GERMAN AMERICAN BANCORP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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GERMAN AMERICAN BANCORP, INC.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

German American Bancorp, Inc. is a Nasdaq-traded (symbol: GABC) financial
holding company based in Jasper, Indiana. German American, through its banking
subsidiary German American Bank, operates 77 banking offices in 19 contiguous
southern Indiana counties and 14 Kentucky counties. The Company also owns an
investment brokerage subsidiary (German American Investment Services, Inc.) and
a full line property and casualty insurance agency (German American Insurance,
Inc.).

Throughout this Management's Discussion and Analysis, as elsewhere in this
Report, when we use the term "Company," we will usually be referring to the
business and affairs (financial and otherwise) of German American Bancorp, Inc.
and its subsidiaries and affiliates as a whole. Occasionally, we will refer to
the term "parent company" or "holding company" when we mean to refer to only
German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the
Company as of March 31, 2022 and December 31, 2021 and the consolidated results
of operations for the three months ended March 31, 2022 and 2021. This
discussion should be read in conjunction with the consolidated financial
statements and other financial data presented elsewhere herein and with the
financial statements and other financial data, as well as the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2021.

MANAGEMENT OVERVIEW

This updated discussion should be read in conjunction with management’s overview that was included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Net income for the quarter ended March 31, 2022 totaled $9,067,000, or $0.31 per
share, a decline of 58% on a per share basis compared with the first quarter
2021 net income of $19,557,000, or $0.74 per share. The change in net income
during the first quarter of 2022, compared with the first quarter of 2021, was
largely impacted by acquisition-related expenses for the CUB transaction that
closed on January 1, 2022. The first quarter of 2022 results of operations
included acquisition-related expenses of $11,705,000 ($8,908,000 or $0.30 per
share, on an after tax basis) and also included Day 1 provision for credit
losses under the CECL model of $6,300,000 ($4,725,000 or $0.16 per share, on an
after tax basis).

On January 1, 2022, the Company completed its acquisition of Citizens Union
Bancorp of Shelbyville, Inc. ("CUB"). CUB, headquartered in Shelbyville,
Kentucky, operated 15 retail banking offices located in Shelby, Jefferson,
Spencer, Bullitt, Oldham, Owen, Gallatin and Hardin counties in Kentucky through
its banking subsidiary, Citizens Union Bank of Shelbyville, Inc. As of the
closing of the transaction, CUB had total assets of approximately $1.109
billion, total loans of approximately $683.8 million, and total deposits of
approximately $930.5 million. The Company issued approximately 2.9 million
shares of its common stock, and paid approximately $50.8 million in cash, in
exchange for all of the issued and outstanding shares of common stock of CUB.

For further information regarding this acquisition, see Note 15 (Business combinations) in the Notes to the consolidated financial statements included in Item 1 of this Report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for the Company presented in
the Consolidated Financial Statements, accompanying Notes to the Consolidated
Financial Statements, and selected financial data appearing elsewhere within
this Report, are, to a large degree, dependent upon the Company's accounting
policies. The selection of and application of these policies involve estimates,
judgments, and uncertainties that are subject to change. The critical accounting
policies and estimates that the Company has determined to be the most
susceptible to change in the near term relate to the determination of the
allowance for credit losses, the valuation of securities available for sale,
income tax expense, and the valuation of goodwill and other intangible assets.
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Provision for credit losses

The Company maintains an allowance for credit losses to cover the estimated
expected credit losses over the expected contractual life of the loan portfolio.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off. A provision for credit losses is
charged to operations based on management's periodic evaluation of the necessary
allowance balance. Evaluations are conducted at least quarterly and more often
if deemed necessary. The ultimate recovery of all loans is susceptible to future
market factors beyond the Company's control.

The Company has an established process to determine the adequacy of the
allowance for credit losses. The determination of the allowance is inherently
subjective, as it requires significant estimates, including the amounts and
timing of expected future cash flows on individually analyzed loans, estimated
losses on other classified loans and pools of homogeneous loans, and
consideration of past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, reasonable and supportable forecasts and
other factors, all of which may be susceptible to significant change. The
allowance consists of two components of allocations, specific and general. These
two components represent the total allowance for credit losses deemed adequate
to cover expected credit losses over the expected life of the loan portfolio.

Commercial and agricultural loans are subject to a standardized grading process
administered by an internal loan review function. The need for specific reserves
is considered for credits when: (a) the customer's cash flow or net worth
appears insufficient to repay the loan; (b) the loan has been criticized in a
regulatory examination; (c) the loan is on non-accrual; or (d) other reasons
where the ultimate collectability of the loan is in question, or the loan
characteristics require special monitoring.

Specific reserves on individually analyzed loans are determined by comparing the
loan balance to the present value of expected cash flows or expected collateral
proceeds. Allocations are also applied to categories of loans not individually
analyzed but for which the rate of loss is expected to be greater than other
similar type loans, including non-performing consumer or residential real estate
loans. Such allocations are based on past loss experience, reasonable and
supportable forecasts and information about specific borrower situations and
estimated collateral values.

