investments, interest expense on deposits and borrowings, premises expense for banking centers acquired and amortization of intangibles arising from the transaction and the related income tax effects. The pro forma information for the year ended December 31, 2019 includes operating revenue from MBT of $19.7 million since the date of acquisition. Additionally $19.7 million, net of tax, of non-recurring expenses directly attributable to the MBT acquisition were included in the year ended December 31, 2019 pro forma information.

The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, or intended to be a projection of future results.

~~NOTE 3~~

INVESTMENT SECURITIES

The following table summarizes the amortized cost, gross unrealized gains ~~gross unrealized~~and losses and approximate ~~market~~fair value of ~~the Corporation's~~ investment securities ~~at the dates indicated were:~~

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Available for sale at September 30, 2020
U.S. Treasury $ 300 $ 0 $ 0 $ 300
U.S. Government-sponsored agency securities 2,384 60 0 2,444
State and municipal 1,074,381 72,752 187 1,146,946
U.S. Government-sponsored mortgage-backed securities 645,089 25,306 0 670,395
Corporate obligations 4,031 44 0 4,075
Total available for sale 1,726,185 98,162 187 1,824,160
Held to maturity at September 30, 2020
U.S. Government-sponsored agency securities 21,094 2 33 21,063
State and municipal 573,538 25,880 1,240 598,178
U.S. Government-sponsored mortgage-backed securities 512,994 18,788 3 531,779
Foreign investment 1,500 0 2 1,498
Total held to maturity 1,109,126 44,670 1,278 1,152,518
Total Investment Securities $ 2,835,311 $ 142,832 $ 1,465 $ 2,976,678
available for sale as of September 30, 2021 and December 31, 2020.


		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, 2019
Available for sale at September 30, 2021										Available for sale at September 30, 2021
U.S. Treasury										U.S. Treasury	$	1,000	$	—	$	—	$	1,000
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	$	38,529	$	346	$	0	$	38,875	U.S. Government-sponsored agency securities	11,500		57		—		11,557
State and municipal	State and municipal	859,511		41,092		807		899,796		State and municipal	1,466,349		72,152		3,946		1,534,555
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	842,349		10,378		1,404		851,323		U.S. Government-sponsored mortgage-backed securities	825,097		10,255		12,215		823,137
Corporate obligations	Corporate obligations	31		0		0		31		Corporate obligations	4,031		298		—		4,329

Total available for sale	Total available for sale	1,740,420		51,816		2,211		1,790,025		Total available for sale	$	2,307,977	$	82,762	$	16,161	$	2,374,578
Held to maturity at December 31, 2019
U.S. Government-sponsored agency securities		15,619		1		37		15,583
State and municipal		354,115		15,151		107		369,159
U.S. Government-sponsored mortgage-backed securities		434,804		6,921		401		441,324
Foreign investment		1,500		0		0		1,500
Total held to maturity		806,038		22,073		545		827,566
Total Investment Securities		$	2,546,458	$	73,889	$	2,756	$	2,617,591


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2020
U.S. Government-sponsored agency securities	$	2,380	$	50	$	—	$	2,430
State and municipal	1,168,711		89,420		246		1,257,885
U.S. Government-sponsored mortgage-backed securities	632,267		22,505		103		654,669
Corporate obligations	4,031		104		—		4,135

Total available for sale	$	1,807,389	$	112,079	$	349	$	1,919,119

The increase in unrealized gains from December 31, 2019 to September 30, 2020 is primarily due to interest rate declines. The longer term points on the yield curve have declined since year-end which increases the fair value of securities in the portfolio.

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 amortized cost, gross unrealized gains and losses, approximate fair value and allowance for credit losses on investment securities held to maturity as of September 30, 2021 and December 31, 2020.


	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to maturity at September 30, 2021
U.S. Government-sponsored agency securities	$	90,678	$	—	$	90,678	$	86	$	840	$	89,924
State and municipal	996,247		245		996,002		24,330		9,618		1,010,959
U.S. Government-sponsored mortgage-backed securities	982,758		—		982,758		10,353		8,939		984,172
Foreign investment	1,500		—		1,500		—		—		1,500
Total held to maturity	$	2,071,183	$	245	$	2,070,938	$	34,769	$	19,397	$	2,086,555


	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to maturity at December 31, 2020
U.S. Government-sponsored agency securities	$	31,087	$	—	$	31,087	$	10	$	113	$	30,984
State and municipal	619,927		—		619,927		34,978		32		654,873
U.S. Government-sponsored mortgage-backed securities	575,154		—		575,154		17,889		107		592,936
Foreign investment	1,500		—		1,500		—		—		1,500
Total held to maturity	$	1,227,668	$	—	$	1,227,668	$	52,877	$	252	$	1,280,293

Accrued interest on investment securities available for sale and held to maturity of $22.8 million 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 atpresented 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 September 30, ~~2020~~2021, there were no past due principal and ~~December 31, 2019,~~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 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.

Available for Sale Held to Maturity
Amortized Cost Fair Value Amortized Cost Fair Value
Maturity Distribution at September 30, 2020:
Due in one year or less $ 1,649 $ 1,659 $ 9,677 $ 9,758
Due after one through five years 4,571 4,728 25,872 26,925
Due after five through ten years 58,644 61,968 106,342 112,055
Due after ten years 1,016,232 1,085,410 454,241 472,001
1,081,096 1,153,765 596,132 620,739
U.S. Government-sponsored mortgage-backed securities 645,089 670,395 512,994 531,779
Total Investment Securities $ 1,726,185 $ 1,824,160 $ 1,109,126 $ 1,152,518

Available for Sale Held to Maturity
Amortized Cost Fair Value Amortized Cost Fair Value
Maturity Distribution at December 31, 2019
Due in one year or less $ 1,134 $ 1,136 $ 9,920 $ 10,105
Due after one through five years 5,031 5,141 45,197 45,654
Due after five through ten years 74,745 76,920 84,153 88,844
Due after ten years 817,161 855,505 231,964 241,639
898,071 938,702 371,234 386,242
U.S. Government-sponsored mortgage-backed securities 842,349 851,323 434,804 441,324
Total Investment Securities $ 1,740,420 $ 1,790,025 $ 806,038 $ 827,566
Moody’s, for similarly rated securities.

The carrying value of securities pledged as collateral, to secure borrowings and for other purposes, was $989,906,000 at September 30, 2020, and $503,427,000 at December 31, 2019. In order to facilitate the funding of PPP loans, the Bank pledged securities to the Discount Window at the Federal Reserve Bank resulting in the increase in pledged securities at September 30, 2020 compared to December 31, 2019.

~~The book value of securities sold under agreements to repurchase amounted to $177,543,000 at September 30, 2020, and $182,856,000 at December 31, 2019.~~

~~Gross gains on the sales and redemptions of available for sale securities for the three and nine months ended September 30, 2020 and 2019 are shown below.~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Sales and Redemptions of Available for Sale Securities:
Gross gains $ 1,836 $ 393 $ 9,516 $ 3,376
Gross losses 19 0 19 0

The following tables show the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at September 30, 2020, and December 31, 2019:

Less than
12 Months 12 Months
or Longer Total
Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses
Temporarily Impaired Available for Sale Securities at September 30, 2020
State and municipal $ 22,515 $ 187 $ 0 $ 0 $ 22,515 $ 187
Total Temporarily Impaired Available for Sale Securities 22,515 187 0 0 22,515 187
Temporarily Impaired Held to Maturity Securities at September 30,2020
U.S. Government-sponsored agency securities 20,961 33 0 0 20,961 33
State and municipal 101,136 1,240 0 0 101,136 1,240
U.S. Government-sponsored mortgage-backed securities 10,284 3 0 0 10,284 3
Foreign investment 1,498 2 0 0 1,498 2
Total Temporarily Impaired Held to Maturity Securities 133,879 1,278 0 0 133,879 1,278
Total Temporarily Impaired Investment Securities $ 156,394 $ 1,465 $ 0 $ 0 $ 156,394 $ 1,465

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Less than
12 Months 12 Months
or Longer Total
Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses
Temporarily Impaired Available for Sale Securities at December 31, 2019
State and municipal $ 76,273 $ 807 $ 0 $ 0 $ 76,273 $ 807
U.S. Government-sponsored mortgage-backed securities 127,673 1,326 20,796 78 148,469 1,404
Total Temporarily Impaired Available for Sale Securities 203,946 2,133 20,796 78 224,742 2,211
Temporarily Impaired Held to Maturity Securities at December 31, 2019
U.S. Government-sponsored agency securities 3,016 4 12,467 33 15,483 37
State and municipal 22,947 107 0 0 22,947 107
U.S. Government-sponsored mortgage-backed securities 124,253 364 7,991 37 132,244 401
Total Temporarily Impaired Held to Maturity Securities 150,216 475 20,458 70 170,674 545
Total Temporarily Impaired Investment Securities $ 354,162 $ 2,608 $ 41,254 $ 148 $ 395,416 $ 2,756

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 September 30, 2021, aggregated by credit quality indicator.


	Held to Maturity
	State and municipal		Other		Total
Credit Rating:
Aaa	$	90,991	$	60,678	$	151,669
Aa1	146,992		—		146,992
Aa2	161,730		—		161,730
Aa3	124,369		—		124,369
A1	88,277		—		88,277
A2	23,103		—		23,103
A3	1,066		—		1,066
Baa2	266		—		266
Non-rated	359,453		1,014,258		1,373,711
Total	$	996,247	$	1,074,936	$	2,071,183

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


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

The following tables summarize, as of September 30, 2021 and December 31, 2020, 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 September 30, 2021

State and municipal	$	273,742	$	3,938	$	501	$	8	$	274,243	$	3,946
U.S. Government-sponsored mortgage-backed securities	525,836		12,215		—		—		525,836		12,215

Total investment securities available for sale	$	799,578	$	16,153	$	501	$	8	$	800,079	$	16,161


	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	$	—	$	—	$	5,368	$	246
U.S. Government-sponsored mortgage-backed securities	9,651		103		—		—		9,651		103

Total investment securities available for sale	$	15,019	$	349	$	—	$	—	$	15,019	$	349

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Certain ~~investments in debt and equity~~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.


		September 30, 2020			December 31, 2019				September 30, 2021			December 31, 2020
Investments 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	$	157,859		$	398,172		Historical cost	$	816,240		$	15,368
Fair value	Fair value	156,394			395,416			Fair value	800,079			15,019
Gross unrealized losses	Gross unrealized losses	$	1,465		$	2,756		Gross unrealized losses	$	16,161		$	349
Percent of the Corporation's investment portfolio		9.4		%	15.2		%
Percent of the Corporation's investments available for sale								Percent of the Corporation's investments available for sale	33.7		%	0.8		%

The Corporation's management believes the decline in fair value for these securities was temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income during the period the other-than-temporary-impairment ("OTTI") is identified. The Corporation’s management has evaluated all securities with unrealized losses for OTTI and concluded no OTTI existed at September 30, 2020.

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.

~~State and Municipal Securities, U.S. Government-Sponsored Agency Securities and Foreign Investment Securities~~

The unrealized losses on the Corporation's investments in securities of state and political subdivisions, U.S. Government-Sponsored Agency securities and foreign investment securities were caused by interest rate changes. 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. 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, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2020. The state and municipal securities portfolio contains unrealized losses of $187,000 on 13 securities and $1,240,000 on NaN securities in the available for sale and held to maturity portfolios, respectively. At September 30, 2020, the Corporation had little to no exposure to municipal bonds related to entertainment receipts, student housing, parking facilities, airports, nursing homes or public transit. The U.S. Government-Sponsored Agency securities portfolio contains no unrealized losses in the available for sale portfolio, and unrealized losses of $33,000 on 2 securities in the held to maturity portfolio. The foreign investment securities portfolio contains no unrealized losses in the available for sale portfolio, and an unrealized loss of $2,000 on 1 security in the held to maturity portfolio.

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, the Corporation does not consider those investments to be other-than-temporarily impaired at~~maturity. At September 30, ~~2020. The~~2021, the mortgage-backed securities portfolio contains no unrealized losses of $12.2 million on NaN securities in the available for sale ~~portfolio, and an unrealized loss of $3,000 on 1 security in the held to maturity~~ portfolio. All these securities are issued by a ~~U.S.~~ government-sponsored ~~entity~~entity.

State and Municipal Securities

The unrealized losses on the Corporation's investments in securities of state and political subdivisions 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 September 30, 2021, the state and municipal securities portfolio contains unrealized losses of $3.9 million 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 September 30, 2021 and December 31, 2020, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have ~~an implicit~~the right to call or explicit government guarantee. The slowing of prepayments and the forbearance programs resulting from the financial impacts of COVID-19 could increase bond duration and potentially improve market values on these securities.prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at September 30, 2021
Due in one year or less	$	2,421	$	2,428	$	8,718	$	8,766
Due after one through five years	13,087		14,068		28,789		30,589
Due after five through ten years	100,122		105,457		176,603		180,790
Due after ten years	1,367,250		1,429,488		874,315		882,238
	1,482,880		1,551,441		1,088,425		1,102,383
U.S. Government-sponsored mortgage-backed securities	825,097		823,137		982,758		984,172

Total investment securities	$	2,307,977	$	2,374,578	$	2,071,183	$	2,086,555


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at December 31, 2020
Due in one year or less	$	1,349	$	1,353	$	9,712	$	9,755
Due after one through five years	5,545		5,764		22,241		23,190
Due after five through ten years	70,777		75,223		115,408		121,333
Due after ten years	1,097,451		1,182,110		505,153		533,079
	1,175,122		1,264,450		652,514		687,357
U.S. Government-sponsored mortgage-backed securities	632,267		654,669		575,154		592,936

Total investment securities	$	1,807,389	$	1,919,119	$	1,227,668	$	1,280,293

1718

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 $946.2 million and $890.0 million were pledged at September 30, 2021 and December 31, 2020, 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 $176.7 million at September 30, 2021 and $167.3 million at

December 31, 2020.

Gross gains and losses on the sales and redemptions of investment securities available for sale for the three and nine months ended September 30, 2021 and 2020 are shown below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Sales and redemptions of investment securities available for sale:
Gross gains	$	1,915	$	1,836	$	5,814	$	9,516
Gross losses	159		19		498		19

Net gains on sales and redemptions of investment securities available for sale	$	1,756	$	1,817	$	5,316	$	9,497

NOTE 4

LOANS AND ALLOWANCE

Loans are stated at the amount of unpaid principal, reduced by deferred income (net of costs). Interest on loans is recognized using the simple interest method on the daily balances of the principal amounts outstanding. Loan ~~origination fees, net of direct loan origination costs,~~Portfolio and ~~commitment fees are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.~~ Credit Quality

The ~~Corporation’s~~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 ~~the allowance for loan losses~~ and credit quality characteristics by collateral classification, excluding loans held for sale. Loans held for sale ~~as of~~at September 30, ~~2020,~~2021 and December 31, ~~2019,~~2020, were ~~$3,183,000~~$6.0 million and ~~$9,037,000,~~$4.0 million, respectively.

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


							September 30, 2021		December 31, 2020
		September 30, 2020		December 31, 2019
Commercial and industrial loans	Commercial and industrial loans	$	2,875,331	$	2,109,879	Commercial and industrial loans	$	2,573,615	$	2,776,699
Agricultural production financing and other loans to farmers		83,090		93,861
Agricultural land, production and other loans to farmers						Agricultural land, production and other loans to farmers	240,686		281,884
Real estate loans:	Real estate loans:					Real estate loans:
Construction	Construction	622,084		787,568		Construction	521,889		484,723
Commercial and farmland		3,248,506		3,052,698
Commercial real estate, non-owner occupied						Commercial real estate, non-owner occupied	2,150,387		2,220,949
Commercial real estate, owner occupied						Commercial real estate, owner occupied	952,441		958,501
Residential	Residential	1,146,406		1,143,217		Residential	1,154,373		1,234,741
Home equity	Home equity	527,458		588,984		Home equity	531,307		508,259
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	125,411		135,989		Individuals' loans for household and other personal expenditures	135,093		129,479

Public finance and other commercial loans	Public finance and other commercial loans	615,547		547,114		Public finance and other commercial loans	781,785		647,939
Loans	Loans	9,243,833		8,459,310		Loans	$	9,041,576	$	9,243,174
Allowance for loan losses		(126,726)		(80,284)
Net Loans		$	9,117,107	$	8,379,026

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives. For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted. Among other things, this legislation amends the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion. The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act ("the Flexibility Act"), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act. For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years. The Bank has actively participated in assisting its customers with applications for resources through the program. PPP loans earn interest at a fixed rate of 1 percent and primarily have a two year term. The Bank anticipates that the majority of these loans will ultimately be forgiven, in whole or in part, by the SBA as, in accordance with the terms of the PPP, the loans are fully guaranteed by the SBA. As of September 30, 2021, the Corporation had $198.1 million of Paycheck Protection Program ("PPP") loans compared to the December 31, 2020 ~~the Bank had funded over 5,200~~balance of $667.1 million. PPP loans ~~primarily~~are included in the commercial and industrial loan ~~class, totaling $901.4 million, net~~class. Additional details of ~~deferred processing fees~~the PPP are included in The CARES Act and ~~costs of $21.5 million. The Bank borrowed from~~ the Paycheck Protection Program ~~Liquidity Facility ("PPPL Facility") to supplement liquidity to fund~~sections of the ~~PPP loans~~"COVID-19 UPDATE" in the ~~second quarter 2020. At September 30, 2020, the Corporation did not have an outstanding balance with the PPPL Facility.~~Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

~~Allowance,~~ Credit Quality ~~and Loan Portfolio~~

~~The original implementation date~~As part of the Current Expected Credit Loss (CECL) model for calculating the Allowance for Credit Losses guided by FASB Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit losses on Financial Instruments was January 1, 2020. 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. As discussed below, ASU No. 2016-13, provides for the replacementongoing monitoring of the ~~incurred loss model for recording the allowance for loan losses with CECL. However, as a result~~credit quality of the Corporation’s election, its 2020 financial statements have been prepared under the existing incurred loss model. As the temporary relief applicable to the Corporation’s compliance with CECL will end no later than December 31, 2020, the Corporation will implement CECL during the fourth quarter of 2020.

~~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 maintains an allowance for loan losses to cover probable credit losses identified during its loan review process. Management believes the allowance for loan losses is adequate to cover probable losses inherent in theCorporation's loan portfolio, ~~at September 30, 2020. The process for determining~~management tracks certain credit quality indicators including trends related to: (i) the adequacy of the allowance for loan losses is critical to the Corporation’s financial results. It requires management to make difficult, subjective and complex judgments to estimate the effect of uncertain matters. The allowance for loan losses considers current factors, including economic conditions and ongoing internal and external examinations, and will increase or decrease as deemed necessary to ensure it remains adequate. In addition, the allowance as a percentage of charge-offs and nonperforming loans will change at different points in time based on credit performance, portfolio mix and collateral values.

The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. The allowance is increased by provision expense and decreased by charge-offs less recoveries. All charge-offs are approved by the Bank's senior credit officers and in accordance with established policies. The Bank charges off a loan when a determination is made that all or a portion of the loan is uncollectable. The amount provided for loan losses in a given period may be greater than or less than net loan losses experienced during the period, and is based on management’s judgment as to the appropriate level of criticized commercial loans, (ii) net charge-offs, (iii) non-performing loans, (iv) covenant failures and (v) the allowance for loan losses. The determination of the provision amount is based on management’s ongoing review and evaluation of the loan portfolio, including an internally administered loan "watch" list and independent loan reviews. The evaluation takes into consideration identified credit problems, the possibility of losses inherent in the loan portfolio that are not specifically identified and management’s judgment as to the impact of the current environment and economic conditions on the portfolio.

The allowance consists of specific impairment reserves as required by ASC 310-10-35, a component for historical losses in accordance with ASC 450 and the consideration of current environmental factors in accordance with ASC 450. A loan is deemed impaired when, based on current information or events, it is probable that all amounts due of principal and interest according to the contractual terms of the loan agreement will not be collected.

The historical loss allocation for loans not deemed impaired according to ASC 450 is the product of the volume of loans within the non-impaired criticized and non-criticized risk grade classifications, each segmented by call code, and the historical loss factor for each respective classification and call code segment. The historical loss factors are based upon actual loss experience within each risk and call code classification. The historical look back period for non-criticized loans looks to the most recent rolling-four-quarter average and aligns with the look back period for non-impaired criticized loans. Each of the rolling four quarter periods used to obtain the average, include all charge-offs for the previous twelve-month period, therefore the historical look back period includes seven quarters. The resulting allocation is reflective of current conditions. Criticized loans are grouped based on the risk grade assigned to the loan. Loans with a special mention grade but not impaired are assigned a loss factor, and loans with a classified grade but not impaired are assigned a separate loss factor. The loss factor computation for this allocation includes a segmented historical loss migration analysis of risk grades to charge-off.

In addition to the specific reserves and historical loss components of the allowance, consideration is given to various environmental factors to ensure that losses inherent in the portfolio are reflected in the allowance for loan losses. The environmental component adjusts the historical loss allocations for non-impaired loans to reflect relevant current conditions that, in management's opinion, have an impact on loss recognition. Environmental factors that management reviews in the analysis include:general national and local economic trends and conditions; trends in growth in the loan portfolio and growth in higher risk areas; levels of, and trends in, delinquencies and non-accruals; experience and depth of lending management and staff; adequacy of, and adherence to, lending policies and procedures including those for underwriting; industry concentrations of credit; and adequacy of risk identification systems and controls through the internal loan review and internal audit processes.

In conformance with ASC 805 and ASC 820, purchased loans are recorded at the acquisition date fair value. Such loans are included in the allowance to the extent a specific impairment is identified that exceeds the fair value adjustment on an impaired loan or the historical loss and environmental factor analysis indicates losses inherent in a purchased portfolio exceeds the fair value adjustment on the portion of the purchased portfolio not deemed impaired.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)

The ~~following tables summarize changes in~~Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the ~~allowance~~overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for ~~loan losses by loan segment for~~pass grade loans. Loans with grades below pass are reviewed more frequently depending on the ~~three and nine months ended September 30, 2020 and September 30, 2019:~~

Three Months Ended September 30, 2020
Commercial Commercial
Real Estate Consumer Residential Total
Allowance for loan losses:
Balances, June 30, 2020 $ 44,678 $ 46,918 $ 8,445 $ 21,078 $ 121,119
Provision for losses 7,299 2,990 971 1,284 12,544
Recoveries on loans 197 46 54 130 427
Loans charged off (6,827) 0 (92) (445) (7,364)
Balances, September 30, 2020 $ 45,347 $ 49,954 $ 9,378 $ 22,047 $ 126,726

Nine Months Ended September 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 19,240 21,129 5,678 8,144 54,191
Recoveries on loans 746 271 152 248 1,417
Loans charged off (7,541) (224) (487) (914) (9,166)
Balances, September 30, 2020 $ 45,347 $ 49,954 $ 9,378 $ 22,047 $ 126,726

Three Months Ended September 30, 2019
Commercial Commercial
Real Estate Consumer Residential Total
Allowance for loan losses:
Balances, June 30, 2019 $ 33,202 $ 29,531 $ 4,070 $ 14,471 $ 81,274
Provision for losses 130 370 40 60 600
Recoveries on loans 149 143 105 199 596
Loans charged off (480) (1,078) (109) (232) (1,899)
Balances, September 30, 2019 $ 33,001 $ 28,966 $ 4,106 $ 14,498 $ 80,571

Nine Months Ended September 30, 2019
Commercial Commercial
Real Estate Consumer Residential Total
Allowance for loan losses:
Balances, December 31, 2018 $ 32,657 $ 29,609 $ 3,964 $ 14,322 $ 80,552
Provision for losses 466 1,459 181 194 2,300
Recoveries on loans 1,035 1,166 323 511 3,035
Loans charged off (1,157) (3,268) (362) (529) (5,316)
Balances, September 30, 2019 $ 33,001 $ 28,966 $ 4,106 $ 14,498 $ 80,571
grade. A description of the general characteristics of these grades is as follows:

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

~~The tables below show the Corporation’s allowance for loan losses and loan portfolio by loan segment as~~•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 ~~periods indicated.~~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.