General allocations are made for commercial and agricultural loans that are
graded as substandard and special mention, but are not individually analyzed for
specific reserves as well as other pools of loans, including non-classified
loans, homogeneous portfolios of consumer and residential real estate loans, and
loans within certain industry categories believed to present unique risk of
loss.  General allocations of the allowance are primarily made based on
historical averages for loan losses for these portfolios along with reasonable
and supportable forecasts, judgmentally adjusted for economic, external and
internal quantitative and qualitative factors and portfolio trends. Economic
factors include evaluating changes in international, national, regional and
local economic and business conditions that affect the collectability of the
loan portfolio. Internal factors include evaluating changes in lending policies
and procedures; changes in the nature and volume of the loan portfolio; and
changes in experience, ability and depth of lending management and staff.

The allowance for credit losses for loans represents management's estimate of
all expected credit losses over the expected contractual life of the loan
portfolio. Determining the appropriateness and adequacy of the allowance is
complex and requires judgment by management about the effect of matters that are
inherently uncertain. Subsequent evaluations of the loan portfolio may result in
significant changes in the allowance for credit losses in future periods.

Valuation of securities

Available-for-sale debt securities in unrealized loss positions are evaluated
for impairment related to credit losses at least quarterly. For
available-for-sale debt securities in an unrealized loss position, the Company
assesses whether we intend to sell, or it is more likely than not that we 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 available-for sale debt securities that do not meet the criteria, the
Company evaluates whether the decline in fair value has resulted from credit
losses or other factors. In making this assessment, management 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 and the issuer, among other factors. If this assessment
indicates that a credit loss exists, the Company compares the present value of
cash flows expected to be collected from the security with 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 for the security, a credit loss
exists and an allowance for credit losses is recorded, limited to the amount
that the fair value of the security is less than its amortized cost basis. Any
impairment that has not been recorded through an allowance for credit losses is
recognized in
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other comprehensive income, net of applicable taxes. No allowance for credit
losses for available-for-sale debt securities was needed at March 31, 2022.
Accrued interest receivable on available-for-sale debt securities is excluded
from the estimate of credit losses. As of March 31, 2022, gross unrealized gains
on the securities available-for-sale portfolio totaled approximately $6,699,000
and gross unrealized losses totaled approximately $155,992,000 net of applicable
taxes is included in other comprehensive income.

Equity securities whose fair value is not readily determinable are carried at cost less impairment, with observable price changes recognized in profit or loss.

income tax expense

Income tax expense includes estimates related to valuation allowance on deferred tax assets and potential losses related to exposure to tax audits assumed to occur.

A valuation allowance reduces deferred tax assets to the amount management
believes is more likely than not to be realized. In evaluating the realization
of deferred tax assets, management considers the likelihood that sufficient
taxable income of appropriate character will be generated within carry-back and
carry-forward periods, including consideration of available tax planning
strategies. Tax-related loss contingencies, including assessments arising from
tax examinations and tax strategies, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. In considering the likelihood of loss, management considers the
nature of the contingency, the progress of any examination or related protest or
appeal, the views of legal counsel and other advisors, experience of the Company
or other enterprises in similar matters, if any, and management's intended
response to any assessment.

Good will and other intangible assets

Goodwill resulting from business combinations represents the excess of the
purchase price over the fair value of the net assets of businesses acquired.
Goodwill resulting from business combinations is generally determined as the
excess of the fair value of the consideration transferred, plus the fair value
of any noncontrolling interests in the acquiree, over the fair value of the net
assets acquired and liabilities assumed as of the acquisition date. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but tested for impairment at
least annually. The Company has selected December 31 as the date to perform the
annual impairment test. Goodwill is the only intangible asset with an indefinite
life on the Company's balance sheet. No impairment to Goodwill was indicated
based on year-end testing and no triggering events occurred in 2022 causing
reassessment.

Intangible assets with definite useful lives are amortized over their estimated
useful lives to their estimated residual values. Other intangible assets consist
of core deposit and acquired customer relationship intangible assets. They are
initially measured at fair value and then are amortized over their estimated
useful lives, which range from 6 to 10 years.

RESULTS OF OPERATIONS

Net revenue:

Net income for the quarter ended March 31, 2022 totaled $9,067,000, or $0.31 per
share, a decline of 58% on a per share basis compared with the first quarter
2021 net income of $19,557,000, or $0.74 per share. The change in net income
during the first quarter of 2022, compared with the first quarter of 2021, was
largely impacted by acquisition-related expenses for the CUB transaction that
closed on January 1, 2022. The first quarter of 2022 results of operations
included acquisition-related expenses of $11,705,000 ($8,908,000 or $0.30 per
share, on an after tax basis) and also included Day 1 provision for credit
losses under the CECL model of $6,300,000 ($4,725,000 or $0.16 per share, on an
after tax basis).

Net Interest Income:

Net interest income is the Company's single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. Several factors contribute to
the determination of net interest income and net interest margin, including the
volume and mix of earning assets, interest rates, and income taxes. Many factors
affecting net interest income are subject to control by management policies and
actions. Factors beyond the control of management include the general level of
credit and deposit demand, Federal Reserve Board monetary policy, and changes in
tax laws.