September 30, 2020
Commercial Commercial
Real Estate Consumer Residential Total
Allowance Balances:
Individually evaluated for impairment $ 601 $ 7,981 $ 0 $ 557 $ 9,139
Collectively evaluated for impairment 44,746 41,973 9,378 21,490 117,587
Total Allowance for Loan Losses $ 45,347 $ 49,954 $ 9,378 $ 22,047 $ 126,726
Loan Balances:
Individually evaluated for impairment $ 4,837 $ 44,203 $ 3 $ 3,441 $ 52,484
Collectively evaluated for impairment 3,568,432 3,819,629 125,408 1,670,423 9,183,892
Loans acquired with deteriorated credit quality 699 6,758 — 0 7,457
Loans $ 3,573,968 $ 3,870,590 $ 125,411 $ 1,673,864 $ 9,243,833

•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)

December 31, 2019
Commercial Commercial
Real Estate Consumer Residential Total
Allowance Balances:
Individually evaluated for impairment $ 0 $ 231 $ 0 $ 458 $ 689
Collectively evaluated for impairment 32,902 28,547 4,035 14,111 79,595
Total Allowance for Loan Losses $ 32,902 $ 28,778 $ 4,035 $ 14,569 $ 80,284
Loan Balances:
Individually evaluated for impairment $ 457 $ 8,728 $ 4 $ 2,520 $ 11,709
Collectively evaluated for impairment 2,748,681 3,821,660 135,985 1,727,966 8,434,292
Loans acquired with deteriorated credit quality 1,716 9,878 — 1,715 13,309
Loans $ 2,750,854 $ 3,840,266 $ 135,989 $ 1,732,201 $ 8,459,310

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 September 30, 2021 with an origination year of 2021 and 2020 include PPP loans of $182.2 million and $15.9 million, respectively.


	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	$	795,366	$	458,425	$	188,155	$	74,791	$	24,767	$	41,419	$	884,233	$	—	$	2,467,156
Special Mention	10,551		27,059		211		992		2,032		2,026		17,466		—		60,337
Substandard	5,912		2,327		6,058		2,948		480		776		27,621		—		46,122


Total Commercial and industrial loans	$	811,829	$	487,811	$	194,424	$	78,731	$	27,279	$	44,221	$	929,320	$	—	$	2,573,615
Agricultural land, production and other loans to farmers
Pass	37,000		48,740		23,447		9,152		7,451		39,875		63,254		—		228,919
Special Mention	84		1,561		—		—		—		391		274		—		2,310
Substandard	719		538		137		1,798		—		2,925		3,340		—		9,457


Total Agricultural land, production and other loans to farmers	$	37,803	$	50,839	$	23,584	$	10,950	$	7,451	$	43,191	$	66,868	$	—	$	240,686
Real estate loans:
Construction
Pass	132,653		202,455		114,065		31,056		2,229		2,559		15,671		0		500,688
Special Mention	20,839		275		—		—		—		—		—		—		21,114
Substandard	—		25		—		62		—		—		—		—		87


Total Construction	$	153,492	$	202,755	$	114,065	$	31,118	$	2,229	$	2,559	$	15,671	$	—	$	521,889
Commercial real estate, non-owner occupied
Pass	455,140		740,465		228,864		132,584		127,045		156,901		26,696		—		1,867,695
Special Mention	52,739		172,621		—		98		—		2,698		—		—		228,156
Substandard	19,437		25,983		180		1,169		7,477		290		—		—		54,536


Total Commercial real estate, non-owner occupied	$	527,316	$	939,069	$	229,044	$	133,851	$	134,522	$	159,889	$	26,696	$	—	$	2,150,387
Commercial real estate, owner occupied
Pass	221,409		423,411		99,381		45,467		49,800		58,497		32,468		—		930,433
Special Mention	1,548		6,064		745		1,604		—		1,326		149		—		11,436
Substandard	1,687		4,565		—		53		2,413		1,854		—		—		10,572


Total Commercial real estate, owner occupied	$	224,644	$	434,040	$	100,126	$	47,124	$	52,213	$	61,677	$	32,617	$	—	$	952,441
Residential
Pass	263,658		381,258		115,505		80,009		60,398		235,365		4,306		44		1,140,543
Special Mention	874		1,131		464		27		229		2,200		5		—		4,930
Substandard	1,103		3,134		105		1,267		109		3,182		—		—		8,900


Total Residential	$	265,635	$	385,523	$	116,074	$	81,303	$	60,736	$	240,747	$	4,311	$	44	$	1,154,373
Home equity
Pass	68,318		21,473		2,315		2,374		1,419		3,982		427,901		195		527,977
Special Mention	—		87		—		9		—		17		1,378		—		1,491
Substandard	472		—		—		—		94		200		1,073		—		1,839


Total Home Equity	$	68,790	$	21,560	$	2,315	$	2,383	$	1,513	$	4,199	$	430,352	$	195	$	531,307
Individuals' loans for household and other personal expenditures
Pass	41,367		30,506		17,797		13,132		2,657		5,684		23,659		—		134,802
Special Mention	31		101		65		45		7		15		11		—		275
Substandard	—		3		—		—		—		13		—		—		16


Total Individuals' loans for household and other personal expenditures	$	41,398	$	30,610	$	17,862	$	13,177	$	2,664	$	5,712	$	23,670	$	—	$	135,093
Public finance and other commercial loans
Pass	203,809		179,913		100,892		39,236		107,674		129,488		20,773		—		781,785




Total Public finance and other commercial loans	$	203,809	$	179,913	$	100,892	$	39,236	$	107,674	$	129,488	$	20,773	$	—	$	781,785
Loans	$	2,334,716	$	2,732,120	$	898,386	$	437,873	$	396,281	$	691,683	$	1,550,278	$	239	$	9,041,576

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

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

Total past due loans equaled $38.9 million as of September 30, 2021, a $33.9 million decrease from the total of $72.8 million for December 31, 2020. At September 30, 2021, 30-59 Days Past Due loans totaled $12.2 million, a decrease of $7.5 million from December 31, 2020. The primary decreases were in commercial and industrial and owner-occupied commercial real estate loans. At September 30, 2021, 60-89 Days Past Due loans totaled $3.5 million, a decrease of $7.6 million from December 31, 2020. The primary decrease was in commercial and industrial loans. At September 30, 2021, 90 Days or More Past Due loans totaled $23.2 million, a decrease of $18.8 million from December 31, 2020. The primary decrease was in non-owner occupied commercial real estate, due to the payoff of a $23.4 million relationship. This was offset by an increase in the commercial and industrial segment of $13.5 million due to one relationship, of $11.4 million, moving into non-accrual status. The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, for the years indicated:


	September 30, 2021
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing
Commercial and industrial loans	$	2,554,111	$	2,667	$	507	$	16,330	$	2,573,615	$	1
Agricultural land, production and other loans to farmers	240,660		—		—		26		240,686		—
Real estate loans:
Construction	521,889		—		—		—		521,889		—
Commercial real estate, non-owner occupied	2,142,055		4,698		424		3,210		2,150,387		—
Commercial real estate, owner occupied	950,676		393		1,017		355		952,441		—
Residential	1,147,965		2,982		1,195		2,231		1,154,373		111
Home equity	528,760		1,197		355		995		531,307		43
Individuals' loans for household and other personal expenditures	134,801		233��		43		16		135,093		2

Public finance and other commercial loans	781,785		—		—		—		781,785		—
Loans	$	9,002,702	$	12,170	$	3,541	$	23,163	$	9,041,576	$	157


	December 31, 2020
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing
Commercial and industrial loans	$	2,761,473	$	5,866	$	6,571	$	2,789	$	2,776,699	$	594
Agricultural land, production and other loans to farmers	280,615		146		226		897		281,884		—
Real estate loans:
Construction	484,706		—		17		—		484,723		—
Commercial real estate, non-owner occupied	2,184,681		2,525		2,109		31,634		2,220,949		—
Commercial real estate, owner occupied	951,561		4,854		180		1,906		958,501		—
Residential	1,226,779		3,269		1,429		3,264		1,234,741		133
Home equity	503,596		2,644		559		1,460		508,259		19
Individuals' loans for household and other personal expenditures	129,049		334		96		—		129,479		—

Public finance and other commercial loans	647,939		—		—		—		647,939		—
Loans	$	9,170,399	$	19,638	$	11,187	$	41,950	$	9,243,174	$	746

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 unpaid accrued interest is reversed against earnings when considered uncollectible and at the time accrual is discontinued. 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:


	September 30, 2021				December 31, 2020
	Non-Accrual Loans		Non-Accrual Loans with no Allowance for Credit Losses		Non-Accrual Loans
Commercial and industrial loans	$	16,817	$	628	$	2,329
Agricultural land, production and other loans to farmers	119		—		1,012
Real estate loans:
Construction	15		—		123
Commercial real estate, non-owner occupied	26,176		3,816		46,316
Commercial real estate, owner occupied	1,002		545		3,040
Residential	5,556		797		6,517
Home equity	1,804		—		2,095
Individuals' loans for household and other personal expenditures	13		—		39

Loans	$	51,502	$	5,786	$	61,471

There was no interest income recognized on non-accrual loans for the three and nine months ended September 30, 2021 and 2020, respectively.

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

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


	September 30, 2021
	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans
Commercial and industrial loans	$	—	$	—	$	17,450	$	17,450	$	4,985
Agricultural land, production and other loans to farmers	—		—		300		300		—
Real estate loans:
Construction	—		15		—		15		1
Commercial real estate, non-owner occupied	26,703		—		—		26,703		6,463
Commercial real estate, owner occupied	1,846		—		—		1,846		21
Residential	—		2,927		—		2,927		327
Home equity	—		402		—		402		66


Loans	$	28,549	$	3,344	$	17,750	$	49,643	$	11,863

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 and nine months ended September 30, 2021 and 2020, respectively.


			Three Months Ended September 30, 2021
	Pre- Modification Recorded Balance		Term Modification		Rate Modification		Post - Modification Recorded Balance		Number of Loans

Real estate loans:
Construction	$	16	$	—	$	16	$	16	1
Commercial real estate, non owner occupied	12,922		12,976		—		12,976		1




Total	$	12,938	$	12,976	$	16	$	12,992	2


			Three Months Ended September 30, 2020
	Pre- Modification Recorded Balance		Term Modification		Rate Modification		Post - Modification Recorded Balance		Number of Loans


Real estate loans:


Residential	$	2,314	$	2,275	$	51	$	2,326	30
Home Equity	307		212		95		307		2
Individuals' loans for household and other personal expenditures	19		19		—		19		2
Total	$	2,640	$	2,506	$	146	$	2,652	34


			Nine Months Ended September 30, 2021
	Pre- Modification Recorded Balance		Term Modification		Rate Modification		Combination		Post - Modification Recorded Balance		Number of Loans
Commercial and industrial loans	$	348	$	348	$	—	$	—	$	348	2
Real estate loans:
Construction	16		—		16		—		16		1
Commercial real estate, non owner occupied	12,922		12,976		—		—		12,976		1
Commercial real estate, owner occupied	21		—		—		21		21		1
Residential	691		449		126		118		693		9


Total	$	13,998	$	13,773	$	142	$	139	$	14,054	14

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)



			Nine Months Ended September 30, 2020
	Pre- Modification Recorded Balance		Term Modification		Rate Modification		Combination		Post - Modification Recorded Balance		Number of Loans
Commercial and industrial loans	$	654	$	654	$	—	$	—	$	654	3
Agricultural land, production and other loans to farmers	458		458		—		—		458		1
Real estate loans:

Commercial real estate, owner occupied	107		107		—		—		107		1
Residential	2,614		2,276		163		224		2,663		36
Home Equity	307		211		96		—		307		2
Individuals' loans for household and other personal expenditures	19		19		—		—		19		2
Total	$	4,159	$	3,725	$	259	$	224	$	4,208	45

Loans secured by commercial real estate, non-owner occupied made up 99.9 percent of the post-modification balances of the troubled debt restructured loans that occurred during the three months ending September 30, 2021 and 92.3 percent for the nine months ending September 30, 2021.

The following tables summarize troubled debt restructures that occurred during the twelve months ended September 30, 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 September 30, 2021			Nine Months Ended September 30, 2021
	Number of Loans	Recorded Balance		Number of Loans	Recorded Balance
Commercial and industrial loans	2	$	160	2	$	160
Real estate loans:

Residential	5	599		5	599


Total	7	$	759	7	$	759


	Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
	Number of Loans	Recorded Balance		Number of Loans	Recorded Balance
Commercial and industrial loans	1	$	317	2	$	585
Real estate loans:
Commercial real estate, non owner occupied	1	106		1	106



Total	2	$	423	3	$	691

Commercial troubled debt restructured loans risk graded special mention, substandard, doubtful and loss are individually evaluated for ~~impairment are comprised of commercial~~apparent loss and ~~consumer loans deemed impaired~~may result in ~~accordance with ASC 310-10. This includes loans acquired with deteriorated credit quality totaling $3,738,000 with $116,000 of related~~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 $3.9 million and $5.1 million at September 30, 2021 and September 30, 2020, respectively.

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 ~~$2,819,000~~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 ~~$124,000~~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.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

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

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

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

The Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending management and staff, and (vi) other environmental factors 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 ~~December 31, 2019.~~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").

The risk characteristics of the Corporation’s ~~material~~ 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

~~These~~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. ~~Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management~~The Corporation monitors ~~and evaluates~~ commercial real estate loans based on collateral and risk grade ~~criteria. In addition, management tracks~~criteria, as well as the ~~level~~levels of owner-occupied ~~commercial real estate loans~~ 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.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences, ~~and~~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, ~~are unsecured~~ such as small installment loans and certain lines of ~~credit.~~credit, are unsecured. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers ~~which~~and can ~~be impacted by economic conditions in their market areas such as unemployment levels. Repayment on loans secured by 1-4 family residences 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.

~~Loans are reclassified to a non-accruing status when,~~The following tables summarize changes in ~~management’s judgment,~~ the ~~collateral value~~allowance for credit losses by loan segment for the three and ~~financial condition of the borrower do not justify accruing i~~nterest. When the interest accrual is discontinued, all unpaid accrued interest is reversed against earnings when considered uncollectable. 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 consecutivenine months ~~of performance. Payments received on impaired accruing or delinquent loans are applied to interest income as accrued.~~ended September 30, 2021:


	Three Months Ended September 30, 2021
	Commercial		Commercial Real Estate		Construction		Consumer & Residential		Total
Allowance for credit losses
Balances, June 30, 2021	$	63,681	$	72,701	$	17,077	$	46,316	$	199,775




Provision for credit losses	3,496		(3,850)		567		(213)		—

Recoveries on loans	204		370		—		261		835
Loans charged off	(137)		(115)		(4)		(382)		(638)
Balances, September 30, 2021	$	67,244	$	69,106	$	17,640	$	45,982	$	199,972

~~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 Corporation’s non-accrual loans by loan class as of the periods indicated:~~

September 30, 2020 December 31, 2019
Commercial and industrial loans $ 5,947 $ 1,255
Agriculture production financing and other loans to farmers 0 183
Real estate loans:
Construction 126 977
Commercial and farmland 43,030 7,007
Residential 4,914 5,062
Home equity 2,674 1,421
Individuals' loans for household and other personal expenditures 48 44
Public finance and other commercial loans — —
Total $ 56,739 $ 15,949


	Nine Months Ended September 30, 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	666		(2,709)		(1,444)		—		—		3,487		—

Recoveries on loans	544		567		1		—		—		829		1,941
Loans charged off	(1,105)		(4,463)		(6)		—		—		(1,098)		(6,672)
Balances, September 30, 2021	$	67,244	$	69,106	$	17,640	$	—	$	—	$	45,982	$	199,972

Non-accrual loans increased $40.8 million from December 31, 2019. An increase of $36.0 million was attributed to the commercial and farmland segment, specifically non-owner occupied commercial real estate, as three relationships were moved to non-accrual during the second and third quarters of 2020. These three relationships involve four properties, three of which total $31.2 million in the senior living sector and the fourth totaled $3.4 million in the self-storage sector. Additionally, $4.7 million of the increase in non-accrual loans was in the commercial and industrial loans segment. This largest portion of this increase was due to the addition of a $2.8 million loan in the university logo apparel sports industry.

~~Impaired loans include loans deemed impaired according to the guidance set forth in ASC 310-10. Commercial loans~~Allowance for Loan Losses under ~~$500,000 and consumer loans, with the exception of troubled debt restructures, are not individually evaluated for impairment.~~prior GAAP ("Incurred Loss Model")

Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method for measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable,Prior to the ~~value. The fair value~~adoption of ~~real estate is generally based~~ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on ~~appraisals by qualified licensed appraisers. The appraisers typically determine~~Financial Instruments on January 1, 2021, the ~~value of the real estate by utilizing~~Corporation maintained 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 andor customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

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

September 30, 2020
Unpaid
Principal
Balance Recorded
Investment Related
Allowance
Impaired loans with no related allowance:
Commercial and industrial loans $ 10,975 $ 3,819 $ —
Agriculture production financing and other loans to farmers 63 0 —
Real estate Loans:
Commercial and farmland 12,385 10,782 —
Residential 74 58 —
Individuals' loans for household and other personal expenditures 3 3 —
Total $ 23,500 $ 14,662 $ —
Impaired loans with related allowance:
Commercial and industrial loans $ 1,019 $ 1,018 $ 601
Real estate Loans:
Commercial and farmland 34,207 33,421 7,981
Residential 3,045 2,908 475
Home equity 501 475 82
Total $ 38,772 $ 37,822 $ 9,139
Total Impaired Loans $ 62,272 $ 52,484 $ 9,139

~~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, 2019
Unpaid
Principal
Balance Recorded
Investment Related
Allowance
Impaired loans with no related allowance:
Commercial and industrial loans $ 320 $ 320 $ —
Agriculture production financing and other loans to farmers 299 137 —
Real estate Loans:
Construction 1,206 970 —
Commercial and farmland 8,037 5,849 —
Residential 93 76 —
Total $ 9,955 $ 7,352 $ —
Impaired loans with related allowance:
Real estate Loans:
Commercial and farmland $ 2,648 $ 1,909 $ 231
Residential 2,070 2,044 383
Home equity 417 400 75
Individuals' loans for household and other personal expenditures 4 4 0
Total $ 5,139 $ 4,357 $ 689
Total Impaired Loans $ 15,094 $ 11,709 $ 689

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Average
Recorded Investment Interest
Income Recognized Average
Recorded Investment Interest
Income Recognized
Impaired loans with no related allowance:
Commercial and industrial loans $ 8,625 $ 0 $ 9,225 $ 0
Real estate Loans:
Commercial and farmland 10,812 37 11,059 113
Residential 58 1 59 2
Individuals' loans for household and other personal expenditures 3 — 3 0
Total $ 19,498 $ 38 $ 20,346 $ 115
Impaired loans with related allowance:
Commercial and industrial loans $ 1,018 $ 0 $ 1,018 $ 0
Real estate Loans:
Commercial and farmland 33,390 — 33,543 —
Residential 2,921 18 2,951 53
Home equity 482 4 488 11
Total $ 37,811 $ 22 $ 38,000 $ 64
Total Impaired Loans $ 57,309 $ 60 $ 58,346 $ 179

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Average
Recorded Investment Interest
Income Recognized Average
Recorded Investment Interest
Income Recognized
Impaired loans with no related allowance:
Commercial and industrial loans $ 877 $ 0 $ 881 $ 0
Agriculture production financing and other loans to farmers 1,012 0 1,014 0
Real estate Loans:
Construction 0 0 339 0
Commercial and farmland 8,075 39 8,651 117
Residential 189 0 190 2
Total $ 10,153 $ 39 $ 11,075 $ 119
Impaired loans with related allowance:
Commercial and industrial loans $ 329 $ — $ 329 $ 0
Agriculture production financing and other loans to farmers 2,100 — 2,123 —
Real estate Loans:
Commercial and farmland 1,324 — 1,324 0
Residential 2,072 15 2,095 47
Home equity 346 3 350 9
Individuals' loans for household and other personal expenditures 4 — 5 0
Total $ 6,175 $ 18 $ 6,226 $ 56
Total Impaired Loans $ 16,328 $ 57 $ 17,301 $ 175

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

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

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

~~(Unaudited)~~

~~Impaired loans in the above tables do not include loans accounted for under ASC 310-30, or any other loan, unless deemed impaired~~losses in accordance with ~~ASC 310-10.~~

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

~~The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and~~incurred 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 ismodel 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 ordisclosed 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. The key distinctions of this category's classification are that it is indicative of an unwarranted level of risk; and weaknesses are considered “potential”, not “defined”, impairments to the primary source of repayment. Examples include businesses that may be suffering from inadequate management, loss of key personnel or significant customer or litigation.


			o			the likelihood that a loan will be paid from the primary source of repayment is uncertain or financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss,


			o			~~the primary source of repayment is gone, and the Corporation is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees,~~


			o			~~loans have a distinct possibility that the Corporation will sustain some loss if deficiencies are not corrected,~~


			o			~~unusual courses of action are needed to maintain a high probability of repayment,~~


			o			~~the borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments,~~


			o			~~the Corporation is forced into a subordinated or unsecured position due to flaws in documentation,~~


			o			~~loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms,~~


			o			~~the Corporation is seriously contemplating foreclosure or legal action due to the apparent deterioration of the loan, and~~


			o			~~there is significant deterioration in market conditions to which the borrower is highly vulnerable.~~

•~~Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based~~2020 Annual Report on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable. Other credit characteristics may include considerable doubt as to the quality of the secondary sources of repayment. The possibility of loss is high, but because of certain important pending factors that may strengthen the loan, loss classification is deferred until the exact status of repayment is known.Form 10-K.

•Loss – Loans that are considered uncollectable 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 not 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 changes in the ~~credit quality of the Corporation’s~~allowance for loan ~~portfolio,~~losses by loan ~~class~~segment for the periods indicated. Consumer non-performing loans include accruing consumer loans 90-days or more delinquent and consumer non-accrual loans. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified 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.

September 30, 2020
Commercial
Pass Commercial
Special
Mention Commercial Substandard Commercial
Doubtful Commercial Loss Consumer Performing Consumer
Non-Performing Total
Commercial and industrial loans $ 2,651,863 $ 130,786 $ 92,682 $ 0 $ 0 $ 0 $ 0 $ 2,875,331
Agriculture production financing and other loans to farmers 70,380 4,810 7,900 0 0 0 0 83,090
Real estate Loans:
Construction 570,635 10,830 14,362 0 0 26,135 122 622,084
Commercial and farmland 3,018,791 109,661 118,721 0 0 1,333 0 3,248,506
Residential 195,916 1,522 6,337 0 0 938,731 3,900 1,146,406
Home equity 14,218 57 929 0 0 509,676 2,578 527,458
Individuals' loans for household and other personal expenditures 0 0 0 0 0 125,363 48 125,411
Public finance and other commercial loans 615,473 74 0 0 0 0 0 615,547
Loans $ 7,137,276 $ 257,740 $ 240,931 $ 0 $ 0 $ 1,601,238 $ 6,648 $ 9,243,833

December 31, 2019
Commercial
Pass Commercial
Special
Mention Commercial Substandard Commercial
Doubtful Commercial Loss Consumer Performing Consumer
Non-Performing Total
Commercial and industrial loans $ 1,956,985 $ 81,179 $ 71,715 $ 0 $ 0 $ 0 $ 0 $ 2,109,879
Agriculture production financing and other loans to farmers 78,558 5,626 9,677 0 0 0 0 93,861
Real estate Loans:
Construction 749,249 1,613 1,634 0 0 35,072 0 787,568
Commercial and farmland 2,894,366 57,776 98,575 0 0 1,981 0 3,052,698
Residential 196,710 877 8,075 0 0 932,743 4,812 1,143,217
Home equity 24,211 257 682 0 0 562,507 1,327 588,984
Individuals' loans for household and other personal expenditures 0 0 0 0 0 135,944 45 135,989
Public finance and other commercial loans 547,114 0 0 0 0 0 0 547,114
Loans $ 6,447,193 $ 147,328 $ 190,358 $ 0 $ 0 $ 1,668,247 $ 6,184 $ 8,459,310

~~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 tables below show a past due aging of the Corporation’s loan portfolio, by loan class, as of September 30, 2020, and December 31, 2019:~~

September 30, 2020
Current
30-59 Days
Past Due
60-89 Days
Past Due Loans 90 Days or More Past Due And Accruing Non-Accrual Total Past Due
& Non-Accrual Total
Commercial and industrial loans $ 2,864,852 $ 4,529 $ 0 $ 3 $ 5,947 $ 10,479 $ 2,875,331
Agriculture production financing and other loans to farmers 81,990 0 0 1,100 0 1,100 83,090
Real estate loans:
Construction 614,383 7,575 0 0 126 7,701 622,084
Commercial and farmland 3,194,394 964 9,978 140 43,030 54,112 3,248,506
Residential 1,137,688 2,743 1,000 61 4,914 8,718 1,146,406
Home equity 522,680 1,467 611 26 2,674 4,778 527,458
Individuals' loans for household and other personal expenditures 124,926 249 188 0 48 485 125,411
Public finance and other commercial loans 615,547 0 0 0 0 0 615,547
Loans $ 9,156,460 $ 17,527 $ 11,777 $ 1,330 $ 56,739 $ 87,373 $ 9,243,833

December 31, 2019
Current
30-59 Days
Past Due
60-89 Days
Past Due Loans 90 Days or More Past Due And Accruing Non-Accrual Total Past Due
& Non-Accrual Total
Commercial and industrial loans $ 2,105,445 $ 3,039 $ 136 $ 4 $ 1,255 $ 4,434 $ 2,109,879
Agriculture production financing and other loans to farmers 93,678 0 0 0 183 183 93,861
Real estate loans:
Construction 784,961 1,630 0 0 977 2,607 787,568
Commercial and farmland 3,043,318 2,324 49 0 7,007 9,380 3,052,698
Residential 1,133,476 4,290 367 22 5,062 9,741 1,143,217
Home equity 584,023 2,960 538 42 1,421 4,961 588,984
Individuals' loans for household and other personal expenditures 135,399 440 105 1 44 590 135,989
Public finance and other commercial loans 547,114 0 0 0 0 — 547,114
Loans $ 8,427,414 $ 14,683 $ 1,195 $ 69 $ 15,949 $ 31,896 $ 8,459,310

As shown in the tables above, the level of total loan delinquencies has increased $14.7 million during the first nine months of 2020. The increases were primarily related to the 60-89 days past due commercial and farmland category, which increased $9.9 million due to one relationship, and the 30-59 days past due construction category, which increased $5.9 million due primarily to one $7.5 million relationship.

On occasion, borrowers experience declines in income and cash flow. As a result, these borrowers seek to reduce contractual cash outlays including debt payments. Concurrently, in an effort to preserve and protect its earning assets, specifically troubled loans, the Corporation works to maintain its relationship with certain customers who are experiencing financial difficulty by contractually modifying the borrower's debt agreement with the Corporation.

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, typically 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. These loans are not considered troubled debt restructures under the applicable guidance at September 30, 2020. Details of the Corporation's modifications are included in the "LOAN QUALITY/PROVISION FOR LOAN LOSSES" section of Management's Discussion and Analysis of Financial Condition and Results of Operations of 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)~~

~~The following tables summarize troubled debt restructures at the time of modification that occurred during the periods indicated:~~

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Pre-Modification
Recorded Balance Post-Modification
Recorded Balance Number
of Loans Pre-Modification
Recorded Balance Post-Modification
Recorded Balance Number
of Loans
Commercial and industrial loans $ 0 $ 0 0 $ 654 $ 654 3
Real estate loans:
Commercial and farmland 0 0 0 565 565 2
Residential 2,314 2,326 30 2,614 2,663 36
Home equity 307 307 2 307 307 2
Individuals' loans for household and other personal expenditures 19 19 2 19 19 2
Total $ 2,640 $ 2,652 34 $ 4,159 $ 4,208 45

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Pre-Modification
Recorded Balance Post-Modification
Recorded Balance Number
of Loans Pre-Modification
Recorded Balance Post-Modification
Recorded Balance Number
of Loans
Real estate loans:
Residential $ 195 $ 185 3 $ 456 $ 439 8
Total $ 195 $ 185 3 $ 456 $ 439 8

~~Loans secured by residential real estate made up 88 percent and 63 percent of the post-modification balance of troubled debt restructured loans made in~~ the three and nine months ended September 30, 2020, respectively. Loans secured by residential real estate made up 100 percent of the post-modification balance of troubled debt restructured loans made in the three and nine months ended September 30, 2019.2020:


	Three Months Ended September 30, 2020
	Commercial		Commercial Real Estate		Consumer		Residential		Total
Allowance for loan losses:
Balances, June 30, 2020	$	44,678	$	46,918	$	8,445	$	21,078	$	121,119
Provision for losses	7,299		2,990		971		1,284		12,544
Recoveries on loans	197		46		54		130		427
Loans charged off	(6,827)		—		(92)		(445)		(7,364)
Balances, September 30, 2020	$	45,347	$	49,954	$	9,378	$	22,047	$	126,726

~~The following tables summarize by modification type, the recorded investment of troubled debt restructures as of September 30, 2020 and 2019, that occurred during the periods indicated:~~

Three Months Ended September 30, 2020
Term
Modification Rate
Modification Combination Total
Modification
Real estate loans:
Residential $ 2,266 $ 51 $ — $ 2,317
Home equity 212 95 — 307
Individuals' loans for household and other personal expenditures 17 0 — 17
Total $ 2,495 $ 146 $ 0 $ 2,641

Nine Months Ended September 30, 2020
Term
Modification Rate
Modification Combination Total
Modification
Commercial and industrial loans $ 585 $ — $ 0 $ 585
Real estate loans:
Commercial and farmland 106 — 0 106
Residential 2,266 161 221 2,648
Home Equity 212 95 — 307
Individuals' loans for household and other personal expenditures 17 0 — 17
Total $ 3,186 $ 256 $ 221 $ 3,663

Three Months Ended September 30, 2019
Term
Modification Rate
Modification Combination Total
Modification
Real estate loans:
Residential $ — $ — $ 184 $ 184
Total $ — $ — $ 184 $ 184

Nine Months Ended September 30, 2019
Term
Modification Rate
Modification Combination Total
Modification
Real estate loans:
Residential $ — $ 88 $ 345 $ 433
Total $ 0 $ 88 $ 345 $ 433


	Nine Months Ended September 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	19,240		21,129		5,678		8,144		54,191
Recoveries on loans	746		271		152		248		1,417
Loans charged off	(7,541)		(224)		(487)		(914)		(9,166)
Balances, September 30, 2020	$	45,347	$	49,954	$	9,378	$	22,047	$	126,726

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 troubled debt restructures that occurred during~~table below shows the ~~twelve months ended September 30, 2020~~Corporation’s allowance for loan losses under the incurred loss model and ~~2019, that subsequently defaulted during the period indicated and remained in default at period end. A~~ loan ~~is considered in default if it is 30-days or more past due.~~

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Number of Loans Recorded Balance Number of Loans Recorded Balance
Commercial and industrial loans 1 $ 317 2 $ 585
Real estate loans:
Commercial and farmland 1 106 1 106
Total 2 $ 423 3 $ 691

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Number of Loans Recorded Balance Number of Loans Recorded Balance
Real estate loans:
Commercial and farmland 1 $ 85 1 $ 85
Total 1 $ 85 1 $ 85
portfolio by loan segment as of December 31, 2020.


	December 31, 2020
	Commercial		Commercial Real Estate		Consumer		Residential		Total
Allowance Balances:
Individually evaluated for impairment	$	223	$	12,246	$	—	$	432	$	12,901
Collectively evaluated for impairment	46,892		38,824		9,648		22,383		117,747

Total Allowance for Loan Losses	$	47,115	$	51,070	$	9,648	$	22,815	$	130,648
Loan Balances:
Individually evaluated for impairment	$	1,258	$	51,605	$	2	$	3,291	$	56,156
Collectively evaluated for impairment	3,505,863		3,805,808		129,477		1,739,709		9,180,857
Loans acquired with deteriorated credit quality	577		5,584		—		—		6,161
Loans	$	3,507,698	$	3,862,997	$	129,479	$	1,743,000	$	9,243,174

~~For potential consumer loan restructures, impairment evaluation occurs prior to modification. Any subsequent impairment is typically addressed through~~The following tables show the charge-off process, or may be addressed through a specific reserve. Consumer troubled debt loan restructures are generally included in the general historical allowance for loan loss at the post modification balance. Consumer non-accrual and delinquent troubled debt loan restructures are also considered in the calculationcomposition of the ~~non-accrual~~Corporation’s impaired loans, related allowance under the incurred loss model and ~~delinquency trend environmental allowance allocation. Consumer mortgage loans secured~~interest income recognized while impaired by ~~residential real estate properties for which formal foreclosure proceedings are in process totaled $5,059,000 and $1,033,000 at September 30, 2020 and December 31, 2019, respectively.~~

Commercial troubled debt restructured loans that are risk graded special mention, substandard, doubtful or loss are individually evaluated for impairment under ASC 310. Any resulting specific reserves are included in the allowance for loan ~~losses. Commercial troubled debt loan restructures 30-89 days delinquent are included in the calculation~~class as of the delinquency trend environmental allocation in the allowance for loan losses. With the exception of the acquired loans excluded from the allowance for loan losses, all commercial non-impaired loans, including non-accrual and 90-days or more delinquent, are included in the ASC 450 loss estimate.periods indicated:

~~NOTE 5~~

~~PURCHASED CREDIT IMPAIRED LOANS~~


	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

Purchased Credit Impaired Loans are included in NOTE 4. LOANS AND ALLOWANCE of these Notes to Consolidated Condensed Financial Statements. As described in NOTE 4, purchased loans are recorded at the acquisition date fair value, which could result in a fair value discount or premium. Purchased loans with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for under ASC 310-30,
~~Loans Acquired with Deteriorated Credit Quality~~. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The accretable portion of the fair value discount or premium is the difference between the expected cash flows and the net present value of expected cash flows, with such difference accreted into earnings over the term of the loans.


	Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance:
Commercial and industrial loans	$	8,625	$	—	$	9,225	$	—

Real estate Loans:

Commercial and farmland	10,812		37		11,059		113
Residential	58		1		59		2

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

Total	$	19,498	$	38	$	20,346	$	115
Impaired loans with related allowance:
Commercial and industrial loans	$	1,018	$	—	$	1,018	$	—

Real estate Loans:

Commercial and farmland	33,390		—		33,543		—
Residential	2,921		18		2,951		53
Home equity	482		4		488		11


Total	$	37,811	$	22	$	38,000	$	64
Total Impaired Loans	$	57,309	$	60	$	58,346	$	179

The carrying amount of Purchased Credit Impaired Loans as of September 30, 2020 was $11.2 million with allowance for loan loss of $116,000. The carrying amount of Purchased Credit Impaired Loans as of December 31, 2019 was $16.1 million with $124,000 of related allowance for loan losses. As customer cash flow expectations improve, nonaccretable yield can be reclassified to accretable yield. The accretable yield, or income expected to be collected, and reclassifications from nonaccretable, are identified in the table below.

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Accretable yield beginning balance $ 1,546 $ 2,132
Additions 0 $ 0
Accretion (793) (2,211)
Reclassification from nonaccretable 511 1,350
Disposals 0 (7)
Accretable yield ending balance $ 1,264 $ 1,264

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Accretable yield beginning balance $ 1,914 $ 2,143
Additions 576 576
Accretion (420) (1,638)
Reclassification from nonaccretable 374 1,363
Disposals (165) (165)
Accretable yield ending balance $ 2,279 $ 2,279

Table of Contents

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 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:


	September 30, 2021		December 31, 2020
Amounts of commitments:
Loan commitments to extend credit	$	3,938,075	$	3,443,514
Standby letters of credit	$	33,986	$	29,555

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

The following table ~~presents loans acquired, as of~~details activity in the ~~acquisition date, during the nine months ended September 30, 2019,~~allowance for ~~which it was probable that all contractually required payments would not be collected. There were no loans acquired during the nine months ended September 30, 2020.~~credit losses on off-balance sheet commitments:


	~~MBT~~Three Months Ended September 30, 2021
~~Contractually required payments receivable at acquisition date~~Balances, June 30, 2021	$	~~6,840~~20,500

~~Nonaccretable difference~~Provision for credit losses	~~2,733~~—
~~Expected cash flows at acquisition date~~	~~4,107~~
~~Accretable difference~~	~~576~~
~~Basis in loans at acquisition date~~Balances, September 30, 2021	$	~~3,531~~20,500

NOTE 65

GOODWILL

Goodwill is recorded on the acquisition date of an entity. ~~During the one-year measurement period, the Corporation may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.~~ The ~~MBT~~Hoosier acquisition on ~~September,~~April, 1, ~~2019~~2021 resulted in ~~$98,563,000~~$1,467,000 of ~~goodwill, which includes a measurement period adjustment of $719,000.~~goodwill. Details regarding the MBT acquisition are discussed in NOTE 2. ACQUISITION of these Notes to Consolidated Condensed Financial Statements. There have been no changes in goodwill since December 31, 2019, resulting in a goodwill balance of $543,918,000 as of September 30, 2020.










	~~2019~~
~~Balance, January 1~~	$	~~445,355~~
~~Goodwill acquired~~	~~97,844~~

~~Measurement period adjustment~~	~~719~~
~~Balance, December 31~~	$	~~543,918~~

The Corporation reviews goodwill annually for impairment, or more frequently if events or circumstances indicate the carrying value might be impaired. The impairment analysis compares the estimated fair value of the Corporation (the reporting unit) with the Corporation's net book value. The Corporation performed its annual impairment test of goodwill as of October 1, 2019. On January 1, 2020, the Corporation adopted ASU No. 2017-04, ~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill~~. Subsequent to the October 1, 2019 impairment test and adoption of ASU 2017-04, the Corporation experienced a decline in market capitalization as a result of a decline in the share price of the Corporation's common stock. At March 31, 2020 and June 30, 2020, the Corporation assessed the economic impact and market conditions from the COVID-19 pandemic. Additionally, the Corporation assessed the general uncertainty as to the full extent of the COVID-19 pandemic and its effect on economic recovery and concluded goodwill was not impaired in either period.

At September 30, 2020, the Corporation performed an additional goodwill impairment test which included various valuation considerations including comparable peer data, precedent transaction comparables, discounted cash flow analysis, overall financial performance, share price of the Corporation's common stock and other factors. The testing resulted in a conclusion that it was not more likely than not that the fair value of the Corporation had declined below its carrying value; therefore, goodwill was not impaired at September 30, 2020. Goodwill assessments are highly sensitive to economic projections and the related assumptions used by management. In the event of a prolonged economic downturn or further deterioration in the economic outlook, continued assessments of our goodwill balance will likely be required in future periods.

~~NOTE 7~~

~~CORE DEPOSIT INTANGIBLES~~

Core deposit intangibles are recorded on the acquisition date of an entity. During the one-year measurement period, the Corporation may record subsequent adjustments to these intangibles for provisional amounts recorded at the acquisition date. The MBT acquisition on September 1, 2019 resulted in a core deposit intangible of $16,527,000. Details regarding the MBTHoosier acquisition are discussed in NOTE 2. ACQUISITION of these Notes to Consolidated Condensed Financial Statements.

~~The carrying basis and accumulated amortization of recognized core deposit intangibles are noted below.~~

September 30, 2020 December 31, 2019
Gross carrying amount $ 102,396 $ 85,869
Core deposit intangibles acquired 0 16,527
Accumulated amortization (71,945) (67,434)
Total core deposit intangibles $ 30,451 $ 34,962


	2021		2020
Balance, January 1	$	543,918	$	543,918
Goodwill acquired	1,467		—


Balance, September 30	$	545,385	$	543,918

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 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 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.


	September 30, 2021		December 31, 2020
Gross carrying amount	$	102,396	$	102,396

Other intangibles acquired	2,247		—

Accumulated amortization	(77,705)		(73,421)

Total core deposit and other intangibles	$	26,938	$	28,975

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 ten years. Intangible asset amortization expense for the three and nine months ended September 30, ~~2020~~2021 was ~~$1,486,000~~$1.5 million and ~~$4,511,000,~~$4.3 million, respectively, compared to ~~$1,356,000~~$1.5 million and ~~$4,404,000, respectively,~~$4.5 million for the three and nine months ended September 30, ~~2019.~~2020, respectively. Estimated future amortization expense is summarized as follows:

Amortization Expense
2020 $ 1,476
2021 5,429
2022 5,027
2023 4,827
2024 4,241
After 2024 9,451
$ 30,451


	Amortization Expense
2021	$	1,463
2022	5,402
2023	5,145
2024	4,510
2025	3,754
After 2025	6,664
	$	26,938

NOTE 87

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 September 30, ~~2020, the Corporation had 3 interest rate swaps with a notional amount of $36.0 million that were designated as cash flow hedges. As of~~2021 and December 31, ~~2019,~~2020, the Corporation had 4 interest rate swaps with a notional amount of ~~$46.0~~$60.0 million that were designated as cash flow hedges. ~~A $10.0 million interest rate swap used to hedge the variable cash outflows associated with a Federal Home Loan Bank advance matured in the third quarter of 2020.~~

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

During ~~2020,~~2021, $26.0 million of the interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with existing trust preferred securities when the outflows converted from a fixed rate to variable rate in September of 2012. In addition, ~~the remaining~~ $10.0 million of interest rate swaps were used to hedge the variable cash outflows (LIBOR-based) associated with 1one Federal Home Loan Bank advance. 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 ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the Corporation did not recognize any ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Corporation's variable-rate liabilities. During the next twelve months, the Corporation expects to reclassify ~~$1,016,000~~$1.0 million from accumulated other comprehensive income to interest expense.

Non-designated Hedges

The Corporation does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers. The Corporation executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Corporation executes with a third party, such that the Corporation minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the notional amount of customer-facing swaps was approximately ~~$878,640,000~~$1.0 billion and ~~$692,287,000,~~$985.0 million, respectively. These amounts are offset with third party counterparties, as described above.

~~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 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 September 30, ~~2020,~~2021, and December 31, ~~2019.~~2020.

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

September 30, 2020

December 31, 2019

September 30, 2020

December 31, 2019

September 30, 2021

December 31, 2020

September 30, 2021

December 31, 2020

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

2,244

Other Liabilities

1,444

Interest rate contracts

Other Assets

—

Other Assets

—

Other Liabilities

1,217

Other Liabilities

2,018

Derivatives not designated as hedging instruments:

Interest rate contracts

Other Assets

82,010

Other Assets

27,855

Other Liabilities

82,010

Other Liabilities

27,855

Interest rate contracts

Other Assets

47,630

Other Assets

74,335

Other Liabilities

47,630

Other Liabilities

74,335

The Corporation's derivative asset and derivative liability relating to interest rate contracts increased $54.2 million and $55.0 million, respectively, from December 31, 2019. The increases are primarily due to a $176.4 million increase in the related outstanding notional balance. Additionally, yield curve rates used for valuation purposes were lower at each term point as of September 30, 2020 compared to December 31, 2019. This was primarily the result of investors seeking the safety of U.S. Treasuries, coupled with Federal Reserve purchases of U.S. Treasuries, as containment efforts related to the COVID-19 outbreak began to significantly reduce economic activity.

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


Derivatives in Cash Flow Hedging Relationships	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				Nine Months Ended					Three Months Ended				Nine Months Ended
		September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019			September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Interest Rate Products	Interest Rate Products	$	8	$	(178)	$	(1,451)	$	(1,270)	Interest Rate Products	$	(20)	$	8	$	22	$	(1,451)

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 nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.

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)
Three Months Ended
September 30, 2020 Three Months Ended
September 30, 2019
Interest rate contracts Interest Expense $ (294) $ (104)

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)

Nine Months Ended
September 30, 2020

Nine Months Ended
September 30, 2019

Three Months Ended
September 30, 2021

Three Months Ended
September 30, 2020

Interest rate contracts

Interest Expense

(651)

(247)

Interest rate contracts

Interest Expense

(266)

(294)

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)

Nine Months Ended
September 30, 2021

Nine Months Ended
September 30, 2020

Interest rate contracts

Interest Expense

(779)

(651)

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.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

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

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

~~(Unaudited)~~

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 September 30, ~~2020,~~2021, the termination value of derivatives in a net liability position related to these agreements was ~~$81,962,000.~~$41.7 million. As of September 30, ~~2020,~~2021, the Corporation has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of ~~$75,415,000.~~$58.8 million. While the Corporation did not breach any of these provisions as of September 30, ~~2020,~~2021, if it had, the Corporation could have been required to settle its obligations under the agreements at their termination value.

NOTE 98

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.

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. 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, government-sponsored mortgage-backed securities and corporate obligations securities. Level 3 fair value for securities was determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

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

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

~~(Unaudited)~~

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 8.7. 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 September 30, ~~2020,~~2021, and December 31, ~~2019.~~2020.

Fair Value Measurements Using:
September 30, 2020 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:
U.S. Treasury $ 300 $ 0 $ 300 $ 0
U.S. Government-sponsored agency securities 2,444 0 2,444 0
State and municipal 1,146,946 0 1,144,494 2,452
U.S. Government-sponsored mortgage-backed securities 670,395 0 670,391 4
Corporate obligations 4,075 0 4,044 31
Interest rate swap asset 82,010 0 82,010 0
Interest rate swap liability 84,254 0 84,254 0


				Fair Value Measurements Using:									Fair Value Measurements Using:
December 31, 2019		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2021										September 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)
Available for sale securities:	Available for sale securities:									Available for sale securities:

U.S. Treasury										U.S. Treasury	$	1,000	$	—	$	1,000	$	—
U.S. Government-sponsored agency securities	U.S. Government-sponsored agency securities	$	38,875	$	0	$	38,875	$	0	U.S. Government-sponsored agency securities	11,557		—		11,557		—
State and municipal	State and municipal	899,796		0		896,938		2,858		State and municipal	1,534,555		—		1,528,990		5,565
U.S. Government-sponsored mortgage-backed securities	U.S. Government-sponsored mortgage-backed securities	851,323		0		851,319		4		U.S. Government-sponsored mortgage-backed securities	823,137		—		823,133		4

Corporate obligations	Corporate obligations	31		0		0		31		Corporate obligations	4,329		—		4,298		31

Interest rate swap asset	Interest rate swap asset	27,855		0		27,855		0		Interest rate swap asset	47,630		—		47,630		—
Interest rate swap liability	Interest rate swap liability	29,299		0		29,299		0		Interest rate swap liability	48,847		—		48,847		—


			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)
Available for sale securities:

U.S. Government-sponsored agency securities	$	2,430	$	—	$	2,430	$	—
State and municipal	1,257,885		—		1,255,441		2,444
U.S. Government-sponsored mortgage-backed securities	654,669		—		654,665		4

Corporate obligations	4,135		—		4,104		31

Interest rate swap asset	74,335		—		74,335		—
Interest rate swap liability	76,353		—		76,353		—

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 September 30, ~~2020~~2021 or December 31, ~~2019.~~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 nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.


		Available for Sale Securities									Available for Sale Securities
		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019			September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Balance at beginning of the period	Balance at beginning of the period	$	2,500	$	2,975	$	2,892	$	3,328	Balance at beginning of the period	$	5,795	$	2,500	$	2,479	$	2,892

Included in other comprehensive income	Included in other comprehensive income	75		6		25		85		Included in other comprehensive income	(21)		75		333		25

Purchases, issuances and settlements										Purchases, issuances and settlements	—		—		3,241		—

Principal payments	Principal payments	(88)		(85)		(430)		(517)		Principal payments	(174)		(88)		(453)		(430)
Ending balance	Ending balance	$	2,487	$	2,896	$	2,487	$	2,896	Ending balance	$	5,600	$	2,487	$	5,600	$	2,487

Transfers Between Levels

There were 0no transfers in or out of Level 3 for the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

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

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

~~(Unaudited)~~

2020.