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The following table summarizes net interest income (on a tax equivalent basis) for the three months ended March 31, 2022 and 2021. For tax equivalent adjustments, an effective tax rate of 21% was used for both periods(1).

                                                                                                  Average Balance Sheet
                                                                                      (Tax-equivalent basis / dollars in thousands)
                                                                     Three Months Ended                                             Three Months Ended
                                                                       March 31, 2022                                                 March 31, 2021
                                                                               Income /                               Principal            Income /
                                                   Principal Balance           Expense          Yield / Rate           Balance             Expense          Yield / Rate
ASSETS
Federal Funds Sold and Other
Short-term Investments                           $      594,901              $     280               0.19  %       $    337,981          $      85               0.10  %
Securities:
Taxable                                               1,067,732                  4,520               1.69  %            706,574              2,607               1.48  %
Non-taxable                                             919,185                  7,013               3.05  %            589,056              4,720               3.21  %
Total Loans and Leases?²?                             3,667,082                 39,022               4.31  %          3,107,902             35,164               4.58  %
TOTAL INTEREST EARNING ASSETS                         6,248,900                 50,835               3.28  %          4,741,513             42,576               3.63  %
Other Assets                                            537,770                                                         396,290
Less: Allowance for Credit Losses                       (46,700)                                                        (47,434)
TOTAL ASSETS                                     $    6,739,970                                                    $  5,090,369

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing Demand, Savings
and Money Market Deposits                        $    3,492,813              $     872               0.10  %       $  2,490,953          $     637               0.10  %
Time Deposits                                           528,452                    457               0.35  %            467,310                805               0.70  %
FHLB Advances and Other Borrowings                      184,481                  1,038               2.28  %            183,376              1,151               2.55  %
TOTAL INTEREST-BEARING LIABILITIES                    4,205,746                  2,367               0.23  %          3,141,639              2,593               0.33  %
Demand Deposit Accounts                               1,739,351                                                       1,268,409
Other Liabilities                                        51,355                                                          53,053
TOTAL LIABILITIES                                     5,996,452                                                       4,463,101
Shareholders' Equity                                    743,518                                                         627,268
TOTAL LIBABILITIES AND
  SHAREHOLDERS' EQUITY                           $    6,739,970                                                    $  5,090,369

COST OF FUNDS                                                                                        0.15  %                                                     0.22  %
NET INTEREST INCOME                                                          $  48,468                                                   $  39,983
NET INTEREST MARGIN                                                                                  3.13  %                                                     3.41  %


(1) Effective tax rates have been determined as if interest earned on the Company’s investments in municipal bonds and loans were fully taxable. (2) Loans held for sale and outstanding loans have been included in average loans.

During the first quarter of 2022, net interest income, on a non tax-equivalent
basis, totaled $46,908,000, an increase of $7,976,000, or 20%, compared to the
first quarter of 2021 net interest income of $38,932,000. The increase in net
interest income during the first quarter of 2022 compared with the first quarter
of 2021 was primarily attributable to a higher level of earning assets driven by
both the CUB acquisition and continued deposit growth, which was partially
mitigated by a lower level of PPP loan fee recognition.

The tax equivalent net interest margin for the quarter ended March 31, 2022 was
3.13% compared with 3.41% in the first quarter of 2021. The Company's net
interest margin in both periods presented has been impacted by fees recognized
as a part of the PPP and accretion of loan discounts on acquired loans. The
impact of the PPP fees was significantly less in the first quarter of 2022
compared to the first quarter of 2021.

Fees recognized on PPP loans through net interest income totaled $562,000 during
the first quarter of 2022 and $3,008,000 during the first quarter of 2021. The
fees recognized related to the PPP contributed approximately 4 basis points to
the net interest margin on an annualized basis in the first quarter of 2022 and
25 basis points in the first quarter of 2021. Accretion of loan discounts on
acquired loans contributed approximately 7 basis points to the net interest
margin in the first quarter of 2022 and 7 basis points in the first quarter of
2021. Accretion of discounts on acquired loans totaled $1,112,000 during the
first quarter of 2022 and $867,000 during the first quarter of 2021.



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Provision for credit losses:

The Company provides for credit losses through regular provisions to the
allowance for credit losses. The provision is affected by net charge-offs on
loans and changes in specific and general allocations of the allowance. During
the quarter ended March 31, 2022, the Company recorded a provision for credit
losses of $5,200,000 compared with a negative provision for credit losses of
$1,500,000 during the first quarter of 2021. During the first quarter of 2022,
the provision for credit losses included $6,300,000 for the Day 1 CECL addition
to the allowance for credit loss related to the CUB acquisition for the non-PCD
loans.

Net charge-offs totaled $256,000, or 3 basis points on an annualized basis, of
average loans outstanding during the first quarter of 2022 compared with
$260,000, or 3 basis points, of average loans during the first quarter of 2021.
The negative provisions for credit losses in the first quarter of 2022,
excluding the Day 1 CECL addition to the allowance for CUB, and the first
quarter 2021 was largely due to declines in certain adversely criticized assets
and improvement in certain pandemic-related stressed sectors for which the
Company had provided significant levels of allowance for credit losses during
2020.