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 September 30, ~~2020,~~2021, and December 31, ~~2019.~~2020.

Fair Value Measurements Using
September 30, 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) $ 34,418 $ 0 $ 0 $ 34,418
Other real estate owned 464 0 0 464


			Fair Value Measurements Using
September 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	$	31,408	$	—	$	—	$	31,408
Other real estate owned	96		—		—		96

Fair Value Measurements Using
December 31, 2019 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) $ 5,653 $ 0 $ 0 $ 5,653
Other real estate owned 194 0 0 194


			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)
Collateral dependent loans	$	37,250	$	—	$	—	$	37,250
Other real estate owned	544		—		—		544

Impaired Loans (collateral dependent)

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 estimating 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 requires obtaining a current independent appraisal of the collateral and applying a discount factor 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 ~~2019~~2020 and ~~2020,~~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/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 September 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

September 30, ~~2020~~2021

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted-Average)

State and municipal securities

~~2,452~~5,565

Discounted cash flow

Maturity/Call date

1 month to 15 years

US Muni BQ curve

A- to ~~BBB-~~BBB--

Discount rate

~~1.5%~~.75% - 4%

Weighted-average coupon

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

~~34,418~~31,408

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

0% - 10%

Weighted-average discount by loan balance

7%5

Other real estate owned

~~464~~96

Appraisals

Discount to reflect current market conditions

0% - 72%

Weighted-average discount of other real estate owned balance

%44%

December 31, ~~2019~~2020

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted-Average)

State and municipal securities

~~2,858~~2,444

Discounted cash flow

Maturity/Call date

1 month to 15 years

US Muni BQ curve

A- to BBB-

Discount rate

2%1.50% - 5%4%

Weighted-average coupon

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)

~~5,653~~37,250

Collateral based measurements

Discount to reflect current market conditions and ultimate collectability

0% - 10%

Weighted-average discount by loan balance

%6%

Other real estate owned

~~194~~544

Appraisals

Discount to reflect current market conditions

0% - ~~37%~~30%

Weighted-average discount of other real estate owned balance

%26%

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.

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 September 30, ~~2020,~~2021, and December 31, ~~2019.~~2020.

September 30, 2020
Quoted Prices in Active Markets
for Identical
Assets Significant
Other
Observable
Inputs Significant Unobservable
Inputs
Carrying Amount (Level 1) (Level 2) (Level 3)
Assets:
Cash and cash equivalents $ 164,632 $ 164,632 $ 0 $ 0
Interest-bearing deposits 273,936 273,936 0 0
Investment securities available for sale 1,824,160 0 1,821,673 2,487
Investment securities held to maturity 1,109,126 0 1,131,014 21,504
Loans held for sale 3,183 0 3,183 0
Loans 9,117,107 0 0 9,198,466
Federal Home Loan Bank stock 28,736 0 28,736 0
Interest rate swap asset 82,010 0 82,010 0
Interest receivable 52,992 0 52,992 0
Liabilities:
Deposits $ 10,906,153 $ 9,797,840 $ 1,108,656 $ 0
Borrowings:
Federal funds purchased 80,000 0 80,000 0
Securities sold under repurchase agreements 187,732 0 187,732 0
Federal Home Loan Bank advances 399,522 0 413,532 0
Subordinated debentures and other borrowings 118,320 0 108,427 0
Interest rate swap liability 84,254 0 84,254 0
Interest payable 5,038 0 5,038 0


				December 31, 2019									September 30, 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	$	177,201	$	177,201	$	0	$	0	Cash and cash equivalents	$	169,261	$	169,261	$	—	$	—
Interest-bearing deposits	Interest-bearing deposits	118,263		118,263		0		0		Interest-bearing deposits	369,447		369,447		—		—
Investment securities available for sale	Investment securities available for sale	1,790,025		0		1,787,132		2,893		Investment securities available for sale	2,374,578		—		2,368,978		5,600
Investment securities held to maturity	Investment securities held to maturity	806,038		0		799,884		27,682		Investment securities held to maturity	2,070,938		—		2,071,246		15,309
Loans held for sale	Loans held for sale	9,037		0		9,037		0		Loans held for sale	5,990		—		5,990		—
Loans		8,379,026		0		0		8,335,340
Loans, net										Loans, net	8,841,604		—		—		8,900,412
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	27,855		0		27,855		0		Interest rate swap asset	47,630		—		47,630		—
Interest receivable	Interest receivable	48,901		0		48,901		0		Interest receivable	53,079		—		53,079		—
Liabilities:	Liabilities:									Liabilities:
Deposits	Deposits	$	9,839,956	$	8,146,745	$	1,675,202	$	0	Deposits	$	12,348,689	$	11,618,882	$	727,961	$	—
Borrowings:	Borrowings:									Borrowings:
Federal funds purchased		55,000		0		55,000		0

Securities sold under repurchase agreements	Securities sold under repurchase agreements	187,946		0		187,801		0		Securities sold under repurchase agreements	183,589		—		183,584		—
Federal Home Loan Bank advances	Federal Home Loan Bank advances	351,072		0		352,581		0		Federal Home Loan Bank advances	334,149		—		339,704		—
Subordinated debentures and other borrowings	Subordinated debentures and other borrowings	138,685		0		123,571		0		Subordinated debentures and other borrowings	118,558		—		107,595		—
Interest rate swap liability	Interest rate swap liability	29,299		0		29,299		0		Interest rate swap liability	48,847		—		48,847		—
Interest payable	Interest payable	6,754		0		6,754		0		Interest payable	3,736		—		3,736		—


			December 31, 2020
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Amount		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	192,896	$	192,896	$	—	$	—
Interest-bearing deposits	392,305		392,305		—		—
Investment securities available for sale	1,919,119		—		1,916,640		2,479
Investment securities held to maturity	1,227,668		—		1,260,815		19,478
Loans held for sale	3,966		—		3,966		—
Loans, net	9,112,526		—		—		9,191,628
Federal Home Loan Bank stock	28,736		—		28,736		—
Interest rate swap asset	74,335		—		74,335		—
Interest receivable	53,948		—		53,948		—
Liabilities:
Deposits	$	11,361,610	$	10,482,865	$	878,257	$	—
Borrowings:

Securities sold under repurchase agreements	177,102		—		177,097		—
Federal Home Loan Bank advances	389,430		—		399,991		—
Subordinated debentures and other borrowings	118,380		—		108,439		—
Interest rate swap liability	76,353		—		76,353		—
Interest payable	3,287		—		3,287		—

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 109

TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

The collateral pledged for all repurchase agreements that are accounted for as secured borrowings as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 were:

September 30, 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 $ 186,081 $ 0 $ 1,651 $ 0 $ 187,732


	September 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	$	183,589	$	—	$	—	$	—	$	183,589

December 31, 2019
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 $ 178,732 $ 0 $ 7,672 $ 1,542 $ 187,946


	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	$	—	$	1,653	$	—	$	177,102

NOTE 11 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 September 30, ~~2020~~2021 and ~~2019:~~2020:


		Accumulated Other Comprehensive Income (Loss)						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			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
Other comprehensive income (loss) before reclassifications											Other comprehensive income (loss) before reclassifications	(31,379)		17		—		(31,362)
Amounts reclassified from accumulated other comprehensive income											Amounts reclassified from accumulated other comprehensive income	(4,200)		615		—		(3,585)
Period change											Period change	(35,579)		632		—		(34,947)

Balance at September 30, 2021											Balance at September 30, 2021	$	52,409	$	(962)	$	(11,558)	$	39,889

Balance at December 31, 2019	Balance at December 31, 2019	$	38,872	$	(1,141)	$	(9,857)		$	27,874	Balance at December 31, 2019	$	38,872	$	(1,141)	$	(9,857)	$	27,874
Other comprehensive income before reclassifications		45,729		(1,146)		0			44,583
Other comprehensive income (loss) before reclassifications											Other comprehensive income (loss) before reclassifications	45,729		(1,146)		—		44,583
Amounts reclassified from accumulated other comprehensive income	Amounts reclassified from accumulated other comprehensive income	(7,503)		514		0			(6,989)		Amounts reclassified from accumulated other comprehensive income	(7,503)		514		—		(6,989)
Period change	Period change	38,226		(632)		0			37,594		Period change	38,226		(632)		—		37,594

Balance at September 30, 2020	Balance at September 30, 2020	$	77,098	$	(1,773)	$	(9,857)		$	65,468	Balance at September 30, 2020	$	77,098	$	(1,773)	$	(9,857)	$	65,468

Balance at December 31, 2018		$	(6,343)	$	(559)	$	(14,520)		$	(21,422)
Other comprehensive income before reclassifications		50,545		(1,003)		0			49,542
Amounts reclassified from accumulated other comprehensive income		(2,667)		195		0			(2,472)
Period change		47,878		(808)		0			47,070

Balance at September 30, 2019		$	41,535	$	(1,367)	$	(14,520)		$	25,648

The following tables present 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 nine months ended September 30, 2020 and 2019.

Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended September 30,
Details about Accumulated Other Comprehensive Income (Loss) Components 2020 2019 Affected Line Item in the Statements of Income
Unrealized gains (losses) on available for sale securities (1)
Realized securities gains reclassified into income $ 1,817 $ 393 Other income - net realized gains on sales of available for sale securities
Related income tax expense (382) (83) Income tax expense
$ 1,435 $ 310
Unrealized gains (losses) on cash flow hedges (2)
Interest rate contracts $ (294) $ (104) Interest expense - subordinated debentures and term loans
Related income tax benefit 62 22 Income tax expense
$ (232) $ (82)
Total reclassifications for the period, net of tax $ 1,203 $ 228

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(table dollar amounts in thousands, except share data)

(Unaudited)

Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Nine Months Ended September 30,
Details about Accumulated Other Comprehensive Income (Loss) Components 2020 2019 Affected Line Item in the Statements of Income
Unrealized gains (losses) on available for sale securities (1)
Realized securities gains reclassified into income $ 9,497 $ 3,376 Other income - net realized gains on sales of available for sale securities
Related income tax expense (1,994) (709) Income tax expense
$ 7,503 $ 2,667
Unrealized gains (losses) on cash flow hedges (2)
Interest rate contracts $ (651) $ (247) Interest expense - subordinated debentures and term loans
Related income tax benefit 137 52 Income tax expense
$ (514) $ (195)
Total reclassifications for the period, net of tax $ 6,989 $ 2,472

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 nine months ended September 30, 2021 and 2020.


	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Three Months Ended September 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	$	1,756	$	1,817	Other income - net realized gains on sales of available for sale securities
Related income tax expense	(369)		(382)		Income tax expense
	$	1,387	$	1,435

Unrealized gains (losses) on cash flow hedges (2)
Interest rate contracts	$	(266)	$	(294)	Interest expense - subordinated debentures and term loans
Related income tax benefit	56		62		Income tax expense
	$	(210)	$	(232)






Total reclassifications for the period, net of tax	$	1,177	$	1,203




	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) For the Nine Months Ended September 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	$	5,316	$	9,497	Other income - net realized gains on sales of available for sale securities
Related income tax expense	(1,116)		(1,994)		Income tax expense
	$	4,200	$	7,503

Unrealized gains (losses) on cash flow hedges (2)
Interest rate contracts	$	(779)	$	(651)	Interest expense - subordinated debentures and term loans
Related income tax benefit	164		137		Income tax expense
	$	(615)	$	(514)






Total reclassifications for the period, net of tax	$	3,585	$	6,989

(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 8.7. DERIVATIVE FINANCIAL INSTRUMENTS of these Notes to Consolidated Condensed Financial Statements.

NOTE 1211

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 3 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 ~~2009 ESPP and~~ 2019 ESPP ~~provide~~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. ~~The 2009 ESPP expired on June 30, 2019.~~

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 nine months ended September 30, ~~2020~~2021 was $1,217,000 and $3,615,000, respectively, compared to $1,135,000 and $3,568,000, ~~respectively, compared to $1,062,000 and $2,887,000,~~ respectively, for the three and nine months ended September 30, ~~2019.~~2020. 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 ~~0.4~~0.5 percent for the nine months ended September 30, ~~2020,~~2021, 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 September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Stock and ESPP Options	Stock and ESPP Options									Stock and ESPP Options
Pre-tax compensation expense	Pre-tax compensation expense	$	23	$	36	$	76	$	72	Pre-tax compensation expense	$	16	$	23	$	131	$	76
Income tax expense (benefit)	Income tax expense (benefit)	0		0		(29)		(57)		Income tax expense (benefit)	—		—		(92)		(29)
Stock and ESPP option expense, net of income taxes	Stock and ESPP option expense, net of income taxes	$	23	$	36	$	47	$	15	Stock and ESPP option expense, net of income taxes	$	16	$	23	$	39	$	47
Restricted Stock Awards	Restricted Stock Awards									Restricted Stock Awards
Pre-tax compensation expense	Pre-tax compensation expense	$	1,112	$	1,026	$	3,492	$	2,815	Pre-tax compensation expense	$	1,201	$	1,112	$	3,484	$	3,492
Income tax expense (benefit)	Income tax expense (benefit)	149		(226)		(344)		(951)		Income tax expense (benefit)	(136)		149		(619)		(344)
Restricted stock awards expense, net of income taxes	Restricted stock awards expense, net of income taxes	$	1,261	$	800	$	3,148	$	1,864	Restricted stock awards expense, net of income taxes	$	1,065	$	1,261	$	2,865	$	3,148
Total Share-Based Compensation	Total Share-Based Compensation									Total Share-Based Compensation
Pre-tax compensation expense	Pre-tax compensation expense	$	1,135	$	1,062	$	3,568	$	2,887	Pre-tax compensation expense	$	1,217	$	1,135	$	3,615	$	3,568
Income tax expense (benefit)	Income tax expense (benefit)	149		(226)		(373)		(1,008)		Income tax expense (benefit)	(136)		149		(711)		(373)
Total share-based compensation expense, net of income taxes	Total share-based compensation expense, net of income taxes	$	1,284	$	836	$	3,195	$	1,879	Total share-based compensation expense, net of income taxes	$	1,081	$	1,284	$	2,904	$	3,195

As of September 30, ~~2020,~~2021, unrecognized compensation expense related to RSAs was ~~$7,726,000~~$9.3 million and is expected to be recognized over a weighted-average period of ~~1.91~~2.13 years. The Corporation did 0tnot have any unrecognized compensation expense related to stock options as of September 30, ~~2020.~~2021.

Stock option activity under the Corporation's stock option plans as of September 30, ~~2020~~2021 and changes during the nine months ended September 30, ~~2020,~~2021, were as follows:

Number of
Shares Weighted-Average Exercise Price Weighted Average Remaining
Contractual Term
(in Years) Aggregate
Intrinsic
Value
Outstanding at January 1, 2020 59,350 $ 13.51
Exercised (10,050) $ 8.29
Outstanding September 30, 2020 49,300 $ 14.57 2.06 $ 423,463
Vested and Expected to Vest at September 30,2020 49,300 $ 14.57 2.06 $ 423,463
Exercisable at September 30, 2020 49,300 $ 14.57 2.06 $ 423,463


	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 September 30, 2021	28,500	$	17.14	1.75	$	703,905
Vested and Expected to Vest at September 30, 2021	28,500	$	17.14	1.75	$	703,905
Exercisable at September 30, 2021	28,500	$	17.14	1.75	$	703,905

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 nine months of ~~2020~~2021 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 September 30, ~~2020.~~2021. 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 nine months ended September 30, 2021 and 2020 was $559,000 and ~~2019 was~~ $197,000, ~~and $355,000,~~ respectively. Cash receipts of stock options exercised during this same period were ~~$83,000~~$198,000 and ~~$121,000,~~$83,000, respectively.

~~The following table summarizes information on unvested RSAs outstanding as of September 30, 2020:~~

Number of Shares Weighted-Average
Grant Date Fair Value
Unvested RSAs at January 1, 2020 351,048 $ 40.67
Granted 135,292 $ 26.89
Vested (116,520) $ 40.46
Forfeited (525) $ 40.44
Unvested RSAs at September 30, 2020 369,295 $ 36.17

The grant date fair value of ESPP options was estimated to be approximately $23,000 at the beginning of the July 1, 2020 quarterly offering period. The ESPP options vested during the three months ending September 30, 2020, leaving 0 unrecognized compensation expense related to unvested ESPP options at September 30, 2020.

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


	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2021	357,883	$	36.30
Granted	147,406	$	42.37
Vested	(94,260)	$	48.31
Forfeited	(5,050)	$	36.56
Unvested RSAs at September 30, 2021	405,979	$	35.69

The grant date fair value of ESPP options was estimated to be approximately $16,000 at the beginning of the July 1, 2021 quarterly offering period. The ESPP options vested during the three months ending September 30, 2021, leaving no unrecognized compensation expense related to unvested ESPP options at September 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 nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
		2020			2019			2020			2019				2021			2020			2021			2020

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%	$	8,785		$	9,050		$	24,612		$	28,908		Federal statutory income tax at 21%	$	12,984		$	8,785		$	39,082		$	24,612
Tax-exempt interest income	Tax-exempt interest income	(3,403)			(2,637)			(9,624)			(7,307)			Tax-exempt interest income	(4,196)			(3,403)			(11,795)			(9,624)

Share-based compensation	Share-based compensation	382			(11)			376			(402)			Share-based compensation	119			382			47			376
Tax-exempt earnings and gains on life insurance	Tax-exempt earnings and gains on life insurance	(246)			(241)			(810)			(647)			Tax-exempt earnings and gains on life insurance	(503)			(246)			(1,037)			(810)
Tax credits	Tax credits	(55)			(61)			(205)			(202)			Tax credits	(127)			(55)			(277)			(205)
CARES Act - NOL carryback rate differential	CARES Act - NOL carryback rate differential	0			0			(1,178)			0			CARES Act - NOL carryback rate differential	—			—			—			(1,178)
State Income Tax														State Income Tax	678			311			2,252			561
Other	Other	158			237			563			677			Other	107			(153)			36			2
Actual Tax Expense	Actual Tax Expense	$	5,621		$	6,337		$	13,734		$	21,027		Actual Tax Expense	$	9,062		$	5,621		$	28,308		$	13,734

Effective Tax Rate	Effective Tax Rate	13.4		%	14.7		%	11.7		%	15.3		%	Effective Tax Rate	14.7		%	13.4		%	15.2		%	11.7		%

NOTE 1413

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 nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.


		Three Months Ended September 30,											Three Months Ended September 30,
		2020					2019						2021					2020
		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	$	36,210	53,843,508	$	0.67	$	36,757	51,433,227	$	0.71	Net income available to common stockholders	$	52,770	53,766,630	$	0.98	$	36,210	53,843,508	$	0.67
Effect of potentially dilutive stock options and restricted stock awards	Effect of potentially dilutive stock options and restricted stock awards			127,090					136,330			Effect of potentially dilutive stock options and restricted stock awards			193,135					127,090
Diluted net income per share	Diluted net income per share	$	36,210	53,970,598	$	0.67	$	36,757	51,569,557	$	0.71	Diluted net income per share	$	52,770	53,959,765	$	0.98	$	36,210	53,970,598	$	0.67

Nine Months Ended September 30,
2020 2019
Net Income Weighted-Average Shares Per Share
Amount Net Income Weighted-Average Shares Per Share
Amount
Net income available to common stockholders $ 103,465 54,111,848 $ 1.91 $ 116,630 50,085,701 $ 2.33
Effect of potentially dilutive stock options and restricted stock awards 166,034 141,679
Diluted net income per share $ 103,465 54,277,882 $ 1.91 $ 116,630 50,227,380 $ 2.32

~~For the three and nine months ended September 30, 2020 and 2019, there were 0 stock options with an option price greater than the average market price of the common shares.~~

~~NOTE 15~~

~~GENERAL LITIGATION AND REGULATORY EXAMINATIONS~~

The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business. Additionally, the Corporation is subject to periodic examinations by various regulatory agencies. It is the general opinion of management that the disposition or ultimate resolution of such claims, lawsuits, and examinations will not have a material adverse effect on the consolidated financial position, results of operations and cash flow of the Corporation.



	Nine Months Ended September 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	$	157,798	53,883,945	$	2.93	$	103,465	54,111,848	$	1.91
Effect of potentially dilutive stock options and restricted stock awards			209,118					166,034
Diluted net income per share	$	157,798	54,093,063	$	2.92	$	103,465	54,277,882	$	1.91

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 16~~

~~SUBSEQUENT EVENT~~For the three and nine months ended September 30, 2021 and 2020, there were no stock options with an option price greater than the average market price of the common shares.

~~On November 6, 2020, the Bank entered into a definitive agreement with Hoosier Trust Company, an Indiana trust company (“Hoosier”), pursuant to which Hoosier will merge with and into the Bank.~~

NOTE 14

GENERAL LITIGATION AND REGULATORY EXAMINATIONS

The ~~consideration to be paid to the shareholders of Hoosier at closing~~Corporation is ~~$3,225,000 in cash. The merger, which remains~~ subject to ~~required regulatory approvals, is expected to close~~claims and lawsuits that arise primarily in the ~~first quarter~~ordinary course of ~~2021.~~business. Additionally, 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.

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 ~~our~~the Corporation's goals, intentions and expectations;

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

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

•estimates of ~~our~~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:

•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.

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, ~~2019.~~2020. 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 ~~three and~~ nine months ended September 30, ~~2020,~~2021 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, ~~2019.~~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.

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 ~~125~~109 banking locations in ~~thirty~~ Indiana, ~~two~~ Illinois, ~~two~~ Ohio and ~~two Michigan counties.~~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, 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.

~~REQUIREMENTS FOR BANK HOLDING COMPANIES WITH $10 BILLION OR MORE IN ASSETS~~

Various federal banking laws and regulations, including rules adopted by the Federal Reserve pursuant to the requirements of the Dodd-Frank Act, impose heightened requirements on certain large banks and bank holding companies. Most of these rules apply primarily to bank holding companies with at least $50 billion in total consolidated assets, but certain rules also apply to banks and bank holding companies with at least $10 billion in total consolidated assets. As the quarter ended December 31, 2019 was the fourth consecutive quarter that the Bank reported assets exceeding $10 billion, effective as of April 1, 2020, the Bank and its affiliates became subject to the supervisory and enforcement authority of the Consumer Financial Protection Bureau (the “CFPB”). The CFPB, an independent federal agency created under the Dodd-Frank Act, was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, primarily with authority over banks and their affiliates with assets of more than $10 billion. Prior to April 1, 2020, the Bank had been subject to the primary federal regulatory oversight and supervision of the FDIC. The Bank continues to be subject to the oversight, supervision and examination of the Indiana DFI.COVID-19 UPDATE

The ~~Bank’s deposit accounts~~COVID-19 pandemic continued to impact the Corporation’s operations during the three and nine months ended September 30, 2021. With certain states and localities continuing to experience significant numbers of COVID-19 cases as variant strains of the virus 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 ~~insured up~~or may be unable to meet their contractual payment obligations due to the ~~applicable limits~~effects of COVID-19 and by originating loans under the ~~Deposit Insurance Fund (the “DIF”~~Paycheck Protection Program (“PPP”) of the FDIC. As such, the Bank is subject to deposit insurance premiums and assessments to maintain the DIF. Under the FDIC's risk-based assessment system, insured institutions with at least $10 billion in assets, such as the Bank, are assessed on the basis of a scoring system that measures an institution's financial performance, its ability to withstand stress, and the relative magnitude of potential losses to the FDIC in the event of the institution's failure. The Bank’s FDIC assessment has increased as a result of being subject to this new method for calculating its deposit insurance premiums..

As provided by the Durbin Amendment to the Dodd-Frank Act, financial institutions with more than $10 billion in assets become subject to capped interchange fees in July of the year following the year-end assessment in which the $10 billion threshold was met. As a result, the Bank was subject to these interchange fee restrictions as of July 1, 2020.

~~COVID-19, THE CARES ACT AND RELATED REGULATORY ACTIONS~~

~~Impact of COVID-19~~

On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 ("COVID-19") constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. As a result of the shelter in place mandates in effect early in the second quarter of 2020, commercial activity throughout our geographic footprint, as well as nationally, decreased significantly. Most states have reopened, albeit under limited capacities and under other social distancing restrictions; however, commercial activity has not returned to the levels existing prior to the outbreak of 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 the severity of 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, including social distancing practices, even after formal restrictions have been lifted, are also unknown. As a result of COVID-19 and the actions taken to contain it or reduce its impact, we may 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 the remainder of 2020, especially if positive cases continue to increase and further economic shutdowns are mandated. 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.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

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

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position. Additionally, in response to the COVID-19 pandemic, we have taken a number of actions to offer various forms of support to our customers, employees and communities that have experienced impacts from this development. The Corporation contributed approximately $1 million to non-profit organizations in our communities on the front lines of fighting the COVID-19 pandemic. In response to social distancing protocols, we have modified office locations by installing protective barriers, required the use of personal protective equipment and incurred additional cleaning and janitorial expense to disinfect banking centers and office locations. Additionally, we have enhanced mobile and online services, such as increased mobile deposit limits, to allow more transactions to be completed outside the banking centers. We have also provided customer alerts focused on COVID-19 scams and fraud education and prevention.

~~Interest Rates~~

On March 3, 2020, the Federal Open Market Committee ("FOMC") reduced the target range for the federal funds rate by 50 basis points to 1.00 percent to 1.25 percent. This rate was further reduced to a target range of 0 percent to 0.25 percent on March 16, 2020. Additionally, there was a decline in one-month LIBOR from 99 basis points as of March 31, 2020 to 15 basis points on September 30, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak are likely to negatively impact the Corporation’s net interest income.

The CARES Act and the Paycheck Protection Program

~~On March 27, 2020,~~As previously reported, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law ~~providing an approximately $2 trillion stimulus package~~in March 2020, establishing the PPP, a lending program administered by the Small Business Administration (“SBA”) that ~~includes direct payments~~was intended 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~~incentivize small businesses, eligible nonprofits and certain others ~~the CARES Act established a Paycheck Protection Program (“PPP”), which is administered~~to retain their employees by providing them with loans that are fully guaranteed by the ~~Small Business Administration (“SBA”). On April 24, 2020,~~U.S. government and subject to forgiveness if program guidelines are met. The ability of borrowers to apply for loans under the ~~Paycheck Protection Program and Health Care Enhancement Act was enacted. Among other things, this legislation amends the initial CARES Act program by raising the appropriation level for~~ PPP ~~loans from $349 billion to $670 billion. The PPP was further modified~~ended on ~~June 5, 2020~~May 31, 2021, with the ~~adoption of the Paycheck Protection Program Flexibility Act (the Flexibility Act), which extended the maturity date for PPP loans from two years~~SBA having until June 30, 2021 to five years for loans disbursed on or after the date of enactment of the Flexibility Act. For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of theprocess loan ~~to five years.~~ applications.

The Bank ~~has~~ actively participated in assisting its customers with ~~applications for resources through~~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 September 30, 2021, the Bank had approximately 1,600 PPP loans representing $198.1 million, which is net of $5.6 million of deferred processing fee income and costs. The weighted-average deferred processing fee on remaining PPP loans was approximately 4.27 percent and ~~primarily have a two-year term.~~is recognized over the term of the loan. The Bank anticipates that the majority of ~~these~~its remaining PPP loans will ~~ultimately~~also be forgiven ~~in whole or in part,~~ by the SBA in accordance with the terms of the program. Under the terms of the PPP, the loans are fully guaranteed by the SBA. On October 8, 2020, the SBA announced a streamlined forgiveness process for PPP loans of $50,000 or less. As of September 30, 2020, the Bank had over 5,200 PPP loans representing $901.4 million, which is net of deferred processing fee income and costs of $21.5 million. The weighted-average deferred processing fee on PPP loans was approximately 3.26 percent and is recognized over the term of the loan. 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 nine months ended September 30, ~~2020,~~2021, the Corporation recognized interest income on PPP loans of ~~$3.8~~$796,000 and $4.0 million, respectively, compared to $2.3 million and ~~$6.7~~$4.1 million, respectively, ~~from~~for the three and nine months ended September 30, 2020. Additionally, PPP loan related deferred processing fee income of $7.4 million and $23.2 million was recorded during the three and nine months ended September 30, 2021, respectively, compared to $3.8 million and $6.7 for the three and nine months ended September 30, 2020, respectively. PPP deferred processing fee income is recorded as a yield adjustment. As of November 2, 2020, approximately 200 loans totaling $129.3 million have been submitted to the SBA for forgiveness and 60 loans totaling $35.1 million have been approved by the SBA for full forgiveness.

~~Main Street Business Lending Program~~

On April 9, 2020, the Federal Reserve announced its proposed Main Street emergency lending initiative as an additional measure to provide much-needed financial support to small and mid-sized businesses adversely impacted by the COVID-19 pandemic. The Main Street programs are intended to provide credit flows to financial institutions so that they can provide loans to eligible small and mid-sized businesses. The funds available through the Main Street programs amount to $600 billion. Under this initiative, which was modified and supplemented by the Federal Reserve on April 30, 2020, three loan facilities have been established for "for profit" entities: (i) the Main Street New Loan Facility (the “MSNLF), (ii) the Main Street Priority Loan Facility (the “MSPLF”); and (iii) the Main Street Expanded Loan Facility (the “MSELF”), each of which was authorized by the Federal Reserve under Section 13(3) of the Federal Reserve Act. All three facilities use the same eligible lender and eligible borrower criteria, and have many of the same features, including the same maturity, interest rate, deferral of principal and interest for one year, and ability of the borrower to prepay without penalty. As required by the CARES Act, Main Street loans are full-recourse to the borrower and are not forgivable. The loan types differ in amounts and other terms, including in how they interact with the eligible borrower’s existing outstanding debt. The proposed minimum loan amounts under the MSNLF and the MSPLF were initially set at $250,000, but were lowered to $100,000 by the Federal Reserve effective October 30, 2020. The minimum loan amount under the MSELF has been set at $10 million. The maximum loan amount under all three programs is dependent upon the borrower's financial position. The Bank may participate in some or all of these programs.

~~Paycheck Protection Program Liquidity Facility~~

To provide liquidity to small business lenders and the broader credit markets, to help stabilize the financial system, and to provide economic relief to small businesses nationwide, the Federal Reserve authorized each of the Federal Reserve Banks to participate in the Paycheck Protection Program Liquidity Facility (the “PPPL Facility”), pursuant to the Federal Reserve Act. Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions such as the Bank to fund loans guaranteed by the SBA under the PPP. The Bank has until December 31, 2020 to access funds under the PPPL Facility, unless further extended by the Federal Reserve and the Department of the Treasury. At September 30, 2020, the Corporation did not have an outstanding balance with the PPPL Facility.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

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

Loan Modifications and Troubled Debt Restructures

~~On March 22, 2020, a statement was issued by~~As previously reported, 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 encouragesissued 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 further ~~provides~~provided that a qualified loan modification iswould be 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~~2020. With 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 interactionenactment of the ~~original guidance with Section 4013~~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 ~~as well as setting forth~~was amended to, among other things, extend the ~~banking regulators’ views on consumer protection considerations.~~expiration date for the troubled debt restructure exemption until, effectively, January 1, 2022. In accordance with ~~such~~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. As of September 30, ~~2020, $176~~2021, $15.4 million in loan balances remained in deferral. Details of the modifications are included in the "LOAN ~~QUALITY/PROVISION FOR LOAN LOSSES"~~QUALITY" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

~~Optional Delay of CECL Implementation~~

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 ~~as of~~in March ~~27,~~ 2020), and consistent with guidance from the SEC and FASB, the Corporation ~~has~~ elected to delay implementation of ~~Accounting Standards Update (“ASU”)~~ASU No. 2016-13, ~~Financial Instruments - Credit Losses (Topic 326)~~,the optional deferral of which ~~would have become effective for~~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 aselected to delay adoption of CECL to January 1, ~~2020.~~2021. As discussed in NOTE 1. GENERAL of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q, ASU 2016-13, provides for the replacement of the incurred loss model for recording the allowance for loan losses with CECL. However, as a result of the Corporation’s election, its ~~first, second and third quarter~~ 2020 financial statements have been prepared under the ~~existing~~ incurred loss ~~model. As~~model and its 2021 financial statements have been prepared under the ~~temporary relief applicable to the Corporation’s compliance with~~ CECL ~~will end no later than December 31, 2020, the Corporation will implement CECL during the fourth quarter of 2020.~~model.

Regulatory Capital

~~CECL Model~~. As part of ~~the~~a March 27, 2020 joint statement of federal banking regulators, ~~discussed above,~~ an interim final rule that ~~allows~~allowed banking organizations to mitigate the effects of the CECL accounting standard on their regulatory capital was ~~also~~ announced. Banking organizations ~~that are required under GAAP to adopt CECL during 2020 can~~could elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay iswas 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 ~~has~~ elected to delay implementation of ASU No. 2016-13 until January 1, 2021 and, as ~~described above, it expects to take advantage of~~a result, will recognize the ~~additional time permitted by this interim final rule, which will largely delay the~~implementation effects of CECL on its regulatory capital ~~through December 31, 2021.~~over a three-year transition period. Beginning on January 1, ~~2022,~~2021, the Corporation ~~will be required to phase~~phased in 25 percent of the ~~previously~~ deferred ~~estimated~~ capital impact of CECL, with an additional 25 percent to be phased in at the beginning of ~~each subsequent year until~~the following three years, resulting in the impact being fully phased in byon January 1, 2025. Under the interim final rule, the amount of adjustments to regulatory capital that can be deferred until the phase-in period includes both the initial impact of our adoption of CECL, and 25 percent of subsequent changes in our allowance for credit losses during each quarter following implementation of CECL until December 31, 2021.2024.

~~PPP Loans and PPPL Facility.~~ On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the PPP to neutralize the regulatory capital effects of participating in the program. The interim final rule, which became effective on April 13, 2020, clarifies 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 September 30, 2020, risk-weighted assets included $901.4 million 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 September 30, 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.

RESULTS OF OPERATIONS

~~Executive Summary~~

The Corporation reported third quarter ~~2020~~2021 net income of ~~$36.2~~$52.8 million, compared to ~~$36.8~~$36.2 million during the third quarter of ~~2019.~~2020. Diluted earnings per share for the third quarter 2021 totaled ~~$0.67~~$0.98 per share, compared to ~~$0.71~~$0.67 per diluted share during the same period in ~~2019.~~2020. Year-to-date net income totaled ~~$103.5~~$157.8 million, compared to ~~$116.6~~$103.5 million during the same period ~~of 2019.~~in 2020. Diluted earnings per share for the nine months ended September 30, ~~2020~~2021 was ~~$1.91~~$2.92 per share, compared to ~~$2.32~~$1.91 per share during the same period in ~~2019.~~

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

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

2020.

As of September 30, ~~2020,~~2021, total assets equaled ~~$13.7~~$15.1 billion, an increase of ~~$1.3 billion,~~$993.5 million, or ~~10.3~~7.1 percent, from December 31, ~~2019. The Corporation's total loan portfolio~~2020.

Total investment securities increased ~~$778.7 million,~~$1.3 billion, or ~~9.2~~41.3 percent, from December 31, 2019. At September 30, 2020, the Corporation's PPP loans totaled $901.4 million, net of deferred processing fees and costs of $21.5 million, which were primarily included in the commercial and industrial loan class.2020. The largest loan segments that experienced a decrease were construction real estate and home equity loans. 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/PROVISION FOR LOAN LOSSES" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

~~Interest-bearing deposits increased $155.7 million from December 31, 2019 due to~~Corporation purchased investment securities by utilizing excess liquidity from deposit growth, which was held in interest-bearing deposits and ~~an increase~~cash and cash equivalents, in ~~wholesale funding. Additionally, total investment securities increased $337.2 million from December 31, 2019 as a portion of the excess~~addition to liquidity from deposit growth and additional wholesale funding was used to invest in the bond portfolio. Also contributing to the increase in investment securities was a $48.4 million increase in net unrealized gains on the available for sale portfolio. The net increase in unrealized gains from December 31, 2019 to September 30, 2020 is primarily due to interest rate declines in 2020 as the longer term points on the yield curve have declined since year-end, which increases the fair valueSBA forgiveness of ~~securities in the portfolio.~~PPP loans. 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 total loan portfolio decreased $199.6 million from December 31, 2020. As of September 30, 2021, PPP loans, which are included in the commercial and industrial loan class, totaled $198.1 million, a decrease of $469.0 million from the December 31, 2020 balance of $667.1 million, and when coupled with organic commercial and industrial loan growth of $265.9 million, the net decrease in the commercial and industrial loan class was $203.1 million. Other loan classes that experienced the largest decreases from December 31, 2020 were residential real estate, 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, construction and home equity. 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.

The Corporation’s allowance for ~~loan~~credit losses - loans totaled ~~$126.7~~$200.0 million as of September 30, ~~2020~~2021 and equaled ~~1.37~~2.21 percent of total loans. The ~~Corporation's~~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. 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. The impact of the adoption was an increase to the Allowance for Credit Losses - Loans of $74.1 million. Additional details of the Allowance methodology 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 ~~and net charge-offs for~~during the three and nine months ended September 30, ~~2020 were $12.5 million and $6.9 million, respectively,~~2021, compared to provision expense of $12.5 million and ~~net charge-offs of $600,000 and $1.3~~$54.2 million, respectively, during the same ~~period~~periods of ~~2019. For~~the prior year. The provision expense taken during the three ~~months ended September 30, 2020, there was one individual charge-off greater than $500,000 that totaled $6,665,000~~ and ~~for the same period in 2019, there was one individual charge-off greater than $500,000 that totaled $1,318,000.~~

~~For the~~ nine months ended September 30, 2020 reflected the Corporation's provision expense and net charge-offs were $54.2 million and $7.7 million, respectively, compared to provision expense and net charge-offs of $2.3 million and $2.3 million during the same period in 2019. For the nine months ended September 30, 2020, there were two charge-offs greater than $500,000 for a total of $6,930,000 and for the same period in 2019, there were two individual charge-offs greater than $500,000 that totaled $3,273,000. The increase in the allowance for loan losses and provision expense primarily reflects our view of increased credit risk related to the COVID-19 pandemic.

Net recoveries in the third quarter of 2021 were $197,000, compared to net charge-offs of $6.9 million during the same period of 2020. Net charge-offs in the nine months ended September 30, 2021 were $4.7 million, compared to net charge-offs of $7.7 million during the same period of 2020. Non-accrual loans totaled ~~$56.7~~$51.5 million, ~~an increase~~a decrease of ~~$40.8~~$10.0 million from December 31, ~~2019. An increase~~2020, resulting in a coverage ratio of $36.0 million was attributed to the commercial and farmland segment, specifically non-owner occupied commercial real estate, as three relationships, primarily in the senior living and self storage sector, were moved to non-accrual during the second and third quarters of 2020.388.3 percent. Additional details of the ~~Allowance for Loan Losses and non-performing loans~~Corporation's credit quality are discussed within the “LOAN ~~QUALITY/~~QUALITY AND PROVISION FOR ~~LOAN LOSSES”~~CREDIT LOSSES ON LOANS” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation's ~~other assets~~net tax asset, deferred and receivable increased ~~$55.7~~$27.2 million from December 31, ~~2019.~~2020. As 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 in a $9.5 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.

In 2020, the Corporation 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.

The Corporation's other assets decreased $8.1 million from December 31, 2020. The Corporation's derivative asset (recorded in other assets) and derivative liability (recorded in other liabilities) related to interest rate contracts ~~increased $54.2~~decreased $26.7 million and ~~$55.0~~$27.5 million, respectively, from December 31, ~~2019.~~2020. The ~~increases~~decreases in valuations are ~~primarily~~ due to ~~a $176.4 million increase in the related outstanding notional balance. Additionally,~~higher yield curve rates ~~used for valuation purposes were lower at each~~across the entire term point ~~as of September 30, 2020 compared to December 31, 2019. This was primarily~~spectrum. The higher interest rates are the result of ~~investors seeking the safety of U.S. Treasuries, coupled with Federal Reserve purchases of U.S. Treasuries,~~more directional certainty as ~~containment efforts related~~ to the ~~COVID-19 outbreak began to significantly reduce economic activity.~~outcome of COVID, higher inflation expectations, current increases in short-term rate trajectories and increases in term premiums.

As of September 30, ~~2020,~~2021, total deposits equaled ~~$10.9~~$12.3 billion, an increase of ~~$1.1 billion~~$987.1 million from December 31, ~~2019.~~2020. The Corporation experienced increases from December 31, ~~2019~~2020 in demand and savings accounts of ~~$1.0 billion~~$496.2 million and ~~$622.1~~$639.8 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 ~~$468.1~~$118.0 million and ~~$116.8~~$31.0 million, respectively, from December 31, ~~2019.~~2020. 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 ~~increased $52.9~~decreased $48.6 million as of September 30, ~~2020,~~2021, compared to December 31, ~~2019.~~2020. Federal Home Loan Bank advances ~~increased $48.5~~decreased $55.3 million compared to December 31, 2019. The Corporation took advantage of the low interest rate environment to lock in longer term FHLB advances at low rates. Additionally, the Corporation's Federal Funds purchased increased $25 million from December 31, 2019. Offsetting this increase,2020 as the Corporation ~~redeemed $20.0 million of subordinated debentures. Of the redemptions, $10.0 million was for a partial redemption of debentures held~~utilized excess liquidity from deposit growth to pay off maturing advances. Additionally, securities sold under repurchase agreements increased by First Merchants Capital Trust II (“FMC Trust”) and the remaining $10.0 million was for a complete redemption of debentures held by Grabill Capital Trust I ("Grabill Trust"). Both FMC Trust and Grabill Trust used the proceeds from the redemptions to concurrently redeem like amounts of their capital (preferred) securities, each with an aggregate principal redemption price of $10.0$6.5 million. The common securities of FMC Trust are, and the common securities of Grabill Trust were, held by the Corporation (recorded in other assets). Subsequent to the redemption of its capital securities, Grabill Trust was dissolved.

The Corporation's other liabilities as of September 30, ~~2020~~2021 increased ~~$115.5~~$62.2 million compared to December 31, ~~2019.~~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. The Corporation also accrued ~~$66.2~~$74.0 million of trade date accounting related to investment securities purchases as of September 30, ~~2020,~~2021, of which, ~~there~~the accrual was ~~no accrual at~~$6.2 million as of December 31, ~~2019.~~2020. Additionally, as noted above, the derivative hedge liability ~~increased $55.0~~decreased $27.5 million from December 31, ~~2019.~~2020.

The Corporation ~~was able~~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.

4645

Table of Contents

PART I: FINANCIAL INFORMATION

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

NET INTEREST INCOME

Net interest income is the most significant component of our earnings, comprising 7779 percent of revenues for the nine months ended September 30, ~~2020.~~2021. 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 ~~costs~~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.

~~For the~~Net interest margin, on a tax equivalent basis, increased 5 basis points to 3.20 percent for three ~~and nine~~ months ended September 30, ~~2020,~~2021 compared to 3.15 percent for the ~~increase~~same period in 2020. Average earning assets ~~from~~for the three months ended September 30, 2021 increased $1.4 billion compared to the same ~~periods~~period in ~~2019~~2020, and was primarily attributable to ~~the September 2019 MBT acquisition,~~ an increase in ~~loans as a result~~investment securities of ~~$901.4 million~~$1.3 billion. Since the beginning of the PPP in April 2020, the Bank has originated over $1.2 billion of PPP loans, ~~and~~which averaged $315.2 million in the third quarter of 2021. The increase in the investment securities portfolio was the result of excess liquidity generated from growth in deposits and ~~wholesale funding that was~~SBA forgiveness of PPP loans being used to invest in the ~~securities~~bond portfolio. Details regarding the MBT acquisition and changes in earning assets are discussed in NOTE 2. ACQUISITION of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q and the "EARNING ASSETS" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

In the third quarter of ~~2020,~~2021, FTE asset yields decreased ~~119~~12 basis points ~~FTE~~ compared to the same period in ~~2019.~~2020. This decrease was primarily a result of the decline in the investment portfolio yield of 23 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 $7.4 million during the third quarter of 2021 compared to $3.8 million for the same period in 2020, which is included in interest income.

The Corporation recognized fair value accretion income on purchased loans, which is included in interest income, of $1.5 million, which accounted for 4 basis points of net interest margin in the third quarter of 2021. Comparatively, the Corporation recognized $3.3 million of accretion income for the third quarter of 2020, or 10 basis points of net interest margin.

Interest costs decreased 22 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 as wholesale funding rates declined. Interest-bearing deposits and borrowing costs for the three months ended September 30, 2021 were 0.23 percent and 2.02 percent, respectively, compared to 0.45 percent and 1.92 percent, respectively, during the same period in 2020.

Net interest margin, on a tax equivalent basis, decreased 4 basis points to 3.22 percent for the nine months ended September 30, 2021 compared to 3.26 percent for the same period in 2020. Average earning assets for the nine months ended September 30, 2021 increased $1.5 billion compared to the same period in 2020, and was primarily attributable to an increase in investment securities and loans of $1.0 billion and $214.7 million, respectively. PPP loans averaged $529.6 million in 2021. The increase in the investment securities portfolio was the result of excess liquidity generated from growth in deposits and SBA forgiveness of PPP loans being used to invest in the bond portfolio.

In the nine months ended September 30, 2021, FTE asset yields decreased 39 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. ~~Moreover,~~Additionally, one-month LIBOR also saw a significant decline from January 1, 2020 of 1.73 percent to September 30, 2021 of .08 percent. The yield of the ~~2020 addition of $901.4 million of PPP loans negatively impacted margin by 7~~investment portfolio decreased 27 basis points ~~during the quarter. Interest costs decreased 87 basis points, contributing to a 32 basis point FTE decrease in net interest spread as~~ compared to the same period in 2019. Interest costs have decreased as management aggressively moved deposit rates down, coupled with a decline in wholesale funding rates. Interest-bearing deposit and borrowing costs decreased from 1.332020. The PPP loans originated were recorded at an interest rate of only 1 percent, ~~and 2.59 percent, respectively,~~but the Corporation also recognized fee income of $23.2 million during the ~~three~~nine months ended September 30, ~~2019,~~2021, compared to ~~0.45 percent and 1.92 percent, respectively, during~~$6.7 million for the same period in ~~2020. Net~~2020, which is included in interest ~~margin, on a tax equivalent basis, decreased to 3.15 percent for the third quarter of 2020 compared to 3.62 percent during the same period in 2019.~~income.

The Corporation recognized fair value accretion income on purchased loans, which is included in interest income, of ~~$3.3~~$5.8 million, which accounted for 105 basis points of net interest margin in the ~~third quarter of 2020.~~nine months ended September 30, 2021. Comparatively, the Corporation recognized ~~$2.5~~$10.5 million of accretion income for the ~~third quarter of 2019,~~nine months ended September 30, 2020, or 1012 basis points of net interest margin.

In the nine months ended September 30, 2020, asset yields decreased 96 basis points FTE compared to the same period in 2019. 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 202 basis points as of September 30, 2019 to 15 basis points on September 30, 2020. Interest costs decreased 6243 basis points, ~~contributing to~~which mitigated the decrease in asset yields and resulted in a 344 basis point FTE ~~decrease~~increase in net interest spread as compared to the same period in ~~2019.~~2020. Interest costs have decreased as management aggressively moved deposit rates down ~~coupled with a decline in~~as wholesale funding ~~rates.~~rates declined. Interest-bearing ~~deposit~~deposits and borrowing costs ~~decreased from 1.29 percent and 2.72 percent, respectively, during~~for the nine months ended September 30, ~~2019~~2021 were 0.25 percent and 1.96 percent, respectively, compared to 0.69 percent and 1.88 percent, respectively, during the same period in 2020. ~~Net~~

Table of Contents

PART I: FINANCIAL INFORMATION

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

The following tables present the Corporation’s average balance sheet, interest ~~margin, on~~income/interest expense, and the average rate as a ~~tax equivalent basis, decreased to 3.26~~ percent of average earning assets/liabilities for the three and nine months ended September 30, ~~2020 compared to 3.72 percent during the same period in 2019.~~2021, and 2020.