The provision for credit losses made during the three months ended March 31,
2022 was made at a level deemed necessary by management to absorb expected
losses in the loan portfolio. A detailed evaluation of the adequacy of the
allowance for credit losses is completed quarterly by management, the results of
which are used to determine provision for credit losses. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions and reasonable and supportable
forecasts along with other qualitative and quantitative factors.

Non-interest income:

During the quarter ended March 31, 2022, non-interest income totaled
$16,188,000, an increase of $1,151,000, or 8%, compared with the first quarter
of 2021. The increase in non-interest income during the first quarter of 2022
compared with the first quarter of 2021 was primarily driven by the CUB
acquisition.

Non-interest Income                           Three Months Ended                Change From
(dollars in thousands)                             March 31,                    Prior Period
                                                                            Amount         Percent
                                              2022            2021          Change         Change
Wealth Management Fees                    $     2,638      $  2,358      $       280          12  %
Service Charges on Deposit Accounts             2,683         1,678            1,005          60
Insurance Revenues                              3,721         3,292              429          13
Company Owned Life Insurance                      458           352              106          30
Interchange Fee Income                          3,627         2,830              797          28
Other Operating Income                          1,268         1,350              (82)         (6)
Subtotal                                       14,395        11,860            2,535          21
Net Gains on Sales of Loans                     1,421         2,202             (781)        (35)
Net Gains on Securities                           372           975             (603)        (62)
Total Non-interest Income                 $    16,188      $ 15,037      $     1,151           8


Wealth management fees increased $280,000, or 12%, during the first quarter of
2022 compared with the first quarter of 2021. The increase during the first
quarter of 2022 compared with the first quarter of 2021 was largely attributable
to increased assets under management within the Company's wealth management
group.

Service charges on deposit accounts increased $1,005,000, or 60%, during the
first quarter of 2022 compared with the first quarter of 2021. The increase
during the first quarter of 2022 compared with the the first quarter of 2021 was
the result of the CUB acquisition as well as increased deposit customer
activity.

Insurance revenues increased $429,000, or 13%, during the quarter ended March
31, 2022, compared with the first quarter of 2021. The increase during the first
quarter of 2022 compared with the first quarter of 2021 was primarily due to
increased contingency revenue and improved commercial lines revenue. Contingency
revenue during the first quarter of 2022 totaled $1,620,000 compared with
$1,445,000 during the first quarter of 2021. Contingency revenue is reflective
of claims and loss experience with insurance carriers that the Company
represents through its property and casualty insurance agency. Typically, the
majority of contingency revenue is recognized during the first quarter of the
year.

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Interchange fee income increased $797,000, or 28%, during the quarter ended
March 31, 2022 compared with the first quarter of 2021. The increase in the
level of fees during the first quarter of 2022 compared with the first quarter
of 2021 was related to the CUB acquisition as well as increased card utilization
by customers.

Net gains on sales of loans declined $781,000, or 35%, during the first quarter
of 2022 compared with the first quarter of 2021. The decline in the first
quarter of 2022 compared with the first quarter of 2021 was largely related to a
lower volume of loans sold and lower pricing levels. Loan sales totaled $52.0
million during the first quarter of 2022 compared with $68.5 million during the
first quarter of 2021.

The Company realized $372,000 in gains on sales of securities during the first
quarter of 2022 compared with $975,000 during the first quarter of 2021. The
sales of securities in all periods was done as part of modest shifts in the
allocations within the securities portfolio.


Non-interest charges:

During the quarter ended March 31, 2022, non-interest expense totaled
$48,160,000, an increase of $16,901,000, or 54%, compared with the first quarter
of 2021. The first quarter of 2022 non-interest expenses included approximately
$11,705,000 of non-recurring acquisition-related expenses for the acquisition of
CUB. The primary drivers of the remaining increases in the first quarter of 2022
compared with the first quarter of 2021 were the operating costs for CUB.

Non-interest Expense                                       Three Months Ended                            Change From
(dollars in thousands)                                          March 31,                               Prior Period
                                                                                                Amount                Percent
                                                          2022               2021               Change                Change
Salaries and Employee Benefits                       $    23,088          $ 17,805          $      5,283                    30  %
Occupancy, Furniture and Equipment Expense                 3,809             4,348                  (539)                  (12)
FDIC Premiums                                                476               334                   142                    43
Data Processing Fees                                       7,724             1,743                 5,981                   343
Professional Fees                                          2,363             1,160                 1,203                   104
Advertising and Promotion                                  1,138               782                   356                    46
Intangible Amortization                                    1,017               760                   257                    34
Other Operating Expenses                                   8,545             4,327                 4,218                    97
Total Non-interest Expense                           $    48,160          $ 31,259          $     16,901                    54



Salaries and benefits increased $5,283,000, or 30%, during the quarter ended
March 31, 2022 compared with the first quarter of 2021. The increase in salaries
and benefits during the first quarter of 2022 compared with the first quarter of
2021 was largely attributable to the CUB acquisition completed on January 1,
2021. The first quarter of 2022 included approximately $1,470,000 of
acquisition-related salary and benefit costs of a non-recurring nature with the
remainder of the increase due primarily to the salaries and benefits costs for
the CUB employee base.