The Corporation recognized fair value accretion income on purchased loans, which is included in interest income, of $10.5 million, which accounted for 12 basis points of net interest margin for the nine months ended September 30, 2020. Comparatively, the Corporation recognized $7.0 million of accretion income for the nine months ended September 30, 2019, or 10 basis points of net interest margin.


(Dollars in Thousands)	Three Months Ended
	September 30, 2021						September 30, 2020
	Average Balance		Interest Income / Expense		Average Rate		Average Balance		Interest Income / Expense		Average Rate
Assets:

Interest-bearing deposits	$	539,377	$	218	0.16	%	$	301,529	$	90	0.12	%
Federal Home Loan Bank stock	28,736		168		2.34		28,736		248		3.45
Investment Securities: (1)
Taxable	1,843,026		7,788		1.69		1,258,690		5,399		1.72
Tax-Exempt (2)	2,240,409		18,309		3.27		1,499,463		13,837		3.69
Total Investment Securities	4,083,435		26,097		2.56		2,758,153		19,236		2.79
Loans held for sale	17,426		158		3.63		24,705		257		4.16
Loans: (3)
Commercial	6,745,303		70,442		4.18		6,965,837		66,826		3.84
Real Estate Mortgage	886,469		8,142		3.67		887,661		9,996		4.50
Installment	690,093		6,576		3.81		693,363		7,083		4.09
Tax-Exempt (2)	750,357		7,078		3.77		681,273		6,829		4.01
Total Loans	9,089,648		92,396		4.07		9,252,839		90,991		3.93
Total Earning Assets	13,741,196		118,879		3.46	%	12,341,257		110,565		3.58	%
Total Non-Earning Assets	1,264,891						1,319,561
Total Assets	$	15,006,087					$	13,660,818
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits	$	4,799,624	$	3,606	0.30	%	$	4,098,017	$	3,890	0.38	%
Money market deposits	2,459,205		764		0.12		1,813,392		1,167		0.26
Savings deposits	1,788,281		486		0.11		1,574,700		583		0.15
Certificates and other time deposits	758,565		851		0.45		1,267,152		4,136		1.31
Total Interest-bearing Deposits	9,805,675		5,707		0.23		8,753,261		9,776		0.45
Borrowings	619,768		3,126		2.02		733,757		3,528		1.92
Total Interest-bearing Liabilities	10,425,443		8,833		0.34		9,487,018		13,304		0.56
Noninterest-bearing deposits	2,544,661						2,191,460
Other liabilities	146,946						151,040
Total Liabilities	13,117,050						11,829,518
Stockholders' Equity	1,889,037						1,831,300
Total Liabilities and Stockholders' Equity	$	15,006,087	8,833				$	13,660,818	13,304
Net Interest Income (FTE)			$	110,046					$	97,261
Net Interest Spread (FTE) (4)					3.12	%					3.02	%

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets					3.46	%					3.58	%
Interest Expense / Average Earning Assets					0.26	%					0.43	%
Net Interest Margin (FTE) (5)					3.20	%					3.15	%

(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 $5,331 and $4,340 for the three months ended September 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

The following tables presents 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 September 30, 2020, and 2019.



(Dollars in Thousands)	Nine Months Ended
	September 30, 2021						September 30, 2020
	Average Balance		Interest Income / Expense		Average Rate		Average Balance		Interest Income / Expense		Average Rate
Assets:

Interest-bearing deposits	$	509,153	$	461	0.12	%	$	280,038	$	799	0.38	%
Federal Home Loan Bank stock	28,736		434		2.01		28,736		828		3.84
Investment Securities: (1)
Taxable	1,689,697		21,923		1.73		1,302,943		19,177		1.96
Tax-Exempt (2)	1,989,397		50,532		3.39		1,342,477		38,335		3.81
Total Investment Securities	3,679,094		72,455		2.63		2,645,420		57,512		2.90
Loans held for sale	19,360		551		3.79		17,175		581		4.51
Loans: (3)
Commercial	6,857,968		210,502		4.09		6,698,042		213,241		4.24
Real Estate Mortgage	924,652		26,917		3.88		882,911		30,520		4.61
Installment	674,696		19,456		3.84		725,596		23,784		4.37
Tax-Exempt (2)	725,651		20,854		3.83		663,921		20,341		4.09
Total Loans	9,202,327		278,280		4.03		8,987,645		288,467		4.28
Total Earning Assets	13,419,310		351,630		3.49	%	11,941,839		347,606		3.88	%
Total Non-Earning Assets	1,253,286						1,355,950
Total Assets	$	14,672,596					$	13,297,789
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits	$	4,721,267	$	10,875	0.31	%	$	3,880,489	$	16,351	0.56	%
Money market deposits	2,295,589		2,395		0.14		1,674,622		6,647		0.53
Savings deposits	1,730,149		1,424		0.11		1,507,269		3,007		0.27
Certificates and other time deposits	809,721		3,036		0.50		1,476,499		18,226		1.65
Total Interest-bearing Deposits	9,556,726		17,730		0.25		8,538,879		44,231		0.69
Borrowings	646,326		9,502		1.96		796,836		11,237		1.88
Total Interest-bearing Liabilities	10,203,052		27,232		0.36		9,335,715		55,468		0.79
Noninterest-bearing deposits	2,460,609						2,002,898
Other liabilities	150,255						144,705
Total Liabilities	12,813,916						11,483,318
Stockholders' Equity	1,858,680						1,814,471
Total Liabilities and Stockholders' Equity	$	14,672,596	27,232				$	13,297,789	55,468
Net Interest Income (FTE)			$	324,398					$	292,138
Net Interest Spread (FTE) (4)					3.13	%					3.09	%

Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets					3.49	%					3.88	%
Interest Expense / Average Earning Assets					0.27	%					0.62	%
Net Interest Margin (FTE) (5)					3.22	%					3.26	%

(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 $14,991 and $12,322 for the nine months ended September 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.

(Dollars in Thousands) Three Months Ended
September 30, 2020 September 30, 2019
Average Balance Interest
Income /
Expense Average
Rate Average Balance Interest
Income /
Expense Average
Rate
Assets:
Interest-bearing deposits $ 301,529 $ 90 0.12 % $ 262,082 $ 1,363 2.06 %
Federal Home Loan Bank stock 28,736 248 3.45 24,633 355 5.76
Investment Securities: (1)
Taxable 1,258,690 5,399 1.72 1,104,612 6,729 2.44
Tax-Exempt (2)
1,499,463 13,837 3.69 1,027,528 10,551 4.11
Total Investment Securities 2,758,153 19,236 2.79 2,132,140 17,280 3.24
Loans held for sale 24,705 257 4.16 21,913 274 5.00
Loans: (3)
Commercial 6,965,837 66,826 3.84 5,674,956 77,370 5.45
Real Estate Mortgage 887,661 9,996 4.50 822,874 9,518 4.63
Installment 693,363 7,083 4.09 715,428 9,688 5.42
Tax-Exempt (2)
681,273 6,829 4.01 538,157 5,696 4.23
Total Loans 9,252,839 90,991 3.93 7,773,328 102,546 5.28
Total Earning Assets 12,341,257 110,565 3.58 % 10,192,183 121,544 4.77 %
Net unrealized gain (loss) on securities available for sale 70,277 30,353
Allowance for loan losses (125,150) (80,918)
Cash and cash equivalents 169,539 143,266
Premises and equipment 113,216 99,021
Other assets 1,091,679 893,837
Total Assets $ 13,660,818 $ 11,277,742
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits $ 4,098,017 $ 3,890 0.38 % $ 3,134,675 $ 9,285 1.18 %
Money market deposits 1,813,392 1,167 0.26 1,307,647 3,766 1.14
Savings deposits 1,574,700 583 0.15 1,244,859 2,523 0.80
Certificates and other time deposits 1,267,152 4,136 1.31 1,736,759 9,256 2.11
Total Interest-bearing Deposits 8,753,261 9,776 0.45 7,423,940 24,830 1.33
Borrowings 733,757 3,528 1.92 660,107 4,370 2.59
Total Interest-bearing Liabilities 9,487,018 13,304 0.56 8,084,047 29,200 1.43
Noninterest-bearing deposits 2,191,460 1,498,282
Other liabilities 151,040 98,818
Total Liabilities 11,829,518 9,681,147
Stockholders' Equity 1,831,300 1,596,595
Total Liabilities and Stockholders' Equity $ 13,660,818 13,304 $ 11,277,742 29,200
Net Interest Income (FTE) $ 97,261 $ 92,344
Net Interest Spread (FTE) (4)
3.02 % 3.34 %
Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets 3.58 % 4.77 %
Interest Expense / Average Earning Assets 0.43 % 1.15 %
Net Interest Margin (FTE) (5)
3.15 % 3.62 %
(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 2020 and 2019. These totals equal $4,340 and $3,412 for the three months ended September 30, 2020 and 2019, 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

(Dollars in Thousands) Nine Months Ended
September 30, 2020 September 30, 2019
Average Balance Interest
Income /
Expense Average
Rate Average Balance Interest
Income /
Expense Average
Rate
Assets:
Interest-bearing deposits $ 280,038 $ 799 0.38 % $ 184,640 $ 3,022 2.18 %
Federal Home Loan Bank stock 28,736 828 3.84 24,603 1,028 5.57
Investment Securities: (1)

Taxable 1,302,943 19,177 1.96 1,021,102 19,822 2.59
Tax-Exempt (2)
1,342,477 38,335 3.81 923,030 28,684 4.14
Total Investment Securities 2,645,420 57,512 2.90 1,944,132 48,506 3.33
Loans held for sale 17,175 581 4.51 13,618 512 5.01
Loans: (3)

Commercial 6,698,042 213,241 4.24 5,469,377 224,766 5.48
Real Estate Mortgage 882,911 30,520 4.61 778,778 26,526 4.54
Installment 725,596 23,784 4.37 686,055 28,351 5.51
Tax-Exempt (2)
663,921 20,341 4.09 517,082 16,325 4.21
Total Loans 8,987,645 288,467 4.28 7,464,910 296,480 5.30
Total Earning Assets 11,941,839 347,606 3.88 % 9,618,285 349,036 4.84 %
Net unrealized gain on securities available for sale 58,623 12,856
Allowance for loan losses (104,465) (81,172)
Cash and cash equivalents 210,778 130,587
Premises and equipment 113,517 94,628
Other assets 1,077,497 848,480
Total Assets $ 13,297,789 $ 10,623,664
Liabilities:
Interest-bearing deposits:
Interest-bearing deposits $ 3,880,489 $ 16,351 0.56 % $ 2,921,762 $ 24,844 1.13 %
Money market deposits 1,674,622 6,647 0.53 1,222,860 10,057 1.10
Savings deposits 1,507,269 3,007 0.27 1,187,173 7,315 0.82
Certificates and other time deposits 1,476,499 18,226 1.65 1,652,141 25,295 2.04
Total Interest-bearing Deposits 8,538,879 44,231 0.69 6,983,936 67,511 1.29
Borrowings 796,836 11,237 1.88 636,295 12,997 2.72
Total Interest-bearing Liabilities 9,335,715 55,468 0.79 7,620,231 80,508 1.41
Noninterest-bearing deposits 2,002,898 1,413,120
Other liabilities 144,705 87,839
Total Liabilities 11,483,318 9,121,190
Stockholders' Equity 1,814,471 1,502,474
Total Liabilities and Stockholders' Equity $ 13,297,789 55,468 $ 10,623,664 80,508
Net Interest Income (FTE) $ 292,138 $ 268,528
Net Interest Spread (FTE) (4)
3.09 % 3.43 %
Net Interest Margin (FTE):
Interest Income (FTE) / Average Earning Assets 3.88 % 4.84 %
Interest Expense / Average Earning Assets 0.62 % 1.12 %
Net Interest Margin (FTE) (5)
3.26 % 3.72 %
(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 2020 and 2019. These totals equal $12,322 and $9,452 for the nine months ended September 30, 2020 and 2019, 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 ~~increased $4.0~~totaled $28.5 million for the quarter ended September 30, 2021, a $2.3 million, or ~~18.3~~8.9 percent increase from the third quarter of 2020. Organic growth continues to result in increased fiduciary and wealth management fees with a $1.4 million increase over the same quarter last year. Additionally, service charges on deposit accounts increased $1.0 million for the three months ended September 30, 2021 due to the impact of the COVID-19 pandemic on customer activity in 2020 compared to the same period in 2021. Finally, gains on life insurance benefits increased $1.3 million in the third quarter of ~~2020,~~2021 when compared to the ~~third quarter of 2019. The continued low mortgage interest rate environment produced an increase of $3.6 million~~same period in 2020. These increases were partially reduced by the net gains and fees on sales of loans decrease of $1.9 million from the third quarter of 2020.

During the first nine months of 2021, non-interest income totaled $83.5 million, a $1.0 million, or 1.3 percent increase when compared to the same period in ~~2019. Additionally,~~2020. Contributing to the ~~larger~~improvement were increases in customer ~~base resulting from the MBT acquisition on September 1, 2019, in addition to organic growth, resulted in an increase in~~related fees for fiduciary and wealth management of $3.8 million and in service charges on deposit accounts of $1.6 million in the nine months ended September 30, 2021 when compared to the same period in 2020. Additionally, net gains and fees on sales of loans increased $3.4 million in the first nine months of 2021 when compared to the same period in 2020, primarily due to a $76.1 million portfolio mortgage loan sale that occurred in the second quarter of 2021. Gains on life insurance benefits increased $1.3 million in the nine months ended September 30, 2021 when compared to the same period in 2020.

The increases over the same period in 2020 were mainly offset by the decrease in net realized gains on the sales of available for sale securities, which declined by $4.2 million, and a decrease in card payment fees of ~~$1.5 million. Details~~$3.3 million, due to the adoption of the ~~Corporation's 2019 acquisition can be found~~Durbin Amendment on July 1, 2020. Additionally, the interest rate environment resulted in derivative hedge fees being $2.4 million lower in the first nine months of 2021 when compared to the same period in 2020.

NON-INTEREST EXPENSE

Non-interest expense totaled $71.4 million for the third quarter of 2021, a $6.7 million, or 10.3 percent increase over the third quarter of 2020. The largest contributing factor was a $4.1 million increase in salaries and employee benefits, primarily due to higher salary and incentive expenses based upon current year financial results. Outside data processing fees increased $1.0 million in the third quarter of 2021 compared to the third quarter of 2020 due to increases in loan processing and digital platform delivery expenses.

Additionally, in the third quarter of 2021, other expenses increased $2.0 million compared to the same period in 2020. Travel and entertainment increased in the third quarter of 2021 compared to the third quarter of 2020 by $579,000 as our bankers were actively visiting customers and prospects after the COVID-19 restrictions that were in place for a majority of 2020 were lifted. Amortization of mortgage servicing rights increased $444,000 as the mortgage servicing portfolio has increased in 2021 compared to 2020, primarily due to the $76.1 million mortgage loan sale that occurred in the second quarter of 2021. Lastly, in the third quarter of 2020 the Corporation recognized a gain on the sale of a former banking center of $599,000 and no gains were recognized in the same period of 2021.

During the first nine months of 2021, non-interest expense totaled $206.8 million, a $15.9 million, or 8.3 percent increase when compared to the same period in 2020. Salaries and employee benefits increased by $10.4 million in the first nine months of 2021 when compared to the same period in 2020, primarily due to higher salary and incentive expenses based upon current year financial results. Additionally, the first nine months of 2020 reflected $2.5 million more salary expense deferral, primarily related to PPP loan originations, than the first nine months of 2021.

Lastly, other outside data processing fees increased $3.1 million for the first nine months of 2021 when compared to the same period in 2020 primarily due to increased loan processing and digital platform delivery expenses in 2021 and reduced expense in 2020 for the sunsetting of a debit rewards program.

INCOME TAXES

Income tax expense for the third quarter of 2021 was $9,062,000 on pre-tax net income of $61,832,000. For the same period in 2020, income tax expense was $5,621,000 on pre-tax net income of $41,831,000. The effective income tax rates for the third quarter of 2021 and 2020 were 14.7 percent and 13.4 percent, respectively.

Income tax expense for the nine months ended September 30, 2021 was $28,308,000 on pre-tax net income of $186,106,000. For the same period in 2020, income tax expense was $13,734,000 on pre-tax net income of $117,199,000. The effective income tax rates for the nine months ended September 30, 2021 and 2020 were 15.2 percent and 11.7 percent, respectively.

The lower effective income tax rate for the comparative periods ended September 30, 2020 was driven by two factors. First, an abnormally high level of loan provision expense as a 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.

The detailed reconciliation of federal statutory to actual tax expense is shown in NOTE ~~2. ACQUISITION~~12. INCOME TAX of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q. ~~Finally, net realized gains on the sales of available for sale securities increased by $1.4 million in the third quarter of 2020 when compared to the same period in 2019.~~

These increases were partially offset by a decrease in card payment fee income of $1.2 million in the third quarter of 2020 when compared to the third quarter of 2019. While the larger customer base resulting from the MBT acquisition and organic growth resulted in increased transaction volume, the cap placed on interchange fee income as a result of the Durbin Amendment to the Dodd-Frank Act became effective for the Bank July 1, 2020 and resulted in over $2 million less in interchange revenue. Additionally, service charges on deposit accounts decreased by $898,000 in the third quarter of 2020 when compared to the same period in 2019 mainly due to higher than normal customer deposit balances as a result of stimulus funds received in response to the COVID-19 pandemic. This resulted in significantly lower non-sufficient funds and overdraft fees during the quarter ended September 30, 2020.

During the first nine months of 2020, non-interest income increased $20.0 million, or 32.0 percent, compared to the same period in 2019. The larger customer base and the low mortgage interest rate environment combined to produce an increase of $7.6 million in net gains and fees on sales of loans. Additionally, the larger customer base from the MBT acquisition, in addition to organic growth, resulted in increases in fiduciary and wealth management fees, card payment fees, and derivative hedge fees of $5.3 million, $1.2 million and $744,000, respectively. Finally, net realized gains on the sales of available for sale securities increased by $6.1 million in the first nine months of 2020 when compared to the same period in 2019.

The increases noted above were partially offset by a decrease in service charges on deposit accounts of $1.1 million mainly due to higher than normal customer deposit balances as a result of stimulus funds received in response to the COVID-19 pandemic. This resulted in significantly lower non-sufficient funds and overdraft fees during the first nine months of 2020 when compared to the same period in 2019.

~~NON-INTEREST EXPENSE~~

Non-interest expense decreased $2.6 million, or 3.9 percent, in the third quarter of 2020, compared to the third quarter of 2019. The acquisition of MBT on September 1, 2019 was the largest contributing factor to the decrease. In the third quarter of 2019, the Corporation recorded acquisition related expenses of $11.2 million primarily consisting of $5.2 million of contract terminations and core conversion expenses, $4.5 million of employee severance and retention expenses and $1.3 million of professional and other outside services expense.

While the third quarter of 2020 did not have the acquisition related expenses noted above, the larger franchise and growth in our customer base from the acquisition and organic growth resulted in increases in most non-interest expense categories with the largest being in salaries and employee benefits, net occupancy, and equipment which accounted for a $6.7 million increase in the third quarter of 2020 compared to the third quarter of 2019. Additionally, FDIC assessment expense increased $1.9 million in the third quarter of 2020, when compared to the same period in 2019, due to a combination of 2019 reflecting assessment credits issued as a result of the FDIC insurance fund reaching the FDIC's target minimum reserve ratio and increased expense in the current year resulting from the Corporation's FDIC assessment changing to the calculation applicable to banks over $10 billion in total assets. Finally, the Corporation incurred $618,000 of additional expense in the third quarter of 2020, compared to the same period of 2019, mainly in net occupancy and equipment costs, in response to social distancing and cleaning protocols related to actions taken in response to the COVID-19 pandemic.

Non-interest expense increased $9.3 million, or 5.1 percent, in the first nine months of 2020, compared to the same period in 2019. The MBT acquisition on September 1, 2019 resulted in increases in most non-interest expense categories due to the larger franchise and growth in our customer base with the largest increases in salaries and employee benefits, net occupancy, and equipment accounting for an increase of $14.3 million. Additionally, FDIC assessment expense increased $3.5 million in the first nine months of 2020, when compared to the same period in 2019, due to a combination of 2019 reflecting assessment credits issued as a result of the FDIC insurance fund reaching the FDIC's target minimum reserve ratio and increased expense in the current year resulting from the Corporation's FDIC assessment changing to the calculation applicable to banks over $10 billion in total assets. The Corporation also incurred $2.0 million of additional expense in the first nine months of 2020, compared to the same period of 2019, related to actions taken in response to the COVID-19 pandemic which included approximately $1.0 million recorded in marketing expense for donations to non-profit organizations in our communities on the front lines of the COVID-19 pandemic efforts and approximately $1.0 million in net occupancy and equipment costs in response to social distancing and cleaning protocols.

The increases noted above, for the nine-month period, were partially offset by the acquisition of MBT on September 1, 2019, as the Corporation recorded $11.9 million of acquisition-related expenses, primarily consisting of $5.2 million of contract termination and core system conversion expenses, $4.5 million of employee severance and retention expenses and $1.5 million of professional and other outside services expense. Additionally, the decrease in outside data processing fees of $1.5 million, when comparing the first nine months of 2020 to the first nine months of 2019, is mainly related to the sunsetting of a debit rewards program. Finally, the increase noted above in marketing expense was offset by a decrease of $1.2 million related to the fair lending settlement expense incurred in 2019.

5049

Table of Contents

PART I: FINANCIAL INFORMATION

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

~~INCOME TAXES~~

Income tax expense for the third quarter of 2020 was $5,621,000 on pre-tax net income of $41,831,000. For the same period in 2019, income tax expense was $6,337,000 on pre-tax net income of $43,094,000. The effective income tax rates for the third quarter of 2020 and 2019 were 13.4 percent and 14.7 percent, respectively.

Income tax expense for the nine months ended September 30, 2020 was $13,734,000 on pre-tax net income of $117,199,000. For the same period in 2019, income tax expense was $21,027,000 on pre-tax net income of $137,657,000. The effective income tax rates for the nine months ended September 30, 2020 and 2019 were 11.7 percent and 15.3 percent, respectively.

The lower effective income tax rates during the three and nine months ended September 30, 2020 when compared to the same periods in 2019 was primarily driven by two factors. First, the abnormally high level of loan provision expense resulting from the economic impact of the COVID-19 pandemic has, and likely will continue, to distort the normal relationship of taxable income to tax-exempt income. Secondly, the CARES Act provided the opportunity to carryback certain federal net operating losses. The Corporation's net operating loss had previously been valued at the current statutory rate of 21 percent. As such, the Corporation booked a tax benefit of $1,178,000 in the first quarter of 2020 in recognition of the rate differential between the current rate and the rate in effect during the period to which the net operating loss was carried back.

The detailed reconciliation of federal statutory to actual tax expense is shown in NOTE 13. INCOME TAX of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

CAPITAL

Stockholders' Equity

~~On September~~The Corporation adopted the current expected credit losses ("CECL") model for calculating the allowance for credit losses on January 1, ~~2019,~~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 ~~acquired 100 percent~~recorded a one-time cumulative-effect adjustment to retained earnings, net of ~~MBT. Pursuant to the merger agreement, each MBT shareholder received 0.275 shares~~income taxes, of $68.0 million. See additional details of the Corporation's common stock for each outstanding share of MBT common stock held. The Corporation issued approximately 6.4 million shares of common stock, which was valued at approximately $229.9 million. Details regarding the MBT acquisition are discussedCECL adoption in NOTE ~~2. ACQUISITION~~4. LOANS AND ALLOWANCE of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

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 ~~may~~was not to exceed $75 million. On a share basis, the amount of common stock subject to the repurchase program ~~represents~~represented approximately 5 percent of the Corporation's outstanding shares. During the first quarter of 2020, the Corporation repurchased 1,634,437 of its common shares for $55.9 million at an average price of $34.21, which resulted in the aggregate investment in share repurchases ~~to equal~~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 approximately 6 percent of the Corporation's outstanding shares. During the three and nine months ended September 30, 2021, the Corporation repurchased 529,498 of its common shares for $20.8 million at an average price of $39.30.