Occupancy, furniture and equipment expense declined $539,000, or 12%, during the
first quarter of 2022 compared with the first quarter of 2021. The decline
during the first quarter of 2022 compared to the first quarter of 2021 was
largely related to operating fewer branch offices from the Company's existing
branch network (excluding the CUB acquisition), which was the result of the
Company's 2021 operating optimization plan, and non-recurring costs associated
with the optimization plan in the first quarter of 2021, partially mitigated by
the operating costs of the CUB branch network in the first quarter of 2022.

Data processing fees increased $5,981,000, or 343%, during the first quarter of
2022 compared with the first quarter of 2021. The increase during the first
quarter of 2022 compared with the first quarter of 2021 was largely driven by
acquisition-related costs which totaled approximately $4,973,000 during the
first quarter of 2022.

Professional fees increased $1,203,000, or 104%, in the first quarter of 2022
compared with the first quarter of 2021. The increase during the first quarter
of 2022 was due in large part to professional fees associated with the CUB
acquisition. Merger and acquisition related professional fees totaled
approximately $1,336,000 during the first quarter of 2022.

Other operating expenses increased $4,218,000, or 97%, during the first quarter
of 2022 compared with the first quarter of 2021. The increase in the first
quarter of 2022 compared to the first quarter of 2021 was largely attributable
to acquisition-
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related costs which totaled approximately $3,733,000 in the first quarter of 2022. Costs related to the acquisition were mainly costs for terminating contracts with suppliers.


Income Taxes:

The Company's effective income tax rate was 6.9% and 19.2%, respectively, during
the three months ended March 31, 2022 and 2021. The lower effective tax rate
during the first quarter of 2022 compared with the first quarter of 2021 was the
result of non-taxable sources of income being a greater component of pre-tax
income. The lower level of pre-tax income in the first quarter of 2022 was
driven in large part by acquisition costs and the Day 1 CECL provision
associated with the CUB merger. The effective tax rate in all periods presented
was lower than the blended statutory rate resulting primarily from the Company's
tax-exempt investment income on securities, loans and company-owned life
insurance, income tax credits generated from affordable housing projects, and
income generated by subsidiaries domiciled in a state with no state or local
income tax.

FINANCIAL CONDITION

Total assets for the Company totaled $6.698 billion at March 31, 2022,
representing an increase of $1.089 billion compared with year-end 2021. The
increase in total assets at March 31, 2022 compared with year-end 2021 was in
large part attributable to the acquisition of CUB as well as continued growth in
deposits.

Securities available for sale increased $34.0 million as of March 31, 2022
compared with year-end 2021. The increase in the securities portfolio in the
first quarter of 2022 was largely the result of increased levels of deposits.
The growth in the reported level of the available for sale securities portfolio
was tempered by the fair value adjustments on the portfolio caused by the rapid
rise in market interest rates during the first quarter of 2022.

March 31, 2022 total loans increased $648.1 million compared with December 31,
2021. The increase in total loans at March 31, 2022, compared with year-end
2021, was largely due to the acquisition of CUB, which was partially offset by a
decline in PPP loans. PPP loans, net of deferred fees, totaled $6.6 million at
March 31, 2022 compared with $19.5 million at December 31, 2021. As of March 31,
2022, outstanding loans from the CUB acquisition totaled $659.2 million.

Excluding PPP loans and loans acquired through the CUB acquisition, total loans
increased $1.7 million, or less than 1% on an annualized basis, at March 31,
2022 compared with December 31, 2021. Commercial and industrial loans increased
approximately $21.2 million, or 16% on an annualized basis, during the first
quarter of 2022 compared with year-end 2021, commercial real estate loans
increased $13.2 million, or 4% on an annualized basis, while agricultural loans
seasonally declined $32.3 million, or 36% on an annualized basis. During the
first quarter of 2022 compared with year-end 2021, retail loans declined $0.4
million, or less than 1% on an annualized basis.

End of Period Loan Balances:                               March 31,           December 31,         Current Period
(dollars in thousands)                                        2022                 2021                 Change
Commercial and Industrial Loans and Leases               $   636,519          $    548,350          $    88,169
Commercial Real Estate Loans                               1,938,528             1,530,677              407,851
Agricultural Loans                                           387,764               358,150               29,614
Home Equity and Consumer Loans                               351,083               307,184               43,899
Residential Mortgage Loans                                   342,140               263,565               78,575
Total Loans                                              $ 3,656,034          $  3,007,926          $   648,108



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The following table shows the breakdown of the allowance for credit losses for the periods indicated (in thousands of dollars):

                                                         March 31,      

the 31st of December,

                                                           2022             

2021

        Commercial and Industrial Loans and Leases      $  12,916      $       9,754
        Commercial Real Estate Loans                       23,217             19,245
        Agricultural Loans                                  4,759              4,505
        Home Equity and Consumer Loans                      2,035              1,808
        Residential Mortgage Loans                          2,151              1,705
        Unallocated                                             -                  -

        Total Allowance for Credit Losses               $  45,078      $      37,017



The Company's allowance for credit losses totaled $45.1 million at March 31,
2022 compared to $37.0 million at year-end 2021. The allowance for credit losses
represented 1.23% of period-end loans at March 31, 2022 and year-end 2021.