Regulatory Capital

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

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total 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.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

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

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.~~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 September 30, ~~2020,~~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 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.

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.

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 September 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:

Prompt Corrective Action Thresholds
Actual Basel III Minimum Capital Required Well Capitalized
September 30, 2020 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital to risk-weighted assets
First Merchants Corporation $ 1,438,331 14.38 % $ 1,050,092 10.50 % N/A N/A
First Merchants Bank 1,400,114 13.96 1,053,455 10.50 $ 1,003,291 10.00 %
Tier 1 capital to risk-weighted assets
First Merchants Corporation $ 1,248,299 12.48 % $ 850,075 8.50 % N/A N/A
First Merchants Bank 1,274,686 12.71 852,797 8.50 $ 802,633 8.00 %
CET1 capital to risk-weighted assets
First Merchants Corporation $ 1,201,991 12.02 % $ 700,061 7.00 % N/A N/A
First Merchants Bank 1,274,686 12.71 702,304 7.00 $ 652,139 6.50 %
Tier 1 capital to average assets
First Merchants Corporation $ 1,248,299 9.53 % $ 523,790 4.00 % N/A N/A
First Merchants Bank 1,274,686 9.75 522,926 4.00 $ 653,657 5.00 %


						Prompt Corrective Action Thresholds													Prompt Corrective Action Thresholds
		Actual				Basel III Minimum Capital Required				Well Capitalized					Actual				Basel III Minimum Capital Required				Well Capitalized
December 31, 2019		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2021														September 30, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital to risk-weighted assets	Total risk-based capital to risk-weighted assets													Total risk-based capital to risk-weighted assets
First Merchants Corporation	First Merchants Corporation	$	1,400,617	14.29	%	$	1,028,930	10.50	%	N/A		N/A		First Merchants Corporation	$	1,547,138	14.02	%	$	1,158,955	10.50	%	N/A		N/A
First Merchants Bank	First Merchants Bank	1,267,649		12.87		1,033,926		10.50		$	984,691	10.00	%	First Merchants Bank	1,435,909		12.97		1,162,608		10.50		$	1,107,245	10.00	%
Tier 1 capital to risk weighted assets
Tier 1 capital to risk-weighted assets														Tier 1 capital to risk-weighted assets
First Merchants Corporation	First Merchants Corporation	$	1,255,333	12.81	%	$	832,943	8.50	%	N/A		N/A		First Merchants Corporation	$	1,342,938	12.17	%	$	938,201	8.50	%	N/A		N/A
First Merchants Bank	First Merchants Bank	1,187,365		12.06		836,988		8.50		$	787,753	8.00	%	First Merchants Bank	1,296,284		11.71		941,159		8.50		$	885,796	8.00	%
CET1 capital to risk-weighted assets	CET1 capital to risk-weighted assets													CET1 capital to risk-weighted assets
First Merchants Corporation	First Merchants Corporation	$	1,188,970	12.13	%	$	685,953	7.00	%	N/A		N/A		First Merchants Corporation	$	1,296,392	11.75	%	$	772,636	7.00	%	N/A		N/A
First Merchants Bank	First Merchants Bank	1,187,365		12.06		689,284		7.00		$	640,049	6.50	%	First Merchants Bank	1,296,284		11.71		775,072		7.00		$	719,710	6.50	%
Tier 1 capital to average assets	Tier 1 capital to average assets													Tier 1 capital to average assets
First Merchants Corporation	First Merchants Corporation	$	1,255,333	10.54	%	$	476,383	4.00	%	N/A		N/A		First Merchants Corporation	$	1,342,938	9.28	%	$	578,976	4.00	%	N/A		N/A
First Merchants Bank	First Merchants Bank	1,187,365		9.99		475,564		4.00		$	594,455	5.00	%	First Merchants Bank	1,296,284		8.97		578,223		4.00		$	722,779	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 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 September 30, ~~2020,~~2021, risk-weighted assets included ~~$901.4~~$198.1 million 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 September 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.

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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.


		September 30, 2020						December 31, 2019							September 30, 2021						December 31, 2020
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	First Merchants Corporation			First Merchants Bank			First Merchants Corporation			First Merchants Bank			(Dollars in thousands, except per share amounts)	First Merchants Corporation			First Merchants Bank			First Merchants Corporation			First Merchants Bank
Total Risk-Based Capital	Total Risk-Based Capital													Total Risk-Based Capital
Total Stockholders' Equity (GAAP)	Total Stockholders' Equity (GAAP)	$	1,833,656		$	1,908,858		$	1,786,437		$	1,787,006		Total Stockholders' Equity (GAAP)	$	1,868,090		$	1,869,943		$	1,875,645		$	1,926,269
Adjust for Accumulated Other Comprehensive (Income) Loss (1)	Adjust for Accumulated Other Comprehensive (Income) Loss (1)	(65,468)			(68,423)			(27,874)			(30,495)			Adjust for Accumulated Other Comprehensive (Income) Loss (1)	(39,889)			(42,329)			(74,836)			(77,687)
Less: Preferred Stock	Less: Preferred Stock	(125)			(125)			(125)			(125)			Less: Preferred Stock	(125)			(125)			(125)			(125)
Add: Qualifying Capital Securities	Add: Qualifying Capital Securities	46,308			—			66,363			—			Add: Qualifying Capital Securities	46,546			—			46,368			—

Less: Disallowed Goodwill and Intangible Assets	Less: Disallowed Goodwill and Intangible Assets	(566,072)			(565,624)			(569,468)			(569,021)			Less: Disallowed Goodwill and Intangible Assets	(565,221)			(564,773)			(564,982)			(564,535)
Add: Modified CECL Transition Amount														Add: Modified CECL Transition Amount	34,542			34,542			—			—

Less: Disallowed Deferred Tax Assets														Less: Disallowed Deferred Tax Assets	(1,005)			(974)			—			—
Total Tier 1 Capital (Regulatory)	Total Tier 1 Capital (Regulatory)	1,248,299			1,274,686			1,255,333			1,187,365			Total Tier 1 Capital (Regulatory)	1,342,938			1,296,284			1,282,070			1,283,922
Qualifying Subordinated Debentures	Qualifying Subordinated Debentures	65,000			—			65,000			—			Qualifying Subordinated Debentures	65,000			—			65,000			—
Allowance for Loan Losses Includible in Tier 2 Capital	Allowance for Loan Losses Includible in Tier 2 Capital	125,032			125,428			80,284			80,284			Allowance for Loan Losses Includible in Tier 2 Capital	139,200			139,625			128,481			128,883
Total Risk-Based Capital (Regulatory)	Total Risk-Based Capital (Regulatory)	$	1,438,331		$	1,400,114		$	1,400,617		$	1,267,649		Total Risk-Based Capital (Regulatory)	$	1,547,138		$	1,435,909		$	1,475,551		$	1,412,805

Net Risk-Weighted Assets (Regulatory)	Net Risk-Weighted Assets (Regulatory)	$	10,000,878		$	10,032,908		$	9,799,329		$	9,849,913		Net Risk-Weighted Assets (Regulatory)	$	11,037,663		$	11,072,454		$	10,276,333		$	10,308,855
Average Assets (Regulatory)	Average Assets (Regulatory)	$	13,094,746		$	13,073,145		$	11,909,571		$	11,889,092		Average Assets (Regulatory)	$	14,474,403		$	14,455,581		$	13,403,065		$	13,381,969

Total Risk-Based Capital Ratio (Regulatory)	Total Risk-Based Capital Ratio (Regulatory)	14.38		%	13.96		%	14.29		%	12.87		%	Total Risk-Based Capital Ratio (Regulatory)	14.02		%	12.97		%	14.36		%	13.70		%
Tier 1 Capital to Risk-Weighted Assets	Tier 1 Capital to Risk-Weighted Assets	12.48		%	12.71		%	12.81		%	12.05		%	Tier 1 Capital to Risk-Weighted Assets	12.17		%	11.71		%	12.48		%	12.45		%
Tier 1 Capital to Average Assets	Tier 1 Capital to Average Assets	9.53		%	9.75		%	10.54		%	9.99		%	Tier 1 Capital to Average Assets	9.28		%	8.97		%	9.57		%	9.59		%

CET1 Capital Ratio	CET1 Capital Ratio													CET1 Capital Ratio
Total Tier 1 Capital (Regulatory)	Total Tier 1 Capital (Regulatory)	$	1,248,299		$	1,274,686		$	1,255,333		$	1,187,365		Total Tier 1 Capital (Regulatory)	$	1,342,938		$	1,296,284		$	1,282,070		$	1,283,922
Less: Qualified Capital Securities	Less: Qualified Capital Securities	(46,308)			—			(66,363)			—			Less: Qualified Capital Securities	(46,546)			—			(46,368)			—

CET1 Capital (Regulatory)	CET1 Capital (Regulatory)	$	1,201,991		$	1,274,686		$	1,188,970		$	1,187,365		CET1 Capital (Regulatory)	$	1,296,392		$	1,296,284		$	1,235,702		$	1,283,922

Net Risk-Weighted Assets (Regulatory)	Net Risk-Weighted Assets (Regulatory)	$	10,000,878		$	10,032,908		$	9,799,329		$	9,849,913		Net Risk-Weighted Assets (Regulatory)	$	11,037,663		$	11,072,454		$	10,276,333		$	10,308,855
CET1 Capital Ratio (Regulatory)	CET1 Capital Ratio (Regulatory)	12.02		%	12.71		%	12.13		%	12.05		%	CET1 Capital Ratio (Regulatory)	11.75		%	11.71		%	12.02		%	12.45		%

(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 tangible common equity to tangible assets ratio of ~~9.57~~8.94 percent at September 30, ~~2020,~~2021, and ~~10.16~~9.65 percent at December 31, ~~2019.~~2020.


		Tangible Common Equity to Tangible Assets (non-GAAP)							Tangible Common Equity to Tangible Assets (non-GAAP)
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	September 30, 2020			December 31, 2019			(Dollars in thousands, except per share amounts)	September 30, 2021			December 31, 2020
Total Stockholders' Equity (GAAP)	Total Stockholders' Equity (GAAP)	$	1,833,656		$	1,786,437		Total Stockholders' Equity (GAAP)	$	1,868,090		$	1,875,645
Less: Cumulative preferred stock (GAAP)	Less: Cumulative preferred stock (GAAP)	(125)			(125)			Less: Cumulative preferred stock (GAAP)	(125)			(125)
Less: Intangible assets (GAAP)	Less: Intangible assets (GAAP)	(574,369)			(578,881)			Less: Intangible assets (GAAP)	(572,323)			(572,893)
Tangible common equity (non-GAAP)	Tangible common equity (non-GAAP)	$	1,259,162		$	1,207,431		Tangible common equity (non-GAAP)	$	1,295,642		$	1,302,627
Total assets (GAAP)	Total assets (GAAP)	$	13,737,350		$	12,457,254		Total assets (GAAP)	$	15,060,725		$	14,067,210
Less: Intangible assets (GAAP)	Less: Intangible assets (GAAP)	(574,369)			(578,881)			Less: Intangible assets (GAAP)	(572,323)			(572,893)
Tangible assets (non-GAAP)	Tangible assets (non-GAAP)	$	13,162,981		$	11,878,373		Tangible assets (non-GAAP)	$	14,488,402		$	13,494,317
Stockholders' Equity to Assets (GAAP)	Stockholders' Equity to Assets (GAAP)	13.35		%	14.34		%	Stockholders' Equity to Assets (GAAP)	12.40		%	13.33		%
Tangible common equity to tangible assets (non-GAAP)	Tangible common equity to tangible assets (non-GAAP)	9.57		%	10.16		%	Tangible common equity to tangible assets (non-GAAP)	8.94		%	9.65		%

Tangible common equity (non-GAAP)	Tangible common equity (non-GAAP)	$	1,259,162		$	1,207,431		Tangible common equity (non-GAAP)	$	1,295,642		$	1,302,627
Plus: Tax Benefit of intangibles (non-GAAP)	Plus: Tax Benefit of intangibles (non-GAAP)	6,292			7,257			Plus: Tax Benefit of intangibles (non-GAAP)	5,153			5,989
Tangible common equity, net of tax (non-GAAP)	Tangible common equity, net of tax (non-GAAP)	$	1,265,454		$	1,214,688		Tangible common equity, net of tax (non-GAAP)	$	1,300,795		$	1,308,616
Common Stock outstanding	Common Stock outstanding	53,892			55,368			Common Stock outstanding	53,511			53,922
Book Value (GAAP)	Book Value (GAAP)	$	34.02		$	32.26		Book Value (GAAP)	$	34.91		$	34.78
Tangible book value - common (non-GAAP)	Tangible book value - common (non-GAAP)	$	23.48		$	21.94		Tangible book value - common (non-GAAP)	$	24.31		$	24.27

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 nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	2020			2019			2020			2019			(Dollars in thousands, except per share amounts)	2021			2020			2021			2020
Average goodwill (GAAP)	Average goodwill (GAAP)	$	543,919		$	477,260		$	543,919		$	456,107		Average goodwill (GAAP)	$	545,385		$	543,919		$	545,371		$	543,919
Average core deposit intangible (GAAP)	Average core deposit intangible (GAAP)	31,357			26,193			32,851			24,088			Average core deposit intangible (GAAP)	27,781			31,357			28,040			32,851
Average deferred tax on CDI (GAAP)	Average deferred tax on CDI (GAAP)	(6,478)			(5,405)			(6,806)			(4,956)			Average deferred tax on CDI (GAAP)	(5,314)			(6,478)			(5,597)			(6,806)
Intangible adjustment (non-GAAP)	Intangible adjustment (non-GAAP)	$	568,798		$	498,048		$	569,964		$	475,239		Intangible adjustment (non-GAAP)	$	567,852		$	568,798		$	567,814		$	569,964
Average stockholders' equity (GAAP)	Average stockholders' equity (GAAP)	$	1,831,300		$	1,596,595		$	1,814,471		$	1,502,474		Average stockholders' equity (GAAP)	$	1,889,037		$	1,831,300		$	1,858,680		$	1,814,471
Average cumulative preferred stock (GAAP)	Average cumulative preferred stock (GAAP)	(125)			(125)			(125)			(125)			Average cumulative preferred stock (GAAP)	(125)			(125)			(125)			(125)

Intangible adjustment (non-GAAP)	Intangible adjustment (non-GAAP)	(568,798)			(498,048)			(569,964)			(475,239)			Intangible adjustment (non-GAAP)	(567,852)			(568,798)			(567,814)			(569,964)
Average tangible capital (non-GAAP)	Average tangible capital (non-GAAP)	$	1,262,377		$	1,098,422		$	1,244,382		$	1,027,110		Average tangible capital (non-GAAP)	$	1,321,060		$	1,262,377		$	1,290,741		$	1,244,382
Average assets (GAAP)	Average assets (GAAP)	$	13,660,818		$	11,277,742		$	13,297,789		$	10,623,664		Average assets (GAAP)	$	15,006,087		$	13,660,818		$	14,672,596		$	13,297,789
Intangible adjustment (non-GAAP)	Intangible adjustment (non-GAAP)	(568,798)			(498,048)			(569,964)			(475,239)			Intangible adjustment (non-GAAP)	(567,852)			(568,798)			(567,814)			(569,964)
Average tangible assets (non-GAAP)	Average tangible assets (non-GAAP)	$	13,092,020		$	10,779,694		$	12,727,825		$	10,148,425		Average tangible assets (non-GAAP)	$	14,438,235		$	13,092,020		$	14,104,782		$	12,727,825
Net income available to common stockholders (GAAP)	Net income available to common stockholders (GAAP)	$	36,210		$	36,757		$	103,465		$	116,630		Net income available to common stockholders (GAAP)	$	52,770		$	36,210		$	157,798		$	103,465
CDI amortization, net of tax (GAAP)	CDI amortization, net of tax (GAAP)	1,174			1,071			3,564			3,480			CDI amortization, net of tax (GAAP)	1,156			1,174			3,384			3,564
Tangible net income available to common stockholders (non-GAAP)	Tangible net income available to common stockholders (non-GAAP)	$	37,384		$	37,828		$	107,029		$	120,110		Tangible net income available to common stockholders (non-GAAP)	$	53,926		$	37,384		$	161,182		$	107,029
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)	$	0.67		$	0.71		$	1.91		$	2.32		Diluted net income available to common stockholders (GAAP)	$	0.98		$	0.67		$	2.92		$	1.91
Diluted tangible net income available to common stockholders (non-GAAP)	Diluted tangible net income available to common stockholders (non-GAAP)	$	0.69		$	0.73		$	1.97		$	2.39		Diluted tangible net income available to common stockholders (non-GAAP)	$	1.00		$	0.69		$	2.98		$	1.97
Ratios:	Ratios:													Ratios:
Return on average GAAP capital (ROE)	Return on average GAAP capital (ROE)	7.91		%	9.21		%	7.60		%	10.35		%	Return on average GAAP capital (ROE)	11.17		%	7.91		%	11.32		%	7.60		%
Return on average tangible capital	Return on average tangible capital	11.85		%	13.78		%	11.47		%	15.59		%	Return on average tangible capital	16.33		%	11.85		%	16.65		%	11.47		%
Return on average assets (ROA)	Return on average assets (ROA)	1.06		%	1.30		%	1.04		%	1.46		%	Return on average assets (ROA)	1.41		%	1.06		%	1.43		%	1.04		%
Return on average tangible assets	Return on average tangible assets	1.14		%	1.40		%	1.12		%	1.58		%	Return on average tangible assets	1.49		%	1.14		%	1.52		%	1.12		%

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/~~QUALITY AND PROVISION FOR ~~LOAN~~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 September 30, ~~2020,~~2021, non-performing loans totaled ~~$59.4~~$51.9 million, ~~an increase~~a decrease of ~~$42.6~~$12.8 million from December 31, ~~2019.~~2020. Loans not accruing interest income totaled ~~$56.7~~$51.5 million at September 30, ~~2020, an increase~~2021, a decrease of ~~$40.8~~$10.0 million from December 31, ~~2019. An increase of $36.0 million~~2020. The decrease in non-accrual loans was primarily attributed to the ~~commercial and farmland segment, specifically non-owner occupied commercial real estate, as three relationships were moved to non-accrual during the second and third quarters~~payoff of ~~2020. These three relationships involve four properties, three of which total $31.2 million in the~~one senior living sector ~~and~~relationship totaling $23.4 million, partially offset by the ~~fourth totals $3.4 million in the self-storage sector. Additionally, $4.7 million~~addition of ~~the increase in non-accrual loans was~~two relationships, in the commercial and industrial ~~loans segment. This largest portion of this increase was due to the addition of a $2.8 million~~and non owner occupied commercial real estate loan in the university logo apparel sports industry. This loan was added to the non-accrual list in the second quarter at a balance of $14.4 million, but was restructured in the third quarter resulting in a $6.7 million charge-off.classes, totaling $19.7 million.

Other real estate owned and repossessions, totaling ~~$6.9 million~~$698,000 at September 30, ~~2020,~~2021, decreased ~~$543,000~~$242,000 from December 31, ~~2019.~~2020. For other real estate owned, current appraisals are obtained to determine fair value as management continues to aggressively market these real estate assets.

~~Impaired~~According to applicable accounting guidance, loans ~~include loans deemed impaired according~~that no longer exhibit similar risk characteristics are evaluated individually to ~~the guidance set forth in ASC 310-10.~~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~~evaluated. The determination for ~~impairment. A loan~~individual evaluation is ~~deemed impaired when,~~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 ~~not~~ be ~~collected~~ substantially within the contractual terms of the note. At September 30, 2020, impaired loans totaled $52.5 million, an increase of $40.8 million from the December 31, 2019 balance of $11.7 million. Also at September 30, 2020, a specific allowance for losses was not deemed necessary for impaired loans totaling $14.7 million as there were no identified losses on these credits. An allowance of $9.1 million was recorded for the remaining balance of these impaired loans totaling $37.8 million, and was included in the Corporation’s allowance for loan losses.collected.

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


(Dollars in Thousands)	(Dollars in Thousands)	September 30, 2020		December 31, 2019		(Dollars in Thousands)	September 30, 2021		December 31, 2020
Non-Performing Assets:	Non-Performing Assets:					Non-Performing Assets:
Non-accrual loans	Non-accrual loans	$	56,739	$	15,949	Non-accrual loans	$	51,502	$	61,471
Renegotiated loans	Renegotiated loans	2,677		841		Renegotiated loans	439		3,240
Non-performing loans (NPL)	Non-performing loans (NPL)	59,416		16,790		Non-performing loans (NPL)	51,941		64,711
OREO and Repossessions	OREO and Repossessions	6,984		7,527		OREO and Repossessions	698		940
Non-performing assets (NPA)	Non-performing assets (NPA)	66,400		24,317		Non-performing assets (NPA)	52,639		65,651
Loans 90-days or more delinquent and still accruing	Loans 90-days or more delinquent and still accruing	1,330		69		Loans 90-days or more delinquent and still accruing	157		746
NPAs and loans 90-days or more delinquent	NPAs and loans 90-days or more delinquent	$	67,730	$	24,386	NPAs and loans 90-days or more delinquent	$	52,796	$	66,397
Impaired Loans		$	52,484	$	11,709

The non-accrual balances in the table above include troubled debt loan restructures totaling ~~$1.7~~$14.3 million and ~~$709,000~~$1.7 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The increase is primarily due to one relationship in the non owner occupied commercial real estate loan class, totaling $12.7 million, that became a TDR during the quarter.

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)	September 30, 2020		December 31, 2019		(Dollars in Thousands)	September 30, 2021		December 31, 2020
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	$	5,950	$	1,259	Commercial and industrial loans	$	16,818	$	2,923
Agricultural production financing and other loans to farmers		1,100		183
Agricultural land, production and other loans to farmers						Agricultural land, production and other loans to farmers	119		1,012
Real estate loans:	Real estate loans:					Real estate loans:
Construction	Construction	6,340		7,191		Construction	327		435
Commercial and farmland		43,740		7,103
Commercial real estate, non-owner occupied						Commercial real estate, non-owner occupied	26,272		47,548
Commercial real estate, owner occupied						Commercial real estate, owner occupied	1,023		3,040
Residential	Residential	7,581		6,810		Residential	6,375		9,034
Home equity	Home equity	2,912		1,795		Home equity	1,847		2,350
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	65		45		Individuals' loans for household and other personal expenditures	15		55

Public finance and other commercial loans		42		—
Non-performing assets and loans 90-days or more delinquent:	Non-performing assets and loans 90-days or more delinquent:	$	67,730	$	24,386	Non-performing assets and loans 90-days or more delinquent:	$	52,796	$	66,397

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PART I: FINANCIAL INFORMATION

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

OnIn March ~~22,~~ 2020, a statement was issued by the ~~Bank's~~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"~~“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~~provided that a qualified loan modification iswould be 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.~~2020. The Interagency Statement was subsequently revised onin 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~~began offering 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 effectively, January 1, 2022. The following table summarizes modifications ~~that remained~~ in deferment ~~as of~~for the ~~period indicated:~~periods indicated.


		September 30, 2020				September 30, 2021			December 31, 2020
		Recorded Balance		Number of Loans		Recorded Balance		Number of Loans	Recorded Balance			Number of Loans
Commercial and industrial loans	Commercial and industrial loans	$	29,735	33	Commercial and industrial loans	$	14,024	4	$	18,143		14
Agriculture production financing and other loans to farmers		265		2
Agricultural land, production and other loans to farmers					Agricultural land, production and other loans to farmers	—		—	10,724			2
Real estate loans:	Real estate loans:				Real estate loans:
Construction	Construction	3,093		1	Construction	—		—	21,131			5
Commercial and farmland		134,435		62
Commercial real estate, non-owner occupied					Commercial real estate, non-owner occupied	—		—	65,139			10
Commercial real estate, owner occupied					Commercial real estate, owner occupied	—		—	2,428			6
Residential	Residential	6,815		50	Residential	1,318		7	1,733			20
Home equity	Home equity	1,286		11	Home equity	—		—	154			4
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	305		20	Individuals' loans for household and other personal expenditures	46		3	893			26

Total	Total	$	175,934	179	Total	$	15,388	14	$	120,345	120,345	87

~~During the third quarter of 2020, a second COVID-19 related modification was processed on approximately $116 million of loan balances.~~

Of the loans still in deferment at September 30, ~~2020, $92~~2021, $13.8 million, ~~or 52~~or 89.8 percent of the balance, ~~were~~which was included in the ~~hotel~~commercial and industrial segment, was in the entertainment industry.