The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses
(Topic 326) ("CECL") on January 1, 2020. The Company added $9.4 million to the
allowance for credit losses in conjunction with the closing of the CUB
acquisition on January 1, 2022 related to the CUB loan portfolio. Of the
increase in the allowance for credit losses for the CUB portfolio, $6.3 million
was recorded through the provision for credit losses on "Day 1" under the CECL
model for non-PCD loans. The Company also acquired $29.9 million in PCD loans
for which the Company recorded a credit adjustment of $3.1 million which was
included in the allowance for credit losses.

Under the CECL model, certain acquired loans continue to carry a fair value
discount as well as an allowance for credit losses. As of March 31, 2022, the
Company held net discounts on acquired loans of $9.2 million which included $4.6
million related to the CUB loan portfolio.

In response to requests from borrowers who had experienced pandemic-related
business or personal cash flow interruptions, and in accordance with regulatory
guidance, the Company began making short-term loan modifications involving both
partial and full payment deferrals in April 2020. As of March 31, 2022, the
Company has just one commercial real estate loan, in the principal amount of
$3.5 million, with a payment modification that is still in effect, with such
credit relationship making full interest payments.

The following is an analysis of the Company's non-performing assets at March 31,
2022 and December 31, 2021:

Non-performing Assets:                                   March 31,      December 31,
(dollars in thousands)                                     2022             2021
Non-accrual Loans                                       $ 14,929       $     14,602
Past Due Loans (90 days or more)                             383                156
Total Non-performing Loans                                15,312             14,758
Other Real Estate                                             30                  -
Total Non-performing Assets                             $ 15,342       $     14,758

Restructured Loans                                      $    102       $        104

Non-performing Loans to Total Loans                         0.42  %            0.49  %
Allowance for Credit Loss to Non-performing Loans         294.40  %         

250.83%

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The following table shows outstanding loans and loans 90 days or more past due by loan category:

                                                                                                           Loans Past Due 90 Days
                                                               Non-Accrual Loans                          or More & Still Accruing
                                                                              December 31,                                   December 31,
                                                       March 31, 2022             2021              March 31, 2022               2021
Commercial and Industrial Loans and Leases           $        10,470          $   10,530          $         383             $         -
Commercial Real Estate Loans                                   2,124               2,243                      -                     156
Agricultural Loans                                             1,055               1,136                      -                       -
Home Equity Loans                                                216                  24                      -                       -
Consumer Loans                                                    78                  82                      -                       -
Residential Mortgage Loans                                       986                 587                      -                       -
Total                                                $        14,929          $   14,602          $         383             $       156



Non-performing assets totaled $15.3 million at March 31, 2022 compared to $14.8
million at year-end 2021. Non-performing assets represented 0.23% of total
assets at March 31, 2022 compared to 0.26% at December 31, 2021. Non-performing
loans totaled $15.3 million at March 31, 2022 compared to $14.8 million at
year-end 2021. Non-performing loans represented 0.42% of total loans at March
31, 2022 compared to 0.49% at December 31, 2021. The increase in non-performing
assets was primarily attributable to the CUB acquisition which totaled
approximately $0.8 million at March 31, 2022.

March 31, 2022 total deposits increased $1.085 billion compared to year-end
2021. The increase in total deposits at March 31, 2022 compared with year-end
2021 was largely attributable to the CUB acquisition and continued general
inflows of customer deposits. As of March 31, 2022, deposits from the CUB
acquisition totaled $893.9 million. Excluding the deposits related to the
acquisition, total deposits increased $191.4 million, or 16% on an annualized
basis, at March 31, 2022 compared with year-end 2021.

End of Period Deposit Balances:                                  March 31,           December 31,         Current Period
(dollars in thousands)                                              2022                 2021                 Change
Non-interest-bearing Demand Deposits                           $ 1,789,353          $  1,529,223          $    260,130
Interest-bearing Demand, Savings, & Money Market
Accounts                                                         3,527,373             2,867,994               659,379
Time Deposits < $100,000                                           278,477               201,683                76,794
Time Deposits of $100,000 or more                                  234,407               145,416                88,991
Total Deposits                                                 $ 5,829,610          $  4,744,316          $  1,085,294


Capital Resources:

As of March 31, 2022, shareholders' equity declined by $19.5 million to $649.0
million compared with $668.5 million at year-end 2021. The decline in
shareholders' equity was primarily attributable to a decline in accumulated
other comprehensive income of $133.9 million related to the decrease in value of
the Company's available-for-sale securities portfolio driven by a rapid increase
in market interest rates during the first quarter of 2022. Partially mitigating
the decline was the issuance of the Company's common shares in the acquisition
of CUB. Approximately 2.9 million shares were issued to CUB shareholders
resulting in an increase to shareholders' equity of $111.9 million. Also
mitigating the decline was increased retained earnings of $2.3 million due to
net income of $9.1 million, which was partially offset by the payment of $6.8
million in shareholder dividends.

Shareholders' equity represented 9.7% of total assets at March 31, 2022 and
11.9% of total assets at December 31, 2021. Shareholders' equity included $190.9
million of goodwill and other intangible assets at March 31, 2022 compared to
$127.6 million of goodwill and other intangible assets at December 31, 2021. The
increase in goodwill and other intangible assets was attributable to the CUB
acquisition.