~~Although~~though the Corporation believes its underwriting and loan review procedures are appropriate for the various kinds of 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.

Provision and Allowance for ~~Loan~~Credit Losses on Loans

~~As noted~~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 ~~the "COVID-19, THE CARES ACT AND RELATED REGULATORY ACTIONS" section~~estimating credit losses, as well as credit quality and underwriting standards of ~~this Management's Discussion and Analysis of Financial Condition and Results of Operations, the Corporation elected to defer the adoption of~~an organization's portfolio.

The CECL ~~and to continue to use the incurred loss model for calculating the Allowance for Loan and Lease Losses. The~~allowance is maintained through the provision for loan losses, which is a charge against earnings. Based on management’s judgment as to the appropriate level of the allowance for loan 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, including an internally administered loan "watch" list and independent loan reviews. The evaluation also takes into consideration identified credit problems, portfolio growth, management's judgment as to the impact of current economic conditions on the portfolio and the possibility of losses inherent in the loan portfolio that are not specifically identified.portfolio.

In conformance with ASC 805 and ASC 820, purchased loans are recorded at the acquisition date fair value. Such loans are included in the allowance to the extent a specific impairment is identified that exceeds the fair value adjustment on an impaired loan. An allowance may also be necessary if the historical loss and environmental factor analysis indicates losses inherent in a purchased portfolio exceed the fair value adjustment on the portion of the purchased portfolio not deemed impaired.

The Corporation’s total loan balance ~~increased $778.7~~decreased $199.6 million from December 31, ~~2019~~2020 to ~~$9.2~~$9.0 billion at September 30, ~~2020.~~2021. PPP loans accounted for ~~$901.4~~$198.1 million of the total loan balance at September 30, ~~2020.~~2021. At September 30, ~~2020,~~2021, the allowance for ~~loan and lease~~credit losses totaled ~~$126.7~~$200.0 million, which represents an increase of ~~$46.4~~$69.3 million from December 31, ~~2019.~~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 nine months ended September 30, 2021 of $4.7 million. As a ~~percent~~percentage of loans, the allowance for ~~loan~~credit losses was ~~1.37~~2.21 percent at September 30, ~~2020~~2021 compared to ~~0.95~~1.41 percent at December 31, ~~2019. When excluding PPP loans of $901.4 million, the~~2020. The allowance for ~~loan~~credit losses as a percentage of total loans less PPP loans was ~~1.52~~2.26 percent as of September 30, ~~2020. Under~~2021. 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 ~~PPP, the loans are fully guaranteed by the SBA.~~program.

There was no provision for credit losses for the three and nine months ended September 30, 2021 compared to $12.5 million and $54.2 million, respectively, for the same period of 2020. The ~~allowance was~~provision for the three and nine months ended September 30, 2020 reflected the Corporation's view of increased ~~primarily due an increase in the national and local economic conditions qualitative factor and~~credit risk related to ~~an increase in impairment. Continuing uncertainty surrounding the current economic climate prompted by~~ the COVID-19 pandemic and ~~governmental actions taken to reduce~~ the ~~spread~~estimated impact on the economy and the credit quality of ~~the virus have contributed to a higher level of unemployment which has negatively impacted consumer and business spending. Due to~~our loan portfolio. The Corporation deems this uncertainty, the national and local economic conditions qualitative factor has increased $35.1 million during 2020. In addition, impairment increased $8.5 million from December 31, 2019 due primarily to the addition of specific reserves, of $7.9 million, related to commercial senior living relationships. See discussion of the impact of the COVID-19 pandemicestimate for loan portfolio credit exposure as appropriate, thus there was no provision expense in the ~~“COVID-19, THE CARES ACT AND RELATED REGULATORY ACTIONS” section of this Management’s Discussion~~three and ~~Analysis of Financial Condition and Results of Operations.~~nine months ended September 30, 2021.

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PART I: FINANCIAL INFORMATION

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

~~The provision for loan losses for the three months~~Net recoveries totaling $197,000 and nine months ended September 30, 2020 was $12.5 million and $54.2 million, respectively. Comparatively, the provision for loan losses for the three months and nine months ended September 30, 2019 was $600,000 and $2.3 million, respectively. The year-over-year increase in the provision for loan losses primarily reflects our view of increased credit risk related to the COVID-19 pandemic.

~~Net~~net charge-offs totaling ~~$6.9~~$4.7 million, ~~and $7.7 million,~~ respectively, were recognized for the three and nine months ended September 30, ~~2020.~~2021. Comparatively, net charge-offs totaled ~~$1.3~~$6.9 million and ~~$2.3~~$7.7 million, respectively, for the same periods in ~~2019.~~2020. For the three months ended September 30, 2021, there weren't any individual charge-offs greater than $500,000. For the nine months ended September 30, 2021, there were three individual charge-offs greater than $500,000 that totaled $4.3 million. For the three and nine months ended September 30, 2020, there was one individual charge-off greater than $500,000 that totaled $6,665,000 and for the nine months ended September 30, 2020 there were two charge-offs greater than $500,000 for a total of $6,930,000. There have been no recoveries greater than these amounts in 2020. For the three months ended September 30, 2019, there was one individual charge-off greater than $500,000 that totaled $1,318,000. For the nine months ended September 30, 2019, there were two individual charge-offs greater than $500,000 that totaled $3,273,000. For the three months ended September 30, 2019, there were no individual recoveries greater than $500,000. For the nine months ended September 30, 2019, there was one individual recovery greater than $500,000, which totaled $738,000.$6.7 million. The distribution of the net charge-offs (recoveries) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 are reflected in the following ~~table:~~table.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	(Dollars in Thousands)	2020		2019		2020		2019		(Dollars in Thousands)	2021		2020		2021		2020
Net charge-offs (Recoveries):
Net charge-offs (recoveries):										Net charge-offs (recoveries):
Commercial and industrial loans	Commercial and industrial loans	$	6,702	$	23	$	6,862	$	(130)	Commercial and industrial loans	$	14	$	6,702	$	618	$	6,862
Agricultural production financing and other loans to farmers		(72)		(3)		(67)		13
Agricultural land, production and other loans to farmers										Agricultural land, production and other loans to farmers	(81)		(72)		(57)		(67)
Real estate loans:	Real estate loans:									Real estate loans:
Construction	Construction	—		1,007		(37)		1,226		Construction	4		—		5		(37)
Commercial and farmland		(46)		(72)		(10)		876
Commercial real estate, non-owner occupied										Commercial real estate, non-owner occupied	(232)		(19)		3,263		(80)
Commercial real estate, owner occupied										Commercial real estate, owner occupied	(23)		(27)		633		70
Residential	Residential	19		8		50		62		Residential	(73)		19		(72)		50
Home equity	Home equity	296		25		616		(44)		Home equity	63		296		106		616
Individuals' loans for household and other personal expenditures	Individuals' loans for household and other personal expenditures	38		4		335		39		Individuals' loans for household and other personal expenditures	131		38		235		335

Public finance and other commercial loans		—		311		—		239
Total net charge-offs		$	6,937	$	1,303	$	7,749	$	2,281
Total net charge-offs (recoveries)										Total net charge-offs (recoveries)	$	(197)	$	6,937	$	4,731	$	7,749

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 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 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.

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 ~~$1.8~~$2.4 billion at September 30, ~~2020,~~2021, an increase of ~~$34.1~~$455.5 million, or ~~1.9~~23.7 percent, from December 31, ~~2019.~~2020. 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 ~~$9.7~~$8.7 million at September 30, ~~2020.~~2021. 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 ~~sources.~~source. At September 30, ~~2020,~~2021, total borrowings from the FHLB were ~~$399.5 million~~$334.1 million. The Bank has pledged certain mortgage loans and investments to the FHLB. The total available remaining borrowing capacity from the FHLB at September 30, ~~2020~~2021 was ~~$690.3~~$719.3 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 required payments related to operating leases and borrowings at September 30, ~~2020~~2021 are as follows:


(Dollars in Thousands)	(Dollars in Thousands)	Remaining 2020		2021		2022		2023		2024		2025 and after		ASC 805 fair value adjustments at acquisition		Total		(Dollars in Thousands)	Remaining 2021		2022		2023		2024		2025		2026 and after		ASC 805 fair value adjustments at acquisition		Total
Operating leases	Operating leases	$	913	$	3,458	$	3,331	$	2,937	$	2,867	$	10,277	$	—	$	23,783	Operating leases	$	967	$	3,924	$	3,542	$	3,436	$	3,189	$	7,832	$	—	$	22,890
Federal funds purchased		80,000		—		—		—		—		—		—		80,000

Securities sold under repurchase agreements	Securities sold under repurchase agreements	187,732		—		—		—		—		—		—		187,732		Securities sold under repurchase agreements	183,589		—		—		—		—		—		—		183,589
Federal Home Loan Bank advances	Federal Home Loan Bank advances	20,024		55,097		75,097		115,097		97		134,110		—		399,522		Federal Home Loan Bank advances	24		75,097		115,097		10,097		25,097		108,737		—		334,149
Subordinated debentures and other borrowings	Subordinated debentures and other borrowings	—		—		—		—		—		122,012		(3,692)		118,320		Subordinated debentures and other borrowings	—		—		—		—		—		122,012		(3,454)		118,558
Total	Total	$	288,669	$	58,555	$	78,428	$	118,034	$	2,964	$	266,399	$	(3,692)	$	809,357	Total	$	184,580	$	79,021	$	118,639	$	13,533	$	28,286	$	238,581	$	(3,454)	$	659,186

On March 16, 2020, the Corporation partially redeemed $10.0 million of its subordinated debentures, with an interest rate of 3.45 percent, all of which were held by First Merchants Capital Trust II (“FMC Trust”). As a result, FMC Trust used the proceeds from such partial redemption to concurrently redeem a like amount of its capital securities at an aggregate principal redemption price of $10.0 million. Debentures issued by the Corporation in the principal amount of $41.7 million remain outstanding with a maturity date of September 15, 2037.

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 September 30, ~~2020~~2021 are as follows:


(Dollars in Thousands)	September 30, ~~2020~~2021
Amounts of commitments:
Loan commitments to extend credit	$	~~3,462,258~~3,938,075
Standby and commercial letters of credit	~~31,908~~33,986
	$	~~3,494,166~~3,972,061

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.

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 September 30, ~~2020,~~2021, 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.

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

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

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 September 30, 2021 and December 31, 2020, 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. ~~Total rate movements (beginning point minus ending point) to each of the various driver rates utilized by management have the following results:~~

September 30, 2020
RISING FALLING
Driver Rates (200 Basis Points) (100 Basis Points)
Prime 200 —
Federal funds 200 —
One-year CMT 200 (4)
Three-year CMT 200 (4)
Five-year CMT 200 (5)
CD's 200 (16)
FHLB advances 200 (1)

Results for the ~~base,~~ 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 September 30, 2021 and December 31, 2020. The ~~net interest income shown~~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.

September 30, 2020
RISING FALLING
(Dollars in Thousands) Base (200 Basis Points) (100 Basis Points)
Net interest income $ 348,659 $ 367,460 $ 352,237
Variance from base $ 18,800 $ 3,577
Percent of change from base 5.4 % 1.0 %

The comparative rising 200 basis points and falling 100 basis points scenarios below, as of December 31, 2019, 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. Total rate movements (beginning point minus ending point) to each of the various driver rates utilized by management in the base simulation are as follows:

December 31, 2019
RISING FALLING
Driver Rates (200 Basis Points) (100 Basis Points)
Prime 200 (100)
Federal funds 200 (100)
One-year CMT 200 (100)
Three-year CMT 200 (100)
Five-year CMT 200 (100)
CD's 200 (24)
FHLB advances 200 (89)

Results for the base, 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 December 31, 2019.The net interest income shown 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.

December 31, 2019
RISING FALLING
(Dollars in Thousands) Base (200 Basis Points) (100 Basis Points)
Net interest income $ 368,024 $ 389,367 $ 355,191
Variance from base $ 21,343 $ (12,833)
Percent of change from base 5.8 % (3.5) %


	September 30, 2021		December 31, 2020
Rising 200 basis points from base case	1.9	%	5.9	%
Falling 100 basis points from base case	(0.3)	%	0.7	%

~~Table of Contents~~

~~PART I: FINANCIAL INFORMATION~~

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

EARNING ASSETS

The following table presents the earning asset mix as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Earning assets increased by ~~$1.3~~$1.1 billion during the nine months ended September 30, ~~2020.~~2021.

~~Interest-bearing deposits~~Total investment securities increased ~~$155.7 million~~$1.3 billion, or 41.2 percent, from December 31, ~~2019 due to~~2020. The Corporation purchased investment securities by utilizing excess liquidity from deposit growth, which was held in interest-bearing deposits and ~~an increase~~cash and cash equivalents, in ~~wholesale funding. Additionally, total investment securities increased $337.2 million from December 31, 2019 as a portion of the excess~~addition to liquidity from deposit growth and additional wholesale funding was used to invest in the bond portfolio. Also contributing to the increase in investment securities was a $48.4 million increase in net unrealized gains on the available for sale portfolio. The net increase in unrealized gains from December 31, 2019 to September 30, 2020 is primarily due to interest rate declines in 2020 as the longer term points on the yield curve have declined since year-end, which increases the fair valueSBA forgiveness of ~~securities in the portfolio.~~

~~Loans and loans held for sale increased $778.7 million from December 31, 2019. As of September 30, 2020, the Corporation had $901.4 million of~~ PPP loans, which were primarily included in the commercial and industrial loan class. The largest loan segments that experienced a decrease from December 31, 2019 were real estate construction and home equity loans. 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 total loan portfolio decreased $199.6 million from December 31, 2020. As of September 30, 2021, PPP loans, which are included in the commercial and industrial loans class, totaled $198.1 million, a decrease of $469.0 million from the December 31, 2020 balance of $667.1 million, and when coupled with commercial and industrial loan organic growth of $265.9 million, the net decrease in the commercial and industrial loan class was $203.1 million. Other loan classes that experienced the largest decreases from December 31, 2020 were residential real estate, 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, construction and home equity. 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.~~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)	(Dollars in Thousands)	September 30, 2020		December 31, 2019		(Dollars in Thousands)	September 30, 2021		December 31, 2020
Interest-bearing deposits	Interest-bearing deposits	$	273,936	$	118,263	Interest-bearing deposits	$	369,447	$	392,305
Investment securities available for sale	Investment securities available for sale	1,824,160		1,790,025		Investment securities available for sale	2,374,578		1,919,119
Investment securities held to maturity		1,109,126		806,038
Investment securities held to maturity, net of allowance for credit losses of $245,000 as of September 30, 2021						Investment securities held to maturity, net of allowance for credit losses of $245,000 as of September 30, 2021	2,070,938		1,227,668
Loans held for sale	Loans held for sale	3,183		9,037		Loans held for sale	5,990		3,966
Loans	Loans	9,243,833		8,459,310		Loans	9,041,576		9,243,174
Federal Home Loan Bank stock	Federal Home Loan Bank stock	28,736		28,736		Federal Home Loan Bank stock	28,736		28,736
Total	Total	$	12,482,974	$	11,211,409	Total	$	13,891,265	$	12,814,968

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).

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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”.

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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.

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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

There are no 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

~~Except for the additional risk factors set forth below, there~~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, ~~2019.~~

The ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely impacted the Corporation’s business and financial results, and the continued impact will depend on future developments, which are highly uncertain and cannot be predicted, including the severity and duration of the pandemic and further actions taken by governmental authorities and other third parties to contain and treat the virus.

In March 2020, the World Health Organization declared novel coronavirus disease 2019 (COVID-19) as a global pandemic. Also in March 2020, the President of the Unites States declared the COVID-19 outbreak a national emergency. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. As a result, the demand for the Corporation’s products and services has been, and will continue to be, significantly impacted. Furthermore, the pandemic has caused, and could continue to influence, the recognition of credit losses in the Corporation’s loan portfolios and increases in the Corporation’s allowance for credit losses as our customers are negatively impacted by the economic downturn. In addition, governmental actions have resulted in decreased interest rates and yields, which may lead to decreases in the Corporation’s net interest income and non-interest income.

As our banking regulators have encouraged us to work prudently with borrowers who are unable to meet their contractual payment obligations due to the effects of COVID-19, the Bank has implemented certain hardship relief programs (including payment deferrals, fee waivers, extensions of repayment terms, and other delays in payment). As a result, the Bank has made numerous short-term loan modifications for customers who are current and otherwise not past due. As provided under the CARES Act, these qualified loan modifications are currently exempt by law from classification as troubled debt restructures as defined by GAAP. The potential adverse impact resulting from the inability of customers to repay loans on a timely basis cannot be determined at this time. However, the extent of such impact, as reflected in the Corporation's financial statements, may be muted by these loan modifications, which would have the effect of delaying loan loss recognition until after any applicable deferral period.

The spread of COVID-19 has caused the Corporation to modify is business practices (including developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. Furthermore, the Corporation’s business operations have been, and may again in the future be, disrupted due to vendors and third-party service providers being unable to work or provide services effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.

The extent to which the coronavirus outbreak impacts the Corporation’s business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, 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 can resume. Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in the section entitled “Risk Factors” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K. While we do not yet know the full extent of the COVID-19 impact, the negative effects on the Corporation’s business, results of operations and financial condition could be material.

~~Table of Contents~~

~~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)~~

As a participating lender in the Small Business Administration’s Paycheck Protection Program (the “PPP” or “program”), the Corporation and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties in connection with the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, the CARES Act was enacted, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses, eligible nonprofits and certain others can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Under the terms of the program, loans are to be fully guaranteed by the SBA. The Bank is participating as a lender in the PPP. Because of the short timeframe between the passing of the CARES Act and the April 3, 2020 opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the program, which exposes the Corporation to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the program and the related new legislation was enacted on April 24, 2020. Since the opening of the PPP, several larger banks have been subject to litigation relating to the policies and procedures that they used in processing applications for the program. The Corporation and the Bank may be exposed to the risk of litigation: (1) from both customers and non-customers that have approached the Bank in connection with PPP loans and its policies and procedures used in processing applications for the program; and (2) from agents of the PPP borrowers claiming they are entitled to a portion of the Bank's loan processing fees as a result of their assisting borrowers with their PPP loan applications. If any such litigation is filed against the Corporation or the Bank and is not resolved in a manner favorable to the Corporation or the Bank, it may result in significant financial liability or adversely affect the Corporation’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the program. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Corporation, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.

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 September 30, ~~2020.~~2021.

Period Total Number
of Shares
Purchased (i) 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
July, 2020 35,668 $ 24.43 — —
August, 2020 275 $ 26.36 — —
September, 2020 422 $ 24.40 — —


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)
July, 2021	235,079	$	39.67	235,079	3,097,921
August, 2021	59,037	$	41.56	21,300	3,076,621
September, 2021	273,119	$	38.92	273,119	2,803,502
Total	567,235			529,498

~~(i) The~~(1) Includes shares repurchased ~~were~~pursuant to the Corporation's share repurchase program described in note (2) below. The amount in August 2021 also includes 37,737 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 529,498 shares of common stock for a total aggregate investment of $20,807,496.

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:

3.1			First Merchants Corporation Articles of Incorporation, as amended (Incorporated by reference to registrant’s Form 8-K filed on May 2, 2017) (SEC No. 000-17071)
3.2			Bylaws of First Merchants Corporation dated August 11, 2016 (Incorporated by reference to 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 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 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 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 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.
~~10.1~~			Consulting Agreement between Michael C. Rechin and First Merchants Corporation, effective January 1, 2021 (Incorporated by reference to registrant’s Form 8-K filed on September 29, 2020) (SEC No. 000-17071) (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 ~~(2)~~(1)
31.2			Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 ~~(2)~~(1)
32			Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ~~(3)~~(2)
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 ~~(2)~~(1)
101.SCH			Inline XBRL Taxonomy Extension Schema Document ~~(2)~~(1)
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document ~~(2)~~(1)
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document ~~(2)~~(1)
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document ~~(2)~~(1)
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document ~~(2)~~(1)
104			Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)

			~~(1) Management contract or compensatory plan.~~
			~~(2)~~(1) Filed herewith.
			~~(3)~~(2) Furnished herewith.

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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)


November ~~9, 2020~~3, 2021			~~By:~~ ~~/s/ Michael C. Rechin~~
			~~Michael C. Rechin~~
			~~President and Chief Executive Officer~~
			~~(Principal Executive Officer)~~

~~November 9, 2020~~			~~By:~~by /s/ Mark K. Hardwick
			Mark K. Hardwick
			Chief Executive Officer
			(Principal Executive Officer)

November 3, 2021			by /s/ Michele M. Kawiecki
			Michele M. Kawiecki
			Executive Vice President,
			Chief Financial ~~Officer and Chief Operating~~ Officer
			(Principal Financial and Accounting Officer)

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	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	3,531	$	6,840	$	2,733
Acquired receivables not subject to ASC 310-30	$	729,047	$	907,210	$	14,722


	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Temporarily Impaired Available for Sale Securities at September 30, 2020

State and municipal	$	22,515	$	187	$	0	$	0	$	22,515	$	187

Total Temporarily Impaired Available for Sale Securities	22,515		187		0		0		22,515		187
Temporarily Impaired Held to Maturity Securities at September 30,2020
U.S. Government-sponsored agency securities	20,961		33		0		0		20,961		33
State and municipal	101,136		1,240		0		0		101,136		1,240
U.S. Government-sponsored mortgage-backed securities	10,284		3		0		0		10,284		3

Foreign investment	1,498		2		0		0		1,498		2
Total Temporarily Impaired Held to Maturity Securities	133,879		1,278		0		0		133,879		1,278
Total Temporarily Impaired Investment Securities	$	156,394	$	1,465	$	0	$	0	$	156,394	$	1,465


	Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		Number of Loans
Commercial and industrial loans	$	0	$	0	0	$	654	$	654	3

Real estate loans:

Commercial and farmland	0		0		0	565		565		2
Residential	2,314		2,326		30	2,614		2,663		36
Home equity	307		307		2	307		307		2
Individuals' loans for household and other personal expenditures	19		19		2	19		19		2
Total	$	2,640	$	2,652	34	$	4,159	$	4,208	45


	Three Months Ended September 30, 2020
	Term Modification		Rate Modification		Combination		Total Modification


Real estate loans:


Residential	$	2,266	$	51	$	—	$	2,317
Home equity	212		95		—		307
Individuals' loans for household and other personal expenditures	17		0		—		17
Total	$	2,495	$	146	$	0	$	2,641


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Accretable yield beginning balance	$	1,546	$	2,132
Additions	0		$	0
Accretion	(793)		(2,211)
Reclassification from nonaccretable	511		1,350
Disposals	0		(7)
Accretable yield ending balance	$	1,264	$	1,264


	Amortization Expense
2020	$	1,476
2021	5,429
2022	5,027
2023	4,827
2024	4,241
After 2024	9,451
	$	30,451


	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2020	351,048	$	40.67
Granted	135,292	$	26.89
Vested	(116,520)	$	40.46
Forfeited	(525)	$	40.44
Unvested RSAs at September 30, 2020	369,295	$	36.17


	September 30, 2020
	RISING	FALLING
Driver Rates	(200 Basis Points)	(100 Basis Points)
Prime	200	—
Federal funds	200	—
One-year CMT	200	(4)
Three-year CMT	200	(4)
Five-year CMT	200	(5)
CD's	200	(16)
FHLB advances	200	(1)


Period	Total Number of Shares Purchased (i)	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
July, 2020	35,668	$	24.43	—	—
August, 2020	275	$	26.36	—	—
September, 2020	422	$	24.40	—	—