                                       47
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On January 31, 2022, the Company's Board of Directors approved a plan to
repurchase up to 1.0 million shares of the Company's outstanding common stock.
On a share basis, the amount of common stock subject to the new repurchase plan
represented approximately 3% of the Company's outstanding shares on the date it
was approved. The Company is not obligated to purchase any shares under the
plan, and the plan may be discontinued at any time. The actual timing, number
and share price of shares purchased under the repurchase plan will be determined
by the Company at its discretion and will depend upon such factors as the market
price of the stock, general market and economic conditions and applicable legal
requirements. At the time it approved the new plan, the Board also terminated a
similar plan that had been adopted in January 2021. The Company has not
repurchased any shares of common stock under the 2022 repurchase plan.

Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. The Company is required to maintain minimum levels
of capital in proportion to total risk-weighted assets and off-balance sheet
exposures.

The current risk-based capital rules, as adopted by federal banking regulators,
are based upon guidelines developed by the Basel Committee on Banking
Supervision and reflect various requirements of the Dodd-Frank Act (the "Basel
III Rules"). The Basel III Rules require banking organizations to, among other
things, maintain a minimum ratio of Total Capital to risk-weighted assets, a
minimum ratio of Tier 1 Capital to risk-weighted assets, a minimum ratio of
"Common Equity Tier 1 Capital" to risk-weighted assets, and a minimum leverage
ratio (calculated as the ratio of Tier 1 Capital to adjusted average
consolidated assets). In addition, under the Basel III Rules, in order to avoid
limitations on capital distributions, including dividend payments, the Company
is required to maintain a 2.5% capital conservation buffer above the adequately
capitalized regulatory capital ratios. At March 31, 2022, the capital levels for
the Company and its subsidiary bank remained well in excess of the minimum
amounts needed for capital adequacy purposes and the Bank's capital levels met
the necessary requirements to be considered well-capitalized.

The table below presents the consolidated capital ratios of the Company and the banking subsidiary according to regulatory guidelines:

                                                                                                       Minimum for Capital
                                                     3/31/2022                  12/31/2021              Adequacy Purposes
                                                       Ratio                       Ratio                       ?¹?               Well-Capitalized Guidelines
Total Capital (to Risk Weighted Assets)
Consolidated                                                14.64  %                    16.20  %                   8.00  %                               N/A
Bank                                                        13.71  %                    13.36  %                   8.00  %                          10.00  %
Tier 1 (Core) Capital (to Risk Weighted
Assets)
Consolidated                                                13.16  %                    14.61  %                   6.00  %                               N/A
Bank                                                        13.07  %                    12.83  %                   6.00  %                           8.00  %
Common Tier 1, (CET 1) Capital Ratio
 (to Risk Weighted Assets)
Consolidated                                                12.46  %                    14.18  %                   4.50  %                               N/A
Bank                                                        13.07  %                    12.83  %                   4.50  %                           6.50  %
Tier 1 Capital (to Average Assets)
Consolidated                                                 9.45  %                    10.10  %                   4.00  %                               N/A
Bank                                                         9.26  %                     8.88  %                   4.00  %                           5.00  %

(1) Excluding capital conservation buffer.

In December 2018, the federal banking regulators approved a final rule to
address changes to credit loss accounting under GAAP, including banking
organizations' implementation of CECL. The final rule provides banking
organizations the option to phase in over a three-year period the day-one
adverse effects on regulatory capital that may result from the adoption of the
new accounting standard. On March 27, 2020, in an action related to the CARES
Act, the federal banking regulators announced an interim final rule to delay the
estimated impact on regulatory capital stemming from the implementation of CECL.
The interim final rule, which was finalized effective September 30, 2020,
maintains the three-year transition option in the previous rule and provides
banks the option to delay for two years an estimate of CECL's effect on
regulatory capital, relative to the incurred loss methodology's effect on
regulatory capital, followed by a three-year transition period (five-year
transition option). The Company elected to adopt the five-year transition option
and, as a result, began the required three-year phase-in by reflecting 25% of
the previously deferred estimated capital impact of CECL in its regulatory
capital effective January 1, 2022. An additional 25% is to be phased in at the
beginning of each subsequent year until fully phased in by January 1, 2025.
Under the five-year transition option, the amount of adjustments to regulatory
capital that could be deferred until the phase-in period
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began included both the initial impact of our adoption of CECL at January 1,
2020 and 25% of subsequent changes in our allowance for credit losses during
each quarter of the two-year period ended December 31, 2021.

On April 9, 2020, federal banking regulators issued an interim final rule to
modify the Basel III regulatory capital rules applicable to banking
organizations to allow those organizations participating in the PPP to
neutralize the regulatory capital effects of participating in the program.
Specifically, the agencies have clarified that banking organizations, including
the Company and the Bank, are permitted to assign a zero percent risk weight to
PPP loans for purposes of determining risk-weighted assets and risk-based
capital ratios.

Liquidity:

The Consolidated Statement of Cash Flows details the elements of changes in the
Company's consolidated cash and cash equivalents. Total cash and cash
equivalents increased $273.7 million during the three months ended March 31,
2022 ending at $670.6 million.  During the three months ended March 31, 2022,
operating activities resulted in net cash inflows of $46.3 million. Investing
activities resulted in net cash inflows of $139.1 million during the three
months months ended March 31, 2022. Financing activities resulted in net cash
inflows for the three months ended March 31, 2022 of $88.3 million primarily
related to growth in the Company's deposit portfolio.

The parent company is a corporation separate and distinct from its bank and
other subsidiaries. The Company uses funds at the parent-company level to pay
dividends to its shareholders, to acquire or make other investments in other
businesses or their securities or assets, to repurchase its stock from time to
time, and for other general corporate purposes including debt service. The
parent company does not have access at the parent-company level to the deposits
and certain other sources of funds that are available to its bank subsidiary to
support its operations. Instead, the parent company has historically derived
most of its revenues from dividends paid to the parent company by its bank
subsidiary. The Company's banking subsidiary is subject to statutory
restrictions on its ability to pay dividends to the parent company. The parent
company has in recent years supplemented the dividends received from its
subsidiaries with borrowings. As of March 31, 2022, the parent company had
approximately $32.3 million of cash and cash equivalents available to meet its
cash flow needs.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

The Company from time to time in its oral and written communications makes
statements relating to its expectations regarding the future. These types of
statements are considered "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company may include
forward-looking statements in filings with the Securities and Exchange
Commission ("SEC"), such as this Form 10-Q, in other written materials, and in
oral statements made by senior management to analysts, investors,
representatives of the media, and others. Such forward looking statements can
include statements about the Company's net interest income or net interest
margin; its adequacy of allowance for credit losses, levels of provisions for
credit losses, and the quality of the Company's loans, investment securities and
other assets; simulations of changes in interest rates; expected results from
mergers with or acquisitions of other businesses; litigation results; tax
estimates and recognition; dividend policy; parent company cash resources and
cash requirements, and parent company capital resources; estimated cost savings,
plans and objectives for future operations; and expectations about the Company's
financial and business performance and other business matters as well as
economic and market conditions and trends. They often can be identified by the
use of words like "plan," "expect," "can," "might," "may," "will," "would,"
"could," "should," "intend," "project," "estimate," "believe" or "anticipate,"
or similar expressions.

Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made.

Readers are cautioned that, by their nature, all forward-looking statements are
based on assumptions and are subject to risks, uncertainties, and other factors.
Actual results may differ materially and adversely from the expectations of the
Company that are expressed or implied by any forward-looking statement. The
discussions in this Item 2 list some of the factors that could cause the
Company's actual results to vary materially from those expressed or implied by
any forward-looking statements. Other risks, uncertainties, and factors that
could cause the Company's actual results to vary materially from those expressed
or implied by any forward-looking statement include:

•the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;

•changes in competitive conditions;

•the introduction, withdrawal, success and timing of asset/liability management
strategies or of mergers and acquisitions and other business initiatives and
strategies;

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•changes in customer borrowing, repayment, investment and deposit practices;

•changes in budgetary, monetary and fiscal policies;

•changes in financial and capital markets;

•the potential deterioration in general economic conditions, nationally or locally, leading to, among other things, a deterioration in the quality of credit;

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

•our participation as a PPP lender;

•capital management activities, including any future sales of new securities, or any repurchases or redemptions by the Company of outstanding debt or equity securities;

•the factors determining investment impairment charges;

•the impact, extent and timing of technological changes;

• potential cyberattacks, information security breaches and other criminal activities;

•litigation liabilities, including related costs, expenses, settlements and
judgments, or the outcome of matters before regulatory agencies, whether pending
or commencing in the future;

• shares of the Federal Reserve Board;

•the possible effects of the replacement of the London interbank offer rate (LIBOR);

•the impact of the current standard on expected credit losses (CECL);

•changes in accounting principles and interpretations;

•potential increases of federal deposit insurance premium expense, and possible
future special assessments of FDIC premiums, either industry wide or specific to
the Company's banking subsidiary;

•actions by regulators under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms;

•impacts resulting from possible amendments or revisions to the Dodd-Frank Act
and the regulations promulgated thereunder, or to Consumer Financial Protection
Bureau rules and regulations;

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

•with respect to the merger with CUB, the possibility that the anticipated
benefits of the transaction, including anticipated cost savings and strategic
gains, are not realized when expected or at all, including as a result of the
impact of, or problems arising from, the integration of the two companies,
unexpected credit quality problems of the acquired loans or other assets, or
unexpected attrition of the customer base of the acquired institution or
branches.

Such statements reflect our views with respect to future events and are subject
to these and other risks, uncertainties and assumptions relating to the
operations, results of operations, growth strategy and liquidity of the Company.
Readers are cautioned not to place undue reliance on these forward-looking
statements.

Investors should consider these risks, uncertainties, and other factors, in
addition to those mentioned by the Company in its Annual Report on Form 10-K for
its fiscal year ended December 31, 2021, this Quarterly Report on Form 10-Q, and
other SEC filings from time to time, when considering any forward-looking
statement.

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